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 December 31, 2020September 30, 2021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 0-19658001-40432
TUESDAY MORNING CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware |
| 75-2398532 |
(State or Other Jurisdiction of |
| (I.R.S. Employer |
Incorporation or Organization) |
| Identification Number) |
6250 LBJ Freeway
Dallas, 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 | Name of each exchange on which registered | ||
Common Stock, $0.01 par value per share | TUEM | The Nasdaq Capital Market |
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ |
| Accelerated filer | ☒ |
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Non-accelerated filer | ☐ |
| Smaller reporting company | ☒ |
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| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class |
| Outstanding at |
Common Stock, par value $0.01 per share |
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Table of Contents
PART I. |
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ITEM 1. |
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| Consolidated Balance Sheets as of |
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ITEM 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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ITEM 3. |
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ITEM 4. |
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PART II. |
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ITEM 1. |
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ITEM 1A. |
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ITEM 6. |
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27 | ||||||
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2
Forward-Looking Statements
This Form 10-Q contains forward looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995, which are based on management’s current expectations, estimates and projections. These statements may be found throughout this Form 10-Q, particularly under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” among others. Forward looking statements typically are identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend” and similar words, although some forward looking statements are expressed differently. You should consider statements that contain these words or words that state other “forward looking” information carefully because they describe our current expectations, plans, strategies and goals and our beliefs concerning future business conditions, future results of operations, future financial positions, and our current business outlook. Forward looking statements also include statements regarding the Company’s strategy, future operations, performance and prospects, sales and growth expectations, our liquidity, capital expenditure plans, future store openings and closings, our inventory management plans and merchandising and marketing strategies.
The terms “Tuesday Morning,” “the Company,” “we,” “us,” and “our” as used in this Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries.
Reference is hereby made to the Company’s filings with the Securities and Exchange Commission, including, but not limited to, "Item 1A. Risk Factors" of the Company's most Annual Report on Form 10-K for the fiscal year ended June 30, 2021, for examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. These risks, uncertainties and events also include, but are not limited to, the following: the effects and length of the COVID-19 pandemic; changes in economic and political conditions which may adversely affect consumer spending; our ability to identify and respond to changes in consumer trends and preferences; our ability to mitigate reductions of customer traffic in shopping centers where our stores are located; increases in the cost or a disruption in the flow of our products, including the extent and duration of the ongoing impacts to domestic and international supply chains from the COVID-19 pandemic; our ability to continuously attract buying opportunities for off-price merchandise and anticipate consumer demand; our ability to obtain merchandise on varying payment terms; our ability to successfully manage our inventory balances profitably; our ability to effectively manage our supply chain operations; loss of, disruption in operations of, or increased costs in the operation of our distribution center facility; unplanned loss or departure of one or more members of our senior management or other key management; increased or new competition; our ability to maintain and protect our information technology systems and technologies and related improvements to support our growth; increases in fuel prices and changes in transportation industry regulations or conditions; changes in federal tax policy including tariffs; the success of our marketing, advertising and promotional efforts; our ability to attract, train and retain quality employees in appropriate numbers, including key employees and management; increased variability due to seasonal and quarterly fluctuations; our ability to protect the security of information about our business and our customers, suppliers, business partners and employees; our ability to comply with existing, changing and new government regulations; our ability to manage risk to our corporate reputation from our customers, employees and other third parties; our ability to manage litigation risks from our customers, employees and other third parties; our ability to manage risks associated with product liability claims and product recalls; the impact of adverse local conditions, natural disasters and other events; our ability to manage the negative effects of inventory shrinkage; our ability to manage exposure to unexpected costs related to our insurance programs; increased costs or exposure to fraud or theft resulting from payment card industry related risk and regulations; and our ability to maintain an effective system of internal controls over financial reporting. The Company’s filings with the SEC are available at the SEC’s web site at www.sec.gov.
The forward-looking statements made in this Form 10-Q relate only to events as of the date on which the statements were made. Except as may be required by law, the Company disclaims obligations to update any forward-looking statements to reflect events and circumstances after the date on which the statements were made or to reflect the occurrence of unanticipated events. Investors are cautioned not to place undue reliance on any forward-looking statements.
3
PART I — FINANCIAL INFORMATION
Item 1. | Financial Statements |
Tuesday Morning Corporation
(Debtor-in-Possession)
Consolidated Balance Sheets
December 31, 2020 (unaudited) and June 30, 2020
(In thousands, except share and per share data)
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| December 31, |
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| June 30, |
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| September 30, |
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| June 30, |
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| 2020 |
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| 2020 |
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| 2021 |
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| 2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 26,244 |
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| $ | 46,676 |
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| $ | 4,550 |
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| $ | 6,534 |
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Restricted cash |
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| 100,490 |
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| — |
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| 137 |
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| 22,321 |
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Inventories |
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| 114,424 |
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| 114,905 |
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| 174,149 |
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| 145,075 |
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Prepaid expenses |
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| 10,793 |
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| 6,353 |
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| 4,404 |
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| 5,486 |
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Other current assets |
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| 5,010 |
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| 7,210 |
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| 6,519 |
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| 3,385 |
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Total Current Assets |
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| 256,961 |
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| 175,144 |
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| 189,759 |
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| 182,801 |
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Property and equipment, net |
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| 41,838 |
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| 68,635 |
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| 33,838 |
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| 37,784 |
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Operating lease right-of-use assets |
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| 216,871 |
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| 258,433 |
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| 185,619 |
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| 193,244 |
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Deferred financing costs |
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| 2,954 |
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| — |
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| 2,214 |
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| 2,459 |
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Other assets |
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| 3,345 |
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| 3,178 |
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| 1,546 |
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| 1,596 |
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Total Assets |
| $ | 521,969 |
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| $ | 505,390 |
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| $ | 412,976 |
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| $ | 417,884 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Debtor-in-possession financing |
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| — |
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| $ | 100 |
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Accounts payable |
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| 31,971 |
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| 5,514 |
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| $ | 56,814 |
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| $ | 45,930 |
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Accrued liabilities |
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| 48,773 |
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| 33,942 |
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| 41,876 |
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| 46,454 |
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Operating lease liabilities |
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| 53,155 |
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| — |
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| 55,388 |
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| 54,632 |
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Total Current Liabilities |
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| 133,899 |
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| 39,556 |
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| 154,078 |
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| 147,016 |
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Long-term debt (see Note 8 for amounts due to related parties) |
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| 24,439 |
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| — |
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Lease liability — non-current |
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| 183,117 |
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| — |
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Operating lease liabilities — non current |
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| 146,533 |
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| 156,240 |
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Borrowings under revolving credit facility |
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| 22,390 |
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| 12,000 |
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Long term debt (see Note 3 for amounts due to related parties) |
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| 27,396 |
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| 26,374 |
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Asset retirement obligation — non-current |
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| 971 |
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| 1,213 |
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| 1,066 |
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| 1,021 |
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Other liabilities — non-current |
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| 2,859 |
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| 1,347 |
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| 2,709 |
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| 3,432 |
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Total Liabilities not subject to compromise |
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| 345,285 |
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| 42,116 |
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Liabilities subject to compromise |
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| 110,043 |
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| 456,339 |
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Total Liabilities |
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| 455,328 |
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| 498,455 |
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| 354,172 |
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| 346,083 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, par value $0.01 per share, authorized 10,000,000 shares; NaN issued or outstanding |
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| — |
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| — |
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| — |
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| — |
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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 |
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| 450 |
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| 455 |
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Common stock, par value $0.01 per share, authorized 200,000,000 shares; 87,554,344 shares issued and 85,770,683 shares outstanding at September 30, 2021 and 87,988,233 shares issued and 86,204,572 shares outstanding at June 30, 2021 |
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| 858 |
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| 862 |
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Additional paid-in capital |
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| 244,769 |
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| 244,021 |
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| 307,108 |
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| 305,498 |
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Retained deficit |
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| (171,766 | ) |
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| (230,729 | ) |
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| (242,350 | ) |
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| (227,747 | ) |
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 |
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| (6,812 | ) |
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| (6,812 | ) | ||||||||
Less: 1,783,661 common shares in treasury, at cost, at September 30, 2021 and at June 30, 2021, respectively |
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| (6,812 | ) |
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| (6,812 | ) | ||||||||
Total Stockholders’ Equity |
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| 66,641 |
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| 6,935 |
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| 58,804 |
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| 71,801 |
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Total Liabilities and Stockholders’ Equity |
| $ | 521,969 |
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| $ | 505,390 |
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| $ | 412,976 |
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| $ | 417,884 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
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)
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| Three Months Ended |
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| Six Months Ended |
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| Three Months Ended |
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| December 31, |
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| December 31, |
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| September 30, |
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| 2020 |
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| 2019 |
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| 2020 |
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| 2019 |
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| 2021 |
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| 2020 |
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Net sales |
| $ | 198,625 |
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| $ | 324,414 |
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| $ | 360,171 |
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| $ | 548,853 |
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| $ | 176,872 |
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| $ | 161,546 |
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Cost of sales |
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| 138,571 |
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| 218,638 |
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| 249,047 |
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| 361,945 |
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| 125,858 |
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| 110,476 |
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Gross profit |
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| 60,054 |
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| 105,776 |
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| 111,124 |
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| 186,908 |
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Gross margin |
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| 51,014 |
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| 51,070 |
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Selling, general and administrative expenses |
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| 63,348 |
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| 94,677 |
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| 125,418 |
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| 184,460 |
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| 60,277 |
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| 62,069 |
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Restructuring and abandonment expenses |
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| 1,018 |
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| — |
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| 6,507 |
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| — |
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Operating income/(loss) |
|
| (4,312 | ) |
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| 11,099 |
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| (20,801 | ) |
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| 2,448 |
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Restructuring, impairment and abandonment charges |
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| 2,430 |
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| 5,489 |
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Operating loss before interest, reorganization and other income/(expense) |
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| (11,693 | ) |
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| (16,488 | ) | ||||||||||||||||
Other income/(expense): |
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Interest expense |
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| (2,514 | ) |
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| (726 | ) |
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| (5,267 | ) |
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| (1,391 | ) |
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| (1,716 | ) |
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| (2,753 | ) |
Reorganization items, net |
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| 48,142 |
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| — |
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| 85,766 |
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| — |
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| (1,292 | ) |
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| 37,624 |
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Other income, net |
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| (198 | ) |
|
| 166 |
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|
| (192 | ) |
|
| 234 |
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| 49 |
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| 5 |
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Other income/(expense) total |
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| 45,430 |
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| (560 | ) |
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| 80,307 |
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| (1,157 | ) |
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| (2,959 | ) |
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| 34,876 |
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Income before income taxes |
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| 41,118 |
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| 10,539 |
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| 59,506 |
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| 1,291 |
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Income tax expense/(benefit) |
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| 779 |
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| (398 | ) |
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| 543 |
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| (18 | ) | ||||||||
Net income |
| $ | 40,339 |
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| $ | 10,937 |
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| $ | 58,963 |
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| $ | 1,309 |
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Earnings/(loss) before income taxes |
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| (14,652 | ) |
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| 18,388 |
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Income tax benefit |
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| (49 | ) |
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| (236 | ) | ||||||||||||||||
Net earnings/(loss) |
| $ | (14,603 | ) |
| $ | 18,624 |
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Earnings Per Share |
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Net income per common share: |
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Net earnings/(loss) per common share: |
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Basic |
| $ | 0.88 |
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| $ | 0.24 |
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| $ | 1.29 |
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| $ | 0.03 |
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| $ | (0.17 | ) |
| $ | 0.41 |
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Diluted |
| $ | 0.88 |
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| $ | 0.24 |
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| $ | 1.29 |
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| $ | 0.03 |
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| $ | (0.17 | ) |
| $ | 0.41 |
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Weighted average number of common shares: |
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Basic |
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| 45,511 |
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| 45,218 |
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| 45,460 |
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|
| 45,086 |
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|
| 84,310 |
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|
| 45,462 |
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Diluted |
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| 45,511 |
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| 45,218 |
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| 45,460 |
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| 45,086 |
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| 84,310 |
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| 45,462 |
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Dividends per common share |
| $ | 0 |
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| $ | 0 |
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| $ | 0 |
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| $ | 0 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Tuesday Morning Corporation
(Debtor-in-Possession)
Consolidated Statements of Stockholders' Equity (unaudited)
Three Months Ended December 31, 2020 and 2019
(In thousands)
| Common Stock |
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| Additional Paid-In |
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| Retained |
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| Treasury |
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| Total Stockholders' |
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| Shares |
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| Amount |
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| Capital |
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| Deficit |
|
| Stock |
|
| Equity |
| ||||||
Balance at September 30, 2020 |
| 46,851 |
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| $ | 450 |
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| $ | 244,454 |
|
| $ | (212,105 | ) |
| $ | (6,812 | ) |
| $ | 25,987 |
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Net income |
| — |
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| — |
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| — |
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| 40,339 |
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| — |
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| 40,339 |
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Share-based compensation |
| — |
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|
| — |
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|
| 315 |
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|
| — |
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|
| — |
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|
| 315 |
|
Shares issued or canceled in connection with employee stock incentive plans and related tax effect |
| (5 | ) |
|
| — |
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|
| — |
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|
| — |
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|
| — |
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|
| — |
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Balance at December 31, 2020 |
| 46,846 |
|
| $ | 450 |
|
| $ | 244,769 |
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| $ | (171,766 | ) |
| $ | (6,812 | ) |
| $ | 66,641 |
|
| Common Stock |
|
| Additional Paid-In |
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| Retained |
|
| Treasury |
|
| Total Stockholders' |
| |||||||||
| Shares |
|
| Amount |
|
| Capital |
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| Deficit |
|
| Stock |
|
| Equity |
| ||||||
Balance at June 30, 2021 |
| 86,205 |
|
| $ | 862 |
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| $ | 305,498 |
|
| $ | (227,747 | ) |
| $ | (6,812 | ) |
| $ | 71,801 |
|
Net earnings |
| — |
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|
| — |
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|
| — |
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|
| (14,603 | ) |
|
| — |
|
|
| (14,603 | ) |
Share-based compensation |
| — |
|
|
| — |
|
|
| 1,155 |
|
|
| — |
|
|
| — |
|
|
| 1,155 |
|
Shares issued or canceled in connection with employee stock incentive plans and related tax effect |
| (434 | ) |
|
| (4 | ) |
|
| 455 |
|
|
| — |
|
|
| — |
|
|
| 451 |
|
Balance at September 30, 2021 |
| 85,771 |
|
| $ | 858 |
|
| $ | 307,108 |
|
| $ | (242,350 | ) |
| $ | (6,812 | ) |
| $ | 58,804 |
|
| 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 |
|
| 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 loss |
| — |
|
|
| — |
|
|
| — |
|
|
| 18,624 |
|
|
| — |
|
|
| 18,624 |
|
Share-based compensation |
| — |
|
|
| — |
|
|
| 428 |
|
|
| — |
|
|
| — |
|
|
| 428 |
|
Shares issued or canceled in connection with employee stock incentive plans and related tax effect |
| (490 | ) |
|
| (5 | ) |
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance at September 30, 2020 |
| 46,851 |
|
| $ | 450 |
|
| $ | 244,454 |
|
| $ | (212,105 | ) |
| $ | (6,812 | ) |
| $ | 25,987 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
56
Tuesday Morning Corporation
(Debtor-in-Possession)
Consolidated Statements of Stockholders' EquityCash Flows (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 |
|
|
| Three Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings/(loss) |
| $ | (14,603 | ) |
| $ | 18,624 |
|
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 3,397 |
|
|
| 4,384 |
|
Loss on impairment and abandonment of assets |
|
| 2,089 |
|
|
| 4,804 |
|
Amortization of financing costs and interest expense |
|
| 1,267 |
|
|
| 2,466 |
|
(Gain)/loss on disposal of assets |
|
| 68 |
|
|
| (1,037 | ) |
Share-based compensation |
|
| 1,173 |
|
|
| 582 |
|
Gain on lease terminations |
|
| — |
|
|
| (82,010 | ) |
Deferred income taxes |
|
| (118 | ) |
|
| — |
|
Construction allowances from landlords |
|
| 426 |
|
|
| 120 |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Inventories |
|
| (29,092 | ) |
|
| 6,651 |
|
Prepaid and other current assets |
|
| (2,002 | ) |
|
| 3,152 |
|
Accounts payable |
|
| 10,884 |
|
|
| 18,639 |
|
Accrued liabilities |
|
| (4,448 | ) |
|
| 37,809 |
|
Operating lease assets and liabilities |
|
| (1,875 | ) |
|
| (351 | ) |
Other liabilities — non-current |
|
| (575 | ) |
|
| 1,411 |
|
Income taxes payable |
|
| 193 |
|
|
| — |
|
Net cash provided by/(used in) operating activities |
|
| (33,216 | ) |
|
| 15,244 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (1,761 | ) |
|
| (619 | ) |
Proceeds from sales of assets |
|
| — |
|
|
| 1,096 |
|
Net cash provided by/(used in) investing activities |
|
| (1,761 | ) |
|
| 477 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from borrowings under revolving credit facility |
|
| 209,314 |
|
|
| 170,280 |
|
Repayments of borrowings under revolving credit facility |
|
| (198,924 | ) |
|
| (170,280 | ) |
Proceeds from exercise of employee stock options |
|
| 467 |
|
|
| — |
|
Tax payments related to vested stock awards |
|
| (12 | ) |
|
| — |
|
Payments on finance leases |
|
| (36 | ) |
|
| (69 | ) |
Payment of financing fees |
|
| — |
|
|
| (444 | ) |
Net cash provided by/(used in) financing activities |
|
| 10,809 |
|
|
| (513 | ) |
Net increase/(decrease) in cash and cash equivalents and restricted cash |
|
| (24,168 | ) |
|
| 15,208 |
|
Cash and cash equivalents and restricted cash, beginning of period |
|
| 28,855 |
|
|
| 46,676 |
|
Cash and cash equivalents and restricted cash, end of period |
| $ | 4,687 |
|
| $ | 61,884 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
Tuesday Morning Corporation
(Debtor-in-Possession)
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended December 31, 2020 and 2019
(In thousands)
|
| 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.
7
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, 20202021 for our critical accounting policies.
1. Nature of Operations and Significant Accounting Policies
Basis of Presentationpresentation — The unaudited interim consolidated financial statements included herein include the accounts of Tuesday Morning Corporation and its subsidiaries (the "Company") and have been prepared by uswithout audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”"SEC"). CertainAs applicable under such regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuantomitted. We believe the presentation and disclosures herein are adequate to such rulesmake the information not misleading, and regulations. Thesethe consolidated financial statements includereflect all adjustments, consisting only of those of aelimination entries and normal recurring nature,adjustments which in the opinion of management, are necessary tofor a fair presentation of the financial position, results of operations and cash flows at the dates and for the periods presented. We do not present fairlya consolidated statement of comprehensive income as there are no other comprehensive income items in either the current or prior fiscal periods.
Our business results historically have fluctuated throughout the year and, as a result, the operating results of the interim periods presented andare not necessarily indicative of the results that may be achieved for the full year. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes theretoincluded in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.2021. The consolidated balance sheet at June 30, 20202021 has been derived from the audited consolidated financial statements at that date. These interim financial statements do not include allThe preparation of the information and notes required by GAAP for complete financial statements. For further information, refer to the audited consolidated financial statements is in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and notes thereto included in our Annual Report on Form 10-K forassumptions that affect the reported amounts and related disclosures. Actual amounts could differ from those estimates.
Our fiscal year endedends on June 30 2020. and we operate our business as a single operating segment.
The accompanying unaudited interim consolidated financial statements(A)Cash and Cash Equivalents—Cash and cash equivalents include the accountscredit card receivables and all highly liquid instruments with original maturities of Tuesday Morning Corporation, a Delaware corporation,three months or less. Cash equivalents are carried at cost, which approximates fair value. At September 30, 2021 and its wholly‑owned subsidiaries. All entitiesJune 30, 2021, credit card receivables from third party consumer credit card providers were $3.1 million and $3.2 million, respectively. Such receivables generally are collected within one week of the Company were includedbalance sheet date.
(B)Restricted Cash—Restricted cash was $0.1 million and $22.3 million, as of September 30, 2021 and June 30, 2021, respectively, which is being held in the filingUnsecured Creditor Claims Fund (defined below in Note 2).
Emergence from Chapter 11 Bankruptcy Proceedings
In response to the impacts of athe COVID-19 pandemic, on May 27, 2020 (the “Petition Date”), we filed voluntary petitionpetitions (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the “Bankruptcy Court”) and all entities are included in our consolidated financial statements, thus separate condensed combined financial statements of the entities in the reorganization proceedings are not required. All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications were made to prior period amounts to conform to the current period presentation. None of the reclassifications affected our net income in any period. We do not present a consolidated statement of comprehensive income as there are no other comprehensive income items in either the current or prior fiscal periods.
The results of operations for the three and 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
The COVID-19 pandemic has had, and could continue to have, an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow.
On March 25, 2020, we temporarily closed all of our stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. Stores gradually reopened as allowed by state and local jurisdictions, and all but 2 of our stores had reopened as of the end of 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. While we have taken actions to minimize costs, some of which are permanent including the closure of 197 stores and the closure of our Phoenix distribution center, and mitigate the related risks, there can be no assurance that these measures will continue to provide benefit or that they will be adequate to mitigate future changes in circumstances.
Voluntary Petitions for Reorganization under Chapter 11
On May 27, 2020 (the “Petition Date”), we filed the Chapter 11 Cases.. The Chapter 11 Cases were jointly administered for procedural purposes.
8
Significant Bankruptcy Court Actions
purposes. During the pendency of the Chapter 11 Cases, we continued to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. On May 28, 2020, at the first-day hearingsIn accordance with orders of the Chapter 11 Cases, the Bankruptcy Court, granted relief in conjunction with various motions intendedwe entered into certain debtor-in-possession financing arrangements to ensure our ability to continue our ordinary operations after the Petition Date. The Bankruptcy Court’s orders granting such relief, entered on May 28, 2020 and May 29, 2020, authorized us to, among other things, pay certain pre-petition employee and retiree expenses and benefits, use our existing cash management system, maintain and administer customer programs, pay certain critical and foreign vendors and pay certain pre-petition taxes and related fees. In addition, the Bankruptcy Court issued orders approving, among other things, (1) our entry into the Senior Secured Super Priority Debtor-in-Possession Credit Agreement (the “DIP ABL Credit Agreement”) among the Company, JPMorgan Chase Bank, N.A., as administrative agent, for itself and the other lenders, which provided for a super priority secured debtor-in-possession revolving credit facility in an aggregate amount of up to $100 million (the “DIP ABL Facility”), and (2) our use of cash collateral in accordance with the terms of the DIP ABL Credit Agreement. See Note 8 to the Consolidated Financial Statements for additional information regarding the DIP ABL Facility.
These orders are significant because they allowed us to operate our businesses in the normal course.
The Bankruptcy Court has issued orders designed to assist us in preserving certain tax attributesprovide financing during the pendency of the Chapter 11 Cases by establishing, among other things, notification and hearing procedures (the “Procedures”) relating to proposed transfers of its common stock and the taking of worthless stock deductions. The Procedures, among other things, restricted transfers involving, and required notice of the holdings of and proposed transactions by any person or “entity” (as defined the applicable U.S. Treasury Regulations) owning or seeking to acquire ownership of 4.5% or more of the Company’s common stock. The Bankruptcy Court orders provided that any actions in violation of the Procedures (including the notice requirements) would be null and void ab initio, and (a) the person or entity making such a transfer would be required to take remedial actions specified by us to appropriately reflect that such transfer of our common stock is null and void ab initio and (b) the person or entity making such a declaration of worthlessness with respect to our common stock would be required to file an amended tax return revoking such declaration and any related deduction to reflect that such declaration is void ab initio.Cases. See Note 3 “Debt” below for additional information regarding these debtor-in-possession financing arrangements.
On June 9, 2020, the Bankruptcy Court issued an order approving procedures for the closure of up to 230 of our store locations. In early June 2020, in accordance with orders of the Bankruptcy Court, we commenced the process to close 132 store locations in a first wave of store closings.locations. By the end of July 2020, all of these stores were permanently closed. In mid-July 2020, we began the process to close an additional 65 stores following negotiations with our landlords, and those store closures were completed in August 2020. In total, we permanently closed 197 stores during the first quarter of fiscal 2021,2021. In addition, we recorded abandonment charges of $4.8 million, related to our Phoenix distribution center closure plan. In the second quarter of fiscal 2021, we recorded abandonment charges of $0.8 million, related to our Phoenix distribution center closure plan. We closed our Phoenix Arizona distribution center in the second quarter of fiscal 2021.
On July 10, 2020, in accordance with a final order issued by the Bankruptcy Court on July 10, 2020, we entered into a Senior Secured Super Priority Debtor-In-Possession Delayed Draw Term Loan Agreement (the “DIP DDTL Agreement”) with the Franchise Group, Inc. (the “Lender”). Pursuant to the DIP DDTL Agreement, the Lender agreed to lend us up to an aggregate principal amount of $25 million in the form of delayed draw term loans (the “DIP Term Facility”). See Note 8 for additional information.
On September 23, 2020, the Company and its subsidiaries filed with the Bankruptcy Court a proposed Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Original Plan”) and a proposed Disclosure Statement in Support of the Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Original Disclosure Statement”) describing the Plan and the solicitation of votes to approve the same from certain of the Debtors’ creditors with respect to the Chapter 11 Cases.
On September 23, 2020, contemporaneously with the filing of the Original Plan and Original Disclosure Statement, the Company and its subsidiaries filed an expedited motion for entry of an order (1) approving sale and bidding procedures in connection with a potential sale of assets of the Company and its subsidiaries, (2) authorizing the sale of assets free and clear of all liens, claims, encumbrances and other interests, and (3) granting related relief (the “Bidding Procedures Motion”). The Company believed that the concurrent prosecution of a plan of reorganization and a court-approved process for bidding and potential sale of substantially all of their assets would allow the Company and its subsidiaries to assess the relative benefits of a plan of reorganization and a sale. The Bidding Procedures Motion provided that the Bankruptcy Court would consider approval of a sale of assets on October 29, 2020 if the Company determined to proceed with a sale of assets.
On October 26, 2020, the Company and its subsidiaries filed a motion with the Bankruptcy Court indicating the Company would not be seeking approval of a sale of assets on October 29, 2020. On October 26, 2020, the Company also filed a motion indicating the Company was working to make revisions to the Original Plan and Original Disclosure Statement and seeking to establish a hearing on November 9, 2020 for consideration of a revised plan of reorganization and disclosure statement. The Company reserved the right to continue to pursue a sale of assets if the Company determined that a sale of assets is in the best interests of the bankruptcy estate.
9
On November 4, 2020, the Company and its subsidiaries filed with the Bankruptcy Court a proposed Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code and a proposed Amended Disclosure Statement. On November 16, 2020, the Company and its subsidiaries filed with the Bankruptcy Court a proposed Revised Second Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Amended Plan”) and a proposed Amended Disclosure Statement (the “Amended Disclosure Statement”) in support of the Amended Plan describing the Amended Plan and the solicitation of votes to approve the same from certain of the Debtors’ creditors with respect to the Chapter 11 Cases. The Amended Plan and the Amended Disclosure Statement contemplated the proposeddebt financing transactions described in Notes 8Note 3 below under the caption “Post-Emergence Debt Financing Arrangements,” the exchange and 13 below, including the transactions contemplated by the Purchase and Sale Agreement (as definedRights Offering (defined in Note 13),12 below) and the New ABL Facility (as definedsale-leaseback transactions described in Note 8),8 to the Term Loan Credit Agreement (as definedconsolidated financial statements in Note 8) andour Annual Report on Form 10-K for the Rights Offering (as defined below). fiscal year ended June 30, 2021.
On November 18, 2020, the Bankruptcy Court issued an order approving the Amended Disclosure Statement. On December 23, 2020, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Amended Plan, with certain modifications described in the Confirmation Order (as modified and confirmed, the “Plan of Reorganization”). On December 31, 2020, all of the conditions precedent to the Plan of Reorganization were satisfied and the Company completed the transactionsdebt financing and sale-leaseback contemplated in the Plan of Reorganization. However, the closing of the Rights Offering was considered a critical component
8
to the execution of our confirmed Plan of Reorganization, therefore, we continued to apply the requirements of ASC 852 – Reorganizations until that transaction closed on February 9, 2021.
In accordance with the Plan of Reorganization, effective December 31, 2020 (the “Effective Date”), the Company’s board of directors was comprised of 9 members, including 5 continuing directors of the Company, 3 new directors appointed by the PurchaseBackstop Party (as defined in Note 12 below) and Sale Agreement,1 director appointed by the New ABL Facility andequity committee in the Term Loan Credit Agreement.
Chapter 11 Cases.
Pursuant to the Plan of Reorganization, each outstanding share of the Company’s common stock as of the close of business on January 4, 2021 was exchanged (the “Exchange”) for (1) 1 new share of the Company’s stock and (2) a share purchase right entitling the holder to purchase its pro rata portion of shares available to eligible holders in the Rights Offering. In accordance withOffering described under the caption “Equity Financing under the Plan of Reorganization,Reorganization” in Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. On February 9, 2021, the Company commencedcompleted the equity financing contemplated by the Plan of Reorganization.
On September 29, 2021, the U.S. Bankruptcy Court issued a $40final decree (the “Final Decree”) closing the Chapter 11 Cases of the Company and its subsidiaries. While the Company emerged from bankruptcy proceedings on December 31, 2020, the Chapter 11 Cases remained opened pending final resolution of all claims of general unsecured creditors. The Company was able to resolve all of the claims for approximately $14 million rights offering (the “Rights Offering”), under which eligible holdersless than the amounts reserved and retained in the Unsecured Creditor Claim Fund. Upon entry of the Final Decree, the approximately $14 million remaining in the escrow account was returned to the Company to make a repayment on its ABL credit facility and the Chapter 11 Cases are now final.
See Note 2 regarding Bankruptcy Accounting for further discussion.
Listing
During the pendency of our bankruptcy proceedings, the Company’s common stock could purchase up to $24 million of shares ofwas delisted by the Nasdaq Stock Market, LLC (“Nasdaq”) and began trading on the OTC Pink marketplace under the symbol “TUESQ”. In January 2021, following our emergence from bankruptcy, 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 sharesbegan trading on the OTCQX market under the ticker symbol “TUEM.”
On May 24, 2021, Nasdaq approved our application for the relisting of the Company’sCompany's common stock on the Nasdaq Capital Market. The Company's common stock was relisted and commenced trading on the Nasdaq Capital Market 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 termsopening of the backstop commitment agreement,market on May 25, 2021, under 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 sharesticker symbol "TUEM."
Impact of the Company’s common stock at a priceCOVID-19 Pandemic
The COVID-19 pandemic has had an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of $1.65 per share.operations, liquidity and cash flow. On March 25, 2020, we temporarily closed all of our 687 stores nationwide, severely reducing revenues, resulting in significant operating losses and the elimination of substantially all operating cash flow. As allowed by state and local jurisdictions, 685 of our stores gradually reopened as of the end of June 2020, and 2 were permanently closed during the quarter. In accordance with our bankruptcy plan of reorganization, described below, we completed the termspermanent closure of 197 stores in the Planfirst quarter of Reorganization, all proceeds fromfiscal 2021 and the Rights Offering will be usedclosure of our Phoenix distribution center in second quarter of fiscal 2021. In addition, as part of our restructuring, we secured financing to make payments of the claims of general unsecuredpay creditors in the Chapter 11 Cases.
In accordance with the Planplan of Reorganization,reorganization and to fund planned operations and expenditures.
Future impacts from the COVID-19 pandemic will depend on the potential further geographic spread and duration of the ongoing pandemic, the timing and extent of recovery in traffic and consumer spending in our stores, the extent and duration of ongoing impacts to domestic and international supply chains and the related impacts on the flow, availability and cost of products, the production and administration of effective medical treatments and vaccines, and the actions that may be taken by various governmental authorities and other third parties in response to the pandemic.
Accounting Pronouncement Recently Adopted
In March 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). This update is intended to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange and is effective for all entities for fiscal years beginning after December 31, 2020,15, 2021, including interim periods within those fiscal years.Early adoption is permitted for all entities, including adoption in an interim period. We adopted this standard in the first quarter of fiscal 2022 and it did not result in a material impact to the Company’s board of directors was comprised of 9 members,consolidated financial statements.
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, including 5 continuing directors of the Company, 3 new directors appointed by the Backstop Party and 1 director appointed by the equity committeeinterim periods within those fiscal years, with early adoption permitted. We adopted this standard in the Chapter 11 Cases.first quarter of fiscal 2022 and it did not result in a material impact to the Company’s consolidated financial statements.
De-listing
On May 27, 2020,
2.Bankruptcy Accounting
Reorganizations require that the Company received a letter fromconsolidated financial statements, for periods subsequent to the Listing Qualifications Department staff of The Nasdaq Stock Market (“Nasdaq”) notifying it that, as a resultfiling of the Chapter 11 Cases, distinguish transactions and in accordanceevents that are directly associated with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, Nasdaq determined that the Company’s common stock would be delistedreorganization from Nasdaq. On June 8, 2020, tradingthe ongoing operations of the Company’s common stock on Nasdaq was suspended. On July 1, 2020, Nasdaq filed a Form 25 with the SEC to delist the Company’s common stock.business. During the pendency of the Chapter 11 Cases the Company’s common stock traded over the counter in the OTC Pink Marketuntil we qualified for emergence 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
10
Standards Board (“FASB”) Accounting Standards Codification (“ASC”)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 beenwere 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 arewere realized or incurred in the bankruptcy proceedings arewere recorded in reorganizationReorganization items, onnet in our consolidated statementsConsolidated 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.Operations.
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 (Unsecuredan escrow account (the “Unsecured Creditor Claim Fund)Fund”) was established for the benefit of holders of Allowed General Unsecured Claims.allowed general unsecured claims. Upon the closing of the sale and leaseback of the Corporate Office and the Dallas Distribution Center properties and the issuance of the Term Loan (as defined in Note 8)3 below), 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 that were not deposited into the Unsecured Creditor Claim Fund were deposited into our operating account. In addition, $14.2 million of additional cash was deposited into a segregated bank account at Wells Fargo Bank and iswas restricted for use in paying compensation for services rendered by professionals on or after the Petition date and prior to the approval date of our Plan of Reorganization by the court (“Effective Date (WellsDate”) (“Wells Fargo Restricted Fund)Fund”). The $86.3closing of the Rights Offering described in Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 provided approximately $40.0 million and $14.2 millionof cash balances held inthat was deposited to the Unsecured Creditor Claim Fund and recorded as restricted cash. During the fiscal 2021, all services rendered by professionals were paid and the Wells Fargo Restricted Fund respectively, are recorded as restricted cash on the balance sheet. Upon the completionaccount was closed with all of the Rights Offering, an additional approximate $40applicable funds disbursed. Net cash remaining of $1.9 million will be transferred towas deposited directly into our unrestricted cash account during the Unsecured Creditor Claim Fund. For specific discussion on balancesfourth quarter 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.fiscal 2021.
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 componentclosing of exit financing forthcoming from the ongoingour Rights Offering which we currently expect to close on February 9, 2021, iswas considered a critical component required to executethe execution of 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
11
fresh start accounting under ASC 852;Reorganization, therefore, we expectcontinued to discloseapply the effectsrequirements of ASC 852 until that transaction closed on February 9, 2021.
On September 29, 2021, the Plan of Reorganization in our third quarter of fiscal 2021 Form 10-Q, subsequent to theU.S. Bankruptcy Court issued a Final Decree 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 authorizedits subsidiaries. While 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 ofemerged from bankruptcy proceedings on December 31, 2020, the Chapter 11 Cases remained opened pending final resolution of all claims expected. Pre-petition liabilities that are subjectof general unsecured creditors. The Company was able to compromise were required to be reported atresolve all of these claims for approximately $14 million less than the amounts expected to be allowed, even if they may be settled for lesser amounts (see above for details onreserved and retained in the Unsecured Creditor Claim Fund). OnFund. Upon entry of the December 31, 2020,Final Decree, the legal effective dateapproximately $14 million remaining 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 priorUnsecured Creditor Claim Fund was returned to the endCompany to make a repayment on its ABL credit facility and the Chapter 11 Cases are now final.
As of September 30, 2021, we had $0.1 million of cash held in the second fiscal quarter. Estimated allowable claims for those which were rejected are included in accrued expenses. Liabilities subject to compromise in our condensed consolidatedUnsecured Creditor Claim Fund, recorded as restricted cash on the balance sheet includefor the following aspayment 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 |
|
remaining resolved claims.
Restructuring, Impairment and Abandonment Charges
Restructuring, impairment and abandonment charges total $1.0totaled $2.4 million and $6.5$5.5 million for the three and six months ended December 31,September 30, 2021 and September 30, 2020, respectively and includeincluded the following (in thousands):
|
| Three Months Ended |
| |||||||||||||
|
| Three Months Ended |
|
| Six Months Ended |
|
| September 30, |
| |||||||
|
| December 31, 2020 |
|
| December 31, 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Restructuring costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and compensation related costs |
| $ | 184 |
|
| $ | 869 |
|
| $ | 341 |
|
| $ | 685 |
|
Total restructuring costs |
| $ | 184 |
|
| $ | 869 |
|
| $ | 341 |
|
| $ | 685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment costs: |
|
|
|
|
|
|
|
| ||||||||
Corporate long-lived assets |
| $ | 2,089 |
|
| $ | - |
| ||||||||
Total impairment costs |
| $ | 2,089 |
|
| $ | - |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||
Abandonment costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated recognition of operating right-of-use assets |
| $ | 834 |
|
| $ | 5,638 |
|
| $ | - |
|
| $ | 4,804 |
|
Total abandonment costs |
| $ | 834 |
|
| $ | 5,638 |
|
| $ | - |
|
| $ | 4,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and abandonment costs |
| $ | 1,018 |
|
| $ | 6,507 |
| ||||||||
Total restructuring, impairment and abandonment costs |
| $ | 2,430 |
|
| $ | 5,489 |
|
TheFor the three months ended September 30, 2021, restructuring, impairment and abandonment cost related to $0.3 million of employee retention costs shown aboveand $2.1 million of software impairment charges.During the three months ended September 30, 2020, restructuring, impairment and abandonment charges of $4.8 million primarily relaterelated to theour permanent closure of our storesstore and Phoenix, Arizona distribution center. These decisionscenter closing plans as well as $0.7 million in severance and employee retention cost. Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021.
12
Reorganization Items
Reorganization items included in our consolidated statement of operations represent amounts directly resulting from the Chapter 11 Cases and totalresulted in a net loss of $1.3 million and a net benefit of $48.1 million and $85.8$37.6 million for the three and six months ended December 31,September 30, 2021 and September 30, 2020, respectively, and includeincluded the following (in thousands):
|
| Three Months Ended |
| |||||||||||||
|
| Three Months Ended |
|
| Six Months Ended |
|
| September 30, |
| |||||||
|
| December 31, 2020 |
|
| December 31, 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Reorganization items, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional and legal fees |
| $ | 20,274 |
|
| $ | 30,120 |
|
| $ | 228 |
|
| $ | 9,846 |
|
Gains on lease termination, net of estimated claims |
|
| (18,777 | ) |
|
| (66,247 | ) | ||||||||
Gain on sale-leaseback |
|
| (49,639 | ) |
|
| (49,639 | ) | ||||||||
Claims related costs |
|
| 1,063 |
|
|
| - |
| ||||||||
Gains on lease terminations, net of estimated claims |
|
| - |
|
|
| (47,470 | ) | ||||||||
Total reorganization items, net |
| $ | (48,142 | ) |
| $ | (85,766 | ) |
| $ | 1,292 |
|
| $ | (37,624 | ) |
DuringFor the first sixthree months of fiscalended September 30, 2021, the leases for store locationsreorganization items, net charges related to $1.1 million in claims related cost and $0.2 million in professional and legal fees related to our reorganization. For the three months ended September 30, 2020, reorganization item, net was a net benefit of $37.6 million due to a net gain of $47.5 million resulting from store lease terminations under our permanent closure plan as well as the lease forpartially offset by $9.8 million in professional and legal fees related to 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 endedreorganization.
3. Debt
Pre-Petition Financing Agreements
Through December 31, 2020, respectively. Inwe were party to a credit agreement that provided for an asset-based, five-year senior secured revolving credit facility in the second quarteroriginal amount of fiscal 2021, we executedup to $180.0 million which was scheduled to mature on January 29, 2024 (the “Pre-Petition ABL Credit Agreement”). The availability of funds under the Pre-Petition ABL Credit Agreement was limited to the lesser of a sale-leaseback agreementcalculated borrowing base and the lenders’ aggregate commitments under the Pre-Petition ABL Credit Agreement. Our indebtedness under the Pre-Petition ABL Credit Agreement was secured by a lien on our owned real estate as partsubstantially all 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.assets.
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, $14.7we had 0 amounts outstanding under the Pre-Petition ABL Credit Agreement, and that agreement was terminated in connection with our legal emergence from bankruptcy.
Debtor-In-Possession Financing Agreements
On May 29, 2020, we entered into a Senior Secured Super Priority Debtor-in-Possession Credit Agreement (the “DIP ABL Credit Agreement”) among the Company, JPMorgan Chase Bank, N.A., as administrative agent, for itself and the other lenders, which provided for a super priority secured debtor-in-possession revolving credit facility in an aggregate amount of up to $100.0 million. On July 10, 2020, we entered into a Senior Secured Super Priority Debtor-In-Possession Delayed Draw Term Loan Agreement (the “DIP DDTL Agreement”) with the Franchise Group, Inc., which provided for delayed draw term loans in an amount not to exceed $25.0 million. We made no borrowings under the DIP ABL Credit Agreement or the DIP DDTL Agreement. On December 31, 2020, the DIP ABL Credit Agreement and the DIP DDTL Agreement were terminated in connection with our legal emergence from bankruptcy.
Post-Emergence Financing Arrangements
On December 31, 2020, the Company and its subsidiaries entered into a Credit Agreement (the “New ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A. and Bank of America, N.A. (collectively, the “Lenders”) that provides for a revolving credit facility in an aggregate amount of $110.0 million (the “New ABL Facility”). The New ABL Credit Agreement includes conditions to borrowings, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. The New ABL Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio if borrowing availability falls below certain minimum levels, after the first anniversary of the agreement. We are not required to be compliant per the lender agreement until December 31, 2021.
11
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 September 30, 2021, we had $22.4 million of professional feesborrowings outstanding under the New ABL Facility and, $13.8 million of letters of credit outstanding. Taking into account $10.0 million of borrowing capacity that is unavailable until December 31, 2021, we have borrowing availability of $39.7 million under the New ABL Facility, as of September 30, 2021.
On December 31, 2020, the Company, Alter Domus (US), LLC, as administrative agent, and the lenders named therein including Tensile Capital Partners Master Fund LP and affiliates of Osmium Partners, LLC, entered into a Credit Agreement (the “Term Loan Credit Agreement”) to provide a term loan of $25.0 million to the Company (the “Term Loan”).
In accordance with the Plan of Reorganization, on December 31, 2020, 3 new directors were unpaidselected for membership on the Board of Directors by Osmium Partners (Larkspur SPV), LP, an affiliate of Tensile Capital Partners Master Fund LP (“Tensile”) and accrued in Accounts PayableOsmium Partners, LLC (“Osmium”). Pursuant to the Term Loan Credit Agreement, Tensile Capital Partners Master Fund, LP and Accrued Liabilitiesaffiliates of Osmium Partners, LLC., held $19.0 million and $1.0 million, respectively, of the $25.0 million outstanding Term Loan. Representatives of Osmium and Tensile both hold seats on the board and therefore Osmium and Tensile are related parties to the company.
Pursuant to the terms of the Term Loan Credit Agreement, the Term Loan has a maturity date of December 31, 2024 and bears interest at a rate of 14% per annum, with interest payable in-kind (“PIK”). Under the terms of the Term Loan Credit Agreement, the Term Loan is secured by a second lien on the collateral securing the New ABL Facility and a first lien on certain other assets of the Company as described in the accompanying Consolidated Balance Sheet.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.
The following table provide details on our Term loan as of September 30, 2021 and June 30, 2021 (in thousands):
Term Loan |
|
|
| |||||
|
| September 30, 2021 |
|
| June 30, 2021 |
| ||
Loan balance |
| $ | 25,000 |
|
| $ | 25,000 |
|
Debt issuance costs |
|
| (373 | ) |
|
| (432 | ) |
Accrued paid-in-kind interest |
|
| 2,769 |
|
|
| 1,806 |
|
Loan balance, ending |
| $ | 27,396 |
|
| $ | 26,374 |
|
At September 30, 2021, we are in compliance with covenants in the New ABL Facility and Term Loan.
Interest Expense
Interest expense for the three months ended September 30, 2021 was $1.7 million, and was comprised of $1.0 million in interest on the New ABL Facility as well as PIK interest on the Term Loan, $0.3 million amortization of financing fees, and $0.4 million commitment fees. Interest expense for the three months ended September 30, 2020 was $2.8 million from the DIP ABL Credit Agreement and the DIP Term Facility and was comprised of $2.6 million amortization of financing fees and $0.2million of commitment fees.
Fair Value Measurements
The fair value of our Term Loan was determined based on observable market data provided by a third party for similar types of debt which are considered Level 2 inputs within the fair value hierarchy. The carrying value of our Term Loan as of September 30, 2021 and June 30, 2021 was $27.4 million and $26.4 million, respectively. The fair value of our Term Loan as of September 30, 2021 and June 30, 2021 was $30.4 million and $29.6 million, respectively.
3.4. Revenue recognition —
Our revenue is earned from sales of merchandise within our stores and is recorded at the point of sale and conveyance of merchandise to customers. Revenue is measured based on the amount of consideration that we expect to receive, reduced by point of sale discounts and estimates for sales returns, and excludes sales tax. Payment for our sales is due at the time of sale. We maintain a reserve for estimated returns, as well as a corresponding returns asset in “Other Assets” in the Consolidated Balance Sheet,Sheets, and we use historical customer return behavior to estimate our reserve requirements. NaN impairment of the returns asset was identified or recorded as of December 31, 2020.September 30, 2021. 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
12
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$0.1 million in the second quarter of fiscalthree months ended September 30, 2021 and was $0.1$0.05 million infor the second quarter of fiscal 2020. Breakage income recognized was $0.1 million in the first sixthree months of fiscal 2021 and was $0.2 million in the first six months of fiscalended September 30, 2020. The gift card liability is included in “Accrued liabilities” in the Consolidated Balance Sheet.Sheets. We will continue to evaluate whether and how store closures may affect customer behavior with respect to sales returns and gift card redemption and related breakage.
4. Share-based5. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
|
| September 30, |
|
| June 30, |
| ||
|
| 2021 |
|
| 2021 |
| ||
Sales and use tax |
| $ | 3,582 |
|
| $ | 2,698 |
|
Self-insurance reserves |
|
| 9,798 |
|
|
| 9,405 |
|
Wages, benefits and payroll taxes |
|
| 8,271 |
|
|
| 9,639 |
|
Property taxes |
|
| 2,069 |
|
|
| 1,510 |
|
Freight and distribution |
|
| 9,643 |
|
|
| 8,658 |
|
Capital expenditures |
|
| 333 |
|
|
| 348 |
|
Utilities |
|
| 1,058 |
|
|
| 1,466 |
|
Gift card liability |
|
| 1,020 |
|
|
| 1,045 |
|
Reorganization expenses |
|
| 288 |
|
|
| 6,337 |
|
Other expenses |
|
| 5,814 |
|
|
| 5,348 |
|
Total accrued liabilities |
| $ | 41,876 |
|
| $ | 46,454 |
|
6. Common Stock & Share-Based Incentive Plans
For a discussion of the exchange of our common stock and equity financing under the Plan of Reorganization, please see Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
Ownership Restrictions
In order to continue to assist the Company in preserving certain tax attributes (the “Tax Benefits”), the Company’s Amended and Restated Certificate of incorporation imposes certain restrictions on the transferability and ownership of the Company’s capital stock (the “Ownership Restrictions”). Subject to certain exceptions, the Ownership Restrictions restrict (i) any transfer that would result in any person acquiring 4.5% or more of our Common Stock, (ii) any transfer that would result in an increase of the ownership percentage of any person already owning 4.5% or more of our Common Stock, or (iii) any transfer during the five-year period following December 31, 2020 that would result in a decrease of the ownership percentage of any person already owning 4.5% or more of our Common Stock. Pursuant to the Company’s Amended and Restated Certificate of Incorporation, any transferee receiving shares of our Common Stock that would result in a violation of the Ownership Restrictions will not be recognized as a stockholder of the Company or entitled to any rights of stockholders. The Company’s Amended and Restated Certificate of Incorporation allows the Ownership Restrictions to be waived by the Company’s board of directors on a case by case basis. The Board of Directors has taken action to waive the restrictions with respect to sales of shares acquired in the Rights Offering by the Backstop Party.
The Ownership Restrictions will remain in effect until the earliest of (i) the repeal of Section 382 of the Internal Revenue Code or any successor statute if the board of directors determines the Ownership Restrictions are no longer necessary for preservation of the Tax Benefits, (ii) the beginning of a taxable year in which the board of directors determines no Tax Benefits may be carried forward, or (iii) such other date as shall be established by the board of directors.
Share-Based Incentive Plans
For a discussion of our share-based incentive plans, — please see Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
Restricted Stock Option Awards. We have established theAwards/Units
The Tuesday Morning Corporation 2008 Long-Term Equity Incentive Plan (the “2008 Plan”) and the Tuesday Morning Corporation 2014 Long-Term Incentive Plan as amended (the “2014 Plan”), which allow for the granting of stock options to directors, officers and key employees of the Company, and certain other key individuals who perform services for us and our subsidiaries. Equity awards may no longer be granted undertogether with the 2008 Plan, but equity awards granted under the 2008 Plan are still outstanding. Pursuant to the Plan of Reorganization, upon the Company’s emergence from bankruptcy, all outstanding equity awards remained in full force and effect under their existing terms. In addition, the Plan of Reorganization provided for an amendment to the 2014 Plan to increase the number of shares available for future awards by 2.4 million shares.
Stock options were awarded under the 2008 Plan and the 2014 Plan with a strike price at the fair market value equal to the closing price of our common stock on the date of the grant.
Options granted under the 2008 Plan and the 2014 Plan typically vest over periods of one to four years and expire ten years from the date of grant. Options granted under the 2008 Plan and the 2014 Plan may have certain performance requirements in addition to service terms. If the performance conditions are not satisfied, the options are forfeited. The exercise prices of stock options outstanding on 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 5.9 million shares available for grant under the 2014 Plan at December 31, 2020.
13
Restricted Stock Awards—The 2008 Plan and the 2014 Plan“Plans” authorize the grant of restricted stock awards to directors, officers, key employees and certain other key individuals who perform services for us and our subsidiaries. Equity awards may no longer be granted under the 2008 Plan, but restricted stock awards granted under the 2008 Plan are still outstanding.Plan. Restricted stock awards are not transferable, but bear certain rights of common stock ownership including voting and dividend rights. The 2014 Plan also authorizes the issuance of restricted stock units which, upon vesting, provide for the issuance of an equivalent number of shares of common stock or a cash payment based on the value of our common stock at vesting. Restricted units are not transferable and do not provide voting or dividend rights. Shares and units are valued at the fair market value of our common stock onat the date of the grant.award. Shares and units may be subject to certain performance requirements. If the performance requirements are not met, the restricted shares or units are forfeited. On September 15, 2021, Marc Katz was awarded 867,052 time-based and 867,052 performance-based restricted stock units as an incentive to become Principal and Chief Operating Officer and Paul Metcalf was awarded 289,017 time-based and 578,035 performance-based restricted stock units to become the Principal and Chief Merchant (the “Inducement Awards”). In addition, during the first quarter of fiscal 2022, the fiscal 2022 Long-Term Incentive Plan was approved by the Board of Directors and restricted stock units and performance stock units were granted under the 2014 Long-Term Incentive Plan. Under the 2008 PlanPlans and the 2014 Plan,Inducement Awards, as of December 31, 2020,September 30, 2021, there were 912,9331,093,747 shares of restricted stock awards and 1,067,5758,230,396 restricted stock units outstanding with award vesting periods, both performance-based and service-based, of one to fourfive years and a weighted average grant date fair value of $2.46$1.62 and $1.90$2.42 per share, respectively.
Performance-Based Restricted Stock Awards13
The following table summarizes information about restricted stock units, performance stock units, restricted stock awards and Performance-Based Stock Option Awards.performance stock awards granted and outstanding for the fiscal quarter ended September 30, 2021:
|
| Restricted and Performance Stock Units Number of Shares |
|
| Weighted- Average Fair Value at Date of Grant |
|
| Restricted and Performance Stock Awards Number of Shares |
|
| Weighted- Average Fair Value at Date of Grant |
| ||||
Outstanding at June 30, 2021 |
|
| 3,021,924 |
|
| $ | 2.83 |
|
|
| 1,708,368 |
|
| $ | 1.94 |
|
Granted during the quarter |
|
| 5,266,165 |
|
|
| 2.19 |
|
|
| - |
|
|
| - |
|
Vested during the quarter |
|
| (57,693 | ) |
|
| 3.25 |
|
|
| (215,859 | ) |
|
| 2.18 |
|
Forfeited during the quarter |
|
| - |
|
|
| - |
|
|
| (398,762 | ) |
|
| 2.69 |
|
Outstanding at September 30, 2021 |
|
| 8,230,396 |
|
| $ | 2.42 |
|
|
| 1,093,747 |
|
| $ | 1.62 |
|
As of December 31, 2020,September 30, 2021, there were 287,3486,693,401 unvested performance-based restricted stock awards and performance-based restricted stock units payableto be settled in stock.
Cash Settled Awards
We have granted stock-based awards to certain employees, which vest over a period of three to four years, and will be settled in cash outstanding under(“cash settled awards”). Both performance-based and time-based awards were granted. Except for the 2014 Plan.performance based awards which have been deemed unlikely to vest, the fair value of the cash settled awards at each reporting period is based on the price of our common stock. The fair value of the cash settled awards will be re-measured at each reporting period until the awards are settled.
The following table summarizes the activity of cash settled awards based on their initial grant date values, the three months ended September 30, 2021:
|
| Performance-Based |
|
| Service-Based |
|
| Total |
| |||
Outstanding at June 30, 2021 |
|
| 143,675 |
|
|
| 547,698 |
|
|
| 691,373 |
|
Granted during the quarter |
|
| - |
|
|
| 503,673 |
|
|
| 503,673 |
|
Vested during the quarter |
|
| - |
|
|
| (165,969 | ) |
|
| (165,969 | ) |
Forfeited during the quarter |
|
| - |
|
|
| (33,379 | ) |
|
| (33,379 | ) |
Outstanding at September 30, 2021 |
|
| 143,675 |
|
|
| 852,023 |
|
|
| 995,698 |
|
The liability associated with the cash settled awards was $0.6 million and $1.7 million at September 30, 2021 and June 30, 2021, respectively.
Share-based Compensation Costs.Costs Share-based
Share based compensation costs were recognized as followsconsisted of the following (in thousands):
| Three Months Ended December 31, |
|
| Six Months Ended December 31, |
| Three Months Ended September 30, |
| |||||||||||||||
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| 2021 |
|
| 2020 |
| ||||||
Amortization of share-based compensation during the period | $ | 315 |
|
| $ | 721 |
|
| $ | 744 |
|
| $ | 1,441 |
| $ | 1,155 |
|
| $ | 428 |
|
Amounts capitalized in ending inventory |
| (74 | ) |
|
| (190 | ) |
|
| (166 | ) |
|
| (391 | ) |
| (239 | ) |
|
| (92 | ) |
Amounts recognized and charged to cost of sales |
| 141 |
|
|
| 323 |
|
|
| 386 |
|
|
| 509 |
|
| 257 |
|
|
| 246 |
|
Amounts charged against income for the period before tax | $ | 382 |
|
| $ | 854 |
|
| $ | 964 |
|
| $ | 1,559 |
| $ | 1,173 |
|
| $ | 582 |
|
5.7. Commitments and contingencies —
Information related to the Chapter 11 Cases that were filed on May 27, 2020 is included in Note 1.
Notes 1 and 2 above.
In addition, we are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established when a loss is considered probable and are based on management’s best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.
6.8. Leases—
We conduct substantially all operations from leased facilities, including our corporate offices in Dallas and the Dallas warehouse, distribution and retail complex, which are leased as of December 31, 2020, subsequent to the sale and leaseback of those facilities on that date.facilities. Our retail store locations, our corporate office and our distribution center are under operating leases that will expire over the next 1 to 1110 years. Many of our leases include options to renew at our discretion. We include the lease renewal option periods in the calculation of our operating lease assets and liabilities when it is reasonably certain that we will renew the lease. We also lease certain equipment under finance leases that generally expire within 60 months.4 years.
On December 7, 2020,In accordance with ASC 842, 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 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 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 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 continued into our second quarter of fiscal 2021. As a result of the remeasurements and terminations of rejected leases, we reduced our operating lease right-of-use assets by approximately $32 million and our operating lease liabilities by approximately $124 million, recording a gain of approximately $92 million, which is included in Reorganization items, net (see Note 2) in the unaudited interim Consolidated Statement of Operations.
14
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)(“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, |
| ||||||||||||||||||
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| Three Months Ended September 30, 2021 |
|
| Three Months Ended September 30, 2020 |
| ||||||
Operating lease cost | $ | 19,434 |
|
| $ | 23,424 |
|
| $ | 34,473 |
|
| $ | 47,550 |
|
| $ | 16,528 |
|
| $ | 15,039 |
|
Variable lease cost |
| 3,022 |
|
|
| 6,328 |
|
|
| 6,978 |
|
|
| 12,823 |
|
|
| 2,272 |
|
|
| 3,956 |
|
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
| 49 |
|
|
| 71 |
|
|
| 122 |
|
|
| 142 |
|
|
| 33 |
|
|
| 73 |
|
Interest on lease liabilities |
| 1 |
|
|
| 8 |
|
|
| 7 |
|
|
| 16 |
|
|
| — |
|
|
| 6 |
|
Total lease cost | $ | 22,506 |
|
| $ | 29,831 |
|
| $ | 41,580 |
|
| $ | 60,531 |
|
| $ | 18,833 |
|
| $ | 19,074 |
|
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 December 31, 2020:leases:
As of September 30, 2021 | ||||
Weighted average remaining lease term (in years) | ||||
Operating leases | 4.4 | |||
Finance leases | 0.5 | |||
Weighted average discount rate | ||||
Operating leases | 8.7% | |||
Finance leases | 2.4% |
|
| 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):
|
| Six Months Ended December 31, 2020 |
|
| Six Months Ended December 31, 2019 |
|
| Three Months Ended September 30, 2021 |
|
| Three Months Ended September 30, 2020 |
| ||||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
| $ | 31,218 |
|
| $ | 44,037 |
|
| $ | 17,050 |
|
| $ | 16,732 |
|
Operating cash flows from finance leases |
|
| 7 |
|
|
| 16 |
|
|
| 9 |
|
|
| 5 |
|
Financing cash flows from finance leases |
|
| 120 |
|
|
| 142 |
|
|
| 217 |
|
|
| 69 |
|
Right-of-use assets obtained in exchange for operating lease liabilities |
|
| (106,180 | ) |
|
| 10,573 |
|
|
| 4,304 |
|
|
| (115,285 | ) |
15
Maturities of lease liabilities were as follows as of December 31, 2020September 30, 2021 (in thousands):
| Operating Leases |
|
| Finance Leases |
|
| Total |
| Operating Leases |
|
| Finance Leases |
|
| Total |
| ||||||
Fiscal year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 (remaining) | $ | 34,595 |
|
| $ | 126 |
|
| $ | 34,721 |
| |||||||||||
2022 |
| 68,312 |
|
|
| 125 |
|
|
| 68,437 |
| |||||||||||
2022 (remaining) | $ | 52,506 |
|
| $ | 74 |
|
| $ | 52,580 |
| |||||||||||
2023 |
| 58,780 |
|
|
| — |
|
|
| 58,780 |
|
| 61,197 |
|
|
| — |
|
|
| 61,197 |
|
2024 |
| 46,392 |
|
|
| — |
|
|
| 46,392 |
|
| 47,298 |
|
|
| — |
|
|
| 47,298 |
|
2025 |
| 32,241 |
|
|
| — |
|
|
| 32,241 |
|
| 32,748 |
|
|
| — |
|
|
| 32,748 |
|
2026 |
| 19,766 |
|
|
| — |
|
|
| 19,766 |
|
| 20,264 |
|
|
| — |
|
|
| 20,264 |
|
2027 |
| 14,153 |
|
|
| — |
|
|
| 14,153 |
| |||||||||||
Thereafter |
| 28,635 |
|
|
| — |
|
|
| 28,635 |
|
| 14,931 |
|
|
| — |
|
|
| 14,931 |
|
Total lease payments | $ | 288,721 |
|
| $ | 251 |
|
| $ | 288,972 |
| $ | 243,097 |
|
| $ | 74 |
|
| $ | 243,171 |
|
Less: Interest |
| 52,449 |
|
|
| 21 |
|
|
| 52,470 |
|
| 41,176 |
|
|
| 1 |
|
|
| 41,177 |
|
Total lease liabilities | $ | 236,272 |
|
| $ | 230 |
|
| $ | 236,502 |
| $ | 201,921 |
|
| $ | 73 |
|
| $ | 201,994 |
|
Less: Current lease liabilities |
| 53,155 |
|
|
| 198 |
|
|
| 53,353 |
|
| 55,388 |
|
|
| 73 |
|
|
| 55,461 |
|
Non-current lease liabilities | $ | 183,117 |
|
| $ | 32 |
|
| $ | 183,149 |
| $ | 146,533 |
|
| $ | - |
|
| $ | 146,533 |
|
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 December 31, 2020,September 30, 2021, there were 0 operating lease payments for legally binding minimum lease payments for leases signed but not yet commenced.
7.9. Earnings per common share —
The Company uses the two-class method of computing basic EPS due to the existence of non-vested restricted stock awards with non-forfeitable rights to dividends or dividend equivalents (referred to as participating securities). Basic EPS is computed using the weighted average number of common shares outstanding during each of the respective years. Diluted EPS is computed using the weighted average number of common and common equivalent shares outstanding during each of the respective years using the more dilutive of either the treasury stock method or two-class method. The difference between basic and diluted shares, if any, largely results from common equivalent shares, which represents the dilutive effect of the assumed exercise of certain outstanding share options and warrants, the assumed vesting of restricted stock granted to employees and directors, or the satisfaction of certain necessary conditions for contingently
16
issuable shares. The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except per share amounts):
| Three Months Ended December 31, |
|
| Six Months Ended December 31, |
| Three Months Ended September 30, |
| |||||||||||||||
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| 2021 |
|
| 2020 |
| ||||||
Net income | $ | 40,339 |
|
| $ | 10,937 |
|
| $ | 58,963 |
|
| $ | 1,309 |
| |||||||
Net income/(loss) | $ | (14,603 | ) |
| $ | 18,624 |
| |||||||||||||||
Less: Income to participating securities |
| (137 | ) |
|
| (267 | ) |
|
| (274 | ) |
|
| (15 | ) |
| — |
|
|
| — |
|
Net income attributable to common shares | $ | 40,202 |
|
| $ | 10,670 |
|
| $ | 58,689 |
|
| $ | 1,294 |
| |||||||
Net income/(loss) attributable to common shares | $ | (14,603 | ) |
| $ | 18,624 |
| |||||||||||||||
Weighted average number of common shares outstanding — basic |
| 45,511 |
|
|
| 45,218 |
|
|
| 45,460 |
|
|
| 45,086 |
|
| 84,310 |
|
|
| 45,462 |
|
Effect of dilutive stock equivalents |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| — |
|
|
| — |
|
Weighted average number of common shares outstanding — diluted |
| 45,511 |
|
|
| 45,218 |
|
|
| 45,460 |
|
|
| 45,086 |
|
| 84,310 |
|
|
| 45,462 |
|
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 |
| |||||||
Net income/(loss) per common share — basic | $ | (0.17 | ) |
| $ | 0.41 |
| |||||||||||||||
Net income/(loss) per common share — diluted | $ | (0.17 | ) |
| $ | 0.41 |
|
For the quartersquarter ended December 31,September 30, 2021, all options, warrants and awards representing the right to purchase shares were excluded in the dilutive earnings per share calculation because the assumed exercise of such options, warrants and awards would have been anti-dilutive. For the quarter ended September 30, 2020, options, warrants and December 31, 2019, optionsawards 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. ForOn February 9, 2021, as part of the six months ended December 31, 2020 and December 31, 2019, options representingRights Offering, the rightsCompany issued warrants to purchase approximately 2.610 million weighted average shares of common stock with an exercise price of $1.65 and 3.0 million weighted average shares, respectively, were excluded in the dilutive earnings per share calculation, because the assumed exercisea five year term, all which remained outstanding as of such options would have been anti-dilutive.
8. Debt —
16
Pre-Petition Financing Agreements
Through December 31, 2020, we were party to 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 (the “Pre-Petition ABL Credit Agreement”). The availability of funds under the Pre-Petition ABL Credit Agreement was limited to the lesser of a calculated borrowing base and the lenders’ aggregate commitments under the Pre-Petition ABL Credit Agreement. Our indebtedness under the Pre-Petition ABL Credit Agreement was secured by a lien on substantially all of our assets.
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 December 31, 2020, we had 0 amounts outstanding 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 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 amortization of financing fees of $2.3 million and commitment fees of $0.2 million. Interest expense for the second quarter of fiscal 2020 from the Pre-Petition ABL Credit Agreement of $0.7 million was comprised of interest of $0.5 million, commitment fees of $0.1 million, and the amortization of financing fees of $0.1 million. Interest expense for the first six months of 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.
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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.September 30, 2021.
Pursuant to the terms of the Term Loan Credit Agreement, the Term Loan has a maturity date of December 31, 202410. Property 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,equipment, 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 December 31, 2020September 30, 2021 and June 30, 20202021 was $145.2$155.1 million and $231.1$151.9 million, respectively. The decrease in the current year was due to the stores closed permanently during the first quarter of fiscal 2021, the Phoenix distribution center closure and the sale-leaseback of our corporate office and Dallas distribution center properties in the second quarter of fiscal 2021 which resulted in property and equipment disposals, as discussed in Note 13.
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 December 31, 2020,September 30, 2021, 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 thatof our temporary store closures and COVID-19 had on cash flows.closures. As a result of this assessment, while 3 stores did present indicators of impairment, we determined that 0 additional store fixed asset impairment was required as the undiscounted projected future cash flows for each store sufficiently recovered the carrying value of the related asset group. Due to the uncertainty around COVID-19, our projected future cash flows may differ materially from actual results. While we believe our estimates and 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.
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11. Income taxes
10. Income taxes —TheThe Company or 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 prior to fiscal 2016 and are no longer subject to federal income tax examinations for years prior to fiscal 2013.
On March 27, 2020, in an effort to mitigate the economic impact of the COVID-19 pandemic, the U.S. Congress enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act includes certain corporate income tax provisions, which among other things, included a five-year carryback of net operating losses and acceleration of the corporate alternative minimum tax credit. The Company has evaluated the CARES Act and it is not expected to have a material impact on the income tax provision. The CARES Act also contains provisions for deferral of the employer portion of social security taxes incurred through the end of calendar 2020 and an employee retention credit, a refundable payroll credit for 50% of wages and health benefits paid to employees not providing services due to the pandemic. As a result of the CARES Act, we continuedcontinue to defer qualified payroll taxes through December 31, 2020. Current and non-current qualified deferred payroll taxes are each $2.1 million as of December 31, 2020.intend to claim the employee retention credit.
The effective tax ratesrate for the quartersquarter ended December 31, 2020September 30, 2021 was 0.3% and 2019 were 1.9% and (3.8%), respectively.resulted in a tax benefit for the quarter. The effective tax ratesrate for the six monthsquarter ended December 31,September 30, 2020 and 2019 were 0.9% and (1.4%was (1.3%), respectively.resulting in tax benefit for the prior year quarter. A full valuation allowance is currently recorded against substantially all of the Company’s deferred tax assets. A deviation from the customary relationship between income tax expense and (benefit) and pretax income income/(loss) results from the effects of the valuation allowance.
11. Cash, cash equivalents
12. Related Party
On November 16, 2020, following approval of the Bankruptcy Court, the Company and restricted cash — CashOsmium Partners LLC (“Osmium Partners”) entered into a backstop commitment agreement (the “Backstop Commitment Agreement”), pursuant to which Osmium Partners agreed that Osmium Partners or an affiliate would serve as the backstop party (the “Backstop Party”) and cash equivalents include credit card receivables andpurchase all highly liquid instruments with original maturitiesunsubscribed shares for a price of three months or less. Cash equivalents are carried at cost,$1.10 per share in a $40 million rights offering (the “Rights Offering”), pursuant to which approximates fair value. Aseligible holders of December 31, 2020 andthe Company’s common stock could purchase up to $24 million of shares of the Company’s common stock for a price of $1.10 per share. The Rights Offering is described in more detail in Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended June 30, 2021. Osmium Partners (Larkspur SPV) LP (“Larkspur SPV”), jointly owned by Osmium Partners and Tensile Capital Partners Master Fund LP (“TCM”), was formed to serve as the Backstop Party. In addition, on November 15, 2020, credit card receivables from third party consumer credit card providers were $1.9the Company and TCM entered into a commitment letter (the “Commitment Letter”) pursuant to which TCM agreed to provide $25 million in subordinated debt financing to the Company.
In accordance with the Plan of Reorganization 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. 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 ofCommitment Letter, on December 31, 2020, the carrying valueCompany, Alter Domus (US), LLC, as administrative agent, and the lenders named therein, including TCM and an affiliate of Osmium, entered into the intellectual property,Term Loan Credit Agreement described in Note 3 above which included indefinite-lived trademarks, was $1.6provided for the $25 million Term Loan to the Company.
In accordance with the Plan of Reorganization and 0 impairment was identified or recorded.
13. Sale-leaseback — Onthe Backstop Commitment Agreement, on December 7,31, 2020, wethe Company, Osmium Partners and Larkspur SPV (Osmium Partners and Larkspur SPV together, the “Osmium Group”) entered into an agreement pursuant to sell our corporate officewhich the Osmium Group is entitled to appoint 3 directors to the Company’s Board of Directors (the “Directors Agreement”). Pursuant to the Directors Agreement, Douglas J. Dossey of Tensile Capital Management LP, John H. Lewis of Osmium Partners and Dallas distribution center propertiesW. Paul Jones were appointed as members of the Company’s Board of Directors. The Directors Agreement entitles the Osmium Group to appoint an additional member of the Board of Directors under certain circumstances. The Directors Agreement also specifies various other board-related and leaseback those facilities. voting-related procedures and includes a standstill provision limiting certain actions by the Osmium Group.
On December 31, 2020,February 9, 2021, the Company received proceeds of approximately $40 million upon the closing of the Rights Offering, as contemplated by the Plan of Reorganization. In accordance with the authority granted us by the Bankruptcy Court, we executed those transactions. The leaseterms of the corporate office isBackstop Commitment Agreement, Larkspur SPV purchased 18,340,411 shares of the Company’s common stock in the Rights Offering for a terman aggregate purchase price of 10 yearsapproximately $20.2 million. In addition, in accordance with the Plan of Reorganization and the leaseBackstop Commitment Agreement, Larkspur SPV received (1) 1,818,182 additional shares 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 valueCompany’s common stock as payment of the underlying assets soldcommitment fee for serving as Backstop Party in the Rights Offering, and we have no continuing involvement(2) a warrant to purchase 10 million additional shares of the Company’s common stock at a purchase price of $1.65 per share.
Based on Schedule 13D filings made by Osmium Partners and TCM, and their respective affiliates, on February 19, 2021, Osmium Partners and TCM each are deemed to beneficially own the 30,158,593 shares of the Company’s stock beneficially owned by Larkspur SPV (representing approximately 31.4% of outstanding shares). Based on the Schedule 13D and subsequent filings with the properties sold other than a normal leaseback.SEC, Osmium Partners beneficially owns an additional 2,026,840 shares of the Company’s common stock.
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.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should beWe encourage you to read this "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") in conjunction with our unaudited interim consolidated financial statements and the notes theretocorresponding section included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.2021.
Business OverviewBackground
We are one of the original off-price retailers and a leading destination for unique home and lifestyle goods, selling high-quality products at prices generally below those found in boutique, specialty and department stores, catalogs and on-line retailers. Our customers come to us for an ever-changing, exceptional assortment of brand names at great prices. Our strong value proposition has established a loyal customer base, who we engage regularly with social media, email, direct mail and digital media.
The COVID-19 pandemic has had an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow. On March 25, 2020, we temporarily closed all of our 687 stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. As allowed by state and local jurisdictions, 685 of our stores gradually reopened as of the end of June 2020 and two stores were permanently closed during the quarter. In accordance with our bankruptcy Plan of Reorganization, described below, we completed the permanent closure of 197 stores in the first quarter of 2021 and the closure of our Phoenix distribution center in the second quarter of 2021. In addition, as part of our restructuring, we secured financing to pay the creditors in accordance with the plan of reorganization and to fund planned operations and expenditures.
Future impacts from the COVID-19 pandemic will depend on the potential further geographic spread and duration of the ongoing pandemic, the timing and extent of recovery in traffic and consumer spending in our stores, the extent and duration of ongoing impacts to domestic and international supply chains and the related impacts on the flow, availability and cost of products, the production and administration of effective medical treatments and vaccines, and the actions that may be taken by various governmental authorities and other third parties in response to the pandemic.
Emergence from Chapter 11 Bankruptcy Proceedings
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Bankruptcy Filing and Going Concern
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| During the pendency of the Chapter 11 Cases, we continued to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy |
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| • | 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. However, the closing of the Rights Offering was considered a critical component to the execution of our confirmed Plan of Reorganization, therefore, we continued to apply the requirements of ASC 852 – Reorganizations until that transaction closed on February 9, 2021. In connection |
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Key Metrics for the Quarter Ended September 30, 2021
Key operating metrics for continuing operations for the three months ended September 30, 2021 include:
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• | Gross margin was 28.8%, compared to 31.6% for the same period last year. |
• | Selling, general and administrative expenses (“SG&A”) decreased $1.8 million or 2.9% to $60.3 million, from $62.1 million for the same period last year. As a percentage of sales, SG&A was 34.1% compared to 38.1% for the same period last year. |
• | Restructuring, impairment and abandonment charges were $2.4 million, compared to $5.5 million for the same period last year. |
• | Reorganization items, net were a loss of $1.3 million compared to a net benefit of $37.6 million for the same period last year. |
• | Our net loss was $14.7 million, or diluted net loss per share of $0.17 compared to a net income for the same period last year of $18.6 million, or diluted earnings per share of $0.41. |
• | As shown under the heading “Non-GAAP Financials Measures” below, EBITDA was a negative $9.5 million compared to a positive $25.5 million for the same period last year. Adjusted EBITDA was negative $5.7 million compared to a negative $6.0 million for the same period last year, |
Key balance sheet and liquidity metrics for the three months ended September 30, 2021 include:
• | Cash and cash equivalents at September 30, 2021 decreased $2.0 million to $4.5 million from $6.5 million at June 30, 2021. Restricted cash at September 30, 2021 decreased $22.2 million to $0.1 million from $22.3 million at June 30, 2021. The decrease in cash, cash equivalents and restricted cash were primarily driven by payments for bankruptcy court approved petition claims, legal and professional fees and payments to the Company’s vendors for inventory. See Note 2 to our |
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Quarter and Six-months Ended December 31, 2020
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21Store Data
The following table presents information with respect to our stores in operation during each of the fiscal periods:
Store Openings/Closings Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 Fiscal Year Ended June 30, 2021 Open at beginning of period 490 685 685 Opened — 2 2 Closed (1 ) (197 ) (197 ) Open at end of period 489 490 490 New stores are included in the same store sales calculation starting with the sixteenth month following the date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is generally considered the same store for purposes of this computation. Stores that are closed are included in the computation of comparable store sales until the month of closure. |
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Results of Operations
Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in the quarter ending December 31.
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There can be no assurance that the trends in sales or operating results will continue in the future.
Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020
Net sales for the quarter ended September 30, 2021 were $176.9 million, an increase of 9.5%, compared to $161.6 million for the same period last year, primarily driven by an increase in comparable store sales of 26.2%, partially offset by the completion of our permanent store closing plans approved through bankruptcy proceedings of 197 stores during the quarter ended September 30, 2020. The increase in comparable store sales was due to a 12.9% increase in average ticket and an 11.8% increase in customer transactions. Non-comparable store sales decreased by a total of $22.0 million primarily due to the permanent closure of 197 stores since the first quarter of fiscal 2021. Non-comparable store sales include the net effect of sales from new stores and sales from stores that have closed.
Gross margin for the quarter ended September 30, 2021 was $51.0 million, a decrease of 0.1% compared to $51.1 million for the same period last year. As a percentage of net sales, gross margin decreased to 28.8% in the first quarter fiscal 2022 compared with 31.6% in the first quarter of fiscal 2021. The decrease in gross margin as a percentage of net sales was primarily a result of higher supply chain and transportation costs recognized in the quarter ended September 30, 2021.
SG&A decreased $1.8 million to $60.3 million in the quarter ended September 30, 2021, compared to $62.1 million in the same period last year. As a percentage of net sales, SG&A decreased 430 basis points to 34.1% for the quarter ended September 30, 2021, compared to 38.4% in the quarter ended September 30, 2020. The decrease was due to lower store expenses on a smaller store base, including a significant decrease in store rents for both closed stores and renegotiated rents for the ongoing store base. Subsequent to the filing of the Chapter 11 Cases, we commenced negotiations with our landlords on substantially all of our ongoing leases, resulting in significant modifications and reduced lease costs.
Restructuring, impairment and abandonment charges were $2.4 million during the three months ended September 30, 2021, compared to $5.5 million during the quarter ended September 30, 2020. During the quarter ended September 30, 2021, adjustments include a software impairment charge of $2.1 million as well as $0.3 million in employee retention cost. During the quarter ended September 30, 2020, adjustments include restructuring, impairment and abandonment charges of $4.8 million primarily related to in our permanent store and Phoenix, Arizona distribution center closing plans as well as $0.7 million in severance and employee retention cost. Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021.
Our operating loss was $11.7 million for the quarter ended September 30, 2021 as compared to an operating loss of $16.5 million for the quarter ended September 30, 2020, an improvement of $4.8 million. The operating loss in the current year was primarily the result of the lower SG&A costs and restructuring, impairment and abandonment charges as discussed above.
Interest expense decreased $1.1 million to $1.7 million for the three months ended September 30, 2021 compared to $2.8 million in the same period last year. Interest expense for the three months ended September 30, 2021 was primarily due to the interest and amortization of financing fees incurred on our New ABL facility and accrued interest on our Term loan. Interest expense for the three months ended September 30, 2020 was due to amortization of financing fees incurred for the DIP financing. See Note 3 to our unaudited consolidated financial statements herein for additional information.
Reorganization items, net were $1.3 million for the quarter ended September 30, 2021 compared to a net benefit of $37.6 million in the quarter ended September 30, 2020, related to $1.1 million loss of claims related cost and $0.2 million of professional and legal fees related to our reorganization. The net benefit of $37.6 million in the quarter ended September 30, 2020, was due to a net gain of $47.5 million resulting from store lease terminations under our permanent closure plan partially offset by $9.8 million in professional and legal fees related to our reorganization.
Income tax benefit for the quarter ended September 30, 2021 was $0.05 million compared to $0.24 million in the quarter ended September 30, 2020. The effective tax rates for the first quarter 2021 and 2020 were 0.3% and (1.3%), respectively. We currently believe the expected effects on future year effective tax rates to continue to be nominal until the cumulative losses and valuation allowance are fully utilized.
Our net loss for the quarter ended September 30, 2021 was $14.6 million, or diluted net loss per share of $0.17 compared to a net income for the quarter ended September 30, 2020 of $18.6 million, or diluted net earnings per share of $0.41.
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
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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
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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 income,income/(loss), the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA, each of which is a non-GAAP financial measure (in thousands):
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Net income/(loss) (GAAP) | $ | 40,339 |
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| $ | 10,937 |
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| $ | 58,963 |
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| $ | 1,309 |
| $ | (14,603 | ) |
| $ | 18,624 |
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Depreciation and amortization |
| 3,922 |
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| 6,424 |
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| 8,306 |
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| 12,807 |
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| 3,397 |
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Interest expense, net |
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| 719 |
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Income tax benefit |
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EBITDA (non-GAAP) | $ | 47,554 |
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| $ | 15,480 |
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Restructuring, impairment and abandonment charges (2) |
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Reorganization items, net (3) |
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Adjusted EBITDA (non-GAAP) | $ | 812 |
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| $ | 18,536 |
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| $ | (5,216 | ) |
| $ | 17,039 |
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| $ | (6,028 | ) |
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(1) Adjustment includes charges related to share-based compensation programs, which vary from period to period depending on volume, timing and vesting of awards. We adjust for these charges to facilitate comparisons from period to period. | (1) Adjustment includes charges related to share-based compensation programs, which vary from period to period depending on volume, timing and vesting of awards. We adjust for these charges to facilitate comparisons from period to period. |
| (1) Adjustment includes charges related to share-based compensation programs, which vary from period to period depending on volume, timing and vesting of awards. We adjust for these charges to facilitate comparisons from period to period. |
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(2) Adjustment includes only certain restructuring expenses, including abandonment charges and compensation costs related to the 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. |
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(2) For the three months ended September 30, 2021, adjustments included restructuring, impairment and abandonment charges related to software impairment charges and employee retention cost. For the three months ended September 30, 2020, adjustments include restructuring, impairment and abandonment charges primarily related to our permanent store and Phoenix, Arizona distribution center closing plans as well as severance and employee retention cost. Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021. See note 2 to our unaudited consolidated financial statements herein for further discussion | (2) For the three months ended September 30, 2021, adjustments included restructuring, impairment and abandonment charges related to software impairment charges and employee retention cost. For the three months ended September 30, 2020, adjustments include restructuring, impairment and abandonment charges primarily related to our permanent store and Phoenix, Arizona distribution center closing plans as well as severance and employee retention cost. Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021. See note 2 to our unaudited consolidated financial statements herein for further discussion |
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(3) Adjustment includes only incremental professional and legal fees incurred after and as a direct result of the filing of the Chapter 11 Cases, along with gains resulting from lease terminations, gain on sale-leaseback, partially offset by estimated claims. Such items vary from period to period and are not considered in management's evaluation of the Company’s ongoing operations. |
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(3) For the three months ended September 30, 2021, adjustments included claims related cost as well as professional and legal fees related to our reorganization. For the three months ended September 30, 2020, adjustments included a gain resulting from store lease termination under our permanent closure plan offset by professional and lease fees related to our reorganization. See note 2 to our unaudited consolidated financial statements herein for further discussion | (3) For the three months ended September 30, 2021, adjustments included claims related cost as well as professional and legal fees related to our reorganization. For the three months ended September 30, 2020, adjustments included a gain resulting from store lease termination under our permanent closure plan offset by professional and lease fees related to our reorganization. See note 2 to our unaudited consolidated financial statements herein for further discussion |
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(4) For the three months ended September 30, 2021, adjustments included non-cash benefit recognized related to cash settled awards in our long-term incentive plan. | (4) For the three months ended September 30, 2021, adjustments included non-cash benefit recognized related to cash settled awards in our long-term incentive plan. |
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Three Months Ended December 31, 2020
Compared to the Three Months Ended December 31, 2019
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 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. Stores that are closed are included in the computation of comparable store sales until the month of closure. The decrease in comparable store sales was due to a 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 $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 217 store closures, slightly offset by two store openings, which have occurred since the end of the second quarter of fiscal 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.
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| Three Months Ended December 31, 2020 |
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| Three Months Ended December 31, 2019 |
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| Fiscal Year Ended June 30, 2020 |
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Stores open at beginning of period |
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| 490 |
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| 707 |
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| 714 |
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Stores opened during the period |
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| — |
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| — |
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| 1 |
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Stores closed during the period |
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| — |
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| (2 | ) |
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| (30 | ) |
Stores open at end of period |
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| 490 |
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| 705 |
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| 685 |
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We ended the second quarter of fiscal 2021 with 490 stores, compared to 705 stores at December 31, 2019. No stores were relocated during the second quarter of either fiscal 2021 or fiscal 2020.
Gross profit for the second quarter of fiscal 2021 was $60.1 million, a decrease of 43.2% compared to $105.8 million in gross profit for the second quarter of fiscal 2020. Gross profit as a percentage of net sales was 30.2% for the second quarter of fiscal 2021, compared to 32.6% for the second quarter of fiscal 2020. The decrease in gross margin was primarily a result of higher supply chain and transportation costs recognized in the current quarter, partially offset by lower markdowns.
Selling, general & administrative (SG&A) expenses for the second quarter of fiscal 2021 decreased $31.4 million to $63.3 million, compared to $94.7 million in the same period last year. The decrease in SG&A was primarily due to lower store expenses on a smaller store base, including a significant decrease in store rents for both closed stores and renegotiated rents for the ongoing store base. Subsequent to the petition date, we commenced negotiations with our landlords on substantially all of our ongoing leases, resulting in significant modifications and reduced lease costs. Labor costs and depreciation were also lower on the smaller store base. Also contributing to the favorable comparison were reduced advertising and lower corporate expenses including reductions in compensation costs and legal and professional fees. As a percentage of net sales, SG&A expenses were 31.9% for the second quarter of fiscal 2021 compared to 29.2% in the same period last year, deleveraging approximately 270 basis points, on lower sales.
Our operating loss was $4.3 million for the second quarter of fiscal 2021, compared to operating income of $11.1 million during the second quarter of fiscal 2020.
Interest expense was $2.5 million for the second quarter of fiscal 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 DIP Term Loan financing, partially offset by lower interest on reduced borrowings in the current period.
Income tax expense was $0.8 million in the second quarter of fiscal 2021, compared to income tax benefit of $0.4 million in the second quarter of the prior fiscal year. The effective tax rates for the second quarter of fiscal 2021 and fiscal 2020 were 1.9% and (3.8%), respectively. A full valuation allowance is currently recorded against substantially all of our deferred tax assets as of
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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.
Six Months Ended December 31, 2020
Compared to the Six Months Ended December 31, 2019
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%. New stores are included in the same store sales calculation starting with the sixteenth month following the date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is generally considered the same store for purposes of this computation. Stores that are closed are included in the computation of comparable store sales until the month of closure. The decrease in comparable store sales was due to a 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. 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 $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 217 store closures, slightly offset by two store openings, which have occurred since the end of the first six months of fiscal 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.
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| Six Months Ended December 31, 2020 |
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| Six Months Ended December 31, 2019 |
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| Fiscal Year Ended June 30, 2020 |
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Stores open at beginning of period |
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| 685 |
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| 714 |
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| 714 |
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Stores opened during the period |
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| 2 |
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| 1 |
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| 1 |
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Stores closed during the period |
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| (197 | ) |
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| (10 | ) |
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| (30 | ) |
Stores open at end of period |
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| 490 |
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| 705 |
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| 685 |
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We ended the first six months of fiscal 2021 with 490 stores, compared to 705 stores at December 31, 2019. No stores were relocated during the first six months of fiscal 2021, while one store was relocated in the first six months of the prior fiscal year.
Gross profit for the first six months of fiscal 2021 was $111.1 million, a decrease of 40.6% compared to $186.9 million in gross profit for the first six months of fiscal 2020. Gross profit as a percentage of net sales was 30.9% for the first six months of fiscal 2021, compared to 34.1% for the first six months of fiscal 2020. The decrease in gross margin was primarily a result of higher supply chain and transportation costs recognized in the current quarter, partially offset by lower markdowns.
Selling, general & administrative (SG&A) expenses for the first six months of fiscal 2021 decreased $59.1 million to $125.4 million, compared to $184.5 million in the same period last year. The decrease in SG&A was primarily due to lower store expenses on a smaller store base, including a significant decrease in store rents for both closed stores and renegotiated rents for the ongoing store base. Subsequent to the petition date, we commenced negotiations with our landlords on substantially all of our ongoing leases, resulting in significant modifications and reduced lease costs. Labor costs and depreciation were also lower on the smaller store base. Also contributing to the favorable comparison were reduced advertising costs and lower corporate expenses including reductions in compensation costs and legal and professional fees. As a percentage of net sales, SG&A expenses were 34.8% for the first six months of fiscal 2021 compared to 33.6% in the same period last year, deleveraging approximately 120 basis points, on lower sales.
Our operating loss was $20.8 million for the first six months of fiscal 2021, compared to operating income of $2.4 million during the first six months of fiscal 2020.
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Interest expense was $5.3 million for the first six months of fiscal 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 six months of fiscal 2021, compared to income tax benefit of $18 thousand for the same period in the prior fiscal year. The effective tax rates for the first six months of fiscal 2021 and fiscal 2020 were 0.9% and (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.
Liquidity and Capital Resources
Cash Flows for the Period Ended December 31, 2020September 30, 2021
Cash Flows from Operating Activities
NetIn the first quarter of fiscal 2022, cash used in operating activities for the six months ended December 31, 2020 was $10.6$33.2 million, compared to cash provided by operating activities of $15.2 million in the same period last year. Net cash used in operations in the first quarter of $28.1 million2022 was primarily driven by the inventory purchases and payments for the six months ended December 31, 2019. The higherbankruptcy court approved pre-petition claims, legal and professional fees. Net cash usage inprovided by operating activities in the current yearfirst quarter of 2021 was primarily the result of $18.9 milliona lower cash use for inventory due to lower purchases partially offset by higher cash use in accounts payable. Additionally, July 2020 rents were paid at the end of cash paid for reorganization expenses, $23.2 million lower operating incomeJune 2020, in the current year, and $6.1 million higherfourth quarter of fiscal 2020, favorably impacting cash usageflows from operations in the first quarter of fiscal 2021. Prepayment of rents in the first quarter of fiscal 2021 for prepaid expenses. There were no significant changes to our vendor payments policy during the six months ended December 31, 2020.second quarter decreased significantly.
CashCash Flows from Investing Activities
Net cash used in investing activities for the first quarter of fiscal 2022 of $1.8 million related primarily to capital expenditures in enhancements to our store fleet and new stores, as well as investments in technology. Net cash provided by investing activities for the six months ended December 31, 2020
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first quarter of fiscal 2021 of $0.5 million related primarily to $68.6 million$1.1 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$0.6 million of capital expenditures in the first six months of fiscal 2021. Net cash used in investing activities for the six months ended December 31, 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, equipment, and systems along with improvements related to our corporate office, technology and equipment.
We currently expect to incur capital expenditures, net of construction allowances received from landlords, of approximately $3 million to $5 million in fiscal year 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 $21.6$10.8 million for the six months ended December 31, 2020first quarter of fiscal 2022 related primarily to the proceeds of $25.0 from the Term Loan, partially offset by the payment of financing fees of $3.2 million.net borrowings under our New ABL Facility. Net cash used in financing activities of $26.3$0.5 million related primarily to $0.5 million for the prior year period related primarily to $31.1 millionthe payments of net payments onfinancing fees paid for our Pre-Petition ABL Credit Agreement, along with a $5.0 million cash overdraft provision.DIP finance agreements.
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Liquidity
Historically, we have financed our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under a credit agreement providing for an asset-based, five year senior secured revolving credit facility infacility.
On December 31, 2020, as contemplated by our Plan of Reorganization, the original amount of up to $180.0 million that was scheduled to mature on January 29, 2024Company and its subsidiaries entered into a Credit Agreement (the “Pre-Petition“New ABL Credit Agreement”). The availability with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A. and Bank of funds under the Pre-Petition ABL Credit Agreement was limited to the lesser ofAmerica, N.A. that provides for a calculated borrowing base and the lenders’ aggregate commitments under the Pre-Petition ABL Credit Agreement. Our indebtedness under the Pre-Petition ABL Credit Agreement was secured by a lien on substantially all of our assets.
The COVID-19 pandemic has had, and could continue to have, an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow. As of March 25, 2020, we temporarily closed all of our stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. Stores gradually reopened as allowed by state and local jurisdictions, and all but two of our stores had re-opened by the end of fiscal 2020. The scope and duration of this pandemic and the related disruption to our business and financial impacts cannot be reasonably estimated at this time. While we have taken actions to minimize costs, some of which are permanent including the closure of 197 stores and the closure of our Phoenix distribution center, and mitigate the related risks, there can be no assurance that these measures will continue to provide benefit or that they will be adequate to mitigate future changes in circumstances.
The filing of the Chapter 11 Cases was an event of default under the Pre-Petition ABL Credit Agreement and no further borrowings were available under the Pre-Petition ABL Credit Agreement. To provide for liquidity during the Chapter 11 Cases, we entered into agreements for debtor-in-possession financing. On May 29, 2020, in accordance with an order of the Bankruptcy Court, Debtors entered into the DIP ABL Credit Agreement, which provided for a super priority secured debtor-in-possession revolving credit facility in an aggregate amount of up$110.0 million (the “New ABL Facility”). The New ABL Credit Agreement includes conditions to $100 million. 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. For additional information regarding the New ABL Facility, see Note 3 to our unaudited consolidated financial statements herein.
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 DIP ABL Credit Agreement, amounts available for advances were subject to a borrowing base generally consistent with the borrowing base under the Pre-Petition ABL Credit Agreement, subject to certain agreed upon exceptions. 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, 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, the Term Loan is secured by a second lien on the collateral securing the New ABL Facility and completeda first lien on certain other assets of the sale-leaseback transactionsCompany 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 respecta change of control of the Company as described in the Term Loan Credit Agreement. The Term Loan Credit Agreement also includes customary covenants and events of default. As of September 30, 2021, the outstanding principal balance of the Term Loan was $27.4 million, net of debt issuance costs. For additional information regarding the Term Loan, see Note 3 to our corporate office and Dallas distribution center properties. See Notes 8 and 13 to theunaudited consolidated financial statements herein. In addition, we commenced the $40 million Rights Offering, which we expect to complete 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.
Following our legal emergence from bankruptcy,Going forward, we expect to fund itsour operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under the New ABL Facility.
As of September 30, 2021, we had $22.4 million of borrowings outstanding under our New ABL Facility and, $13.8 million of letters of credit outstanding. Taking into account $10.0 million of borrowing capacity that is unavailable until December 31, 2020, cash and cash equivalents, excluding restricted cash, were $26.22021, we have borrowing availability of $39.7 million and total liquidity,under our New ABL Facility, as of September 30, 2021.
Liquidity, defined as cash and cash equivalents plus the $45.9$39.7 million availability for borrowing under theour New ABL Facility, was $72.1$44.2 million as of December 31, 2020.September 30, 2021.
We believe that our plans, already implemented and continuingincurred capital expenditures, net of construction allowances received from landlords, of approximately $1.4 million in the first quarter of fiscal 2022. Capital expenditures are anticipated to be implemented, will mitigate$9.1 million total for fiscal year 2022. The amounts include the conditions and events thatexpected costs to open approximately eight stores, costs to enhance our store fleet, investment in technology as well as our Dallas distribution center.
We do not presently have raised substantial doubt aboutany plans to pay dividends or repurchase shares of our common stock. Under the entity’s ability to continue as a going concern. However, due to the uncertainty around the scope and durationterms of the COVID-19 pandemicour New ABL Credit Agreement and the related disruptionTerm Loan, we are subject 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 torestrictions on our ability to continue as a going concern.pay dividends or repurchase shares of our common stock. Under the terms of our New ABL Credit Agreement, we must maintain certain minimum levels of borrowing availability, and under the Term Loan any amounts paid for these purposes may not exceed $2 million.
Off-Balance Sheet Arrangements and Contractual Obligations
We had no off-balance sheet arrangements as of December 31, 2020.September 30, 2021.
Except as discussed in Notes 1, 6 and 8 to the Consolidated Financial Statements, thereThere have been no material changes outside the ordinary course of business from the disclosures relating to our contractual obligations contained under “Contractual Obligations” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includedas discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. Note 6 herein reflects the updated maturities of lease liabilities as of December 31, 2020, subsequent to renegotiations with our landlords and termination of rejected leases.2021.
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Critical Accounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited 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 herein, as of December 31, 2020,September 30, 2021, there were no changes to our critical accounting policies from those listed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.2021.
Under the retail inventory method, permanent markdowns result in cost reductions in inventory at the time the markdowns are taken. We also utilize promotional markdowns for specific marketing efforts used to drive higher sales volume and customer transactions for a specified period of time. Promotional markdowns do not impact the value of unsold inventory and thus do not impact cost of sales until the merchandise is sold. Markdowns and damages during the secondfirst quarter of fiscal 20212022 were 3.6%3.5% of sales compared to 5.0%4.1% 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 December 31, 2020September 30, 2021 would result in a decline in gross profitmargin and diluted incomeloss per share for the secondfirst quarter of fiscal 20212022 of $0.6$0.9 million and $0.01, respectively.
For a further discussion of the judgments we make in applying our accounting policies, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.2021.
Recent Accounting Pronouncements
Please refer to Note 1 of our unaudited consolidated financial statements herein 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, 2020 and Part II, Item 1A “Risk Factors” of this Current Report on Form 10-Q for examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. These risks, uncertainties and events also include, but are not limited to, the following:
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The forward-looking statements made in this Form 10-Q relate only to events as of the date on which the statements are made. Except as may be required by law, we disclaim obligations to update any forward-looking statements to reflect events or
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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 |
Not required.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
OurThe Company's management, with the participation of ourthe Company's principal executive officer ("CEO") and our principal financial officer ("CFO"), evaluated the effectiveness of the design and operation of ourCompany's disclosure controls and procedures as of December 31, 2020. The term “disclosure controls and procedures,” as(as defined in Rules 13a-15(e) and 15d-15(e)15d15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Act”"Exchange Act"), means) as of the end of the period covered by this report. Based on this evaluation, the CEO and CFO have concluded that, as of the end of such period, the Company's disclosure controls and other procedures of a company that are designedwere effective to ensure information that informationis required to be disclosed by a companythe Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’sSEC's rules and forms. Disclosure controlsforms and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is(ii) accumulated and communicated to the company’sCompany's management, including its principal executivethe CEO and principal financial officers, or persons performing similar functions,CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weakness in internal control over financial reporting described below.
During our fiscal 2020 year-end closing process, we identified a material weakness in internal control related to ineffective assessment of impairment of long-lived assets. Management’s estimation of fair value did not appropriately utilize market participant assumptions. The material weakness resulted in a material misstatement in our June 30, 2020 financial statements which was identified and corrected prior to filing. There were no restatements of prior period financial statements and no change in previously released financial results were required as the result of the control deficiency.
Changes in Internal Control Over Financial Reporting
We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weakness are remediated. We are designing and implementing our remediation plan for the material weakness in internal control over financial reporting described above, which includes steps to improve the operation and monitoring of control activities and procedures associated with our impairment assessment. We will consider the material weakness remediated after the applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectivelyT.
Other than as described above, therehere were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2020September 30, 2021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. | Legal Proceedings |
Information related to the Chapter 11 Cases that were filed on May 27, 2020 is included in Note 1 in the Notes2 to Consolidated Financial Statements.
our unaudited consolidated financial statements herein.
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.
Item 1A. | Risk Factors |
We believe there have been no material changes from our risk factors previously disclosed in Part 1, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.2021.
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Item 6. | Exhibits |
Exhibit |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. | |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Document | |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
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101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document | |
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101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document | |
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101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
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104 |
| Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* | The certifications attached hereto as Exhibit 32.1 and Exhibit 32.2 are furnished with this Quarterly Report on Form 10-Q and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
† | Management contract or compensatory plan or arrangement |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TUESDAY MORNING CORPORATION | ||
| (Registrant) | ||
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DATE: | By: |
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Executive Vice President and Chief Financial Officer (Principal Financial
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