tues-10q_20200331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2020

OR

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

FOR THE TRANSITION PERIOD FROM          TO         

Commission File Number 0-19658

 

TUESDAY MORNING CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

75-2398532

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

6250 LBJ Freeway

Dallas, Texas 75240

(Address of principal executive offices) (Zip code)

(972) 387-3562

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

TUESQ*

 

*

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


 

Class

 

Outstanding at June 15, 2020

Common Stock, par value $0.01 per share

 

47,894,980

 

 

 

 


Table of Contents

 

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

4

 

 

 

 

 

 

 

ITEM 1.

 

Financial Statements (Unaudited)

 

 

 

4

 

 

 

 

 

 

 

 

 

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

 

 

 

4

 

 

 

 

 

 

 

 

 

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

 

 

 

5

 

 

 

 

 

 

 

 

 

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

 

 

 

6

 

 

 

 

 

 

 

 

 

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

 

 

 

8

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

9

 

 

 

 

 

 

 

ITEM 2.

 

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

 

 

 

18

 

 

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

27

 

 

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

 

 

27

 

 

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

28

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

 

 

28

 

 

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

 

 

28

 

 

 

 

 

 

 

ITEM 6.

 

Exhibits

 

 

 

33

 

 

 

 

 

 

 

 

3


PART I — FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

Tuesday Morning Corporation

Consolidated Balance Sheets

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

(In thousands, except share and per share data)

 

 

 

March 31,

 

 

June 30,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,334

 

 

$

11,395

 

Inventories

 

 

215,494

 

 

 

237,895

 

Prepaid expenses

 

 

4,237

 

 

 

5,388

 

Other current assets

 

 

1,690

 

 

 

1,822

 

Total Current Assets

 

 

268,755

 

 

 

256,500

 

Property and equipment, net

 

 

104,872

 

 

 

110,146

 

Operating lease right-of-use assets

 

 

347,495

 

 

 

 

Deferred financing costs

 

 

831

 

 

 

994

 

Other assets

 

 

2,550

 

 

 

2,881

 

Total Assets

 

$

724,503

 

 

$

370,521

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

78,916

 

 

$

91,251

 

Accrued liabilities

 

 

33,854

 

 

 

45,923

 

Operating lease liabilities

 

 

71,782

 

 

 

 

Current portion of long-term debt

 

 

90,600

 

 

 

 

Total Current Liabilities

 

 

275,152

 

 

 

137,174

 

 

 

 

 

 

 

 

 

 

Operating lease liabilities — non-current

 

 

302,456

 

 

 

 

Borrowings under revolving credit facility

 

 

 

 

 

34,650

 

Deferred rent

 

 

 

 

 

23,551

 

Asset retirement obligation — non-current

 

 

3,002

 

 

 

3,002

 

Other liabilities — non-current

 

 

895

 

 

 

835

 

Total Liabilities

 

 

581,505

 

 

 

199,212

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share, authorized 10,000,000 shares;

   none issued or outstanding

 

 

 

 

 

 

Common stock, par value $0.01 per share, authorized 100,000,000 shares;

   49,794,195 shares issued and 48,010,534 shares outstanding at

   March 31, 2020 and 48,466,930 shares issued and 46,683,269 shares

   outstanding at June 30, 2019

 

 

461

 

 

 

465

 

Additional paid-in capital

 

 

243,481

 

 

 

241,456

 

Retained deficit

 

 

(94,132

)

 

 

(63,800

)

Less: 1,783,661 common shares in treasury, at cost, at March 31, 2020

   and 1,783,661 common shares in treasury, at cost, at June 30, 2019

 

 

(6,812

)

 

 

(6,812

)

Total Stockholders’ Equity

 

 

142,998

 

 

 

171,309

 

Total Liabilities and Stockholders’ Equity

 

$

724,503

 

 

$

370,521

 

 

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

 

 

4


Tuesday Morning Corporation

Consolidated Statements of Operations (unaudited)

Three and Nine Months Ended March 31, 2020 and 2019

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net sales

 

$

165,698

 

 

$

210,984

 

 

$

714,551

 

 

$

776,716

 

Cost of sales

 

 

113,531

 

 

 

134,486

 

 

 

475,476

 

 

 

501,054

 

Gross profit

 

 

52,167

 

 

 

76,498

 

 

 

239,075

 

 

 

275,662

 

Selling, general and administrative expenses

 

 

82,814

 

 

 

84,309

 

 

 

267,273

 

 

 

274,751

 

Operating income/(loss)

 

 

(30,647

)

 

 

(7,811

)

 

 

(28,198

)

 

 

911

 

Other income/(expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(499

)

 

 

(513

)

 

 

(1,890

)

 

 

(1,868

)

Other income, net

 

 

223

 

 

 

165

 

 

 

456

 

 

 

597

 

Other income/(expense) total

 

 

(276

)

 

 

(348

)

 

 

(1,434

)

 

 

(1,271

)

Loss before income taxes

 

 

(30,923

)

 

 

(8,159

)

 

 

(29,632

)

 

 

(360

)

Income tax benefit

 

 

117

 

 

 

130

 

 

 

99

 

 

 

31

 

Net loss

 

$

(31,040

)

 

$

(8,289

)

 

$

(29,731

)

 

$

(391

)

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.69

)

 

$

(0.18

)

 

$

(0.66

)

 

$

(0.01

)

Diluted

 

$

(0.69

)

 

$

(0.18

)

 

$

(0.66

)

 

$

(0.01

)

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,314

 

 

 

44,811

 

 

 

45,162

 

 

 

44,677

 

Diluted

 

 

45,314

 

 

 

44,811

 

 

 

45,162

 

 

 

44,677

 

Dividends per common share

 

$

 

 

$

 

 

$

 

 

$

 

 

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

 

5


Tuesday Morning Corporation

Consolidated Statements of Stockholders' Equity (unaudited)

Three Months Ended March 31, 2020 and 2019

(In thousands)

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

Balance at December 31, 2019

 

48,036

 

 

$

462

 

 

$

242,899

 

 

$

(63,092

)

 

$

(6,812

)

 

$

173,457

 

Net loss

 

 

 

 

 

 

 

 

 

 

(31,040

)

 

 

 

 

 

(31,040

)

Share-based compensation

 

 

 

 

 

 

 

581

 

 

 

 

 

 

 

 

 

581

 

Shares issued or canceled in connection with

   employee stock incentive plans and related tax effect

 

(25

)

 

 

(1

)

 

 

1

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2020

 

48,011

 

 

$

461

 

 

$

243,481

 

 

$

(94,132

)

 

$

(6,812

)

 

$

142,998

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

Balance at December 31, 2018

 

46,801

 

 

$

469

 

 

$

239,723

 

 

$

(43,462

)

 

$

(6,812

)

 

$

189,918

 

Net loss

 

 

 

 

 

 

 

 

 

 

(8,289

)

 

 

 

 

 

(8,289

)

Share-based compensation

 

 

 

 

 

 

 

896

 

 

 

 

 

 

 

 

 

896

 

Shares issued or canceled in connection with

   employee stock incentive plans and related tax effect

 

(61

)

 

 

(4

)

 

 

4

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

46,740

 

 

$

465

 

 

$

240,623

 

 

$

(51,751

)

 

$

(6,812

)

 

$

182,525

 

 

6


Tuesday Morning Corporation

Consolidated Statements of Stockholders' Equity (unaudited)

Nine Months Ended March 31, 2020 and 2019

(In thousands)

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

Balance at June 30, 2019

 

46,683

 

 

$

465

 

 

$

241,456

 

 

$

(63,800

)

 

$

(6,812

)

 

 

171,309

 

Net loss

 

 

 

 

 

 

 

 

 

 

(29,731

)

 

 

 

 

 

(29,731

)

Share-based compensation

 

 

 

 

 

 

 

2,022

 

 

 

 

 

 

 

 

 

2,022

 

Shares issued or canceled in connection with

   employee stock incentive plans and related tax effect

 

1,328

 

 

 

(4

)

 

 

3

 

 

 

 

 

 

 

 

 

(1

)

Cumulative effect of accounting change

 

 

 

 

 

 

 

 

 

 

(601

)

 

 

 

 

 

(601

)

Balance at March 31, 2020

 

48,011

 

 

$

461

 

 

$

243,481

 

 

$

(94,132

)

 

$

(6,812

)

 

$

142,998

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

Balance at June 30, 2018

 

45,865

 

 

$

469

 

 

$

237,957

 

 

$

(51,360

)

 

$

(6,812

)

 

$

180,254

 

Net loss

 

 

 

 

 

 

 

 

 

 

(391

)

 

 

 

 

 

(391

)

Share-based compensation

 

 

 

 

 

 

 

2,655

 

 

 

 

 

 

 

 

 

2,655

 

Shares issued in connection with exercises of

   employee stock options

 

3

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Shares issued or canceled in connection with

   employee stock incentive plans and related tax effect

 

872

 

 

 

(4

)

 

 

4

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

46,740

 

 

$

465

 

 

$

240,623

 

 

$

(51,751

)

 

$

(6,812

)

 

$

182,525

 

 

7


Tuesday Morning Corporation

Consolidated Statements of Cash Flows (unaudited)

Nine Months Ended March 31, 2020 and 2019

(In thousands)

 

 

 

Nine Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(29,731

)

 

$

(391

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

20,935

 

 

 

19,727

 

Amortization of financing fees

 

 

163

 

 

 

220

 

(Gain)/loss on disposal of assets

 

 

92

 

 

 

(10

)

Share-based compensation

 

 

2,082

 

 

 

2,671

 

Construction allowances from landlords

 

 

1,313

 

 

 

1,121

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventories

 

 

22,341

 

 

 

(3,931

)

Prepaid and other current assets

 

 

1,631

 

 

 

885

 

Accounts payable

 

 

(7,339

)

 

 

(15,349

)

Accrued liabilities

 

 

(9,842

)

 

 

5,063

 

Operating lease assets and liabilities

 

 

(1,085

)

 

 

 

Deferred rent

 

 

 

 

 

(141

)

Income taxes payable

 

 

153

 

 

 

82

 

Other liabilities — non-current

 

 

(106

)

 

 

34

 

Net cash provided by operating activities

 

 

607

 

 

 

9,981

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(15,513

)

 

 

(10,924

)

Purchases of intellectual property

 

 

(27

)

 

 

(292

)

Proceeds from sales of assets

 

 

114

 

 

 

25

 

Net cash used in investing activities

 

 

(15,426

)

 

 

(11,191

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings under revolving credit facility

 

 

265,353

 

 

 

156,200

 

Repayments of borrowings under revolving credit facility

 

 

(209,403

)

 

 

(159,480

)

Change in cash overdraft

 

 

(4,996

)

 

 

9,391

 

Payments on finance leases

 

 

(196

)

 

 

(121

)

Proceeds from exercise of stock options and stock purchase plan purchases

 

 

 

 

 

7

 

Payment of financing fees

 

 

 

 

 

(529

)

Net cash provided by financing activities

 

 

50,758

 

 

 

5,468

 

Net increase in cash and cash equivalents

 

 

35,939

 

 

 

4,258

 

Cash and cash equivalents, beginning of period

 

 

11,395

 

 

 

9,510

 

Cash and cash equivalents, end of period

 

$

47,334

 

 

$

13,768

 

 

 

 

 

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

 

 

8


Tuesday Morning Corporation

Notes to Consolidated Financial Statements (unaudited)

The terms “Tuesday Morning,” the “Company,” “we,” “us” and “our” as used in this Quarterly Report on Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries.  Other than as disclosed in this document, please refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 for our critical accounting policies.

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

 

 

1.     Basis of presentation — The unaudited interim consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These financial statements include all adjustments, consisting only of those of a normal recurring nature, which, in the opinion of management, are necessary to present fairly the results of the interim periods presented and should be read in conjunction with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019. The consolidated balance sheet at June 30, 2019 has been derived from the audited consolidated financial statements at that date. These interim financial statements do not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019. The results of operations for the three and nine months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year ending June 30, 2020, which we refer to as fiscal 2020, due in part to the seasonality of our business and the financial impact of the COVID-19 pandemic, discussed further below. Certain reclassifications were made to prior period amounts to conform to the current period presentation. None of the reclassifications affected our net income in any period.

We do not present a consolidated statement of comprehensive income as there are no other comprehensive income items in either the current or prior fiscal periods.

The preparation of unaudited interim consolidated financial statements, in conformity with GAAP, requires us to make assumptions and use estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The most significant estimates relate to inventory valuation under the retail method and estimation of reserves and valuation allowances specifically related to insurance, income taxes and litigation. Actual results could differ materially from these estimates.  The COVID-19 pandemic has increased the difficulty in making various estimates in our financial statements.  Our fiscal year ends on June 30 and we operate our business as a single operating segment.

COVID-19 Pandemic

The COVID-19 pandemic has had, and will continue to have, an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow.

On March 25, 2020, we temporarily closed all of our stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. The scope and duration of this pandemic and the related disruption to our business and financial impacts cannot be reasonably estimated at this time.

Going Concern

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

Subsequent to March 31, 2020, the COVID-19 pandemic and the resulting store closures have continued to severely reduce our revenues and operating cash flows.  As described in Note 2, on May 27, 2020 (the “Petition Date”), we filed voluntary petitions (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the “Bankruptcy Court”).  The filing of the Chapter 11 Cases constituted an event of default that caused our obligations under the Pre-Petition ABL Credit Agreement to become immediately due

9


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

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

The consolidated financial statements for three and nine month periods ended March 31, 2020, have been prepared assuming that the Company will continue as a going concern. The consolidated financial statements do not include any adjustments that would result if the Company was unable to realize its assets and settle its liabilities as a going concern in the ordinary course of business.  We have concluded that our financial condition and our projected operating results, our need to satisfy certain financial and other covenants in our debtor-in-possession financing, our need to implement a restructuring plan and receive new financing, and the risks and uncertainties surrounding the Chapter 11 Cases raise substantial doubt as to our ability to continue as a going concern.  Our future plans, including those in connection with the Chapter 11 Cases, are not yet finalized, fully executed or approved by the Bankruptcy Court, and therefore cannot be deemed probable of mitigating this substantial doubt within 12 months of the date of issuance of these financial statements.

Bankruptcy Filing

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

Accounting Pronouncement Recently Adopted

 

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

 

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

 

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

 

See Note 5 for additional information.

 

 

2.     Subsequent events —

 

Voluntary Petitions for Reorganization under Chapter 11

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

 

Significant Bankruptcy Court Actions

10


We will continue to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  On May 28, 2020 at the first-day hearings of the Chapter 11 Cases, the Bankruptcy Court granted relief in conjunction with various motions intended to ensure our ability to continue our ordinary operations after the Petition Date.  The Bankruptcy Court’s Orders granting such relief, entered on May 28, 2020 and May 29, 2020, authorized us to, among other things, pay certain pre-petition employee and retiree expenses and benefits, use our existing cash management system, maintain and administer customer programs, pay certain critical and foreign vendors and pay certain pre-petition taxes and related fees. In addition, the Bankruptcy Court issued an interim order [Docket No. 67] (the “Interim DIP Order”) approving, among other things, (1) our entry into the Senior Secured Super Priority Debtor-in-Possession Credit Agreement (the “DIP ABL Credit Agreement”) among the Company, JPMorgan Chase Bank, N.A., as administrative agent, for itself and the other lenders, which provides for a super priority secured debtor-in-possession revolving credit facility in an aggregate amount of up to $100 million (the “DIP ABL Facility”), and (2) our use of cash collateral in accordance with the terms of the DIP ABL Credit Agreement. Pursuant to the Interim DIP Order, an initial amount of up to $50 million became available for revolving loans under the DIP ABL Facility, with the remaining amounts to become available upon entry of a final order by the Bankruptcy Court.

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

On May 29, 2020, the Bankruptcy Court issued an interim order [Docket No. 98] (including the exhibits attached thereto, the “Interim NOL Order”) designed to assist us in preserving certain tax attributes by establishing, among other things, notification and hearing procedures (the “Procedures”) relating to proposed transfers of its common stock and the taking of worthless stock deductions and setting a final hearing to consider the issues addressed in the Interim Order. The Procedures, among other things, restrict transfers involving, and require notice of the holdings of and proposed transactions by any person or “entity” (as defined the applicable U.S. Treasury Regulations) owning or seeking to acquire ownership of 4.5% or more of the Company’s common stock. The Interim NOL Order provides that any actions in violation of the Procedures (including the notice requirements) would be null and void ab initio, and (a) the person or entity making such a transfer would be required to take remedial actions specified by us to appropriately reflect that such transfer of our common stock is null and void ab initio and (b) the person or entity making such a declaration of worthlessness with respect to our common stock would be required to file an amended tax return revoking such declaration and any related deduction to reflect that such declaration is void ab initio.

On May 29, 2020, the Bankruptcy Court issued an interim order approving procedures for the closure of up to 230 of our store locations, for which the decision and identification occurred subsequently to March 31, 2020 as part of our planned objectives under reorganization.  The Bankruptcy Court entered a final order approving these procedures on June 9, 2020.  We have commenced the process to close approximately 130 store locations in a first wave of store closings. We currently expect to close an additional approximately 100 stores following negotiations with our landlords. We also expect to close our Phoenix, Arizona distribution center. We are not able to estimate at this time the amount, nature and timing of the charges that will be incurred as a result of these actions.

Debtor-in-Possession Credit Facilities

DIP ABL Facility

On May 29, 2020, the Debtors entered into the DIP ABL Credit Agreement. The Lenders under the DIP ABL Facility are the existing lenders under the Pre-Petition ABL Credit Agreement.

The DIP ABL Credit Agreement includes conditions precedent, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. The DIP ABL Credit Agreement requires the Debtors to, among other things, maintain certain minimum liquidity requirements, complete the DIP Term Facility (as defined below), and receive approval of a plan of reorganization or sale of substantially all assets of the Debtors through the Chapter 11 process by agreed upon deadlines.

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

The commitments of the lenders under the DIP ABL Facility terminate and outstanding borrowings under the DIP ABL Facility mature at the earliest of the date which is one hundred eighty (180) days after the Petition Date; the date of consummation of the sale of all or substantially all of the Debtors’ assets; the effective date of a plan of reorganization; or upon the occurrence of an event of default under the DIP ABL Credit Agreement or such other date as the outstanding borrowings under the DIP Facility are accelerated.

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DIP Term Facility

On June 3, 2020, the Debtors entered into a term sheet (the “Term Sheet”) with BRF Finance Co., LLC (“BRF Finance”), pursuant to which, and subject to the satisfaction of certain customary conditions, including the approval of the Bankruptcy Court, BRF Finance would agree to provide a debtor-in-possession delayed draw term loan facility in an amount not to exceed $25 million (the “DIP Term Facility”) secured by the owned real estate of the Debtors (the “Real Estate Assets”).  Under the terms of the Term Sheet, the closing and initial extension of credit under the DIP Term Facility (which initial extension of credit is not to exceed $10 million) will be subject to satisfaction of certain conditions precedent, including execution and delivery of definitive loan documentation, entry of an interim order of the Bankruptcy Court authorizing the DIP Term Facility, receipt by BRF Finance of certain financial and tax information with respect to the Debtors, including the Budget, and receipt by BRF Finance of certain real estate appraisals and title reports with respect to the Real Estate Assets.  Thereafter and so long as a final order of the Bankruptcy Court authorizing the DIP Term Facility has been entered and is in full force and effect, the Debtors would be entitled to make additional borrowings under the DIP Term Facility in minimum increments of $2.5 million subject to the satisfaction of certain additional conditions, including absence of defaults under the DIP Term Facility, delivery of notices of borrowing and the accuracy of the representations and warranties of the Debtor in the definitive loan documentation for the DIP Term Facility.

 

Pursuant to the Term Sheet, proceeds of borrowings under the DIP Term Facility would be used by the Debtors to: (1) repay obligations of the Debtors under (a) the DIP ABL Credit Agreement, and (b) the Pre-Petition ABL Credit Agreement; (2) fund general working capital; and (3) fund operational expenses and restructuring expenses of the Debtors, in each case, to the extent permitted by the applicable orders of the Bankruptcy Court, the Budget and the definitive loan documents for the DIP Term Facility.

 

The DIP Term Facility is expected to include conditions precedent, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size, but in all events consistent with the terms of the DIP ABL Credit Agreement.  The Debtors will be obligated to prepay amounts outstanding under the DIP Term Facility upon certain asset sales and casualty or condemnation events with respect to the Real Estate Assets.

 

Under the terms of the DIP ABL Credit Agreement and the Term Sheet, the lenders under the DIP ABL Credit Agreement will have a lien on the Real Estate Assets ranking junior to the rights of the lenders under the DIP Term Facility, with the lien priorities and enforcement rights with respect to the Real Estate Assets and the application of proceeds thereof to be governed by the terms of an intercreditor agreement.

 

The proposed DIP Term Facility would mature on the earliest of (1) the date that is 180 days after the Petition Date, (2) the date of consummation of a sale of all or substantially all assets of the Debtors, (3) the effective date of a plan of reorganization, or (4) the date the obligations of the Debtors under the DIP Term Facility are accelerated as a result of an event of default.

De-listing

On May 27, 2020, the Company received a letter from the Listing Qualifications Department staff of The Nasdaq Stock Market (“Nasdaq”) notifying it that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, Nasdaq determined that the Company’s common stock will be delisted from Nasdaq. On June 8, 2020, trading of the Company’s common stock on Nasdaq was suspended and the Company’s common stock began trading over the counter in the OTC Pink Market under the symbol “TUESQ”.

 

3.     Revenue recognition — Our revenue is earned from sales of merchandise within our stores and is recorded at the point of sale and conveyance of merchandise to customers. Revenue is measured based on the amount of consideration that we expect to receive, reduced by point of sale discounts and estimates for sales returns, and excludes sales tax.  Payment for our sales is due at the time of sale.  We maintain a reserve for estimated returns, as well as a corresponding returns asset, and we use historical customer return behavior to estimate our reserve requirements.  No impairment of the returns asset was identified or recorded as of March 31, 2020.  Gift cards are sold to customers in our stores and we issue gift cards for merchandise returns in our stores. Revenue from sales of gift cards and issuances of merchandise credits is recognized when the gift card is redeemed by the customer, or if the likelihood of the gift card being redeemed by the customer is remote (gift card breakage). The gift card breakage rate is determined based upon historical redemption patterns. An estimate of the rate of gift card breakage is applied over the period of estimated performance and the breakage amounts are included in net sales in the Consolidated Statement of Operations.  Breakage income recognized was $0.1 million in the third quarter of fiscal 2020 and was less than $0.1 million in the third quarter of fiscal 2019. Breakage income recognized was $0.4 million in the first nine months of fiscal 2020 and was $0.3 million in the first nine months of fiscal 2019.  The gift card liability is included in “Accrued liabilities” in the Consolidated Balance Sheet.  We will continue to evaluate whether and how store closures may affect customer behavior with respect to sales returns and gift card redemption and related breakage.

 

4.     Share-based incentive plans — Stock Option Awards. We have established the Tuesday Morning Corporation 2008 Long-Term Equity Incentive Plan (the “2008 Plan”) and the Tuesday Morning Corporation 2014 Long-Term Incentive Plan, as amended (the “2014 Plan”), which allow for the granting of stock options to directors, officers and key employees of the Company, and certain other

12


key individuals who perform services for us and our subsidiaries. Equity awards may no longer be granted under the 2008 Plan, but equity awards granted under the 2008 Plan are still outstanding.

 

Stock options were awarded under the 2008 Plan and the 2014 Plan with a strike price at the fair market value equal to the closing price of our common stock on the date of the grant.

 

Options granted under the 2008 Plan and the 2014 Plan typically vest over periods of one to four years and expire ten years from the date of grant.  Options granted under the 2008 Plan and the 2014 Plan may have certain performance requirements in addition to service terms. If the performance conditions are not satisfied, the options are forfeited. The exercise prices of stock options outstanding on March 31, 2020 range between $1.64 per share and $20.91 per share.  The 2008 Plan terminated as to new awards as of September 16, 2014.  There were 2.1 million shares available for grant under the 2014 Plan at March 31, 2020.

Restricted Stock Awards—The 2008 Plan and the 2014 Plan authorize the grant of restricted stock awards to directors, officers, key employees and certain other key individuals who perform services for us and our subsidiaries.  Equity awards may no longer be granted under the 2008 Plan, but restricted stock awards granted under the 2008 Plan are still outstanding.  Restricted stock awards are not transferable, but bear certain rights of common stock ownership including voting and dividend rights.  The 2014 Plan also authorizes the issuance of restricted stock units which, upon vesting, provide for the issuance of an equivalent number of shares of common stock or a cash payment based on the value of our common stock at vesting.  Restricted units are not transferable and do not provide voting or dividend rights.  Shares and units are valued at the fair market value of our common stock on the date of the grant.  Shares and units may be subject to certain performance requirements. If the performance requirements are not met, the restricted shares or units are forfeited.  Under the 2008 Plan and the 2014 Plan, as of March 31, 2020, there were 2,688,548 shares of restricted stock and 1,473,787 restricted stock units outstanding with award vesting periods, both performance-based and service-based, of one to four years and a weighted average grant date fair value of $2.30 and $1.83 per share, respectively.

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

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

 

 

Three Months Ended

March 31,

 

 

Nine Months Ended

March 31,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Amortization of share-based compensation during the period

$

581

 

 

$

896

 

 

$

2,022

 

 

$

2,655

 

Amounts capitalized in ending inventory

 

(160

)

 

 

(275

)

 

 

(552

)

 

 

(892

)

Amounts recognized and charged to cost of sales

 

102

 

 

 

218

 

 

 

612

 

 

 

908

 

Amounts charged against income for the period before tax

$

523

 

 

$

839

 

 

$

2,082

 

 

$

2,671

 

 

 

 

5.     Commitments and contingencies — Information related to the Chapter 11 Cases that were filed on May 27, 2020 is included in Note 2.

 

In addition, we are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established when a loss is considered probable and are based on management’s best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies.  Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.

 

6.     Leases — We conduct substantially all operations from leased facilities, with the exception of the corporate headquarters in Dallas and the Dallas warehouse, distribution and retail complex, which are owned facilities.  The other warehouse facility and all other retail store locations are under operating leases that will expire over the next 1 to 11 years.  Many of our leases include options to renew at our discretion.  We include the lease renewal option periods in the calculation of our operating lease assets and liabilities when it is reasonably certain that we will renew the lease.  We also lease certain equipment under finance leases that expire generally within 60 months.

As discussed in Note 1, we adopted ASC 842 effective July 1, 2019 using the modified retrospective adoption method, which resulted in an adjustment to opening retained earnings of $0.6 million as of July 1, 2019 to recognize impairment of the opening right-of-use asset balance for two stores for which assets had been previously impaired under ASC 360, “Property, Plant, and Equipment.”

We utilized the simplified transition option available in ASC 842, which allowed the continued application of the legacy guidance in ASC 840, including disclosure requirements, in the comparative periods presented in the year of adoption.

13


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

March 31,

2020

 

 

Nine Months Ended

March 31,

2020

 

Operating lease cost

 

$

23,552

 

 

$

71,186

 

Variable lease cost

 

 

6,244

 

 

 

18,982

 

Finance lease cost:

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

 

72

 

 

 

213

 

Interest on lease liabilities

 

 

7

 

 

 

23

 

Total lease cost

 

$

29,875

 

 

$

90,404

 

 

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

 

 

 

As of March 31, 2020

 

Weighted average remaining lease term (in years)

 

 

 

 

Operating leases

 

 

6.1

 

Finance leases

 

 

2.9

 

Weighted average discount rate

 

 

 

 

Operating leases

 

 

5.8

%

Finance leases

 

 

3.8

%

 

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

 

 

 

Three Months Ended

March 31,

2020

 

 

Nine Months Ended

March 31,

2020

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

23,615

 

 

$

67,146

 

Operating cash flows from finance leases

 

 

6

 

 

 

22

 

Financing cash flows from finance leases

 

 

54

 

 

 

196

 

Right-of-use assets obtained in exchange

   for operating lease liabilities

 

 

6,632

 

 

 

28,040

 

 

14


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

 

 

Operating

Leases

 

 

Finance

Leases

 

 

Total

 

Fiscal year:

 

 

 

 

 

 

 

 

 

 

 

2020 (remaining)

$

23,762

 

 

 

97

 

 

$

23,859

 

2021

 

87,942

 

 

 

315

 

 

 

88,257

 

2022

 

75,022

 

 

 

236

 

 

 

75,258

 

2023

 

64,830

 

 

 

94

 

 

 

64,924

 

2024

 

55,820

 

 

 

10

 

 

 

55,830

 

2025

 

48,376

 

 

 

 

 

 

48,376

 

Thereafter

 

91,174

 

 

 

 

 

 

91,174

 

Total lease payments

$

446,926

 

 

$

752

 

 

$

447,678

 

Less:  Interest

 

72,688

 

 

 

32

 

 

 

72,720

 

Total lease liabilities

$

374,238

 

 

$

720

 

 

$

374,958

 

Less:  Current lease liabilities

 

71,782

 

 

 

293

 

 

 

72,075

 

Non-current lease liabilities

$

302,456

 

 

$

427

 

 

$

302,883

 

 

Current and non-current finance lease liabilities are recorded in “Accrued liabilities” and “Other liabilities – non-current,” respectively, on our consolidated balance sheet.  As of March 31, 2020, there were no operating lease payments for legally binding minimum lease payments for leases signed but not yet commenced.

 

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

 

 

Three Months Ended

March 31,

 

 

Nine Months Ended

March 31,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net loss

$

(31,040

)

 

$

(8,289

)

 

$

(29,731

)

 

$

(391

)

Less: Income to participating securities

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common shares

$

(31,040

)

 

$

(8,289

)

 

$

(29,731

)

 

$

(391

)

Weighted average number of common shares

   outstanding — basic

 

45,314

 

 

 

44,811

 

 

 

45,162

 

 

 

44,677

 

Effect of dilutive stock equivalents

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares

   outstanding — diluted

 

45,314

 

 

 

44,811

 

 

 

45,162

 

 

 

44,677

 

Net loss per common share — basic

$

(0.69

)

 

$

(0.18

)

 

$

(0.66

)

 

$

(0.01

)

Net loss per common share — diluted

$

(0.69

)

 

$

(0.18

)

 

$

(0.66

)