UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number
(Exact Name of Registrant as Specified in its Charter)
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(State or Other Jurisdiction of |
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(I.R.S. Employer |
Incorporation or Organization) |
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Identification Number) |
(Address of principal executive offices) (Zip code)
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(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 |
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Trading Symbol |
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Name of each exchange on which registered |
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The |
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.
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).
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 |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class |
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Outstanding at May 9, 2022 |
Common Stock, par value $0.01 per share |
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Table of Contents
PART I. |
4 |
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ITEM 1. |
4 |
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Condensed Consolidated Balance Sheets as of April 2, 2022 and June 30, 2021 |
4 |
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5 |
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6 |
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7 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
8 |
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ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
24 |
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ITEM 3. |
32 |
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ITEM 4. |
32 |
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PART II. |
33 |
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ITEM 1. |
33 |
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ITEM 1A. |
33 |
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ITEM 6. |
34 |
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35 |
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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; impacts to general economic conditions and supply chains from the disruption in Europe; impacts of inflation and increasing interest rates; our ability to continuously attract buying opportunities for off-price merchandise and anticipate consumer demand; our ability to obtain merchandise on varying payment terms; our ability to successfully manage our inventory balances profitably; our ability to effectively manage our supply chain operations; loss of, disruption in operations of, or increased costs in the operation of our distribution center facility; our ability to generate sufficient cash flows, maintain compliance with our debt agreements and continue to access the capital markets; unplanned loss or departure of one or more members of our senior management or other key management; increased or new competition; our ability to maintain and protect our information technology systems and technologies and related improvements to support our growth; increases in fuel prices and changes in transportation industry regulations or conditions; changes in federal tax policy including tariffs; the success of our marketing, advertising and promotional efforts; our ability to attract, train and retain quality employees in appropriate numbers, including key employees and management; increased variability due to seasonal and quarterly fluctuations; our ability to protect the security of information about our business and our customers, suppliers, business partners and employees; our ability to comply with existing, changing and new government regulations; our ability to manage risk to our corporate reputation from our customers, employees and other third parties; our ability to manage litigation risks from our customers, employees and other third parties; our ability to manage risks associated with product liability claims and product recalls; the impact of adverse local conditions, natural disasters and other events; our ability to manage the negative effects of inventory shrinkage; our ability to manage exposure to unexpected costs related to our insurance programs; increased costs or exposure to fraud or theft resulting from payment card industry related risk and regulations; our ability to meet all applicable requirements for continued listing of our common stock on The Nasdaq Stock Market, including the minimum bid requirement of $1.00 per share, and our ability to maintain an effective system of internal controls over financial reporting. The Company’s filings with the SEC are available at the SEC’s web site at www.sec.gov.
The forward-looking statements made in this Form 10-Q relate only to events as of the date on which the statements were made. Except as may be required by law, the Company disclaims obligations to update any forward-looking statements to reflect events and circumstances after the date on which the statements were made or to reflect the occurrence of unanticipated events. Investors are cautioned not to place undue reliance on any forward-looking statements.
3
PART I — FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Tuesday Morning Corporation
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share and per share data)
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April 2, |
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June 30, |
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2022 |
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2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Inventories |
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Prepaid expenses |
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Other current assets |
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Total Current Assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Deferred financing costs |
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Other assets |
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Total Assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued liabilities |
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Operating lease liabilities |
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Total Current Liabilities |
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Operating lease liabilities — non-current |
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Borrowings under revolving credit facility |
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Long term debt (see Note 3 for amounts due to related parties) |
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Asset retirement obligation — non-current |
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Other liabilities — non-current |
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Total Liabilities |
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— |
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— |
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Stockholders’ equity: |
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Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Retained deficit |
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( |
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( |
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Less: |
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( |
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( |
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Total Stockholders’ Equity |
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Total Liabilities and Stockholders’ Equity |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Tuesday Morning Corporation
Condensed Consolidated Statements of Operations (unaudited)
(In thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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April 2, |
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March 31, |
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April 2, |
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March 31, |
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2022 |
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2021 |
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2022 |
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2021 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross margin |
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Selling, general and administrative expenses |
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Restructuring, impairment and abandonment charges |
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Operating loss before interest, reorganization and other income/(expense) |
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( |
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( |
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( |
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( |
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Other income/(expense): |
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Interest expense |
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( |
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( |
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( |
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( |
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Reorganization items, net |
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( |
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( |
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Other income/(expense), net |
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( |
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Other income/(expense) total |
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( |
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( |
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( |
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Earnings/(loss) before income taxes |
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( |
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( |
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( |
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Income tax expense |
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Net earnings/(loss) |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Earnings Per Share |
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Net earnings/(loss) per common share: |
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Basic |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Diluted |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Weighted average number of common shares: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Tuesday Morning Corporation
Condensed Consolidated Statements of Stockholders' Equity (unaudited)
(In thousands)
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Common Stock |
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Additional |
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Retained |
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Treasury |
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Total |
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Shares |
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Amount |
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Capital |
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Deficit |
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Stock |
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Equity |
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Balance at June 30, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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( |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Shares issued or canceled in connection with |
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( |
) |
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( |
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— |
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— |
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Balance at September 30, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net earnings |
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— |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Shares issued or canceled in connection with |
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( |
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— |
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— |
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— |
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— |
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— |
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Balance at December 31, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Shares issued or canceled in connection with |
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— |
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( |
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— |
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— |
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( |
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Balance at April 2, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Common Stock |
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Additional |
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Retained |
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Treasury |
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Total |
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Shares |
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Amount |
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Capital |
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Deficit |
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Stock |
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Equity |
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Balance at June 30, 2020 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net earnings |
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— |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Shares issued or canceled in connection with |
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( |
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( |
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— |
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— |
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— |
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Balance at September 30, 2020 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Net earnings |
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— |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Shares issued or canceled in connection with |
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( |
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— |
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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 |
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$ |
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$ |
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$ |
( |
) |
|
$ |
( |
) |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Share-based compensation |
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— |
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— |
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— |
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— |
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Shares issued in connection with rights offering |
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— |
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— |
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Shares issued or canceled in connection with |
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— |
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— |
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— |
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Balance at March 31, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Tuesday Morning Corporation
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
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Nine Months Ended |
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April 2, |
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March 31, |
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2022 |
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2021 |
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Cash flows from operating activities: |
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Net earnings/(loss) |
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$ |
( |
) |
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$ |
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Adjustments to reconcile net earnings/(loss) to net cash used in operating activities: |
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Depreciation and amortization |
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11,933 |
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Loss on impairment and abandonment of assets |
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Amortization of financing costs and interest expense |
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(Gain)/loss on disposal of assets |
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( |
) |
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Gain on sale-leaseback |
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— |
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( |
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Share-based compensation |
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Rights Offering and Backstop Agreement |
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Gain on lease terminations |
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— |
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( |
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Deferred income taxes |
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( |
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— |
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Construction allowances from landlords |
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Change in operating assets and liabilities: |
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Inventories |
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( |
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( |
) |
Prepaid and other current assets |
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( |
) |
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Accounts payable |
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( |
) |
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( |
) |
Accrued liabilities |
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( |
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Operating lease assets and liabilities |
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( |
) |
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( |
) |
Other liabilities — non-current |
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( |
) |
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Income taxes payable |
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Net cash used in operating activities |
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( |
) |
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( |
) |
Cash flows from investing activities: |
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Capital expenditures |
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( |
) |
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( |
) |
Proceeds from sale-leaseback |
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— |
|
|
|
|
|
Proceeds from sale of assets |
|
|
— |
|
|
|
|
|
Net cash provided by/(used in) investing activities |
|
|
( |
) |
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds from borrowings under revolving credit facility |
|
|
|
|
|
|
||
Repayments of borrowings under revolving credit facility |
|
|
( |
) |
|
|
( |
) |
Proceeds from term loan |
|
|
— |
|
|
|
|
|
Proceeds from Rights Offering |
|
|
— |
|
|
|
|
|
Proceeds from exercise of employee stock options |
|
|
|
|
|
|
||
Tax payments related to vested stock awards |
|
|
( |
) |
|
|
— |
|
Payments on finance leases |
|
|
( |
) |
|
|
( |
) |
Payment of financing fees |
|
|
— |
|
|
|
( |
) |
Net cash provided by financing activities |
|
|
|
|
|
|
||
Net increase/(decrease) in cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
|
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash, end of period |
|
$ |
|
|
$ |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
Tuesday Morning Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
The terms “Tuesday Morning,” the “Company,” “we,” “us” and “our” as used in this Quarterly Report on Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries. Other than as disclosed in this document, please refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 for our critical accounting policies.
1. Nature of Operations and Significant Accounting Policies
Basis of presentation — The condensed consolidated financial statements herein include the accounts of Tuesday Morning Corporation and its subsidiaries (the "Company") and have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). As applicable under such regulations, certain information and footnote disclosures have been condensed or omitted. We believe the presentation and disclosures herein are adequate to make the information not misleading, and the condensed consolidated financial statements reflect all elimination entries and normal recurring adjustments which are necessary for 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 a condensed consolidated statement of comprehensive income as there are no other comprehensive income items in either the current or prior fiscal periods.
Our business results historically have fluctuated throughout the year and, as a result, the operating results of the interim periods presented are not necessarily indicative of the results that may be achieved for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended June 30, 2021. The condensed consolidated balance sheet at June 30, 2021 has been derived from the audited consolidated financial statements at that date. The preparation of the condensed consolidated financial statements is in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual amounts could differ from those estimates.
On February 23, 2022, the board of directors of the Company approved a change in the fiscal year end from a calendar year ending on June 30 to a 52-53 week year ending on the Saturday closest to June 30, effective beginning with fiscal year 2022. In a 52 week fiscal year, each of the Company’s quarterly periods will comprise 13 weeks. The additional week in a 53 week fiscal year is added to the fourth quarter, making such quarter consist of 14 weeks. The Company made the fiscal year change on a prospective basis and will not adjust operating results for prior periods.
We operate our business as a single operating segment.
(A) Cash and Cash Equivalents—Cash and cash equivalents include credit card receivables and all highly liquid instruments with original maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value. At April 2, 2022 and June 30, 2021, credit card receivables from third party consumer credit card providers were $
(B) Restricted Cash—Restricted cash was $
Emergence from Chapter 11 Bankruptcy Proceedings
In response to the impacts of the COVID-19 pandemic, on
In early June 2020, in accordance with orders of the Bankruptcy Court, we commenced the process to close
On November 16, 2020, the Company and its subsidiaries filed with the Bankruptcy Court a proposed Revised Second Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Amended Plan”) and a proposed Amended Disclosure Statement (the “Amended Disclosure Statement”) in support of the Amended Plan describing the Amended Plan and the solicitation of votes to approve the same from certain of the Debtors’ creditors with respect to the Chapter 11 Cases. The Amended Plan and the Amended
8
Disclosure Statement contemplated the debt financing transactions described in Note 3 below under the caption “Post-Emergence Debt Financing Arrangements,” the exchange and Rights Offering (defined in Note 6 below) and the sale-leaseback transactions described in Note 8 below.
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 debt financing and sale-leaseback contemplated 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 Accounting Standards Codification ("ASC") 852 – Reorganizations until that transaction closed on February 9, 2021.
In accordance with the Plan of Reorganization, effective December 31, 2020 (the “Effective Date”), the Company’s board of directors was comprised of
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 for (1)
On September 29, 2021, the U.S. Bankruptcy Court issued a final decree (the “Final Decree”) closing the Chapter 11 Cases of the Company and its subsidiaries. While the Company emerged from bankruptcy proceedings on December 31, 2020, the 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 $
See Note 2 regarding Bankruptcy Accounting for further discussion.
Listing
During the pendency of our bankruptcy proceedings, the Company’s common stock was 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 began trading on the OTCQX market under the ticker symbol “TUEM.”
On May 24, 2021, Nasdaq approved our application for the relisting of the Company's common stock on the Nasdaq Capital Market. The Company's common stock was relisted and commenced trading on the Nasdaq Capital Market at the opening of the market on May 25, 2021, under the ticker symbol "TUEM."
9
Impact of the COVID-19 Pandemic
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
Future impacts from the COVID-19 pandemic will depend on the potential further geographic spread and duration of the ongoing pandemic, the timing and extent of recovery in traffic and consumer spending in our stores, the extent and duration of ongoing impacts to domestic and international supply chains and the related impacts on the flow, availability and cost of products, the production and administration of effective medical treatments and vaccines, and the actions that may be taken by various governmental authorities and other third parties in response to the pandemic.
Accounting Pronouncement Recently Adopted
In March 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update ("ASU") No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). This update is intended to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange and is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for all entities, including adoption in an interim period. We
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. We
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The guidance was effective upon issuance and may be applied prospectively to contract modifications made, hedging relationships entered into, and other transactions affected by reference rate reform, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected. We do not have any receivables, hedging relationships, or lease agreements that reference LIBOR or another reference rate expected to be discontinued. We are currently evaluating the impact of the new guidance on our condensed consolidated financial statements; however, we have determined that, of our current debt commitments as outlined in detail in Note 3, only the obligations under the Post-Emergence ABL Facility may be impacted by ASU 2020-04. Our Term Loan described in Note 3 has fixed interest rate and our New ABL Credit Agreement bears interest at a variable rate based on adjusted term Secured Overnight Financing Rate ("SOFR").
10
2. Bankruptcy Accounting
Reorganizations require that the condensed consolidated financial statements, for periods subsequent to the filing of the Chapter 11 Cases, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. During the pendency of the Chapter 11 Cases until we qualified for emergence under ASC 852, the condensed consolidated financial statements were prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business and reflect the application of ASC 852. Accordingly, certain expenses, gains and losses that were realized or incurred in the bankruptcy proceedings were recorded in Reorganization items, net in our condensed consolidated statements of operations.
Pursuant to the Plan of Reorganization, an escrow account (the “Unsecured Creditor Claim Fund”) was established for the benefit of holders of allowed general unsecured claims. Upon the closing of the sale and leaseback of the Corporate Office and the Dallas Distribution Center properties and the issuance of the Term Loan (as defined in Note 3 below), net proceeds of $
Our Plan of Reorganization was confirmed on December 23, 2020, and all listed material conditions precedent were resolved by the December 31, 2020 legal effective date of emergence as governed by the Bankruptcy Court. However, the closing of our Rights Offering was considered a critical component to the execution of our confirmed Plan of Reorganization, therefore, we continued to apply the requirements of ASC 852 until that transaction closed on February 9, 2021.
On September 29, 2021, the U.S. Bankruptcy Court issued a Final Decree closing the Chapter 11 Cases of the Company and its subsidiaries. While the Company emerged from bankruptcy proceedings on December 31, 2020, the Chapter 11 Cases remained opened pending final resolution of all claims of general unsecured creditors. The Company was able to resolve all of these claims for approximately $
We were not required to apply fresh start accounting based on the provisions of ASC 852 as there was no change in control and the entity’s reorganization value immediately before the date of confirmation was more than the total of all its post-petition liabilities and allowed claims.
Restructuring, Impairment and Abandonment Charges
Restructuring, impairment and abandonment charges are as follows (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
April 2, |
|
|
March 31, |
|
|
April 2, |
|
|
March 31, |
|
||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Restructuring costs: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Severance and compensation related costs (adjustments) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Total restructuring costs |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Impairment costs: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate long-lived assets |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
Total impairment costs |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Abandonment costs: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Accelerated recognition of operating right-of-use assets |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
Total abandonment costs |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total restructuring, impairment and abandonment costs |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
11
For the three months ended April 2, 2022, a net benefit of $
During the three months ended March 31, 2021, the restructuring, impairment and abandonment charges are primarily related to employee retention costs of $
Reorganization Items
Reorganization items included in our condensed consolidated statement of operations represent amounts directly resulting from the Chapter 11 Cases are as follows (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
April 2, |
|
|
March 31, |
|
|
April 2, |
|
|
March 31, |
|
||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Reorganization items, net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Professional and legal fees |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Claims related costs |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Gain on lease terminations, net of estimated claims |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Gain on sale-leaseback |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Rights Offering and Backstop Agreement |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Total reorganization items, net |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
For the three months ended April 2, 2022, reorganization items, net benefit related to $
During the three months ended March 31, 2021, reorganization items, net primarily related to the execution of our Rights Offering (defined in Note 6) of $
3. Debt
Pre-Petition Financing Agreements
Through December 31, 2020, we were party to a credit agreement that provided for an asset-based,
As of December 31, 2020, we had
12
Debtor-In-Possession Financing Agreements
On May 29, 2020, we entered into a Senior Secured Super Priority Debtor-in-Possession Credit Agreement (the “DIP ABL Credit Agreement”) among the Company, JPMorgan Chase Bank, N.A., as administrative agent, for itself and the other lenders, which provided for a super priority secured debtor-in-possession revolving credit facility in an aggregate amount of up to $
Post-Emergence Financing Arrangements
On December 31, 2020, the Company and its subsidiaries entered into a Credit Agreement (the “Post-Emergence ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A. and Bank of America, N.A. (collectively, the “Lenders”) that provided for a revolving credit facility in an aggregate amount of $
Under the terms of the Post-Emergence ABL Credit Agreement, amounts available for advances would be subject to a borrowing base as described in the Post-Emergence ABL Credit Agreement. Under the Post-Emergence ABL Credit Agreement, borrowings initially bore interest at a rate equal to the adjusted LIBOR rate plus a spread of
The Post-Emergence ABL Facility was secured by a first priority lien on all present and after-acquired tangible and intangible assets of the Company and its subsidiaries other than certain collateral that secures the Term Loan (as defined below). The commitments of the Lenders under the Post-Emergence ABL Facility were due to terminate and outstanding borrowings under the Post-Emergence ABL Facility was due to mature on
As of April 2, 2022, we had $
As further described in Note 13 below, on May 9, 2022, we entered into the New ABL Credit Agreement (as defined in Note 13) and used a portion of the proceeds from borrowings under the New Facilities (as defined in Note 13) to repay all outstanding indebtedness under the Post-Emergence ABL Facility, along with accrued interest, expenses and fees. See Note 13 below for additional information regarding the New ABL Credit Agreement.
On December 31, 2020, the Company, Alter Domus (US), LLC, as administrative agent, and the lenders named therein including Tensile Capital Partners Master Fund LP ("Tensile") and affiliates of Osmium Partners, LLC, ("Osmium") entered into a Credit Agreement (as amended from time to time, the “Term Loan Credit Agreement”) to provide a term loan of $
In accordance with the Plan of Reorganization, on December 31, 2020,
Pursuant to the terms of the Term Loan Credit Agreement, the Term Loan has a maturity date of
13
mandatory prepayment in connection with a change of control of the Company as described in the Term Loan Credit Agreement. The Term Loan Credit Agreement also includes customary covenants and events of default.
The following table provides details on our Term Loan (in thousands):
Term Loan |
|
|
|
|||||
|
|
April 2, 2022 |
|
|
June 30, 2021 |
|
||
Loan balance |
|
$ |
|
|
$ |
|
||
Debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Accrued paid-in-kind interest |
|
|
|
|
|
|
||
Loan balance, ending |
|
$ |
|
|
$ |
|
As further described in Note 13 below, the Term Loan Credit Agreement was amended on May 9, 2022 and $
As of April 2, 2022, we are in compliance with covenants in the Post-Emergence ABL Facility and Term Loan.
Interest Expense
Interest expense for the three months ended April 2, 2022 was $
Interest expense for the nine months ended April 2, 2022 was $
Fair Value Measurements
The fair value of our Term Loan was determined based on observable market data provided by a third party for similar types of debt which are considered Level 2 inputs within the fair value hierarchy. The carrying value of our Term Loan as of April 2, 2022 and June 30, 2021 was $
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 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 condensed consolidated balance sheets, and we use historical customer return behavior to estimate our reserve requirements.
14
5. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
|
|
April 2, |
|
|
June 30, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Sales and use tax |
|
$ |
|
|
$ |
|
||
Self-insurance reserves |
|
|
|
|
|
|
||
Wages, benefits and payroll taxes |
|
|
|
|
|
|
||
Property taxes |
|
|
|
|
|
|
||
Freight and distribution |
|
|
|
|
|
|
||
Capital expenditures |
|
|
|
|
|
|
||
Utilities |
|
|
|
|
|
|
||
Gift card liability |
|
|
|
|
|
|
||
Reorganization expenses |
|
|
|
|
|
|
||
Other expenses |
|
|
|
|
|
|
||
Total accrued liabilities |
|
$ |
|
|
$ |
|
Self-insurance reserves were primarily comprised of our worker's compensation liability reserve, followed by our medical liability reserve and general liability reserve.
6. Common Stock & Share-Based Incentive Plans
Equity Financing under Plan of Reorganization
Pursuant to the Plan of Reorganization, each outstanding share of the Company’s common stock as of the close of business on January 4, 2021 was exchanged (the “Exchange”) for (1)
The subscription period for the Rights Offering expired on
In addition, on February 9, 2021, the Company issued warrants with rights to purchase
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
15
(the “Ownership Restrictions”). Subject to certain exceptions, the Ownership Restrictions restrict (i) any transfer that would result in any person acquiring
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 Awards/Units
The Tuesday Morning Corporation 2008 Long-Term Incentive Plan (the “2008 Plan”) and the Tuesday Morning Corporation Long-Term Incentive Plan (the “2014 Plan” and together with the 2008 Plan, the “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. Restricted stock awards are not transferable, but bear certain rights of common stock ownership including voting and dividend rights. Shares are valued at the fair market value of our common stock at the date of award. Shares may be subject to time-vesting and/or certain performance requirements. If the time-vesting and/or performance requirements are not met, the restricted shares are forfeited. The 2014 Plan also authorizes the grant of time-vesting and performance-based restricted stock units. Restricted stock units do not provide voting and dividend rights. Shares of common stock are issued upon the vesting of restricted units.
On September 15, 2021, Marc Katz was awarded
The following table summarizes the activity of time-vesting restricted stock units, performance-based restricted stock units, time-vesting restricted stock awards and performance-based restricted stock awards for the nine months ended April 2, 2022:
|
|
Time and Performance-Based Restricted Stock Units |
|
|
Weighted- |
|
|
Time and Performance-Based Restricted Stock Awards |
|
|
Weighted- |
|
||||
Outstanding at June 30, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted during the year |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Vested during the year |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Forfeited during the year |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Outstanding at April 2, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
As of April 2, 2022, there were
Cash Settled Awards
16
We have granted stock-based awards to certain employees, which vest over a period of to
The following table summarizes the activity of cash settled awards for the nine months ended April 2, 2022:
|
|
Performance-Based |
|
|
Service-Based |
|
|
Total |
|
|||
Outstanding at June 30, 2021 |
|
|
|
|
|
|
|
|
|
|||
Granted during the year |
|
|
— |
|
|
|
|
|
|
|
||
Vested during the year |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Forfeited during the year |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Outstanding at April 2, 2022 |
|
|
|
|
|
|
|
|
|
The liability associated with the cash settled awards was $
Share-based Compensation Costs
Share-based compensation costs consisted of the following (in thousands):
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
April 2, |
|
|
March 31, |
|
|
April 2, |
|
|
March 31, |
|
||||
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Amortization of share-based compensation during the period |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Amounts capitalized in ending inventory |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Amounts recognized and charged to cost of sales |
|
|
|
|
|
|
|
|
|
|
|
||||
Amounts charged against selling, general and administrative expense |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
7. Commitments and contingencies
Information related to the Chapter 11 Cases that were filed on May 27, 2020 is included in Notes 1 and 2 above.
Like many retailers, the Company has been named in a potential class or collective actions on behalf of groups alleging violations of federal and state wage and hour and other labor statutes, and other statutes. In the normal course of business, we are also party to representative claims under the California Private Attorneys’ General Act and various other lawsuits and regulatory proceedings including, among others, commercial, product, product safety, employee, customer, intellectual property and other claims. Actions against us are in various procedural stages. Many of these proceedings raise factual and legal issues and are subject to uncertainties. In addition, we are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established when a loss is considered probable and are based on management’s best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.
8. Leases
We conduct substantially all operations from leased facilities. Our retail store locations, our corporate office and our distribution center are under operating leases that will expire over the next
In accordance with the Plan of Reorganization, on December 31, 2020, we sold our corporate office and Dallas distribution center properties and leased back those facilities. The lease of the corporate office is for a term of
17
The
In accordance with ASC 842, we determine whether an agreement contains a lease at inception based on our right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. Lease liabilities represent the present value of future lease payments and the right-of-use (“ROU”) assets represent our right to use the underlying assets for the respective lease terms.
The operating lease liability is measured as the present value of the unpaid lease payments and the ROU asset is derived from the calculation of the operating lease liability. As our leases do not generally provide an implicit rate, we use our incremental borrowing rate as the discount rate to calculate the present value of lease payments. The incremental borrowing rate represents an estimate of the interest rate that would be required to borrow over a similar term, on a collateralized basis in a similar economic environment.
Rent escalations occurring during the term of the leases are included in the calculation of the future minimum lease payments and the rent expense related to these leases is recognized on a straight-line basis over the lease term. In addition to minimum lease payments, certain leases require payment of a proportionate share of real estate taxes and certain building operating expenses allocated on a percentage of sales in excess of a specified base. These variable lease costs are not included in the measurement of the ROU asset or lease liability due to unpredictability of the payment amount and are recorded as lease expense in the period incurred. The ROU asset is adjusted to account for previously recorded lease-related expenses such as deferred rent and other lease liabilities.
Our lease agreements do not contain residual value guarantees or significant restrictions or covenants other than those customary in such arrangements.
The components of lease cost are as follows (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
April 2, |
|
|
March 31, |
|
|
April 2, |
|
|
March 31, |
|
||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Operating lease cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Variable lease cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of right-of-use assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest on lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total lease cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
The table below presents additional information related to the Company’s leases:
|
|
As of |
|
|
Weighted average remaining lease term (in years) |
|
|
|
|
Operating leases |
|
|
|
|
Finance leases |
|
|
|
|
Weighted average discount rate |
|
|
|
|
Operating leases |
|
|
% |
|
Finance leases |
|
|
% |
Other information related to leases, including supplemental disclosures of cash flow information, is as follows (in thousands):
|
|
April 2, 2022 |
|
|
March 31, 2021 |
|
||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
||
Operating cash flows from operating leases |
|
$ |
|
|
$ |
|
||
Operating cash flows from finance leases |
|
|
|
|
|
|
||
Financing cash flows from finance leases |
|
|
|
|
|
|
||
Right-of-use assets obtained in exchange |
|
|
|
|
|
( |
) |
18
Maturities of lease liabilities were as follows as of April 2, 2022 (in thousands):
|
Operating |
|
|
Finance |
|
|
Total |
|
|||
Fiscal year: |
|
|
|
|
|
|
|
|
|||
2022 (remaining) |
$ |
|
|
$ |
|
|
$ |
|
|||
2023 |
|
|
|
|
— |
|
|
|
|
||
2024 |
|
|
|
|
— |
|
|
|
|
||
2025 |
|
|
|
|
— |
|
|
|
|
||
2026 |
|
|
|
|
— |
|
|
|
|
||
2027 |
|
|
|
|
— |
|
|
|
|
||
Thereafter |
|
|
|
|
— |
|
|
|
|
||
Total lease payments |
$ |
|
|
$ |
|
|
$ |
|
|||
Less: Interest |
|
|
|
|
|
|
|
|
|||
Total lease liabilities |
$ |
|
|
$ |
|
|
$ |
|
|||
Less: Current lease liabilities |
|
|
|
|
|
|
|
|
|||
Non-current lease liabilities |
$ |
|
|
$ |
— |
|
|
$ |
|
Current and non-current finance lease liabilities are recorded in “Accrued liabilities” and “Other liabilities – non-current,” respectively, on our condensed consolidated balance sheet. As of April 2, 2022, there were
9. Earnings per common share
The Company uses the two-class method of computing basic EPS due to the existence of non-vested restricted stock awards with non-forfeitable rights to dividends or dividend equivalents (referred to as participating securities). Basic EPS is computed using the weighted average number of common shares outstanding during each of the respective years. Diluted EPS is computed using the weighted average number of common and common equivalent shares outstanding during each of the respective years using the more dilutive of either the treasury stock method or two-class method. The difference between basic and diluted shares, if any, largely results from common equivalent shares, which represents the dilutive effect of the assumed exercise of certain outstanding share options and warrants, the assumed vesting of restricted stock granted to employees and directors, or the satisfaction of certain necessary conditions for contingently issuable shares.
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
April 2, |
|
|
March 31, |
|
|
April 2, |
|
|
March 31, |
|
||||
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net earnings/(loss) |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Less: Income to participating securities |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Net earnings/(loss) attributable to common shares |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Weighted average number of common shares |
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive stock equivalents |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Weighted average number of common shares |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net earnings/(loss) per common share — basic |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Net earnings/(loss) per common share — diluted |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
For the three months ended April 2, 2022 and March 31, 2021,
10. Property and equipment, net
Accumulated depreciation of owned property and equipment as of April 2, 2022 and June 30, 2021 was $
19
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.
11. Income taxes
The Company or
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 had deferred qualified payroll taxes through December 31, 2020. As of April 2, 2022, we have $
The effective tax rate for the quarter ended April 2, 2022 and March 31, 2021 were (
20
12. Related Party
On November 16, 2020, following approval of the Bankruptcy Court, the Company and Osmium entered into a backstop commitment agreement, pursuant to which Osmium Partners agreed that they or an affiliate would serve as the Backstop Party and purchase all unsubscribed shares for a price of $
In accordance with the Plan of Reorganization and the Commitment Letter, on December 31, 2020, the Company, Alter Domus (US), LLC, as administrative agent, and the lenders named therein, including Tensile and an affiliate of Osmium, entered into the Term Loan Credit Agreement described in Note 3 above which provided for the $
In accordance with the Plan of Reorganization and the backstop commitment agreement, on December 31, 2020, the Company, Osmium and Larkspur SPV (collectively, the “Osmium Group”) entered into an agreement pursuant to which the Osmium Group is entitled to appoint
On February 9, 2021, the Company received proceeds of approximately $
Based on Schedule 13D filings made by Osmium and Tensile, and their respective affiliates, on February 19, 2021, Osmium and Tensile each are deemed to beneficially own the
21
13. Subsequent Events
New ABL Facility and FILO Facilities
On May 9, 2022 (the “Refinancing Closing Date”), Tuesday Morning Corporation (the “Company”), Tuesday Morning, Inc. (the “Borrower”) and each other subsidiary of the Company entered into a Credit Agreement (the “New ABL Credit Agreement”) with the lenders named therein, Wells Fargo Bank, National Association, as administrative agent, and 1903P Loan Agent, LLC, as FILO B documentation agent. The New ABL Credit Agreement provides for (i) a revolving credit facility in an aggregate amount of $
Amounts available for advances under the New Facilities are subject to borrowing bases as described in the New ABL Credit Agreement. Borrowings under the New ABL Facility will bear interest at a rate equal to, at the option of the Borrower, (i) the Adjusted Term SOFR (as defined below) plus a margin ranging from
The New Facilities are 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). Each of the New Facilities will terminate, and outstanding borrowings thereunder will mature, on the earlier of (i) May 9, 2027 and (ii) the date that is 91 days prior to maturity of the Term Loan.
On the Refinancing Closing Date, the Borrower borrowed approximately $
Amendment to Term Loan Credit Agreement
On the Refinancing Closing Date, the Company, the Borrower, certain subsidiaries of the Company, certain of the Term Loan Lenders (the “Consenting Lenders”), and Alter Domus (US) LLC, as administrative agent, entered into an amendment to the Term Loan Credit Agreement (the “Term Loan Credit Agreement Amendment”), pursuant to which, among other things, (i) each Consenting Lender agreed to the Loan Repurchase, (ii) concurrently with the consummation of the Loan Repurchase, each Consenting Lender agreed to
22
waive and forgive an amount of the accrued and unpaid interest owed to such Consenting Lender , (iii) it was agreed that immediately, automatically and permanently upon the consummation of the Loan Repurchase, the Term Loans assigned pursuant to the Loan Repurchase would be deemed cancelled and of no further force and effect and (iv) the Term Loan Credit Agreement was amended to, among other things, (x) provide that the Borrower and its subsidiaries shall not permit the borrowing availability under the New ABL Facility to be less than the greater of (A) $
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We encourage you to read this "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") in conjunction with the corresponding section included in our Annual Report on Form 10-K for the year ended June 30, 2021.
Background
We are one of the original off-price retailers and a leading destination for unique home and lifestyle goods, selling high-quality products at prices generally below those found in boutique, specialty and department stores, catalogs and on-line retailers. Our customers come to us for an ever-changing, exceptional assortment of brand names at great prices. Our strong value proposition has established a loyal customer base, who we engage regularly with social media, email and digital media.
The COVID-19 pandemic has had an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow. On March 25, 2020, we temporarily closed all of our 687 stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. As allowed by state and local jurisdictions, 685 of our stores gradually reopened as of the end of June 2020 and two stores were permanently closed during the quarter. In accordance with our bankruptcy Plan of Reorganization, described below, we completed the permanent closure of 197 stores in the first quarter of 2021 and the closure of our Phoenix, Arizona distribution center ("Phoenix distribution center") in the second quarter of 2021. In addition, as part of our restructuring, we secured financing to pay the creditors in accordance with the plan of reorganization and to fund planned operations and expenditures.
Future impacts from the COVID-19 pandemic will depend on the potential further geographic spread and duration of the ongoing pandemic, the timing and extent of recovery in traffic and consumer spending in our stores, the extent and duration of ongoing impacts to domestic and international supply chains and the related impacts on the flow, availability and cost of products, the production and administration of effective medical treatments and vaccines, and the actions that may be taken by various governmental authorities and other third parties in response to the pandemic.
Emergence from Chapter 11 Bankruptcy Proceedings
24
Key Metrics for the Three and Nine Months Ended April 2, 2022
Key operating metrics for continuing operations for the three and nine months ended April 2, 2022 include:
25
Key balance sheet and liquidity metrics for the nine months ended April 2, 2022 include:
Subsequent to April 2, 2022, the Company and its subsidiaries entered into the New ABL Credit Agreement as part of a refinancing. See Note 13 to the condensed consolidated financial statements and “Liquidity and Capital Resources – Liquidity” herein for additional information.
Store Data
The following table presents information with respect to our stores in operation during each of the fiscal periods:
|
|
Store Openings/Closings |
|
|||||||||||||||||
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
Fiscal Year Ended June 30, 2021 |
|
|||||
Open at beginning of period |
|
492 |
|
|
490 |
|
|
|
490 |
|
|
|
685 |
|
|
|
685 |
|
||
Opened |
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
Closed |
|
|
(2 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
(197 |
) |
|
|
(197 |
) |
Open at end of period |
|
|
490 |
|
|
|
490 |
|
|
|
490 |
|
|
|
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.
Results of Operations
Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in the second quarter of each fiscal year.
There can be no assurance that the trends in sales or operating results will continue in the future.
Three Months Ended April 2, 2022 Compared to the Three Months Ended March 31, 2021
Net sales for the three months ended April 2, 2022 were $159.6 million, with an increase of 4.1%, compared to $153.3 million for the three months ended March 31, 2021, primarily driven by the two additional days in quarter ended April 2, 2022 as a result of a change from a calendar year as defined in Note 1. Comparable store sales for the three months ended April 2, 2022, increased 0.6% due to 6.7% increase in average ticket offset by a 6.6% decrease in customer transactions primarily due to the Easter shift, lapping stimulus and as a result of general economic impacts starting March 2022 following disruption in Europe and incremental inflationary pressures.
26
Gross margin for the three months ended April 2, 2022 was $38.9 million, a decrease of 19.3% compared to $48.2 million for the three months ended March 31, 2021. As a percentage of net sales, gross margin decreased to 24.4% in the third quarter of fiscal 2022 compared with 31.4% in the second quarter of fiscal 2021. The decrease in gross margin as a percentage of net sales was primarily a result of higher supply chain and transportation costs recognized in the three months ended April 2, 2022.
SG&A decreased $3.6 million to $55.6 million in the three months ended April 2, 2022, compared to $59.2 million for the three months ended March 31, 2021 primarily mainly due to lower employee-related incentive pay. As a percentage of net sales, SG&A decreased 380 basis points to 34.8% for the three months ended April 2, 2022, compared to 38.6% for the three months ended March 31, 2021, leveraging of store occupancy cost as percentage of net sales.
Restructuring, impairment and abandonment charges were a net benefit of $0.3 million during the three months ended April 2, 2022, compared to net charge of $1.0 million during the three months ended March 31, 2021. During the three months ended April 2, 2022, adjustments related to compensation adjustments for employee retention cost. During the three months ended March 31, 2021, adjustments include restructuring, impairment and abandonment charges of $1.0 million primarily related to employee retention cost of $0.3 million and severance cost of $0.7 million.
Our operating loss was $16.4 million for the three months ended April 2, 2022 as compared to an operating loss of $12.0 million for the three months ended March 31, 2021, resulting to decline of $4.3 million. The operating loss in the current year was primarily the result of higher supply chain and transportation costs partially offset by lower restructuring, impairment and abandonment charges as discussed above.
Interest expense increased $0.5 million to $1.9 million for the three months ended April 2, 2022 compared to $1.4 million for the three months ended March 31, 2021. Interest expense for the three months ended April 2, 2022 was primarily due to the interest and amortization of financing fees incurred on our Post-Emergence ABL Facility and accrued PIK interest on our Term loan. Interest expense for the three months ended March 31, 2021 was primarily due to accrued PIK interest on the Term Loan along with amortization of financing fees incurred on the Post-Emergence ABL Facility. See Note 3 to our unaudited condensed consolidated financial statements herein for additional information.
Reorganization items, net were a net benefit of $0.1 million for the three months ended April 2, 2022 compared to a net charge of $23.6 million in the three months ended March 31, 2021, related to $0.2 million benefit on claims related cost, offset by $43 thousand of professional and legal fees related to our reorganization. The reorganization items, net charge of $23.6 million in the three months ended March 31, 2021, was due to $19.0 million net charge from the Rights Offering and Backstop Agreement, $0.9 million in claims related costs, and $3.8 million in professional and legal fees related to our reorganization.
Income tax expense for the three months ended April 2, 2022 was $0.1 million to an income tax expense of $0.2 million in the three months ended March 31, 2021. The effective tax rates for the three months ended April 2, 2022 and March 31, 2021 were (0.4%) and (0.5%), respectively. We currently believe the expected effects on future year effective tax rates to continue to be nominal until the cumulative losses and valuation allowance are fully utilized.
Our net loss for the three months ended April 2, 2022 was $18.2 million, or diluted net losses per share of $0.21 compared to a net loss for the three months ended March 31, 2021 of $37.1 million, or diluted net losses per share of $0.55.
Nine Months Ended April 2, 2022 Compared to the Nine Months Ended March 31, 2021
Net sales for the nine months ended April 2, 2022 were $587.9 million, an increase of 14.5%, compared to $513.5 million for the nine months ended March 31, 2021, primarily due to more stores in operation for fiscal year 2022 and completion of bankruptcy proceedings. Comparable store sales for the nine months ended April 2, 2022, increased 18.1% due to a 10.5% increase in average ticket and 6.4% increase in customer transactions.
Gross margin for the nine months ended April 2, 2022 was $161.5 million, an increase of 1.4% compared to $159.3 million for the nine months ended March 31, 2021. As a percentage of net sales, gross margin decreased to 27.5% in the nine months ended April 2, 2022 compared with 31.0% in the nine months ended March 31, 2021. The decrease in gross margin as a percentage of net sales was primarily a result of higher supply chain and transportation costs recognized in the nine months ended April 2, 2022.
SG&A decreased slightly by $1.1 million to $183.5 million in the nine months ended April 2, 2022, compared to $184.6 million for the nine months ended March 31, 2021 primarily mainly due to lower employee-related incentive pay partially offset by increased share-based compensation. As a percentage of net sales, SG&A decreased 470 basis points to 31.2% for the nine months ended April 2, 2022, compared to 35.9% for the nine months ended March 31, 2021. The decrease in SG&A, as a percentage of net sales, was primarily due to leveraging of store occupancy cost as a percentage of sales.
27
Restructuring, impairment and abandonment charges were $2.6 million during the nine months ended April 2, 2022, compared to $7.6 million during the nine months ended March 31, 2021. During the nine months ended April 2, 2022, charges include a software impairment charge of $2.1 million as well as $0.5 million in employee retention cost. During the nine months ended March 31, 2021, charges include restructuring, impairment and abandonment charges of $7.6 million primarily related to abandonment cost of $5.6 million due to our permanent store and Phoenix, Arizona distribution center closing plans as well as $1.9 million in severance and employee retention cost. Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021.
Our operating loss was $24.6 million for the nine months ended April 2, 2022 as compared to an operating loss of $32.8 million for the nine months ended March 31, 2021, an improvement of $8.2 million. The operating loss in the current year was primarily the result of increased sales, lower restructuring, impairment and abandonment charges, offset by lower margins from higher supply chain and transportation costs as discussed above.
Interest expense decreased $1.2 million to $5.5 million for the nine months ended April 2, 2022 compared to $6.7 million for the nine months ended March 31, 2021. Interest expense for the nine months ended April 2, 2022 was primarily due to the interest and amortization of financing fees incurred on our Post-Emergence ABL Facility and accrued PIK interest on our Term loan. Interest expense for the nine months ended March 31, 2021 was primarily due to amortization of financing fees incurred for the Post-Emergence ABL Facility, the DIP ABL Credit Agreement and accrued PIK interest on Term loan. See Note 3 to our unaudited condensed consolidated financial statements herein for additional information.
Reorganization items, net were $0.9 million for the nine months ended April 2, 2022 compared to a net benefit of $62.2 million for the nine months ended March 31, 2021, related to $0.6 million loss of claims related cost and $0.3 million of professional and legal fees related to our reorganization. The net benefit of $62.2 million in the nine months ended March 31, 2021, was primarily due to a net gain of $115.8 million resulting from store lease terminations and the termination of our Phoenix distribution center lease under our permanent closure plan and sale-leaseback transactions pursuant to the Plan of Reorganization, partially offset by $33.8 million in professional and legal fees related to our reorganization, $0.9 million in claims related costs as well as $19.0 million in non-cash charges from the Rights Offering.
Income tax expense for the nine months ended April 2, 2022 was $11,000 compared to an income tax expense of $0.7 million in the nine months ended March 31, 2021. The effective tax rates for the nine months ended April 2, 2022 and March 31, 2021 were 0.0% and 3.2%, respectively. We currently believe the expected effects on future year effective tax rates to continue to be nominal until the cumulative losses and valuation allowance are fully utilized.
Our net loss for the nine months ended April 2, 2022 was $30.9 million, or diluted net loss per share of $0.36 compared to a net earnings for the nine months ended March 31, 2021 of $21.8 million, or diluted net earnings per share of $0.41.
Non-GAAP Financial Measures
We define EBITDA as net earnings 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 earnings or loss as a measure of operating performance. In addition, EBITDA and Adjusted EBITDA are not presented as, and should not be considered as a measure of liquidity. EBITDA and Adjusted EBITDA should not be considered in isolation, or as substitutes for analysis of our results as reported under GAAP and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by such adjustments. We believe it is useful for investors to see these EBITDA and Adjusted EBITDA measures that management uses to evaluate our operating performance. These non-GAAP financial measures are included to supplement our financial information presented in accordance with GAAP and because we use these measures to monitor and evaluate the performance of our business as a supplement to GAAP measures and we believe the presentation of these non-GAAP measures enhances investors’ ability to analyze trends in our business and evaluate our performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The non-GAAP measures presented may not be comparable to similarly titled measures used by other companies.
28
The following table reconciles net earnings/(loss), the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA, each of which is a non-GAAP financial measure (in thousands):
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
April 2, |
|
|
March 31, |
|
|
April 2, |
|
|
March 31, |
|
||||
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net earnings/(loss) (GAAP) |
$ |
(18,151 |
) |
|
$ |
(37,119 |
) |
|
$ |
(30,860 |
) |
|
$ |
21,844 |
|
Depreciation and amortization |
|
3,369 |
|
|
|
3,627 |
|
|
|
10,175 |
|
|
|
11,933 |
|
Interest expense, net |
|
1,919 |
|
|
|
1,404 |
|
|
|
5,520 |
|
|
|
6,671 |
|
Income tax expense |
|
69 |
|
|
|
172 |
|
|
|
11 |
|
|
|
715 |
|
EBITDA (non-GAAP) |
$ |
(12,794 |
) |
|
$ |
(31,916 |
) |
|
$ |
(15,154 |
) |
|
$ |
41,163 |
|
Share based compensation expense (1) |
|
1,600 |
|
|
|
382 |
|
|
|
4,645 |
|
|
|
1,347 |
|
Restructuring, impairment and abandonment charges (2) |
|
(278 |
) |
|
|
1,047 |
|
|
|
2,588 |
|
|
|
7,554 |
|
Reorganization items, net (3) |
|
(128 |
) |
|
|
23,597 |
|
|
|
923 |
|
|
|
(62,169 |
) |
Other (4) |
|
(265 |
) |
|
|
— |
|
|
|
(1,219 |
) |
|
|
— |
|
Adjusted EBITDA (non-GAAP) |
$ |
(11,865 |
) |
|
$ |
(6,890 |
) |
|
$ |
(8,217 |
) |
|
$ |
(12,105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
(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) For the three months ended April 2, 2022, a net benefit in restructuring, impairment and abandonment costs is related to compensation adjustments for employee retention. During the nine months ended April 2, 2022, restructuring, impairment and abandonment charges are primarily related to software abandonment charges and employee retention cost. During the three months ended March 31, 2021, the restructuring, impairment and abandonment charges are primarily related to employee retention costs and severance cost. During the nine months ended March 31, 2021, the charges are primarily related to abandonment costs due to the permanent closure of our stores and Phoenix, Arizona distribution center and severance and employee retention costs. Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021. See Notes 2 to the condensed consolidated financial statements herein for additional information. |
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||||
(3) For the three months ended April 2, 2022, reorganization items, net benefit from claims related cost, partially offset by professional and legal fees. For the nine months ended April 2, 2022, reorganization items, net charges is from claims-related costs including professional and legal fees. During the three months ended March 31, 2021, reorganization items, net is primarily non-cash charges related to the execution of our Rights Offering (defined in Note 6), professional fees and claims-related costs. For the nine months ended March 31, 2021, reorganization items, net benefit was primarily due to a net gain resulting from store lease terminations and the termination of our Phoenix distribution center lease under our permanent closure plan and sale-leaseback transactions pursuant to the Plan of Reorganization, partially offset by professional and legal fees related to our reorganization, claims-related costs as well as non-cash charges from the Rights Offering. See Notes 1, 2, 6 and 8 to the condensed consolidated financial statements herein for additional information. |
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(4) For the three and nine months ended April 2, 2022, adjustments included non-cash expense (benefit) recognized related to cash settled awards in our long-term incentive plan. |
|
Liquidity and Capital Resources
Cash Flows for the Nine Months Ended April 2, 2022
Cash Flows from Operating Activities
In the nine months ended April 2, 2022, net cash used in operating activities was $57.6 million, compared to cash used in operating activities of $114.5 million in the same period last year. Net cash used in operating activities in the nine months ended April 2, 2022 was primarily driven by the inventory purchases and payments of operating expenses as part of ordinary course of business. Net cash used in operating activities in the nine months ended March 31, 2021 was primarily driven by the increase in inventory purchases, decrease in payables, reorganization expenses, and bankruptcy court approved pre-petition claims, legal, and professional fees.
Cash Flows from Investing Activities
Net cash used in investing activities for the nine months ended April 2, 2022 of $5.2 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 nine months ended March 31, 2021 of $68.1 million was related primarily from $68.6 million of proceeds from sale-leaseback transactions and $1.9 million of proceeds from the sale of property and equipment at the 197 stores that we permanently closed, and was partially offset by $2.3 million of capital expenditures.
Cash Flows from Financing Activities
Net cash provided by financing activities of $42.4 million for the nine months ended April 2, 2022 related primarily to net borrowings under our Post-Emergence ABL Facility. Net cash provided by financing activities of $61.6 million for the nine months ended March 31, 2021 related primarily to $25.0 million in proceeds from the term loan and $40.0 million of proceeds from the Rights Offering, offset by $3.2 million from payments of financing fees.
29
Liquidity
Historically, we have financed our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under an asset-based, senior secured revolving credit facility.
Post-Emergence ABL Credit Agreement
On December 31, 2020, as contemplated by our Plan of Reorganization, the Company and its subsidiaries entered into a Credit Agreement (the “Post-Emergence ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A. and Bank of America, N.A. that provides for a revolving credit facility in an aggregate amount of $110.0 million (the “Post-Emergence ABL Facility”). The Post-Emergence ABL Credit Agreement included conditions to borrowings, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. The Post-Emergence ABL Credit Agreement required the Company to maintain a minimum fixed charge coverage ratio if borrowing availability fell below certain minimum levels, after the first anniversary of the agreement. For additional information regarding the Post-Emergence ABL Facility, see Note 3 to our unaudited condensed consolidated financial statements herein.
As further described below, on May 9, 2022, we entered into the New ABL Credit Agreement (as defined below) and used a portion of the proceeds from borrowings under the New Facilities (as defined below) to repay all outstanding indebtedness under the Post-Emergence ABL Facility, along with accrued interest, expenses and fees.
New ABL Credit Agreement
On May 9, 2022 (the “Refinancing Closing Date”), Tuesday Morning Corporation (“Parent”), Tuesday Morning, Inc. (the “Borrower”) and each other subsidiary of Parent entered into a Credit Agreement (the “New ABL Credit Agreement”) with the lenders named therein, Wells Fargo Bank, National Association, as administrative agent, and 1903P Loan Agent, LLC, as FILO B documentation agent. The New ABL Credit Agreement provides for (i) a revolving credit facility in an aggregate amount of $110.0 million (the “New ABL Facility”), which includes a $10.0 million sublimit for swingline loans and a $25.0 million sublimit for letters of credit, (ii) a first-in last-out term loan facility in an aggregate amount of $5.0 million (the “FILO A Facility”) and (iii) an additional first-in last-out term loan facility in an aggregate amount of $5.0 million (the “FILO B Facility” and, collectively with the New ABL Facility and the FILO A Facility, the “New Facilities”). Each of the New Facilities will terminate, and outstanding borrowings thereunder will mature, on the earlier of (i) May 9, 2027 and (ii) the date that is 91 days prior to maturity of the Term Loan.
The New ABL Credit Agreement includes conditions to borrowings, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. In addition, the Borrower and its subsidiaries must maintain borrowing availability under the New ABL Facility at least equal to the greater of (i) $7.5 million and (ii) 7.5% of the Modified Revolving Loan Cap (as defined in the New ABL Credit Agreement). For additional information regarding the New ABL Credit Agreement and the New Facilities, see Note 13 to our unaudited condensed consolidated financial statements herein.
Term Loan Credit Agreement
On December 31, 2020, the Company, Alter Domus (US), LLC, as administrative agent, and the lenders named therein including Tensile Capital Partners Master Fund LP and affiliates of Osmium Partners, LLC, entered into a Credit Agreement (as amended from time to time, the “Term Loan Credit Agreement”) to provide a term loan of $25.0 million to the Company (the “Term Loan”). Pursuant to the terms of the Term Loan Credit Agreement, the Term Loan has a maturity date of December 31, 2024 and 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 Facilities and a first lien on certain other assets of the Company as described in the Term Loan Credit Agreement. The Term Loan is subject to optional prepayment after the first anniversary of the date of issuance at a prepayment price equal to (1) the outstanding principal amount of the Term Loan, plus (2) accrued and unpaid interest to the date of prepayment, plus (3) the prepayment premium, if any. The prepayment premium (which may not be less than zero) is equal to (1) 125% of the original principal amount of the Term Loan, minus (2) the aggregate principal amount of the loans advanced as of the prepayment date, plus all accrued interest thereon accrued as of such date. The Term Loan is subject to mandatory prepayment in connection with 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 April 2, 2022, the outstanding principal balance of the Term Loan was $29.5 million, net of debt issuance costs.
On the Refinancing Closing Date, (i) each Consenting Lender agreed to the Loan Repurchase, (ii) concurrently with the consummation of the Loan Repurchase, each Consenting Lender agreed to waive and forgive an amount of the accrued and unpaid interest owed to such Consenting Lender, (iii) it was agreed that immediately, automatically and permanently upon the consummation of the Loan Repurchase, the Term Loans assigned pursuant to the Loan Repurchase would be deemed cancelled and of no further force and effect, and (iv) the Term Loan Credit Agreement was amended to, among other things, (x) require us to maintain the same minimum level of
30
borrowing availability under the New ABL Facility as required by the New ABL Credit Agreement, (y) permit the Borrower to borrow on the $5.0 million committed FILO B accordion, subject to certain conditions, on and following November 9, 2022, and (z) require us to maintain a minimum total secured net leverage ratio beginning with the 12-month period ending September 30, 2023.
For additional information regarding the Term Loan, see Note 3 and Note 15 to our unaudited condensed consolidated financial statements herein.
Recent Liquidity Developments and Outlook
At April 2, 2022 we are in compliance with covenants in the Post-Emergence ABL Facility and Term Loan. As of April 2, 2022, we had $54.1 million of borrowings outstanding under our Post-Emergence ABL Facility and, $14.6 million of letters of credit outstanding. We currently have borrowing availability of $26.6 million under our Post-Emergence ABL Facility, as of April 2, 2022. Liquidity, defined as cash and cash equivalents plus the $26.6 million availability for borrowing under our Post-Emergence ABL Facility, was $35.0 million as of April 2, 2022.
Going forward, we expect to fund our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under the New ABL Facility.
On the Refinancing Closing Date, the Borrower borrowed approximately $75.2 million under the New ABL Facility, $5.0 million under the FILO A Facility and $5.0 million under the FILO B Facility (collectively, the “Closing Date Loans”). A portion of the aggregate proceeds from the Closing Date Loans was used to (i) repay all outstanding indebtedness (the “Existing ABL Loans”) under that certain Credit Agreement, dated as of December 31, 2020, among the Company, the Borrower, each of the subsidiary guarantors party thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (the “Existing ABL Credit Agreement”), along with accrued interest, expenses and fees, (ii) purchase of a portion of the principal amount of the outstanding indebtedness (the “Term Loan”) under that certain Credit Agreement, dated as of December 31, 2020, by and among the Company, the Borrower, each of the subsidiary guarantors party thereto, the lenders party thereto (including Tensile Capital Partners Master Fund LP and affiliates of Osmium Partners, LLC) (collectively, the “Term Loan Lenders”), and Alter Domus (US) LLC, as administrative agent (the “Term Loan Credit Agreement”) for the aggregate purchase price of $5.0 million (the “Loan Repurchase”), and (iii) pay transaction costs related to the transactions described in the foregoing clauses (i) and (ii) and the execution and delivery of the New ABL Credit Agreement and related loan documents. The remainder of the proceeds from the Closing Date Loans, as well as the proceeds from future borrowings, will be used for working capital needs and other general corporate purposes.
We currently have $85.2 million of aggregate borrowings outstanding under the New Facilities and aggregate borrowing availability of $26.0 million under the New ABL Facility, in each case as of May 9, 2022. In addition, we have the right to request (i) an additional incremental loan under the FILO B Facility in an aggregate amount not to exceed $5.0 million, which, subject to the satisfaction of certain conditions, the FILO B lenders have committed to provide, and (ii) additional incremental commitments from the FILO B lenders to make additional loans in an aggregate amount not to exceed $5.0 million, subject to the satisfaction of certain conditions.
We incurred capital expenditures of approximately $5.2 million in the first nine months of fiscal 2022. Capital expenditures are anticipated to be $6.7 million total for fiscal year 2022. The amounts include the expected costs to open three new stores, reopen a Hurricane-damaged store, costs to enhance our existing store fleet, investment in technology as well as our Dallas distribution center.
We do not presently have any plans to pay dividends or repurchase shares of our common stock. Under the terms of the our New ABL Credit Agreement and the Term Loan, we are subject to restrictions on our ability to pay dividends or repurchase shares of our common stock, including a $2.0 million limit on such payments imposed by the Term Loan Credit Agreement, and must maintain certain minimum levels of borrowing availability.
Off-Balance Sheet Arrangements and Contractual Obligations
We had no off-balance sheet arrangements as of April 2, 2022.
There have been no material changes to our contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
31
Critical Accounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared pursuant to the rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of certain assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On a recurring basis, we evaluate our significant estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ materially from these estimates.
Other than as described in Note 1 of our unaudited condensed consolidated financial statements herein, as of April 2, 2022, there were no changes to our critical accounting policies from those listed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
Under the retail inventory method, permanent markdowns result in cost reductions in inventory at the time the markdowns are taken. We also utilize promotional markdowns for specific marketing efforts used to drive higher sales volume and customer transactions for a specified period of time. Promotional markdowns do not impact the value of unsold inventory and thus do not impact cost of sales until the merchandise is sold. Markdowns and damages during the third quarter of fiscal 2022 were 4.4% of sales compared to 4.0% of sales for the same period last year. Markdowns and damages during the first nine months of fiscal 2022 were 3.3% of sales compared to 3.9% of sales for the same period last year. If our sales forecasts are not achieved, we may be required to record additional markdowns that could exceed historical levels. The effect of a 0.5% markdown in the value of our inventory at April 2, 2022 would result in a decline in gross margin and diluted earnings per share for the third quarter of fiscal 2022 of $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, 2021.
Recent Accounting Pronouncements
Please refer to Note 1 of our unaudited condensed consolidated financial statements herein for a summary of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's principal executive officer ("CEO") and principal financial officer ("CFO"), evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) 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 procedures were effective to ensure information that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended April 2, 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information related to the Chapter 11 Cases that were filed on May 27, 2020 is included in Note 1 and Note 2 to our unaudited condensed consolidated financial statements herein.
See Note 7 to our unaudited condensed consolidated financial statements herein for additional information.
Item 1A. Risk Factors
Except as set forth below, we believe there have been no material changes from our risk factors previously disclosed in Part 1, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
If we are not able to generate cash flows from our operations, remain in compliance with our debt agreements, and continue to access credit markets, we will not be able to support capital expenditure requirements, operations or debt repayment.
Our business is dependent upon our operations generating sufficient cash flows to support capital expenditure requirements and general operating activities. We also have relied on a revolving credit facility to support our liquidity needs. On May 9, 2022, we entered into the New ABL Credit Agreement, which increased our borrowing capacity with the addition of two first-in-last out term facilities in an aggregate amount of $10.0 million. The New ABL Credit Agreement includes customary conditions to borrowing, affirmative and negative covenants and events of default, and requires us to maintain minimum borrowing availability under the New ABL Credit Agreement. In addition, in connection with the New ABL Credit Agreement, the Term Loan Credit Agreement was amended to require satisfaction of a total secured net leverage ratio beginning with the 12-month period ending September 30, 2023. Our failure to satisfy any of these requirements may result in an event of default under the New ABL Credit Agreement and the Term Loan Credit Agreement.
While we believe the New ABL Credit Agreement will provide us with sufficient liquidity for the next 12 months, our ability to meet our capital expenditure, operating and debt service requirements will be dependent upon our ability to generate sufficient cash flows, maintain compliance with the requirements of our debt agreements and continue to access the credit markets as necessary. If we are unable to generate sufficient cash flows and maintain compliance with the requirements of the New ABL Agreement and the Term Loan Credit Agreement, we can provide no assurance that we will be able to secure additional or alternative financing sufficient to meet our liquidity needs.
33
Item 6. Exhibits
Exhibit |
|
Description |
|
|
|
10.1 |
|
|
10.2 |
|
|
31.1 |
|
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|
31.2 |
|
|
|
|
|
32.1 |
|
|
|
|
|
32.2 |
|
|
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. |
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
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.
34
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) |
||
|
|
|
|
DATE: May 12, 2022 |
By: |
|
/s/ Jennifer N. Robinson |
|
|
|
Jennifer N. Robinson Executive Vice President and Chief Financial Officer (Principal Financial Officer)
|
35