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Washington, D.C. 20549
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Other General Principles
Throughout these notes, Tuesday Morning Corporation is referred to as “Tuesday Morning,” “we” or “the Company”.
Tuesday Morning is a leading off-price retailer, specializing in name-brand, high-quality products for the home, including upscale textiles, furnishings, housewares, gourmet food, toys and seasonal décor at prices generally below those charged by boutique, specialty and department stores, catalogs and on‑line retailers in the United States. We operated 490 discount retail stores in 40 states as of June 30, 2021 (“fiscal 2021”). We operated 685 and 714 discount retail stores at June 30, 2020 (“fiscal 2020”) and 2019 (“fiscal 2019”), respectively. Our customer is a savvy shopper with discerning taste for quality at a value. Our strong value proposition has established a loyal customer base, who we engage regularly with social media, email, direct mail and digital media
Listing
During the pendency of our bankruptcy proceedings, the Company’s common stock was delisted by the Nasdaq Stock Market, LLC (“Nasdaq”) and began trading on the OTC Pink marketplace under the symbol “TUESQ”. In January 2021, following our emergence from bankruptcy, the Company’s common stock began trading on the OTCQX market under the ticker symbol “TUEM.”
On May 24, 2021, Nasdaq approved our application for the relisting of the Company's common stock on the Nasdaq Capital Market. The Company's common stock was relisted and commenced trading on the Nasdaq Capital Market at the opening of the market on Tuesday, May 25, 2021, under the ticker symbol "TUEM."
COVID-19 Pandemic
The COVID-19 pandemic had an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow. On March 25, 2020, we temporarily closed all of our 687 stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. As allowed by state and local jurisdictions, 685 of our stores gradually reopened as of the end of June 2020. Two stores were permanently closed during the fourth quarter 2020. In accordance with our bankruptcy plan of reorganization, described below, we completed the permanent closure of 197 stores in the first quarter of 2021 and the closure of our Phoenix distribution center in second quarter of 2021. In addition, as part of our restructuring, we secured financing to pay creditors in accordance with the plan of reorganization and to fund planned operations and expenditures.
Future impacts from the COVID-19 pandemic will depend on the potential further geographic spread and duration of the ongoing pandemic, the timing and extent of recovery in traffic and consumer spending in our stores, the extent and duration of ongoing impacts to domestic and international supply chains and the related impacts on the flow, availability and cost of products, the production and administration of effective medical treatments and vaccines, and the actions that may be taken by various governmental authorities and other third parties in response to the pandemic.
Emergence From Chapter 11 Bankruptcy Proceedings
In response to the impacts of the COVID-19 pandemic, 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 Chapter 11 Cases were jointly administered for procedural purposes. During the pendency of the Chapter 11 Cases, we continued to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In accordance with orders of the Bankruptcy Court, we entered into certain debtor-in-possession financing arrangements to provide financing during the pendency of the Chapter 11 Cases. See Note 3 “Debt” to the consolidated financial statements for additional information regarding these debtor-in-possession financing arrangements.
In early June 2020, in accordance with orders of the Bankruptcy Court, we commenced the process to close 132 store locations. By the end of July 2020, all of these stores were permanently closed. In mid-July 2020, we began the process to close an additional 65 stores following negotiations with our landlords, and those store closures were completed in August 2020. In total, we permanently closed 197 stores during the first quarter of fiscal 2021. In addition, we closed our Phoenix distribution center in the second quarter of fiscal 2021.
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
37
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 debt financing transactions described in Note 3 below under the caption “Post-Emergence Debt Financing Arrangements”, the exchange and Rights Offering (defined in Note 7 below under “Equity Financing under Plan of Reorganization”) and the sale-leaseback transactions described in Note 8.
On December 23, 2020, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Amended Plan, with certain modifications described in the Confirmation Order (as modified and confirmed, the “Plan of Reorganization”). On December 31, 2020, all of the conditions precedent to the Plan of Reorganization were satisfied and the Company completed the debt financing and sale-leaseback contemplated in the Plan of Reorganization. However, the closing of the Rights Offering was considered a critical component to the execution of our confirmed Plan of Reorganization, therefore, we continued to apply the requirements of ASC 852 – Reorganizations until that transaction closed on February 9, 2021.
In accordance with the Plan of Reorganization, effective December 31, 2020 (the “Effective Date”), the Company’s board of directors was comprised of nine members, including five continuing directors of the Company, three new directors appointed by the Backstop Party (as defined in Note 7 under the caption “Equity Financing under Plan of Reorganization”) 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 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 described in Note 7 under the caption “Equity Financing under Plan of Reorganization.” On February 9, 2021, the Company completed the equity financing contemplated by the Plan of Reorganization.
See Note 2 regarding Bankruptcy Accounting for further discussion.
Liquidity and Going Concern
The consolidated balance sheets as of June 30, 2021 and 2020, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2021, and the related notes (collectively referred to as the “consolidated financial statements”) were prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Starting in the third quarter of fiscal 2020, the COVID-19 pandemic had an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow. These conditions raised substantial doubt about the Company’s ability to continue as a going concern as described in the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended June 30, 2020 and in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, September 30, 2020, December 31, 2020 and March 31, 2021.
During the fourth quarter of fiscal 2021, the COVID-19 vaccine was rolled out widely in the United States. This is a significant change in circumstances from our previous going concern assessments. With the expanded availability of the COVID-19 vaccine and relaxed COVID-19 protocols, the Company does not expect widespread store closures as a result of COVID-19, which was a significant contributing factor to the Company’s distressed position in fiscal 2020. Additionally, the Company has completed its restructuring plan, as defined in the Plan of Reorganization, which consisted of (i) closing 197 store locations; (ii) closing the Phoenix distribution center; (iii) renegotiating a majority of our leases with landlords; (iv) securing financing to pay creditors in accordance with the plan; and (v) securing financing that will be utilized in connection to fund planned operations and expenditures.
Accordingly, the Company re-evaluated its potential going concern disclosure requirements in accordance with ASC 205-40-50 as of the date of filing. Upon completion of this evaluation, the Company has concluded that funds generated from operating activities, available cash and cash equivalents, and borrowings under the New ABL Facility will be sufficient to fund its planned operations and capital expenditure requirements for at least 12 months. Furthermore, the Company believes this alleviates the prior substantial doubt about the Company’s ability to continue as a going concern. This evaluation is based on relevant conditions and events that are currently known or reasonably knowable, as of September 13, 2021.
Summary of Significant Accounting Policies
(a)
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Basis of Presentation—The accompanying consolidated financial statements include the accounts of Tuesday Morning Corporation, a Delaware corporation, and its wholly‑owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. We operate our business as a single operating segment. Certain reclassifications were made to prior
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38
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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period amounts to conform to the current period presentation. None of the reclassifications affected our net earnings/(loss) in any period. We do not present a separate statement of comprehensive income, as we have no other comprehensive income items.
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(b)
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Use of Estimates—The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates.
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(c)
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Cash and Cash Equivalents—Cash and cash equivalents include credit card receivables and all highly liquid instruments with original maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value. At June 30, 2021 and 2020, credit card receivables from third party consumer credit card providers were $3.2 million and $3.7 million, respectively. Such receivables generally are collected within one week of the balance sheet date.
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(d)
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Restricted Cash—Restricted cash was $22.3 million, as of June 30, 2021, which is being held in the Unsecured Creditor Claims Fund (defined below in Note 2).
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(e)
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Inventories—Inventories, consisting of finished goods, are stated at the lower of cost or market using the retail inventory method for store inventory and the specific identification method for warehouse inventory. We have a perpetual inventory system that tracks on-hand inventory and inventory sold at a stock-keeping unit (“SKU”) level. Inventory is relieved and cost of sales is recorded based on the current calculated cost of the item sold. Buying, distribution, freight and certain other costs are capitalized as part of inventory and are charged to cost of sales as the related inventory is sold. We charged $95.1 million, $97.8 million, and $106.6 million of such capitalized inventory costs to cost of sales for the fiscal years ended June 30, 2021, 2020 and 2019, respectively. We have capitalized $24.2 million and $22.3 million of such costs in inventory at June 30, 2021 and 2020, respectively.
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Stores conduct annual physical inventories, staggered during the second half of the fiscal year. During periods in which physical inventory observations do not occur, we utilize an estimate for recording inventory shrink based on the historical results of our previous physical inventories. The estimated shrink rate may require a favorable or unfavorable adjustment to costs of sales based on actual results to the extent that our subsequent actual physical inventory yields a different result. Although inventory shrink rates have not fluctuated significantly in recent years, if the actual rate were to differ from our estimates, then an adjustment to inventory shrink would be required.
We review our inventory during and at the end of each quarter to ensure that all necessary pricing actions are taken to adequately value our inventory at the lower of cost or market by recording permanent markdowns to our on-hand inventory. Management believes these markdowns result in the appropriate prices necessary to stimulate demand for the merchandise. Actual recorded permanent markdowns could differ materially from management’s initial estimates based on future customer demand or economic conditions.
(f)
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Property and Equipment—Property and equipment are recorded at cost less accumulated depreciation. Furniture, fixtures, leasehold improvements, finance leases and equipment are depreciated on a straight‑line basis over the estimated useful lives of the assets as follows:
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Estimated Useful Lives
Furniture and fixtures
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3 to 7 years
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Leasehold improvements
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Shorter of useful life or lease term
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Equipment
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5 to 10 years
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Assets under finance lease
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Shorter of useful life or lease term
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Software
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3 to 10 years
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Upon sale or retirement of an asset, the related cost and accumulated depreciation are removed from our balance sheet and any gain or loss is recognized in the statement of operations. Expenditures for maintenance, minor renewals and repairs are expensed as incurred, while major replacements and improvements are capitalized.
(g)
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Deferred Financing Costs— Deferred financing costs represent costs paid in connection with obtaining bank and other long‑term financing. These costs for the term loan are reported in the balance sheet as a direct deduction from the face amount of the term loan and the new ABL credit agreement (defined in Note 3 below) are presented as deferred financing costs in the balance sheet.
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39
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(h)
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Income Taxes—Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the date of enactment. Valuation allowances are established against deferred tax assets when it is more likely than not that the realization of those deferred tax assets will not occur. Valuation allowances are released when positive evidence becomes available that future taxable income is sufficient to utilize the underlying deferred tax assets.
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We file our annual federal income tax return on a consolidated basis. Furthermore, we recognize uncertain tax positions when we have determined it is more likely than not that a tax position will be sustained upon examination. However, new information may become available, or applicable laws or regulations may change, thereby resulting in a favorable or unfavorable adjustment to amounts recorded.
On March 27, 2020, in an effort to mitigate the economic impact of the COVID-19 pandemic, the U.S. Congress enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act included certain corporate income tax provisions, which among other things, included a five-year carryback of net operating losses and acceleration of the corporate AMT credit. The Company has evaluated the CARES Act and it did not have a material impact on the income tax provision. The CARES Act also contains provisions for deferral of the employer portion of social security taxes incurred through the end of calendar 2020 and an employee retention credit, a refundable payroll credit for 50% of wages and health benefits paid to employees not providing services due to the pandemic. As a result of the CARES Act, we continued to defer qualified payroll taxes through December 31, 2020. Current and non-current qualified deferred payroll taxes are each $2.1 million as of June 30, 2021. Payroll taxes were deferred through December 31, 2020. Half of the deferral is due on December 31, 2021 and the other half is due on December 31, 2022.
(i)
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Self-Insurance Reserves—We use a combination of insurance and self‑insurance plans to provide for the potential liabilities associated with workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Our stop loss limits per claim are $500,000 for workers’ compensation, $250,000 for general liability, and $150,000 for medical. Liabilities associated with the risks that are retained by us are estimated, in part, by historical claims experience, severity factors and the use of loss development factors by third-party actuaries.
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The insurance liabilities we record are primarily influenced by the frequency and severity of claims, and include a reserve for claims incurred but not yet reported. Our estimated reserves may be materially different from our future actual claim costs, and, when required adjustments to our estimate reserves are identified, the liability will be adjusted accordingly in that period. Our self‑insurance reserves for workers’ compensation, general liability and medical were $7.3 million, $1.2 million, and $1.0 million, respectively, at June 30, 2021, and $8.4 million, $1.3 million, and $0.9 million, respectively, at June 30, 2020.
We recognize insurance expenses based on the date of an occurrence of a loss including the actual and estimated ultimate costs of our claims. Claims are paid from our reserves and our current period insurance expense is adjusted for the difference in prior period recorded reserves and actual payments as well as changes in estimated reserves. Current period insurance expenses also include the amortization of our premiums paid to our insurance carriers. Expenses for workers’ compensation, general liability and medical insurance were $1.4 million, $3.7 million and $7.8 million, respectively, for the fiscal year ended June 30, 2021, $2.7 million, $3.3 million and $8.7 million, respectively, for the fiscal year ended June 30, 2020, and $2.1 million, $2.3 million and $7.9 million, respectively, for the fiscal year ended June 30, 2019.
(j)
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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.
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We maintain a reserve for estimated sales returns, and we use historical customer return behavior to estimate our reserve requirements. ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606) (“ASC 606”) was adopted in the first quarter of fiscal 2019. No impairment of the returns asset was indicated or recorded for the fiscal year ended June 30, 2021.
Gift cards are sold to customers in our stores and we issue gift cards for merchandise returns in our stores. Revenue from sales of gift 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 $0.4 million, $0.8 million and $0.4 million for the fiscal years ended June 30, 2021, 2020 and 2019, respectively. The gift card liability totals $1.0 million and $1.3 million included in “Accrued Liabilities” in the Consolidated Balance Sheet at June 30, 2021 and 2020, respectively (See Note 5).
40
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(k)
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Advertising—Costs for direct mail, television, radio, newspaper, digital and other media are expensed as the advertised events take place. Advertising expenses for the fiscal years ended June 30, 2021, 2020, and 2019 were $8.3 million, $18.6 million, and $26.5 million, respectively. We do not and did not receive consideration from vendors to support our advertising expenditures during fiscal 2021, 2020 and 2019.
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(l)
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Share‑Based Compensation— The Company accounts for share-based compensation in accordance ASC 718, Compensation-Stock Compensation, which requires the fair value of share-based payments to be recognized in the consolidated financial statements as share-based compensation expense over the requisite service period. For time-based awards, share-based compensation expense is recognized on a straight-line basis, net of forfeitures, over the requisite service period for awards that actually vest. For performance-based awards, share-based compensation expense is estimated based on achievement of the performance condition and is recognized using the accelerated attribution method over the requisite service period for awards that actually vest. Share-based compensation expense is recorded in the selling, general and administrative expenses line in the consolidated statements of operations. ASC 718 also provides guidance for determining whether certain financial instruments awarded in share-based payment transactions are liabilities. The guidance requires that instruments that include conditions other than service, performance or market conditions that affect their fair value, exercisability or vesting be classified as a liability and be remeasured at fair value at each fiscal period (See Note 7 for further discussion on share-based compensation).
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During fiscal year ended June 30, 2021, no stock options were granted. The fair value of each stock option granted during the fiscal years ended June 30, 2020 and 2019 was estimated at the date of grant using a Black‑Scholes option pricing model, using the following assumptions:
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Fiscal Years Ended June 30,
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2021
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2020
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2019
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Risk-free interest rate
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-
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2.4%
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2.3 - 2.9%
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Expected term (years)
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-
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4.6
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3.8 - 5.0
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Expected stock volatility
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-
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64.8%
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49.0 - 64.8%
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Expected dividend yield
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-
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0.0%
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0.0%
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•
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Risk‑free interest rate - the risk‑free interest rate is the constant maturity risk-free interest rate for U.S. Treasury instruments with terms consistent with the expected lives of the awards.
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•
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Expected term - the expected term of an option is based on our historical review of employee exercise behavior based on the employee class (executive or non‑executive) and based on our consideration of the remaining contractual term if limited exercise activity existed for a certain employee class.
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•
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Expected stock volatility - the expected stock volatility is based on both the historical volatility of our stock based on our historical stock prices and implied volatility of our traded stock options.
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•
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Expected dividend yield - the expected dividend yield is based on our expectation of not paying dividends on our common stock for the foreseeable future.
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(m)
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Net Earnings/(Loss) Per Common Share—Basic net earnings/(loss) per common share for the fiscal years ended June 30, 2021, 2020, and 2019, was calculated by dividing net earnings/(loss) by the weighted average number of common shares outstanding for each period. Diluted net earnings/(loss) per common share for the fiscal years ended June 30, 2021, 2020 and 2019 was calculated by dividing net earnings/(loss) by the weighted average number of common shares including the impact of dilutive common stock equivalents and warrants (unless anti-dilutive). See Note 10.
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(n)
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Impairment of Long‑Lived Assets and Long‑Lived Assets to Be Disposed Of—Long‑lived assets, principally property and equipment, including leasehold improvements, and lease right-of-use assets are reviewed for impairment when, in management’s judgment, events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. If the carrying value of the asset or asset group exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the asset group, the Company will write the carrying value down to the fair value in the period identified. Since there is typically no active market for our long-lived tangible assets, we estimate fair values based on the expected future cash flows. We estimate future cash flows based on store-level historical results, current trends, and operating and cash flow projections. While we believe our estimates and judgments about future cash flows are reasonable, future impairment charges may be required if the expected cash flow estimates, as projected, do not occur or if events change requiring us to revise our estimates.
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Assets subject to fair value measurement under ASC 820, “Fair Value Measurement”, are categorized into one of three different levels of the fair value hierarchy depending on the observability of the inputs employed in the measurement, as follows:
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•
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Level 1 – observable inputs that reflect quoted prices (unadjusted) for identical assets in active markets.
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41
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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•
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Level 2 – inputs that reflect quoted prices for identical assets in markets which are not active; quoted prices for similar assets in active markets; inputs other than quoted prices that are observable for the asset; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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•
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Level 3 – unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
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Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. See Note 4 and Note 8 for additional information.
(o)
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Intellectual Property—Our intellectual property primarily consists of indefinite-lived trademarks. We evaluate annually whether the trademarks continue to have an indefinite life. Trademarks and other intellectual property are reviewed for impairment annually in the fourth quarter, and may be reviewed more frequently if indicators of impairment are present.
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Due to change in the Company’s management in the fourth quarter of fiscal 2021 and their future strategy related to the reduced use of certain intellectual properties, the Company concluded the assets no longer held value which resulted in a $1.6 million impairment of the intangible assets.
(p)
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Asset Retirement Obligations—We account for asset retirement obligations (“ARO”) in accordance with ASC 410, Asset Retirement and Environmental Obligations, which requires the recognition of a liability for the fair value of a legally required asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. Our ARO liabilities are associated with the disposal and retirement of leasehold improvements and removal of installed equipment, resulting from contractual obligations, at the end of a lease to restore a facility to a condition specified in the lease agreement.
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For leases that contractually result in an ARO, we record the net present value of the ARO liability and also record a related capital asset, in an equal amount. The estimated ARO liability is based on a number of assumptions, including costs to return facilities back to specified conditions, inflation rates and discount rates. Accretion expense related to the ARO liability is recognized as operating expense in our Consolidated Statements of Operations. The capitalized asset is depreciated on a straight-line basis over the useful life of the related leasehold improvements. Upon ARO fulfillment, any difference between the actual retirement expense incurred and the recorded estimated ARO liability is recognized as an operating gain or loss in our Consolidated Statements of Operations. Our ARO liability, which totaled $1.0 million as of June 30, 2021 is included in “Asset retirement obligation—non-current” on our Consolidated Balance Sheet at June 30, 2021. Our ARO liability, which totaled $2.8 million as of June 30, 2020 was comprised of a $1.6 million short-term portion included in accrued liabilities and a $1.2 million long-term portion included in “Asset retirement obligation—non-current” on our Consolidated Balance Sheet.
(q)
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Leases—We conduct substantially all operations from leased facilities, including our corporate offices in Dallas and the Dallas warehouse, distribution and retail complex, which were leased on December 31, 2020, subsequent to the sale and leaseback of those facilities on that date. Our retail store locations, our corporate office and our distribution center are under operating leases that will expire over the next 1 to 10 years. Many of our leases include options to renew at our discretion. We include the lease renewal option periods in the calculation of our operating lease assets and liabilities when it is reasonably certain that we will renew the lease. We also lease certain equipment under finance leases that generally expire within 5 years.
|
We adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“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.
In addition, subsequent to the petition date noted above, we commenced negotiations with our landlords on substantially all of our ongoing leases, resulting in significant modifications and remeasurement recorded in the fiscal 2021. As a result of the remeasurements and terminations of rejected leases, we reduced our operating lease right-of-use assets by approximately $31 million and our operating lease liabilities by approximately $124 million, recording a gain of approximately $93 million, which would have been reduced by the $80.1 million impairment loss recorded on right-of-use lease assets in fiscal 2020, if the liability had been adjusted in the same fiscal year. The results of our fourth quarter fiscal 2020 impairment analysis indicated an impairment of our property and equipment as well as operating lease right-of-use assets at approximately 200 of our stores along with property and equipment of our Phoenix distribution center facility totaling $80.1 million, which is included in restructuring costs in the consolidated statement of operations for fiscal 2020. The impairments were the result of closing plans for these stores and the Phoenix distribution center. The $93 million gain was further reduced by an amount of estimated claims allowable by the bankruptcy court, resulting in a $66 million net gain which is included in Reorganization items, net (see Note 2) in the Consolidated Statement of Operations.
42
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(r)
|
Legal Proceedings— Information related to the Chapter 11 Cases that were filed on May 27, 2020 is included in Note 1 (under the heading “Emergence from Chapter 11 Bankruptcy Proceedings”) and Note 2 in the Notes to Consolidated Financial Statements.
|
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.
(s)
|
Recent Accounting Pronouncements
|
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. The adoption of this standard in the first quarter of fiscal 2022 is not expected to result in a material impact to the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for public companies for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal years. We adopted ASU 2018-15 in the first quarter of fiscal 2021 and it did not have a material impact on our results of operations, financial condition or cash flows.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, the purpose of which is to improve the effectiveness of disclosures about fair value measurements required under ASC 820. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2018-13 in the first quarter of fiscal 2021 and it did not have a material impact on our results of operations, financial condition or cash flows.
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 and it did not have a material impact on our results of operations, financial condition or cash flows.
2. BANKRUPTCY ACCOUNTING
ASC 852 – Reorganizations 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 were realized or incurred in the bankruptcy proceedings were recorded in Reorganization items, net in 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 in our Consolidated Balance Sheet.
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 8) and the issuance of the Term Loan (as defined in Note 3), net proceeds of $67.5 million, after payment of property taxes, and $18.8 million, respectively, were deposited directly into the Unsecured Creditor Claim Fund that is being administered by an independent unsecured claims disbursing agent. The remaining proceeds from the Term Loan that were not deposited into the Unsecured Creditor Claim Fund were deposited into our operating account. In addition, $14.2 million of additional cash was deposited into a segregated bank account at Wells Fargo Bank and was restricted for use in paying compensation for services rendered by professionals on or after the Petition date and prior to the approval date of our Plan of Reorganization by the court (“Effective Date”) (“Wells Fargo Restricted Fund”). The closing of the Rights Offering described in Note 7 provided approximately $40.0 million of cash that was deposited to the Unsecured Creditor Claim Fund and recorded as restricted cash. During
43
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the fiscal 2021, all services rendered by professionals were paid and the Wells Fargo Restricted Fund account was closed with all of the applicable funds disbursed. Net cash remaining of $1.9 million was deposited directly into our unrestricted cash account during the fourth quarter of fiscal 2021.
As of June 30, 2021, we had $22.3 million of cash held in the Unsecured Creditor Claim Fund, recorded as restricted cash on the balance sheet for the payment of claims.
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.
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 as of June 30, 2021 were cured. As of June 30, 2021, all are known and are reclassified.
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 June 30, 2021. 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. Liabilities subject to compromise in our condensed consolidated balance sheet include the following as of June 30, 2021 and 2020 (in thousands):
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
83,467
|
|
Accrued expenses
|
|
|
-
|
|
|
|
6,630
|
|
Operating lease liabilities
|
|
|
-
|
|
|
|
71,097
|
|
Lease liabilities - non-current
|
|
|
-
|
|
|
|
294,812
|
|
Other liabilities - non-current
|
|
|
-
|
|
|
|
333
|
|
Liabilities subject to compromise
|
|
$
|
-
|
|
|
$
|
456,339
|
|
44
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring, Impairment and Abandonment Charges
Restructuring and abandonment charges total $10.8 million and $113.5 million for the years-ended June 30, 2021 and 2020, respectively, and include the following (in thousands):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Restructuring costs:
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
-
|
|
|
$
|
5,212
|
|
Severance and compensation related costs
|
|
|
3,557
|
|
|
|
3,122
|
|
Total restructuring costs
|
|
$
|
3,557
|
|
|
$
|
8,334
|
|
|
|
|
|
|
|
|
|
|
Impairment costs:
|
|
|
|
|
|
|
|
|
Store long-lived assets
|
|
$
|
-
|
|
|
$
|
11,656
|
|
Distribution center long-lived assets
|
|
|
-
|
|
|
|
16,794
|
|
Operating lease right-of-use assets
|
|
|
-
|
|
|
|
51,626
|
|
Intangible asset
|
|
|
1,639
|
|
|
|
-
|
|
Total impairment costs
|
|
$
|
1,639
|
|
|
$
|
80,076
|
|
|
|
|
|
|
|
|
|
|
Abandonment costs:
|
|
|
|
|
|
|
|
|
Accelerated recognition of operating lease right-of-use assets
|
|
|
5,638
|
|
|
|
25,082
|
|
Total abandonment costs
|
|
$
|
5,638
|
|
|
$
|
25,082
|
|
|
|
|
|
|
|
|
|
|
Total restructuring, impairment and abandonment costs
|
|
$
|
10,834
|
|
|
$
|
113,492
|
|
There were no Restructuring, Impairment and Abandonment Charges recorded in fiscal 2019.
For the year-ended June 30, 2021, restructuring and abandonment costs primarily related to $3.6 million of executive severance and employee retention costs, intangible impairment charge of $1.6 million, as well as abandonment cost of $5.6 million related to the permanent closure of our stores and the Phoenix distribution center. For the year-ended June 30 2020, restructuring, impairment and abandonment charges primarily related to (i) $80.1 million in impairment cost and $25.1 million in abandonment cost relating to our permanent store closing plan along with our decision to close the Phoenix distribution center; (ii) $5.2 million in pre-filing incremental professional fees; and (iii) $3.1 million in compensation costs related to a reorganization reduction in force completed prior to the filing of the Chapter 11 Cases. Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021.
Reorganization Items, net
Reorganization items, net, included in our consolidated statement of operations represent amounts resulting from the Chapter 11 Cases and resulted in a net gain of $60.0 million and a net loss of $3.6 million for the years ended June 30, 2021 and 2020 respectively, and include the following (in thousands):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Reorganization items, net:
|
|
|
|
|
|
|
|
|
Professional and legal fees
|
|
$
|
34,579
|
|
|
$
|
3,619
|
|
Gains on lease termination, net of estimated claims
|
|
|
(66,247
|
)
|
|
|
-
|
|
Claims related costs
|
|
|
1,302
|
|
|
|
-
|
|
Rights Offering and Backstop Agreement
|
|
|
19,990
|
|
|
|
-
|
|
Gain on sale-leaseback
|
|
|
(49,639
|
)
|
|
|
-
|
|
Total reorganization items, net
|
|
$
|
(60,015
|
)
|
|
$
|
3,619
|
|
45
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no reorganization items recorded in fiscal 2019.
For the year-ended June 30, 2021, Reorganization items, net was a net gain of $60.0 million due to a net gain of $66.2 million resulting from the store lease terminations and the termination of our Phoenix distribution center lease under our permanent closure plan, and a $49.6 million gain on the sale-leaseback transactions under our Plan of Reorganization (see Note 1 and Note 8). These gains were partially offset by $34.6 million in professional and legal fees related to our reorganization costs as well as $20.0 million of charges related to the execution of our Rights Offering (see Note 1 and 7). The proceeds of the sales-leaseback transaction, along with other sources of financing, continue to be used to satisfy allowed claims and are categorized as Reorganization items, net.
For the year-ended June 30, 2020, reorganization costs represent amounts incurred from the Petition Date onward directly resulting from the Chapter 11 Cases and consist of professional fees of $3.6 million.
3. DEBT
Pre-Petition Financing Agreements
Through December 31, 2020, we were party to a credit agreement that provided for an asset-based, five-year senior secured revolving credit facility in the original amount of up to $180.0 million which was scheduled to mature on January 29, 2024 (the “Pre-Petition ABL Credit Agreement”). The availability of funds under the Pre-Petition ABL Credit Agreement was limited to the lesser of a calculated borrowing base and the lenders’ aggregate commitments under the Pre-Petition ABL Credit Agreement. Our indebtedness under the Pre-Petition ABL Credit Agreement was secured by a lien on substantially all of our assets.
As of December 31, 2020, we had no amounts outstanding under the Pre-Petition ABL Credit Agreement, and that agreement was terminated in connection with our legal emergence from bankruptcy.
Debtor-In-Possession Financing Agreements
On May 29, 2020, we entered into a Senior Secured Super Priority Debtor-in-Possession Credit Agreement (the “DIP ABL Credit Agreement”) among the Company, JPMorgan Chase Bank, N.A., as administrative agent, for itself and the other lenders, which provided for a super priority secured debtor-in-possession revolving credit facility in an aggregate amount of up to $100.0 million. On July 10, 2020, we entered into a Senior Secured Super Priority Debtor-In-Possession Delayed Draw Term Loan Agreement (the “DIP DDTL Agreement”) with the Franchise Group, Inc., which provided for delayed draw term loans in an amount not to exceed $25.0 million. We made no borrowings under the DIP ABL Credit Agreement or the DIP DDTL Agreement. On December 31, 2020, the DIP ABL Credit Agreement and the DIP DDTL Agreement were terminated in connection with our legal emergence from bankruptcy.
Post-Emergence Financing Arrangements
On December 31, 2020, the Company and its subsidiaries entered into a Credit Agreement (the “New ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A. and Bank of America, N.A. (collectively, the “Lenders”) that provides for a revolving credit facility in an aggregate amount of $110.0 million (the “New ABL Facility”). The New ABL Credit Agreement includes conditions to borrowings, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. The New ABL Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio if borrowing availability falls below certain minimum levels, after the first anniversary of the agreement. We are not required to be compliant per the lender agreement until December 31, 2021.
Under the terms of the New ABL Credit Agreement, amounts available for advances would be subject to a borrowing base as described in the New ABL Credit Agreement. Under the New ABL Credit Agreement, borrowings will initially bear interest at a rate equal to the adjusted LIBOR rate plus a spread of 2.75% or the Commercial Bank Floating Bank rate plus a spread of 1.75%.
The New ABL Facility is secured by a first priority lien on all present and after-acquired tangible and intangible assets of the Company and its subsidiaries other than certain collateral that secures the Term Loan (as defined below). The commitments of the Lenders under the New ABL Facility will terminate and outstanding borrowings under the New ABL Facility will mature on December 31, 2023.
As of June 30, 2021, we had $12.0 million of borrowings outstanding under the New ABL Facility and, $12.1 million of letters of credit outstanding. Taking into account $10.0 million of borrowing capacity that is unavailable until December 31, 2021, we have borrowing availability of $38.9 million under the New ABL Facility, as of June 30, 2021.
46
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 31, 2020, the Company, Alter Domus (US), LLC, as administrative agent, and the lenders named therein including Tensile Capital Partners Master Fund LP and affiliates of Osmium Partners, LLC, entered into a Credit Agreement (the “Term Loan Credit Agreement”) to provide a term loan of $25.0 million to the Company (the “Term Loan”).
In accordance with the Plan of Reorganization, on December 31, 2020, three new directors were selected for membership on the Board of Directors by Osmium Partners (Larkspur SPV), LP, an affiliate of Tensile Capital Partners Master Fund LP (“Tensile”) and Osmium Partners, LLC (“Osmium”). Pursuant to the Term Loan Credit Agreement, Tensile Capital Partners Master Fund, LP and affiliates of Osmium Partners, LLC., held $19.0 million and $1.0 million, respectively, of the $25.0 million outstanding Term Loan. Representatives of Osmium and Tensile both hold seats on the board and therefore Osmium and Tensile are related parties to the company.
Pursuant to the terms of the Term Loan Credit Agreement, the Term Loan has a maturity date of December 31, 2024 and bears interest at a rate of 14% per annum, with interest payable in-kind (“PIK”). Under the terms of the Term Loan Credit Agreement, the Term Loan is secured by a second lien on the collateral securing the New ABL Facility and a first lien on certain other assets of the Company as described in the Term Loan Credit Agreement. The Term Loan is subject to optional prepayment after the first anniversary of the date of issuance at prepayment price equal to the greater of (1) the original principal amount of the Term Loan plus accrued interest thereon, and (2) 125% of the original principal amount of the Term Loan. The Term Loan is subject to mandatory prepayment in connection with a change of control of the Company as described in the Term Loan Credit Agreement. The Term Loan Credit Agreement also includes customary covenants and events of default. As of June 30, 2021, the outstanding principal balance of the Term Loan was $26.4 million.
Term Loan
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Loan balance, at December 31, 2020
|
|
$
|
25,000
|
|
|
|
-
|
|
Debt issuance costs
|
|
|
(432
|
)
|
|
|
-
|
|
Accrued paid-in-kind interest
|
|
|
1,806
|
|
|
|
-
|
|
Loan balance, at June 30, 2021
|
|
$
|
26,374
|
|
|
|
-
|
|
At June 30, 2021, we are in compliance with covenants in the New ABL Facility and Term Loan respectively.
Interest Expense
Interest expense for fiscal year 2021 from the New ABL Facility, the DIP ABL Credit Agreement and the Term Loan of $8.2 million was comprised of the amortization of financing fees of $5.5 million, commitment fees of $0.8 million, and, interest paid on the New ABL Facility and accrued PIK interest on the Term Loan of $1.9 million. Interest expense for fiscal year 2020 from the Pre-Petition ABL Credit Agreement of $1.9 million was comprised of interest of $1.5 million, commitment fees of $0.2 million, and the amortization of financing fees of $0.2 million.
Fair Value Measurements
The fair value of our Term Loan was determined based on observable market data provided by a third party for similar types of debt which are considered Level 2 inputs within the fair value hierarchy. The carrying and fair values of our Term Loan as of June 30, 2021 was $26.4 million and $29.6 million, respectively.
47
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT, net
Property and equipment, net of accumulated depreciation, consisted of the following (in thousands):
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Land
|
|
$
|
-
|
|
|
$
|
6,628
|
|
Buildings and building improvements
|
|
|
-
|
|
|
|
43,215
|
|
Furniture and fixtures
|
|
|
47,587
|
|
|
|
63,755
|
|
Equipment
|
|
|
50,231
|
|
|
|
68,909
|
|
Software
|
|
|
41,575
|
|
|
|
50,691
|
|
Leasehold improvements
|
|
|
49,651
|
|
|
|
65,281
|
|
Assets under finance lease
|
|
|
681
|
|
|
|
1,223
|
|
|
|
|
189,725
|
|
|
|
299,702
|
|
Less accumulated depreciation
|
|
|
(151,941
|
)
|
|
|
(231,067
|
)
|
Net property and equipment
|
|
$
|
37,784
|
|
|
$
|
68,635
|
|
In the second quarter ended December 31, 2020, we sold our corporate office and Dallas distribution center properties and land with a total net book value of $18.9 million in a sale-leaseback transaction (see further discussion in Note 8 below). Gains related to the sale or other disposal of such assets are presented in Reorganization items, net on our Consolidated Statement of Operations (See Note 2).
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Sales and use tax
|
|
$
|
2,698
|
|
|
$
|
5,027
|
|
Self-insurance reserves
|
|
|
9,405
|
|
|
|
10,631
|
|
Wages, benefits and payroll taxes
|
|
|
9,639
|
|
|
|
2,303
|
|
Property taxes
|
|
|
1,510
|
|
|
|
1,809
|
|
Freight and distribution
|
|
|
8,658
|
|
|
|
1,620
|
|
Capital expenditures
|
|
|
348
|
|
|
|
-
|
|
Utilities
|
|
|
1,466
|
|
|
|
791
|
|
Advertising
|
|
|
613
|
|
|
|
69
|
|
Gift card liability
|
|
|
1,045
|
|
|
|
1,281
|
|
Asset retirement obligation
|
|
|
3
|
|
|
|
1,598
|
|
Reorganization expenses
|
|
|
6,337
|
|
|
|
3,544
|
|
Other expenses
|
|
|
4,732
|
|
|
|
5,269
|
|
Total accrued liabilities
|
|
$
|
46,454
|
|
|
$
|
33,942
|
|
Liabilities subject to compromise as of June 30, 2020 are discussed in Note 2 above and are not included in this table of accrued liabilities.
48
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
Income tax provision/(benefit) consisted of the following (in thousands):
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Fiscal Year Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
20
|
|
State and local
|
|
|
267
|
|
|
|
4
|
|
|
|
271
|
|
Total
|
|
$
|
267
|
|
|
$
|
24
|
|
|
$
|
291
|
|
Fiscal Year Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(286
|
)
|
|
$
|
306
|
|
|
$
|
20
|
|
State and local
|
|
|
196
|
|
|
|
5
|
|
|
|
201
|
|
Total
|
|
$
|
(90
|
)
|
|
$
|
311
|
|
|
$
|
221
|
|
Fiscal Year Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(286
|
)
|
|
$
|
303
|
|
|
$
|
17
|
|
State and local
|
|
|
225
|
|
|
|
4
|
|
|
|
229
|
|
Total
|
|
$
|
(61
|
)
|
|
$
|
307
|
|
|
$
|
246
|
|
A reconciliation between income taxes computed at the statutory federal income tax rate of 21%. Income taxes recognized in the Consolidated Statements of Operations was as follows (in thousands):
|
|
Fiscal Year Ended
|
|
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Federal income tax benefit computed at statutory rate
|
|
$
|
687
|
|
|
$
|
(34,883
|
)
|
|
$
|
(2,561
|
)
|
State income taxes, net of related federal tax benefit
|
|
|
214
|
|
|
|
159
|
|
|
|
181
|
|
Increase/(decrease) in federal valuation allowance
|
|
|
(11,637
|
)
|
|
|
34,586
|
|
|
|
2,291
|
|
Federal tax credits
|
|
|
(113
|
)
|
|
|
(91
|
)
|
|
|
(294
|
)
|
Stock option expiration/deficiencies
|
|
|
250
|
|
|
|
620
|
|
|
|
548
|
|
Warrant issue expenses
|
|
|
4,324
|
|
|
|
-
|
|
|
|
-
|
|
Reorganization expenses
|
|
|
6,202
|
|
|
|
-
|
|
|
|
-
|
|
Other, net
|
|
|
364
|
|
|
|
(170
|
)
|
|
|
81
|
|
Provision for income taxes
|
|
$
|
291
|
|
|
$
|
221
|
|
|
$
|
246
|
|
49
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities as of June 30, 2021 and 2020, all of which are classified as non-current in our Consolidated Balance Sheets, were comprised of the following (in thousands):
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Other payroll and benefits
|
|
$
|
1,182
|
|
|
$
|
189
|
|
Inventory reserves
|
|
|
931
|
|
|
|
1,516
|
|
Self-insurance reserves
|
|
|
2,318
|
|
|
|
2,620
|
|
Share-based compensation
|
|
|
1,800
|
|
|
|
1,648
|
|
Other current assets
|
|
|
1,160
|
|
|
|
1,288
|
|
Operating lease liabilities
|
|
|
52,008
|
|
|
|
87,073
|
|
Property and equipment
|
|
|
727
|
|
|
|
3,208
|
|
Disallowed interest expense
|
|
|
2,954
|
|
|
|
942
|
|
Net operating loss and tax credits
|
|
|
41,833
|
|
|
|
38,096
|
|
Other noncurrent assets
|
|
|
556
|
|
|
|
191
|
|
Total gross deferred tax assets
|
|
$
|
105,469
|
|
|
$
|
136,771
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Inventory costs
|
|
$
|
2,924
|
|
|
$
|
4,371
|
|
Prepaid supplies
|
|
|
1,353
|
|
|
|
1,174
|
|
Operating lease - right of use
|
|
|
47,627
|
|
|
|
63,694
|
|
Total gross deferred tax liabilities
|
|
|
51,904
|
|
|
|
69,239
|
|
Valuation allowance
|
|
|
(53,683
|
)
|
|
|
(67,626
|
)
|
Net deferred tax liability
|
|
$
|
(118
|
)
|
|
$
|
(94
|
)
|
During fiscal 2013, we established a valuation allowance related to deferred tax assets. In assessing whether a deferred tax asset would be realized, we considered whether it is more likely than not that some portion or all of the deferred tax assets would not be realized. We considered the reversal of existing taxable temporary differences, projected future taxable income, tax planning strategies and loss carry back potential in making this assessment. In evaluating the likelihood that sufficient future earnings would be available in the near future to realize the deferred tax assets, we considered our cumulative losses over three years including the then-current year. Based on the foregoing, we concluded that a valuation allowance was necessary, and based on our results since fiscal 2013, we have continued to conclude that a full tax valuation allowance is necessary. In fiscal 2021, the deferred tax asset valuation allowance, decreased $13.9 million, due to our operating income for fiscal 2021 and non-deductible reorganization costs.
We have federal net operating loss carryforwards of $153.6 million. These losses can only be carried forward and utilized to offset future taxable income. Of this carryforward amount, $70.2 million will expire in fiscal years 2033 through 2037 if not utilized before then. The remaining $83.4 million can be carried forward indefinitely, due to provisions of the TCJA. Additionally, we have tax effected state net operating loss carryforwards of $6.0 million, which will expire throughout fiscal years 2021 through 2041 filings, if not utilized before then.
Accounting for Uncertainty in Income Taxes. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before fiscal 2015. The Internal Revenue Service has concluded an examination of the Company for years ending on or before June 30, 2010.
50
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at June 30, 2018
|
|
$
|
147
|
|
Additions for tax positions of prior years
|
|
|
—
|
|
Reductions for lapse of statute of limitations
|
|
|
—
|
|
Balance at June 30, 2019
|
|
$
|
147
|
|
Additions for tax positions of prior years
|
|
|
—
|
|
Reductions for lapse of statute of limitations
|
|
|
—
|
|
Balance at June 30, 2020
|
|
$
|
147
|
|
Additions for tax positions of prior years
|
|
|
—
|
|
Reductions for lapse of statute of limitations
|
|
|
—
|
|
Balance at June 30, 2021
|
|
$
|
147
|
|
The balance of taxes, interest, and penalties at June 30, 2021, that if recognized, would affect the effective tax rate is $0.3 million. We classify and recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense. No interest or penalties were paid in the tax years ended June 30, 2021, 2020, and 2019.
We do not anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease the effective tax rate within 12 months of June 30, 2021.
7. COMMON STOCK & SHARE‑BASED INCENTIVE PLANS
Increase in Authorized Capital Stock
As provided in the Plan of Reorganization, the Company’s Amended and Restated Certificate of Incorporation (the “Amended and Restated Certificate of Incorporation”) increased the number of authorized shares of the Company’s common stock, par value $0.01 per share, to 200,000,000 shares. The Company had 86,204,572 shares of common stock outstanding as of June 30, 2021.
Equity Financing under Plan of Reorganization
Pursuant to the Plan of Reorganization, each outstanding share of the Company’s common stock as of the close of business on January 4, 2021 was exchanged (the “Exchange”) for (1) 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 a rights offering. In accordance with the Plan of Reorganization, the Company commenced a $40.0 million rights offering in January 2021, 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 (Larkspur SPV), LP (the “Backstop Party”), a special purpose entity affiliate of Osmium Partners, LLC jointly owned with Tensile Capital Management, could purchase up to $16 million of the Company’s common stock at a purchase price of $1.10 per share (the “Rights Offering”). 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 the company’s common stock, with the Backstop Party purchasing the remaining $20.2 million of the company’s common stock. On February 9, 2021, the Company closed on the Rights Offering and 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 that limited the holders ability to resell securities until they were registered pursuant to a Registration Rights Agreement entered into on February 9, 2021 between the Company and Backstop Party.
In addition, on February 9, 2021, 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 $3.5 million measured at fair value using the Black-Scholes model. Significant inputs used in the model were: i) An expected term of 5 years; ii) a volatility rate of 37.98%; iii) a risk free interest rate of 0.36%; iv) a discount for lack of marketability of 30%. Finally, on February 9, 2021 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. The non-cash charges of approximately $14.5 million for the Backstop Premium, the $3.5 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 fiscal year ended June 30, 2021. In accordance with the terms of the Plan of Reorganization, all proceeds from the Rights Offering were used to make payments of the claims of general unsecured creditors in the Chapter 11 Cases.
51
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ownership Restrictions
In order to continue to assist the Company in preserving certain tax attributes (the “Tax Benefits”), the Company’s Amended and Restated Certificate of incorporation imposes certain restrictions on the transferability and ownership of the Company’s capital stock (the “Ownership Restrictions”). Subject to certain exceptions, the Ownership Restrictions restrict (i) any transfer that would result in any person acquiring 4.5% or more of our Common Stock, (ii) any transfer that would result in an increase of the ownership percentage of any person already owning 4.5% or more of our Common Stock, or (iii) any transfer during the five-year period following December 31, 2020 that would result in a decrease of the ownership percentage of any person already owning 4.5% or more of our Common Stock. Pursuant to the Company’s Amended and Restated Certificate of Incorporation, any transferee receiving shares of our Common Stock that would result in a violation of the Ownership Restrictions will not be recognized as a stockholder of the Company or entitled to any rights of stockholders. The Company’s Amended and Restated Certificate of Incorporation allows the Ownership Restrictions to be waived by the Company’s board of directors on a case by case basis. The board of directors has taken action to waive the restrictions with respect to sales of shares acquired in the Rights Offering by the Backstop Party.
The Ownership Restrictions will remain in effect until the earliest of (i) the repeal of Section 382 of the Internal Revenue Code or any successor statute if the board of directors determines the Ownership Restrictions are no longer necessary for preservation of the Tax Benefits, (ii) the beginning of a taxable year in which the board of directors determines no Tax Benefits may be carried forward, or (iii) such other date as shall be established by the board of directors.
Share-based 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 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.
On September 16, 2014, our Board of Directors adopted the Tuesday Morning Corporation 2014 Plan and the 2014 Plan was approved by our stockholders at the 2014 annual meeting of stockholders on November 12, 2014. Our Board of Directors also approved the termination of the Company’s ability to grant new awards under the 2008 Plan, effective upon the date of stockholder approval of the 2014 Plan, and no new awards will be made under the 2008 Plan. On September 22, 2016, our Board of Directors adopted amendments to the 2014 Plan, which were approved at the 2016 Annual Meeting of Stockholders, to increase the number of shares of our common stock available for issuance under the 2014 Plan and to make additional amendments to the 2014 Plan to, among other things, remove liberal share recycling, reduce the number of shares exempt from minimum vesting, and eliminate discretion to accelerate vesting upon a change in control. On August 22, 2017, our Board of Directors adopted a Second Amendment to the 2014 Plan that modified the minimum vesting provisions as they apply to non-employee directors.
As provided in the Plan of Reorganization, on December 31, 2020, the 2014 Plan was further amended to increase the number of shares available for issuance under the 2014 Plan. The maximum number of shares reserved for issuance under the 2014 Plan, as amended, is 8.5 million shares plus any awards under the 2008 Plan (i) that were outstanding on September 16, 2014, and, on or after September 16, 2014, are forfeited, expired or are cancelled, and (ii) any shares subject to such awards that, on or after September 16, 2014 are used to satisfy the exercise price or tax withholding obligations with respect to such awards.
The 2014 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other awards which may be granted singly, in combination, or in tandem, and which may be paid in cash, shares of common stock, or a combination of cash and shares of common stock. Under the 2014 Plan, stock options may not vest earlier than one year after the date of grant. “Full Value Awards” (i.e., restricted stock or restricted stock units) that constitute performance awards must vest no earlier than one year after the date of grant and Full Value Awards that constituted “Tenure Awards” (i.e., awards that vest upon passage of time) may not vest earlier than over the three-year period commencing on the date of grant (other than awards to non-employee directors which may not vest earlier than one year from the date of grant). The Compensation Committee of our Board of Directors may grant only stock options or Full Value Awards with vesting conditions that are more favorable than the foregoing restrictions with respect to up to 5% of the shares of common stock authorized under the 2014 Plan (referred to in the 2014 Plan as “exempt shares”).
Stock options were awarded with a strike price at a fair market value equal to the closing price of our common stock on the date of the grant under the 2008 Plan and the 2014 Plan.
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 June 30, 2021 range between $1.64 per share and $19.36 per share. The 2008 Plan terminated with respect to the granting of new awards as the 2014 Plan became effective to provide new awards as of September 16, 2014. There were 1.9 million shares available for grant under the 2014 Plan at June 30, 2021.
52
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of transactions relating to the 2008 Plan and 2014 Plan options for the fiscal years ended June 30, 2021, 2020, and 2019:
|
|
Number of
Shares
|
|
|
Weighted-Average
Exercise
Price
|
|
|
Weighted-Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Options Outstanding at June 30, 2018
|
|
|
3,957,243
|
|
|
$
|
6.30
|
|
|
|
7.21
|
|
|
$
|
475,381
|
|
Granted during year
|
|
|
536,877
|
|
|
|
3.22
|
|
|
|
|
|
|
|
|
|
Exercised during the year
|
|
|
(3,105
|
)
|
|
|
2.10
|
|
|
|
|
|
|
|
|
|
Forfeited or expired during year
|
|
|
(792,972
|
)
|
|
|
7.38
|
|
|
|
|
|
|
|
|
|
Options Outstanding at June 30, 2019
|
|
|
3,698,043
|
|
|
|
5.63
|
|
|
|
7.10
|
|
|
|
-
|
|
Granted during year
|
|
|
12,000
|
|
|
|
1.64
|
|
|
|
|
|
|
|
|
|
Exercised during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or expired during year
|
|
|
(1,015,427
|
)
|
|
|
6.22
|
|
|
|
|
|
|
|
|
|
Options Outstanding at June 30, 2020
|
|
|
2,694,616
|
|
|
|
5.33
|
|
|
|
6.11
|
|
|
|
-
|
|
Granted during year
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised during the year
|
|
|
(22,308
|
)
|
|
|
1.98
|
|
|
|
|
|
|
|
|
|
Forfeited or expired during year
|
|
|
(327,565
|
)
|
|
|
5.37
|
|
|
|
|
|
|
|
|
|
Options Outstanding at June 30, 2021
|
|
|
2,344,743
|
|
|
$
|
5.36
|
|
|
|
4.70
|
|
|
$
|
1,642,845
|
|
Options Exercisable at June 30, 2021
|
|
|
2,019,170
|
|
|
$
|
4.43
|
|
|
|
|
|
|
$
|
1,121,354
|
|
The weighted average grant date fair value of stock options granted during the fiscal years ended June 30, 2020, and 2019, was $0.83 per share, and $1.71 per share, respectively. There were no stock options granted during the fiscal year ended June 30, 2021. There is a $1.1 million intrinsic value of vested unexercised options at June 30, 2021.
The aggregate intrinsic value of stock options exercised was $43,599, $0, and $1,800 during the fiscal years ended June 30, 2021, 2020, and 2019, respectively. At June 30, 2021, we had $0.2 million of total unrecognized share‑based compensation expense related to stock options that is expected to be recognized over a weighted average period of 0.93 years.
The following table summarizes information about stock options outstanding at June 30, 2021:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining
Contractual Life
(Years)
|
|
Weighted
Average
Exercise Price
Per Share
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
$1.64 - $2.10
|
|
|
151,483
|
|
|
5.91
|
|
$
|
2.03
|
|
|
|
118,353
|
|
|
$
|
2.07
|
|
$2.45 - $2.45
|
|
|
348,036
|
|
|
5.58
|
|
|
2.45
|
|
|
|
261,029
|
|
|
|
2.45
|
|
$3.12 - $3.12
|
|
|
15,000
|
|
|
6.86
|
|
3.12
|
|
|
|
11,250
|
|
|
|
3.12
|
|
$3.25 - $3.25
|
|
|
411,571
|
|
|
6.49
|
|
3.25
|
|
|
|
209,885
|
|
|
|
3.25
|
|
$3.95 - $5.59
|
|
|
104,390
|
|
|
2.64
|
|
4.84
|
|
|
|
104,390
|
|
|
|
4.84
|
|
$5.64 - $5.64
|
|
|
376,101
|
|
|
3.66
|
|
5.64
|
|
|
|
376,101
|
|
|
|
5.64
|
|
$5.95 - $5.95
|
|
|
272,825
|
|
|
3.61
|
|
5.95
|
|
|
|
272,825
|
|
|
|
5.95
|
|
$6.71 - $6.71
|
|
|
367,485
|
|
|
4.75
|
|
6.71
|
|
|
|
367,485
|
|
|
|
6.71
|
|
$7.90 - $14.72
|
|
|
244,894
|
|
|
3.42
|
|
9.42
|
|
|
|
244,894
|
|
|
|
9.42
|
|
$18.42 - $19.36
|
|
|
52,958
|
|
|
3.42
|
|
18.96
|
|
|
|
52,958
|
|
|
|
18.96
|
|
|
|
|
2,344,743
|
|
|
4.70
|
|
|
5.36
|
|
|
|
2,019,170
|
|
|
|
5.76
|
|
Restricted Stock Awards/Units
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. Shares are valued at the fair market value of our common stock
53
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
at the date of award. Shares may be subject to certain performance requirements. If the performance requirements are not met, the restricted shares are forfeited. Under the 2008 Plan and the 2014 Plan, as of June 30, 2021, there were 1,708,368 shares of restricted stock awards and 3,021,924 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 $1.94 and $2.83 per share, respectively. On May 19, 2021, Fred Hand was awarded 1,230,769 performance based and 1,538,462 service based restricted stock units as an incentive to become CEO. These awards vest over a period of one to five years.
The following table summarizes information about restricted stock units, performance stock units, restricted stock awards and performance stock awards granted and outstanding for the fiscal years ended June 30, 2021, 2020, and 2019:
|
|
Restricted and Performance Stock Units Number of Shares
|
|
|
Weighted-
Average
Fair Value at
Date of Grant
|
|
|
Restricted and Performance Stock Awards Number of Shares
|
|
|
Weighted-
Average
Fair Value at
Date of Grant
|
|
Outstanding at June 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1,433,269
|
|
|
$
|
3.95
|
|
Granted during year
|
|
|
57,693
|
|
|
|
3.25
|
|
|
|
1,039,050
|
|
|
|
3.09
|
|
Vested during year
|
|
|
-
|
|
|
|
3.25
|
|
|
|
(421,359
|
)
|
|
|
4.59
|
|
Forfeited during year
|
|
|
-
|
|
|
|
-
|
|
|
|
(211,099
|
)
|
|
|
3.63
|
|
Outstanding at June 30, 2019
|
|
|
57,693
|
|
|
$
|
3.25
|
|
|
|
1,839,861
|
|
|
$
|
3.36
|
|
Granted during year
|
|
|
57,693
|
|
|
|
1.58
|
|
|
|
1,422,927
|
|
|
|
1.63
|
|
Vested during year
|
|
|
(57,693
|
)
|
|
|
1.58
|
|
|
|
(446,987
|
)
|
|
|
3.55
|
|
Forfeited during year
|
|
|
-
|
|
|
|
-
|
|
|
|
(836,321
|
)
|
|
|
2.38
|
|
Outstanding at June 30, 2020
|
|
|
57,693
|
|
|
$
|
3.25
|
|
|
|
1,979,480
|
|
|
$
|
2.43
|
|
Granted during year
|
|
|
3,021,924
|
|
|
|
2.81
|
|
|
|
1,121,250
|
|
|
|
1.50
|
|
Vested during year
|
|
|
(57,693
|
)
|
|
|
1.91
|
|
|
|
(595,190
|
)
|
|
|
2.26
|
|
Forfeited during year
|
|
|
-
|
|
|
|
-
|
|
|
|
(797,172
|
)
|
|
|
2.29
|
|
Outstanding at June 30, 2021
|
|
|
3,021,924
|
|
|
$
|
2.83
|
|
|
|
1,708,368
|
|
|
$
|
1.94
|
|
Cash Settled Awards
In the fiscal year ending 2019, 2020 and 2021, we granted stock-based awards to certain employees, which vest over a period of three to four years, and will be settled in cash (“cash settled awards”). Both performance based and service-based awards were granted. Except for the performance based awards which have been deemed unlikely to vest, the fair value of the cash settled awards at each reporting period is based on the price of our common stock. The fair value of the cash settled awards will be remeasured at each reporting period until the awards are settled.
The following table summarizes the activity of cash settled awards during fiscal 2021:
|
|
Performance
|
|
|
Service
|
|
|
|
|
|
|
|
Based
|
|
|
Based
|
|
|
Total
|
|
Outstanding at June 30, 2020
|
|
|
287,350
|
|
|
|
861,056
|
|
|
|
1,148,406
|
|
Grant during year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested during year
|
|
|
-
|
|
|
|
(208,328
|
)
|
|
|
(208,328
|
)
|
Forfeited during year
|
|
|
(143,675
|
)
|
|
|
(105,030
|
)
|
|
|
(248,705
|
)
|
Outstanding at June 30, 2021
|
|
|
143,675
|
|
|
|
547,698
|
|
|
|
691,373
|
|
The liability associated with the cash settled awards was $1.7 million and $0.1 million at June 30, 2021 and June 30, 2020, respectively.
54
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-based compensation costs: We recognized share‑based compensation costs as follows (in thousands):
|
|
Fiscal Years Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Amortization of share-based compensation during the period
|
|
$
|
1,851
|
|
|
$
|
2,555
|
|
|
$
|
3,488
|
|
Amounts capitalized in inventory
|
|
|
(410
|
)
|
|
|
(681
|
)
|
|
|
(1,114
|
)
|
Amount recognized and charged to cost of sales
|
|
|
613
|
|
|
|
846
|
|
|
|
1,162
|
|
Amounts charged against income for the period before tax
|
|
$
|
2,054
|
|
|
$
|
2,720
|
|
|
$
|
3,536
|
|
Share-based Compensation from Related Party to CEO
Upon his appointment as the Company’s Chief Executive Officer, Fred Hand entered into agreements with Osmium Partners, LLC., pursuant to which Mr. Hand became entitled to receive 30% of all carry distributions (“Carried Interest”) payable by certain members of Osmium Partners (Larkspur SPV) LP (the “SPV”) in respect of its approximately 31.4% of the outstanding shares of common stock of the Company, at the date of the Carried Interest Arrangement, May 4, 2021 (including warrants to purchase 10,000,000 shares of common stock), to Osmium Partners, LLC, the SPV’s carry partner.
Subject to Mr. Hand’s continued employment with the Company, such entitlement will vest over 42 months as follows: (a) on the second anniversary of Mr. Hand’s employment by the Company, Mr. Hand’s entitlement to approximately 17.14% (the product of 30% times 24/42) of the Carried Interest will become vested, and (b) thereafter, Mr. Hand’s entitlement to approximately 0.71% (the product of 30% times 1/42) of the Carried Interest will become vested each month. In addition, Mr. Hand’s entitlement to a portion of the Carried Interest will be subject to a participation threshold in the minimum amount necessary to render his entitlement a valid profit interest for tax purposes.
Share-based payments awarded to an employee of the reporting entity by a related party or other holder of an economic interest in the entity as compensation for services provided to the entity, are share-based payment transactions to be accounted for unless the transfer is clearly for a purpose other than compensation for services to the reporting entity. The substance of such a transaction is that the economic interest holder makes a capital contribution to the reporting entity, and that entity makes a share-based payment to its employee in exchange for services rendered. The Company concluded that the Carried Interest entitlement granted by Osmium Partners, LLC to Mr. Hand falls under this category and therefore it is treated as share based compensation in the accounts of the Company. We performed a valuation on the Carried Interest to determine the Level 2 fair value measurement, using: the Option Pricing method. The significant inputs utilized in the model assumed the following: i) a risk free interest rate of 0.34%: ii) a volatility rate of 70.0%; iii) an expected time to liquidity of 3 years; iv) a discount for lack of marketability of 25% and v) expected dividend of 0%. Shared-based compensation expense with respect to the Carried Interest Agreement was $0.1 million for fiscal 2021.
8. LEASES
We conduct substantially all operations from leased facilities. Our retail store locations, our corporate office and our distribution center are under operating leases that will expire over the next 1 to 10 years. Many of our leases include options to renew at our discretion. We include the lease renewal option periods in the calculation of our operating lease assets and liabilities when it is reasonably certain that we will renew the lease. We also lease certain equipment under finance leases that generally expire within 5 years.
In accordance with the Plan of Reorganization, on December 31, 2020, we sold our corporate office and Dallas distribution center properties and leased back those facilities. The lease of the corporate office is for a term of 10 years, and the lease of the distribution center is for an initial term of two and one-half years, with an option to extend the distribution center lease for one additional year. We believe it is reasonably certain the option to extend will be exercised. We determined the sale price represented the fair value of the underlying assets sold and have no continuing involvement with the properties sold other than a normal leaseback. The consideration received for the sale, as reduced by the closing and transaction costs, was $68.5 million, and the net book value of the properties sold was $18.9 million, resulting in a $49.6 million gain, which was recognized as of December 31, 2020. Cash proceeds were deposited directly into the Unsecured Creditor Claim Fund (See Note 2).
The two leases, associated with the transaction, were recorded as operating leases. As of June 30, 2021 we will pay approximately $10.0 million in fixed rents and in-substance fixed rents, over the remaining lease term for the corporate office and we will pay approximately $16.0 million in fixed rents and in-substance fixed rents for the Dallas distribution center property over the remaining lease term, including the one-year option period as noted above. Fixed rents and in-substance fixed rents for each lease were discounted using the incremental borrowing rate we established for the respective term of each lease.
55
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with ASC 842, we determine whether an agreement contains a lease at inception based on our right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. Lease liabilities represent the present value of future lease payments and the right-of-use (“ROU”) assets represent our right to use the underlying assets for the respective lease terms.
The operating lease liability is measured as the present value of the unpaid lease payments and the ROU asset is derived from the calculation of the operating lease liability. As our leases do not generally provide an implicit rate, we use our incremental borrowing rate as the discount rate to calculate the present value of lease payments. The incremental borrowing rate represents an estimate of the interest rate that would be required to borrow over a similar term, on a collateralized basis in a similar economic environment.
Rent escalations occurring during the term of the leases are included in the calculation of the future minimum lease payments and the rent expense related to these leases is recognized on a straight-line basis over the lease term. In addition to minimum lease payments, certain leases require payment of a proportionate share of real estate taxes and certain building operating expenses allocated on a percentage of sales in excess of a specified base. These variable lease costs are not included in the measurement of the ROU asset or lease liability due to unpredictability of the payment amount and are recorded as lease expense in the period incurred. The ROU asset is adjusted to account for previously recorded lease-related expenses such as deferred rent and other lease liabilities.
Our lease agreements do not contain residual value guarantees or significant restrictions or covenants other than those customary in such arrangements.
The components of lease cost are as follows (in thousands):
|
|
Year Ended
June 30,
2021
|
|
|
Year Ended
June 30,
2020
|
|
Operating lease cost
|
|
$
|
62,617
|
|
|
$
|
94,318
|
|
Variable lease cost
|
|
|
10,924
|
|
|
|
24,014
|
|
Amortization of right-of-use assets
|
|
|
210
|
|
|
|
286
|
|
Interest on lease liabilities
|
|
|
8
|
|
|
|
29
|
|
Total lease cost
|
|
$
|
73,759
|
|
|
$
|
118,647
|
|
The table below presents additional information related to the Company’s leases as of June 30, 2021 and June 30, 2020:
|
|
June 30, 2021
|
|
June 30, 2020
|
|
Weighted average remaining lease term (in years)
|
|
|
|
|
|
|
|
Operating leases
|
|
|
4.6
|
|
|
5.9
|
|
Finance leases
|
|
|
0.7
|
|
|
2.6
|
|
Weighted average discount rate
|
|
|
|
|
|
|
|
Operating leases
|
|
|
8.5
|
%
|
|
5.8
|
%
|
Finance leases
|
|
|
2.4
|
%
|
|
3.9
|
%
|
Other information related to leases, including supplemental disclosures of cash flow information, is as follows (in thousands):
|
|
Year Ended
June 30,
2021
|
|
|
|
Year Ended
June 30,
2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
64,496
|
|
|
|
$
|
90,983
|
|
Operating cash flows from finance leases
|
|
$
|
9
|
|
|
|
$
|
23
|
|
Financing cash flows from finance leases
|
|
$
|
217
|
|
|
|
$
|
224
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
|
|
$
|
(107,497
|
)
|
|
|
$
|
28,957
|
|
56
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of lease liabilities were as follows as of June 30, 2021 (in thousands):
|
Operating
Leases
|
|
|
Finance
Leases
|
|
|
Total
|
|
Fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
2022
|
$
|
69,461
|
|
|
$
|
124
|
|
|
$
|
69,585
|
|
2023
|
|
59,776
|
|
|
|
-
|
|
|
|
59,776
|
|
2024
|
|
46,086
|
|
|
|
-
|
|
|
|
46,086
|
|
2025
|
|
31,740
|
|
|
|
-
|
|
|
|
31,740
|
|
2026
|
|
19,332
|
|
|
|
-
|
|
|
|
19,332
|
|
Thereafter
|
|
28,223
|
|
|
|
-
|
|
|
|
28,223
|
|
Total lease payments
|
$
|
254,618
|
|
|
$
|
124
|
|
|
$
|
254,742
|
|
Less: Interest
|
|
43,746
|
|
|
|
1
|
|
|
|
43,747
|
|
Total lease liabilities
|
$
|
210,872
|
|
|
$
|
123
|
|
|
$
|
210,995
|
|
Less: Current lease liabilities
|
|
54,632
|
|
|
|
-
|
|
|
|
54,632
|
|
Non-current lease liabilities
|
$
|
156,240
|
|
|
$
|
123
|
|
|
$
|
156,363
|
|
Current and non-current finance lease liabilities recorded in “Accrued liabilities” and “Other liabilities – non-current”, respectively, on our Consolidated Balance Sheets. As of June 30, 2021, there were no operating lease payments for legally binding minimum lease payments for leases signed by not yet commenced.
Rent expense for real estate leases for the fiscal years ended June 30, 2021, 2020, and 2019 was $73.5 million, $118.3 million, and $121.5 million, respectively. Total lease cost in fiscal 2021 was $73.8 million, including finance lease costs. Rent expense includes minimum base rent as well as contractually required payments for maintenance, insurance and taxes on our leased store locations and distribution centers. Total lease costs of $73.8 million for fiscal 2021 excludes $5.6 million recorded for accelerated recognition of rent expense due to our abandonment of our Phoenix distribution center.
Total lease costs of $118.6 million for fiscal 2020 excluded $51.6 million of impairment recorded for operating lease right-of-use assets and $25.1 million recorded for accelerated recognition of rent expense due to planned abandonments due to our permanent store and Phoenix distribution center closing plans.
9. 401(K) PROFIT SHARING PLAN
We have a 401(k) profit sharing plan for the benefit of our full‑time employees who become eligible after one month of service, and for our part-time employees who become eligible after both 12 months of service and a minimum of 1,000 hours worked. Under the plan, eligible employees may request us to deduct and contribute from 1% to 75% of their salary to the plan, subject to Internal Revenue Service Regulations. We match each participant’s contribution up to 4% of participant’s compensation. We expensed contributions of $1.4 million, $1.4 million, and $1.4 million for the fiscal years ended June 30, 2021, 2020, and 2019, respectively.
10. EARNINGS PER COMMON SHARE
The Company uses the two-class method of computing basic EPS due to the existence of non-vested restricted stock awards with non-forfeitable rights to dividends or dividend equivalents (referred to as participating securities). Basic EPS is computed using the weighted average number of common shares outstanding during each of the respective years. Diluted EPS is computed using the weighted average number of common and common equivalent shares outstanding during each of the respective years using the more dilutive of either the treasury stock method or two-class method. The difference between basic and diluted shares, if any, largely results from common equivalent shares, which represents the dilutive effect of the assumed exercise of certain outstanding share options, the assumed vesting of restricted stock granted to employees and directors, or the satisfaction of certain necessary conditions for contingently issuable shares.
57
TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the computation of our basic and diluted earnings (loss) per common share (in thousands, except per share amounts):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Net earnings/(loss)
|
|
$
|
2,982
|
|
|
$
|
(166,328
|
)
|
|
$
|
(12,440
|
)
|
Less: Income to participating securities
|
|
|
(135
|
)
|
|
|
—
|
|
|
|
—
|
|
Net earnings/(loss) attributable to common shares
|
|
$
|
2,847
|
|
|
$
|
(166,328
|
)
|
|
$
|
(12,440
|
)
|
Weighted average common shares outstanding—basic
|
|
|
60,584
|
|
|
|
45,208
|
|
|
|
44,719
|
|
Effect of dilutive stock equivalents
|
|
|
1,105
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average common shares outstanding—dilutive
|
|
|
61,689
|
|
|
|
45,208
|
|
|
|
44,719
|
|
Net earnings/(loss) per common share—basic
|
|
$
|
0.05
|
|
|
$
|
(3.68
|
)
|
|
$
|
(0.28
|
)
|
Net earnings/(loss) per common share—diluted
|
|
$
|
0.05
|
|
|
$
|
(3.68
|
)
|
|
$
|
(0.28
|
)
|
For June 30, 2021, 2020 and 2019, options and awards representing the rights to purchase approximately 2.8 million, 3.9 million and 4.8 million weighted average shares respectively, were excluded in the dilutive earnings per share calculation because the assumed exercise of such options would have been anti-dilutive. On February 9, 2021, as part of the Rights Offering, the Company issued warrants to purchase 10 million shares of common stock with an exercise price of $1.65 and a five year term, all which remained outstanding as of June 30, 2021.
11. Related Party
On November 16, 2020, following approval of the Bankruptcy Court, the Company and Osmium Partners LLC (“Osmium Partners”) entered into a backstop commitment agreement (the “Backstop Commitment Agreement”), pursuant to which Osmium Partners agreed that Osmium Partners or an affiliate would serve as the backstop party (the “Backstop Party”) and purchase all unsubscribed shares in the $40 million Rights Offering described in Note 7 above. Osmium Partners (Larkspur SPV) LP (“Larkspur SPV”), jointly owned by Osmium Partners and Tensile Capital Partners Master Fund LP (“TCM”), was formed to serve as the Backstop Party. In addition, on November 15, 2020, the Company and TCM entered into a commitment letter (the “Commitment Letter”) pursuant to which TCM agreed to provide $25 million in subordinated debt financing to the Company.
In accordance with the Plan of Reorganization and the Commitment Letter, on December 31, 2020, the Company, Alter Domus (US), LLC, as administrative agent, and the lenders named therein, including TCM and an affiliate of Osmium, entered into the Term Loan Credit Agreement described in Note 3 above which provided for the $25 million Term Loan to the Company.
In accordance with the Plan of Reorganization and the Backstop Commitment Agreement, on December 31, 2020, the Company, Osmium Partners and Larkspur SPV (Osmium Partners and Larkspur SPV together, the “Osmium Group”) entered into an agreement pursuant to which the Osmium Group is entitled to appoint three directors to the Company’s Board of Directors (the “Directors Agreement”). Pursuant to the Directors Agreement, Douglas J. Dossey of Tensile Capital Management LP, John H. Lewis of Osmium Partners and W. Paul Jones were appointed as members of the Company’s Board of Directors. The Directors Agreement entitles the Osmium Group to appoint an additional member of the Board of Directors under certain circumstances. The Directors Agreement also specifies various other board-related and voting-related procedures and includes a standstill provision limiting certain actions by the Osmium Group. The full text of the Directors Agreement is included as Exhibit 10.35 to this Annual Report on Form 10-K.
On February 9, 2021, the Company received proceeds of approximately $40 million upon the closing of the Rights Offering, as contemplated by the Plan of Reorganization. In accordance with the terms of the Backstop Commitment Agreement, Larkspur SPV purchased 18,340,411 shares of the Company’s common stock in the Rights Offering for an aggregate purchase price of approximately $20.2 million. In addition, in accordance with the Plan of Reorganization and the Backstop Commitment Agreement, Larkspur SPV received (1) 1,818,182 additional shares of the Company’s common stock as payment of the commitment fee for serving as Backstop Party in the Rights Offering, and (2) a warrant to purchase 10 million additional shares of the Company’s common stock at a purchase price of $1.65 per share.
Based on Schedule 13D filings made by Osmium Partners and TCM, and their respective affiliates, on February 19, 2021, Osmium Partners and TCM each are deemed to beneficially own the 30,158,593 shares of the Company’s stock beneficially owned by Larkspur SPV (representing approximately 31.4% of outstanding shares), and Osmium Partners beneficially owns an additional 3,004,840 shares of the Company’s common stock.
58