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hi

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, 2021

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 April 26, 2021

Common Stock, par value $0.01 per share

 

86,194,528

 

 

 

 


 

Table of Contents

 

PART I.

 

FINANCIAL INFORMATION

 

3

 

 

 

 

 

ITEM 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2021 and June 30, 2020

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2021 and 2020

 

4

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended March 31, 2021 and 2020

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2021 and 2020

 

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

 

29

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

29

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

30

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

30

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

30

 

 

 

 

 

ITEM 6.

 

Exhibits

 

31

 

 

 

 

 

 

2


 

PART I — FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

Tuesday Morning Corporation

Consolidated Balance Sheets

March 31, 2021 (unaudited) and June 30, 2020

(In thousands, except share and per share data)

 

 

 

March 31,

 

 

June 30,

 

 

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,314

 

 

$

46,676

 

Restricted cash

 

 

55,569

 

 

 

 

Inventories

 

 

137,360

 

 

 

114,905

 

Prepaid expenses

 

 

8,081

 

 

 

6,353

 

Other current assets

 

 

3,970

 

 

 

7,210

 

Total Current Assets

 

 

211,294

 

 

 

175,144

 

Property and equipment, net

 

 

39,082

 

 

 

68,635

 

Operating lease right-of-use assets

 

 

203,565

 

 

 

258,433

 

Deferred financing costs

 

 

2,705

 

 

 

 

Other assets

 

 

3,329

 

 

 

3,178

 

Total Assets

 

$

459,975

 

 

$

505,390

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

     Debtor-in-possession financing

 

 

 

 

$

100

 

Accounts payable

 

 

46,082

 

 

 

5,514

 

Accrued liabilities

 

 

72,866

 

 

 

33,942

 

Operating lease liabilities

 

 

53,480

 

 

 

 

Total Current Liabilities

 

 

172,428

 

 

 

39,556

 

 

 

 

 

 

 

 

 

 

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

 

 

25,392

 

 

 

 

Lease liability — non-current

 

 

169,190

 

 

 

 

Asset retirement obligation — non-current

 

 

971

 

 

 

1,213

 

Other liabilities — non-current

 

 

3,061

 

 

 

1,347

 

Total Liabilities not subject to compromise

 

 

371,042

 

 

 

42,116

 

Liabilities subject to compromise

 

 

 

 

 

456,339

 

Total Liabilities

 

 

371,042

 

 

 

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 March 31, 2021 and authorized 100,000,000 shares at June 30, 2020;

   87,978,189 shares issued and 86,194,528 shares outstanding at

  March 31, 2021 and 49,124,313 shares issued and 47,340,652 shares

   outstanding at June 30, 2020

 

 

832

 

 

 

455

 

Additional paid-in capital

 

 

303,798

 

 

 

244,021

 

Retained deficit

 

 

(208,885

)

 

 

(230,729

)

Less: 1,783,661 common shares in treasury, at cost, at March 31, 2021

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

 

 

(6,812

)

 

 

(6,812

)

Total Stockholders’ Equity

 

 

88,933

 

 

 

6,935

 

Total Liabilities and Stockholders’ Equity

 

$

459,975

 

 

$

505,390

 

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

 

3


 

Tuesday Morning Corporation

Consolidated Statements of Operations (unaudited)

Three and Nine Months Ended

March 31, 2021 and 2020

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net sales

 

$

153,345

 

 

$

165,698

 

 

$

513,516

 

 

$

714,551

 

Cost of sales

 

 

105,145

 

 

 

113,531

 

 

 

354,192

 

 

 

475,476

 

Gross profit

 

 

48,200

 

 

 

52,167

 

 

 

159,324

 

 

 

239,075

 

Selling, general and administrative expenses

 

 

59,183

 

 

 

82,814

 

 

 

184,600

 

 

 

267,273

 

Restructuring and abandonment expenses

 

 

1,047

 

 

 

 

 

 

7,554

 

 

 

 

Operating loss

 

 

(12,030

)

 

 

(30,647

)

 

 

(32,830

)

 

 

(28,198

)

Other income/(expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,409

)

 

 

(499

)

 

 

(6,676

)

 

 

(1,890

)

Reorganization items, net

 

 

(23,597

)

 

 

 

 

 

62,169

 

 

 

 

Other income/(expense), net

 

 

89

 

 

 

223

 

 

 

(104

)

 

 

456

 

Other income/(expense) total

 

 

(24,917

)

 

 

(276

)

 

 

55,389

 

 

 

(1,434

)

Income/(loss) before income taxes

 

 

(36,947

)

 

 

(30,923

)

 

 

22,559

 

 

 

(29,632

)

Income tax expense

 

 

172

 

 

 

117

 

 

 

715

 

 

 

99

 

Net income/(loss)

 

$

(37,119

)

 

$

(31,040

)

 

$

21,844

 

 

$

(29,731

)

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.55

)

 

$

(0.69

)

 

$

0.41

 

 

$

(0.66

)

Diluted

 

$

(0.55

)

 

$

(0.69

)

 

$

0.41

 

 

$

(0.66

)

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

67,584

 

 

 

45,314

 

 

 

52,741

 

 

 

45,162

 

Diluted

 

 

67,584

 

 

 

45,314

 

 

 

52,741

 

 

 

45,162

 

Dividends per common share

 

$

 

 

$

 

 

$

 

 

$

 

 

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

 

4


 

Tuesday Morning Corporation

Consolidated Statements of Stockholders' Equity (unaudited)

Three Months Ended March 31, 2021 and 2020

(In thousands)

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

Balance at December 31, 2020

 

46,846

 

 

$

450

 

 

$

244,769

 

 

$

(171,766

)

 

$

(6,812

)

 

$

66,641

 

Net loss

 

 

 

 

 

 

 

 

 

 

(37,119

)

 

 

 

 

 

(37,119

)

Share-based compensation

 

 

 

 

 

 

 

409

 

 

 

 

 

 

 

 

 

409

 

Shares issued in connection with rights offering

 

38,182

 

 

 

382

 

 

 

58,607

 

 

 

 

 

 

 

 

 

58,989

 

Shares issued or canceled in connection with

   employee stock incentive plans and related tax effect

 

1,167

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

13

 

Balance at March 31, 2021

 

86,195

 

 

$

832

 

 

$

303,798

 

 

$

(208,885

)

 

$

(6,812

)

 

$

88,933

 

 

 

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

 

 

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

5


Tuesday Morning Corporation

Consolidated Statements of Stockholders' Equity (unaudited)

Nine Months Ended March 31, 2021 and 2020

(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

 

 

 

 

 

 

 

 

 

 

21,844

 

 

 

 

 

 

21,844

 

Share-based compensation

 

 

 

 

 

 

 

1,152

 

 

 

 

 

 

 

 

 

1,152

 

Shares issued in connection with rights offering

 

38,182

 

 

 

382

 

 

 

58,607

 

 

 

 

 

 

 

 

 

58,989

 

Shares issued or canceled in connection with

   employee stock incentive plans and related tax effect

 

672

 

 

 

(5

)

 

 

18

 

 

 

 

 

 

 

 

 

13

 

Balance at March 31, 2021

 

86,195

 

 

$

832

 

 

$

303,798

 

 

$

(208,885

)

 

$

(6,812

)

 

$

88,933

 

 

 

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

)

Cumulative effect of change in accounting principle

 

 

 

 

 

 

 

 

 

 

(601

)

 

 

 

 

 

(601

)

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

)

Balance at March 31, 2020

 

48,011

 

 

$

461

 

 

$

243,481

 

 

$

(94,132

)

 

$

(6,812

)

 

$

142,998

 

 

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

 

 

6


 

Tuesday Morning Corporation

Consolidated Statements of Cash Flows (unaudited)

Nine Months Ended March 31, 2021 and 2020

(In thousands)

 

 

 

Nine Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

21,844

 

 

$

(29,731

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,933

 

 

 

20,935

 

Loss on abandonment of assets

 

 

5,638

 

 

 

 

Amortization of financing costs and interest expense

 

 

5,949

 

 

 

163

 

(Gain)/loss on disposal of assets

 

 

(1,403

)

 

 

92

 

Gain on sale-leaseback

 

 

(49,639

)

 

 

 

Share-based compensation

 

 

1,347

 

 

 

2,082

 

Rights Offering and Backstop Agreement

 

 

18,990

 

 

 

 

Gain on lease terminations

 

 

(93,281

)

 

 

 

Construction allowances from landlords

 

 

401

 

 

 

1,313

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventories

 

 

(22,650

)

 

 

22,341

 

Prepaid and other current assets

 

 

(2,952

)

 

 

1,631

 

Accounts payable

 

 

(42,899

)

 

 

(7,339

)

Accrued liabilities

 

 

37,295

 

 

 

(9,842

)

Operating lease assets and liabilities

 

 

(6,538

)

 

 

(1,085

)

Income taxes payable

 

 

 

 

 

153

 

Other liabilities — non-current

 

 

1,481

 

 

 

(106

)

Net cash provided by/(used in) operating activities

 

 

(114,484

)

 

 

607

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,342

)

 

 

(15,513

)

Proceeds from sale-leaseback

 

 

68,566

 

 

 

 

Purchases of intellectual property

 

 

 

 

 

(27

)

Proceeds from sales of assets

 

 

1,896

 

 

 

114

 

Net cash provided by/(used in) investing activities

 

 

68,120

 

 

 

(15,426

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings under revolving credit facility

 

 

613,370

 

 

 

265,353

 

Repayments of borrowings under revolving credit facility

 

 

(613,470

)

 

 

(209,403

)

Proceeds from term loan

 

 

25,000

 

 

 

 

     Proceeds from issuance of common stock and exercise of employee stock options

 

 

40,012

 

 

 

 

Change in cash overdraft

 

 

 

 

 

(4,996

)

Payments on finance leases

 

 

(167

)

 

 

(196

)

Payment of financing fees

 

 

(3,174

)

 

 

 

Net cash provided by financing activities

 

 

61,571

 

 

 

50,758

 

Net increase in cash, cash equivalents and restricted cash

 

 

15,207

 

 

 

35,939

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

46,676

 

 

 

11,395

 

Cash, cash equivalents and restricted cash at end of period

 

$

61,883

 

 

$

47,334

 

 

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

 

 

7


 

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, 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 and subsequent emergence from 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. Separate condensed combined financial statements of the entities were not required during the reorganization proceedings, nor required post emergence from bankruptcy.  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 nine months ended March 31, 2021 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, the financial impact of the COVID-19 pandemic, and the Chapter 11 cases, 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 June 2020.  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 $100.0 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 were 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 $25.0 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.

 

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 (as defined below) and one director appointed by the equity committee in the Chapter 11 Cases.

 

Pursuant to the Plan of Reorganization, each outstanding share of the Company’s common stock as of the close of business on January 4, 2021 was exchanged (the “Exchange”) for (1) 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 $40.0 million rights offering (the “Rights Offering”), under which eligible holders of the Company’s common stock could purchase up to $24.0 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 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 purchasing the remaining $20.2 million of shares. On February 9, 2021, the Company closed on the Rights Offering and in the three months ended March 31, 2021, recorded proceeds of $40.0 million and recognized a non-cash charge of approximately $14.5 million as a result of the change in fair value of the Company’s common stock issued to the Backstop Party as measured from the consummation of the Exchange through the close date (“Backstop Premium”). The change in fair value was determined by reference to the Company’s stock price, traded over-the-counter, discounted for the restrictions limited the holders ability to resell securities until they are registered pursuant to the Registration Rights Agreement entered into on February 9, 2021 between the Company and Backstop Party.  In addition, on the close date, the Company issued warrants with rights to purchase 10 million shares of common stock with an exercise price of $1.65 and a five year term to the Backstop Party (“Warrants”).  The Company classified the Warrants as equity instruments and recognized expense of $2.5 million measured at fair value using the Black-Scholes model for the three months ended March 31, 2021.   Finally, on the close date the Backstop Party received a backstop fee in the amount of $2.0 million (payable in shares of common stock valued at $1.10 per share) that was classified as an equity instrument for the three month period ended March 31, 2021. The non-cash charges of approximately $14.5 million for the Backstop Premium, the $2.5 million of expense related to the Warrants, and backstop fee of approximately $2.0 million are recorded in Reorganization items, net in our Consolidated Statements of Operations for the three and nine months ended March 31, 2021. In accordance with the terms of the Plan of Reorganization, all proceeds from the Rights Offering will be used to make payments of the claims of general unsecured creditors in the Chapter 11 Cases.

 

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, we applied for listing on the over the counter market, and the Company’s common stock now trades over the counter on the OTCQX market under the symbol “TUEM.”

10


Going Concern

Our operating loss was $32.8 and $28.2 million for the nine months ended March 31, 2021 and March 31, 2020, respectively. Our operating loss for the fiscal year ended June 30, 2020 was $159.2 million.

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 nine 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. The Rights Offering that closed on February 9, 2021 raised approximately $40 million of cash and was considered a critical component to the execution of our confirmed Plan of Reorganization.

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 our plans, implemented during the nine month period ended March 31, 2021 in connection with the Chapter 11 Cases and those continuing to be implemented, will mitigate the known conditions and events that initially 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 ongoing COVID-19 pandemic and current challenges related to the global transportation market those plans collectively cannot be deemed probable of mitigating 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

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. During the pendency of the Chapter 11 cases until we qualified for emergence under ASC 852, the consolidated financial statements were prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business and reflect the application of ASC 852. Accordingly, certain expenses, gains and losses that are realized or incurred in the bankruptcy proceedings were recorded in reorganization items on our consolidated statements of operations. In addition, pre-petition unsecured and under-secured obligations that were subject to the bankruptcy reorganization process were classified as liabilities subject to compromise.  

 

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 (see Note 6) 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 operating 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 closing of the Rights Offering provided approximately $40.0 million of cash that was deposited to the Unsecured Creditor Claim Fund and recorded as restricted cash.  As of March 31, 2021, we had $46.3 million and $9.3 million of cash held in the Unsecured Creditor Claim Fund and the Wells Fargo Restricted Fund, respectively, that are recorded as restricted cash on the balance sheet. The accompanying consolidated financial statements as of June 30, 2020 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. For specific discussion on balances of liabilities subject to compromise and reorganization items, see below.

11


Our Plan of Reorganization was confirmed on December 23, 2020, and all listed material conditions precedent were resolved by the December 31, 2020 legal effective date of emergence as governed by the Bankruptcy Court. However, the closing of our Rights Offering was considered a critical component to the execution of our confirmed Plan of Reorganization, therefore, we continued to apply the requirements of ASC 852 until that transaction closed on February 9, 2021.   

 

We were not required to apply fresh start accounting based on the provisions of ASC 852 as there was no change in control and the entity’s reorganization value immediately before the date of confirmation was more than the total of all its post-petition liabilities and allowed claims.

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 and certain insurance, tax, and principal and interest payments. With respect to pre-petition claims, we notified all known claimants of the deadline to file a proof of claim with the Bankruptcy Court. 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 December 31, 2020, the legal effective date in accordance with the Bankruptcy Court, we assumed some 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 ending December 31, 2020.  Estimated allowable claims for those which were rejected are included in accrued expenses.  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 June 30, 2020.

 

In connection with our emergence from bankruptcy, all allowable claims have been reclassified from Liabilities subject to compromise to Accounts payable and Accrued liabilities in our Consolidated Balance Sheets as of March 31, 2021. Liabilities subject to compromise in our condensed consolidated balance sheet include the following as of March 31, 2021 and June 30, 2020 (in thousands):

 

 

 

As of March 31, 2021

 

 

As of June 30, 2020

 

Accounts payable

 

$

-

 

 

$

83,467

 

Accrued expenses

 

 

-