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2020-12-31

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED December 31, 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: None

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

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

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

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

 

Class

 

Outstanding at February 3, 2021

Common Stock, par value $0.01 per share

 

46,894,235

 

 

 

 


 

Table of Contents

 

PART I.

 

FINANCIAL INFORMATION

 

3

 

 

 

 

 

ITEM 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2020 and June 30, 2020

 

3

 

 

 

 

 

 

 

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

 

4

 

 

 

 

 

 

 

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

 

5

 

 

 

 

 

 

 

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

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

8

 

 

 

 

 

ITEM 2.

 

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

 

20

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

30

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

31

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

31

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

31

 

 

 

 

 

ITEM 6.

 

Exhibits

 

32

 

 

 

 

 

 

2


PART I — FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

Tuesday Morning Corporation

(Debtor-in-Possession)

Consolidated Balance Sheets

December 31, 2020 (unaudited) and June 30, 2020

(In thousands, except share and per share data)

 

 

 

December 31,

 

 

June 30,

 

 

 

2020

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

26,244

 

 

$

46,676

 

Restricted cash

 

 

100,490

 

 

 

 

Inventories

 

 

114,424

 

 

 

114,905

 

Prepaid expenses

 

 

10,793

 

 

 

6,353

 

Other current assets

 

 

5,010

 

 

 

7,210

 

Total Current Assets

 

 

256,961

 

 

 

175,144

 

Property and equipment, net

 

 

41,838

 

 

 

68,635

 

Operating lease right-of-use assets

 

 

216,871

 

 

 

258,433

 

Deferred financing costs

 

 

2,954

 

 

 

 

Other assets

 

 

3,345

 

 

 

3,178

 

Total Assets

 

$

521,969

 

 

$

505,390

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

     Debtor-in-possession financing

 

 

 

 

$

100

 

Accounts payable

 

 

31,971

 

 

 

5,514

 

Accrued liabilities

 

 

48,773

 

 

 

33,942

 

Operating lease liabilities

 

 

53,155

 

 

 

 

Total Current Liabilities

 

 

133,899

 

 

 

39,556

 

 

 

 

 

 

 

 

 

 

Long-term debt (see Note 8 for amounts due to related parties)

 

 

24,439

 

 

 

 

Lease liability — non-current

 

 

183,117

 

 

 

 

Asset retirement obligation — non-current

 

 

971

 

 

 

1,213

 

Other liabilities — non-current

 

 

2,859

 

 

 

1,347

 

Total Liabilities not subject to compromise

 

 

345,285

 

 

 

42,116

 

Liabilities subject to compromise

 

 

110,043

 

 

 

456,339

 

Total Liabilities

 

 

455,328

 

 

 

498,455

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   none issued or outstanding

 

 

 

 

 

 

Common stock, par value $0.01 per share, authorized 200,000,000 shares at December 31, 2020 and authorized 100,000,000 shares at June 30, 2020;

   48,629,874 shares issued and 46,846,213 shares outstanding at

  December 31, 2020 and 49,124,313 shares issued and 47,340,652 shares

   outstanding at June 30, 2020

 

 

450

 

 

 

455

 

Additional paid-in capital

 

 

244,769

 

 

 

244,021

 

Retained deficit

 

 

(171,766

)

 

 

(230,729

)

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

   and 1,783,661 common shares in treasury, at cost, at June 30, 2020

 

 

(6,812

)

 

 

(6,812

)

Total Stockholders’ Equity

 

 

66,641

 

 

 

6,935

 

Total Liabilities and Stockholders’ Equity

 

$

521,969

 

 

$

505,390

 

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

 

3


Tuesday Morning Corporation

(Debtor-in-Possession)

Consolidated Statements of Operations (unaudited)

Three and Six Months Ended

December 31, 2020 and 2019

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net sales

 

$

198,625

 

 

$

324,414

 

 

$

360,171

 

 

$

548,853

 

Cost of sales

 

 

138,571

 

 

 

218,638

 

 

 

249,047

 

 

 

361,945

 

Gross profit

 

 

60,054

 

 

 

105,776

 

 

 

111,124

 

 

 

186,908

 

Selling, general and administrative expenses

 

 

63,348

 

 

 

94,677

 

 

 

125,418

 

 

 

184,460

 

Restructuring and abandonment expenses

 

 

1,018

 

 

 

 

 

 

6,507

 

 

 

 

Operating income/(loss)

 

 

(4,312

)

 

 

11,099

 

 

 

(20,801

)

 

 

2,448

 

Other income/(expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(2,514

)

 

 

(726

)

 

 

(5,267

)

 

 

(1,391

)

Reorganization items, net

 

 

48,142

 

 

 

 

 

 

85,766

 

 

 

 

Other income, net

 

 

(198

)

 

 

166

 

 

 

(192

)

 

 

234

 

Other income/(expense) total

 

 

45,430

 

 

 

(560

)

 

 

80,307

 

 

 

(1,157

)

Income before income taxes

 

 

41,118

 

 

 

10,539

 

 

 

59,506

 

 

 

1,291

 

Income tax expense/(benefit)

 

 

779

 

 

 

(398

)

 

 

543

 

 

 

(18

)

Net income

 

$

40,339

 

 

$

10,937

 

 

$

58,963

 

 

$

1,309

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.88

 

 

$

0.24

 

 

$

1.29

 

 

$

0.03

 

Diluted

 

$

0.88

 

 

$

0.24

 

 

$

1.29

 

 

$

0.03

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,511

 

 

 

45,218

 

 

 

45,460

 

 

 

45,086

 

Diluted

 

 

45,511

 

 

 

45,218

 

 

 

45,460

 

 

 

45,086

 

Dividends per common share

 

$

 

 

$

 

 

$

 

 

$

 

 

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

 

4


 

Tuesday Morning Corporation

(Debtor-in-Possession)

Consolidated Statements of Stockholders' Equity (unaudited)

Three Months Ended December 31, 2020 and 2019

(In thousands)

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

Balance at September 30, 2020

 

46,851

 

 

$

450

 

 

$

244,454

 

 

$

(212,105

)

 

$

(6,812

)

 

$

25,987

 

Net income

 

 

 

 

 

 

 

 

 

 

40,339

 

 

 

 

 

 

40,339

 

Share-based compensation

 

 

 

 

 

 

 

315

 

 

 

 

 

 

 

 

 

315

 

Shares issued or canceled in connection with

   employee stock incentive plans and related tax effect

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

46,846

 

 

$

450

 

 

$

244,769

 

 

$

(171,766

)

 

$

(6,812

)

 

$

66,641

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

Balance at September 30, 2019

 

47,738

 

 

$

462

 

 

$

242,179

 

 

$

(74,030

)

 

$

(6,812

)

 

$

161,799

 

Net income

 

 

 

 

 

 

 

 

 

 

10,937

 

 

 

 

 

 

10,937

 

Share-based compensation

 

 

 

 

 

 

 

720

 

 

 

 

 

 

 

 

 

720

 

Shares issued or canceled in connection with

   employee stock incentive plans and related tax effect

 

298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

48,036

 

 

$

462

 

 

$

242,899

 

 

$

(63,092

)

 

$

(6,812

)

 

$

173,457

 

 

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

5


Tuesday Morning Corporation

(Debtor-in-Possession)

Consolidated Statements of Stockholders' Equity (unaudited)

Six Months Ended December 31, 2020 and 2019

(In thousands)

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

Balance at June 30, 2020

 

47,341

 

 

$

455

 

 

$

244,021

 

 

$

(230,729

)

 

$

(6,812

)

 

$

6,935

 

Net income

 

 

 

 

 

 

 

 

 

 

58,963

 

 

 

 

 

 

58,963

 

Share-based compensation

 

 

 

 

 

 

 

743

 

 

 

 

 

 

 

 

 

743

 

Shares issued or canceled in connection with

   employee stock incentive plans and related tax effect

 

(495

)

 

 

(5

)

 

 

5

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

46,846

 

 

$

450

 

 

$

244,769

 

 

$

(171,766

)

 

$

(6,812

)

 

$

66,641

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

Balance at June 30, 2019

 

46,683

 

 

$

465

 

 

$

241,456

 

 

$

(63,800

)

 

$

(6,812

)

 

$

171,309

 

Net income

 

 

 

 

 

 

 

 

 

 

1,309

 

 

 

 

 

 

1,309

 

Cumulative effect of change in accounting principle

 

 

 

 

 

 

 

 

 

 

(601

)

 

 

 

 

 

(601

)

Share-based compensation

 

 

 

 

 

 

 

1,441

 

 

 

 

 

 

 

 

 

1,441

 

Shares issued or canceled in connection with

   employee stock incentive plans and related tax effect

 

1,353

 

 

 

(3

)

 

 

3

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

48,036

 

 

$

462

 

 

$

242,899

 

 

$

(63,092

)

 

$

(6,812

)

 

$

173,457

 

 

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

 

 

6


Tuesday Morning Corporation

(Debtor-in-Possession)

Consolidated Statements of Cash Flows (unaudited)

Six Months Ended December 31, 2020 and 2019

(In thousands)

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

58,963

 

 

$

1,309

 

Adjustments to reconcile net income to net cash provided by/(used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,306

 

 

 

12,807

 

Loss on abandonment of assets

 

 

5,638

 

 

 

 

Amortization of financing fees

 

 

4,747

 

 

 

108

 

(Gain)/loss on disposal of assets

 

 

(1,429

)

 

 

137

 

Gain on sale-leaseback

 

 

(49,639

)

 

 

 

Share-based compensation

 

 

964

 

 

 

1,559

 

Gain on lease terminations

 

 

(93,264

)

 

 

 

Construction allowances from landlords

 

 

120

 

 

 

483

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventories

 

 

260

 

 

 

33,769

 

Prepaid and other current assets

 

 

(6,715

)

 

 

(578

)

Accounts payable

 

 

23,440

 

 

 

(23,263

)

Accrued liabilities

 

 

42,673

 

 

 

1,424

 

Operating lease assets and liabilities

 

 

(5,914

)

 

 

219

 

Income taxes payable

 

 

 

 

 

46

 

Other liabilities — non-current

 

 

1,232

 

 

 

101

 

Net cash provided by/(used in) operating activities

 

 

(10,618

)

 

 

28,121

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,392

)

 

 

(8,365

)

Proceeds from sale-leaseback

 

 

68,566

 

 

 

 

Purchases of intellectual property

 

 

 

 

 

(20

)

Proceeds from sales of assets

 

 

1,896

 

 

 

22

 

Net cash provided by/(used in) investing activities

 

 

69,070

 

 

 

(8,363

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings under revolving credit facility

 

 

424,659

 

 

 

142,300

 

Repayments of borrowings under revolving credit facility

 

 

(424,759

)

 

 

(173,350

)

Proceeds from term loan

 

 

25,000

 

 

 

 

Change in cash overdraft

 

 

 

 

 

4,957

 

Payments on finance leases

 

 

(120

)

 

 

(157

)

Payment of financing fees

 

 

(3,174

)

 

 

 

Net cash provided by/(used in) financing activities

 

 

21,606

 

 

 

(26,250

)

Net increase/(decrease) in cash, cash equivalents and restricted cash

 

 

80,058

 

 

 

(6,492

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

46,676

 

 

 

11,395

 

Cash, cash equivalents and restricted cash at end of period

 

$

126,734

 

 

$

4,903

 

 

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

 

 

7


Tuesday Morning Corporation

(Debtor-in-Possession)

Notes to Consolidated Financial Statements (unaudited)

The terms “Tuesday Morning,” the “Company,” “we,” “us” and “our” as used in this Quarterly Report on Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries.  Other than as disclosed in this document, please refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 for our critical accounting policies.

 

 

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, 2020. The consolidated balance sheet at June 30, 2020 has been derived from the audited consolidated financial statements at that date. These interim financial statements do not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. 

 

The accompanying unaudited interim consolidated financial statements include the accounts of Tuesday Morning Corporation, a Delaware corporation, and its wholly‑owned subsidiaries.  All entities of the Company were included in the filing of a voluntary petition (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the “Bankruptcy Court”) and all entities are included in our consolidated financial statements, thus separate condensed combined financial statements of the entities in the reorganization proceedings are not required.  All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications were made to prior period amounts to conform to the current period presentation.  None of the reclassifications affected our net income in any period.  We do not present a consolidated statement of comprehensive income as there are no other comprehensive income items in either the current or prior fiscal periods.

 

The results of operations for the three and six months ended December 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year ending June 30, 2021, which we refer to as fiscal 2021, due in part to the seasonality of our business and the financial impact of the COVID-19 pandemic, including bankruptcy proceedings, discussed further below.

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

COVID-19 Pandemic  

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

On March 25, 2020, we temporarily closed all of our stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. Stores gradually reopened as allowed by state and local jurisdictions, and all but two of our stores had reopened as of the end of the prior fiscal year.  In the first quarter of fiscal 2021, we completed the permanent closure of 197 stores.  The scope and duration of this pandemic and the related disruption to our business and financial impacts cannot be reasonably estimated at this time.  While we have taken actions to minimize costs, some of which are permanent including the closure of 197 stores and the closure of our Phoenix distribution center, and mitigate the related risks, there can be no assurance that these measures will continue to provide benefit or that they will be adequate to mitigate future changes in circumstances.

Voluntary Petitions for Reorganization under Chapter 11  

On May 27, 2020 (the “Petition Date”), we filed the Chapter 11 Cases.  The Chapter 11 Cases were jointly administered for procedural purposes.

8


Significant Bankruptcy Court Actions

During the pendency of the Chapter 11 Cases, we continued to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  On May 28, 2020, at the first-day 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 orders approving, among other things, (1) our entry into the Senior Secured Super Priority Debtor-in-Possession Credit Agreement (the “DIP ABL Credit Agreement”) among the Company, JPMorgan Chase Bank, N.A., as administrative agent, for itself and the other lenders, which provided for a super priority secured debtor-in-possession revolving credit facility in an aggregate amount of up to $100 million (the “DIP ABL Facility”), and (2) our use of cash collateral in accordance with the terms of the DIP ABL Credit Agreement.  See Note 8 to the Consolidated Financial Statements for additional information regarding the DIP ABL Facility.

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

The Bankruptcy Court has issued orders designed to assist us in preserving certain tax attributes during the pendency of the Chapter 11 Cases by establishing, among other things, notification and hearing procedures (the “Procedures”) relating to proposed transfers of its common stock and the taking of worthless stock deductions. The Procedures, among other things, restricted transfers involving, and required notice of the holdings of and proposed transactions by any person or “entity” (as defined the applicable U.S. Treasury Regulations) owning or seeking to acquire ownership of 4.5% or more of the Company’s common stock. The Bankruptcy Court orders provided that any actions in violation of the Procedures (including the notice requirements) would be null and void ab initio, and (a) the person or entity making such a transfer would be required to take remedial actions specified by us to appropriately reflect that such transfer of our common stock is null and void ab initio and (b) the person or entity making such a declaration of worthlessness with respect to our common stock would be required to file an amended tax return revoking such declaration and any related deduction to reflect that such declaration is void ab initio.

On June 9, 2020, the Bankruptcy Court issued an order approving procedures for the closure of up to 230 of our store locations.  In early June 2020, we commenced the process to close 132 store locations in a first wave of store closings.  By the end of July 2020, all of these stores were permanently closed.  In mid-July 2020, we began the process to close an additional 65 stores following negotiations with our landlords, and those store closures were completed in August 2020.  In the first quarter of fiscal 2021, we recorded abandonment charges of $4.8 million, related to our Phoenix distribution center closure plan.  In the second quarter of fiscal 2021, we recorded abandonment charges of $0.8 million, related to our Phoenix distribution center closure plan.  We closed our Phoenix, Arizona distribution center in the second quarter of fiscal 2021.

On July 10, 2020, in accordance with a final order issued by the Bankruptcy Court on July 10, 2020, we entered into a Senior Secured Super Priority Debtor-In-Possession Delayed Draw Term Loan Agreement (the “DIP DDTL Agreement”) with the Franchise Group, Inc. (the “Lender”). Pursuant to the DIP DDTL Agreement, the Lender agreed to lend us up to an aggregate principal amount of $25 million in the form of delayed draw term loans (the “DIP Term Facility”).  See Note 8 for additional information.

On September 23, 2020, the Company and its subsidiaries filed with the Bankruptcy Court a proposed Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Original Plan”) and a proposed Disclosure Statement in Support of the Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Original Disclosure Statement”) describing the Plan and the solicitation of votes to approve the same from certain of the Debtors’ creditors with respect to the Chapter 11 Cases.

On September 23, 2020, contemporaneously with the filing of the Original Plan and Original Disclosure Statement, the Company and its subsidiaries filed an expedited motion for entry of an order (1) approving sale and bidding procedures in connection with a potential sale of assets of the Company and its subsidiaries, (2) authorizing the sale of assets free and clear of all liens, claims, encumbrances and other interests, and (3) granting related relief (the “Bidding Procedures Motion”). The Company believed that the concurrent prosecution of a plan of reorganization and a court-approved process for bidding and potential sale of substantially all of their assets would allow the Company and its subsidiaries to assess the relative benefits of a plan of reorganization and a sale.  The Bidding Procedures Motion provided that the Bankruptcy Court would consider approval of a sale of assets on October 29, 2020 if the Company determined to proceed with a sale of assets.

On October 26, 2020, the Company and its subsidiaries filed a motion with the Bankruptcy Court indicating the Company would not be seeking approval of a sale of assets on October 29, 2020.  On October 26, 2020, the Company also filed a motion indicating the Company was working to make revisions to the Original Plan and Original Disclosure Statement and seeking to establish a hearing on November 9, 2020 for consideration of a revised plan of reorganization and disclosure statement.  The Company reserved the right to continue to pursue a sale of assets if the Company determined that a sale of assets is in the best interests of the bankruptcy estate.

9


 

On November 4, 2020, the Company and its subsidiaries filed with the Bankruptcy Court a proposed Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code and a proposed Amended Disclosure Statement. On November 16, 2020, the Company and its subsidiaries filed with the Bankruptcy Court a proposed Revised Second Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Amended Plan”) and a proposed Amended Disclosure Statement (the “Amended Disclosure Statement”) in support of the Amended Plan describing the Amended Plan and the solicitation of votes to approve the same from certain of the Debtors’ creditors with respect to the Chapter 11 Cases. The Amended Plan and the Amended Disclosure Statement contemplated the proposed financing transactions described in Notes 8 and 13 below, including the transactions contemplated by the Purchase and Sale Agreement (as defined in Note 13), the New ABL Facility (as defined in Note 8), the Term Loan Credit Agreement (as defined in Note 8) and the Rights Offering (as defined below).  

 

On November 18, 2020, the Bankruptcy Court issued an order approving the Amended Disclosure Statement.  On December 23, 2020, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Amended Plan, with certain modifications described in the Confirmation Order (as modified and confirmed, the “Plan of Reorganization”).  On December 31, 2020, all of the conditions precedent to the Plan of Reorganization were satisfied and the Company completed the transactions contemplated by the Purchase and Sale Agreement, the New ABL Facility and the Term Loan Credit Agreement.

 

Pursuant to the Plan of Reorganization, each outstanding share of the Company’s common stock as of the close of business on January 4, 2021 was exchanged (the “Exchange”) for (1) one new share of the Company’s stock and (2) a share purchase right entitling the holder to purchase its pro rata portion of shares available to eligible holders in the Rights Offering. In accordance with the Plan of Reorganization, the Company commenced a $40 million rights offering (the “Rights Offering”), under which eligible holders of the Company’s common stock could purchase up to $24 million of shares of the Company’s common stock at a purchase price of $1.10 per share, and Osmium Partners, LLC or its affiliates, including a special purpose entity affiliate of Osmium Partners, LLC jointly owned with Tensile Capital Management (the “Backstop Party”), could purchase up to $16 million of shares of the Company’s common stock at a purchase price of $1.10 per share.  Pursuant to a backstop commitment agreement, the Backstop Party has agreed to purchase all unsubscribed shares in the Rights Offering. The subscription period for the Rights Offering expired on February 1, 2021, with eligible holders subscribing to purchase approximately $19.8 million of shares, with the Backstop Party to purchase the remaining $20.2 million of shares. The Company expects to close the Rights Offering on February 9, 2021. Pursuant to the terms of the backstop commitment agreement, the Backstop Party will receive a backstop fee equal of $2 million (payable in shares of common stock valued at $1.10 per share) and warrants to purchase 10 million shares of the Company’s common stock at a price of $1.65 per share. In accordance with the terms of the Plan of Reorganization, all proceeds from the Rights Offering will be used to make payments of the claims of general unsecured creditors in the Chapter 11 Cases.

 

In accordance with the Plan of Reorganization, effective December 31, 2020, the Company’s board of directors was comprised of nine members, including five continuing directors of the Company, three new directors appointed by the Backstop Party and one director appointed by the equity committee in the Chapter 11 Cases.

De-listing  

On May 27, 2020, the Company received a letter from the Listing Qualifications Department staff of The Nasdaq Stock Market (“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 would be delisted from Nasdaq. On June 8, 2020, trading of the Company’s common stock on Nasdaq was suspended.  On July 1, 2020, Nasdaq filed a Form 25 with the SEC to delist the Company’s common stock. During the pendency of the Chapter 11 Cases, the Company’s common stock traded over the counter in the OTC Pink Market under the symbol “TUESQ”. Following the Company’s legal emergence from bankruptcy, on December 31, 2020, the Company’s common stock now trades over the counter on the OTCQX market under the symbol “TUEM.”

Going Concern

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

The COVID-19 pandemic and the resulting store closures severely reduced our revenues and operating cash flows during the third and fourth quarters of our fiscal year ended June 30, 2020 as well as the first six months of fiscal 2021.  As described further above, on May 27, 2020, we commenced the Chapter 11 Cases in the Bankruptcy Court. Our Plan of Reorganization was confirmed by the Bankruptcy Court on December 23, 2020, and all listed material conditions precedent were deemed resolved by the December 31, 2020 legal effective date of emergence as governed by the Bankruptcy Court.  However, we believe that the remaining significant component of exit financing forthcoming from the ongoing Rights Offering is a critical component required to execute our confirmed Plan of Reorganization.  Therefore, we continue to prepare our financial statements in accordance with Financial Accounting

10


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

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The consolidated financial statements do not include any adjustments that would result if the Company was unable to realize its assets and settle its liabilities as a going concern in the ordinary course of business.  We believe that our plans, already implemented and continuing to be implemented, will mitigate the conditions and events that have raised substantial doubt about the entity’s ability to continue as a going concern.  However, due to the uncertainty around the scope and duration of the COVID-19 pandemic and the related disruption to our business and financial impacts, and because our plans, including those in connection with the Chapter 11 Cases, are not yet fully executed, although approved by the Bankruptcy Court, they cannot be deemed probable of mitigating this substantial doubt as to our ability to continue as a going concern.

Bankruptcy Accounting

See Note 2 entitled “Bankruptcy Accounting” for additional information regarding the Chapter 11 Cases.

Accounting Pronouncement Recently Adopted

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326)” (“ASC 326”), which makes significant changes to the accounting for credit losses on financial assets and disclosures.  The standard requires immediate recognition of management’s estimates of current expected credit losses.  We adopted ASC 326 in the first quarter of fiscal 2021.  The adoption did not have a material impact to our consolidated financial statements.

 

 

2.     Bankruptcy Accounting

 

Bankruptcy Accounting

The consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business and reflect the application of ASC 852. ASC 852 requires that the consolidated financial statements, for periods subsequent to the filing of the Chapter 11 Cases, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the bankruptcy proceedings are recorded in reorganization items on our consolidated statements of operations. In addition, pre-petition unsecured and under-secured obligations that may be impacted by the bankruptcy reorganization process have been classified as liabilities subject to compromise on our unaudited interim consolidated balance sheet as of December 31, 2020.  

 

As of December 31, 2020, these liabilities were reported at the amounts expected to be allowed as claims by the Bankruptcy Court. Where there was uncertainty about whether a secured claim would be paid or impaired pursuant to the Chapter 11 Cases, we classified the entire amount of the claim as an outstanding liability subject to compromise as of December 31, 2020. Pursuant to the Plan of Reorganization, a General Unsecured Claim Fund (Unsecured Creditor Claim Fund) was established for the benefit of holders of Allowed General Unsecured Claims.  Upon the closing of the sale and leaseback of the Corporate Office and the Dallas Distribution Center properties and the issuance of the Term Loan (as defined in Note 8), net proceeds of $67.5 million, after payment of property taxes, and $18.8 million, respectively, were deposited directly into the Unsecured Creditor Claim Fund that is being administered by an independent unsecured claims disbursing agent. The remaining proceeds from the Term Loan not deposited into the Unsecured Creditor Claim Fund, were deposited into our account. In addition, $14.2 million of additional cash was deposited into a segregated bank account at Wells Fargo Bank and is restricted for use in paying compensation for services rendered by professionals on or after the Petition date and prior to the Effective Date (Wells Fargo Restricted Fund).  The $86.3 million and $14.2 million cash balances held in the Unsecured Creditor Claim Fund and the Wells Fargo Restricted Fund, respectively, are recorded as restricted cash on the balance sheet. Upon the completion of the Rights Offering, an additional approximate $40 million will be transferred to the Unsecured Creditor Claim Fund.  For specific discussion on balances of liabilities subject to compromise and reorganization items, see below. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the Chapter 11 Cases. In particular, the consolidated financial statements do not purport to show: (i) the realizable value of assets on a liquidation basis or their availability to satisfy liabilities; (ii) the full amount of pre-petition liabilities that may be allowed for claims or contingencies, or the status and priority thereof; (iii) the effect on stockholders’ investment accounts of any changes that may be made to our capitalization; or (iv) the effect on operations of any changes that may be made to our business.

Our Plan of Reorganization was confirmed on December 23, 2020, and all listed material conditions precedent were resolved by the December 31, 2020 legal effective date of emergence as governed by the Bankruptcy Court.  However, we believe that the remaining significant component of exit financing forthcoming from the ongoing Rights Offering, which we currently expect to close on February 9, 2021, is a critical component required to execute our confirmed Plan of Reorganization.  As a result, we continue to report as a Debtor in Possession for the current period.  The outcome of the Rights Offering will determine whether we qualify for

11


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

Liabilities Subject to Compromise

As a result of the Chapter 11 Cases, the payment of pre-petition indebtedness was subject to compromise. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims is generally not permitted, the Bankruptcy Court granted the Company authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of our businesses and assets. Among other things, the Bankruptcy Court authorized the Company to pay certain pre-petition claims relating to employee wages and benefits, customers, vendors, and suppliers in the ordinary course of business as well as certain insurance, tax, and principal and interest payments. We have been paying and intend to continue to pay undisputed post-petition claims in the ordinary course of business. With respect to pre-petition claims, we notified all known claimants of the deadline to file a proof of claim with the Bankruptcy Court. Our liabilities subject to compromise represent the estimate as of December 31, 2020 of claims expected.  Pre-petition liabilities that are subject to compromise were required to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts (see above for details on the Unsecured Creditor Claim Fund). On the December 31, 2020, the legal effective date in accordance with the Bankruptcy Court, we assumed leases and other executory contracts, while we rejected others.  Liabilities for those leases and contracts that were assumed are no longer categorized in liabilities subject to compromise, as any pre-petition amounts outstanding were cured prior to the end of the second fiscal quarter.  Estimated allowable claims for those which were rejected are included in accrued expenses.  Liabilities subject to compromise in our condensed consolidated balance sheet include the following as of December 31, 2020 and June 30, 2020 (in thousands):

 

 

 

As of December 31, 2020

 

 

As of June 30, 2020

 

Accounts payable

 

$

80,450

 

 

$

83,467

 

Accrued expenses

 

 

29,593

 

 

 

6,630

 

Operating lease liabilities

 

 

-

 

 

 

71,097

 

Lease liabilities - non-current

 

 

-

 

 

 

294,812

 

Other liabilities - non-current

 

 

-

 

 

 

333

 

Liabilities subject to compromise

 

$

110,043

 

 

$

456,339

 

 

Restructuring, Impairment and Abandonment Charges

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31, 2020

 

 

December 31, 2020

 

Restructuring costs:

 

 

 

 

 

 

 

 

  Severance and compensation related costs

 

$

184

 

 

$

869

 

     Total restructuring costs

 

$

184

 

 

$

869

 

 

 

 

 

 

 

 

 

 

Abandonment costs:

 

 

 

 

 

 

 

 

    Accelerated recognition of operating right-of-use assets