hi
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED March 31, 2021April 2, 2022
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 0-19658001-40432
TUESDAY MORNING CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware | 75-2398532 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification Number) |
6250 LBJ Freeway
Dallas, Texas75240
(Address of principal executive offices) (Zip code)
(972) (972) 387-3562
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, $0.01 par value per share | TUEM | The Nasdaq Capital Market |
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | ||||
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| ☐ | Smaller reporting company | ☒ | ||||
Emerging growth company | ☐ | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at | |
Common Stock, par value $0.01 per share |
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Table of Contents
PART I. |
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ITEM 1. |
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| Condensed Consolidated Balance Sheets as of |
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| 7 | |||
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| Notes to Condensed Consolidated Financial Statements (Unaudited) | 8 | ||
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ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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ITEM 3. |
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ITEM 4. |
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PART II. |
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ITEM 1. |
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ITEM 1A. |
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ITEM 6. |
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35 | ||||
2
Forward-Looking Statements
This Form 10-Q contains forward looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995, which are based on management’s current expectations, estimates and projections. These statements may be found throughout this Form 10-Q, particularly under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” among others. Forward looking statements typically are identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend” and similar words, although some forward looking statements are expressed differently. You should consider statements that contain these words or words that state other “forward looking” information carefully because they describe our current expectations, plans, strategies and goals and our beliefs concerning future business conditions, future results of operations, future financial positions, and our current business outlook. Forward looking statements also include statements regarding the Company’s strategy, future operations, performance and prospects, sales and growth expectations, our liquidity, capital expenditure plans, future store openings and closings, our inventory management plans and merchandising and marketing strategies.
The terms “Tuesday Morning,” “the Company,” “we,” “us,” and “our” as used in this Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries.
Reference is hereby made to the Company’s filings with the Securities and Exchange Commission, including, but not limited to, "Item 1A. Risk Factors" of the Company's most Annual Report on Form 10-K for the fiscal year ended June 30, 2021, for examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. These risks, uncertainties and events also include, but are not limited to, the following: the effects and length of the COVID-19 pandemic; changes in economic and political conditions which may adversely affect consumer spending; our ability to identify and respond to changes in consumer trends and preferences; our ability to mitigate reductions of customer traffic in shopping centers where our stores are located; increases in the cost or a disruption in the flow of our products, including the extent and duration of the ongoing impacts to domestic and international supply chains from the COVID-19 pandemic; impacts to general economic conditions and supply chains from the disruption in Europe; impacts of inflation and increasing interest rates; our ability to continuously attract buying opportunities for off-price merchandise and anticipate consumer demand; our ability to obtain merchandise on varying payment terms; our ability to successfully manage our inventory balances profitably; our ability to effectively manage our supply chain operations; loss of, disruption in operations of, or increased costs in the operation of our distribution center facility; our ability to generate sufficient cash flows, maintain compliance with our debt agreements and continue to access the capital markets; unplanned loss or departure of one or more members of our senior management or other key management; increased or new competition; our ability to maintain and protect our information technology systems and technologies and related improvements to support our growth; increases in fuel prices and changes in transportation industry regulations or conditions; changes in federal tax policy including tariffs; the success of our marketing, advertising and promotional efforts; our ability to attract, train and retain quality employees in appropriate numbers, including key employees and management; increased variability due to seasonal and quarterly fluctuations; our ability to protect the security of information about our business and our customers, suppliers, business partners and employees; our ability to comply with existing, changing and new government regulations; our ability to manage risk to our corporate reputation from our customers, employees and other third parties; our ability to manage litigation risks from our customers, employees and other third parties; our ability to manage risks associated with product liability claims and product recalls; the impact of adverse local conditions, natural disasters and other events; our ability to manage the negative effects of inventory shrinkage; our ability to manage exposure to unexpected costs related to our insurance programs; increased costs or exposure to fraud or theft resulting from payment card industry related risk and regulations; our ability to meet all applicable requirements for continued listing of our common stock on The Nasdaq Stock Market, including the minimum bid requirement of $1.00 per share, and our ability to maintain an effective system of internal controls over financial reporting. The Company’s filings with the SEC are available at the SEC’s web site at www.sec.gov.
The forward-looking statements made in this Form 10-Q relate only to events as of the date on which the statements were made. Except as may be required by law, the Company disclaims obligations to update any forward-looking statements to reflect events and circumstances after the date on which the statements were made or to reflect the occurrence of unanticipated events. Investors are cautioned not to place undue reliance on any forward-looking statements.
3
PART I — FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
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Tuesday Morning Corporation
Condensed Consolidated Balance Sheets (unaudited)
March 31, 2021 (unaudited) and June 30, 2020
(In thousands, except share and per share data)
|
| March 31, |
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| June 30, |
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| April 2, |
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| June 30, |
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|
| 2021 |
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| 2020 |
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| 2022 |
|
| 2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 6,314 |
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| $ | 46,676 |
|
| $ | 8,457 |
| $ | 6,534 |
| |
Restricted cash |
|
| 55,569 |
|
|
| — |
|
| 0 |
| 22,321 |
| |||
Inventories |
|
| 137,360 |
|
|
| 114,905 |
|
| 176,650 |
| 145,075 |
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Prepaid expenses |
|
| 8,081 |
|
|
| 6,353 |
|
| 5,073 |
| 5,486 |
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Other current assets |
|
| 3,970 |
|
|
| 7,210 |
|
|
| 1,862 |
|
|
| 3,385 |
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Total Current Assets |
|
| 211,294 |
|
|
| 175,144 |
|
| 192,042 |
| 182,801 |
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Property and equipment, net |
|
| 39,082 |
|
|
| 68,635 |
|
| 30,365 |
| 37,784 |
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Operating lease right-of-use assets |
|
| 203,565 |
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|
| 258,433 |
|
| 162,320 |
| 193,244 |
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Deferred financing costs |
|
| 2,705 |
|
|
| — |
|
| 1,816 |
| 2,459 |
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Other assets |
|
| 3,329 |
|
|
| 3,178 |
|
|
| 1,641 |
|
|
| 1,596 |
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Total Assets |
| $ | 459,975 |
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| $ | 505,390 |
|
| $ | 388,184 |
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| $ | 417,884 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Debtor-in-possession financing |
|
| — |
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| $ | 100 |
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Accounts payable |
|
| 46,082 |
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| 5,514 |
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| $ | 42,950 |
| $ | 45,930 |
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Accrued liabilities |
|
| 72,866 |
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| 33,942 |
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| 39,082 |
| 46,454 |
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Operating lease liabilities |
|
| 53,480 |
|
|
| — |
|
|
| 54,165 |
|
|
| 54,632 |
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Total Current Liabilities |
|
| 172,428 |
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|
| 39,556 |
|
| 136,197 |
| 147,016 |
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Long-term debt (see Note 8 for amounts due to related parties) |
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| 25,392 |
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|
| — |
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Lease liability — non-current |
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| 169,190 |
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|
| — |
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Operating lease liabilities — non-current |
| 120,711 |
| 156,240 |
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Borrowings under revolving credit facility |
| 54,077 |
| 12,000 |
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Long term debt (see Note 3 for amounts due to related parties) |
| 29,531 |
| 26,374 |
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Asset retirement obligation — non-current |
|
| 971 |
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| 1,213 |
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| 1,056 |
| 1,021 |
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Other liabilities — non-current |
|
| 3,061 |
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| 1,347 |
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| 607 |
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| 3,432 |
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Total Liabilities not subject to compromise |
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| 371,042 |
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| 42,116 |
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Liabilities subject to compromise |
|
| — |
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| 456,339 |
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Total Liabilities |
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| 371,042 |
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|
| 498,455 |
|
| 342,179 |
| 346,083 |
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Commitments and contingencies |
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|
|
| — |
| — |
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Stockholders’ equity: |
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Preferred stock, par value $0.01 per share, authorized 10,000,000 shares; NaN issued or outstanding |
|
| — |
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| — |
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Common stock, par value $0.01 per share, authorized 200,000,000 shares at March 31, 2021 and authorized 100,000,000 shares at June 30, 2020; 87,978,189 shares issued and 86,194,528 shares outstanding at March 31, 2021 and 49,124,313 shares issued and 47,340,652 shares outstanding at June 30, 2020 |
|
| 832 |
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|
| 455 |
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Preferred stock, par value $0.01 per share, authorized 10,000,000 shares; |
| 0 |
| 0 |
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Common stock, par value $0.01 per share, authorized 200,000,000 shares; |
| 858 |
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| 862 |
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Additional paid-in capital |
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| 303,798 |
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| 244,021 |
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| 310,566 |
| 305,498 |
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Retained deficit |
|
| (208,885 | ) |
|
| (230,729 | ) |
| (258,607 | ) |
| (227,747 | ) | ||
Less: 1,783,661 common shares in treasury, at cost, at March 31, 2021 and 1,783,661 common shares in treasury, at cost, at June 30, 2020 |
|
| (6,812 | ) |
|
| (6,812 | ) | ||||||||
Less: 1,783,661 common shares in treasury, at cost, at April 2, 2022 |
|
| (6,812 | ) |
|
| (6,812 | ) | ||||||||
Total Stockholders’ Equity |
|
| 88,933 |
|
|
| 6,935 |
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|
| 46,005 |
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| 71,801 |
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Total Liabilities and Stockholders’ Equity |
| $ | 459,975 |
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| $ | 505,390 |
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| $ | 388,184 |
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| $ | 417,884 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Tuesday Morning Corporation
Condensed Consolidated Statements of Operations (unaudited)
Three and Nine Months Ended
March 31, 2021 and 2020
(In thousands, except per share data)
|
| Three Months Ended |
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| Nine Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| March 31, |
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| March 31, |
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| April 2, |
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| March 31, |
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| April 2, |
|
| March 31, |
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|
| 2021 |
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| 2020 |
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| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
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| 2022 |
|
| 2021 |
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Net sales |
| $ | 153,345 |
|
| $ | 165,698 |
|
| $ | 513,516 |
|
| $ | 714,551 |
|
| $ | 159,621 |
|
| $ | 153,345 |
|
| $ | 587,875 |
|
| $ | 513,516 |
|
Cost of sales |
|
| 105,145 |
|
|
| 113,531 |
|
|
| 354,192 |
|
|
| 475,476 |
|
|
| 120,700 |
|
|
| 105,145 |
|
|
| 426,396 |
|
|
| 354,192 |
|
Gross profit |
|
| 48,200 |
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|
| 52,167 |
|
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| 159,324 |
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|
| 239,075 |
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Gross margin |
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| 38,921 |
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| 48,200 |
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|
| 161,479 |
|
|
| 159,324 |
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Selling, general and administrative expenses |
|
| 59,183 |
|
|
| 82,814 |
|
|
| 184,600 |
|
|
| 267,273 |
|
|
| 55,568 |
|
|
| 59,183 |
|
|
| 183,507 |
|
|
| 184,600 |
|
Restructuring and abandonment expenses |
|
| 1,047 |
|
|
| — |
|
|
| 7,554 |
|
|
| — |
| ||||||||||||||||
Operating loss |
|
| (12,030 | ) |
|
| (30,647 | ) |
|
| (32,830 | ) |
|
| (28,198 | ) | ||||||||||||||||
Restructuring, impairment and abandonment charges |
|
| (278 | ) |
|
| 1,047 |
|
|
| 2,588 |
|
|
| 7,554 |
| ||||||||||||||||
Operating loss before interest, reorganization and other income/(expense) |
|
| (16,369 | ) |
|
| (12,030 | ) |
|
| (24,616 | ) |
|
| (32,830 | ) | ||||||||||||||||
Other income/(expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Interest expense |
|
| (1,409 | ) |
|
| (499 | ) |
|
| (6,676 | ) |
|
| (1,890 | ) |
|
| (1,919 | ) |
|
| (1,409 | ) |
|
| (5,520 | ) |
|
| (6,676 | ) |
Reorganization items, net |
|
| (23,597 | ) |
|
| — |
|
|
| 62,169 |
|
|
| — |
|
|
| 128 |
|
|
| (23,597 | ) |
|
| (923 | ) |
|
| 62,169 |
|
Other income/(expense), net |
|
| 89 |
|
|
| 223 |
|
|
| (104 | ) |
|
| 456 |
|
|
| 78 |
|
|
| 89 |
|
|
| 210 |
|
|
| (104 | ) |
Other income/(expense) total |
|
| (24,917 | ) |
|
| (276 | ) |
|
| 55,389 |
|
|
| (1,434 | ) |
|
| (1,713 | ) |
|
| (24,917 | ) |
|
| (6,233 | ) |
|
| 55,389 |
|
Income/(loss) before income taxes |
|
| (36,947 | ) |
|
| (30,923 | ) |
|
| 22,559 |
|
|
| (29,632 | ) | ||||||||||||||||
Earnings/(loss) before income taxes |
|
| (18,082 | ) |
|
| (36,947 | ) |
|
| (30,849 | ) |
|
| 22,559 |
| ||||||||||||||||
Income tax expense |
|
| 172 |
|
|
| 117 |
|
|
| 715 |
|
|
| 99 |
|
|
| 69 |
|
|
| 172 |
|
|
| 11 |
|
|
| 715 |
|
Net income/(loss) |
| $ | (37,119 | ) |
| $ | (31,040 | ) |
| $ | 21,844 |
|
| $ | (29,731 | ) | ||||||||||||||||
Net earnings/(loss) |
| $ | (18,151 | ) |
| $ | (37,119 | ) |
| $ | (30,860 | ) |
| $ | 21,844 |
| ||||||||||||||||
Earnings Per Share |
|
|
|
|
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|
|
|
|
|
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Net income/(loss) per common share: |
|
|
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|
|
|
|
|
|
|
|
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Net earnings/(loss) per common share: |
|
|
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Basic |
| $ | (0.55 | ) |
| $ | (0.69 | ) |
| $ | 0.41 |
|
| $ | (0.66 | ) |
| $ | (0.21 | ) |
| $ | (0.55 | ) |
| $ | (0.36 | ) |
| $ | 0.41 |
|
Diluted |
| $ | (0.55 | ) |
| $ | (0.69 | ) |
| $ | 0.41 |
|
| $ | (0.66 | ) |
| $ | (0.21 | ) |
| $ | (0.55 | ) |
| $ | (0.36 | ) |
| $ | 0.41 |
|
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Basic |
|
| 67,584 |
|
|
| 45,314 |
|
|
| 52,741 |
|
|
| 45,162 |
|
|
| 85,097 |
|
|
| 67,584 |
|
|
| 84,695 |
|
|
| 52,741 |
|
Diluted |
|
| 67,584 |
|
|
| 45,314 |
|
|
| 52,741 |
|
|
| 45,162 |
|
|
| 85,097 |
|
|
| 67,584 |
|
|
| 84,695 |
|
|
| 52,741 |
|
Dividends per common share |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Tuesday Morning Corporation
Condensed Consolidated Statements of Stockholders' Equity (unaudited)
Three Months Ended March 31, 2021 and 2020
(In thousands)
| Common Stock |
|
| Additional Paid-In |
|
| Retained |
|
| Treasury |
|
| Total Stockholders' |
| ||||||||||||||||||||||||||||||||
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Stock |
|
| Equity |
| Common Stock |
|
| Additional |
|
| Retained |
|
| Treasury |
|
| Total |
| |||||||||||||||
Balance at December 31, 2020 |
| 46,846 |
|
| $ | 450 |
|
| $ | 244,769 |
|
| $ | (171,766 | ) |
| $ | (6,812 | ) |
| $ | 66,641 |
| |||||||||||||||||||||||
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Stock |
|
| Equity |
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Balance at June 30, 2021 |
| 86,205 |
| $ | 862 |
| $ | 305,498 |
| $ | (227,747 | ) |
| $ | (6,812 | ) |
| $ | 71,801 |
| ||||||||||||||||||||||||||
Net loss |
| — |
|
|
| — |
|
|
| — |
|
|
| (37,119 | ) |
|
| — |
|
|
| (37,119 | ) |
| — |
| — |
| — |
| (14,603 | ) |
| — |
| (14,603 | ) | |||||||||
Share-based compensation |
| — |
|
|
| — |
|
|
| 409 |
|
|
| — |
|
|
| — |
|
|
| 409 |
|
| — |
| — |
| 1,155 |
| — |
| — |
| 1,155 |
| ||||||||||
Shares issued in connection with rights offering |
| 38,182 |
|
|
| 382 |
|
|
| 58,607 |
|
|
| — |
|
|
| — |
|
|
| 58,989 |
| |||||||||||||||||||||||
Shares issued or canceled in connection with employee stock incentive plans and related tax effect |
| 1,167 |
|
|
| — |
|
|
| 13 |
|
|
| — |
|
|
| — |
|
|
| 13 |
|
| (434 | ) |
|
| (4 | ) |
|
| 455 |
|
|
| — |
|
|
| — |
|
|
| 451 |
|
Balance at March 31, 2021 |
| 86,195 |
|
| $ | 832 |
|
| $ | 303,798 |
|
| $ | (208,885 | ) |
| $ | (6,812 | ) |
| $ | 88,933 |
| |||||||||||||||||||||||
Balance at September 30, 2021 |
| 85,771 |
|
| $ | 858 |
|
| $ | 307,108 |
|
| $ | (242,350 | ) |
| $ | (6,812 | ) |
| $ | 58,804 |
| |||||||||||||||||||||||
Net earnings |
| — |
| — |
| — |
| 1,894 |
| — |
| 1,894 |
| |||||||||||||||||||||||||||||||||
Share-based compensation |
| — |
| — |
| 1,833 |
| — |
| — |
| 1,833 |
| |||||||||||||||||||||||||||||||||
Shares issued or canceled in connection with |
| (6 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |||||||||||||||||||||||
Balance at December 31, 2021 |
| 85,765 |
|
| $ | 858 |
|
| $ | 308,941 |
|
| $ | (240,456 | ) |
| $ | (6,812 | ) |
| $ | 62,531 |
| |||||||||||||||||||||||
Net loss |
| — |
| — |
| — |
| (18,151 | ) |
| — |
| (18,151 | ) | ||||||||||||||||||||||||||||||||
Share-based compensation |
| — |
| — |
| 1,678 |
| — |
| — |
| 1,678 |
| |||||||||||||||||||||||||||||||||
Shares issued or canceled in connection with |
| 2 |
|
|
| — |
|
|
| (53 | ) |
|
| — |
|
|
| — |
|
|
| (53 | ) | |||||||||||||||||||||||
Balance at April 2, 2022 |
| 85,767 |
|
| $ | 858 |
|
| $ | 310,566 |
|
| $ | (258,607 | ) |
| $ | (6,812 | ) |
| $ | 46,005 |
|
| Common Stock |
|
| Additional Paid-In |
|
| Retained |
|
| Treasury |
|
| Total Stockholders' |
| ||||||||||||||||||||||||||||||||
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Stock |
|
| Equity |
| Common Stock |
|
| Additional |
| Retained |
| Treasury |
|
| Total |
| |||||||||||||||||
Balance at December 31, 2019 |
| 48,036 |
|
| $ | 462 |
|
| $ | 242,899 |
|
| $ | (63,092 | ) |
| $ | (6,812 | ) |
| $ | 173,457 |
| |||||||||||||||||||||||
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Stock |
|
| Equity |
| |||||||||||||||||||||||||||||
Balance at June 30, 2020 |
| 47,341 |
| $ | 455 |
| $ | 244,021 |
| $ | (230,729 | ) |
| $ | (6,812 | ) |
| $ | 6,935 |
| ||||||||||||||||||||||||||
Net earnings |
| — |
| — |
| — |
| 18,624 |
| — |
| 18,624 |
| |||||||||||||||||||||||||||||||||
Share-based compensation |
| — |
| — |
| 428 |
| — |
| — |
| 428 |
| |||||||||||||||||||||||||||||||||
Shares issued or canceled in connection with |
| (490 | ) |
|
| (5 | ) |
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| — |
| |||||||||||||||||||||||
Balance at September 30, 2020 |
| 46,851 |
|
| $ | 450 |
|
| $ | 244,454 |
|
| $ | (212,105 | ) |
| $ | (6,812 | ) |
| $ | 25,987 |
| |||||||||||||||||||||||
Net earnings |
| — |
| — |
| — |
| 40,339 |
| — |
| 40,339 |
| |||||||||||||||||||||||||||||||||
Share-based compensation |
| — |
| — |
| 315 |
| — |
| — |
| 315 |
| |||||||||||||||||||||||||||||||||
Shares issued or canceled in connection with |
| (5 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |||||||||||||||||||||||
Balance at December 31, 2020 |
| 46,846 |
|
| $ | 450 |
|
| $ | 244,769 |
|
| $ | (171,766 | ) |
| $ | (6,812 | ) |
| $ | 66,641 |
| |||||||||||||||||||||||
Net loss |
| — |
|
|
| — |
|
|
| — |
|
|
| (31,040 | ) |
|
| — |
|
|
| (31,040 | ) |
| — |
| — |
| — |
| (37,119 | ) |
| — |
| (37,119 | ) | |||||||||
Share-based compensation |
| — |
|
|
| — |
|
|
| 581 |
|
|
| — |
|
|
| — |
|
|
| 581 |
|
| — |
| — |
| 409 |
| — |
| — |
| 409 |
| ||||||||||
Shares issued in connection with rights offering |
| 38,182 |
| 382 |
| 58,607 |
| — |
| — |
| 58,989 |
| |||||||||||||||||||||||||||||||||
Shares issued or canceled in connection with employee stock incentive plans and related tax effect |
| (25 | ) |
|
| (1 | ) |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 1,167 |
|
|
| — |
|
|
| 13 |
|
|
| — |
|
|
| — |
|
|
| 13 |
|
Balance at March 31, 2020 |
| 48,011 |
|
| $ | 461 |
|
| $ | 243,481 |
|
| $ | (94,132 | ) |
| $ | (6,812 | ) |
| $ | 142,998 |
| |||||||||||||||||||||||
Balance at March 31, 2021 |
| 86,195 |
|
| $ | 832 |
|
| $ | 303,798 |
|
| $ | (208,885 | ) |
| $ | (6,812 | ) |
| $ | 88,933 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
56
Tuesday Morning Corporation
Condensed Consolidated Statements of Stockholders' EquityCash Flows (unaudited)
Nine Months Ended March 31, 2021 and 2020
(In thousands)
| Common Stock |
|
| Additional Paid-In |
|
| Retained |
|
| Treasury |
|
| Total Stockholders' |
| |||||||||
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Stock |
|
| Equity |
| ||||||
Balance at June 30, 2020 |
| 47,341 |
|
| $ | 455 |
|
| $ | 244,021 |
|
| $ | (230,729 | ) |
| $ | (6,812 | ) |
| $ | 6,935 |
|
Net income |
| — |
|
|
| — |
|
|
| — |
|
|
| 21,844 |
|
|
| — |
|
|
| 21,844 |
|
Share-based compensation |
| — |
|
|
| — |
|
|
| 1,152 |
|
|
| — |
|
|
| — |
|
|
| 1,152 |
|
Shares issued in connection with rights offering |
| 38,182 |
|
|
| 382 |
|
|
| 58,607 |
|
|
| — |
|
|
| — |
|
|
| 58,989 |
|
Shares issued or canceled in connection with employee stock incentive plans and related tax effect |
| 672 |
|
|
| (5 | ) |
|
| 18 |
|
|
| — |
|
|
| — |
|
|
| 13 |
|
Balance at March 31, 2021 |
| 86,195 |
|
| $ | 832 |
|
| $ | 303,798 |
|
| $ | (208,885 | ) |
| $ | (6,812 | ) |
| $ | 88,933 |
|
|
| Nine Months Ended |
| |||||
|
| April 2, |
|
| March 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net earnings/(loss) |
| $ | (30,860 | ) |
| $ | 21,844 |
|
Adjustments to reconcile net earnings/(loss) to net cash used in operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 10,175 |
|
|
| 11,933 |
|
Loss on impairment and abandonment of assets |
|
| 2,126 |
|
|
| 5,638 |
|
Amortization of financing costs and interest expense |
|
| 3,900 |
|
|
| 5,949 |
|
(Gain)/loss on disposal of assets |
|
| 71 |
|
|
| (1,403 | ) |
Gain on sale-leaseback |
|
| — |
|
|
| (49,639 | ) |
Share-based compensation |
|
| 4,666 |
|
|
| 1,347 |
|
Rights Offering and Backstop Agreement |
|
| — |
|
|
| 18,990 |
|
Gain on lease terminations |
|
| — |
|
|
| (93,281 | ) |
Deferred income taxes |
|
| (118 | ) |
|
| — |
|
Construction allowances from landlords |
|
| 472 |
|
|
| 401 |
|
Change in operating assets and liabilities: |
|
|
|
|
|
| ||
Inventories |
|
| (31,575 | ) |
|
| (22,650 | ) |
Prepaid and other current assets |
|
| 1,891 |
|
|
| (2,952 | ) |
Accounts payable |
|
| (2,689 | ) |
|
| (42,899 | ) |
Accrued liabilities |
|
| (7,710 | ) |
|
| 37,295 |
|
Operating lease assets and liabilities |
|
| (5,421 | ) |
|
| (6,538 | ) |
Other liabilities — non-current |
|
| (2,779 | ) |
|
| 1,481 |
|
Income taxes payable |
|
| 265 |
|
|
| — |
|
Net cash used in operating activities |
|
| (57,586 | ) |
|
| (114,484 | ) |
Cash flows from investing activities: |
|
|
|
|
|
| ||
Capital expenditures |
|
| (5,164 | ) |
|
| (2,342 | ) |
Proceeds from sale-leaseback |
|
| — |
|
|
| 68,566 |
|
Proceeds from sale of assets |
|
| — |
|
|
| 1,896 |
|
Net cash provided by/(used in) investing activities |
|
| (5,164 | ) |
|
| 68,120 |
|
Cash flows from financing activities: |
|
|
|
|
|
| ||
Proceeds from borrowings under revolving credit facility |
|
| 675,171 |
|
|
| 613,370 |
|
Repayments of borrowings under revolving credit facility |
|
| (633,094 | ) |
|
| (613,470 | ) |
Proceeds from term loan |
|
| — |
|
|
| 25,000 |
|
Proceeds from Rights Offering |
|
| — |
|
|
| 40,000 |
|
Proceeds from exercise of employee stock options |
|
| 459 |
|
|
| 12 |
|
Tax payments related to vested stock awards |
|
| (63 | ) |
|
| — |
|
Payments on finance leases |
|
| (121 | ) |
|
| (167 | ) |
Payment of financing fees |
|
| — |
|
|
| (3,174 | ) |
Net cash provided by financing activities |
|
| 42,352 |
|
|
| 61,571 |
|
Net increase/(decrease) in cash, cash equivalents and restricted cash |
|
| (20,398 | ) |
|
| 15,207 |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
| 28,855 |
|
|
| 46,676 |
|
Cash, cash equivalents and restricted cash, end of period |
| $ | 8,457 |
|
| $ | 61,883 |
|
| Common Stock |
|
| Additional Paid-In |
|
| Retained |
|
| Treasury |
|
| Total Stockholders' |
| |||||||||
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Stock |
|
| Equity |
| ||||||
Balance at June 30, 2019 |
| 46,683 |
|
| $ | 465 |
|
| $ | 241,456 |
|
| $ | (63,800 | ) |
| $ | (6,812 | ) |
| $ | 171,309 |
|
Net loss |
| — |
|
|
| — |
|
|
| — |
|
|
| (29,731 | ) |
|
| — |
|
|
| (29,731 | ) |
Cumulative effect of change in accounting principle |
| — |
|
|
| — |
|
|
| — |
|
|
| (601 | ) |
|
| — |
|
|
| (601 | ) |
Share-based compensation |
| — |
|
|
| — |
|
|
| 2,022 |
|
|
| — |
|
|
| — |
|
|
| 2,022 |
|
Shares issued or canceled in connection with employee stock incentive plans and related tax effect |
| 1,328 |
|
|
| (4 | ) |
|
| 3 |
|
|
|
|
|
|
| — |
|
|
| (1 | ) |
Balance at March 31, 2020 |
| 48,011 |
|
| $ | 461 |
|
| $ | 243,481 |
|
| $ | (94,132 | ) |
| $ | (6,812 | ) |
| $ | 142,998 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
Tuesday Morning Corporation
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended March 31, 2021 and 2020
(In thousands)
|
| Nine Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income/(loss) |
| $ | 21,844 |
|
| $ | (29,731 | ) |
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 11,933 |
|
|
| 20,935 |
|
Loss on abandonment of assets |
|
| 5,638 |
|
|
| — |
|
Amortization of financing costs and interest expense |
|
| 5,949 |
|
|
| 163 |
|
(Gain)/loss on disposal of assets |
|
| (1,403 | ) |
|
| 92 |
|
Gain on sale-leaseback |
|
| (49,639 | ) |
|
| — |
|
Share-based compensation |
|
| 1,347 |
|
|
| 2,082 |
|
Rights Offering and Backstop Agreement |
|
| 18,990 |
|
|
| — |
|
Gain on lease terminations |
|
| (93,281 | ) |
|
| — |
|
Construction allowances from landlords |
|
| 401 |
|
|
| 1,313 |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Inventories |
|
| (22,650 | ) |
|
| 22,341 |
|
Prepaid and other current assets |
|
| (2,952 | ) |
|
| 1,631 |
|
Accounts payable |
|
| (42,899 | ) |
|
| (7,339 | ) |
Accrued liabilities |
|
| 37,295 |
|
|
| (9,842 | ) |
Operating lease assets and liabilities |
|
| (6,538 | ) |
|
| (1,085 | ) |
Income taxes payable |
|
| — |
|
|
| 153 |
|
Other liabilities — non-current |
|
| 1,481 |
|
|
| (106 | ) |
Net cash provided by/(used in) operating activities |
|
| (114,484 | ) |
|
| 607 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (2,342 | ) |
|
| (15,513 | ) |
Proceeds from sale-leaseback |
|
| 68,566 |
|
|
| — |
|
Purchases of intellectual property |
|
| — |
|
|
| (27 | ) |
Proceeds from sales of assets |
|
| 1,896 |
|
|
| 114 |
|
Net cash provided by/(used in) investing activities |
|
| 68,120 |
|
|
| (15,426 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from borrowings under revolving credit facility |
|
| 613,370 |
|
|
| 265,353 |
|
Repayments of borrowings under revolving credit facility |
|
| (613,470 | ) |
|
| (209,403 | ) |
Proceeds from term loan |
|
| 25,000 |
|
|
| — |
|
Proceeds from issuance of common stock and exercise of employee stock options |
|
| 40,012 |
|
|
| — |
|
Change in cash overdraft |
|
| — |
|
|
| (4,996 | ) |
Payments on finance leases |
|
| (167 | ) |
|
| (196 | ) |
Payment of financing fees |
|
| (3,174 | ) |
|
| — |
|
Net cash provided by financing activities |
|
| 61,571 |
|
|
| 50,758 |
|
Net increase in cash, cash equivalents and restricted cash |
|
| 15,207 |
|
|
| 35,939 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
| 46,676 |
|
|
| 11,395 |
|
Cash, cash equivalents and restricted cash at end of period |
| $ | 61,883 |
|
| $ | 47,334 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Tuesday Morning Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
The terms “Tuesday Morning,” the “Company,” “we,” “us” and “our” as used in this Quarterly Report on Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries. Other than as disclosed in this document, please refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 20202021 for our critical accounting policies.
1. Nature of Operations and Significant Accounting Policies
1.
Basis of Presentationpresentation — The unaudited interimcondensed consolidated financial statements included herein include the accounts of Tuesday Morning Corporation and its subsidiaries (the "Company") and have been prepared by uswithout audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”"SEC"). CertainAs applicable under such regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuantomitted. We believe the presentation and disclosures herein are adequate to such rulesmake the information not misleading, and regulations. Thesethe condensed consolidated financial statements includereflect all adjustments, consisting only of those of aelimination entries and normal recurring nature,adjustments which in the opinion of management, are necessary tofor a fair presentation of the financial position, results of operations and cash flows at the dates and for the periods presented. We do not present fairlya condensed consolidated statement of comprehensive income as there are no other comprehensive income items in either the current or prior fiscal periods.
Our business results historically have fluctuated throughout the year and, as a result, the operating results of the interim periods presented andare not necessarily indicative of the results that may be achieved for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes theretoincluded in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.2021. The condensed consolidated balance sheet at June 30, 20202021 has been derived from the audited consolidated financial statements at that date. These interim financial statements do not include allThe preparation of the information and notes required by GAAP for complete financial statements. For further information, refer to the auditedcondensed consolidated financial statements is in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and notes thereto includedassumptions that affect the reported amounts and related disclosures. Actual amounts could differ from those estimates.
On February 23, 2022, the board of directors of the Company approved a change in our Annual Report on Form 10-K for the fiscal year endedend from a calendar year ending on June 30 2020.
The accompanying unaudited interim consolidated financial statements includeto a 52-53 week year ending on the accounts of Tuesday Morning Corporation,Saturday closest to June 30, effective beginning with fiscal year 2022. In a Delaware corporation, and its wholly‑owned subsidiaries. All entities52 week fiscal year, each of the Company’s quarterly periods will comprise 13 weeks. The additional week in a 53 week fiscal year is added to the fourth quarter, making such quarter consist of 14 weeks. The Company made the fiscal year change on a prospective basis and will not adjust operating results for prior periods.
We operate our business as a single operating segment.
(A) Cash and Cash Equivalents—Cash and cash equivalents include credit card receivables and all highly liquid instruments with original maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value. At April 2, 2022 and June 30, 2021, credit card receivables from third party consumer credit card providers were included$6.8 million and $3.2 million, respectively. Such receivables generally are collected within one week of the balance sheet date.
(B) Restricted Cash—Restricted cash was $22.3 million, as of June 30, 2021, which was held in the filingUnsecured Creditor Claims Fund (defined below in Note 2).
Emergence from Chapter 11 Bankruptcy Proceedings
In response to the impacts of and subsequent emergence from athe COVID-19 pandemic, on May 27, 2020 (the “Petition Date”), we filed voluntary petitionpetitions (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the “Bankruptcy Court”) and all entities are included in our consolidated financial statements. Separate condensed combined financial statements of the entities were not required during the reorganization proceedings, nor required post emergence from bankruptcy. All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications were made to prior period amounts to conform to the current period presentation. None of the reclassifications affected our net income in any period. We do not present a consolidated statement of comprehensive income as there are no other comprehensive income items in either the current or prior fiscal periods.
The results of operations for the three and nine months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full fiscal year ending June 30, 2021, which we refer to as fiscal 2021, due in part to the seasonality of our business, the financial impact of the COVID-19 pandemic, and the Chapter 11 cases, discussed further below.
The preparation of unaudited interim consolidated financial statements, in conformity with GAAP, requires us to make assumptions and use estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to inventory valuation under the retail method and estimation of reserves and valuation allowances specifically related to insurance, income taxes and litigation. Actual results could differ materially from these estimates. The COVID-19 pandemic has increased the difficulty in making various estimates in our financial statements. Our fiscal year ends on June 30 and we operate our business as a single operating segment.
COVID-19 Pandemic
The COVID-19 pandemic has had, and could continue to have, an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow.
On March 25, 2020, we temporarily closed all of our stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. Stores gradually reopened as allowed by state and local jurisdictions, and all but 2 of our stores had reopened as of the end of June 2020. In the first quarter of fiscal 2021, we completed the permanent closure of 197 stores. The scope and duration of this pandemic and the related disruption to our business and financial impacts cannot be reasonably estimated at this time. While we have taken actions to minimize costs, some of which are permanent including the closure of 197 stores and the closure of our Phoenix distribution center, and mitigate the related risks, there can be no assurance that these measures will continue to provide benefit or that they will be adequate to mitigate future changes in circumstances.
Voluntary Petitions for Reorganization under Chapter 11
On May 27, 2020 (the “Petition Date”), we filed the Chapter 11 Cases.. The Chapter 11 Cases were jointly administered for procedural purposes.
8
Significant Bankruptcy Court Actions
purposes. During the pendency of the Chapter 11 Cases, we continued to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. On May 28, 2020, at the first-day hearingsIn accordance with orders of the Chapter 11 Cases, the Bankruptcy Court, granted relief in conjunction with various motions intendedwe entered into certain debtor-in-possession financing arrangements to ensure our ability to continue our ordinary operations after the Petition Date. The Bankruptcy Court’s orders granting such relief, entered on May 28, 2020 and May 29, 2020, authorized us to, among other things, pay certain pre-petition employee and retiree expenses and benefits, use our existing cash management system, maintain and administer customer programs, pay certain critical and foreign vendors and pay certain pre-petition taxes and related fees. In addition, the Bankruptcy Court issued orders approving, among other things, (1) our entry into the Senior Secured Super Priority Debtor-in-Possession Credit Agreement (the “DIP ABL Credit Agreement”) among the Company, JPMorgan Chase Bank, N.A., as administrative agent, for itself and the other lenders, which provided for a super priority secured debtor-in-possession revolving credit facility in an aggregate amount of up to $100.0 million (the “DIP ABL Facility”), and (2) our use of cash collateral in accordance with the terms of the DIP ABL Credit Agreement. See Note 8 to the Consolidated Financial Statements for additional information regarding the DIP ABL Facility.
These orders were significant because they allowed us to operate our businesses in the normal course.
The Bankruptcy Court has issued orders designed to assist us in preserving certain tax attributesprovide financing during the pendency of the Chapter 11 Cases by establishing, among other things, notification and hearing procedures (the “Procedures”) relating to proposed transfers of its common stock and the taking of worthless stock deductions. The Procedures, among other things, restricted transfers involving, and required notice of the holdings of and proposed transactions by any person or “entity” (as defined the applicable U.S. Treasury Regulations) owning or seeking to acquire ownership of 4.5% or more of the Company’s common stock. The Bankruptcy Court orders provided that any actions in violation of the Procedures (including the notice requirements) would be null and void ab initio, and (a) the person or entity making such a transfer would be required to take remedial actions specified by us to appropriately reflect that such transfer of our common stock is null and void ab initio and (b) the person or entity making such a declaration of worthlessness with respect to our common stock would be required to file an amended tax return revoking such declaration and any related deduction to reflect that such declaration is void ab initio.Cases. See Note 3 “Debt” below for additional information regarding these debtor-in-possession financing arrangements.
On June 9, 2020, the Bankruptcy Court issued an order approving procedures for the closure of up to 230 of our store locations.
In early June 2020, in accordance with orders of the Bankruptcy Court, we commenced the process to close 132 store locations in a first wave of store closings.locations. By the end of July 2020, all of these stores were permanently closed. In mid-July 2020, we began the process to close an additional 65 stores following negotiations with our landlords, and those store closures were completed in August 2020. In total, we permanently closed 197 stores during the first quarter of fiscal 2021,2021. In addition, we recorded abandonment charges of $4.8 million, related to our Phoenix distribution center closure plan. In the second quarter of fiscal 2021, we recorded abandonment charges of $0.8 million, related to our Phoenix distribution center closure plan. We closed our Phoenix, Arizona distribution center (“Phoenix distribution center”) in the second quarter of fiscal 2021.
On July 10, 2020, in accordance with a final order issued by the Bankruptcy Court on July 10, 2020, we entered into a Senior Secured Super Priority Debtor-In-Possession Delayed Draw Term Loan Agreement (the “DIP DDTL Agreement”) with the Franchise Group, Inc. (the “Lender”). Pursuant to the DIP DDTL Agreement, the Lender agreed to lend us up to an aggregate principal amount of $25.0 million in the form of delayed draw term loans (the “DIP Term Facility”). See Note 8 for additional information.
On September 23, 2020, the Company and its subsidiaries filed with the Bankruptcy Court a proposed Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Original Plan”) and a proposed Disclosure Statement in Support of the Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Original Disclosure Statement”) describing the Plan and the solicitation of votes to approve the same from certain of the Debtors’ creditors with respect to the Chapter 11 Cases.
On September 23, 2020, contemporaneously with the filing of the Original Plan and Original Disclosure Statement, the Company and its subsidiaries filed an expedited motion for entry of an order (1) approving sale and bidding procedures in connection with a potential sale of assets of the Company and its subsidiaries, (2) authorizing the sale of assets free and clear of all liens, claims, encumbrances and other interests, and (3) granting related relief (the “Bidding Procedures Motion”). The Company believed that the concurrent prosecution of a plan of reorganization and a court-approved process for bidding and potential sale of substantially all of their assets would allow the Company and its subsidiaries to assess the relative benefits of a plan of reorganization and a sale. The Bidding Procedures Motion provided that the Bankruptcy Court would consider approval of a sale of assets on October 29, 2020 if the Company determined to proceed with a sale of assets.
On October 26, 2020, the Company and its subsidiaries filed a motion with the Bankruptcy Court indicating the Company would not be seeking approval of a sale of assets on October 29, 2020. On October 26, 2020, the Company also filed a motion indicating the Company was working to make revisions to the Original Plan and Original Disclosure Statement and seeking to establish a hearing on November 9, 2020 for consideration of a revised plan of reorganization and disclosure statement. The Company reserved the right to continue to pursue a sale of assets if the Company determined that a sale of assets is in the best interests of the bankruptcy estate.
On November 4, 2020, the Company and its subsidiaries filed with the Bankruptcy Court a proposed Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code and a proposed Amended Disclosure Statement. On November 16, 2020, the Company and its subsidiaries filed with the Bankruptcy Court a proposed Revised Second Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Amended Plan”) and a proposed Amended Disclosure Statement (the “Amended Disclosure Statement”) in support of the Amended Plan describing the Amended Plan and the solicitation of votes to approve the same from certain of the Debtors’ creditors with respect to the Chapter 11 Cases. The Amended Plan and the Amended
8
Disclosure Statement contemplated the proposeddebt financing transactions described in Notes 8Note 3 below under the caption “Post-Emergence Debt Financing Arrangements,” the exchange and 13 below, including the transactions contemplated by the Purchase and Sale Agreement (as definedRights Offering (defined in Note 13),6 below) and the New ABL Facility (as definedsale-leaseback transactions described in Note 8), the Term Loan Credit Agreement (as defined in Note 8) and the Rights Offering (as defined below). 8 below.
On November 18, 2020, the Bankruptcy Court issued an order approving the Amended Disclosure Statement. On December 23, 2020, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Amended Plan, with certain modifications described in the Confirmation Order (as modified and confirmed, the “Plan of Reorganization”). On December 31, 2020, all of the conditions precedent to the Plan of Reorganization were satisfied and the Company completed the transactionsdebt financing and sale-leaseback contemplated byin the Purchase and Sale Agreement,Plan of Reorganization. However, the New ABL Facility andclosing of the Term Loan Credit Agreement.Rights Offering was considered a critical component to the execution of our confirmed Plan of Reorganization, therefore, we continued to apply the requirements of Accounting Standards Codification ("ASC") 852 – Reorganizations until that transaction closed on February 9, 2021.
In accordance with the Plan of Reorganization, effective December 31, 2020 (the “Effective Date”), the Company’s board of directors was comprised of 9 members, including 5 continuing directors of the Company, 3 new directors appointed by the Backstop Party (as defined in Note 6 below) and 1 director appointed by the equity committee in the Chapter 11 Cases.
Pursuant to the Plan of Reorganization, each outstanding share of the Company’s common stock as of the close of business on January 4, 2021 was exchanged (the “Exchange”) for (1) 1 new share of the Company’s stock and (2) a share purchase right entitling the holder to purchase its pro rata portion of shares available to eligible holders in the Rights Offering. In accordance withOffering described under the caption “Equity Financing under the Plan of Reorganization, the Company commenced a $40.0 million rights offering (the “Rights Offering”), under which eligible holders of the Company’s common stock could purchase up to $24.0 million of shares of the Company’s common stock at a purchase price of $1.10 per share, and Osmium Partners, LLC or its affiliates, including a special purpose entity affiliate of Osmium Partners, LLC jointly owned with Tensile Capital Management (the “Backstop Party”), could purchase up to $16 million of shares of the Company’s common stock at a purchase price of $1.10 per share. Pursuant to a backstop commitment agreement, the Backstop Party agreed to purchase all unsubscribed sharesReorganization” in the Rights Offering.
The subscription period for the Rights Offering expired on February 1, 2021, with eligible holders subscribing to purchase approximately $19.8 million of shares, with the Backstop Party purchasing the remaining $20.2 million of shares.Note 6 below. On February 9, 2021, the Company closedcompleted the equity financing contemplated by the Plan of Reorganization.
On September 29, 2021, the U.S. Bankruptcy Court issued a final decree (the “Final Decree”) closing the Chapter 11 Cases of the Company and its subsidiaries. While the Company emerged from bankruptcy proceedings on December 31, 2020, the Rights OfferingChapter 11 Cases remained opened pending final resolution of all claims of general unsecured creditors. The Company was able to resolve all of the claims for approximately $14 million less than the amounts reserved and retained in the three months ended March 31, 2021, recorded proceeds of $40.0 million and recognized a non-cash charge of approximately $14.5 million as a resultUnsecured Creditor Claim Fund. Upon entry of the changeFinal Decree, the approximately $14 million remaining in fair valuethe escrow account was returned to the Company to make a repayment on its ABL credit facility and the Chapter 11 Cases are now final.
See Note 2 regarding Bankruptcy Accounting for further discussion.
Listing
During the pendency of our bankruptcy proceedings, the Company’s common stock issued towas delisted by the Backstop Party as measured from the consummation of the Exchange through the close date (“Backstop Premium”). The change in fair value was determined by reference to the Company’s stock price, traded over-the-counter, discounted for the restrictions limited the holders ability to resell securities until they are registered pursuant to the Registration Rights Agreement entered into on February 9, 2021 between the Company and Backstop Party. In addition, on the close date, the Company issued warrants with rights to purchase 10 million shares of common stock with an exercise price of $1.65 and a five year term to the Backstop Party (“Warrants”). The Company classified the Warrants as equity instruments and recognized expense of $2.5 million measured at fair value using the Black-Scholes model for the three months ended March 31, 2021. Finally, on the close date the Backstop Party received a backstop fee in the amount of $2.0 million (payable in shares of common stock valued at $1.10 per share) that was classified as an equity instrument for the three month period ended March 31, 2021. The non-cash charges of approximately $14.5 million for the Backstop Premium, the $2.5 million of expense related to the Warrants, and backstop fee of approximately $2.0 million are recorded in Reorganization items, net in our Consolidated Statements of Operations for the three and nine months ended March 31, 2021. In accordance with the terms of the Plan of Reorganization, all proceeds from the Rights Offering will be used to make payments of the claims of general unsecured creditors in the Chapter 11 Cases.
De-listing
On May 27, 2020, the Company received a letter from the Listing Qualifications Department staff of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying it that, as a result ofand began trading on the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, Nasdaq determined thatOTC Pink marketplace under the symbol “TUESQ”. In January 2021, following our emergence from bankruptcy, the Company’s common stock would be delisted from Nasdaq. On June 8, 2020,began trading of the Company’s common stock on Nasdaq was suspended. On July 1, 2020, Nasdaq filed a Form 25 with the SEC to delist the Company’s common stock. During the pendency of the Chapter 11 Cases, the Company’s common stock traded over the counter in the OTC Pink Market under the symbol “TUESQ”. Following the Company’s legal emergence from bankruptcy, we applied for listing on the over the counter market, and the Company’s common stock now trades over the counter on the OTCQX market under the ticker symbol “TUEM.”
10
On May 24, 2021, Nasdaq approved our application for the relisting of the Company's common stock on the Nasdaq Capital Market. The Company's common stock was relisted and commenced trading on the Nasdaq Capital Market at the opening of the market on May 25, 2021, under the ticker symbol "TUEM."
9
Going ConcernImpact of the COVID-19 Pandemic
Our operating loss was $32.8 and $28.2 million for the nine months ended March 31, 2021 and March 31, 2020, respectively. Our operating loss for the fiscal year ended June 30, 2020 was $159.2 million.
The COVID-19 pandemic has had an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow. On March 25, 2020, we temporarily closed all of our 687 stores nationwide, severely reducing revenues, resulting in significant operating losses and the resulting store closures severely reduced our revenues andelimination of substantially all operating cash flowsflow. As allowed by state and local jurisdictions, 685 of our stores gradually reopened as of the end of June 2020, and 2 were permanently closed during the third and fourth quartersquarter. In accordance with our bankruptcy plan of our fiscal year ended June 30, 2020 as well asreorganization, described below, we completed the first nine monthspermanent closure of fiscal 2021. As described further above, on May 27, 2020, we commenced the Chapter 11 Cases in the Bankruptcy Court. Our Plan of Reorganization was confirmed by the Bankruptcy Court on December 23, 2020, and all listed material conditions precedent were deemed resolved by the December 31, 2020 legal effective date of emergence as governed by the Bankruptcy Court. The Rights Offering that closed on February 9, 2021 raised approximately $40 million of cash and was considered a critical component to the execution of our confirmed Plan of Reorganization.
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The consolidated financial statements do not include any adjustments that would result if the Company was unable to realize its assets and settle its liabilities as a going concern in the ordinary course of business. We believe our plans, implemented during the nine month period ended March 31, 2021 in connection with the Chapter 11 Cases and those continuing to be implemented, will mitigate the known conditions and events that initially raised substantial doubt about the entity’s ability to continue as a going concern. However, due to the uncertainty around the scope and duration of the ongoing COVID-19 pandemic and current challenges related to the global transportation market those plans collectively cannot be deemed probable of mitigating substantial doubt as to our ability to continue as a going concern.
Bankruptcy Accounting
See Note 2 entitled “Bankruptcy Accounting197” for additional information regarding the Chapter 11 Cases.
Accounting Pronouncement Recently Adopted
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326)” (“ASC 326”), which makes significant changes to the accounting for credit losses on financial assets and disclosures. The standard requires immediate recognition of management’s estimates of current expected credit losses. We adopted ASC 326 stores in the first quarter of fiscal 2021 and the closure of our Phoenix distribution center in second quarter of fiscal 2021. TheIn addition, as part of our restructuring, we secured financing to pay creditors in accordance with the plan of reorganization and to fund planned operations and expenditures.
Future impacts from the COVID-19 pandemic will depend on the potential further geographic spread and duration of the ongoing pandemic, the timing and extent of recovery in traffic and consumer spending in our stores, the extent and duration of ongoing impacts to domestic and international supply chains and the related impacts on the flow, availability and cost of products, the production and administration of effective medical treatments and vaccines, and the actions that may be taken by various governmental authorities and other third parties in response to the pandemic.
Accounting Pronouncement Recently Adopted
In March 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update ("ASU") No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). This update is intended to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange and is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.Early adoption is permitted for all entities, including adoption in an interim period. We adopted this standard in the first quarter of fiscal 2022 and it did not have result in a material impact to ourthe Company’s condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. We adopted this standard in the first quarter of fiscal 2022 and it did not result in a material impact to the Company’s condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The guidance was effective upon issuance and may be applied prospectively to contract modifications made, hedging relationships entered into, and other transactions affected by reference rate reform, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected. We do not have any receivables, hedging relationships, or lease agreements that reference LIBOR or another reference rate expected to be discontinued. We are currently evaluating the impact of the new guidance on our condensed consolidated financial statements; however, we have determined that, of our current debt commitments as outlined in detail in Note 3, only the obligations under the Post-Emergence ABL Facility may be impacted by ASU 2020-04. Our Term Loan described in Note 3 has fixed interest rate and our New ABL Credit Agreement bears interest at a variable rate based on adjusted term Secured Overnight Financing Rate ("SOFR").
10
2.Bankruptcy Accounting
Bankruptcy Accounting
ASC 852 requiresReorganizations require that the condensed consolidated financial statements, for periods subsequent to the filing of the Chapter 11 Cases, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. During the pendency of the Chapter 11 casesCases until we qualified for emergence under ASC 852, the condensed consolidated financial statements were prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business and reflect the application of ASC 852. Accordingly, certain expenses, gains and losses that arewere realized or incurred in the bankruptcy proceedings were recorded in reorganizationReorganization items, onnet in our condensed consolidated statements of operations. In addition, pre-petition unsecured and under-secured obligations that were subject to the bankruptcy reorganization process were classified as liabilities subject to compromise.
Pursuant to the Plan of Reorganization, a General Unsecured Claim Fund (“Unsecuredan escrow account (the “Unsecured Creditor Claim Fund”) was established for the benefit of holders of Allowed General Unsecured Claims.allowed general unsecured claims. Upon the closing of the sale and leaseback of the Corporate Office and the Dallas Distribution Center properties (see Note 6) and the issuance of the Term Loan (as defined in Note 8)3 below), net proceeds of $67.5$67.5 million, after payment of property taxes, and $18.8$18.8 million, respectively, were deposited directly into the Unsecured Creditor Claim Fund that is beingwas administered by an independent unsecured claims disbursing agent. The remaining proceeds from the Term Loan that were not deposited into the Unsecured Creditor Claim Fund were deposited into our operating account. In addition, $14.2$14.2 million of additional cash was deposited into a segregated bank account at Wells Fargo Bank and iswas restricted for use in paying compensation for services rendered by professionals on or after the Petition date and prior to the approval of the Effective Date (“Wells Fargo Restricted Fund”).Date. The closing of the Rights Offering described in Note 6 below provided approximately $40.0$40.0 million of cash that was deposited to the Unsecured Creditor Claim Fund and recorded as restricted cash. As of March 31,During the fiscal 2021, we had $46.3 million and $9.3 million of cash held in the Unsecured Creditor Claim Fundall services rendered by professionals were paid and the Wells Fargo Restricted Fund respectively, that are recorded as restricted cash on the balance sheet. The accompanying consolidated financial statements as of June 30, 2020 do not purport to reflect or provide for the consequencesaccount was closed with all of the Chapter 11 Cases. In particular,applicable funds disbursed. Net cash remaining of $1.9 million was deposited directly into our unrestricted cash account during the consolidated financial statements do not purport to show: (i) the realizable valuefourth quarter of assets on a liquidation basis or their availability to satisfy liabilities; (ii) the full amount of pre-petition liabilities that may be allowed for claims or contingencies, or the status and priority thereof; (iii) the effect on stockholders’ investment accounts of any changes that may be made to our capitalization; or (iv) the effect on operations of any changes that may be made to our business. For specific discussion on balances of liabilities subject to compromise and reorganization items, see below.fiscal 2021.
11
Our Plan of Reorganization was confirmed on December 23, 2020, and all listed material conditions precedent were resolved by the December 31, 2020 legal effective date of emergence as governed by the Bankruptcy Court. However, the closing of our Rights Offering was considered a critical component to the execution of our confirmed Plan of Reorganization, therefore, we continued to apply the requirements of ASC 852 until that transaction closed on February 9, 2021.
On September 29, 2021, the U.S. Bankruptcy Court issued a Final Decree closing the Chapter 11 Cases of the Company and its subsidiaries. While the Company emerged from bankruptcy proceedings on December 31, 2020, the Chapter 11 Cases remained opened pending final resolution of all claims of general unsecured creditors. The Company was able to resolve all of these claims for approximately $14 million less than the amounts reserved and retained in the Unsecured Creditor Claim Fund. Upon entry of the Final Decree, the approximately $14 million remaining in the Unsecured Creditor Claim Fund was returned to the Company to make a repayment on its ABL credit facility and the Chapter 11 Cases are now final.
We were not required to apply fresh start accounting based on the provisions of ASC 852 as there was no change in control and the entity’s reorganization value immediately before the date of confirmation was more than the total of all its post-petition liabilities and allowed claims.
Liabilities Subject to Compromise
As a result of the Chapter 11 Cases, the payment of pre-petition indebtedness was subject to compromise. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims is generally not permitted, the Bankruptcy Court granted the Company authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of our businesses and assets. Among other things, the Bankruptcy Court authorized the Company to pay certain pre-petition claims relating to employee wages and benefits, customers, vendors, and suppliers in the ordinary course of business and certain insurance, tax, and principal and interest payments. With respect to pre-petition claims, we notified all known claimants of the deadline to file a proof of claim with the Bankruptcy Court. Pre-petition liabilities that are subject to compromise were required to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts (see above for details on the Unsecured Creditor Claim Fund). On December 31, 2020, the legal effective date in accordance with the Bankruptcy Court, we assumed some leases and other executory contracts, while we rejected others. Liabilities for those leases and contracts that were assumed are no longer categorized in liabilities subject to compromise, as any pre-petition amounts outstanding were cured prior to the end of the second fiscal quarter ending December 31, 2020. Estimated allowable claims for those which were rejected are included in accrued expenses. Where there was uncertainty about whether a secured claim would be paid or impaired pursuant to the Chapter 11 Cases, we classified the entire amount of the claim as an outstanding liability subject to compromise as of June 30, 2020.
In connection with our emergence from bankruptcy, all allowable claims have been reclassified from Liabilities subject to compromise to Accounts payable and Accrued liabilities in our Consolidated Balance Sheets as of March 31, 2021. Liabilities subject to compromise in our condensed consolidated balance sheet include the following as of March 31, 2021 and June 30, 2020 (in thousands):
|
| As of March 31, 2021 |
|
| As of June 30, 2020 |
| ||||
Accounts payable |
| $ | - |
|
| $ | 83,467 |
| ||
Accrued expenses |
|
| - |
|
|
| 6,630 |
| ||
Operating lease liabilities |
|
| - |
|
|
| 71,097 |
| ||
Lease liabilities - non-current |
|
| - |
|
|
| 294,812 |
| ||
Other liabilities - non-current |
|
| - |
|
|
| 333 |
| ||
Liabilities subject to compromise |
| $ | - |
|
| $ | 456,339 |
|
Restructuring, Impairment and Abandonment Charges
Restructuring, impairment and abandonment charges total $1.0 million and $7.6 million forare as follows (in thousands):
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| April 2, |
|
| March 31, |
|
| April 2, |
|
| March 31, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Restructuring costs: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Severance and compensation related costs (adjustments) |
| $ | (278 | ) |
| $ | 1,047 |
|
| $ | 499 |
|
| $ | 1,916 |
|
Total restructuring costs |
| $ | (278 | ) |
| $ | 1,047 |
|
| $ | 499 |
|
| $ | 1,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Impairment costs: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate long-lived assets |
| $ | — |
|
| $ | — |
|
| $ | 2,089 |
|
| $ | — |
|
Total impairment costs |
| $ | — |
|
| $ | — |
|
| $ | 2,089 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Abandonment costs: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Accelerated recognition of operating right-of-use assets |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 5,638 |
|
Total abandonment costs |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 5,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total restructuring, impairment and abandonment costs |
| $ | (278 | ) |
| $ | 1,047 |
|
| $ | 2,588 |
|
| $ | 7,554 |
|
11
For the three months ended April 2, 2022, a net benefit of $0.3 million of restructuring, impairment and abandonment costs is related to compensation adjustments for employee retention. During the nine months ended April 2, 2022, restructuring, impairment and abandonment charges of $2.1 million primarily relate to software abandonment charges and $0.5 million in employee retention cost.
During the three months ended March 31, 2021, respectively, and include the following (in thousands):
|
| Three Months Ended |
|
| Nine Months Ended |
| ||
|
| March 31, 2021 |
|
| March 31, 2021 |
| ||
Restructuring costs: |
|
|
|
|
|
|
|
|
Severance and compensation related costs |
| $ | 1,047 |
|
| $ | 1,916 |
|
Total restructuring costs |
| $ | 1,047 |
|
| $ | 1,916 |
|
|
|
|
|
|
|
|
|
|
Abandonment costs: |
|
|
|
|
|
|
|
|
Accelerated recognition of operating right-of-use assets |
| $ | - |
|
| $ | 5,638 |
|
Total abandonment costs |
| $ | - |
|
| $ | 5,638 |
|
|
|
|
|
|
|
|
|
|
Total restructuring and abandonment costs |
| $ | 1,047 |
|
| $ | 7,554 |
|
The restructuring, impairment and abandonment costs shown abovecharges are primarily relaterelated to the remaining employee retention costs of $0.3$0.3 million and $0.7 millionseverance cost of severance costs as of March 31, 2021. For$0.7 million. During the nine months ended March 31, 2021, the restructuring, impairment and abandonment charges of $7.6 million are primarily related to abandonment costs shown were primarily relatedof $5.6 million due to the permanent closure of our stores and Phoenix, Arizona distribution center.center and $1.9 million in severance and employee retention costs. Decisions regarding store closures and the Phoenix Arizona distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021. There were 0 charges for restructuring, impairment or abandonment recorded in the statement of operations for the three and nine month periods ended March 31, 2020.
Reorganization Items
Reorganization items included in our condensed consolidated statement of operations represent amounts directly resulting from the Chapter 11 Cases and total a net expense of $23.6 million and a totalare as follows (in thousands):
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| April 2, |
|
| March 31, |
|
| April 2, |
|
| March 31, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Reorganization items, net: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Professional and legal fees |
| $ | 43 |
|
| $ | 3,733 |
|
| $ | 329 |
|
| $ | 33,853 |
|
Claims related costs |
|
| (171 | ) |
|
| 874 |
|
|
| 594 |
|
|
| 874 |
|
Gain on lease terminations, net of estimated claims |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (66,247 | ) |
Gain on sale-leaseback |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (49,639 | ) |
Rights Offering and Backstop Agreement |
|
| — |
|
|
| 18,990 |
|
|
| — |
|
|
| 18,990 |
|
Total reorganization items, net |
| $ | (128 | ) |
| $ | 23,597 |
|
| $ | 923 |
|
| $ | (62,169 | ) |
For the three months ended April 2, 2022, reorganization items, net benefit of $62.2related to $0.2 million forin claims related cost, offset by about $43 thousand in professional and legal fees. For the three and nine months ended March 31, 2021, respectively,April 2, 2022, reorganization items, net charges related to $0.6 million in net claims related costs and include the following (in thousands):$0.3 million in professional and legal fees.
|
| Three Months Ended |
|
| Nine Months Ended |
| ||
|
| March 31, 2021 |
|
| March 31, 2021 |
| ||
Reorganization items, net: |
|
|
|
|
|
|
|
|
Professional and legal fees |
| $ | 3,733 |
|
| $ | 33,853 |
|
Gains on lease termination, net of estimated claims |
|
| - |
|
|
| (66,247 | ) |
Claims related costs |
|
| 874 |
|
|
| 874 |
|
Rights Offering and Backstop Agreement |
|
| 18,990 |
|
|
| 18,990 |
|
Gain on sale-leaseback |
|
| - |
|
|
| (49,639 | ) |
Total reorganization items, net |
| $ | 23,597 |
|
| $ | (62,169 | ) |
During the three months ended March 31, 2021, reorganization costsitems, net primarily related to the execution of our Rights Offering along with(defined in Note 6) of $19.0 million, related professional fees (see Note 1). Duringof $3.7 million and $0.9 million in claims related costs. For the first nine months of fiscalended March 31, 2021, in addition to the Rights Offering and related professional fees, reorganization costsitems, net benefit were primarily related to the leases for store locations related to our permanent closure plan, as well as the lease for our Phoenix distribution center, which were rejected and the related lease liabilities were reduced to the amount of estimated claims allowable by the Bankruptcy Court, resulting in the $66.2$66.2 million gain shown above for the nine months ended March 31, 2021. In the second quarter of fiscal 2021, we also executed a sale-leaseback agreement on our owned real estate as part of our Plan of Reorganization, recognizing a gain of $49.6 million (see Note 1 and Note 8), the proceeds of which, along with other sources of financing, will bewere utilized to satisfy allowed claims and are thus categorized as a reorganization item. Please refer to Note 13These gains partially offset the costs of Rights Offering of $19.0 million, professional fees of $34.0 million and claims related cost of $0.9 million for additional details regarding the sale-leaseback transactions. There were 0 charges for reorganization items recorded in the statement of operations for the three and nine months ended March 31, 2020.2021.
3. Debt
Cash paid
Pre-Petition Financing Agreements
Through December 31, 2020, we were party to a credit agreement that provided for reorganization items duringan asset-based, five-year senior secured revolving credit facility in the original amount of up to $180.0 million which was scheduled to mature on January 29, 2024 (the “Pre-Petition ABL Credit Agreement”). The availability of funds under the Pre-Petition ABL Credit Agreement was limited to the lesser of a calculated borrowing base and the lenders’ aggregate commitments under the Pre-Petition ABL Credit Agreement. Our indebtedness under the Pre-Petition ABL Credit Agreement was secured by a lien on substantially all of our assets.
As of December 31, 2020, we had 0 amounts outstanding under the Pre-Petition ABL Credit Agreement, and that agreement was terminated in connection with our legal emergence from bankruptcy.
12
Debtor-In-Possession Financing Agreements
On May 29, 2020, we entered into a Senior Secured Super Priority Debtor-in-Possession Credit Agreement (the “DIP ABL Credit Agreement”) among the Company, JPMorgan Chase Bank, N.A., as administrative agent, for itself and the other lenders, which provided for a super priority secured debtor-in-possession revolving credit facility in an aggregate amount of up to $100.0 million. On July 10, 2020, we entered into a Senior Secured Super Priority Debtor-In-Possession Delayed Draw Term Loan Agreement (the “DIP DDTL Agreement”) with the Franchise Group, Inc., which provided for delayed draw term loans in an amount not to exceed $25.0 million. We made no borrowings under the DIP ABL Credit Agreement or the DIP DDTL Agreement. On December 31, 2020, the DIP ABL Credit Agreement and the DIP DDTL Agreement were terminated in connection with our legal emergence from bankruptcy.
Post-Emergence Financing Arrangements
On December 31, 2020, the Company and its subsidiaries entered into a Credit Agreement (the “Post-Emergence ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A. and Bank of America, N.A. (collectively, the “Lenders”) that provided for a revolving credit facility in an aggregate amount of $110.0 million (the “Post-Emergence ABL Facility”). The Post-Emergence ABL Credit Agreement included conditions to borrowings, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. The Post-Emergence ABL Credit Agreement required the Company to maintain a minimum fixed charge coverage ratio if borrowing availability fell below certain minimum levels, after the first anniversary of the agreement. We were not required to be compliant per the lender agreement until after the first anniversary of the agreement.
Under the terms of the Post-Emergence ABL Credit Agreement, amounts available for advances would be subject to a borrowing base as described in the Post-Emergence ABL Credit Agreement. Under the Post-Emergence ABL Credit Agreement, borrowings initially bore interest at a rate equal to the adjusted LIBOR rate plus a spread of 2.75% or the Commercial Bank Floating Bank rate plus a spread of 1.75%.
The Post-Emergence ABL Facility was secured by a first priority lien on all present and after-acquired tangible and intangible assets of the Company and its subsidiaries other than certain collateral that secures the Term Loan (as defined below). The commitments of the Lenders under the Post-Emergence ABL Facility were due to terminate and outstanding borrowings under the Post-Emergence ABL Facility was due to mature on December 31, 2023.
As of April 2, 2022, we had $54.1 million of borrowings outstanding under the Post-Emergence ABL Facility and, $14.6 million of letters of credit outstanding. We had borrowing availability of $26.6 million under the Post-Emergence ABL Facility, as of April 2, 2022.
As further described in Note 13 below, on May 9, 2022, we entered into the New ABL Credit Agreement (as defined in Note 13) and used a portion of the proceeds from borrowings under the New Facilities (as defined in Note 13) to repay all outstanding indebtedness under the Post-Emergence ABL Facility, along with accrued interest, expenses and fees. See Note 13 below for additional information regarding the New ABL Credit Agreement.
On December 31, 2020, the Company, Alter Domus (US), LLC, as administrative agent, and the lenders named therein including Tensile Capital Partners Master Fund LP ("Tensile") and affiliates of Osmium Partners, LLC, ("Osmium") entered into a Credit Agreement (as amended from time to time, the “Term Loan Credit Agreement”) to provide a term loan of $25.0 million to the Company (the “Term Loan”).
In accordance with the Plan of Reorganization, on December 31, 2020, 3 new directors were selected for membership on the Board of Directors by Osmium Partners (Larkspur SPV), LP, ("Larkspur SPV") an affiliate of Tensile and Osmium. Pursuant to the Term Loan Credit Agreement, Tensile and affiliates of Osmium held $19.0 million and $1.0 million, respectively, of the $25.0 million outstanding Term Loan. Representatives of Osmium and Tensile both hold seats on the board and therefore Osmium and Tensile are related parties to the Company.
Pursuant to the terms of the Term Loan Credit Agreement, the Term Loan has a maturity date of December 31, 2024 and bears interest at a rate of 14% per annum, with interest payable in-kind (“PIK”). Under the terms of the Term Loan Credit Agreement, the Term Loan is secured by a second lien on the collateral securing the New Facilities (as defined in Note 13) and a first lien on certain other assets of the Company as described in the Term Loan Credit Agreement. The Term Loan is subject to optional prepayment after the first anniversary of the date of issuance at a prepayment price equal to (1) the outstanding principal amount of the Term Loan, plus (2) accrued and unpaid interest to the date of prepayment, plus (3) the prepayment premium, if any. The prepayment premium (which may not be less than zero) is equal to (1) 125% of the original principal amount of the Term Loan, minus (2) the aggregate principal amount of the loans advanced as of the prepayment date, plus all accrued interest thereon accrued as of such date. The Term Loan is subject to
13
mandatory prepayment in connection with a change of control of the Company as described in the Term Loan Credit Agreement. The Term Loan Credit Agreement also includes customary covenants and events of default.
The following table provides details on our Term Loan (in thousands):
Term Loan |
|
|
| |||||
|
| April 2, 2022 |
|
| June 30, 2021 |
| ||
Loan balance |
| $ | 25,000 |
|
| $ | 25,000 |
|
Debt issuance costs |
|
| (269 | ) |
|
| (432 | ) |
Accrued paid-in-kind interest |
|
| 4,800 |
|
|
| 1,806 |
|
Loan balance, ending |
| $ | 29,531 |
|
| $ | 26,374 |
|
As further described in Note 13 below, the Term Loan Credit Agreement was amended on May 9, 2022 and $5.0 million borrowed under the New Facilities was used to repurchase a portion of principal amount of the Term Loan for an aggregate purchase price of $5.0 million.
As of April 2, 2022, we are in compliance with covenants in the Post-Emergence ABL Facility and Term Loan.
Interest Expense
Interest expense for the three months ended April 2, 2022 was $2.0 million, and was comprised of $1.0 million in interest on the Post-Emergence ABL Facility and PIK interest on the Term Loan, $0.4 million amortization of financing fees, and $0.6 million commitment fees. Interest expense for the three months ended March 31, 2021 was $1.4 million from the DIP ABL Credit Agreement and the DIP Term Facility, and was comprised of $1.2 million amortization of financing fees and $0.2 million of commitment fees.
Interest expense for the nine months ended April 2, 2022 was $5.5 million and was comprised of $3.0 million in interest on the Post-Emergence ABL Facility and PIK interest on the Term Loan, $1.0 million amortization of financing fees, and $1.5 million commitment fees. Interest expense for the nine months ended March 31, 2021 was $3.7$6.7 million from the Post-Emergence ABL Facility, DIP ABL Credit Agreement, and the Term loan, and was comprised of $5.2 million amortization of financing fees, $0.6 million of commitment fees, and accrued PIK interest on the Term Loan of $0.9 million.
Fair Value Measurements
The fair value of our Term Loan was determined based on observable market data provided by a third party for similar types of debt which are considered Level 2 inputs within the fair value hierarchy. The carrying value of our Term Loan as of April 2, 2022 and June 30, 2021 was $29.5 million and $22.6$26.4 million, respectively,respectively. The fair value of our Term Loan as of April 2, 2022 and related to professionalJune 30, 2021 was $30.0 million and legal fees. As of March 31, 2021, $15.6$29.6 million, of professional fees were unpaid and accrued in Accounts Payable and Accrued Liabilities in the accompanying Consolidated Balance Sheet.respectively.
3.4. Revenue recognition —
Our revenue is earned from sales of merchandise within our stores and is recorded at the point of sale and conveyance of merchandise to customers. Revenue is measured based on the amount of consideration that we expect to receive, reduced by point of sale discounts and estimates for sales returns, and excludes sales tax. Payment for our sales is due at the time of sale. We maintain a reserve for estimated returns, as well as a corresponding returns asset in “Other Assets” in the Consolidated Balance Sheet,condensed consolidated balance sheets, and we use historical customer return behavior to estimate our reserve requirements. NaN impairment of the returns asset was identified or recorded as of March 31, 2021.April 2, 2022. Gift cards are sold to customers in our stores and we issue gift cards for merchandise returns in our stores. Revenue from sales of gift cards and issuances of merchandise credits is recognized when the gift card is redeemed by the customer, or if the likelihood of the gift card being redeemed by the customer is remote (gift card breakage). The gift card breakage rate is determined based upon historical redemption patterns. An estimate of the rate of gift card breakage is applied over the period of estimated performance and the breakage amounts are included in net sales in the Consolidated Statementcondensed consolidated statement of Operations.operations. Breakage income recognized was $0.2 million and $0.1 million for the three and nine months ended April 2, 2022 and March 31, 2021, was $0.1 million and $0.3 million, respectively. Breakage income recognized was $0.4 million and $0.3 million for the three and nine months ended April 2, 2022 and March 31, 2020 was $0.1 million and $0.42021, respectively. The gift card liability is included in “Accrued liabilities” in the Consolidated Balance Sheet.condensed consolidated balance sheets. We will continue to evaluate whether and how store closures may affect customer behavior with respect to sales returns and gift card redemption and related breakage.
14
5. Accrued Liabilities
4. Share-based incentive plans — On
Accrued liabilities consisted of the following (in thousands):
|
| April 2, |
|
| June 30, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Sales and use tax |
| $ | 4,524 |
|
| $ | 2,698 |
|
Self-insurance reserves |
|
| 9,165 |
|
|
| 9,405 |
|
Wages, benefits and payroll taxes |
|
| 7,142 |
|
|
| 9,639 |
|
Property taxes |
|
| 879 |
|
|
| 1,510 |
|
Freight and distribution |
|
| 10,190 |
|
|
| 8,658 |
|
Capital expenditures |
|
| 308 |
|
|
| 348 |
|
Utilities |
|
| 966 |
|
|
| 1,466 |
|
Gift card liability |
|
| 1,080 |
|
|
| 1,045 |
|
Reorganization expenses |
|
| 80 |
|
|
| 6,337 |
|
Other expenses |
|
| 4,748 |
|
|
| 5,348 |
|
Total accrued liabilities |
| $ | 39,082 |
|
| $ | 46,454 |
|
Self-insurance reserves were primarily comprised of our worker's compensation liability reserve, followed by our medical liability reserve and general liability reserve.
6. Common Stock & Share-Based Incentive Plans
Equity Financing under Plan of Reorganization
Pursuant to the Plan of Reorganization, each outstanding share of the Company’s common stock as of the close of business on January 4, 2021 Tuesday Morning Corporation interests, prior to reorganization, consisting of options, warrants, or other rights, contractual or otherwise, to acquire shareswas exchanged (the “Exchange”) for (1) 1 new share of the existing commonCompany’s stock were reinstated and entitled(2) a share purchase right entitling the holder to acquire an equal numberpurchase its pro rata portion of shares available to eligible holders in a rights offering. In accordance with the Plan of Reorganization, the Company commenced a $40.0 million rights offering in January 2021, under which eligible holders of the Company’s common stock could purchase up to $24.0 million of shares of the Company’s common stock at a purchase price of reorganized Tuesday Morning, subject$1.10 per share, and Larkspur SPV (the “Backstop Party”), a special purpose entity affiliate of Osmium jointly owned with Tensile Capital Management, could purchase up to dilution$16 million of the Company’s common stock at a purchase price of $1.10 per share (the “Rights Offering”). Pursuant to a backstop commitment agreement, the Backstop Party agreed to purchase all unsubscribed shares in the Rights Offering.
The subscription period for the Rights Offering expired on February 1, 2021, with eligible holders subscribing to purchase approximately $19.8 million of the company’s common stock, with the Backstop Party purchasing the remaining $20.2 million of the company’s common stock. On February 9, 2021, the Company closed on the Rights Offering and recorded proceeds of $40.0 million and recognized a non-cash charge of approximately $14.5 million as a result of the issuancechange in fair value of the Company’s common stock issued to the Backstop Party as measured from the consummation of the Exchange through the close date (“Backstop Premium”). The change in fair value was determined by reference to the Company’s stock price, traded over-the-counter, discounted for the restrictions that limited the holders ability to resell securities until they were registered pursuant to a Registration Rights Agreement entered into on February 9, 2021 between the Company and Backstop Party.
In addition, on February 9, 2021, the Company issued warrants with rights to purchase 10 million shares of common stock with an exercise price of $1.65 and a five year term to the Backstop Party (“Warrants”). The Company classified the Warrants as equity instruments and recognized expense of $2.5 million measured at fair value using the Black-Scholes model. Finally, on February 9, 2021 the Backstop Party received a backstop fee in the amount of $2.0 million (payable in shares of common stock valued at $1.10 per share) that was classified as an equity instrument. The non-cash charges of approximately $14.5 million for the Backstop Premium, the $2.5 million of expense related to the Warrants, and backstop fee of approximately $2.0 million are recorded in Reorganization items, net in our Consolidated Statements of Operations for the three and nine months ended March 31, 2021. In accordance with the terms of the Plan of Reorganization, all proceeds from the Rights Offering were used to make payments of the claims of general unsecured creditors in the Chapter 11 Cases.
Ownership Restrictions
In order to continue to assist the Company in preserving certain tax attributes (the “Tax Benefits”), the Company’s Amended and Restated Certificate of incorporation imposes certain restrictions on the issuancetransferability and ownership of equity securitiesthe Company’s capital stock
15
(the “Ownership Restrictions”). Subject to certain exceptions, the Ownership Restrictions restrict (i) any transfer that would result in any person acquiring 4.5% or more of our Common Stock, (ii) any transfer that would result in an increase of the ownership percentage of any person already owning 4.5% or more of our Common Stock, or (iii) any transfer during the five-year period following December 31, 2020 that would result in a decrease of the ownership percentage of any person already owning 4.5% or more of our Common Stock. Pursuant to the Company’s Amended and Restated Certificate of Incorporation, any transferee receiving shares of our Common Stock that would result in a violation of the Ownership Restrictions will not be recognized as a stockholder of the Company or entitled to any rights of stockholders. The Company’s Amended and Restated Certificate of Incorporation allows the Ownership Restrictions to be waived by the Company’s board of directors on and after January 4,a case by case basis. The Board of Directors has taken action to waive the restrictions with respect to sale of shares acquired in the Rights Offering by the Backstop Party.
The Ownership Restrictions will remain in effect until the earliest of (i) the repeal of Section 382 of the Internal Revenue Code or any successor statute if the board of directors determines the Ownership Restrictions are no longer necessary for preservation of the Tax Benefits, (ii) the beginning of a taxable year in which the board of directors determines no Tax Benefits may be carried forward, or (iii) such other date as shall be established by the board of directors.
Share-Based Incentive Plans
For a discussion of our share-based incentive plans, please see Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
Restricted Stock Option Awards.Awards/Units
We have established the
The Tuesday Morning Corporation 2008 Long-Term Equity Incentive Plan (the “2008 Plan”) and the Tuesday Morning Corporation 2014 Long-Term Incentive Plan as amended (the “2014 Plan”), which allow for the granting of stock options to directors, officers and key employees of the Company, and certain other key individuals who perform services for us and our subsidiaries. Equity awards may no longer be granted undertogether with the 2008 Plan, but equity awards granted under the 2008 Plan are still outstanding. Pursuant to the Plan of Reorganization, upon the Company’s emergence from bankruptcy, all outstanding equity awards remained in full force and effect under their existing terms. In addition, the Plan of Reorganization provided for an amendment to the 2014 Plan to increase the number of shares available for future awards by 2.4 million shares.
Stock options were awarded under the 2008 Plan and the 2014 Plan with a strike price at the fair market value equal to the closing price of our common stock on the date of the grant.
Options granted under the 2008 Plan and the 2014 Plan typically vest over periods of one to four years and expire ten years from the date of grant. Options granted under the 2008 Plan and the 2014 Plan may have certain performance requirements in addition to service terms. If the performance conditions are not satisfied, the options are forfeited. The exercise prices of stock options outstanding on March 31, 2021 range between $1.64 per share and $20.91 per share. There were 5.9 million shares available for grant under the 2014 Plan at March 31, 2021.
Restricted Stock Awards—The 2008 Plan and the 2014 Plan“Plans”) authorize the grant of restricted stock awards to directors, officers, key employees and certain other key individuals who perform services for us and our subsidiaries. Equity awards may no longer be granted under the 2008 Plan, but restricted stock awards granted under the 2008 Plan are still outstanding.Plan. Restricted stock awards are not transferable, but bear certain rights of common stock ownership including voting and dividend rights. The 2014 Plan also authorizes the issuance of restricted stock units which, upon vesting, provide for the issuance of an equivalent number of shares of common stock or a cash payment based on the value of our common stock at vesting. Restricted units are not transferable and do not provide voting or dividend rights. Shares and units are valued at the fair market value of our common stock onat the date of the grant.award. Shares and units may be subject to time-vesting and/or certain performance requirements. If the time-vesting and/or performance requirements are not met, the restricted shares or units are forfeited. The 2014 Plan also authorizes the grant of time-vesting and performance-based restricted stock units. Restricted stock units do not provide voting and dividend rights. Shares of common stock are issued upon the vesting of restricted units.
On September 15, 2021, Marc Katz was awarded 867,052 time-based and 867,052 performance-based restricted stock units as an incentive to become Principal and Chief Operating Officer and Paul Metcalf was awarded 289,017 time-based and 578,035 performance-based restricted stock units to become the Principal and Chief Merchant (the “Inducement Awards”). In addition, during the first quarter of fiscal 2022, the fiscal 2022 long-term incentive awards were approved by the Board of Directors and time-vesting and performance-based restricted stock units were granted under the 2014 Long-Term Incentive Plan. Under the 2008 PlanPlans and the 2014 Plan,Inducement Awards, as of March 31, 2021,April 2, 2022, there were 2,011,061500,895 shares of restricted stock awards and 1,028,9328,419,829 restricted stock units outstanding with award vesting periods, both performance-based and service-based, of one to fourfive years and a weighted average grant date fair value of $1.92$1.70 and $1.91$2.29 per share, respectively.
Performance-Based Restricted Stock Awards
The following table summarizes the activity of time-vesting restricted stock units, performance-based restricted stock units, time-vesting restricted stock awards and Performance-Based Stock Option Awards.performance-based restricted stock awards for the nine months ended April 2, 2022:
|
| Time and Performance-Based Restricted Stock Units |
|
| Weighted- |
|
| Time and Performance-Based Restricted Stock Awards |
|
| Weighted- |
| ||||
Outstanding at June 30, 2021 |
|
| 3,021,924 |
|
| $ | 2.83 |
|
|
| 1,708,368 |
|
| $ | 1.94 |
|
Granted during the year |
|
| 5,580,713 |
|
|
| 2.02 |
|
|
| — |
|
|
| — |
|
Vested during the year |
|
| (106,443 | ) |
|
| 3.18 |
|
|
| (791,359 | ) |
|
| 1.70 |
|
Forfeited during the year |
|
| (76,365 | ) |
|
| 2.72 |
|
|
| (416,114 | ) |
|
| 2.69 |
|
Outstanding at April 2, 2022 |
|
| 8,419,829 |
|
| $ | 2.29 |
|
|
| 500,895 |
|
| $ | 1.70 |
|
As of March 31, 2021,April 2, 2022, there were 287,3483,839,496 unvested performance-based restricted stock awards and performance-based restricted stock units payableto be settled in stock.
Cash Settled Awards
16
We have granted stock-based awards to certain employees, which vest over a period of three to four years, and will be settled in cash outstanding under(“cash settled awards”). Both performance-based and time-based awards were granted. Except for the 2014 Plan.performance based awards which have been deemed unlikely to vest, the fair value of the cash settled awards at each reporting period is based on the price of our common stock. The fair value of the cash settled awards will be re-measured at each reporting period until the awards are settled.
The following table summarizes the activity of cash settled awards for the nine months ended April 2, 2022:
|
| Performance-Based |
|
| Service-Based |
|
| Total |
| |||
Outstanding at June 30, 2021 |
|
| 143,675 |
|
|
| 547,698 |
|
|
| 691,373 |
|
Granted during the year |
|
| — |
|
|
| 565,492 |
|
|
| 565,492 |
|
Vested during the year |
|
| — |
|
|
| (177,719 | ) |
|
| (177,719 | ) |
Forfeited during the year |
|
| — |
|
|
| (131,505 | ) |
|
| (131,505 | ) |
Outstanding at April 2, 2022 |
|
| 143,675 |
|
|
| 803,966 |
|
|
| 947,641 |
|
The liability associated with the cash settled awards was $0.4 million and $1.7 million at April 2, 2022 and June 30, 2021, respectively.
Share-based Compensation Costs.Costs
Share-based compensation costs were recognized as followsconsisted of the following (in thousands):
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
| April 2, |
|
| March 31, |
|
| April 2, |
|
| March 31, |
| ||||
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Amortization of share-based compensation during the period | $ | 1,679 |
|
| $ | 409 |
|
| $ | 4,666 |
|
| $ | 1,152 |
|
Amounts capitalized in ending inventory |
| (338 | ) |
|
| (93 | ) |
|
| (947 | ) |
|
| (259 | ) |
Amounts recognized and charged to cost of sales |
| 259 |
|
|
| 66 |
|
|
| 926 |
|
|
| 454 |
|
Amounts charged against selling, general and administrative expense | $ | 1,600 |
|
| $ | 382 |
|
| $ | 4,645 |
|
| $ | 1,347 |
|
| Three Months Ended March 31, |
|
| Nine Months Ended March 31, |
| ||||||||||
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Amortization of share-based compensation during the period | $ | 409 |
|
| $ | 581 |
|
| $ | 1,152 |
|
| $ | 2,022 |
|
Amounts capitalized in ending inventory |
| (93 | ) |
|
| (160 | ) |
|
| (259 | ) |
|
| (552 | ) |
Amounts recognized and charged to cost of sales |
| 66 |
|
|
| 102 |
|
|
| 454 |
|
|
| 612 |
|
Amounts charged against income for the period before tax | $ | 382 |
|
| $ | 523 |
|
| $ | 1,347 |
|
| $ | 2,082 |
|
5.7. Commitments and contingencies —
Information related to the Chapter 11 Cases that were filed on May 27, 2020 is included in Note 1.Notes 1 and 2 above.
Like many retailers, the Company has been named in a potential class or collective actions on behalf of groups alleging violations of federal and state wage and hour and other labor statutes, and other statutes. In the normal course of business, we are also party to representative claims under the California Private Attorneys’ General Act and various other lawsuits and regulatory proceedings including, among others, commercial, product, product safety, employee, customer, intellectual property and other claims. Actions against us are in various procedural stages. Many of these proceedings raise factual and legal issues and are subject to uncertainties. In addition, we are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established when a loss is considered probable and are based on management’s best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.
6.
8. Leases
— We conduct substantially all operations from leased facilities, including our corporate offices in Dallas and the Dallas warehouse, distribution and retail complex, which were leased on December 31, 2020, subsequent to the sale and leaseback of those facilities on that date.facilities. Our retail store locations, our corporate office and our distribution center are under operating leases that will expire over the next 1 to 11 years.10 years. Many of our leases include options to renew at our discretion. We include the lease renewal option periods in the calculation of our operating lease assets and liabilities when it is reasonably certain that we will renew the lease. We also lease certain equipment under finance leases that generally expire within 60 months.4 years.
14
OnIn accordance with the Plan of Reorganization, on December 31, 2020, we sold our corporate office and Dallas distribution center properties and leased back those facilities. The lease of the corporate office is for a term of 10 years, and the lease of the distribution center is for an initial term of two and one-half years, with an option to extend the distribution center lease for one additional year. We believe it is reasonably certain the option to extend will be exercised. We determined the sale price represented the fair value of the underlying assets sold and have no continuing involvement with the properties sold other than a normal leaseback. The consideration received for the sale, as reduced by the closing and transaction costs, was $68.5 million, and the net book value of the properties sold was $18.9 million, resulting in a $49.6 million gain, which was recognized as of December 31, 2020. Cash proceeds, net of property taxes, were deposited directly into the Unsecured Creditor Claim Fund (See Note 2).
17
The 2 leases, associated with the transaction, were recorded as operating leases. As of March 31, 2021 weApril 2, 2022, we will pay approximately $ $10.07.8 million in fixed rents and in-substance fixed rents, over the 10 yearremaining lease term for the corporate office and we will pay approximately $17.3$9.7 million in fixed rents and in-substance fixed rents for the Dallas distribution center property over the three and one-half yearremaining lease term, including the one-year option period as noted above. Fixed rents and in-substance fixed rents for each lease were discounted using the incremental borrowing rate we established for the respective term of each lease.
Subsequent to the petition date,
In accordance with ASC 842, we commenced negotiations with our landlords on substantially all of our ongoing leases, resulting in significant modifications and remeasurement recorded in the first and second quarter of fiscal 2021. As a result of the remeasurements and terminations of rejected leases, we reduced our operating lease right-of-use assets by approximately $32 million and our operating lease liabilities by approximately $124 million, recording a gain of approximately $92 million, which is included in Reorganization items, net (see Note 2) in the unaudited interim Consolidated Statement of Operations.
We determine whether an agreement contains a lease at inception based on our right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. Lease liabilities represent the present value of future lease payments and the right-of-use (“ROU”) assets represent our right to use the underlying assets for the respective lease terms.
The operating lease liability is measured as the present value of the unpaid lease payments and the ROU asset is derived from the calculation of the operating lease liability. As our leases do not generally provide an implicit rate, we use our incremental borrowing rate as the discount rate to calculate the present value of lease payments. The incremental borrowing rate represents an estimate of the interest rate that would be required to borrow over a similar term, on a collateralized basis in a similar economic environment.
Rent escalations occurring during the term of the leases are included in the calculation of the future minimum lease payments and the rent expense related to these leases is recognized on a straight-line basis over the lease term. In addition to minimum lease payments, certain leases require payment of a proportionate share of real estate taxes and certain building operating expenses allocated on a percentage of sales in excess of a specified base. These variable lease costs are not included in the measurement of the ROU asset or lease liability due to unpredictability of the payment amount and are recorded as lease expense in the period incurred. The ROU asset is adjusted to account for previously recorded lease-related expenses such as deferred rent and other lease liabilities.
Our lease agreements do not contain residual value guarantees or significant restrictions or covenants other than those customary in such arrangements.
The components of lease cost are as follows (in thousands):
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| April 2, |
|
| March 31, |
|
| April 2, |
|
| March 31, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Operating lease cost |
| $ | 17,036 |
|
| $ | 16,142 |
|
| $ | 50,614 |
|
| $ | 46,429 |
|
Variable lease cost |
|
| 2,324 |
|
|
| 2,342 |
|
|
| 7,021 |
|
|
| 9,308 |
|
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Amortization of right-of-use assets |
|
| 22 |
|
|
| 49 |
|
|
| 121 |
|
|
| 161 |
|
Interest on lease liabilities |
|
| 0 |
|
|
| 1 |
|
|
| 1 |
|
|
| 7 |
|
Total lease cost |
| $ | 19,382 |
|
| $ | 18,534 |
|
| $ | 57,757 |
|
| $ | 55,905 |
|
|
| Three Months Ended March 31, |
|
| Nine Months Ended March 31, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Operating lease cost |
| $ | 16,142 |
|
| $ | 23,552 |
|
| $ | 46,429 |
|
| $ | 71,186 |
|
Variable lease cost |
|
| 2,342 |
|
|
| 6,244 |
|
|
| 9,308 |
|
|
| 18,982 |
|
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
| 49 |
|
|
| 72 |
|
|
| 161 |
|
|
| 213 |
|
Interest on lease liabilities |
|
| 1 |
|
|
| 7 |
|
|
| 7 |
|
|
| 23 |
|
Total lease cost |
| $ | 18,534 |
|
| $ | 29,875 |
|
| $ | 55,905 |
|
| $ | 90,404 |
|
Total lease costs shown above exclude $5.6 million recorded in the nine months ended March 31, 2021, for accelerated recognition of rent expense as a result of abandonment due to our Phoenix distribution center closure.
15
The table below presents additional information related to the Company’s leases as of March 31, 2021 and June 30, 2020:leases:
As of | ||||
Weighted average remaining lease term (in years) | ||||
Operating leases | 4.2 | |||
Finance leases | 0.1 | |||
Weighted average discount rate | ||||
Operating leases | 8.9 | % | ||
Finance leases | 4.5 | % |
|
| As of March 31, 2021 |
|
| As of June 30, 2020 |
| ||
Weighted average remaining lease term (in years) |
|
|
|
|
|
|
|
|
Operating leases |
|
| 4.8 |
|
|
| 5.9 |
|
Finance leases |
|
| 1.0 |
|
|
| 2.6 |
|
Weighted average discount rate |
|
|
|
|
|
|
|
|
Operating leases |
|
| 8.4 | % |
|
| 5.8 | % |
Finance leases |
|
| 2.5 | % |
|
| 3.9 | % |
Other information related to leases, including supplemental disclosures of cash flow information, is as follows (in thousands):
|
| April 2, 2022 |
|
| March 31, 2021 |
| ||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
| ||
Operating cash flows from operating leases |
| $ | 57,775 |
|
| $ | 47,692 |
|
Operating cash flows from finance leases |
|
| 1 |
|
|
| 8 |
|
Financing cash flows from finance leases |
|
| 121 |
|
|
| 167 |
|
Right-of-use assets obtained in exchange |
|
| 12,010 |
|
|
| (108,423 | ) |
18
|
| Nine Months Ended March 31, 2021 |
|
| Nine Months Ended March 31, 2020 |
| ||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
| $ | 47,692 |
|
| $ | 67,146 |
|
Operating cash flows from finance leases |
|
| 8 |
|
|
| 22 |
|
Financing cash flows from finance leases |
|
| 167 |
|
|
| 196 |
|
Right-of-use assets obtained in exchange for operating lease liabilities |
|
| (108,423 | ) |
|
| 28,040 |
|
Maturities of lease liabilities were as follows as of March 31, 2021April 2, 2022 (in thousands):
|
| Operating Leases |
|
| Finance Leases |
|
| Total |
| Operating |
|
| Finance |
|
| Total |
| ||||||
Fiscal year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
2021 (remaining) |
| $ | 17,298 |
|
| $ | 60 |
|
| $ | 17,358 |
| |||||||||||
2022 |
|
| 68,507 |
|
|
| 125 |
|
|
| 68,632 |
| |||||||||||
2022 (remaining) | $ | 18,070 |
| $ | 2 |
| $ | 18,072 |
| ||||||||||||||
2023 |
|
| 58,844 |
|
|
| — |
|
|
| 58,844 |
|
| 62,643 |
| — |
| 62,643 |
| ||||
2024 |
|
| 46,163 |
|
|
| — |
|
|
| 46,163 |
|
| 45,479 |
| — |
| 45,479 |
| ||||
2025 |
|
| 31,831 |
|
|
| — |
|
|
| 31,831 |
|
| 34,099 |
| — |
| 34,099 |
| ||||
2026 |
|
| 19,397 |
|
|
| — |
|
|
| 19,397 |
|
| 21,101 |
| — |
| 21,101 |
| ||||
2027 |
| 15,410 |
| — |
| 15,410 |
| ||||||||||||||||
Thereafter |
|
| 28,542 |
|
|
| — |
|
|
| 28,542 |
|
| 14,472 |
|
|
| — |
|
|
| 14,472 |
|
Total lease payments |
| $ | 270,582 |
|
| $ | 185 |
|
| $ | 270,767 |
| $ | 211,274 |
| $ | 2 |
| $ | 211,276 |
| ||
Less: Interest |
|
| 47,912 |
|
|
| 5 |
|
|
| 47,917 |
|
| 36,398 |
|
|
| 1 |
|
|
| 36,399 |
|
Total lease liabilities |
| $ | 222,670 |
|
| $ | 180 |
|
| $ | 222,850 |
| $ | 174,876 |
| $ | 1 |
| $ | 174,877 |
| ||
Less: Current lease liabilities |
|
| 53,480 |
|
|
| 171 |
|
|
| 53,651 |
|
| 54,165 |
|
|
| 1 |
|
|
| 54,166 |
|
Non-current lease liabilities |
| $ | 169,190 |
|
| $ | 9 |
|
| $ | 169,199 |
| $ | 120,711 |
|
| $ | — |
|
| $ | 120,711 |
|
Current and non-current finance lease liabilities are recorded in “Accrued liabilities” and “Other liabilities – non-current,” respectively, on our condensed consolidated balance sheet. As of March 31, 2021,April 2, 2022, there were 0 operating lease payments for legally binding minimum lease payments for leases signed but not yet commenced.
7.9. Earnings per common share —
The Company uses the two-class method of computing basic EPS due to the existence of non-vested restricted stock awards with non-forfeitable rights to dividends or dividend equivalents (referred to as participating securities). Basic EPS is computed using the weighted average number of common shares outstanding during each of the respective years. Diluted EPS is computed using the weighted average number of common and common equivalent shares outstanding during each of the respective years using the more dilutive of either the treasury stock method or two-class method. The difference between basic and diluted shares, if any, largely results from common equivalent shares, which represents the dilutive effect of the assumed exercise of certain outstanding share options and warrants, the assumed vesting of restricted stock granted to employees and directors, or the satisfaction of certain necessary conditions for contingently issuable shares. The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except per share amounts):
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
| April 2, |
|
| March 31, |
|
| April 2, |
|
| March 31, |
| ||||
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Net earnings/(loss) | $ | (18,151 | ) |
| $ | (37,119 | ) |
| $ | (30,860 | ) |
| $ | 21,844 |
|
Less: Income to participating securities |
| — |
|
|
| — |
|
|
| — |
|
|
| (311 | ) |
Net earnings/(loss) attributable to common shares | $ | (18,151 | ) |
| $ | (37,119 | ) |
| $ | (30,860 | ) |
| $ | 21,533 |
|
Weighted average number of common shares |
| 85,097 |
|
|
| 67,584 |
|
|
| 84,695 |
|
|
| 52,741 |
|
Effect of dilutive stock equivalents |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Weighted average number of common shares | $ | 85,097 |
|
| $ | 67,584 |
|
| $ | 84,695 |
|
| $ | 52,741 |
|
Net earnings/(loss) per common share — basic | $ | (0.21 | ) |
| $ | (0.55 | ) |
| $ | (0.36 | ) |
| $ | 0.41 |
|
Net earnings/(loss) per common share — diluted | $ | (0.21 | ) |
| $ | (0.55 | ) |
| $ | (0.36 | ) |
| $ | 0.41 |
|
| Three Months Ended March 31, |
|
| Nine Months Ended March 31, |
| ||||||||||
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Net income/(loss) | $ | (37,119 | ) |
| $ | (31,040 | ) |
| $ | 21,844 |
|
| $ | (29,731 | ) |
Less: Income to participating securities |
| — |
|
|
| — |
|
|
| (311 | ) |
|
| — |
|
Net income/(loss) attributable to common shares | $ | (37,119 | ) |
| $ | (31,040 | ) |
| $ | 21,533 |
|
| $ | (29,731 | ) |
Weighted average number of common shares outstanding — basic |
| 67,584 |
|
|
| 45,314 |
|
|
| 52,741 |
|
|
| 45,162 |
|
Effect of dilutive stock equivalents |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Weighted average number of common shares outstanding — diluted |
| 67,584 |
|
|
| 45,314 |
|
|
| 52,741 |
|
|
| 45,162 |
|
Net income/(loss) per common share — basic | $ | (0.55 | ) |
| $ | (0.69 | ) |
| $ | 0.41 |
|
| $ | (0.66 | ) |
Net income/(loss) per common share — diluted | $ | (0.55 | ) |
| $ | (0.69 | ) |
| $ | 0.41 |
|
| $ | (0.66 | ) |
For the quartersthree months ended April 2, 2022 and March 31, 2021, 5.9 million and March 31, 2020, options representing the rights to purchase approximately 2.3 million weighted averageanti-dilutive shares and 2.8 million weighted average shares, respectively,of common stock were excluded infrom the dilutive earningscalculation of diluted earnings/(loss) per common share, calculation because the assumed exercise of such options would have been anti-dilutive.respectively. For the nine months ended April 2, 2022 and March 31, 2021, 3.1 million and March 31, 2020, options representing the rights to purchase approximately 2.6 million weighted averageanti-dilutive shares and 2.9 million weighted average shares, respectively,of common stock were excluded infrom the dilutive earningscalculation of diluted earnings/(loss) per common share, calculation, because the assumed exercise of such options would have been anti-dilutive.respectively. On February 9, 2021, as part of the Rights Offering, the Company issued warrants to purchase 10 million shares of common stock with an exercise price of $1.65$1.65 and a five year term, all which remained outstanding and anti-dilutive as of March 31, 2021. For the three and nine months ended March 31, 2021, warrants representing the rights to purchase approximately 5.7 million and 1.9 million weighted average shares, respectively were excluded in the dilutive earnings per share calculation because the assumed exercise of such warrants would have been anti-dilutive.
8. Debt —
Pre-Petition Financing Agreements
Through December 31, 2020, we were party to a credit agreement that provided for an asset-based, five-year senior secured revolving credit facility in the original amount of up to $180.0 million which was scheduled to mature on January 29, 2024 (the “Pre-Petition ABL Credit Agreement”). The availability of funds under the Pre-Petition ABL Credit Agreement was limited to the lesser of a calculated borrowing base and the lenders’ aggregate commitments under the Pre-Petition ABL Credit Agreement. Our indebtedness under the Pre-Petition ABL Credit Agreement was secured by a lien on substantially all of our assets.April 2, 2022.
On May 14, 2020, we entered into a Limited Forbearance Agreement (the “Forbearance Agreement”) with the lenders under the Pre-Petition ABL Credit Agreement.
Under the terms of the Forbearance Agreement, the lenders under the Pre-Petition ABL Credit Agreement agreed to not exercise remedies under the Pre-Petition ABL Credit Agreement and applicable law through May 26, 2020 (or earlier, if certain events occurred) based on the event of default resulting from our suspension of the operation of our business in the ordinary course and other events of default that may arise during the forbearance period as a result of failing to meet our obligations under certain agreements.
Pursuant to the Forbearance Agreement, the commitment of the lenders under the Pre-Petition ABL Credit Agreement was permanently reduced from $180.0 million to $130.0 million and new swingline loans were not advanced. During the forbearance period, the lenders were not obligated to fund further loans or issue or renew letters of credit under the Pre-Petition ABL Credit Agreement. The Forbearance Agreement required loan repayments of $10.0 million under the Pre-Petition ABL Credit Agreement, and the application of unrestricted and unencumbered cash balances in excess of $32.0 million to the repayment of outstanding borrowings under the Pre-Petition ABL Credit Agreement. The Forbearance Agreement also required daily cash sweeps to the Company’s main concentration account, a deposit account control agreement over such account, the imposition of additional reporting obligations, including a business plan, cash flow forecasts and working capital plan, and adherence to such cash flow forecasts, subject to certain permitted variances. The Forbearance Agreement also required the Company to retain a liquidation consultant and financial advisor. The Forbearance Agreement ended on May 26, 2020.
As 0 availability remains under the Pre-Petition ABL Credit Agreement, unused commitment fees and interest charges ceased.
17
The filing of the Chapter 11 Cases on May 27, 2020, was an event of default under the Pre-Petition ABL Credit Agreement10. Property and equipment, making all amounts outstanding under the existing Pre-Petition ABL Credit Agreement immediately due and payable. As of December 31, 2020, we had 0 amounts outstanding under the Pre-Petition ABL Credit Agreement, and that agreement was terminated. net
Debtor-In-Possession Financing Agreements
On May 29, 2020, we entered into the DIP ABL Credit Agreement, which provided for a super priority secured debtor-in-possession revolving credit facility in an aggregate amount of up to $100.0 million. The Lenders under the DIP ABL Facility were the existing lenders under the Pre-Petition ABL Credit Agreement. On July 10, 2020, we entered into the DIP DDTL Agreement, which provided for delayed draw term loans in an amount not to exceed $25.0 million. On December 31, 2020, the DIP ABL Credit Agreement and the DIP DDTL Agreement were terminated.
Post-Emergence Financing Arrangements
On December 31, 2020, the Company and its subsidiaries entered into a Credit Agreement (the “New ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A. and Bank of America, N.A. (collectively, the “Lenders”) that provides for a revolving credit facility in an aggregate amount of $110.0 million (the “New ABL Facility”). The New ABL Credit Agreement includes conditions to borrowings, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. The New ABL Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio if borrowing availability falls below certain minimum levels, after the first anniversary of the agreement.
Under the terms of the New ABL Credit Agreement, amounts available for advances would be subject to a borrowing base as described in the New ABL Credit Agreement. Under the New ABL Credit Agreement, borrowings will initially bear interest at a rate equal to the adjusted LIBOR rate plus a spread of 2.75% or the Commercial Bank Floating Bank rate plus a spread of 1.75%.
The New ABL Facility is secured by a first priority lien on all present and after-acquired tangible and intangible assets of the Company and its subsidiaries other than certain collateral that secures the Term Loan (as defined below). The commitments of the Lenders under the New ABL Facility will terminate and outstanding borrowings under the New ABL Facility will mature on December 31, 2023.
As of March 31, 2021, we had 0 borrowings outstanding under the New ABL Facility, $8.8 million of letters of credit outstanding, and borrowing availability of $48.4 under the New ABL Facility.
On December 31, 2020, the Company, Alter Domus (US), LLC, as administrative agent, and the lenders named therein (the “Term Lenders”), including Tensile Capital Partners Master Fund LP and affiliates of Osmium Partners, LLC, entered into a Credit Agreement (the “Term Loan Credit Agreement”) provided a term loan of $25.0 million to the Company (the “Term Loan”). On December 31, 2020, 3 new directors were selected for membership on the Board of Directors by the Backstop Party, in accordance with the terms of the Plan of Reorganization. Pursuant to the Term Loan Credit Agreement, Tensile Capital Partners Master Fund, LP and affiliates of Osmium Partners, LLC., held $19.0 million and $1.0 million, respectively, of the $25.0 million outstanding Term Loan.
Pursuant to the terms of the Term Loan Credit Agreement, the Term Loan has a maturity date of December 31, 2024 and bears interest at a rate of 14% per annum, with interest payable in-kind. Under the terms of the Term Loan Credit Agreement, the Term Loan is secured by a second lien on the collateral securing the New ABL Facility and a first lien on certain other assets of the Company as described in the Term Loan Credit Agreement. The Term Loan is subject to optional prepayment after the first anniversary of the date of issuance at prepayment price equal to the greater of (1) the original principal amount of the Term Loan plus accrued interest thereon, and (2) 125% of the original principal amount of the Term Loan. The Term Loan is subject to mandatory prepayment in connection with a change of control of the Company as described in the Term Loan Credit Agreement. The Term Loan Credit Agreement also includes customary covenants and events of default. As of March 31, 2021, the outstanding principal balance of the Term Loan was $25.4 million, net of debt issuance costs.
The fair value of the Company’s debt approximated its carrying value at March 31, 2021. At March 31, 2021, we are in compliance with covenants in the New ABL Facility and Term Loan.
Interest Expense
Interest expense of $1.4 million for the third quarter of fiscal 2021 is primarily due to accrued interest on the Term Loan along with the amortization of financing fees incurred for the New ABL facility. Interest expense was $0.5 million for the third quarter fiscal 2020. Interest expense for the first nine months of fiscal 2021 from the New ABL credit facility, the DIP ABL Credit Agreement and the Term Loan of $6.7 million was comprised of the amortization of financing fees of $5.2 million, commitment fees of $0.6 million, and accrued PIK interest on the Term Loan of $0.9 million. Interest expense for the first nine months of fiscal 2020 from the Pre-Petition ABL Credit Agreement of $1.9 million was comprised of interest of $1.5 million, commitment fees of $0.2 million, and the amortization of financing fees of $0.2 million.
9. Property and equipment, including depreciation — Accumulated depreciation of owned property and equipment as of March 31, 2021April 2, 2022 and June 30, 20202021 was $148.5$161.2 million and $231.1$151.9 million, respectively. The decrease in the current year was due to the stores closed permanently during the first quarter of fiscal 2021, the Phoenix distribution center closure and the sale-leaseback of our corporate office and Dallas distribution center properties in the second quarter of fiscal 2021 which resulted in property and equipment disposals, as discussed in Note 13.
As of March 31, 2021,April 2, 2022, due to the ongoing impact of COVID-19, we performed an interim impairment assessment of our leasehold improvement assets, and right-of-use assets, which did notincluded estimated future cash flow assumptions. As a result in a materialof this assessment, we determined that 0 additional store fixed asset impairment was required as the undiscounted projected future cash flows for each store sufficiently
19
recovered the three and nine month periods ending March 31, 2021.carrying value of the related asset group. Due to the uncertainty around COVID-19, our projected future cash flows may differ materially from actual results. While we believe our estimates and judgementsjudgments about projected future cash flows are reasonable, future impairment charges may be required if the future cash flows, as projected, do not occur, or if events changeschange requiring us to revise our estimates.
In the quarter ended December 31, 2020, we sold our corporate office and Dallas distribution center properties and land with a total net book value of $18.9 million in a sale-leaseback transaction (see further discussion in Note 13 below). Gains related to the sale or other disposal of such assets are presented in reorganization items on our Consolidated Statement of Operations.
10.11. Income taxes —The
The Company andor 1 of its subsidiaries files income tax returns in the U.S. federal, state and local income tax returns.taxing jurisdictions. With few exceptions, the Company and its subsidiaries are no longer subject to state and local income tax examinations for years prior to fiscal 2016 and are no longer subject to federal income tax examinations for years prior to fiscal 2013.
On March 27, 2020, in an effort to mitigate the economic impact of the COVID-19 pandemic, the U.S. Congress enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act includes certain corporate income tax provisions, which among other things, included a five-year carryback of net operating losses and acceleration of the corporate alternative minimum tax credit. The Company has evaluated the CARES Act and it is not expected to have a material impact on the income tax provision. The CARES Act also contains provisions for deferral of the employer portion of social security taxes incurred through the end of calendar 2020 and an employee retention credit, a refundable payroll credit for 50% of wages and health benefits paid to employees not providing services due to the pandemic. As a result of the CARES Act, we continued to deferhad deferred qualified payroll taxes through MarchDecember 31, 2021. Current and non-current2020. As of April 2, 2022, we have $2.1 million in current qualified deferred payroll taxes in “Accrued Liabilities in the condensed consolidated balance sheet, which are each $2.1 million as of Marchdue December 31, 2021.2022.
The effective tax ratesrate for the quartersquarter ended April 2, 2022 and March 31, 2021 and 2020 were (0.0%(0.4%) and (0.4%(0.5%), respectively. The effective tax ratesrate for the nine months ended April 2, 2022 and March 31, 2021 was 0.0% and 2020 were 3.3% and (0.3%),3.2% respectively. A full valuation allowance is currently recorded against substantially all of the Company’s deferred tax assets. A deviation from the customary relationship between income tax expense and (benefit) and pretax income income/(loss) results from the effects of the valuation allowance.
20
12. Related Party
11. Cash, cash equivalents and restricted cash — Cash and cash equivalents include credit card receivables and all highly liquid instruments with original maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value. As of March 31, 2021 and June 30,
On November 16, 2020, credit card receivables from third party consumer credit card providers were $3.3 million and $3.7 million, respectively. Such receivables are generally collected within one weekfollowing approval of the balance sheet date. Restricted cash aggregating $55.6Bankruptcy Court, the Company and Osmium entered into a backstop commitment agreement, pursuant to which Osmium Partners agreed that they or an affiliate would serve as the Backstop Party and purchase all unsubscribed shares for a price of $1.10 per share in a $40 million consistsRights Offering, pursuant to which eligible holders of $46.3the Company’s common stock could purchase up to $24 million of shares of the Company’s common stock for a price of $1.10 per share. The Rights Offering is described in more detail in Note 6 above. Larkspur SPV, jointly owned by Osmium and Tensile, was formed to serve as the Backstop Party. In addition, on November 15, 2020, the Company and Tensile entered into a commitment letter (the “Commitment Letter”) pursuant to which is being heldTensile agreed to provide $25 million in subordinated debt financing to the Unsecured Creditor Claim Fund and $9.3 million which is being held inCompany. See Note 13 below for a discussion of certain amendments to the Wells Fargo Restricted Fund (see Note 2). Term Loan Credit Agreement.
12. Intellectual property — Our intellectual property primarily consistsIn accordance with the Plan of indefinite lived trademarks. TrademarksReorganization and other intellectual property are reviewedthe Commitment Letter, on December 31, 2020, the Company, Alter Domus (US), LLC, as administrative agent, and the lenders named therein, including Tensile and an affiliate of Osmium, entered into the Term Loan Credit Agreement described in Note 3 above which provided for impairment annually in the fourth fiscal quarter,$25 million Term Loan to the Company.
In accordance with the Plan of Reorganization and may be reviewed more frequently if indicators of impairment are present. As of Marchthe backstop commitment agreement, on December 31, 2021,2020, the carrying value ofCompany, Osmium and Larkspur SPV (collectively, the intellectual property, which included indefinite-lived trademarks, was $1.6 million, and 0 impairment was identified or recorded.
13. Sale-leaseback — On December 7, 2020, we“Osmium Group”) entered into an agreement pursuant to sell our corporate office and Dallas distribution center properties and leaseback those facilitieswhich the Osmium Group is entitled to appoint 3 directors to the Company’s Board of Directors (the “Purchase and Sales“Directors Agreement”). OnPursuant to the Directors Agreement, Douglas J. Dossey of Tensile Capital Management LP, John H. Lewis of Osmium and W. Paul Jones were appointed as members of the Company’s Board of Directors. The Directors Agreement provides that the Osmium Group may appoint one additional member of the Board of Directors under certain circumstances. As a result of the Company's EBIT (as defined in the Director's Agreement) results over the twelve months period ended December 31, 2020,2021, the Osmium Group is entitled to appoint 1 additional member to the Board of Directors. The Directors Agreement also specifies various other board-related and voting-related procedures and includes a standstill provision limiting certain actions by the Osmium Group.
On February 9, 2021, the Company received proceeds of approximately $40 million upon the closing of the Rights Offering, as contemplated by the Plan of Reorganization. In accordance with the authority granted us by the Bankruptcy Court, we executed those transactions. The leaseterms of the corporate officebackstop commitment agreement, Larkspur SPV purchased 18,340,411 shares of the Company’s common stock in the Rights Offering for an aggregate purchase price of approximately $20.2 million. In addition, in accordance with the Plan of Reorganization and the backstop commitment agreement, Larkspur SPV received (1) 1,818,182 additional shares of the Company’s common stock as payment of the commitment fee for serving as Backstop Party in the Rights Offering, and (2) a warrant to purchase 10 million additional shares of the Company’s common stock at a purchase price of $1.65 per share.
Based on Schedule 13D filings made by Osmium and Tensile, and their respective affiliates, on February 19, 2021, Osmium and Tensile each are deemed to beneficially own the 30,158,593 shares of the Company’s stock beneficially owned by Larkspur SPV (representing approximately 31.4% of outstanding shares). Based on the Schedule 13D and subsequent filings with the SEC, Osmium beneficially owns an additional 2,026,840 shares of the Company’s common stock.
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13. Subsequent Events
New ABL Facility and FILO Facilities
On May 9, 2022 (the “Refinancing Closing Date”), Tuesday Morning Corporation (the “Company”), Tuesday Morning, Inc. (the “Borrower”) and each other subsidiary of the Company entered into a Credit Agreement (the “New ABL Credit Agreement”) with the lenders named therein, Wells Fargo Bank, National Association, as administrative agent, and 1903P Loan Agent, LLC, as FILO B documentation agent. The New ABL Credit Agreement provides for (i) a revolving credit facility in an aggregate amount of $110.0 million (the “New ABL Facility”), which includes a $10.0 million sublimit for swingline loans and a $25.0 million sublimit for letters of credit, (ii) a first-in last-out term loan facility in an aggregate amount of $5.0 million (the “FILO A Facility”) and (iii) an additional first-in last-out term loan facility in an aggregate amount of $5.0 million (the “FILO B Facility” and, collectively with the New ABL Facility and the FILO A Facility, the “New Facilities”). In addition, the Borrower has the right, on and following November 9, 2022, to request (x) an additional incremental loan under the FILO B Facility in an aggregate amount not to exceed $5.0 million, which, subject to the satisfaction of certain conditions, the FILO B lenders have committed to provide, and (y) additional incremental commitments from the FILO B lenders to make additional loans in an aggregate amount not to exceed $5.0 million, subject to the satisfaction of certain conditions.
The New ABL Credit Agreement includes conditions to borrowings, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. Pursuant to the New ABL Credit Agreement, the Borrower and its subsidiaries must maintain borrowing availability under the New ABL Facility at least equal to the greater of (i) $7.5 million and (ii) 7.5% of the Modified Revolving Loan Cap (as defined in the New ABL Credit Agreement).
Amounts available for advances under the New Facilities are subject to borrowing bases as described in the New ABL Credit Agreement. Borrowings under the New ABL Facility will bear interest at a rate equal to, at the option of the Borrower, (i) the Adjusted Term SOFR (as defined below) plus a margin ranging from 1.25% to 1.75%, or (ii) the Base Rate (as defined below) plus a margin ranging from 0.25% to 0.75%, in each case with such margins depending on the Borrower’s average quarterly borrowing availability under the New ABL Facility. Borrowings under the FILO A Facility will bear interest at a rate equal to, at the option of the Borrower, (i) the Adjusted Term SOFR plus 3.00%, or (ii) the Base Rate plus 2.00%. Borrowings under the FILO B Facility will bear interest at a rate equal to, at the option of the Borrower, (i) the Adjusted Term SOFR plus a margin ranging from 8.50% to 9.00%, or (ii) the Base Rate plus a margin ranging from 7.50% to 8.00%, in each case with such margins depending on seasonal periods. The “Adjusted Term SOFR” is forthe term SOFR plus a term SOFR adjustment of 10 years0.10% for loans under the New ABL Facility or a term SOFR adjustment of 0.00% for loans under the FILO A Facility and the leaseFILO B Facility. The “Base Rate” is the greatest of (i) the federal funds effective rate plus 0.50%, (ii) the term SOFR plus 1.00%, and (iii) the prime rate of Wells Fargo Bank, National Association. Each of the distribution center propertiesAdjusted Term SOFR and the Base Rate is subject to a 0.00% floor with respect to the New ABL Facility and a 1.00% floor for an initial term of two and one half years, with an option to extend the distribution center properties lease for one additional year. We believe it is reasonably certain the option to extend will be exercised. We determined the sale price represented the fair valueeach of the underlyingFILO A Facility and the FILO B Facility.
The New Facilities are secured by a first priority lien on all present and after-acquired tangible and intangible assets soldof the Company and we have no continuing involvement with the properties soldits subsidiaries other than a normal leasebackcertain collateral that secures the Term Loan (as defined below). Each of the New Facilities will terminate, and outstanding borrowings thereunder will mature, on the earlier of (i) May 9, 2027 and (ii) the date that is 91 days prior to maturity of the Term Loan.
The consideration received for
On the sale, as reduced by closingRefinancing Closing Date, the Borrower borrowed approximately $75.2 million under the New ABL Facility, $5.0 million under the FILO A Facility and transaction costs,$5.0 million under the FILO B Facility (collectively, the “Closing Date Loans”). A portion of the aggregate proceeds from the Closing Date Loans was $68.5 million, and the net book value of properties sold was $18.9 million, resulting in a $49.6 million gain, which was immediately recognizedused to (i) repay all outstanding indebtedness (the “Existing ABL Loans”) under that certain Credit Agreement, dated as of December 31, 2020. Cash2020, among the Company, the Borrower, each of the subsidiary guarantors party thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (the “Existing ABL Credit Agreement”), along with accrued interest, expenses and fees, (ii) purchase of a portion of the principal amount of the outstanding indebtedness (the “Term Loan”) under that certain Credit Agreement, dated as of December 31, 2020, by and among the Company, the Borrower, each of the subsidiary guarantors party thereto, the lenders party thereto (including Tensile Capital Partners Master Fund LP and affiliates of Osmium Partners, LLC) (collectively, the “Term Loan Lenders”), and Alter Domus (US) LLC, as administrative agent (the “Term Loan Credit Agreement”) for the aggregate purchase price of $5.0 million (the “Loan Repurchase”), and (iii) pay transaction costs related to the transactions described in the foregoing clauses (i) and (ii) and the execution and delivery of the New ABL Credit Agreement and related loan documents. The remainder of the proceeds were deposited directlyfrom the Closing Date Loans, as well as the proceeds from future borrowings, will be used for working capital needs and other general corporate purposes.
Amendment to Term Loan Credit Agreement
On the Refinancing Closing Date, the Company, the Borrower, certain subsidiaries of the Company, certain of the Term Loan Lenders (the “Consenting Lenders”), and Alter Domus (US) LLC, as administrative agent, entered into an amendment to the Unsecured Creditor Claim Fund. See Notes 2 and 11.
The 2 leases, associatedTerm Loan Credit Agreement (the “Term Loan Credit Agreement Amendment”), pursuant to which, among other things, (i) each Consenting Lender agreed to the Loan Repurchase, (ii) concurrently with the transaction, were recorded as operating leases. Asconsummation of March 31, 2021 wthe Loan Repurchase, each Consenting Lender agreed toe will pay approximately $10.0
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waive and forgive an amount of the accrued and unpaid interest owed to such Consenting Lender , (iii) it was agreed that immediately, automatically and permanently upon the consummation of the Loan Repurchase, the Term Loans assigned pursuant to the Loan Repurchase would be deemed cancelled and of no further force and effect and (iv) the Term Loan Credit Agreement was amended to, among other things, (x) provide that the Borrower and its subsidiaries shall not permit the borrowing availability under the New ABL Facility to be less than the greater of (A) $7.5 million in fixed rents and in-substance fixed rents, (B) over7.5% of the 10 year lease term forModified Revolving Loan Cap, (y) permit the corporate officeBorrower to borrow on the $5.0 million committed FILO B accordion, subject to certain conditions, on and we will pay approximately $17.3 million in fixed rentsfollowing November 9, 2022, and in-substance fixed rents for(z) provide that, commencing with the Dallas distribution center property over the three12-month period (each, a “Test Period”) ending September 30, 2023, and one-half year lease term, including the one-year option period as noted above. Fixed rents and in-substance fixed rents for each lease were discounted usingsubsequent Test Period ending on the incremental borrowing rate we established for the respective termlast day of each lease.fiscal month of the Company and TMI Holdings, Inc. (“Intermediate Holdings” and, together with the Company, “Holdings”)thereafter, Holdings shall not permit the Total Secured Net Leverage Ratio (as defined below) as of the last day for any such Test Period to be greater than (A) for any Test Period ending on or prior to the last day of Holdings’ December 2023 fiscal month, 8.00:1.00, or (B) for any Test Period ending on or after the last day of Holdings’ January 2024 fiscal month, 6.00:1.00. For purposes of the Term Loan Credit Agreement, “Total Secured Net Leverage Ratio” means, for any Test Period, Holdings and its subsidiaries’ Consolidated Secured Indebtedness (as defined in the Term Loan Credit Agreement) as of the last day of such Test Period divided by EBITDA (as defined in the Term Loan Credit Agreement) for such Test Period.
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The following discussion should beItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We encourage you to read this "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") in conjunction with our unaudited interim consolidated financial statements and the notes theretocorresponding section included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.2021.
Business Overview
Background
We are one of the original off-price retailers and a leading destination for unique home and lifestyle goods, selling high-quality products at prices generally below those found in boutique, specialty and department stores, catalogs and on-line retailers. Our customers come to us for an ever-changing, exceptional assortment of brand names at great prices. Our strong value proposition has established a loyal customer base, who we engage regularly with social media, email and digital media.
The COVID-19 pandemic has had an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow. On March 25, 2020, we temporarily closed all of our 687 stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. As allowed by state and local jurisdictions, 685 of our stores gradually reopened as of the end of June 2020 and two stores were permanently closed during the quarter. In accordance with our bankruptcy Plan of Reorganization, described below, we completed the permanent closure of 197 stores in the first quarter of 2021 and the closure of our Phoenix, Arizona distribution center ("Phoenix distribution center") in the second quarter of 2021. In addition, as part of our restructuring, we secured financing to pay the creditors in accordance with the plan of reorganization and to fund planned operations and expenditures.
Future impacts from the COVID-19 pandemic will depend on the potential further geographic spread and duration of the ongoing pandemic, the timing and extent of recovery in traffic and consumer spending in our stores, the extent and duration of ongoing impacts to domestic and international supply chains and the related impacts on the flow, availability and cost of products, the production and administration of effective medical treatments and vaccines, and the actions that may be taken by various governmental authorities and other third parties in response to the pandemic.
Emergence from Chapter 11 Bankruptcy Proceedings
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Key Metrics for the Three and Nine Months Ended April 2, 2022
Key operating metrics for continuing operations for the three and nine months ended April 2, 2022 include:
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Quarter and Nine-months Ended March 31, 20212021. Net sales for the nine months ended April 2, 2022 were $587.9 million, an increase of $74.3 million or 14.5%, compared to $513.5 million for the nine months ended March 31, 2021. Comparable store sales for the three and nine months ended April 2, 2022, increased 0.6% and 18.1%, respectively.
• Gross margin for the three months ended April 2, 2022 was 24.4%, compared to 31.4% for the three months ended March 31, 2021. Gross margin for the nine months ended April 2, 2022 was 27.5%, compared to 31.0% for the nine months ended March 31, 2021. • Selling, general and administrative expenses (“SG&A”) for the three months ended April 2, 2022 decreased $3.6 million or 6.1% to $55.6 million, from $59.2 million for the three months ended March 31, 2021. As a percentage of sales for the three months ended April 2, 2022, SG&A was 34.8% compared to 38.6% for the three months ended March 31, 2021. Selling, general and administrative expenses (“SG&A”) for the nine months ended April 2, 2022 decreased $1.1 million or 0.6% to $183.5 million, from $184.6 million for the nine months ended March 31, 2021. As a percentage of sales for the nine months ended April 2, 2022, SG&A was 31.2% compared to 35.9% for the nine months ended March 31, 2021. • Restructuring, impairment and abandonment charges for the three months ended April 2, 2022 were a net benefit of $0.3 million, compared to a charge $1.0 million for the three months ended March 31, 2021. Restructuring, impairment and abandonment charges for the nine months ended April 2, 2022 were $2.6 million, compared to $7.6 million for the nine months ended March 31, 2021, which related to our permanent store closing plan along with our decision to close our Phoenix distribution center. • Reorganization items, net for the three months ended April 2, 2022 were a net benefit of $0.1 million compared to a net charge of $23.6 million for the three months ended March 31, 2021. Reorganization items, net for the nine months ended April 2, 2022 were a loss of $0.9 million compared to a net benefit of $62.2 million for the nine months ended March 31, 2021. • Our net loss for the three months ended April 2, 2022 was $18.2 million, or diluted net loss per share of $0.21 compared to a net loss for the three months ended March 31, 2021of $37.1 million, or diluted loss per share of $0.55. Our net loss for the nine months ended April 2, 2022 was $30.9 million, or diluted net loss per share of $0.36 compared to a net earnings for the nine months ended March 31, 2021 of $21.8 million, or diluted earnings per share of $0.41. • As shown under the heading “Non-GAAP Financials Measures” below, EBITDA for the three months ended April 2, 2022 was a negative $12.8 million compared to a negative $31.9 million for the three months ended March 31, 2021. Adjusted EBITDA for the three months ended April 2, 2022 was a negative $11.9 million compared to a negative $6.9 million for the three months ended March 31, 2021. EBITDA for the nine months ended April 2, 2022 was a negative $15.2 million compared to a positive $41.2 million for the nine months ended March 31, 2021. Adjusted EBITDA for the nine months ended April 2, 2022 was negative $8.2 million compared to a negative $12.1 million for the nine months ended March 31, 2021. 25 Key balance sheet and liquidity metrics for the nine months ended April 2, 2022 include: • Cash, cash equivalents, and restricted cash decreased by $20.4 million to $8.5 million at April 2, 2022 from $28.9 million at June 30, 2021. The decrease in cash, cash equivalents and restricted cash were primarily driven by payments for bankruptcy court approved petition claims, legal and professional fees and payments to the Company’s vendors for inventory. See Note 2 to our condensed consolidated financial statements herein for additional information. • As of April 2, 2022, total liquidity, defined as cash and cash equivalents plus $26.6 million availability for borrowing under our Post-Emergence ABL Facility, was $35.0 million. In addition, we had $54.1 million of borrowings outstanding under our Post-Emergence ABL Facility and $14.6 million of letters of credit outstanding. • Inventory levels increased by $39.3 million at April 2, 2022 to $176.6 million from $137.4 million at March 31, 2021. As of April 2, 2022, inventory levels increased by 28.6% due to the incremental deceleration in topline performance beginning in March 2022 as well as earlier than expected timing of receipts. Last year, inventory level challenges were due in part to the closure of much of our merchant and supply chain operations during the height of the COVID outbreak as well as pandemic-related disruptions to the supply chain. Subsequent to April 2, 2022, the Company and its subsidiaries entered into the New ABL Credit Agreement as part of a refinancing. See Note 13 to the condensed consolidated financial statements and “Liquidity and Capital Resources – Liquidity” herein for additional information. Store Data The following table presents information with respect to our stores in operation during each of the fiscal periods:
New stores are included in the same store sales calculation starting with the sixteenth month following the date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is generally considered the same store for purposes of this computation. Stores that are closed are included in the computation of comparable store sales until the month of closure. |
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Results of Operations
Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in the second quarter of each fiscal year.
There can be no assurance that the trends in sales or operating results will continue in the future.
Three Months Ended April 2, 2022 Compared to the Three Months Ended March 31, 2021
Net sales for the three months ended April 2, 2022 were $159.6 million, with an increase of 4.1%, compared to $153.3 million for the three months ended March 31, 2021, primarily driven by the two additional days in quarter ended April 2, 2022 as a result of a change from a calendar year as defined in Note 1. Comparable store sales for the three months ended April 2, 2022, increased 0.6% due to 6.7% increase in average ticket offset by a 6.6% decrease in customer transactions primarily due to the Easter shift, lapping stimulus and as a result of general economic impacts starting March 2022 following disruption in Europe and incremental inflationary pressures.
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Gross margin for the three months ended April 2, 2022 was $38.9 million, a decrease of 19.3% compared to $48.2 million for the three months ended March 31, 2021. As a percentage of net sales, gross margin decreased to 24.4% in the third quarter of fiscal 2022 compared with 31.4% in the second quarter of fiscal 2021. The decrease in gross margin as a percentage of net sales was primarily a result of higher supply chain and transportation costs recognized in the three months ended April 2, 2022.
SG&A decreased $3.6 million to $55.6 million in the three months ended April 2, 2022, compared to $59.2 million for the three months ended March 31, 2021 primarily mainly due to lower employee-related incentive pay. As a percentage of net sales, SG&A decreased 380 basis points to 34.8% for the three months ended April 2, 2022, compared to 38.6% for the three months ended March 31, 2021, leveraging of store occupancy cost as percentage of net sales.
Restructuring, impairment and abandonment charges were a net benefit of $0.3 million during the three months ended April 2, 2022, compared to net charge of $1.0 million during the three months ended March 31, 2021. During the three months ended April 2, 2022, adjustments related to compensation adjustments for employee retention cost. During the three months ended March 31, 2021, adjustments include restructuring, impairment and abandonment charges of $1.0 million primarily related to employee retention cost of $0.3 million and severance cost of $0.7 million.
Our operating loss was $16.4 million for the three months ended April 2, 2022 as compared to an operating loss of $12.0 million for the three months ended March 31, 2021, resulting to decline of $4.3 million. The operating loss in the current year was primarily the result of higher supply chain and transportation costs partially offset by lower restructuring, impairment and abandonment charges as discussed above.
Interest expense increased $0.5 million to $1.9 million for the three months ended April 2, 2022 compared to $1.4 million for the three months ended March 31, 2021. Interest expense for the three months ended April 2, 2022 was primarily due to the interest and amortization of financing fees incurred on our Post-Emergence ABL Facility and accrued PIK interest on our Term loan. Interest expense for the three months ended March 31, 2021 was primarily due to accrued PIK interest on the Term Loan along with amortization of financing fees incurred on the Post-Emergence ABL Facility. See Note 3 to our unaudited condensed consolidated financial statements herein for additional information.
Reorganization items, net were a net benefit of $0.1 million for the three months ended April 2, 2022 compared to a net charge of $23.6 million in the three months ended March 31, 2021, related to $0.2 million benefit on claims related cost, offset by $43 thousand of professional and legal fees related to our reorganization. The reorganization items, net charge of $23.6 million in the three months ended March 31, 2021, was due to $19.0 million net charge from the Rights Offering and Backstop Agreement, $0.9 million in claims related costs, and $3.8 million in professional and legal fees related to our reorganization.
Income tax expense for the three months ended April 2, 2022 was $0.1 million to an income tax expense of $0.2 million in the three months ended March 31, 2021. The effective tax rates for the three months ended April 2, 2022 and March 31, 2021 were (0.4%) and (0.5%), respectively. We currently believe the expected effects on future year effective tax rates to continue to be nominal until the cumulative losses and valuation allowance are fully utilized.
Our net loss for the three months ended April 2, 2022 was $18.2 million, or diluted net losses per share of $0.21 compared to a net loss for the three months ended March 31, 2021 of $37.1 million, or diluted net losses per share of $0.55.
Nine Months Ended April 2, 2022 Compared to the Nine Months Ended March 31, 2021
Net sales for the nine months ended April 2, 2022 were $587.9 million, an increase of 14.5%, compared to $513.5 million for the nine months ended March 31, 2021, primarily due to more stores in operation for fiscal year 2022 and completion of bankruptcy proceedings. Comparable store sales for the nine months ended April 2, 2022, increased 18.1% due to a 10.5% increase in average ticket and 6.4% increase in customer transactions.
Gross margin for the nine months ended April 2, 2022 was $161.5 million, an increase of 1.4% compared to $159.3 million for the nine months ended March 31, 2021. As a percentage of net sales, gross margin decreased to 27.5% in the nine months ended April 2, 2022 compared with 31.0% in the nine months ended March 31, 2021. The decrease in gross margin as a percentage of net sales was primarily a result of higher supply chain and transportation costs recognized in the nine months ended April 2, 2022.
SG&A decreased slightly by $1.1 million to $183.5 million in the nine months ended April 2, 2022, compared to $184.6 million for the nine months ended March 31, 2021 primarily mainly due to lower employee-related incentive pay partially offset by increased share-based compensation. As a percentage of net sales, SG&A decreased 470 basis points to 31.2% for the nine months ended April 2, 2022, compared to 35.9% for the nine months ended March 31, 2021. The decrease in SG&A, as a percentage of net sales, was primarily due to leveraging of store occupancy cost as a percentage of sales.
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Restructuring, impairment and abandonment charges were $2.6 million during the nine months ended April 2, 2022, compared to $7.6 million during the nine months ended March 31, 2021. During the nine months ended April 2, 2022, charges include a software impairment charge of $2.1 million as well as $0.5 million in employee retention cost. During the nine months ended March 31, 2021, charges include restructuring, impairment and abandonment charges of $7.6 million primarily related to abandonment cost of $5.6 million due to our permanent store and Phoenix, Arizona distribution center closing plans as well as $1.9 million in severance and employee retention cost. Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021.
Our operating loss was $24.6 million for the nine months ended April 2, 2022 as compared to an operating loss of $32.8 million for the nine months ended March 31, 2021, an improvement of $8.2 million. The operating loss in the current year was primarily the result of increased sales, lower restructuring, impairment and abandonment charges, offset by lower margins from higher supply chain and transportation costs as discussed above.
Interest expense decreased $1.2 million to $5.5 million for the nine months ended April 2, 2022 compared to $6.7 million for the nine months ended March 31, 2021. Interest expense for the nine months ended April 2, 2022 was primarily due to the interest and amortization of financing fees incurred on our Post-Emergence ABL Facility and accrued PIK interest on our Term loan. Interest expense for the nine months ended March 31, 2021 was primarily due to amortization of financing fees incurred for the Post-Emergence ABL Facility, the DIP ABL Credit Agreement and accrued PIK interest on Term loan. See Note 3 to our unaudited condensed consolidated financial statements herein for additional information.
Reorganization items, net were $0.9 million for the nine months ended April 2, 2022 compared to a net benefit of $62.2 million for the nine months ended March 31, 2021, related to $0.6 million loss of claims related cost and $0.3 million of professional and legal fees related to our reorganization. The net benefit of $62.2 million in the nine months ended March 31, 2021, was primarily due to a net gain of $115.8 million resulting from store lease terminations and the termination of our Phoenix distribution center lease under our permanent closure plan and sale-leaseback transactions pursuant to the Plan of Reorganization, partially offset by $33.8 million in professional and legal fees related to our reorganization, $0.9 million in claims related costs as well as $19.0 million in non-cash charges from the Rights Offering.
Income tax expense for the nine months ended April 2, 2022 was $11,000 compared to an income tax expense of $0.7 million in the nine months ended March 31, 2021. The effective tax rates for the nine months ended April 2, 2022 and March 31, 2021 were 0.0% and 3.2%, respectively. We currently believe the expected effects on future year effective tax rates to continue to be nominal until the cumulative losses and valuation allowance are fully utilized.
Our net loss for the nine months ended April 2, 2022 was $30.9 million, or diluted net loss per share of $0.36 compared to a net earnings for the nine months ended March 31, 2021 of $21.8 million, or diluted net earnings per share of $0.41.
Non-GAAP Financial Measures
We define EBITDA as net incomeearnings or net loss before interest, income taxes, depreciation, and amortization. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including certain non-cash items and other items that we believe are not representative of our core operating performance. These measures are not presentations made in accordance with GAAP. EBITDA and Adjusted EBITDA should not be considered as alternatives to net incomeearnings or loss as a measure of operating performance. In addition, EBITDA and Adjusted EBITDA are not presented as, and should not be considered as, alternatives to cash flows as a measure of liquidity. EBITDA and Adjusted EBITDA should not be considered in isolation, or as substitutes for analysis of our results as reported under GAAP and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by such adjustments. We believe it is useful for investors to see these EBITDA and Adjusted EBITDA measures that management uses to evaluate our operating performance. These non-GAAP financial measures are included to supplement our
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financial information presented in accordance with GAAP and because we use these measures to monitor and evaluate the performance of our business as a supplement to GAAP measures and we believe the presentation of these non-GAAP measures enhances investors’ ability to analyze trends in our business and evaluate our performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The non-GAAP measures presented may not be comparable to similarly titled measures used by other companies.
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The following table reconciles net income/earnings/(loss), the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA, each of which is a non-GAAP financial measure (in thousands):
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Net income/(loss) (GAAP) | $ | (37,119 | ) |
| $ | (31,040 | ) |
| $ | 21,844 |
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| $ | (29,731 | ) | |||||||||||||||
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| March 31, |
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| March 31, |
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Net earnings/(loss) (GAAP) | $ | (18,151 | ) |
| $ | (37,119 | ) |
| $ | (30,860 | ) |
| $ | 21,844 |
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Depreciation and amortization |
| 3,627 |
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| 8,127 |
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| 11,933 |
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| 20,935 |
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| 3,369 |
| 3,627 |
| 10,175 |
| 11,933 |
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Interest expense, net |
| 1,404 |
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| 486 |
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| 6,671 |
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| 1,868 |
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| 1,919 |
| 1,404 |
| 5,520 |
| 6,671 |
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Income tax provision/(benefit) |
| 172 |
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| 117 |
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| 715 |
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| 99 |
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Income tax expense |
| 69 |
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| 172 |
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| 11 |
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| 715 |
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EBITDA (non-GAAP) | $ | (31,916 | ) |
| $ | (22,310 | ) |
| $ | 41,163 |
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| $ | (6,829 | ) | $ | (12,794 | ) |
| $ | (31,916 | ) |
| $ | (15,154 | ) |
| $ | 41,163 |
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Share based compensation expense (1) |
| 382 |
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| 523 |
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| 1,347 |
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| 2,082 |
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| 1,600 |
| 382 |
| 4,645 |
| 1,347 |
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Restructuring and abandonment expenses (2) |
| 1,047 |
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| 1,260 |
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| 7,554 |
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| 1,260 |
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Restructuring, impairment and abandonment charges (2) |
| (278 | ) |
| 1,047 |
| 2,588 |
| 7,554 |
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Reorganization items, net (3) |
| 23,597 |
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| (62,169 | ) |
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| — |
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| (128 | ) |
| 23,597 |
| 923 |
| (62,169 | ) | |||||
Other (4) |
| (265 | ) |
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| — |
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| (1,219 | ) |
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| — |
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Adjusted EBITDA (non-GAAP) | $ | (6,890 | ) |
| $ | (20,527 | ) |
| $ | (12,105 | ) |
| $ | (3,487 | ) | $ | (11,865 | ) |
| $ | (6,890 | ) |
| $ | (8,217 | ) |
| $ | (12,105 | ) |
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(1) Adjustment includes charges related to share-based compensation programs, which vary from period to period depending on volume, timing and vesting of awards. We adjust for these charges to facilitate comparisons from period to period. | (1) Adjustment includes charges related to share-based compensation programs, which vary from period to period depending on volume, timing and vesting of awards. We adjust for these charges to facilitate comparisons from period to period. |
| (1) Adjustment includes charges related to share-based compensation programs, which vary from period to period depending on volume, timing and vesting of awards. We adjust for these charges to facilitate comparisons from period to period. |
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(2) Adjustment includes only certain restructuring expenses, including abandonment charges and compensation costs related to the severance and retention costs, permanent closure plan for stores and our Phoenix distribution center. Such costs vary from period to period and management does not consider these costs in our evaluation of ongoing operations. |
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(2) For the three months ended April 2, 2022, a net benefit in restructuring, impairment and abandonment costs is related to compensation adjustments for employee retention. During the nine months ended April 2, 2022, restructuring, impairment and abandonment charges are primarily related to software abandonment charges and employee retention cost. During the three months ended March 31, 2021, the restructuring, impairment and abandonment charges are primarily related to employee retention costs and severance cost. During the nine months ended March 31, 2021, the charges are primarily related to abandonment costs due to the permanent closure of our stores and Phoenix, Arizona distribution center and severance and employee retention costs. Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021. See Notes 2 to the condensed consolidated financial statements herein for additional information. | (2) For the three months ended April 2, 2022, a net benefit in restructuring, impairment and abandonment costs is related to compensation adjustments for employee retention. During the nine months ended April 2, 2022, restructuring, impairment and abandonment charges are primarily related to software abandonment charges and employee retention cost. During the three months ended March 31, 2021, the restructuring, impairment and abandonment charges are primarily related to employee retention costs and severance cost. During the nine months ended March 31, 2021, the charges are primarily related to abandonment costs due to the permanent closure of our stores and Phoenix, Arizona distribution center and severance and employee retention costs. Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021. See Notes 2 to the condensed consolidated financial statements herein for additional information. |
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(3) Adjustment includes only incremental professional and legal fees incurred after and as a direct result of the filing of the Chapter 11 Cases, along with gains resulting from lease terminations, gain on sale-leaseback, partially offset by estimated claims. Such items vary from period to period and are not considered in management's evaluation of the Company’s ongoing operations. |
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(3) For the three months ended April 2, 2022, reorganization items, net benefit from claims related cost, partially offset by professional and legal fees. For the nine months ended April 2, 2022, reorganization items, net charges is from claims-related costs including professional and legal fees. During the three months ended March 31, 2021, reorganization items, net is primarily non-cash charges related to the execution of our Rights Offering (defined in Note 6), professional fees and claims-related costs. For the nine months ended March 31, 2021, reorganization items, net benefit was primarily due to a net gain resulting from store lease terminations and the termination of our Phoenix distribution center lease under our permanent closure plan and sale-leaseback transactions pursuant to the Plan of Reorganization, partially offset by professional and legal fees related to our reorganization, claims-related costs as well as non-cash charges from the Rights Offering. See Notes 1, 2, 6 and 8 to the condensed consolidated financial statements herein for additional information. | (3) For the three months ended April 2, 2022, reorganization items, net benefit from claims related cost, partially offset by professional and legal fees. For the nine months ended April 2, 2022, reorganization items, net charges is from claims-related costs including professional and legal fees. During the three months ended March 31, 2021, reorganization items, net is primarily non-cash charges related to the execution of our Rights Offering (defined in Note 6), professional fees and claims-related costs. For the nine months ended March 31, 2021, reorganization items, net benefit was primarily due to a net gain resulting from store lease terminations and the termination of our Phoenix distribution center lease under our permanent closure plan and sale-leaseback transactions pursuant to the Plan of Reorganization, partially offset by professional and legal fees related to our reorganization, claims-related costs as well as non-cash charges from the Rights Offering. See Notes 1, 2, 6 and 8 to the condensed consolidated financial statements herein for additional information. |
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(4) For the three and nine months ended April 2, 2022, adjustments included non-cash expense (benefit) recognized related to cash settled awards in our long-term incentive plan. | (4) For the three and nine months ended April 2, 2022, adjustments included non-cash expense (benefit) recognized related to cash settled awards in our long-term incentive plan. |
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ThreeLiquidity and Capital Resources
Cash Flows for the Nine Months Ended March 31, 2021
Compared to the Three Months Ended March 31, 2020
Net sales for the third quarter of fiscal 2021 were $153.3 million, a decrease of $12.4 million or 7.5%, compared to $165.7 million for the same period last year, primarily due to the permanent closure of 199 stores since the third quarter of fiscal 2020. Comparable store sales, which is calculated by comparing our current store base to the same comparable stores in prior year, increased 17.9% for the third quarter of fiscal 2021. New stores are included in the same store sales calculation starting with the sixteenth month following the date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is generally considered the same store for purposes of this computation. Stores that are closed are included in the computation of comparable store sales until the month of closure.
23
The increase in comparable store sales when comparing the three-month period ended March 31, 2021 to March 31, 2020 was due to an increase in average ticket of 18.8%, the temporary closure of all stores on March 25, 2020 related to COVID-19, and the positive impact of an earlier Easter this fiscal year and the related pre-holiday sales compared to the prior year. The increase in comparable store sales was partially offset by a decrease in customer transactions of 0.8%, reductions in promotional events as compared to the prior year period and as a result of the winter storm that occurred in February 2021 that resulted in the temporary closure of many of our stores. Non-comparable store sales, which include the net effect of sales from new stores and sales from stores that have closed, decreased by a total of $35.5 million primarily due to the permanent closure of 199 stores since the third quarter of fiscal 2020, slightly offset by two store openings, which occurred since the end of the third quarter of fiscal 2020. Additionally, sales continued to be negatively impacted by lower store inventory levels. As of March 31, 2021, store inventory levels on a comparable store basis, were approximately 35.6% below last year. The inventory decline year over year was due to the strength of sales immediately post re-opening and challenges related to restocking stores, the closure of our merchant and supply chain operations during the height of the Spring 2020 COVID-19 outbreak and pandemic-related disruptions to supply chain. We expect inventory levels to increase throughout the spring and expect supply chain costs to remain elevated due to higher freight costs and other supply chain conditions. Store openings and closings are presented in the table below.April 2, 2022
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| Store Openings/Closings |
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| Three Months Ended March 31, 2021 |
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| Three Months Ended March 31, 2020 |
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| Fiscal Year Ended June 30, 2020 |
| |||
Stores open at beginning of period |
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| 490 |
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| 705 |
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| 714 |
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Stores opened during the period |
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| — |
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| — |
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| 1 |
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Stores closed during the period |
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| — |
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| (18 | ) |
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| (30 | ) |
Stores open at end of period |
|
| 490 |
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| 687 |
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| 685 |
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WeCash Flows from Operating Activities
In the nine months ended the third quarter of fiscal 2021 with 490 stores, compared to 687 stores at March 31, 2020. No stores were relocated during the third quarter of either fiscal 2021 or fiscal 2020.
Gross profit for the third quarter of fiscal 2021April 2, 2022, net cash used in operating activities was $48.2 million, a decrease of 7.7% compared to $52.2 million in gross profit for the third quarter of fiscal 2020. Gross profit as a percentage of net sales was 31.4% for the third quarter of fiscal 2021, compared to 31.5% for the third quarter of fiscal 2020. The decrease in gross margin was primarily a result of higher supply chain and transportation costs recognized in the current quarter, partially offset by lower markdowns and lower shrink.
Selling, general & administrative (SG&A) expenses for the third quarter of fiscal 2021 decreased $23.6 million to $59.2$57.6 million, compared to $82.8cash used in operating activities of $114.5 million in the same period last year. The decrease in SG&A was primarily due to lower store expenses on a smaller store base, including a significant decrease in store rents for both closed stores and renegotiated rents for the ongoing store base. Subsequent to the petition date, we commenced negotiations with our landlords on substantially all of our ongoing leases, resulting in significant modifications and reduced lease costs. Labor costs and depreciation were also lower on the smaller store base. Also contributing to the favorable comparison were reduced advertising and lower corporate expenses including reductions in compensation costs. As a percentage of net sales, SG&A expenses were 38.6% for the third quarter of fiscal 2021 compared to 50.0% in the same period last year, a change of 1140 basis points.
Our operating loss was $12.0 million for the third quarter of fiscal 2021, compared to an operating loss of $30.6 million during the third quarter of fiscal 2020. The operating loss for the current period was primarily the result of higher supply chain costs, higher compensation related expenses and the $1.0 million of restructuring and abandonment charges.
Interest expense was $1.4 million for the third quarter of fiscal 2021, compared to $0.5 million for in the third quarter of the prior fiscal year. The increase in the current year period is primarily due to accrued interest expense on Term Loan along with the amortization of financing fees incurred for the New ABL facility and the Term Loan.
Income tax expense was $0.2 million in the third quarter of fiscal 2021, compared to $0.1 million in the third quarter of the prior fiscal year. The effective tax rates for the third quarter of fiscal 2021 and fiscal 2020 were (0.0%) and (0.4%), respectively. A full valuation allowance is currently recorded against substantially all of our deferred tax assets as of March 31, 2021. A deviation from the customary relationship between income tax expense and pretax income results from the effects of the valuation allowance. We currently believe the future year effective tax rates will continue to be nominal until the cumulative losses and valuation allowance are fully utilized.
Nine Months Ended March 31, 2021
Compared to the Nine Months Ended March 31, 2020
Net sales for the first nine months of fiscal 2021 were $513.5 million, a decrease of 28.1%, compared to $714.6 million for the same period last year, primarily due to the completion of our permanent store closing plans approved through bankruptcy proceedings, as well as a decrease in sales from comparable stores of 9.9%. New stores are included in the same store sales calculation starting with the sixteenth month following the date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is generally considered the same store for purposes of this computation. Stores that are closed are included in the computation of comparable store sales until the month of closure. The decrease in comparable store sales was due to a 17.6% decrease in customer transactions, partially offset by a 9.3% increase in average ticket and the temporary closure of all stores on March 25, 2020 related to COVID-19. Sales were significantly impacted by lower store inventory levels, which averaged approximately 45% below last year for the nine months as well as decreased store traffic resulting from the continuing negative impact of COVID-19. As of March 31, 2021, store inventory levels on a comparable store basis, were approximately 35.6% below last year. This decline was partially due to the strength of sales immediately post re-opening as well as challenges related to restocking stores rapidly. Store level inventory challenges were due in part to the closure of much of our merchant and supply chain operations during the height of the spring 2020 COVID outbreak as well as pandemic-related disruptions to the supply chain. Non-comparable store sales decreased by a total of $146.3 million primarily due to the permanent closure of 199 stores since the third quarter of fiscal 2020. Non-comparable store sales include the net effect of sales from new stores and sales from stores that have closed. We expect inventory levels to increase throughout the spring and expect supply chain costs to remain elevated due to higher freight costs and other supply chain conditions. Store openings and closings are presented in the table below.
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| Nine Months Ended March 31, 2021 |
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| Nine Months Ended March 31, 2020 |
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| Fiscal Year Ended June 30, 2020 |
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Stores open at beginning of period |
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| 685 |
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| 714 |
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| 714 |
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Stores opened during the period |
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| 2 |
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| 1 |
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| 1 |
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Stores closed during the period |
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| (197 | ) |
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| (28 | ) |
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| (30 | ) |
Stores open at end of period |
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| 490 |
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| 687 |
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| 685 |
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We ended the first nine months of fiscal 2021 with 490 stores, compared to 687 stores at March 31, 2020. No stores were relocated during the first nine months of fiscal 2021, while five stores were relocated during the first nine months of the prior fiscal year.
Gross profit for the first nine months of fiscal 2021 was $159.3 million, a decrease of 33.4% compared to $239.1 million in gross profit for the first nine months of fiscal 2020. Gross profit as a percentage of net sales was 31.0% for the first nine months of fiscal 2021, compared to 33.5% for the first nine months of fiscal 2020. The decrease in gross margin was primarily a result of higher supply chain and transportation costs recognized in the current period, partially offset by lower markdowns and lower shrink.
Selling, general & administrative (SG&A) expenses for the first nine months of fiscal 2021 decreased $82.7 million to $184.6 million, compared to $267.3 million in the same period last year. The decrease in SG&A was primarily due to lower store expenses on a smaller store base, including a significant decrease in store rents for both closed stores and renegotiated rents for the ongoing store base. Subsequent to the petition date, we commenced negotiations with our landlords on substantially all of our ongoing leases, resulting in significant modifications and reduced lease costs. Labor costs and depreciation were also lower on the smaller store base. Also contributing to the favorable comparison were reduced advertising costs and lower corporate expenses including reductions in compensation costs. As a percentage of net sales, SG&A expenses were 35.9% for the first nine months of fiscal 2021 compared to 37.4% in the same period last year, a change of 150 basis points.
Our operating loss was $32.8 million for the first nine months of fiscal 2021 compared to an operating loss of $28.2 million during the first nine months of fiscal 2020. The operating loss for the current period was primarily the result of the 9.9% decrease in comparable store sales for the stores remaining open, higher supply chain costs, and the $7.6 million of restructuring and abandonment charges.
Interest expense was $6.7 million for the first nine months of fiscal 2021, compared to $1.9 million for the first nine months of the prior fiscal year. The increase in the current year period is primarily due to the amortization of financing fees incurred for the New ABL facility, the DIP ABL Credit Agreement and accrued interest on Term Loan.
Income tax expense was $0.7 million in the first nine months of fiscal 2021, compared to income tax expense of $0.1 million for the same period in the prior fiscal year. The effective tax rates for the first nine months of fiscal 2021 and fiscal 2020 were 3.3% and (0.3%), respectively. A full valuation allowance is currently recorded against substantially all of our deferred tax assets as of March 31, 2021. A deviation from the customary relationship between income tax expense and pretax income results from the effects of the valuation allowance. We currently believe the future year effective tax rates will continue to be nominal until the cumulative losses and valuation allowance are fully utilized.
25
Liquidity and Capital Resources
Cash Flows for the Period Ended March 31, 2021
Cash Flows from Operating Activities
Net cash used in operating activities forin the nine months ended April 2, 2022 was primarily driven by the inventory purchases and payments of operating expenses as part of ordinary course of business. Net cash used in operating activities in the nine months ended March 31, 2021 was $114.5 million compared toprimarily driven by the increase in inventory purchases, decrease in payables, reorganization expenses, and bankruptcy court approved pre-petition claims, legal, and professional fees.
Cash Flows from Investing Activities
Net cash provided by operations of $0.6 millionused in investing activities for the nine months ended March 31, 2020. Net cash usedApril 2, 2022 of $5.2 million related primarily to capital expenditures in operations was primarily driven by payments for bankruptcy court approved Pre-Petition claims, legal and professional fees and payments to the Company’s vendors for inventory. There were no significant changesenhancements to our vendor payments policy during the nine months ended March 31, 2021.
Cash Flows from Investing Activities
store fleet and new stores, as well as investments in technology. Net cash provided by investing activities for the nine months ended March 31, 2021 of $68.1 million was related primarily tofrom $68.6 million of proceeds from sale-leaseback transactions and $1.9 million of proceeds from the sale of our corporate office and Dallas distribution center properties, along with $1.9 million of property and equipment at the 197 stores that we permanently closed, and was partially offset by $2.3 million of capital expenditures in the first nine months of fiscal 2021. expenditures.
Cash Flows from Financing Activities
Net cash used in investingprovided by financing activities of $42.4 million for the nine months ended March 31, 2020April 2, 2022 related primarily to capital expenditures. Our capital expenditures are generally associated with store relocations, expansions and new store openings, capital improvements to existing stores, as well as enhancements tonet borrowings under our distribution center, equipment, and systems along with improvements related to our corporate office, technology and equipment.
Cash Flows from Financing Activities
Post-Emergence ABL Facility. Net cash provided by financing activities of $61.6 million for the nine months ended March 31, 2021 related primarily to the$25.0 million in proceeds of $25.0 from the Term Loanterm loan and $40.0 million of proceeds from the Rights Offering, partially offset by the payment$3.2 million from payments of financing fees of $3.2 million. Net cash provided by financing activities of $50.8 million for the prior year period related primarily to $56.0 million of net proceeds on our Pre-Petition ABL Credit Agreement, along with a $5.0 million cash overdraft provision.fees.
Liquidity29
Liquidity
Historically, we have financed our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under a credit agreement providing for an asset-based, five year senior secured revolving credit facility infacility.
Post-Emergence ABL Credit Agreement
On December 31, 2020, as contemplated by our Plan of Reorganization, the original amount of up to $180.0 million that was scheduled to mature on January 29, 2024Company and its subsidiaries entered into a Credit Agreement (the “Pre-Petition“Post-Emergence ABL Credit Agreement”). The availability with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A. and Bank of funds under the Pre-Petition ABL Credit Agreement was limited to the lesser ofAmerica, N.A. that provides for a calculated borrowing base and the lenders’ aggregate commitments under the Pre-Petition ABL Credit Agreement. Our indebtedness under the Pre-Petition ABL Credit Agreement was secured by a lien on substantially all of our assets.
The COVID-19 pandemic has had, and could continue to have, an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow. As of March 25, 2020, we temporarily closed all of our stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. Stores gradually reopened as allowed by state and local jurisdictions, and all but two of our stores had re-opened by the end of Fiscal 2020. The scope and duration of this pandemic and the related disruption to our business and financial impacts cannot be reasonably estimated at this time. While we have taken actions to minimize costs, some of which are permanent including the closure of 197 stores and the closure of our Phoenix distribution center, and mitigate the related risks, there can be no assurance that these measures will continue to provide benefit or that they will be adequate to mitigate future changes in circumstances.
The filing of the Chapter 11 Cases was an event of default under the Pre-Petition ABL Credit Agreement and no further borrowings were available under the Pre-Petition ABL Credit Agreement. To provide for liquidity during the Chapter 11 Cases, we entered into agreements for debtor-in-possession financing. On May 29, 2020, in accordance with an order of the Bankruptcy Court, Debtors entered into the DIP ABL Credit Agreement, which provided for a super priority secured debtor-in-possession revolving credit facility in an aggregate amount of up to $100.0 million. Under the terms of the DIP$110.0 million (the “Post-Emergence ABL Facility”). The Post-Emergence ABL Credit Agreement amounts availableincluded conditions to borrowings, representations and warranties, affirmative and negative covenants, and events of default customary for advances were subject to a borrowing base generally consistent with the borrowing base under the Pre-Petitionfinancings of this type and size. The Post-Emergence ABL Credit Agreement subjectrequired the Company to maintain a minimum fixed charge coverage ratio if borrowing availability fell below certain agreed upon exceptions. On July 10, 2020, we entered intominimum levels, after the DIP DDTL Agreement, which provided for delayed draw term loans in an amount notfirst anniversary of the agreement. For additional information regarding the Post-Emergence ABL Facility, see Note 3 to exceed $25.0 million. On December 31, 2020, the DIP ABL Credit Agreement and the DIP DDTL Agreement were terminated.our unaudited condensed consolidated financial statements herein.
In connection with our legal emergence from bankruptcy, resolving all material conditions precedent listed in the Plan of Reorganization,
As further described below, on December 31, 2020,May 9, 2022, we entered into the New ABL Credit Agreement (as defined below) and used a portion of the proceeds from borrowings under the New Facilities (as defined below) to repay all outstanding indebtedness under the Post-Emergence ABL Facility, along with accrued interest, expenses and fees.
New ABL Credit Agreement
On May 9, 2022 (the “Refinancing Closing Date”), Tuesday Morning Corporation (“Parent”), Tuesday Morning, Inc. (the “Borrower”) and each other subsidiary of Parent entered into a Credit Agreement (the “New ABL Credit Agreement”) with the lenders named therein, Wells Fargo Bank, National Association, as administrative agent, and 1903P Loan Agent, LLC, as FILO B documentation agent. The New ABL Credit Agreement provides for (i) a revolving credit facility in an aggregate amount of $110.0 million (the “New ABL Facility”), which includes a $10.0 million sublimit for swingline loans and a $25.0 million sublimit for letters of credit, (ii) a first-in last-out term loan facility in an aggregate amount of $5.0 million (the “FILO A Facility”) and (iii) an additional first-in last-out term loan facility in an aggregate amount of $5.0 million (the “FILO B Facility” and, collectively with the New ABL Facility and the FILO A Facility, the “New Facilities”). Each of the New Facilities will terminate, and outstanding borrowings thereunder will mature, on the earlier of (i) May 9, 2027 and (ii) the date that is 91 days prior to maturity of the Term Loan.
The New ABL Credit Agreement includes conditions to borrowings, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. In addition, the Borrower and its subsidiaries must maintain borrowing availability under the New ABL Facility at least equal to the greater of (i) $7.5 million and (ii) 7.5% of the Modified Revolving Loan Cap (as defined in the New ABL Credit Agreement). For additional information regarding the New ABL Credit Agreement and the New Facilities, see Note 13 to our unaudited condensed consolidated financial statements herein.
Term Loan Credit Agreement
On December 31, 2020, the Company, Alter Domus (US), LLC, as administrative agent, and the lenders named therein including Tensile Capital Partners Master Fund LP and affiliates of Osmium Partners, LLC, entered into a Credit Agreement (as amended from time to time, the “Term Loan Credit Agreement”) to provide a term loan of $25.0 million to the Company (the “Term Loan”). Pursuant to the terms of the Term Loan Credit Agreement, the Term Loan has a maturity date of December 31, 2024 and completedbears interest at a rate of 14% per annum, with interest payable in-kind. Under the sale-leaseback transactionsterms of the Term Loan Credit Agreement, the Term Loan is secured by a second lien on the collateral securing the New Facilities and a first lien on certain other assets of the Company as described in the Term Loan Credit Agreement. The Term Loan is subject to optional prepayment after the first anniversary of the date of issuance at a prepayment price equal to (1) the outstanding principal amount of the Term Loan, plus (2) accrued and unpaid interest to the date of prepayment, plus (3) the prepayment premium, if any. The prepayment premium (which may not be less than zero) is equal to (1) 125% of the original principal amount of the Term Loan, minus (2) the aggregate principal amount of the loans advanced as of the prepayment date, plus all accrued interest thereon accrued as of such date. The Term Loan is subject to mandatory prepayment in connection with respecta change of control of the Company as described in the Term Loan Credit Agreement. The Term Loan Credit Agreement also includes customary covenants and events of default. As of April 2, 2022, the outstanding principal balance of the Term Loan was $29.5 million, net of debt issuance costs.
On the Refinancing Closing Date, (i) each Consenting Lender agreed to the Loan Repurchase, (ii) concurrently with the consummation of the Loan Repurchase, each Consenting Lender agreed to waive and forgive an amount of the accrued and unpaid interest owed to such Consenting Lender, (iii) it was agreed that immediately, automatically and permanently upon the consummation of the Loan Repurchase, the Term Loans assigned pursuant to the Loan Repurchase would be deemed cancelled and of no further force and effect, and (iv) the Term Loan Credit Agreement was amended to, among other things, (x) require us to maintain the same minimum level of
30
borrowing availability under the New ABL Facility as required by the New ABL Credit Agreement, (y) permit the Borrower to borrow on the $5.0 million committed FILO B accordion, subject to certain conditions, on and following November 9, 2022, and (z) require us to maintain a minimum total secured net leverage ratio beginning with the 12-month period ending September 30, 2023.
For additional information regarding the Term Loan, see Note 3 and Note 15 to our corporate office and Dallas distribution center properties. See Notes 8 and 13 to theunaudited condensed consolidated financial statements herein. In addition,
Recent Liquidity Developments and Outlook
At April 2, 2022 we completed the $40.0 million Rights Offering on February 9, 2021. In accordanceare in compliance with the terms of the Plan of Reorganization, all proceeds from the Rights Offering will be used to make payments of the claims of general unsecured creditorscovenants in the Chapter 11 Cases (see Note 1).Post-Emergence ABL Facility and Term Loan. As of April 2, 2022, we had $54.1 million of borrowings outstanding under our Post-Emergence ABL Facility and, $14.6 million of letters of credit outstanding. We currently have borrowing availability of $26.6 million under our Post-Emergence ABL Facility, as of April 2, 2022. Liquidity, defined as cash and cash equivalents plus the $26.6 million availability for borrowing under our Post-Emergence ABL Facility, was $35.0 million as of April 2, 2022.
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Going forward, we expect to fund our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under the New ABL Facility.
As of March 31, 2021, cash and cash equivalents, excluding restricted cash, were $6.3
On the Refinancing Closing Date, the Borrower borrowed approximately $75.2 million and total liquidity, defined as cash and cash equivalents plus the $48.4 million availability for borrowing under the New ABL Facility, $5.0 million under the FILO A Facility and $5.0 million under the FILO B Facility (collectively, the “Closing Date Loans”). A portion of the aggregate proceeds from the Closing Date Loans was $54.7 millionused to (i) repay all outstanding indebtedness (the “Existing ABL Loans”) under that certain Credit Agreement, dated as of MarchDecember 31, 2021.
We currently expect to incur capital expenditures, net of construction allowances received from landlords, of approximately $3 million to $4 million in fiscal year 2021, which reflects reduced capital spending as one2020, among the Company, the Borrower, each of the liquidity preservation measures we have taken due tosubsidiary guarantors party thereto, the financial impactlenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (the “Existing ABL Credit Agreement”), along with accrued interest, expenses and fees, (ii) purchase of COVID-19.
We believe our plans, implemented during the nine month period ended March 31, 2021 in connection with the Chapter 11 Cases and those continuing to be implemented, will mitigate the known conditions and events that initially raised substantial doubt about the entity’s ability to continue as a going concern. However, due to the uncertainty around the scope and durationportion of the ongoing COVID-19 pandemicprincipal amount of the outstanding indebtedness (the “Term Loan”) under that certain Credit Agreement, dated as of December 31, 2020, by and current challengesamong the Company, the Borrower, each of the subsidiary guarantors party thereto, the lenders party thereto (including Tensile Capital Partners Master Fund LP and affiliates of Osmium Partners, LLC) (collectively, the “Term Loan Lenders”), and Alter Domus (US) LLC, as administrative agent (the “Term Loan Credit Agreement”) for the aggregate purchase price of $5.0 million (the “Loan Repurchase”), and (iii) pay transaction costs related to the global transportation market thosetransactions described in the foregoing clauses (i) and (ii) and the execution and delivery of the New ABL Credit Agreement and related loan documents. The remainder of the proceeds from the Closing Date Loans, as well as the proceeds from future borrowings, will be used for working capital needs and other general corporate purposes.
We currently have $85.2 million of aggregate borrowings outstanding under the New Facilities and aggregate borrowing availability of $26.0 million under the New ABL Facility, in each case as of May 9, 2022. In addition, we have the right to request (i) an additional incremental loan under the FILO B Facility in an aggregate amount not to exceed $5.0 million, which, subject to the satisfaction of certain conditions, the FILO B lenders have committed to provide, and (ii) additional incremental commitments from the FILO B lenders to make additional loans in an aggregate amount not to exceed $5.0 million, subject to the satisfaction of certain conditions.
We incurred capital expenditures of approximately $5.2 million in the first nine months of fiscal 2022. Capital expenditures are anticipated to be $6.7 million total for fiscal year 2022. The amounts include the expected costs to open three new stores, reopen a Hurricane-damaged store, costs to enhance our existing store fleet, investment in technology as well as our Dallas distribution center.
We do not presently have any plans collectively cannot be deemed probableto pay dividends or repurchase shares of mitigating this substantial doubt asour common stock. Under the terms of the our New ABL Credit Agreement and the Term Loan, we are subject to restrictions on our ability to continue aspay dividends or repurchase shares of our common stock, including a going concern.$2.0 million limit on such payments imposed by the Term Loan Credit Agreement, and must maintain certain minimum levels of borrowing availability.
Off-Balance Sheet Arrangements and Contractual Obligations
We had no off-balance sheet arrangements as of March 31, 2021.April 2, 2022.
Except as discussed in Notes 1, 6 and 8 to the Consolidated Financial Statements, there
There have been no material changes outside the ordinary course of business from the disclosures relating to our contractual obligations contained under “Contractual Obligations” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includedas discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. Note 6 herein reflects the updated maturities of lease liabilities as of March 31, 2021, subsequent to renegotiations with our landlords and termination of rejected leases.2021.
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Critical Accounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited interimcondensed consolidated financial statements, which have been prepared pursuant to the rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of certain assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On a recurring basis, we evaluate our significant estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ materially from these estimates.
Other than as described in Note 1 of our unaudited condensed consolidated financial statements herein, as of March 31, 2021,April 2, 2022, there were no changes to our critical accounting policies from those listed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.2021.
Under the retail inventory method, permanent markdowns result in cost reductions in inventory at the time the markdowns are taken. We also utilize promotional markdowns for specific marketing efforts used to drive higher sales volume and customer transactions for a specified period of time. Promotional markdowns do not impact the value of unsold inventory and thus do not impact cost of sales until the merchandise is sold. Markdowns and damages during the third quarter of fiscal 20212022 were 4.0%4.4% of sales compared to 6.9%4.0% of sales for the same period last year. Markdowns and damages during the first nine months of fiscal 2022 were 3.3% of sales compared to 3.9% of sales for the same period last year. If our sales forecasts are not achieved, we may be required to record additional markdowns that could exceed historical levels. The effect of a 0.5% markdown in the value of our inventory at March 31, 2021April 2, 2022 would result in a decline in gross profitmargin and diluted incomeearnings per share for the third quarter of fiscal 20212022 of $0.7$0.9 million and $0.01, respectively.
For a further discussion of the judgments we make in applying our accounting policies, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.2021.
Recent Accounting Pronouncements
Please refer to Note 1 of our unaudited condensed consolidated financial statements herein for a summary of recent accounting pronouncements.
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Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995, which are based on management’s current expectations, estimates and projections. These statements may be found throughout this Quarterly Report on Form 10-Q, particularly in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” among others. Forward-looking statements typically are identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend” and similar words, although some forward-looking statements are expressed differently. You should consider statements that contain these words or words that state other “forward-looking” information carefully because they describe our current expectations, plans, strategies and goals and our beliefs concerning future business conditions, future results of operations, future financial positions, and our current business outlook. Forward looking statements also include statements regarding the Company’s ability to continue as a going concern, the Company’s plans for store closures and lease renegotiations, financial projections and other statements regarding the Company’s strategy, future operations, performance and prospects, sales and growth expectations, our liquidity, capital expenditure plans, our inventory management plans and merchandising and marketing strategies.
Readers are referred to Part 1, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 and Part II, Item 1A “Risk Factors” of this Current Report on Form 10-Q for examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. These risks, uncertainties and events also include, but are not limited to, the following:
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The forward-looking statements made in this Form 10-Q relate only to events as of the date on which the statements are made. Except as may be required by law, we disclaim obligations to update any forward-looking statements to reflect events or circumstances after the date on which the statements were made or to reflect the occurrence of unanticipated events. Investors are cautioned not to place undue reliance on any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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Not required.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our
The Company's management, with the participation of ourthe Company's principal executive officer ("CEO") and our principal financial officer ("CFO"), evaluated the effectiveness of the design and operation of ourCompany's disclosure controls and procedures as of March 31, 2021. The term “disclosure controls and procedures,” as(as defined in Rules 13a-15(e) and 15d-15(e)15d15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Act”"Exchange Act"), means) as of the end of the period covered by this report. Based on this evaluation, the CEO and CFO have concluded that, as of the end of such period, the Company's disclosure controls and other procedures of a company that are designedwere effective to ensure information that informationis required to be disclosed by a companythe Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’sSEC's rules and forms. Disclosure controlsforms and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is(ii) accumulated and communicated to the company’sCompany's management, including its principal executivethe CEO and principal financial officers, or persons performing similar functions,CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of March 31, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weakness in internal control over financial reporting described below.
During our fiscal 2020 year-end closing process, we identified a material weakness in internal control related to ineffective assessment of impairment of long-lived assets. Management’s estimation of fair value did not appropriately utilize market participant assumptions. The material weakness resulted in a material misstatement in our June 30, 2020 financial statements which was identified and corrected prior to filing. There were no restatements of prior period financial statements and no change in previously released financial results were required as the result of the control deficiency.
Changes in Internal Control Over Financial Reporting
We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weakness are remediated. We are designing and implementing our remediation plan for the material weakness in internal control over financial reporting described above, which includes steps to improve the operation and monitoring of control activities and procedures associated with our impairment assessment. We will consider the material weakness remediated after the applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively.
Other than as described above, there
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2021April 2, 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings Information related to the Chapter 11 Cases that were filed on May 27, 2020 is included in Note 1 and Note 2 to our unaudited condensed consolidated financial statements herein. See Note 7 to our unaudited condensed consolidated financial statements herein for additional information. |
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We are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established when a loss is considered probable and are based on management’s best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.
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We
Item 1A. Risk Factors
Except as set forth below, we believe there have been no material changes from our risk factors previously disclosed in Part 1, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.2021.
If we are not able to generate cash flows from our operations, remain in compliance with our debt agreements, and continue to access credit markets, we will not be able to support capital expenditure requirements, operations or debt repayment.
Our business is dependent upon our operations generating sufficient cash flows to support capital expenditure requirements and general operating activities. We also have relied on a revolving credit facility to support our liquidity needs. On May 9, 2022, we entered into the New ABL Credit Agreement, which increased our borrowing capacity with the addition of two first-in-last out term facilities in an aggregate amount of $10.0 million. The New ABL Credit Agreement includes customary conditions to borrowing, affirmative and negative covenants and events of default, and requires us to maintain minimum borrowing availability under the New ABL Credit Agreement. In addition, in connection with the New ABL Credit Agreement, the Term Loan Credit Agreement was amended to require satisfaction of a total secured net leverage ratio beginning with the 12-month period ending September 30, 2023. Our failure to satisfy any of these requirements may result in an event of default under the New ABL Credit Agreement and the Term Loan Credit Agreement.
While we believe the New ABL Credit Agreement will provide us with sufficient liquidity for the next 12 months, our ability to meet our capital expenditure, operating and debt service requirements will be dependent upon our ability to generate sufficient cash flows, maintain compliance with the requirements of our debt agreements and continue to access the credit markets as necessary. If we are unable to generate sufficient cash flows and maintain compliance with the requirements of the New ABL Agreement and the Term Loan Credit Agreement, we can provide no assurance that we will be able to secure additional or alternative financing sufficient to meet our liquidity needs.
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Item 6. Exhibits
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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