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~~December 31, 2020


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 0-19658

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, Texas 75240

(Address of principal executive offices) (Zip code)

(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(s)~~

~~Name of each exchange on which registered~~

~~Common Stock, par value $0.01 per share~~

TUESQ*

* As previously disclosed, on May 27, 2020, Tuesday Morning Corporation (the “Company”) was notified by the Listing Qualifications Department of The Nasdaq Stock Market (“Nasdaq”) that the Company’s common stock would be delisted from Nasdaq as a result of the Company’s filing of a voluntary petition under Chapter 11 of the United States Bankruptcy Code. On June 8, 2020, trading in the Company’s common stock on Nasdaq was suspended, and the Company’s common stock began trading on the OTC Pink Market under the symbol “TUESQ”. 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	☒

Non-accelerated filer	☐	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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at ~~June 15, 2020~~February 3, 2021
Common Stock, par value $0.01 per share		~~47,894,980~~46,894,235

Table of Contents

PART I.	FINANCIAL INFORMATION	43

ITEM 1.	Financial Statements (Unaudited)	43

	Consolidated Balance Sheets as of ~~March~~December 31, 2020 and June 30, ~~2019~~2020	43

	Consolidated Statements of Operations for the Three and ~~Nine~~Six Months Ended ~~March~~December 31, 2020 and 2019	54

	Consolidated Statements of Stockholders’ Equity for the Three and ~~Nine~~Six Months Ended ~~March~~December 31, 2020 and 2019	65

	Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~March~~December 31, 2020 and 2019	87

	Notes to Consolidated Financial Statements (Unaudited)	98

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1820

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	2730

ITEM 4.	Controls and Procedures	2730

PART II.	OTHER INFORMATION	2831

ITEM 1.	Legal Proceedings	2831

ITEM 1A.	Risk Factors	2831

ITEM 6.	Exhibits	3332

PART I — ~~FINANCI~~ALFINANCIAL INFORMATION

Item 1.

Financial Statements

Tuesday Morning Corporation

(Debtor-in-Possession)

Consolidated Balance Sheets

~~March~~December 31, 2020 (unaudited) and June 30, ~~2019~~2020

(In thousands, except share and per share data)

	March 31,			June 30,			December 31,			June 30,
	2020			2019			2020			2020
ASSETS
Current assets:
Cash and cash equivalents	$	47,334		$	11,395		$	26,244		$	46,676
Restricted cash								100,490			—
Inventories		215,494			237,895			114,424			114,905
Prepaid expenses		4,237			5,388			10,793			6,353
Other current assets		1,690			1,822			5,010			7,210
Total Current Assets		268,755			256,500			256,961			175,144
Property and equipment, net		104,872			110,146			41,838			68,635
Operating lease right-of-use assets		347,495			—			216,871			258,433
Deferred financing costs		831			994			2,954			—
Other assets		2,550			2,881			3,345			3,178
Total Assets	$	724,503		$	370,521		$	521,969		$	505,390
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Debtor-in-possession financing								—		$	100
Accounts payable	$	78,916		$	91,251			31,971			5,514
Accrued liabilities		33,854			45,923			48,773			33,942
Operating lease liabilities		71,782			—			53,155			—
Current portion of long-term debt		90,600			—
Total Current Liabilities		275,152			137,174			133,899			39,556

Operating lease liabilities — non-current		302,456			—
Borrowings under revolving credit facility		—			34,650
Deferred rent		—			23,551
Long-term debt (see Note 8 for amounts due to related parties)								24,439			—
Lease liability — non-current								183,117			—
Asset retirement obligation — non-current		3,002			3,002			971			1,213
Other liabilities — non-current		895			835			2,859			1,347
Total Liabilities not subject to compromise								345,285			42,116
Liabilities subject to compromise								110,043			456,339
Total Liabilities		581,505			199,212			455,328			498,455
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.01 per share, authorized 10,000,000 shares; none issued or outstanding		—			—
Common stock, par value $0.01 per share, authorized 100,000,000 shares; 49,794,195 shares issued and 48,010,534 shares outstanding at March 31, 2020 and 48,466,930 shares issued and 46,683,269 shares outstanding at June 30, 2019		461			465
Preferred stock, par value $0.01 per share, authorized 10,000,000 shares; NaN issued or outstanding								—			—
Common stock, par value $0.01 per share, authorized 200,000,000 shares at December 31, 2020 and authorized 100,000,000 shares at June 30, 2020; 48,629,874 shares issued and 46,846,213 shares outstanding at December 31, 2020 and 49,124,313 shares issued and 47,340,652 shares outstanding at June 30, 2020								450			455
Additional paid-in capital		243,481			241,456			244,769			244,021
Retained deficit		(94,132	)		(63,800	)		(171,766	)		(230,729	)
Less: 1,783,661 common shares in treasury, at cost, at March 31, 2020 and 1,783,661 common shares in treasury, at cost, at June 30, 2019		(6,812	)		(6,812	)
Less: 1,783,661 common shares in treasury, at cost, at December 31, 2020 and 1,783,661 common shares in treasury, at cost, at June 30, 2020								(6,812	)		(6,812	)
Total Stockholders’ Equity		142,998			171,309			66,641			6,935
Total Liabilities and Stockholders’ Equity	$	724,503		$	370,521		$	521,969		$	505,390

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Tuesday Morning Corporation

(Debtor-in-Possession)

Consolidated Statements of Operations (unaudited)

Three and Six Months Ended

December 31, 2020 and 2019

(In thousands, except per share data)

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2020			2019			2020			2019
Net sales	$	198,625		$	324,414		$	360,171		$	548,853
Cost of sales		138,571			218,638			249,047			361,945
Gross profit		60,054			105,776			111,124			186,908
Selling, general and administrative expenses		63,348			94,677			125,418			184,460
Restructuring and abandonment expenses		1,018			—			6,507			—
Operating income/(loss)		(4,312	)		11,099			(20,801	)		2,448
Other income/(expense):
Interest expense		(2,514	)		(726	)		(5,267	)		(1,391	)
Reorganization items, net		48,142			—			85,766			—
Other income, net		(198	)		166			(192	)		234
Other income/(expense) total		45,430			(560	)		80,307			(1,157	)
Income before income taxes		41,118			10,539			59,506			1,291
Income tax expense/(benefit)		779			(398	)		543			(18	)
Net income	$	40,339		$	10,937		$	58,963		$	1,309
Earnings Per Share
Net income per common share:
Basic	$	0.88		$	0.24		$	1.29		$	0.03
Diluted	$	0.88		$	0.24		$	1.29		$	0.03
Weighted average number of common shares:
Basic		45,511			45,218			45,460			45,086
Diluted		45,511			45,218			45,460			45,086
Dividends per common share	$	0		$	0		$	0		$	0

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Tuesday Morning Corporation

(Debtor-in-Possession)

Consolidated Statements of Stockholders' Equity (unaudited)

Three Months Ended December 31, 2020 and 2019

(In thousands)

	Common Stock					Additional Paid-In		Retained			Treasury			Total Stockholders'
	Shares			Amount		Capital		Deficit			Stock			Equity
Balance at September 30, 2020		46,851		$	450	$	244,454	$	(212,105	)	$	(6,812	)	$	25,987
Net income		—			—		—		40,339			—			40,339
Share-based compensation		—			—		315		—			—			315
Shares issued or canceled in connection with employee stock incentive plans and related tax effect		(5	)		—		—		—			—			—
Balance at December 31, 2020		46,846		$	450	$	244,769	$	(171,766	)	$	(6,812	)	$	66,641

	Common Stock				Additional Paid-In		Retained			Treasury			Total Stockholders'
	Shares		Amount		Capital		Deficit			Stock			Equity
Balance at September 30, 2019		47,738	$	462	$	242,179	$	(74,030	)	$	(6,812	)	$	161,799
Net income		—		—		—		10,937			—			10,937
Share-based compensation		—		—		720		—			—			720
Shares issued or canceled in connection with employee stock incentive plans and related tax effect		298		—		—		—			—			—
Balance at December 31, 2019		48,036	$	462	$	242,899	$	(63,092	)	$	(6,812	)	$	173,457

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Tuesday Morning Corporation

(Debtor-in-Possession)

Consolidated Statements of Stockholders' Equity (unaudited)

Six Months Ended December 31, 2020 and 2019

(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		—			—			—		58,963			—			58,963
Share-based compensation		—			—			743		—			—			743
Shares issued or canceled in connection with employee stock incentive plans and related tax effect		(495	)		(5	)		5		—			—			—
Balance at December 31, 2020		46,846		$	450		$	244,769	$	(171,766	)	$	(6,812	)	$	66,641

	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 income		—		—			—		1,309			—			1,309
Cumulative effect of change in accounting principle		—		—			—		(601	)		—			(601	)
Share-based compensation		—		—			1,441		—			—			1,441
Shares issued or canceled in connection with employee stock incentive plans and related tax effect		1,353		(3	)		3					—			—
Balance at December 31, 2019		48,036	$	462		$	242,899	$	(63,092	)	$	(6,812	)	$	173,457

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Tuesday Morning Corporation

~~Consolidated Statements of Operations (unaudited)~~

~~Three and Nine Months Ended March 31, 2020 and 2019~~

(~~In thousands, except per share data)~~

Three Months Ended

Nine Months Ended

March 31,

March 31,

2020

2019

2020

2019

Net sales

$
165,698

$
210,984

$
714,551

$
776,716

Cost of sales

113,531

134,486

475,476

501,054

Gross profit

52,167

76,498

239,075

275,662

Selling, general and administrative expenses

82,814

84,309

267,273

274,751

Operating income/(loss)

(30,647
)

(7,811
)

(28,198
)

911

Other income/(expense):

Interest expense

(499
)

(513
)

(1,890
)

(1,868
)
Other income, net

223

165

456

597

Other income/(expense) total

(276
)

(348
)

(1,434
)

(1,271
)
Loss before income taxes

(30,923
)

(8,159
)

(29,632
)

(360
)
Income tax benefit

117

130

99

31

Net loss

$
(31,040
)

$
(8,289
)

$
(29,731
)

$
(391
)
Earnings Per Share

Net loss per common share:

Basic

$
(0.69
)

$
(0.18
)

$
(0.66
)

$
(0.01
)
Diluted

$
(0.69
)

$
(0.18
)

$
(0.66
)

$
(0.01
)
Weighted average number of common shares:

Basic

45,314

44,811

45,162

44,677

Diluted

45,314

44,811

45,162

44,677

Dividends per common share

$
—

$
—

$
—

$
—

~~The accompanying notes are an integral part of these unaudited consolidated financial statements.~~

~~Tuesday Morning Corporation~~Debtor-in-Possession)

Consolidated Statements of ~~Stockholders' Equity~~Cash Flows (unaudited)

~~Three~~Six Months Ended ~~March~~December 31, 2020 and 2019

(In thousands)

Common Stock

Additional
Paid-In

Retained

Treasury

Total
Stockholders'

Shares

Amount

Capital

Deficit

Stock

Equity

Balance at December 31, 2019

48,036

$
462

$
242,899

$
(63,092
)

$
(6,812
)

$
173,457

Net loss

—

—

—

(31,040
)

—

(31,040
)
Share-based compensation

—

—

581

—

—

581

Shares issued or canceled in connection with
employee stock incentive plans and related tax effect

(25
)

(1
)

1

—

—

—

Balance at March 31, 2020

48,011

$
461

$
243,481

$
(94,132
)

$
(6,812
)

$
142,998

Common Stock

Additional
Paid-In

Retained

Treasury

Total
Stockholders'

Shares

Amount

Capital

Deficit

Stock

Equity

Balance at December 31, 2018

46,801

$
469

$
239,723

$
(43,462
)

$
(6,812
)

$
189,918

Net loss

—

—

—

(8,289
)

—

(8,289
)
Share-based compensation

—

—

896

—

—

896

Shares issued or canceled in connection with
employee stock incentive plans and related tax effect

(61
)

(4
)

4

—

—

—

Balance at March 31, 2019

46,740

$
465

$
240,623

$
(51,751
)

$
(6,812
)

$
182,525

~~Tuesday Morning Corporation~~

~~Consolidated Statements of Stockholders' Equity (unaudited)~~

~~Nine Months Ended March 31, 2020 and 2019~~

~~(In thousands)~~

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
)
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
)
Cumulative effect of accounting change

—

—

—

(601
)

—

(601
)
Balance at March 31, 2020

48,011

$
461

$
243,481

$
(94,132
)

$
(6,812
)

$
142,998

Common Stock

Additional
Paid-In

Retained

Treasury

Total
Stockholders'

Shares

Amount

Capital

Deficit

Stock

Equity

Balance at June 30, 2018

45,865

$
469

$
237,957

$
(51,360
)

$
(6,812
)

$
180,254

Net loss

—

—

—

(391
)

—

(391
)
Share-based compensation

—

—

2,655

—

—

2,655

Shares issued in connection with exercises of
employee stock options

3

—

7

—

—

7

Shares issued or canceled in connection with
employee stock incentive plans and related tax effect

872

(4
)

4

—

—

—

Balance at March 31, 2019

46,740

$
465

$
240,623

$
(51,751
)

$
(6,812
)

$
182,525

~~Tuesday Morning Corporation~~

~~Consolidated Statements of Cash Flows (unaudited)~~

~~Nine Months Ended March 31, 2020 and 2019~~

~~(In thousands)~~

Nine Months Ended

March 31,

2020

2019

Cash flows from operating activities:

Net loss

$
(29,731
)

$
(391
)
Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

20,935

19,727

Amortization of financing fees

163

220

(Gain)/loss on disposal of assets

92

(10
)
Share-based compensation

2,082

2,671

Construction allowances from landlords

1,313

1,121

Change in operating assets and liabilities:

Inventories

22,341

(3,931
)
Prepaid and other current assets

1,631

885

Accounts payable

(7,339
)

(15,349
)
Accrued liabilities

(9,842
)

5,063

Operating lease assets and liabilities

(1,085
)

—

Deferred rent

—

(141
)
Income taxes payable

153

82

Other liabilities — non-current

(106
)

34

Net cash provided by operating activities

607

9,981

Cash flows from investing activities:

Capital expenditures

(15,513
)

(10,924
)
Purchases of intellectual property

(27
)

(292
)
Proceeds from sales of assets

114

25

Net cash used in investing activities

(15,426
)

(11,191
)
Cash flows from financing activities:

Proceeds from borrowings under revolving credit facility

265,353

156,200

Repayments of borrowings under revolving credit facility

(209,403
)

(159,480
)
Change in cash overdraft

(4,996
)

9,391

Payments on finance leases

(196
)

(121
)
Proceeds from exercise of stock options and stock purchase plan purchases

—

7

Payment of financing fees

—

(529
)
Net cash provided by financing activities

50,758

5,468

Net increase in cash and cash equivalents

35,939

4,258

Cash and cash equivalents, beginning of period

11,395

9,510

Cash and cash equivalents, end of period

$
47,334

$
13,768

	Six Months Ended
	December 31,
	2020			2019
Cash flows from operating activities:
Net income	$	58,963		$	1,309
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Depreciation and amortization		8,306			12,807
Loss on abandonment of assets		5,638			—
Amortization of financing fees		4,747			108
(Gain)/loss on disposal of assets		(1,429	)		137
Gain on sale-leaseback		(49,639	)		—
Share-based compensation		964			1,559
Gain on lease terminations		(93,264	)		—
Construction allowances from landlords		120			483
Change in operating assets and liabilities:
Inventories		260			33,769
Prepaid and other current assets		(6,715	)		(578	)
Accounts payable		23,440			(23,263	)
Accrued liabilities		42,673			1,424
Operating lease assets and liabilities		(5,914	)		219
Income taxes payable		—			46
Other liabilities — non-current		1,232			101
Net cash provided by/(used in) operating activities		(10,618	)		28,121
Cash flows from investing activities:
Capital expenditures		(1,392	)		(8,365	)
Proceeds from sale-leaseback		68,566			—
Purchases of intellectual property		—			(20	)
Proceeds from sales of assets		1,896			22
Net cash provided by/(used in) investing activities		69,070			(8,363	)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit facility		424,659			142,300
Repayments of borrowings under revolving credit facility		(424,759	)		(173,350	)
Proceeds from term loan		25,000			—
Change in cash overdraft		—			4,957
Payments on finance leases		(120	)		(157	)
Payment of financing fees		(3,174	)		—
Net cash provided by/(used in) financing activities		21,606			(26,250	)
Net increase/(decrease) in cash, cash equivalents and restricted cash		80,058			(6,492	)
Cash, cash equivalents and restricted cash at beginning of period		46,676			11,395
Cash, cash equivalents and restricted cash at end of period	$	126,734		$	4,903

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Tuesday Morning Corporation

(Debtor-in-Possession)

Notes to 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, ~~2019~~2020 for our critical accounting policies.

In reliance upon the Order of the Securities and Exchange Commission issued March 25, 2020, granting exemptions from specified provisions of the Exchange Act and certain rules thereunder (Release No. 34-88465), the Company has delayed the filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 due to the impacts of the COVID-19 pandemic, as discussed further herein.

1. Basis of ~~presentation~~Presentation — The unaudited interim consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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 pursuant to such rules and regulations. These financial statements include all adjustments, consisting only of those of a normal recurring nature, which, in the opinion of management, are necessary to present fairly the results of the interim periods presented and should be read in conjunction with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2019.~~2020. The consolidated balance sheet at June 30, ~~2019~~2020 has been derived from the audited consolidated financial statements at that date. These interim financial statements do not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2019.~~ 2020.

The ~~results~~accompanying unaudited interim consolidated financial statements include the accounts of ~~operations~~Tuesday Morning Corporation, a Delaware corporation, and its wholly‑owned subsidiaries. All entities of the Company were included in the filing of a voluntary petition (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the ~~three~~Northern District of Texas, Dallas Division (the “Bankruptcy Court”) and ~~nine months ended March 31, 2020~~all entities are included in our consolidated financial statements, thus separate condensed combined financial statements of the entities in the reorganization proceedings are not ~~necessarily indicative of the results to be expected for the full fiscal year ending June 30, 2020, which we refer to as fiscal 2020, due~~required. All intercompany balances and transactions have been eliminated in ~~part to the seasonality of our business and the financial impact of the COVID-19 pandemic, discussed further below.~~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 six months ended December 31, 2020 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 and the financial impact of the COVID-19 pandemic, including bankruptcy proceedings, 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

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 the prior fiscal year. 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.

~~Going Concern~~

~~Our operating losses for~~ While we have taken actions to minimize costs, some of which are permanent including the ~~three and nine month periods ended March 31, 2020, were $30.6 million and $28.2 million, respectively. Cash and cash equivalents were $47.3 million as~~closure of March 31, 2020. The Company had $90.6 million in cash borrowings and $8.8 million in letters of credit outstanding under our existing revolving credit facility, dated as of August 18, 2015, and as previously amended (hereafter referred to as the “Pre-Petition ABL Credit Agreement”), with no amounts remaining available for cash borrowings, all as of March 31, 2020. For information regarding the Company’s borrowings, see Note 8 of the Notes to Consolidated Financial Statements.

~~Subsequent to March 31, 2020, the COVID-19 pandemic~~197 stores and the ~~resulting store closures have continued~~closure of our Phoenix distribution center, and mitigate the related risks, there can be no assurance that these measures will continue to ~~severely reduce our revenues and operating cash flows. As described~~provide benefit or that they will be adequate to mitigate future changes in ~~Note 2, on~~circumstances.

Voluntary Petitions for Reorganization under Chapter 11

On May 27, 2020 (the “Petition Date”), we filed ~~voluntary petitions (the “Chapter 11 Cases”) under~~the Chapter 11 ~~of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States~~Cases. The Chapter 11 Cases were jointly administered for procedural purposes.

Significant Bankruptcy Court ~~for~~Actions

During the ~~Northern District of Texas, Dallas Division (the “Bankruptcy Court”). The filing~~pendency of the Chapter 11 Cases, ~~constituted an event of default that caused our obligations under the Pre-Petition ABL Credit Agreement to become immediately due~~

and payable. We believe that any efforts to enforce such payment obligations under the Pre-Petition ABL Credit Agreement were stayed as a result of the filing of the Chapter 11 Cases, and the creditors’ rights of enforcement with respect to the Pre-Petition ABL Credit Agreement are subject to the applicable provisions of the Bankruptcy Code and the Bankruptcy Court orders modifying the stay, including the interim order of the Bankruptcy Court approving the DIP ABL Facility (as defined below).

~~Cash and cash equivalents and forecasted cash flows from operations are not expected to be sufficient to meet the Company’s obligations that will mature over the next 12 months. Although~~ we are seeking to address our liquidity concerns through the Chapter 11 Cases, the approval of a plan of reorganization or the sale of all or substantially all of our assets is not within our control and uncertainty remains as to whether the Bankruptcy Court will approve a plan of reorganization or a sale of all or substantially all of our assets.

The consolidated financial statements for three and nine month periods ended March 31, 2020, 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 have concluded that our financial condition and our projected operating results, our need to satisfy certain financial and other covenants in our debtor-in-possession financing, our need to implement a restructuring plan and receive new financing, and the risks and uncertainties surrounding the Chapter 11 Cases raise substantial doubt as to our ability to continue as a going concern. Our future plans, including those in connection with the Chapter 11 Cases, are not yet finalized, fully executed or approved by the Bankruptcy Court, and therefore cannot be deemed probable of mitigating this substantial doubt within 12 months of the date of issuance of these financial statements.

~~Bankruptcy Filing~~

~~See Note 2 entitled “Subsequent Events” for additional information regarding the Chapter 11 Cases as well as for a discussion of debtor-in-possession financing.~~

~~Accounting Pronouncement Recently Adopted~~

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASC 842”). ASC 842 requires entities (“lessees”) that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASC 842, a right-of-use asset and lease liability is recorded for all leases, whether operating or finance, while the income statement will reflect lease expense for operating leases and amortization/interest expense for finance leases. In addition, ASC 842 requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.

We adopted ASC 842 effective July 1, 2019 on a modified retrospective basis. We elected the transition option that allows entities to only apply the standard at the adoption date and not apply the provisions to comparative periods; therefore, prior periods were not restated. This transition option allows the recognition of a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than the earliest period presented. Our adoption of the standard resulted in a cumulative effect adjustment to retained earnings of ~~$0.6 million, as of July 1, 2019.~~ ~~The adoption of the standard resulted in the recognition of operating lease assets of approximately $350 million and liabilities of approximately $375 million as of July 1, 2019.~~

We elected certain practical expedients permitted under the transition guidance, including the package of practical expedients, which allows us to not reassess whether existing contracts contain leases, the lease classification of existing leases, or initial direct costs for existing leases. We elected not to separate lease and non-lease components for new and modified leases and not to recognize a right-of-use asset and a lease liability for leases with an initial term of 12 months or less. We did not elect the hindsight practical expedient. The adoption of the ~~standard did not materially impact our consolidated net income or liquidity, and did not have an impact on debt-covenant compliance under our current revolving credit agreement.~~

~~See Note 5 for additional information.~~

~~2. Subsequent events —~~

~~Voluntary Petitions for Reorganization under Chapter 11~~

On the Petition Date, we commenced the Chapter 11 Cases by filing in the Bankruptcy Court voluntary petitions under Chapter 11 of the Bankruptcy Code. The Chapter 11 Cases are being jointly administered for procedural purposes.

~~Significant Bankruptcy Court Actions~~

~~We will continue~~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 hearings of the Chapter 11 Cases, the Bankruptcy Court granted relief in conjunction with various motions intended to ensure our ability to continue our ordinary operations after the Petition Date. The Bankruptcy Court’s ~~Orders~~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 ~~an interim order [Docket No. 67] (the “Interim DIP Order”)~~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 ~~provides~~provided for a super priority secured debtor-in-possession revolving credit facility in an aggregate amount of up to $100 million (the “DIP ABL Facility”), and (2) our use of cash collateral in accordance with the terms of the DIP ABL Credit Agreement. ~~Pursuant~~See Note 8 to the ~~Interim DIP Order, an initial amount of up to $50 million became available~~Consolidated Financial Statements for ~~revolving loans under~~additional information regarding the DIP ABL ~~Facility, with the remaining amounts to become available upon entry of a final order by the Bankruptcy Court.~~Facility.

These orders are significant because they ~~allow~~allowed us to operate our businesses in the normal course.

~~On May 29, 2020, the~~The Bankruptcy Court has issued ~~an interim order [Docket No. 98] (including the exhibits attached thereto, the “Interim NOL Order”)~~orders designed to assist us in preserving certain tax attributes 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 and setting a final hearing to consider the issues addressed in the Interim Order.~~deductions. The Procedures, among other things, ~~restrict~~restricted transfers involving, and ~~require~~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 ~~Interim NOL Order provides~~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.

On ~~May 29,~~June 9, 2020, the Bankruptcy Court issued an ~~interim~~ order approving procedures for the closure of up to 230 of our store ~~locations, for which the decision and identification occurred subsequently to March 31,~~locations. In early June 2020, ~~as part of our planned objectives under reorganization. The Bankruptcy Court entered a final order approving these procedures on June 9, 2020. We have~~ we commenced the process to close ~~approximately 130~~132 store locations in a first wave of store closings. ~~We currently expect~~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 ~~approximately 100~~65 stores following negotiations with our ~~landlords.~~landlords, and those store closures were completed in August 2020. In the first quarter of fiscal 2021, 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 ~~also expect to close~~closed our Phoenix, Arizona distribution ~~center. We are not able~~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 ~~estimate at this time~~ the DIP DDTL Agreement, the Lender agreed to lend us up to an aggregate principal amount ~~nature~~of $25 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 ~~timing~~its subsidiaries filed with the Bankruptcy Court a proposed Joint Plan of Reorganization under Chapter 11 of the ~~charges that will be incurred as~~Bankruptcy Code (the “Original Plan”) and a ~~result~~proposed Disclosure Statement in Support of ~~these actions.~~

~~Debtor-in-Possession Credit Facilities~~

~~DIP ABL Facility~~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 ~~May 29,~~September 23, 2020, contemporaneously with the ~~Debtors entered into~~filing of the ~~DIP ABL Credit Agreement.~~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 ~~Lenders under~~Company believed that the ~~DIP ABL Facility are the existing lenders under the Pre-Petition ABL Credit Agreement.~~

The DIP ABL Credit Agreement includes conditions precedent, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. The DIP ABL Credit Agreement requires the Debtors to, among other things, maintain certain minimum liquidity requirements, complete the DIP Term Facility (as defined below), and receive approvalconcurrent prosecution of a plan of reorganization orand a court-approved process for bidding and potential sale of substantially all of their assets ofwould allow the ~~Debtors through~~Company and its subsidiaries to assess the ~~Chapter 11 process by agreed upon deadlines.~~

Under the terms of the DIP ABL Credit Agreement, amounts available for advances would be subject to a borrowing base generally consistent with the borrowing base under the Pre-Petition ABL Credit Agreement, subject to certain agreed upon exceptions. The DIP ABL Credit Agreement requires that all proceeds of advances under the DIP ABL Facility be used only for ordinary course general corporate and working capital purposes, costs of administration of the Chapter 11 Cases, certain professional fees and fees and expenses relating to the DIP ABL Facility, in each case, in accordance with a cash flow budget that will be updated periodically (the “Budget”), subject to certain permitted variances. The DIP ABL Credit Agreement requires that all cash received by the Debtors (other than proceeds of the DIP ABL Facility) be applied to repay outstanding amounts under the Pre-Petition ABL Credit Agreement.

The commitments of the lenders under the DIP ABL Facility terminate and outstanding borrowings under the DIP ABL Facility mature at the earliest of the date which is one hundred eighty (180) days after the Petition Date; the date of consummation of the sale of all or substantially all of the Debtors’ assets; the effective daterelative benefits of a plan of ~~reorganization; or upon~~reorganization and a sale. The Bidding Procedures Motion provided that the ~~occurrence~~Bankruptcy Court would consider approval of ~~an event~~a sale of ~~default under~~assets on October 29, 2020 if the ~~DIP ABL Credit Agreement or such other date as the outstanding borrowings under the DIP Facility are accelerated.~~

~~DIP Term Facility~~Company determined to proceed with a sale of assets.

On ~~June 3,~~October 26, 2020, the ~~Debtors entered into~~Company and its subsidiaries filed a ~~term sheet (the “Term Sheet”)~~motion with ~~BRF Finance Co., LLC (“BRF Finance”), pursuant~~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 ~~which, and subject~~make revisions to the ~~satisfaction~~Original Plan and Original Disclosure Statement and seeking to establish a hearing on November 9, 2020 for consideration of ~~certain customary conditions, including~~a revised plan of reorganization and disclosure statement. The Company reserved the ~~approval~~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 ~~BRF Finance would agree to provide~~ a ~~debtor-in-possession delayed draw term loan facility in an amount not to exceed $25 million (the “DIP Term Facility”) secured by the owned real estate~~proposed Revised Second Amended Joint Plan of ~~the Debtors (the “Real Estate Assets”). Under the terms of the Term Sheet, the closing and initial extension of credit~~Reorganization under the DIP Term Facility (which initial extension of credit is not to exceed $10 million) will be subject to satisfaction of certain conditions precedent, including execution and delivery of definitive loan documentation, entry of an interim orderChapter 11 of the Bankruptcy ~~Court authorizing~~Code (the “Amended Plan”) and a proposed Amended Disclosure Statement (the “Amended Disclosure Statement”) in support of the ~~DIP Term Facility, receipt by BRF Finance~~Amended Plan describing the Amended Plan and the solicitation of votes to approve the same from certain ~~financial and tax information~~of the Debtors’ creditors with respect to the ~~Debtors,~~Chapter 11 Cases. The Amended Plan and the Amended Disclosure Statement contemplated the proposed financing transactions described in Notes 8 and 13 below, including the ~~Budget,~~transactions contemplated by the Purchase and ~~receipt by BRF Finance of certain real estate appraisals~~Sale Agreement (as defined in Note 13), the New ABL Facility (as defined in Note 8), the Term Loan Credit Agreement (as defined in Note 8) and ~~title reports with respect to~~ the ~~Real Estate Assets. Thereafter and so long as a final order of~~Rights Offering (as defined below).

On November 18, 2020, the Bankruptcy Court ~~authorizing~~issued an order approving the ~~DIP Term Facility has been~~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 ~~is in full force and effect,~~confirmed, the ~~Debtors would be entitled to make additional borrowings under~~“Plan of Reorganization”). On December 31, 2020, all of the ~~DIP Term Facility in minimum increments of $2.5 million subject~~conditions precedent to the ~~satisfaction~~Plan of ~~certain additional conditions, including absence of defaults under the DIP Term Facility, delivery of notices of borrowing~~Reorganization were satisfied and the ~~accuracy of~~Company completed the ~~representations~~transactions contemplated by the Purchase and ~~warranties of~~Sale Agreement, the ~~Debtor in~~New ABL Facility and the ~~definitive loan documentation for the DIP~~ Term ~~Facility.~~Loan Credit Agreement.

Pursuant to the ~~Term Sheet, proceeds~~Plan of ~~borrowings under the DIP Term Facility would be used by the Debtors to: (1) repay obligations~~Reorganization, each outstanding share of the ~~Debtors under (a) the DIP ABL Credit Agreement, and (b) the Pre-Petition ABL Credit Agreement; (2) fund general working capital; and (3) fund operational expenses and restructuring expenses~~Company’s common stock as of the ~~Debtors,~~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 ~~each case,~~the Rights Offering. In accordance with the Plan of Reorganization, the Company commenced a $40 million rights offering (the “Rights Offering”), under which eligible holders of the Company’s common stock could purchase up to $24 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 has 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 shares, with the Backstop Party to purchase the remaining $20.2 million of shares. The Company expects to close the Rights Offering on February 9, 2021. Pursuant to the ~~extent permitted by the applicable orders~~terms of the ~~Bankruptcy Court,~~backstop commitment agreement, the ~~Budget~~Backstop Party will receive a backstop fee equal of $2 million (payable in shares of common stock valued at $1.10 per share) and warrants to purchase 10 million shares of the ~~definitive loan documents for the DIP Term Facility.~~

~~The DIP Term Facility is expected to include conditions precedent, representations and warranties, affirmative and negative covenants, and events~~Company’s common stock at a price of ~~default customary for financings of this type and size, but in all events consistent~~$1.65 per share. In accordance with the terms of the ~~DIP ABL Credit Agreement. The Debtors~~Plan of Reorganization, all proceeds from the Rights Offering will be ~~obligated~~used to ~~prepay amounts outstanding under~~make payments of the ~~DIP Term Facility upon certain asset sales and casualty or condemnation events with respect to~~claims of general unsecured creditors in the ~~Real Estate Assets.~~Chapter 11 Cases.

~~Under~~In accordance with the ~~terms~~Plan of Reorganization, effective December 31, 2020, the Company’s board of directors was comprised of 9 members, including 5 continuing directors of the DIP ABL Credit Agreement and the Term Sheet, the lenders under the DIP ABL Credit Agreement will have a lien on the Real Estate Assets ranking junior to the rights of the lenders under the DIP Term Facility, with the lien priorities and enforcement rights with respect to the Real Estate Assets and the application of proceeds thereof to be governedCompany, 3 new directors appointed by the ~~terms of an intercreditor agreement.~~

~~The proposed DIP Term Facility would mature on~~Backstop Party and 1 director appointed by the ~~earliest of (1)~~equity committee in the date that is 180 days after the Petition Date, (2) the date of consummation of a sale of all or substantially all assets of the Debtors, (3) the effective date of a plan of reorganization, or (4) the date the obligations of the Debtors under the DIP Term Facility are accelerated as a result of an event of default.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 (“Nasdaq”) notifying it that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, Nasdaq determined that the Company’s common stock ~~will~~would be delisted from Nasdaq. On June 8, 2020, trading of the Company’s common stock on Nasdaq was ~~suspended and~~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 ~~began trading~~traded over the counter in the OTC Pink Market under the symbol “TUESQ”. Following the Company’s legal emergence from bankruptcy, on December 31, 2020, the Company’s common stock now trades over the counter on the OTCQX market under the symbol “TUEM.”

Going Concern

Our operating loss for the fiscal year ended June 30, 2020 was $159.2 million, and our operating loss was $20.8 million for the six months of ended December 31, 2020.

The COVID-19 pandemic and the resulting store closures severely reduced our revenues and operating cash flows during the third and fourth quarters of our fiscal year ended June 30, 2020 as well as the first six months 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. However, we believe that the remaining significant component of exit financing forthcoming from the ongoing Rights Offering is a critical component required to execute our confirmed Plan of Reorganization. Therefore, we continue to prepare our financial statements in accordance with Financial Accounting

Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, “Reorganizations” (“ASC 852”) until the completion of the Rights Offering, which we currently expect to close on February 9, 2021.

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 that our plans, already implemented and continuing to be implemented, will mitigate the conditions and events that have 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 COVID-19 pandemic and the related disruption to our business and financial impacts, and because our plans, including those in connection with the Chapter 11 Cases, are not yet fully executed, although approved by the Bankruptcy Court, they cannot be deemed probable of mitigating this substantial doubt as to our ability to continue as a going concern.

Bankruptcy Accounting

See Note 2 entitled “Bankruptcy Accounting” 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 in the first quarter of fiscal 2021. The adoption did not have a material impact to our consolidated financial statements.

2. Bankruptcy Accounting

Bankruptcy Accounting

The consolidated financial statements have been 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. ASC 852 requires that the 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. Accordingly, certain expenses, gains and losses that are realized or incurred in the bankruptcy proceedings are recorded in reorganization items on our consolidated statements of operations. In addition, pre-petition unsecured and under-secured obligations that may be impacted by the bankruptcy reorganization process have been classified as liabilities subject to compromise on our unaudited interim consolidated balance sheet as of December 31, 2020.

As of December 31, 2020, these liabilities were reported at the amounts expected to be allowed as claims by the Bankruptcy Court. 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 December 31, 2020. Pursuant to the Plan of Reorganization, a General Unsecured Claim Fund (Unsecured Creditor Claim Fund) was established for the benefit of holders of Allowed General Unsecured Claims. Upon the closing of the sale and leaseback of the Corporate Office and the Dallas Distribution Center properties and the issuance of the Term Loan (as defined in Note 8), net proceeds of $67.5 million, after payment of property taxes, and $18.8 million, respectively, were deposited directly into the Unsecured Creditor Claim Fund that is being administered by an independent unsecured claims disbursing agent. The remaining proceeds from the Term Loan not deposited into the Unsecured Creditor Claim Fund, were deposited into our account. In addition, $14.2 million of additional cash was deposited into a segregated bank account at Wells Fargo Bank and is restricted for use in paying compensation for services rendered by professionals on or after the Petition date and prior to the Effective Date (Wells Fargo Restricted Fund). The $86.3 million and $14.2 million cash balances held in the Unsecured Creditor Claim Fund and the Wells Fargo Restricted Fund, respectively, are recorded as restricted cash on the balance sheet. Upon the completion of the Rights Offering, an additional approximate $40 million will be transferred to the Unsecured Creditor Claim Fund. For specific discussion on balances of liabilities subject to compromise and reorganization items, see below. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the Chapter 11 Cases. In particular, the consolidated financial statements do not purport to show: (i) the realizable value 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.

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, we believe that the remaining significant component of exit financing forthcoming from the ongoing Rights Offering, which we currently expect to close on February 9, 2021, is a critical component required to execute our confirmed Plan of Reorganization. As a result, we continue to report as a Debtor in Possession for the current period. The outcome of the Rights Offering will determine whether we qualify for

fresh start accounting under ASC 852; therefore, we expect to disclose the effects of the Plan of Reorganization in our third quarter of fiscal 2021 Form 10-Q, subsequent to the closing of the Rights Offering.

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 as well as certain insurance, tax, and principal and interest payments. We have been paying and intend to continue to pay undisputed post-petition claims in the ordinary course of business. With respect to pre-petition claims, we notified all known claimants of the deadline to file a proof of claim with the Bankruptcy Court. Our liabilities subject to compromise represent the estimate as of December 31, 2020 of claims expected. 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 the December 31, 2020, the legal effective date in accordance with the Bankruptcy Court, we assumed 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. Estimated allowable claims for those which were rejected are included in accrued expenses. Liabilities subject to compromise in our condensed consolidated balance sheet include the following as of December 31, 2020 and June 30, 2020 (in thousands):

	As of December 31, 2020		As of June 30, 2020
Accounts payable	$	80,450	$	83,467
Accrued expenses		29,593		6,630
Operating lease liabilities		-		71,097
Lease liabilities - non-current		-		294,812
Other liabilities - non-current		-		333
Liabilities subject to compromise	$	110,043	$	456,339

Restructuring, Impairment and Abandonment Charges

Restructuring and abandonment charges total $1.0 million and $6.5 million for the three and six months ended December 31, 2020, respectively, and include the following (in thousands):

	Three Months Ended		Six Months Ended
	December 31, 2020		December 31, 2020
Restructuring costs:
Severance and compensation related costs	$	184	$	869
Total restructuring costs	$	184	$	869

Abandonment costs:
Accelerated recognition of operating right-of-use assets	$	834	$	5,638
Total abandonment costs	$	834	$	5,638

Total restructuring and abandonment costs	$	1,018	$	6,507

The restructuring and abandonment costs shown above primarily relate to the permanent closure of our stores and Phoenix, Arizona distribution center. These decisions 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.

Reorganization Items

Reorganization items included in our consolidated statement of operations represent amounts directly resulting from the Chapter 11 Cases and total a net benefit of $48.1 million and $85.8 million for the three and six months ended December 31, 2020, respectively, and include the following (in thousands):

	Three Months Ended			Six Months Ended
	December 31, 2020			December 31, 2020
Reorganization items, net:
Professional and legal fees	$	20,274		$	30,120
Gains on lease termination, net of estimated claims		(18,777	)		(66,247	)
Gain on sale-leaseback		(49,639	)		(49,639	)
Total reorganization items, net	$	(48,142	)	$	(85,766	)

During the first six months of fiscal 2021, the leases for store locations related to our permanent closure plan, as well as the lease for our Phoenix distribution center, were rejected and the related lease liabilities were reduced to the amount of estimated claims allowable by the Bankruptcy Court, resulting in the $18.8 million and $66.2 million gains shown above for the three and six months ended December 31, 2020, respectively. In the second quarter of fiscal 2021, we executed a sale-leaseback agreement on our owned real estate as part of our Plan of Reorganization, the proceeds of which, along with other sources of financing, will be utilized to satisfy allowed claims and are thus categorized as a reorganization item. Please refer to Note 13 for additional details regarding the sale-leaseback transactions.

Cash paid for reorganization items during the three and six months ended December 31, 2020 was $9.9 million and $18.9 million, respectively, and related to professional and legal fees. As of December 31, 2020, $14.7 million of professional fees were unpaid and accrued in Accounts Payable and Accrued Liabilities in the accompanying Consolidated Balance Sheet.

3. 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, and we use historical customer return behavior to estimate our reserve requirements. NoNaN impairment of the returns asset was identified or recorded as of ~~March~~December 31, 2020. 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 Statement of Operations. Breakage income recognized was $0.1 million in the ~~third~~second quarter of fiscal ~~2020~~2021 and was ~~less than~~ $0.1 million in the ~~third~~second quarter of fiscal ~~2019.~~2020. Breakage income recognized was ~~$0.4~~$0.1 million in the first ~~nine~~six months of fiscal ~~2020~~2021 and was ~~$0.3~~$0.2 million in the first ~~nine~~six months of fiscal ~~2019.~~2020. The gift card liability is included in “Accrued liabilities” in the Consolidated Balance Sheet. 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.

4. Share-based incentive plans — Stock Option Awards. We have established 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 under 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~~December 31, 2020 range between $1.64 per share and $20.91 per share. The 2008 Plan terminated as to new awards as of September 16, 2014. There were ~~2.1~~5.9 million shares available for grant under the 2014 Plan at ~~March~~December 31, 2020.

Restricted Stock Awards—The 2008 Plan and the 2014 Plan 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. 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 on the date of the grant. Shares and units may be subject to certain performance requirements. If the performance requirements are not met, the restricted shares or units are forfeited. Under the 2008 Plan and the 2014 Plan, as of ~~March~~December 31, 2020, there were ~~2,688,548~~912,933 shares of restricted stock and ~~1,473,787~~1,067,575 restricted stock units outstanding with award vesting periods, both performance-based and service-based, of one to four years and a weighted average grant date fair value of ~~$2.30~~$2.46 and ~~$1.83~~$1.90 per share, respectively.

Performance-Based Restricted Stock Awards and Performance-Based Stock Option Awards. As of ~~March~~December 31, 2020, there were ~~1,505,969~~287,348 unvested performance-based restricted stock awards and performance-based restricted stock units payable in cash outstanding under the 2014 Plan.

Share-based Compensation Costs. Share-based compensation costs were recognized as follows (in thousands):

	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
	2020			2019			2020			2019			2020			2019			2020			2019
Amortization of share-based compensation during the period	$	581		$	896		$	2,022		$	2,655		$	315		$	721		$	744		$	1,441
Amounts capitalized in ending inventory		(160	)		(275	)		(552	)		(892	)		(74	)		(190	)		(166	)		(391	)
Amounts recognized and charged to cost of sales		102			218			612			908			141			323			386			509
Amounts charged against income for the period before tax	$	523		$	839		$	2,082		$	2,671		$	382		$	854		$	964		$	1,559

5. Commitments and contingencies —Information related to the Chapter 11 Cases that were filed on May 27, 2020 is included in Note 2.1.

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.Leases— We conduct substantially all operations from leased facilities, ~~with the exception of the~~including our corporate ~~headquarters~~offices in Dallas and the Dallas warehouse, distribution and retail complex, which are ~~owned facilities. The other warehouse facility~~leased as of December 31, 2020, subsequent to the sale and ~~all other~~leaseback of those facilities on that date. 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. 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 ~~generally~~ within 60 months.

~~As discussed~~On December 7, 2020, we entered into an agreement to sell our corporate office and Dallas distribution center properties and leaseback those facilities. On December 31, 2020, with the authority granted us by the Bankruptcy Court, we executed those transactions. 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 2 leases, associated with the transaction, were recorded as operating leases. We will pay approximately $10.3 million in ~~Note 1,~~fixed rents and in-substance fixed rents, over the 10 year lease term for the corporate office and we ~~adopted ASC 842 effective July 1, 2019~~will pay approximately $18.8 million in fixed rents and in-substance fixed rents, for the Dallas distribution center property over the three 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 using the ~~modified retrospective adoption method,~~incremental borrowing rate we established for the respective term of each lease.

Subsequent to the petition date, we commenced negotiations with our landlords on substantially all of our ongoing leases, resulting in significant modifications and remeasurement in the prior quarter, and which ~~resulted in an adjustment to opening retained earnings~~continued into our second quarter of ~~$0.6 million as of July 1, 2019 to recognize impairment~~fiscal 2021. As a result of the ~~opening~~remeasurements and terminations of rejected leases, we reduced our operating lease right-of-use ~~asset balance for two stores for~~assets by approximately $32 million and our operating lease liabilities by approximately $124 million, recording a gain of approximately $92 million, which ~~assets had been previously impaired under ASC 360, “Property, Plant, and Equipment.”~~

~~We utilized the simplified transition option available~~is included in ~~ASC 842, which allowed the continued application of the legacy guidance in ASC 840, including disclosure requirements,~~Reorganization items, net (see Note 2) in the ~~comparative periods presented in the year~~unaudited interim Consolidated Statement of ~~adoption.~~Operations.

1314

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 December 31,				Six Months Ended December 31,
	Three Months Ended March 31, 2020		Nine Months Ended March 31, 2020		2020		2019		2020		2019
Operating lease cost	$	23,552	$	71,186	$	19,434	$	23,424	$	34,473	$	47,550
Variable lease cost		6,244		18,982		3,022		6,328		6,978		12,823
Finance lease cost:
Amortization of right-of-use assets		72		213		49		71		122		142
Interest on lease liabilities		7		23		1		8		7		16
Total lease cost	$	29,875	$	90,404	$	22,506	$	29,831	$	41,580	$	60,531

Total lease costs shown above excludes $0.8 million and $5.6 million recorded in the three and six months ended December 31, 2020, respectively, for accelerated recognition of rent expense as a result of abandonment due to our Phoenix distribution center closure.

The table below presents additional information related to the Company’s leases as of ~~March~~December 31, 2020:

	~~As of March 31, 2020~~
~~Weighted average remaining lease term (in years)~~
~~Operating leases~~		~~6.1~~
~~Finance leases~~		~~2.9~~
~~Weighted average discount rate~~
~~Operating leases~~		~~5.8~~	%
~~Finance leases~~		~~3.8~~	%

	As of December 31, 2020			As of December 31, 2019
Weighted average remaining lease term (in years)
Operating leases		4.9			6.2
Finance leases		1.2			3.1
Weighted average discount rate
Operating leases		8.3	%		5.8	%
Finance leases		2.4	%		3.8	%

Other information related to leases, including supplemental disclosures of cash flow information, is as follows (in thousands):

	Three Months Ended March 31, 2020		Nine Months Ended March 31, 2020		Six Months Ended December 31, 2020			Six Months Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	23,615	$	67,146	$	31,218		$	44,037
Operating cash flows from finance leases		6		22		7			16
Financing cash flows from finance leases		54		196		120			142
Right-of-use assets obtained in exchange for operating lease liabilities		6,632		28,040		(106,180	)		10,573

1415

Maturities of lease liabilities were as follows as of ~~March~~December 31, 2020 (in thousands):

	Operating Leases		Finance Leases		Total		Operating Leases		Finance Leases		Total
Fiscal year:
2020 (remaining)	$	23,762		97	$	23,859
2021		87,942		315		88,257
2021 (remaining)							$	34,595	$	126	$	34,721
2022		75,022		236		75,258		68,312		125		68,437
2023		64,830		94		64,924		58,780		—		58,780
2024		55,820		10		55,830		46,392		—		46,392
2025		48,376		—		48,376		32,241		—		32,241
2026								19,766		—		19,766
Thereafter		91,174		—		91,174		28,635		—		28,635
Total lease payments	$	446,926	$	752	$	447,678	$	288,721	$	251	$	288,972
Less: Interest		72,688		32		72,720		52,449		21		52,470
Total lease liabilities	$	374,238	$	720	$	374,958	$	236,272	$	230	$	236,502
Less: Current lease liabilities		71,782		293		72,075		53,155		198		53,353
Non-current lease liabilities	$	302,456	$	427	$	302,883	$	183,117	$	32	$	183,149

Current and non-current finance lease liabilities are recorded in “Accrued liabilities” and “Other liabilities – non-current,” respectively, on our consolidated balance sheet. As of ~~March~~December 31, 2020, there were no0 operating lease payments for legally binding minimum lease payments for leases signed but not yet commenced.

7. Earnings per common share — The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except per share amounts):

	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
	2020			2019			2020			2019			2020			2019			2020			2019
Net loss	$	(31,040	)	$	(8,289	)	$	(29,731	)	$	(391	)
Net income													$	40,339		$	10,937		$	58,963		$	1,309
Less: Income to participating securities		—			—			—			—			(137	)		(267	)		(274	)		(15	)
Net loss attributable to common shares	$	(31,040	)	$	(8,289	)	$	(29,731	)	$	(391	)
Net income attributable to common shares													$	40,202		$	10,670		$	58,689		$	1,294
Weighted average number of common shares outstanding — basic		45,314			44,811			45,162			44,677			45,511			45,218			45,460			45,086
Effect of dilutive stock equivalents		—			—			—			—			—			—			—			—
Weighted average number of common shares outstanding — diluted		45,314			44,811			45,162			44,677			45,511			45,218			45,460			45,086
Net loss per common share — basic	$	(0.69	)	$	(0.18	)	$	(0.66	)	$	(0.01	)
Net loss per common share — diluted	$	(0.69	)	$	(0.18	)	$	(0.66	)	$	(0.01	)
Net income per common share — basic													$	0.88		$	0.24		$	1.29		$	0.03
Net income per common share — diluted													$	0.88		$	0.24		$	1.29		$	0.03

For the quarters ~~and year to date periods~~ ended ~~March~~December 31, 2020 and December 31, 2019, ~~all~~ options representing the rights to purchase approximately 2.6 million weighted average shares and 2.8 million weighted average shares, respectively, were excluded in the dilutive earnings per share calculation because the assumed exercise of such options would have been anti-dilutive. For the six months ended December 31, 2020 and December 31, 2019, options representing the rights to purchase approximately 2.6 million weighted average shares and 3.0 million weighted average shares, respectively, were excluded in the dilutive earnings per share calculation, because the assumed exercise of such options would have been anti-dilutive.

8. Debt — ~~We are~~

Pre-Petition Financing Agreements

Through December 31, 2020, we were party to ~~the Pre-Petition ABL Credit Agreement (defined above)~~a credit agreement which 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.~~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 iswas secured by a lien on substantially all of our assets.

As of March 31, 2020, we had $90.6 million outstanding under the Pre-Petition ABL Credit Agreement, $8.8 million of outstanding letters of credit and no availability. Letters of credit under the Pre-Petition ABL Credit Agreement are generally for self-insurance purposes. The fair value of the Company’s debt approximated its carrying amount as of March 31, 2020.

We incur commitment fees of up to 0.25% on the unused portion of the Pre-Petition ABL Credit Agreement, payable quarterly. Any borrowing under the Pre-Petition ABL Credit Agreement incurs interest at the prime rate, or LIBOR, plus an applicable margin, at our election (except with respect to swing loans, which incur interest solely at the prime rate plus the applicable margin), subject to a floor of one-month LIBOR plus an applicable margin in the case of loans based on the prime rate. Interest expense for the third quarter of the current fiscal year from the Pre-Petition ABL Credit Agreement of $0.5 million was comprised of interest of $0.4 million and the amortization of financing fees of $0.1 million. Interest expense for the third quarter of the prior fiscal year of $0.5 million was comprised of interest of $0.3 million, commitment fees of $0.1 million and the amortization of financing fees of $0.1 million. Interest expense for the first nine months of the current fiscal year 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. Interest expense for the third quarter of the prior fiscal year of $1.9 million was comprised of interest of $1.3 million, commitment fees of $0.3 million and the amortization of financing fees of $0.3 million.

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 million to $130 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 million under the Pre-Petition ABL Credit Agreement, and the application of unrestricted and unencumbered cash balances in excess of $32 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.

The filing of the Chapter 11 Cases on May 27, 2020, was an event of default under the Pre-Petition ABL Credit Agreement, making all amounts outstanding under the existing Pre-Petition ABL Credit Agreement immediately due and payable. As of ~~March~~December 31, 2020, ~~all~~we had 0 amounts outstanding borrowings therefore under the existing agreement are reflected as a current liability in the Consolidated Balance Sheet. As discussed in Note 1, we believe that any efforts to enforce such payment obligations under the Pre-Petition ABL Credit Agreement, and that agreement was terminated.

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 million. The Lenders under the DIP ABL Facility were ~~stayed as a result~~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 million. As of December 31, 2020, 0 amounts were outstanding under the DIP ABL Credit Agreement or the DIP DDTL Agreement, all related financing fees were fully amortized and these agreements were terminated.

Interest Expense

Interest expense for the second quarter of fiscal 2021 from the DIP ABL Credit Agreement and the DIP Term Facility of $2.5 million was comprised of the ~~filing~~amortization of financing fees of $2.3 million and commitment fees of $0.2 million. Interest expense for the ~~Chapter 11 Cases, and the creditors’ rights~~second quarter of ~~enforcement with respect to~~fiscal 2020 from the Pre-Petition ABL Credit Agreement ~~are subject to~~of $0.7 million was comprised of interest of $0.5 million, commitment fees of $0.1 million, and the ~~applicable provisions~~amortization of financing fees of $0.1 million. Interest expense for the ~~Bankruptcy Code and any Bankruptcy Court orders modifying the stay, including the interim order~~first six months of ~~the Bankruptcy Court approving~~fiscal 2021 from the DIP ABL Credit Agreement and the DIP Term Facility of $5.3 million was comprised of the amortization of financing fees of $4.9 million and commitment fees of $0.4 million. Interest expense for the first six months of fiscal 2020 from the Pre-Petition ABL Credit Agreement of $1.4 million was comprised of interest of $1.1 million, commitment fees of $0.2 million, and the amortization of financing fees of $0.1 million.

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”), which provides for a revolving credit facility in an aggregate amount of $110 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 December 31, 2020, we had 0 borrowings outstanding under the New ABL Facility, $8.8 million of letters of credit outstanding, and borrowing availability of $45.9 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”). Pursuant to the Term Loan Credit Agreement, the Term Lenders provided a term loan of $25 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. As of December 31, 2020, Tensile Capital Partners Master Fund, LP and affiliates of Osmium Partners, LLC., held $19 million and $1 million, respectively, of the $25 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 December 31, 2020, the outstanding principal balance of the Term Loan was $24.4 million, net of debt issuance costs.

The fair value of the Company’s debt approximated its carrying value at December 31, 2020.

9. Property and equipment, including depreciation — Accumulated depreciation of owned property and equipment as of ~~March~~December 31, 2020 and June 30, ~~2019~~2020 was ~~$197.9~~$145.2 million and ~~$179.7~~$231.1 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.

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.

As of ~~March~~December 31, 2020, due to the ongoing impact of COVID-19, we performed an interim impairment assessment of our leasehold improvement assets, which included estimated ~~future~~ cash flow assumptions incorporating the impact ~~of our~~that temporary store ~~closures.~~closures and COVID-19 had on cash flows. As a result of this assessment, while 3 stores did present indicators of impairment, we determined that ~~approximately $1.9 million~~0 additional store fixed asset impairment was required as the undiscounted projected future cash flows for each store sufficiently recovered the carrying value of ~~our store leasehold improvement fixed assets indicated impairment which was included in selling, general and administrative expenses in~~ the ~~Consolidated Statements of Operations for the three and nine month periods ended March 31, 2020.~~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 judgments 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 change requiring us to revise our estimates.

For certain property associated with our Dallas distribution center facility that had previously been classified as assets held for sale at December 31, 2019, we reassessed the criteria for held for sale classification in light of the current environment and concluded that these assets no longer met the criteria as of March 31, 2020, and accordingly we reclassified these assets into Property and equipment, net in the Consolidated Balance Sheet as of March 31, 2020.18

10. Income taxes ~~— The~~—The Company or ~~one~~1 of its subsidiaries files income tax returns in the U.S. federal, state and local taxing jurisdictions. With few exceptions, the Company and its subsidiaries are no longer subject to state and local income tax examinations for years ~~through~~prior to fiscal ~~2014. The Internal Revenue Service has concluded an examination of the Company~~2016 and are no longer subject to federal income tax examinations for years ~~ending on or before June 30, 2010.~~

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 ~~intend~~continued to defer qualified payroll taxes through December 31, 2020. Current and ~~claim the employee retention credit. At this point in time, the amount~~non-current qualified deferred payroll taxes are each $2.1 million as of ~~the credit is still being evaluated.~~December 31, 2020.

The effective tax rates for the quarters ended ~~March~~December 31, 2020 and 2019 were ~~(0.4%)~~1.9% and ~~(1.6%~~(3.8%), respectively. The effective tax

rates for the ~~nine~~six months ended ~~March~~December 31, 2020 and 2019 were ~~(0.3%)~~0.9% and ~~(8.6%~~(1.4%), 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/~~expense and (benefit) and pretax ~~income/~~income (loss) results from the effects of the valuation allowance.

11. Cash, ~~and~~ 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~~December 31, 2020 ~~there were no credit card receivables from third party consumer credit card providers, as our stores were temporarily closed as of March 25, 2020 due to the COVID-19 pandemic. As of~~and June 30, ~~2019,~~2020, credit card receivables from third party consumer credit card providers were ~~$9.7 million.~~$1.9 million and $3.7 million, respectively. Such receivables are generally collected within one week of the balance sheet date. Restricted cash aggregating $100.5 million consists of $86.3 million, which is being held in the Unsecured Creditor Claim Fund and $14.2 million which is being held in the Wells Fargo Restricted Fund (see Note 2).

12. Intellectual property — Our intellectual property primarily consists of indefinite lived trademarks. ~~We evaluate annually whether the trademarks continue to have an indefinite life.~~ Trademarks and other intellectual property are reviewed for impairment annually in the fourth fiscal quarter, and may be reviewed more frequently if indicators of impairment are present. As of ~~March~~December 31, 2020, the carrying value of the intellectual property, which included indefinite-lived trademarks, was ~~$1.3~~$1.6 million, and no0 impairment was identified or recorded.

1713. Sale-leaseback — On December 7, 2020, we entered into an agreement to sell our corporate office and Dallas distribution center properties and leaseback those facilities. On December 31, 2020, with the authority granted us by the Bankruptcy Court, we executed those transactions. The lease of the corporate office is for a term of 10 years and the lease of the distribution center properties is 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 value of the underlying assets sold and we have no continuing involvement with the properties sold other than a normal leaseback.

The consideration received for the sale, as reduced by closing and transaction costs, 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 recognized as of December 31, 2020. Cash proceeds were deposited directly into the Unsecured Creditor Claim Fund. See Notes 2 and 11.

The 2 leases, associated with the transaction, were recorded as operating leases. We will pay approximately $10.3 million in fixed rents and in-substance fixed rents, over the 10 year lease term for the corporate office and we will pay approximately $18.8 million in fixed rents and in-substance fixed rents, for the Dallas distribution center properties, over the three 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 using the incremental borrowing rate we established for the respective term of each lease.

As of December 31, 2020, 0 operating costs related to these leases have been recorded in the financial statements.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited interim consolidated financial statements and the notes thereto 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, ~~2019.~~2020.

Business Overview

We are one of the original off-price retailers and a leading destination for unique home and lifestyle goods. We are an off-price retailer, 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, direct mail, digital media and newspaper circulars.

•

We are one of the original off-price retailers and a leading destination for unique home and lifestyle goods. We are an off-price retailer, 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 with regularly through social media, email, direct mail, digital media and newspaper circulars.

The COVID-19 pandemic has had, and will 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. The scope and duration of this pandemic and the related disruption to our business and financial impacts cannot be reasonably estimated at this time.

•

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 the prior fiscal year and remain open. The scope and duration of this pandemic and the related disruption to our business and financial impacts cannot be reasonably estimated at this time.

Bankruptcy Filing and Going Concern

On May 27, 2020, we commenced the Chapter 11 Cases by filing in the Bankruptcy Court voluntary petitions under Chapter 11 of the Bankruptcy Code. The Chapter 11 Cases are being jointly administered for procedural purposes.

•

On May 27, 2020, we commenced the Chapter 11 Cases by filing in the Bankruptcy Court voluntary petitions under Chapter 11 of the Bankruptcy Code. The Chapter 11 Cases were jointly administered for procedural purposes.

We will continue 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.

•

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.

After we filed our Chapter 11 Cases, the Bankruptcy Court granted certain relief requested by the us enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay the pre-petition claims of certain of our vendors. For goods and services provided following the Petition Date, we intend to pay vendors in full under normal terms. See Note 2 – “Subsequent Events” to the consolidated financial statements herein for a discussion of the DIP ABL Facility and the proposed DIP Term Facility (each as defined below).

•

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, we commenced the process to close 132 store locations in a first wave of store closings. By the end of July all of these stores were permanently closed. By August 31, 2020, we closed an additional 65 stores following negotiations with our landlords. We also closed our Phoenix, Arizona distribution center in the second quarter of fiscal 2021.

~~Subject to certain exceptions, under~~ the Bankruptcy Code, the filing of the Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against us or our property to recover, collect or secure a claim arising prior to the Petition Date. Accordingly, although the filing of the Chapter 11 Cases triggered defaults under our funded debt obligations, creditors were stayed from taking any actions against us as a result of such defaults, and the creditors’ rights of enforcement are subject to the applicable provisions of the Bankruptcy Code and the Bankruptcy Court orders modifying the stay, including the interim order of the Bankruptcy Court approving the DIP ABL Facility. Absent an order of the Bankruptcy Court, substantially all of our pre-petition liabilities are subject to settlement under the Bankruptcy Code.

•

On December 23, 2020, the Bankruptcy Court entered an order confirming our Plan of Reorganization. On December 31, 2020, all of the conditions precedent to the Plan of Reorganization were satisfied and we legally emerged from bankruptcy, resolving all material conditions precedent listed in the Plan of Reorganization. In connection therewith, we entered into the New ABL Credit Agreement and Term Loan Credit Agreement and the Pre-Petition ABL Credit Agreement, DIP ABL Credit Agreement and DIP DTTL Agreement were terminated. See Note 8 “Debt” to the consolidated financial statements herein.

On May 29, 2020, the Bankruptcy Court issued an interim order approving procedures for the closure of up to 230 of our store locations. The Bankruptcy Court entered a final order approving these procedures on June 9, 2020. We have commenced the process to close approximately 130 store locations in a first wave of store closings. We currently expect to close an additional approximately 100 stores following negotiations with our landlords. We also expect to close our Phoenix, Arizona distribution center. We are not able to estimate at this time the amount, nature and timing of the charges that will be incurred as a result of these actions.

•

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) one 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 with the Plan of Reorganization, the Company commenced the $40 million Rights Offering, under which eligible holders of the Company’s common stock could purchase up to $24 million of shares of the Company’s common stock at a purchase price of $1.10 per share, and 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. The Backstop Party will receive a backstop fee equal of $2 million (payable in shares of common stock valued at $1.10 per share) and warrants to purchase 10 million shares of the Company’s common stock at a price of $1.65 per share. Pursuant to a backstop commitment agreement, the Backstop Party has 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 shares, with the Backstop Party to purchase the remaining $20.2 million of shares. We expect to close the Rights Offering on February 9, 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.

We have concluded that our financial condition and our projected operating results, our need to satisfy certain financial and other covenants in our debtor-in-possession financing, our need to implement a restructuring plan and receive new financing, and the risks and uncertainties surrounding the Chapter 11 Cases raise substantial doubt as to our ability to 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.

For the duration of the Chapter 11 Cases, our operations and ability to develop and execute our business plan are subject to the risks and uncertainties associated with the Chapter 11 process as described in Item 1A. “Risk Factors.” As a result of these risks and uncertainties, the amount and composition of our assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 proceedings, and the description of our operations, properties, liquidity and capital resources included in this quarterly report may not accurately reflect our operations, properties, liquidity and capital resources following the Chapter 11 process.

•

1820

•cannot be deemed probable of mitigating this substantial doubt as to our ability to continue as a going concern until the Rights Offering closes.

•

As a result of the filing of the Chapter 11 Cases, trading of the Company’s common stock on Nasdaq was suspended on June 8, ~~2020, and~~2020. During the pendency of the Chapter 11 Cases, the Company’s common stock ~~began trading~~traded over the counter in the OTC Pink Market under the symbol “TUESQ”. Following the Company’s legal emergence from bankruptcy, the Company’s common stock now trades over the counter on the OTCQX market under the symbol “TUEM”.

Quarter and Six-months Ended ~~March~~December 31, 2020

We operated 687 stores in 39 states as of March 31, 2020. Our store base decreased from 712 stores in 40 states as of March 31, 2019. As of March 25, 2020, we temporarily closed all of our stores due to the COVID-19 pandemic. Prior to that date, we had approximately 400 stores closed in compliance with state and local regulations.

•

As of December 31, 2020, we operated 490 stores in 40 states. As of December 31, 2019, we operated 705 stores in 39 states. During the first six months of fiscal 2021, we completed the closure of 197 stores, as part of our reorganization plans, and opened two new stores. We also closed our Phoenix, Arizona distribution center. These store closures have had and will continue to have an impact on our operating cash flows.

Our net sales for the third quarter of fiscal 2020 were significantly negatively impacted by the COVID-19 pandemic. We temporarily closed many stores at various times during the third quarter of fiscal 2020, with all stores temporarily closed as of March 25, 2020. Net sales for the third quarter of fiscal 2020 were $165.7 million, a decrease of 21.5% compared to $211.0 million for the same period last year, primarily due to a decrease in sales from comparable stores (which we define as stores open at least five quarters, including stores relocated in the same market and renovated stores) of 19.8%. The decrease in comparable store sales was due to a 6.1% decrease in average ticket along with a 14.7% decrease in customer transactions. Sales per square foot for the rolling 12-month period ended March 31, 2020 were $109, a decrease of 5.1% from the rolling 12-month period ended March 31, 2019. Net sales for the first nine months of fiscal 2020 were $714.6 million, a decrease of 8.0% compared to $776.7 million for the same period last year, primarily due to a decrease in sales from comparable stores of 6.9%. The decrease in comparable store sales was due to a 3.9% decrease in average ticket, along with a 3.1% decrease in customer transactions. All stores that have been temporarily closed to the pandemic have continued to be included in the computation of comparable store sales for the three and nine months ended March 31, 2020; thereby negatively impacting comparable store sales. We utilize key performance indicators, such as those described above, to evaluate performance of our business. These measures are defined as described above and throughout management’s discussion and analysis.

•

Net sales for the second quarter of fiscal 2021 were $198.6 million, a decrease of 38.8%, compared to $324.4 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 (which we define as stores open at least five quarters, including stores relocated in the same market and renovated stores) of 19.9%. The decrease in comparable store sales was due to a 25.2% decrease in customer transactions, partially offset by a 7.1% increase in average ticket. We believe the decline in comparable store sales was due in part to a decrease in store level inventory. Sales were impacted by lower store inventory levels, which averaged approximately 48% below last year when compared to the same quarter as well as decreased store traffic resulting from the continuing negative impact of COVID-19. As of December 31, 2020, store inventory levels on a comparable store basis, were approximately 37% below last year. This decline was partially due to the strength of sales immediately post re-opening as well as our inability to restock 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 COVID outbreak as well as pandemic-related disruptions to the supply chain, which continued to have an impact throughout our second quarter of fiscal 2021.

Gross margin for the third quarter of fiscal 2020 was 31.5%, compared to 36.3% for the same period last year. Gross margin for the first nine months of fiscal 2020 was 33.5%, compared to 35.5% for the same period last year.

•

Net sales for the first six months of fiscal 2021 were $360.2 million, a decrease of 34.4%, compared to $548.9 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 18.4%. The decrease in comparable store sales was due to a 23.1% decrease in customer transactions, partially offset by a 6.1% increase in average ticket. To provide a comparable measure for our continuing stores, we calculated comparable store sales excluding sales for the stores we permanently closed, and estimate that comparable store sales, as further adjusted, declined approximately 19.3% for the first six months of fiscal 2021. Sales per square foot for the rolling 12-month period ended December 31, 2020 were $90, a decrease of 20.9% from the rolling 12-month period ended December 31, 2019, and was negatively impacted by reduced inventory levels. We utilize key performance indicators, such as those described above, to evaluate performance of our business. These measures are defined as described above and throughout management’s discussion and analysis. 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 COVID outbreak as well as pandemic-related disruptions to the supply chain, which continued to have an impact throughout our second quarter of fiscal 2021.

For the third quarter of fiscal 2020, selling, general and administrative expenses decreased $1.5 million to $82.8 million, from $84.3 million for the same quarter last year. For the first nine months of fiscal 2020, selling, general and administrative expenses decreased $7.5 million to $267.3 million, from $274.8 million for the same period last year.

•

Gross margin for the second quarter of fiscal 2021 was 30.2%, compared to 32.6% for the same period last year. Gross margin for the first six months of fiscal 2021 was 30.9%, compared to 34.1% for the same period last year.

Our operating loss for the third quarter of fiscal 2020 was $30.6 million, compared to $7.8 million for the same period last year. Our operating loss for the first nine months of fiscal 2020 was $28.2 million, compared to operating income of $0.9 million for the same period last year. The operating loss in the current year was primarily the result of lower net sales which were significantly driven by the impact of the COVID-19 pandemic.

•

For the second quarter of fiscal 2021, selling, general and administrative expenses decreased $31.4 million to $63.3 million, from $94.7 million for the same quarter last year. For the first six months of fiscal 2021, selling, general and administrative expenses decreased $59.1 million to $125.4 million, from $184.5 million for the same period last year.

Our net loss for the third quarter of fiscal 2020 was $31.0 million, or $0.69 per share, compared to $8.3 million, or $0.18 per share, for the same period last year. Our net loss for the first nine months of fiscal 2020 was $29.7 million, or $0.66 per share, compared to $0.4 million, or $0.01 per share, for the same period last year.

•

Restructuring and abandonment charges were $1.0 million during the second quarter of fiscal 2021 and were $6.5 million during the first six months of fiscal 2021, and related to our permanent store closing plan along with our decision to close our Phoenix distribution center.

As shown under the heading “Non-GAAP Financial Measures” below, EBITDA for the third quarter of fiscal 2020 was negative $22.3 million compared to negative $1.2 million for the same period last year. Adjusted EBITDA for the third quarter of fiscal 2020 was negative $20.5 million compared to negative $0.4 million for the same period last year. EBITDA for the first nine months of fiscal 2020 was negative $6.8 million compared to positive $21.2 million for the same period last year. Adjusted EBITDA for the first nine months of fiscal 2020 was negative $3.5 million compared to positive $24.0 million for the same period last year.

•

Our operating loss for the second quarter of fiscal 2021 was $4.3 million, compared to operating income of $11.1 million for the same period last year. The operating loss for the current period was primarily the result of lower net sales which were significantly driven by the closure of 197 stores, as well as the 19.9% decrease in comparable store, and the $1.0 million of restructuring and abandonment charges. Our operating loss for the first six months of fiscal 2021 was $20.8 million, compared to operating income of $2.4 million for the same period last year. The operating loss for the current period was primarily the result of lower net sales which were significantly driven by the closure of 197 stores, as well as the estimated 19.3% decrease in comparable store sales for the stores remaining open, and the $6.5 million of restructuring and abandonment charges.

•

Reorganization items were a net benefit of $48.1 million during the second quarter of fiscal 2021, primarily driven by the gain on the sale-leaseback transaction in which we sold our corporate office and Dallas distribution center properties, gains on lease terminations for rejected leases, net of estimated claims, partially offset by professional and legal fees incurred as a direct result of the filing of our Chapter 11 Cases. Reorganization items were a net benefit of $85.8 million during the first six months of fiscal 2021, primarily driven by gains on lease terminations for rejected leases, net of estimated claims, and the

Inventory levels at March 31, 2020 decreased $22.4 million to $215.5 million from $237.9 million at June 30, 2019. Compared to the same date last year, inventories decreased $22.8 million from $238.3 million at March 31, 2019. The decrease in inventory as compared to March 31, 2019 was driven primarily by lower inventory in our stores and in-transit to our distribution centers, driven in part by a lower ending store count in the current period. Inventory turnover for the trailing five quarters as of March 31, 2020 was 2.7 turns, a slight increase from the trailing five quarter turnover as of March 31, 2019 of 2.6 turns.

gain on sale-leaseback transaction in which we sold our corporate office and Dallas distribution center properties, partially offset by professional and legal fees incurred as a direct result of the filing of our Chapter 11 Cases.

•

Our net income for the second quarter of fiscal 2021 was $40.3 million, or $0.88 per share, compared to $10.9 million, or $0.24 per share, for the same period last year. The net income in the current year was primarily driven by the benefit from net reorganization items, which primarily resulted from the gain on sale-leaseback transaction in which we sold our corporate office and Dallas distribution center properties and the termination of lease liabilities related to our permanently closed stores for which leases were rejected in the Chapter 11 Cases process. Our net income for the first six months of fiscal 2021 was $59.0 million, or $1.29 per share, compared to $1.3 million, or $0.03 per share, for the same period last year. The net income in the current year was primarily driven by the benefit from net reorganization items, which primarily resulted from the gain on sale-leaseback transaction in which we sold our corporate office and Dallas distribution center properties and, the termination of lease liabilities related to our permanently closed stores for which leases were rejected in the Chapter 11 Cases process.

Cash and cash equivalents at March 31, 2020 increased $35.9 million to $47.3 million from $11.4 million at June 30, 2019. Compared to the same date last year, cash and cash equivalents increased $33.5 million from $13.8 million at March 31, 2019. We had borrowings of $90.6 million outstanding under our line of credit at March 31, 2020, compared to $35.2 million at March 31, 2019. As of June 15, 2020, cash and cash equivalents were approximately $455 thousand and outstanding borrowings were $1.7 million. Total liquidity is $48.8 million as of June 15, 2020, which includes the $48.3 million available for borrowing under the DIP ABL Facility pursuant to the Interim DIP Order (defined below). The Company expects an additional $50 million of borrowing capacity under the DIP ABL Facility to become available upon entry of a final order by the Bankruptcy Court, and up to $25 million of additional borrowing capacity to become available upon the Company’s entry into the DIP Term Facility (as defined below) and subject to approval by the Bankruptcy Court.
•
As shown under the heading “Non-GAAP Financial Measures” below, EBITDA for the second quarter of fiscal 2021 was $47.6 million compared to $17.7 million for the same period last year. Adjusted EBITDA for the second quarter of fiscal 2021 was $0.8 million compared to $18.5 million for the same period last year. EBITDA for the first six months of fiscal 2021 was $73.1 million compared to $15.5 million for the same period last year. Adjusted EBITDA for the first six months of fiscal 2021 was negative $5.2 million compared to $17.0 million for the same period last year.

•

Inventory levels at December 31, 2020 decreased $0.5 million to $114.4 million from $114.9 million at June 30, 2020. Compared to the same date last year, inventories decreased $89.6 million from $204.0 million at December 31, 2019. The decrease in inventory as compared to December 31, 2019 was driven primarily by the disruption to our business caused by the COVID-19 pandemic, and the liquidation of inventory at the 217 stores permanently closed since the end of the second quarter of fiscal 2020. While our supply chain recommenced operations in mid-June 2020, the disruption to inventory flow is immense. Inventory turnover for the trailing five quarters as of December 31, 2020 was 3.2 turns, an increase from the trailing five quarter turnover as of December 31, 2019 of 2.7 turns, and was favorably impacted by lower than optimal current inventory levels and higher merchandise sell-through rates.

•

Cash and cash equivalents, excluding restricted cash (as discussed below in Liquidity), at December 31, 2020 decreased $20.5 million to $26.2 million from $46.7 million at June 30, 2020. Compared to the same date last year, cash and cash equivalents increased $21.3 million from $4.9 million at December 31, 2019. We had no balances outstanding under our ABL Credit Agreement at December 31, 2020 compared to borrowings of $57.9 million at December 31, 2019 under our Pre-Petition ABL Credit Agreement. There were no outstanding borrowings under the DIP ABL Facility or DIP Term Facility at December 31, 2020, as those agreements were terminated on that date. Total liquidity, defined as cash and cash equivalents plus the $45.9 million availability for borrowing under the New ABL Facility, was $72.1 million as of December 31, 2020.

•

Preliminary comparable store sales for the month ended January 31, 2021 increased approximately 0.2%, which represents a significant improvement from our second quarter ended December 31, 2020 trend. Sales continued to be impacted by lower store inventory levels and decreased store traffic resulting from the continuing negative impact of COVID-19. As of January 31, 2021, store inventory levels on a comparable basis were approximately 33.5% below last year. This decrease compares favorably to our ending position as of December 31, 2020.

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 quarter ending December 31.

There can be no assurance that the trends in sales or operating results will continue in the future.

Non-GAAP Financial Measures

We define EBITDA as net income 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 income 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 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.

The following table reconciles net ~~loss,~~income, the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA, each of which is a non-GAAP financial measure (in thousands):

Three Months Ended
March 31,

Nine Months Ended
March 31,

2020

2019

2020

2019

Net loss (GAAP)
$
(31,040
)

$
(8,289
)

$
(29,731
)

$
(391
)
Depreciation and amortization

8,127

6,444

20,935

19,727

Interest expense, net

486

510

1,868

1,846

Income tax benefit

117

130

99

31

EBITDA (non-GAAP)
$
(22,310
)

$
(1,205
)

$
(6,829
)

$
21,213

Share based compensation expense  (1)

523

839

2,082

2,671

Cease-use rent expense  (2)

—

(3
)

—

68

Strategic initiative related expenses (3)

1,260

—

1,260

—

Adjusted EBITDA (non-GAAP)
$
(20,527
)

$
(369
)

$
(3,487
)

$
23,952

(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.

(2)  Adjustment includes accelerated rent expense recognized in relation to closing stores prior to lease termination.  While accelerated rent expense may occur in future periods, the amount and timing of such expenses will vary from period to period.

(3)  Adjustment includes consulting and legal costs related to our business strategy in response to the COVID-19 pandemic.

	Three Months Ended December 31,						Six Months Ended December 31,
	2020			2019			2020			2019
Net income/(loss) (GAAP)	$	40,339		$	10,937		$	58,963		$	1,309
Depreciation and amortization		3,922			6,424			8,306			12,807
Interest expense, net		2,514			719			5,267			1,382
Income tax provision/(benefit)		779			(398	)		543			(18	)
EBITDA (non-GAAP)	$	47,554		$	17,682		$	73,079		$	15,480
Share based compensation expense (1)		382			854			964			1,559
Restructuring and abandonment expenses (2)		1,018			—			6,507			—
Reorganization items, net (3)		(48,142	)		—			(85,766	)		—
Adjusted EBITDA (non-GAAP)	$	812		$	18,536		$	(5,216	)	$	17,039

(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.

(2) Adjustment includes only certain restructuring expenses, including abandonment charges and compensation costs related to the permanent closure plan for stores and our Phoenix distribution center. Such costs vary from period to period and management does not consider in our evaluation of ongoing operations.

(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.

Three Months Ended ~~March~~December 31, 2020

Compared to the Three Months Ended ~~March~~December 31, 2019

~~Our net sales for the third quarter of fiscal 2020 were significantly negatively impacted by the COVID-19 pandemic.~~ Net sales for the ~~third~~second quarter of fiscal ~~2020~~2021 were ~~$165.7~~$198.6 million, a decrease of ~~$45.3~~38.8%, compared to $324.4 million ~~from $211.0 million in the third quarter of fiscal 2019. Comparable store sales decreased 19.8% compared to~~for the same period alast year, ~~ago, and was comprised~~primarily due to the completion of our permanent store closing plans approved through bankruptcy proceedings, as well as a ~~6.1%~~ decrease in ~~average ticket, along with a 14.7% decrease in customer transactions.~~sales from comparable stores of 19.9%. 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. ~~All stores~~Stores that ~~have been temporarily~~are closed ~~due to the pandemic have continued to be~~are included in the computation of comparable store sales ~~for~~until the ~~three months ended March 31, 2020; thereby negatively impacting~~month of closure. The decrease in comparable store ~~sales.~~ sales was due to a 25.2% decrease in customer transactions, partially offset by a 7.1% increase in average ticket.We believe the decline in comparable store sales was due in part to a decrease in store level inventory. Sales were significantly impacted by lower store inventory levels, which averaged approximately 48% below last year over the quarter as well as decreased store traffic resulting from the continuing negative impact of COVID-19. As of December 31, 2020, store inventory levels on a comparable store basis, were approximately 37% 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 ~~$4.8 million and resulted in a 170 basis point negative impact on net sales.~~$76.7 million. Non-comparable store sales include the net effect of sales from new stores and sales from stores that have closed. The non-comparable store sales decrease was driven by 31217 store closures, ~~partially~~slightly offset by 6two store openings, which have occurred since the end of the ~~third~~second quarter of fiscal ~~2019.~~2020. 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.

	Store Openings/Closings									Store Openings/Closings
	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			Fiscal Year Ended June 30, 2019			Three Months Ended December 31, 2020		Three Months Ended December 31, 2019			Fiscal Year Ended June 30, 2020
Stores open at beginning of period		705			720			726			490		707			714
Stores opened during the period		—			2			11			—		—			1
Stores closed during the period		(18	)		(10	)		(23	)		—		(2	)		(30	)
Stores open at end of period		687			712			714			490		705			685

We ended the ~~third~~second quarter of fiscal ~~2020~~2021 with ~~687~~490 stores, compared to 705 stores at ~~March 31, 2020, compared to 712 stores at March~~December 31, 2019. ~~As of March 25, 2020, we temporarily closed all of our stores due to the COVID-19 pandemic. Four~~No stores were relocated during the ~~third~~second quarter of either fiscal ~~2020, while one store was relocated in the third quarter of the prior~~2021 or fiscal ~~year.~~2020.

Gross profit for the ~~third~~second quarter of fiscal ~~2020~~2021 was ~~$52.2~~$60.1 million, a decrease of ~~31.8%~~43.2% compared to ~~$76.5~~$105.8 million in gross profit for the ~~third~~second quarter of fiscal ~~2019.~~2020. Gross profit as a percentage of net sales was ~~31.5%~~30.2% for the ~~third~~second quarter of fiscal ~~2020,~~2021, compared to ~~36.3%~~32.6% for the ~~third~~second quarter of fiscal ~~2019.~~2020. The decrease in gross margin was primarily a result of higher ~~markdowns, driven by seasonal merchandise and timing of non-seasonal markdowns, higher recognized~~ supply chain and transportation costs ~~and higher other cost of sales.~~recognized in the current quarter, partially offset by lower markdowns.

Selling, general & administrative (SG&A) expenses for the ~~third~~second quarter of fiscal ~~2020~~2021 decreased ~~$1.5~~$31.4 million to ~~$82.8~~$63.3 million, compared to ~~$84.3~~$94.7 million in the same period last year. The decrease in SG&A was primarily due to lower ~~incentive compensation~~store expenses on a smaller store base, including a significant decrease in store rents for both closed stores and ~~retention~~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 ~~as well as~~and depreciation were also lower on the smaller store base. Also contributing to the favorable comparison were reduced advertising and ~~store labor~~lower corporate expenses including reductions in compensation costs ~~which were driven in part by the temporary store closures in response to the COVID-19 pandemic, partially offset by strategic consulting~~ and legal ~~costs in response to the COVID-19 pandemic, along with store fixed asset impairments recorded in the quarter~~ and ~~increased physical inventory costs due to timing of counts as compared to the prior year.~~professional fees. As a percentage of net sales, SG&A expenses were ~~50.0%~~31.9% for the ~~third~~second quarter of fiscal ~~2020~~2021 compared to ~~40.0%~~29.2% in the same period last year, deleveraging approximately ~~1,000~~270 basis points, ~~impacted by the negative impact~~ on ~~sales in the current year quarter due to the COVID-19 pandemic.~~lower sales.

Our operating loss was ~~$30.6~~$4.3 million for the ~~third~~second quarter of fiscal ~~2020,~~2021, compared to an operating ~~loss~~income of ~~$7.8~~$11.1 million during the ~~third~~second quarter of fiscal ~~2019.~~2020.

Interest expense was ~~$0.5~~$2.5 million for the ~~third~~second quarter of ~~both~~ fiscal ~~2020~~2021, compared to $0.7 million for in the second quarter of the prior fiscal year. The increase in the current year period is primarily due to the amortization of financing fees incurred for the DIP ABL and ~~2019. Other income~~DIP Term Loan financing, partially offset by lower interest on reduced borrowings in the current period.

Income tax expense was ~~$0.2~~$0.8 million in the ~~third~~second quarter of ~~both~~ fiscal ~~2020 and 2019.~~

~~Income~~2021, compared to income tax benefit ~~was $0.1~~of $0.4 million in the ~~third~~second quarter of ~~both~~the prior fiscal ~~2020 and 2019.~~year. The effective tax rates for the ~~third~~second quarter of fiscal ~~2020~~2021 and fiscal ~~2019~~2020 were ~~(0.4%)~~1.9% and ~~(1.6%~~(3.8%), respectively. A full valuation allowance is currently recorded against substantially all of our deferred tax assets as of

December 31, 2020. 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. A full valuation allowance is currently recorded against substantially all of our deferred tax assets as of March 31, 2020. A deviation from the customary relationship between income tax expense and pretax income results from the effects of the valuation allowance.

~~Nine~~

Six Months Ended ~~March~~December 31, 2020

Compared to the ~~Nine~~Six Months Ended ~~March~~December 31, 2019

Net sales for the first ~~nine~~six months of fiscal ~~2020~~2021 were ~~$714.6~~$360.2 million, a decrease of ~~$62.1 million from $776.7~~34.4%, compared to $548.9 million for the ~~first nine months~~same period last year, primarily due to the completion of ~~fiscal 2019. Comparable~~our permanent store ~~sales decreased 6.9% compared to an increase of 0.3% in the first nine months of fiscal 2019, and was comprised of~~closing plans approved through bankruptcy proceedings, as well as a ~~3.9%~~ decrease in ~~average ticket, along with a 3.1% decrease in customer transactions.~~sales from comparable stores of 18.4%. 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. ~~All stores~~Stores that ~~have been temporarily~~are closed ~~due to the pandemic have continued to be~~are included in the computation of comparable store sales until the month of closure. The decrease in comparable store sales was due to a 23.1% decrease in customer transactions, partially offset by a 6.1% increase in average ticket. To provide a comparable measure for our continuing stores, we calculated comparable store sales excluding sales for the ~~nine months ended March 31, 2020; thereby negatively impacting~~stores we permanently closed, and estimate that comparable store ~~sales.~~ sales, as further adjusted, declined approximately 19.3% for the first six months of fiscal 2021. We believe the decline in comparable store sales was due in part to a decrease in store level inventory. Sales were significantly impacted by lower store inventory levels, which averaged approximately 49% below last year for the six months as well as decreased store traffic resulting from the continuing negative impact of COVID-19. As of December 31, 2020, store inventory levels on a comparable store basis, were approximately 37% 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 ~~$10.2 million and resulted in a 110 basis point negative impact on net sales.~~$110.9 million. Non-comparable store sales include the net effect of sales from new stores and sales from stores that have closed. The non-comparable store sales decrease was driven by 51217 store closures, ~~partially~~slightly offset by 12two store openings, which have occurred since the ~~beginning~~end of the ~~prior~~first six months of fiscal ~~year.~~2020. 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.

	Store Openings/Closings									Store Openings/Closings
	Nine Months Ended March 31, 2020			Nine Months Ended March 31, 2019			Fiscal Year Ended June 30, 2019			Six Months Ended December 31, 2020			Six Months Ended December 31, 2019			Fiscal Year Ended June 30, 2020
Stores open at beginning of period		714			726			726			685			714			714
Stores opened during the period		1			6			11			2			1			1
Stores closed during the period		(28	)		(20	)		(23	)		(197	)		(10	)		(30	)
Stores open at end of period		687			712			714			490			705			685

We ended the first ~~nine~~six months of fiscal ~~2020~~2021 with ~~687~~490 stores, compared to 705 stores at ~~March 31, 2020, compared to 712 stores at March~~December 31, 2019. ~~As of March 25, 2020, we temporarily closed all of our stores due to the COVID-19 pandemic. Five~~No stores were relocated during the first ~~nine~~six months of fiscal ~~2020,~~2021, while ~~11 stores were~~one store was relocated in the first ~~nine~~six months of the prior fiscal year.

Gross profit for the first ~~nine~~six months of fiscal ~~2020~~2021 was ~~$239.1~~$111.1 million, a decrease of ~~13.3%~~40.6% compared to ~~$275.7~~$186.9 million in gross profit for the first ~~nine~~six months of fiscal ~~2019.~~2020. Gross profit as a percentage of net sales was ~~33.5%~~30.9% for the first ~~nine~~six months of fiscal ~~2020,~~2021, compared to ~~35.5%~~34.1% for the first ~~nine~~six months of fiscal ~~2019.~~2020. The decrease in gross margin was primarily a result of higher ~~markdowns, higher recognized~~ supply chain and transportation costs ~~and higher other cost of sales.~~recognized in the current quarter, partially offset by lower markdowns.

~~SG&A~~Selling, general & administrative (SG&A) expenses for the ~~nine~~first six months ~~ended March 31, 2020~~of fiscal 2021 decreased ~~$7.5~~$59.1 million to ~~$267.3~~$125.4 million, compared to ~~$274.8~~$184.5 million in the same period last year. The decrease in SG&A was primarily due to lower ~~incentive compensation~~store expenses on a smaller store base, including a significant decrease in store rents for both closed stores and ~~retention~~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 ~~as well as~~and depreciation were also lower on the smaller store base. Also contributing to the favorable comparison were reduced advertising ~~driven in part by the temporary store closures in response to the COVID-19 pandemic,~~costs and lower ~~rent expense, partially offset by strategic consulting~~corporate expenses including reductions in compensation costs and legal ~~costs in response to the COVID-19 pandemic, along with store fixed asset impairments recorded in the quarter~~ and ~~increased physical inventory costs due to timing of counts as compared to the prior year.~~professional fees. As a percentage of net sales, SG&A expenses were ~~37.4%~~34.8% for the first ~~nine~~six months of fiscal ~~2020~~2021 compared to ~~35.4%~~33.6% in the same period last year, deleveraging approximately ~~200~~120 basis points, ~~impacted by the negative impact~~ on ~~sales in the current year quarter due to the COVID-19 pandemic.~~lower sales.

Our operating loss was ~~$28.2~~$20.8 million for the first ~~nine~~six months of fiscal ~~2020,~~2021, compared to operating income of ~~$0.9~~$2.4 million during the first ~~nine~~six months of fiscal ~~2019.~~2020.

Interest expense ~~remained constant at $1.9~~was $5.3 million for the first ~~nine~~six months of ~~both~~ fiscal ~~2020 and 2019. Other income~~2021, compared to $1.4 million for in the first six 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 DIP financing, partially offset by lower interest on reduced borrowings in the current period.

Income tax expense was $0.5 million in the first ~~nine~~six months of fiscal ~~2020~~2021, compared to ~~$0.6 million in the same period~~income tax benefit of ~~fiscal 2019.~~

~~Income tax expense for the first nine months ended March 31, 2020 was $0.1 million compared to $31~~$18 thousand for the same period ~~last~~in the prior fiscal year. The effective tax rates for the first ~~nine~~six months of fiscal ~~2020~~2021 and fiscal ~~2019~~2020 were ~~(0.3%)~~0.9% and ~~(8.6%~~(1.4%), respectively. A full valuation allowance is currently recorded against substantially all of our deferred tax assets as of December 31, 2020. 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. A full valuation allowance is currently recorded against substantially all of our deferred tax assets as of March 31, 2020. A deviation from the customary relationship between income tax expense and pretax income results from the effects of the valuation allowance.

Liquidity and Capital Resources

Cash Flows for the Period Ended ~~March~~December 31, 2020

Cash Flows from Operating Activities

Net cash ~~provided by~~used in operating activities for the ~~nine~~six months ended ~~March~~December 31, 2020 was ~~$0.6~~$10.6 million compared to ~~$10.0~~cash provided by operations of $28.1 million for the ~~nine~~six months ended ~~March~~December 31, 2019. The ~~decrease~~higher cash usage in ~~cash provided by~~ operating activities in the current year was primarily the result of ~~a $14.9~~$18.9 million of cash paid for reorganization expenses, $23.2 million lower operating income in the current year, and $6.1 million higher cash usage for accrued liabilities, primarily due to lower incentive compensation and transportation accruals, as compared to the prior year, partially offset by an $8.0 million lower cash usage in accounts payable and a $0.7 million lower cash usage in prepaid expenses as compared to the prior year, all partially offset by a $26.3 million favorable change in inventory in the current year as compared to the change in the prior year. The lower usage of cash in accounts payable was due to the inventory decline and the timing of merchandise receipts and the related payments. Net cash provided by operating activities was impacted by our $29.3 million higher net loss as compared to the prior year period.expenses. There were no significant changes to our vendor payments policy during the ~~nine~~six months ended ~~March~~December 31, 2020. ~~Due to the impacts of COVID-19, we took actions to preserve liquidity, which included ceasing a significant amount of payments at the end of the quarter.~~

Cash Flows from Investing Activities

Net cash provided by investing activities for the six months ended December 31, 2020 related primarily to $68.6 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 $1.4 million of capital expenditures in the first six months of fiscal 2021. Net cash used in investing activities for the ~~nine~~six months ended ~~March~~December 31, ~~2020 and~~ 2019 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 to our distribution center, ~~facilities,~~ equipment, and systems along with improvements related to our corporate office, technology and equipment. Cash used in investing activities totaled $15.4 million and $11.2 million for the nine months ended March 31, 2020 and 2019, respectively. Prior year spending primarily related to our store real estate strategy, while current year spending reflects reduced real estate project activity and increased investment in our distribution center facilities as well as in technology.

We currently expect to incur capital expenditures, net of construction allowances received from landlords, of approximately ~~$15~~$3 million to $5 million in fiscal year ~~2020,~~2021, which reflects reduced capital spending as one of the liquidity preservation measures we have taken due to the financial impact of COVID-19.

Cash Flows from Financing Activities

Net cash provided by financing activities of ~~$50.7~~$21.6 million for the ~~nine~~six months ended ~~March~~December 31, 2020 related primarily to ~~$56.0 million~~the proceeds of ~~net borrowings on our Pre-Petition ABL Credit Agreement (as defined below),~~$25.0 from the Term Loan, partially offset by ~~a decrease~~the payment of ~~$5.0 million in our cash overdraft provision.~~financing fees of $3.2 million. Net cash ~~provided by~~used in financing activities of ~~$5.5~~$26.3 million for the prior year period related primarily to ~~a $9.4 million cash overdraft provision, partially offset by $3.3~~$31.1 million of net ~~repayments~~payments on our Pre-Petition ABL Credit Agreement, along with a $5.0 million cash overdraft provision.

Liquidity

Historically, we have financed our operations with funds generated from operating activities, available cash and ~~$0.5 million of financing fees paid related to the January 2019 amendment~~cash equivalents, and ~~extension of our Pre-Petition ABL Credit Agreement.~~

~~Pre-Petition ABL Credit Agreement~~

~~We are party to~~borrowings under a credit agreement providing for an asset-based, five year senior secured revolving credit facility in the original amount of up to $180.0 million that 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 iswas secured by a lien on substantially all of our assets.

As of March 31, 2020, we had $90.6 million outstanding under the Pre-Petition ABL Credit Agreement, $8.8 million of outstanding letters of credit and no availability. Letters of credit under the Pre-Petition ABL Credit Agreement are generally for self-insurance purposes. See Note 8 to the consolidated financial statements herein and “Liquidity” below for additional information.

~~Liquidity~~

Historically, we have financed our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under our Pre-Petition ABL Credit Agreement. Cash and cash equivalents as of March 31, 2020 and 2019, were $47.3 million and $13.8 million, respectively.

The COVID-19 pandemic has had, and ~~will~~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.

~~As a result~~ 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 ~~caused by~~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 ~~COVID-19 pandemic, we borrowed $87.0 million (net~~closure of ~~repayments of $36.0 million) under~~197 stores and the Pre-Petition ABL Credit Agreement during the third quarter of fiscal 2020, ending the quarter with $90.6 million outstanding under the Pre-Petition ABL Credit Agreement, to improve our cash position, including a drawdown of $55.0 million at the end of March. In addition, we took other steps to increase available cash and reduce costs, including, but not limited to, deferring or eliminating discretionary capital and operating costs, improving working capital by renegotiating payment terms with our vendors and landlords, and reducing labor costs as a result of the temporary store closures.

~~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 based on the event of default resulting from our suspension of the operation~~closure of our ~~business~~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 ~~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 million to $130 million and new swingline loans will not be advanced. During the forbearance period the lenders were not obligated to fund further loans or issue or renew letters of credit under the Revolving Facility. The Forbearance Agreement required loan repayments of $10 million under the ~~Pre-Petition ABL Credit Agreement, and the application of unrestricted and unencumbered cash balances in excess of $32 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.circumstances.

The filing of the Chapter 11 Cases was an event of default under the Pre-Petition ABL Credit Agreement ~~making all amounts outstanding~~and no further borrowings were available under the Pre-Petition ABL Credit ~~Agreement~~ ~~immediately due and payable. As of March 31, 2020, the outstanding amounts under the existing agreement are reflected as a current liability in the Consolidated Balance Sheet.~~

Agreement. To provide for liquidity during the Chapter 11 Cases, ~~the Debtors have~~we entered into agreements for debtor-in-possession financing. On May 29, 2020, in accordance with an ~~interim~~ order of the Bankruptcy Court, ~~(the “Interim DIP Order”),~~ Debtors entered into the DIP ABL Credit Agreement, which ~~provides~~provided for a super priority secured debtor-in-possession revolving credit facility in an aggregate amount of up to $100 ~~million (the “DIP ABL Facility”). Pursuant to~~million. Under the ~~Interim DIP Order, an initial amount~~terms of ~~up to $50 million became available for revolving loans under~~ the DIP ABL ~~Facility,~~Credit Agreement, amounts available for advances were subject to a borrowing base generally consistent with the ~~remaining amounts~~borrowing base under the Pre-Petition ABL Credit Agreement, subject to ~~become available~~certain agreed upon ~~entry of a final order by the Bankruptcy Court. In addition, the Debtors~~exceptions. On July 10, 2020, we entered into ~~a term sheet with BRF Finance Co., LLC (“BRF Finance”), pursuant to~~the DIP DDTL Agreement, which ~~and subject to the satisfaction of certain customary conditions, including the approval of the Bankruptcy Court, BRF Finance would agree to provide a debtor-in-possession~~provided for delayed draw term ~~loan facility~~loans in an amount not to exceed $25 million. As of December 31, 2020, no amounts were outstanding under the DIP ABL Credit Agreement or the DIP DDTL Agreement, and these agreements were terminated.

In connection with our legal emergence from bankruptcy, resolving all material conditions precedent listed in the Plan of Reorganization, on December 31, 2020, we entered into the New ABL Credit Agreement and Term Loan Credit Agreement and completed the sale-leaseback transactions with respect to our corporate office and Dallas distribution center properties. See Notes 8 and 13 to the consolidated financial statements herein. In addition, we commenced the $40 million ~~(the “DIP Term Facility”) secured by~~Rights Offering, which we expect to complete on February 9, 2021. In accordance with the ~~owned real estate~~terms of the ~~Debtors.~~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.

Following our legal emergence from bankruptcy, we expect to fund its operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under the New ABL Facility.

As of ~~June 15,~~December 31, 2020, cash and cash equivalents, excluding restricted cash, were ~~approximately $455 thousand~~$26.2 million and ~~outstanding borrowings were $1.7 million. Total~~total liquidity, ~~is $48.8~~defined as cash and cash equivalents plus the $45.9 million ~~as of June 15, 2020, which includes the $48.3 million available~~availability for borrowing under the ~~DIP~~New ABL Facility, ~~pursuant~~was $72.1 million as of December 31, 2020.

We believe that our plans, already implemented and continuing to be implemented, will mitigate the conditions and events that have raised substantial doubt about the entity’s ability to continue as a going concern. However, due to the ~~Interim DIP Order (defined below). The Company expects an additional $50 million~~uncertainty around the scope and duration of ~~borrowing capacity under~~ the ~~DIP ABL Facility~~COVID-19 pandemic and the related disruption to ~~become available upon entry of a final order~~our business and financial impacts, and because our plans, including those in connection with the Chapter 11 Cases, are not yet fully executed, although approved by the Bankruptcy Court, ~~and up to $25 million~~they cannot be deemed probable of ~~additional borrowing capacity to become available upon the Company’s entry into the DIP Term Facility (as defined below) and subject to approval by the Bankruptcy Court.~~

As discussed above, we have commenced the process to close approximately 130 store locations in a first wave of store closings. We currently expect to close an additional approximately 100 stores following negotiations with our landlords. We also expect to close our Phoenix, Arizona distribution center. These store closures will have an impact on our operating cash flows. We are not able to estimate atmitigating this ~~time the amount, nature and timing of the charges that will be incurred as a result of these actions.~~

Please refer to Note 2 in the Notes to Consolidated Financial Statements for additional information regarding the Chapter 11 Cases as well as for a discussion of the DIP ABL Facility and the proposed DIP Term Facility.

Although we are seeking to address our liquidity concerns through the Chapter 11 Cases, the approval of a plan of reorganization or the sale of all or substantially all of our assets is not within our control and uncertainty remains as to whether the Bankruptcy Court will approve a plan of reorganization or a sale of all or substantially all of our assets.

Off-Balance Sheet Arrangements and Contractual Obligations

We had no off-balance sheet arrangements as of ~~March~~December 31, 2020.

Except as discussed in Notes 21, 6 and 8 to the Consolidated Financial Statements, there have been no material changes outside the ordinary course of business from the disclosures relating to contractual obligations contained under “Contractual Obligations” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2019.~~2020. Note 6 herein reflects the updated maturities of lease liabilities as of December 31, 2020, subsequent to renegotiations with our landlords and termination of rejected leases.

Critical Accounting Policies

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited interim 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 consolidated financial statements, as of ~~March~~December 31, 2020, 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, ~~2019.~~2020.

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~~second quarter of fiscal ~~2020~~2021 were ~~6.9%~~3.6% of sales compared to ~~4.6%~~5.0% 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~~December 31, 2020 would result in a decline in gross profit and diluted income per share for the ~~third~~second quarter of fiscal ~~2020~~2021 of ~~$1.1~~$0.6 million and ~~$0.02,~~$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, ~~2019.~~2020.

Recent Accounting Pronouncements

Please refer to Note 1 of our unaudited consolidated financial statements for a summary of recent accounting pronouncements.

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 proposed transactions contemplated by the proposed Purchase and Sale Agreement, the proposed New ABL Commitment Letter, the proposed Backstop Commitment Letter, the proposed Amended Plan and the proposed Amended Disclosure Statement, the Company’s plans with respect to the Chapter 11 Cases, the Company’s plan to continue its operations while it works to complete the Chapter 11 process, the Company’s debtor-in-possession financings, 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 proposed reorganization, 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, ~~2019~~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:

~~our ability to obtain timely Bankruptcy Court approval with respect to motions filed in the Chapter 11 Cases;~~

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the challenges we might face as a result of our emergence from bankruptcy;

~~objections to the DIP ABL Facility or DIP Term Facility or other pleadings that could protract the Chapter 11 Cases;~~

the Bankruptcy Court’s rulings in the Chapter 11 Cases, including approvals of the terms and conditions of the DIP ABL Facility and the DIP Term Facility, and the outcome of the Chapter 11 Cases generally;

our ability to comply with the restrictions imposed by the terms of the DIP ABL Facility, including the Company’s ability to maintain certain minimum liquidity requirements, complete the DIP Term Facility, and obtain approval of a plan of reorganization or sale of all of its assets by agreed upon deadlines

~~the length of time that we will operate under Chapter 11 protection and the continued availability of operating capital during the pendency of the Chapter 11 Cases;~~

~~our ability to continue to operate our business during the pendency of the Chapter 11 Cases;~~

~~employee attrition and our ability to retain senior management and other key personnel due to the distractions and uncertainties;~~

~~the effectiveness of the overall restructuring activities pursuant to the Chapter 11 Cases and any additional strategies we may employ to address our liquidity and capital resources;~~

~~the actions and decisions of creditors and other third parties that have an interest in the Chapter 11 Cases;~~

risks associated with third parties seeking and obtaining authority to terminate or shorten the Company’s exclusivity period to propose and confirm one or more plans of reorganization, for the appointment of a Chapter 11 trustee or to convert the Chapter 11 proceeding to a Chapter 7 proceeding;

~~increased legal and other professional costs necessary to execute the Company’s restructuring;~~

~~our ability to maintain relationships with suppliers, customers, employees and other third parties as a result of the Chapter 11 Cases;~~

~~the trading price and volatility of the Company’s common stock and the effects of the delisting from The Nasdaq Stock Market;~~

~~litigation and other risks inherent in a bankruptcy process;~~

~~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;~~

~~our ability to continuously attract buying opportunities for off-price merchandise and anticipate consumer demand;~~

~~our ability to successfully manage our inventory balances profitably;~~

~~our ability to effectively manage our supply chain operations; loss of, disruption in operations, or increased costs in the operation of our distribution center facilities;~~

~~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;~~

~~increases in the cost or a disruption in the flow of our imported products;~~

~~changes in federal tax policy including tariffs;~~

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the Company’s ability to complete the Rights Offering;

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the effects and length of the COVID-19 pandemic;

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changes in economic and political conditions which may adversely affect consumer spending;

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our ability to identify and respond to changes in consumer trends and preferences;

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our ability to mitigate reductions of customer traffic in shopping centers where our stores are located;

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our ability to continuously attract buying opportunities for off-price merchandise and anticipate consumer demand;

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our ability to obtain merchandise on varying payment terms;

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our ability to successfully manage our inventory balances profitably;

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our ability to effectively manage our supply chain operations;

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loss of, disruption in operations of, or increased costs in the operation of our distribution center facility;

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unplanned loss or departure of one or more members of our senior management or other key management;

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increased or new competition;

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our ability to maintain and protect our information technology systems and technologies and related improvements to support our growth;

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increases in fuel prices and changes in transportation industry regulations or conditions;

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increases in the cost or a disruption in the flow of our imported products;

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changes in federal tax policy including tariffs;

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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;~~

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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;~~

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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;~~

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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;~~

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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;~~

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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;~~

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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;~~

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our ability to manage risks associated with product liability claims and product recalls;

~~the impact of adverse local conditions, natural disasters and other events;~~

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the impact of adverse local conditions, natural disasters and other events;

~~our ability to manage the negative effects of inventory shrinkage;~~

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our ability to manage the negative effects of inventory shrinkage;

~~our ability to manage exposure to unexpected costs related to our insurance programs; and~~

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our ability to manage exposure to unexpected costs related to our insurance programs;

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increased costs or exposure to fraud or theft resulting from payment card industry related risk and regulations; and

~~increased costs or exposure to fraud or theft resulting from payment card industry related risk and regulations.~~

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our ability to maintain an effective system of internal controls over financial reporting.

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

~~There have been no material changes to the Company’s market risks as disclosed in our Annual Report on Form 10-K filed for the fiscal year ended June 30, 2019.~~

Not required.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

~~Based on our management’s evaluation (with~~Our management, with the participation of our principal executive officer and our principal financial ~~officer), our principal executive~~ officer, evaluated the effectiveness of the design and ~~our principal financial officer have concluded that~~operation of our disclosure controls and procedures ~~(as~~as of December 31, 2020. The term “disclosure controls and procedures,” as defined in ~~Rule~~Rules 13a-15(e) and 15d-15(e) under the ~~Securities~~ Exchange Act of 1934, as ~~amended) were effective as March 31, 2020~~amended (the “Act”), means controls and other procedures of a company that are designed to ~~provide reasonable assurance~~ensure that information required to be disclosed by usa company in the reports that ~~we file~~it files or ~~submit~~submits under the ~~Securities~~ Exchange Act ~~of 1934, as amended,~~ is ~~(1)~~ recorded, processed, summarized and reported, within the time periods specified in the ~~Securities and Exchange Commission’s~~SEC’s rules and ~~forms~~forms. Disclosure controls and ~~(2)~~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 accumulated and communicated to ~~our~~the company’s management, including ~~our~~its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

~~A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that~~ Based on the ~~objectives of the control system are met. Because of inherent limitations in all control systems, no~~ evaluation of ~~controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly,~~ our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that their objectives are met and, as set forth above, our chief executive officer and chief financial officer have concluded, based on their evaluation as of ~~the end~~December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of ~~the period covered by this report, that~~such date, our disclosure controls and procedures were not effective ~~to provide~~at the reasonable assurance ~~that their objectives~~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 ~~met.~~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

~~There~~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 were no changes in our internal control over financial reporting that occurred during the quarter ended ~~March~~December 31, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - ~~OTHE~~ROTHER INFORMATION

Item 1.

Legal Proceedings

Information related to the Chapter 11 Cases that were filed on May 27, 2020 is included in Note 21 in the Notes to Consolidated Financial Statements.

Item 1A.

Risk Factors

~~Except as set forth below, we~~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, ~~2019.~~2020.

As a result of the filing of the Chapter 11 Cases, we are subject to the risks and uncertainties associated with bankruptcy proceedings, and operating under Chapter 11 may restrict our ability to pursue strategic and operational initiatives.

For the duration of the Chapter 11 Cases, our operations and our ability to execute our business strategy will be subject to the risks and uncertainties associated with bankruptcy. These risks include: