Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We encourage you to read this "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") in conjunction with the corresponding section included in our Annual Report on Form 10-K for the year ended June 30, 2021.
Background
We are one of the original off-price retailers and a leading destination for unique home and lifestyle goods, selling high-quality products at prices generally below those found in boutique, specialty and department stores, catalogs and on-line retailers. Our customers come to us for an ever-changing, exceptional assortment of brand names at great prices. Our strong value proposition has established a loyal customer base, who we engage regularly with social media, email and digital media.
The COVID-19 pandemic has had an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow. On March 25, 2020, we temporarily closed all of our 687 stores nationwide, severely reducing revenues and resulting in significant operating losses and the elimination of substantially all operating cash flow. As allowed by state and local jurisdictions, 685 of our stores gradually reopened as of the end of June 2020 and two stores were permanently closed during the quarter. In accordance with our bankruptcy Plan of Reorganization, described below, we completed the permanent closure of 197 stores in the first quarter of 2021 and the closure of our Phoenix, Arizona distribution center ("Phoenix distribution center") in the second quarter of 2021. In addition, as part of our restructuring, we secured financing to pay the creditors in accordance with the plan of reorganization and to fund planned operations and expenditures.
Future impacts from the COVID-19 pandemic will depend on the potential further geographic spread and duration of the ongoing pandemic, the timing and extent of recovery in traffic and consumer spending in our stores, the extent and duration of ongoing impacts to domestic and international supply chains and the related impacts on the flow, availability and cost of products, the production and administration of effective medical treatments and vaccines, and the actions that may be taken by various governmental authorities and other third parties in response to the pandemic.
Emergence from Chapter 11 Bankruptcy Proceedings
•
In May 2020, we filed voluntary petitions under Chapter 11 of the Bankruptcy Code. 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.
•
In early June 2020, in accordance with the orders of the Bankruptcy Court, we commenced the process to close 132 store locations in a first wave of store closings. By the end of July 2020 all of these stores were permanently closed. In mid-July, 2020, we closed an additional 65 stores following negotiations with our landlords and those store closures were completed in August 2020. In total, we closed 197 stores during fiscal 2021. In addition, we also closed our Phoenix distribution center in the second quarter of fiscal 2021.
•
On December 23, 2020, the Bankruptcy Court entered an order confirming our Plan of Reorganization. On December 31, 2020, all of the conditions precedent to the Plan of Reorganization were satisfied and we legally emerged from bankruptcy, resolving all material conditions precedent listed 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 connection with our legal emergence from bankruptcy on December 31, 2020, we completed the debt financing and sale-leaseback transactions contemplated by the Plan of Reorganization. See Notes 1, 2, 3, 7 and 8 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
•
In February 2021, the Company completed the equity financing transaction contemplated by the Plan of Reorganization with a $40 million Rights Offering that expired in February, 2021. Eligible holders of our common stock subscribed to purchase approximately $19.8 million of shares, at $1.10 per share, with the Backstop Party purchasing the remaining $20.2 million of shares. The Company closed on the Rights Offering and in February, 2021, recorded proceeds of $40.0 million and recognized a non-cash charge of approximately $14.5 million for a change in fair value of the company’s common stock issued to the Backstop Party. See Notes 7 and 11 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
•
On September 29, 2021, the U.S. Bankruptcy Court issued a final decree (the “Final Decree”) closing the Chapter 11 cases of the Company and its subsidiaries. While the Company emerged from bankruptcy proceedings on December 31, 2020, the Chapter 11 Cases remained opened pending final resolution of all claims of general unsecured creditors. The Company was able to resolve all of these claims for approximately $14 million less than the amounts reserved and retained in an escrow account. Upon entry of the Final Decree, the approximately $14 million remaining in the escrow account was returned to the Company to make a repayment on its ABL credit facility and the Chapter 11 Cases are now final.
22
Key Metrics for the Three and Six Months Ended December 31, 2021
Key operating metrics for continuing operations for the three months and six months ended December 31, 2021 include:
•
Net sales for the three months ended December 31, 2021 were $251.4 million, an increase of $52.8 million or 26.6%, compared to $198.6 million for the same period last year. Net sales for the six months ended December 31, 2021 were $428.3 million, an increase of $68.1 million or 18.9%, compared to $360.2 million for the same period last year.
•
Gross margin for the three months ended December 31, 2021 was 28.5%, compared to 30.2% for the same period last year. Gross margin for the six months ended December 31, 2021 was 28.6%, compared to 30.9% for the same period last year.
•
Selling, general and administrative expenses (“SG&A”) for the three months ended December 31, 2021 increased $4.4 million or 6.8% to $67.7 million, from $63.3 million for the same period last year. As a percentage of sales for the second quarter, SG&A was 26.9% compared to 31.9% for the same period last year. Selling, general and administrative expenses (“SG&A”) for the six months ended December 31, 2021 increased $2.5 million or 2.0% to $127.9 million, from $125.4 million for the same period last year. As a percentage of sales for the first six months, SG&A was 29.9% compared to 34.8% for the same period last year.
•
Restructuring, impairment and abandonment charges for the three months ended December 31, 2021 were $0.4 million, compared to $1.0 million for the same period last year. Restructuring, impairment and abandonment charges for the six months ended December 31, 2021 were $2.9 million, compared to $6.5 million for the same period last year, which related to our permanent store closing plan along with our decision to close our Phoenix distribution center.
•
Reorganization items, net for the three months ended December 31, 2021 were a net benefit of $0.2 million compared to a net benefit of $48.1 million for the same period last year. Reorganization items, net for the six months ended December 31, 2021 were a loss of $1.1 million compared to a net benefit of $85.8 million for the same period last year.
•
Our net earnings for the three months ended December 31, 2021 was $1.9 million, or diluted net earnings per share of $0.02 compared to a net earnings for the same period last year of $40.3 million, or diluted earnings per share of $0.88. Our net loss for the six months ended December 31, 2021 was $12.7 million, or diluted net loss per share of $0.15 compared to a net earnings for the same period last year of $59.0 million, or diluted earnings per share of $1.29.
•
As shown under the heading “Non-GAAP Financials Measures” below, EBITDA for the three months ended December 31, 2021 was a positive $7.2 million compared to a positive $47.6 million for the same period last year. Adjusted EBITDA for the three months ended December 31, 2021 was a positive $9.3 million compared to a positive $0.8 million for the same period last year. EBITDA for the six months ended December 31, 2021 was a negative $2.4 million compared to a positive $73.1 million for the same period last year. Adjusted EBITDA for the six months ended December 31, 2021 was positive $3.6 million compared to a negative $5.2 million for the same period last year.
23
Key balance sheet and liquidity metrics for the six months ended December 31, 2021 include:
•
Cash, cash equivalents, and restricted cash decreased $24.5 million from $28.9 million to $4.3 million at June 30, 2021 and December 31, 2021, respectively. The decrease in cash, cash equivalents and restricted cash were primarily driven by payments for bankruptcy court approved petition claims, legal and professional fees and payments to the Company’s vendors for inventory. See Note 2 to our unaudited condensed consolidated financial statements herein for additional information.
•
As of December 31, 2021, total liquidity, defined as cash and cash equivalents plus $58.0 million availability for borrowing under our New ABL Facility, was $62.3 million. In addition, we had $17.9 million of borrowings outstanding under our New ABL Facility and $14.7 million of letters of credit outstanding.
•
Inventory levels increased $12.0 million at December 31, 2021 to $157.1 million from $145.1 million at June 30, 2021. As of December 31, 2021, store inventory levels on a comparable store basis, increased approximately 8.3% when compared to December 31, 2020. Last year, store level inventory challenges were due in part to the closure of much of our merchant and supply chain operations during the height of the COVID outbreak as well as pandemic-related disruptions to the supply chain.
Store Data
The following table presents information with respect to our stores in operation during each of the fiscal periods:
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Store Openings/Closings
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Three Months Ended
December 31, 2021
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Three Months Ended
December 31, 2020
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Six Months Ended
December 31, 2021
|
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Six Months Ended
December 31, 2020
|
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Fiscal Year Ended June 30, 2021
|
|
Open at beginning of period
|
|
489
|
|
|
490
|
|
|
|
490
|
|
|
|
685
|
|
|
|
685
|
|
Opened
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
2
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2
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|
Closed
|
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—
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|
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|
—
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|
|
|
(1
|
)
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(197
|
)
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|
|
(197
|
)
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Open at end of period
|
|
|
492
|
|
|
|
490
|
|
|
|
492
|
|
|
|
490
|
|
|
|
490
|
|
New stores are included in the same store sales calculation starting with the sixteenth month following the date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is generally considered the same store for purposes of this computation. Stores that are closed are included in the computation of comparable store sales until the month of closure.
Results of Operations
Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in the quarter ending December 31.
There can be no assurance that the trends in sales or operating results will continue in the future.
Three Months Ended December 31, 2021 Compared to the Three Months Ended December 31, 2020
Net sales for the three months ended December 31, 2021 were $251.4 million, an increase of 26.6%, compared to $198.6 million for the same period last year, primarily driven by an increase in comparable store sales of 26.1%. The increase in comparable store sales was due to an 11.7% increase in average ticket and a 12.9% increase in customer transactions. Non-comparable store sales increased by a total of $1.6 million primarily due to the effect of sales from new stores.
Gross margin for the three months ended December 31, 2021 was $71.5 million, an increase of 19.1% compared to $60.1 million for the same period last year. As a percentage of net sales, gross margin decreased to 28.5% in the second quarter fiscal 2022 compared with 30.2% in the second quarter of fiscal 2021. The decrease in gross margin as a percentage of net sales was primarily a result of higher supply chain and transportation costs recognized in the three months ended December 31, 2021.
SG&A increased $4.4 million to $67.7 million in the three months ended December 31, 2021, compared to $63.3 million in the same period last year primarily due to higher store payroll costs and share-based compensation. As a percentage of net sales, SG&A decreased 500 basis points to 26.9% for the three months ended December 31, 2021, compared to 31.9% in the same period last year, leveraging from increased net sales.
24
Restructuring, impairment and abandonment charges were $0.4 million during the three months ended December 31, 2021, compared to $1.0 million during the three months ended December 31, 2020. During the three months ended December 31, 2021, adjustments include a $0.4 million in employee retention cost. During the three months ended December 31, 2020, adjustments include restructuring, impairment and abandonment charges of $1.0 million primarily related to in our permanent store and Phoenix distribution center closing plans as well as $0.2 million in severance and employee retention cost. Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021.
Our operating income was $3.4 million for the three months ended December 31, 2021 as compared to an operating loss of $4.3 million for the three months ended December 31, 2020, an improvement of $7.7 million. The operating income in the current year was primarily the result of higher sales and lower restructuring, impairment and abandonment charges as discussed above.
Interest expense decreased $0.6 million to $1.9 million for the three months ended December 31, 2021 compared to $2.5 million in the same period last year. Interest expense for the three months ended December 31, 2021 was primarily due to the interest and amortization of financing fees incurred on our New ABL facility and accrued interest on our Term loan. Interest expense for the three months ended December 31, 2020 was due to amortization of financing fees incurred for the DIP financing. See Note 3 to our unaudited condensed consolidated financial statements herein for additional information.
Reorganization items, net were a net benefit of $0.2 million for the three months ended December 31, 2021 compared to a net benefit of $48.1 million in the three months ended December 31, 2020, related to $0.3 million gain on claims related cost, offset by $0.1 million of professional and legal fees related to our reorganization. The net benefit of $48.1 million in the three months ended December 31, 2020, was due to an $18.8 million net gain from store lease terminations and the termination of our Phoenix distribution center lease under our permanent closure plan and a $49.6 million gain due from the sale-leaseback transactions pursuant to the Plan of Reorganization, partially offset by $20.3 million in professional and legal fees related to our reorganization.
Income tax benefit for the three months ended December 31, 2021 was $9,000 compared to an income tax expense of $0.8 million in the three months ended December 31, 2020. The effective tax rates for the three months ended December 31, 2021 and 2020 were (0.5%) and 1.9%, respectively. We currently believe the expected effects on future year effective tax rates to continue to be nominal until the cumulative losses and valuation allowance are fully utilized.
Our net earnings for the three months ended December 31, 2021 was $1.9 million, or diluted net earnings per share of $0.02 compared to a net earnings for the three months ended December 31, 2020 of $40.3 million, or diluted net earnings per share of $0.88.
Six Months Ended December 31, 2021 Compared to the Six Months Ended December 31, 2020
Net sales for the six months ended December 31, 2021 were $428.3 million, an increase of 18.9%, compared to $360.2 million for the same period last year, primarily driven by an increase in comparable store sales of 26.3%, partially offset by the completion of our permanent store closing plans approved through bankruptcy proceedings of 197 stores during the six months ended December 31, 2020. The increase in comparable store sales was due to a 12.2% increase in average ticket and a 12.5% increase in customer transactions. Non-comparable store sales decreased by a total of $20.5 million primarily due to the permanent closure of 197 stores since the first six months of fiscal 2021. Non-comparable store sales include the net effect of sales from new stores and sales from stores that have closed.
Gross margin for the six months ended December 31, 2021 was $122.6 million, an increase of 10.3% compared to $111.1 million for the same period last year. As a percentage of net sales, gross margin decreased to 28.6% in the six months ended December 31, 2021 compared with 30.9% in the six months ended December 31, 2020. The decrease in gross margin as a percentage of net sales was primarily a result of higher supply chain and transportation costs recognized in the six months ended December 31, 2021.
SG&A increased slightly by $2.5 million to $127.9 million in the six months ended December 31, 2021, compared to $125.4 million in the same period last year. As a percentage of net sales, SG&A decreased 490 basis points to 29.9% for the six months ended December 31, 2021, compared to 34.8% for the same period last year. The decrease in SG&A, as a percentage of net sales, was primarily due to lower store expenses on a smaller store base, including a significant decrease in store rents from both closed stores and renegotiated rents for the ongoing store base. Subsequent to the filing of the Chapter 11 Cases, we commenced negotiations with our landlords on substantially all of our ongoing leases, resulting in significant modifications and reduced lease costs.
Restructuring, impairment and abandonment charges were $2.9 million during the six months ended December 31, 2021, compared to $6.5 million during the six months ended December 31, 2020. During the six months ended December 31, 2021, charges include a software impairment charge of $2.1 million as well as $0.8 million in severance and employee retention cost. During the six months ended December 31, 2020, charges include restructuring, impairment and abandonment charges of $5.6 million primarily related to in our permanent store and Phoenix, Arizona distribution center closing plans as well as $0.9 million in severance and employee retention cost. Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021.
25
Our operating loss was $8.2 million for the six months ended December 31, 2021 as compared to an operating loss of $20.8 million for the same period last year, an improvement of $12.6 million. The operating loss in the current year was primarily the result of increased sales, lower restructuring, impairment and abandonment charges, offset by lower margins from higher supply chain and transportation costs as discussed above.
Interest expense decreased $1.7 million to $3.6 million for the six months ended December 31, 2021 compared to $5.3 million in the same period last year. Interest expense for the six months ended December 31, 2021 was primarily due to the interest and amortization of financing fees incurred on our New ABL facility and accrued interest on our Term loan. Interest expense for the six months ended December 31, 2020 was due to amortization of financing fees incurred for the DIP financing. See Note 3 to our unaudited condensed consolidated financial statements herein for additional information.
Reorganization items, net were $1.1 million for the six months ended December 31, 2021 compared to a net benefit of $85.8 million in the same period last year, related to $0.8 million loss of claims related cost and $0.3 million of professional and legal fees related to our reorganization. The net benefit of $85.8 million in the six months ended December 31, 2020, was due to a net gain of $66.2 million resulting from store lease terminations and the termination of our Phoenix distribution center lease under our permanent closure plan and sale-leaseback transactions pursuant to the Plan of Reorganization, partially offset by $30.1 million in professional and legal fees related to our reorganization.
Income tax benefit for the six months ended December 31, 2021 was $0.1 million compared to an income tax expense of $0.5 million in the quarter ended December 31, 2020. The effective tax rates for the six months ended December 31, 2021 and 2020 were 0.5% and 0.9%, respectively. We currently believe the expected effects on future year effective tax rates to continue to be nominal until the cumulative losses and valuation allowance are fully utilized.
Our net loss for the six months ended December 31, 2021 was $12.7 million, or diluted net loss per share of $0.15 compared to a net earnings for the six months ended December 31, 2020 of $59.0 million, or diluted net earnings per share of $1.29.
Non-GAAP Financial Measures
We define EBITDA as net earnings or net loss before interest, income taxes, depreciation, and amortization. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including certain non-cash items and other items that we believe are not representative of our core operating performance. These measures are not presentations made in accordance with GAAP. EBITDA and Adjusted EBITDA should not be considered as alternatives to net earnings or loss as a measure of operating performance. In addition, EBITDA and Adjusted EBITDA are not presented as, and should not be considered as a measure of liquidity. EBITDA and Adjusted EBITDA should not be considered in isolation, or as substitutes for analysis of our results as reported under GAAP and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by such adjustments. We believe it is useful for investors to see these EBITDA and Adjusted EBITDA measures that management uses to evaluate our operating performance. These non-GAAP financial measures are included to supplement our financial information presented in accordance with GAAP and because we use these measures to monitor and evaluate the performance of our business as a supplement to GAAP measures and we believe the presentation of these non-GAAP measures enhances investors’ ability to analyze trends in our business and evaluate our performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The non-GAAP measures presented may not be comparable to similarly titled measures used by other companies.
26
The following table reconciles net earnings/(loss), the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA, each of which is a non-GAAP financial measure (in thousands):
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Three Months Ended
December 31,
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Six Months Ended
December 31,
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2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net earnings/(loss) (GAAP)
|
$
|
1,894
|
|
|
$
|
40,339
|
|
|
$
|
(12,709
|
)
|
|
$
|
58,963
|
|
Depreciation and amortization
|
|
3,409
|
|
|
|
3,922
|
|
|
|
6,806
|
|
|
|
8,306
|
|
Interest expense, net
|
|
1,885
|
|
|
|
2,514
|
|
|
|
3,601
|
|
|
|
5,267
|
|
Income tax provision/(benefit)
|
|
(9
|
)
|
|
|
779
|
|
|
|
(58
|
)
|
|
|
543
|
|
EBITDA (non-GAAP)
|
$
|
7,179
|
|
|
$
|
47,554
|
|
|
$
|
(2,360
|
)
|
|
$
|
73,079
|
|
Share based compensation expense (1)
|
|
1,872
|
|
|
|
382
|
|
|
|
3,045
|
|
|
|
964
|
|
Restructuring, impairment and abandonment charges (2)
|
|
436
|
|
|
|
1,018
|
|
|
|
2,866
|
|
|
|
6,507
|
|
Reorganization items, net (3)
|
|
(241
|
)
|
|
|
(48,142
|
)
|
|
|
1,051
|
|
|
|
(85,766
|
)
|
Other (4)
|
|
63
|
|
|
|
—
|
|
|
|
(954
|
)
|
|
|
—
|
|
Adjusted EBITDA (non-GAAP)
|
$
|
9,309
|
|
|
$
|
812
|
|
|
$
|
3,648
|
|
|
$
|
(5,216
|
)
|
|
|
|
|
|
|
|
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|
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|
|
(1) Adjustment includes charges related to share-based compensation programs, which vary from period to period depending on volume, timing and vesting of awards. We adjust for these charges to facilitate comparisons from period to period.
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(2) For the three months ended December 31, 2021, adjustments included restructuring, impairment and abandonment charges related to employee retention cost. For the six months ended December 31, 2021, adjustments related to software impairment charges and employee retention cost. For the three and six months ended December 31, 2020, adjustments include restructuring, impairment and abandonment charges primarily related to our permanent store and Phoenix, Arizona distribution center closing plans as well as severance and employee retention cost. Decisions regarding store closures and the Phoenix distribution center were made in the fourth quarter of fiscal 2020, prior to filing the Chapter 11 Cases; however, the closure of the Phoenix distribution center was not completed until the second quarter of fiscal 2021. See note 2 to our unaudited condensed consolidated financial statements herein for further discussion.
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(3) For the three and six months ended December 31, 2021, adjustments included benefit from claims related cost as well as professional and legal fees related to our reorganization. For the three and six months ended December 31, 2020, adjustments included a gain resulting from store lease termination and Phoenix distribution center under our permanent closure plan, sale-leaseback transactions pursuant to the Plan of Reorganization, offset by professional and legal fees related to our reorganization. See note 2 to our unaudited condensed consolidated financial statements herein for further discussion
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|
(4) For the three and six months ended December 31, 2021, adjustments included non-cash expense (benefit) recognized related to cash settled awards in our long-term incentive plan.
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|
Liquidity and Capital Resources
Cash Flows for the Six Months Ended December 31, 2021
Cash Flows from Operating Activities
In the six months ended December 31, 2021, net cash used in operating activities was $27.2 million, compared to cash used in operating activities of $10.6 million in the same period last year. Net cash used in operating activities in the six months ended December 31, 2021 was primarily driven by the inventory purchases and payments for bankruptcy court approved pre-petition claims, legal and professional fees. Net cash used in operating activities in the six months ended December 31, 2020 was primarily driven by cash paid on reorganization expenses and prepaid expenses.
Cash Flows from Investing Activities
Net cash used in investing activities for the six months ended December 31, 2021 of $3.5 million related primarily to capital expenditures in enhancements to our store fleet and new stores, as well as investments in technology. Net cash provided by investing activities for the six months ended December 31, 2020 of $69.1 million related primarily to $68.6 million from sale-leaseback transactions, $1.9 million of proceeds from the sale of property and equipment at the 197 stores that we permanently closed, and was partially offset by $1.4 million of capital expenditures.
Cash Flows from Financing Activities
Net cash provided by financing activities of $6.2 million for the six months ended December 31, 2021 related primarily to net borrowings under our New ABL Facility. Net cash provided by financing activities of $21.6 million for the six months ended December 31, 2020 related primarily to $25.0 million in proceeds from the term loan, offset by $3.2 million from payments of financing fees.
27
Liquidity
Historically, we have financed our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under an asset-based, senior secured revolving credit facility.
On December 31, 2020, as contemplated by our Plan of Reorganization, 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. 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. For additional information regarding the New ABL Facility, see Note 3 to our unaudited condensed consolidated financial statements herein.
Pursuant to the terms of the Term Loan Credit Agreement, the Term Loan has a maturity date of December 31, 2024 and bears interest at a rate of 14% per annum, with interest payable in-kind. Under the terms of the Term Loan Credit Agreement, the Term Loan is secured by a second lien on the collateral securing the New 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 December 31, 2021, the outstanding principal balance of the Term Loan was $27.4 million, net of debt issuance costs. For additional information regarding the Term Loan, see Note 3 to our unaudited condensed consolidated financial statements herein.
At December 31, 2021 we are in compliance with covenants in the New ABL Facility and Term Loan.
Going forward, we expect to fund our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under the New ABL Facility.
As of December 31, 2021, we had $17.9 million of borrowings outstanding under our New ABL Facility and, $14.7 million of letters of credit outstanding. We currently have borrowing availability of $58.0 million under our New ABL Facility, as of December 31, 2021.
Liquidity, defined as cash and cash equivalents plus the $58.0 million availability for borrowing under our New ABL Facility, was $62.3 million as of December 31, 2021.
We incurred capital expenditures, net of construction allowances received from landlords, of approximately $3.1 million in the first six months of fiscal 2022. Capital expenditures are anticipated to be $9.1 million total for fiscal year 2022. The amounts include the expected costs to open approximately eight stores, costs to enhance our store fleet, investment in technology as well as our Dallas distribution center.
We do not presently have any plans to pay dividends or repurchase shares of our common stock. Under the terms of the our New ABL Credit Agreement and the Term Loan, we are subject to restrictions on our ability to pay dividends or repurchase shares of our common stock. Under the terms of our New ABL Credit Agreement, we must maintain certain minimum levels of borrowing availability, and under the Term Loan any amounts paid for these purposes may not exceed $2 million.
Off-Balance Sheet Arrangements and Contractual Obligations
We had no off-balance sheet arrangements as of December 31, 2021.
There have been no material changes to our contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
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Critical Accounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited interim condensed consolidated financial statements, which have been prepared pursuant to the rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of certain assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On a recurring basis, we evaluate our significant estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ materially from these estimates.
Other than as described in Note 1 of our unaudited condensed consolidated financial statements herein, as of December 31, 2021, there were no changes to our critical accounting policies from those listed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
Under the retail inventory method, permanent markdowns result in cost reductions in inventory at the time the markdowns are taken. We also utilize promotional markdowns for specific marketing efforts used to drive higher sales volume and customer transactions for a specified period of time. Promotional markdowns do not impact the value of unsold inventory and thus do not impact cost of sales until the merchandise is sold. Markdowns and damages during the second quarter of fiscal 2022 were 2.6% of sales compared to 3.6% of sales for the same period last year. Markdowns and damages during the first six months of fiscal 2022 were 3.3% of sales compared to 3.8% of sales for the same period last year. If our sales forecasts are not achieved, we may be required to record additional markdowns that could exceed historical levels. The effect of a 0.5% markdown in the value of our inventory at December 31, 2021 would result in a decline in gross margin and diluted earnings per share for the second quarter of fiscal 2022 of $0.8 million and $0.01, respectively.
For a further discussion of the judgments we make in applying our accounting policies, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
Recent Accounting Pronouncements
Please refer to Note 1 of our unaudited condensed consolidated financial statements herein for a summary of recent accounting pronouncements.