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, 6 and 8 to the condensed consolidated financial statements herein for additional information.
•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 1 and 6 to the condensed consolidated financial statements herein for additional information.
•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.
24
Key Metrics for the Three and Nine Months Ended April 2, 2022
Key operating metrics for continuing operations for the three and nine months ended April 2, 2022 include:
•Net sales for the three months ended April 2, 2022 were $159.6 million, an increase of $6.3 million or 4.1%, compared to $153.3 million for the three months ended March 31, 2021. Net sales for the nine months ended April 2, 2022 were $587.9 million, an increase of $74.3 million or 14.5%, compared to $513.5 million for the nine months ended March 31, 2021. Comparable store sales for the three and nine months ended April 2, 2022, increased 0.6% and 18.1%, respectively.
•Gross margin for the three months ended April 2, 2022 was 24.4%, compared to 31.4% for the three months ended March 31, 2021. Gross margin for the nine months ended April 2, 2022 was 27.5%, compared to 31.0% for the nine months ended March 31, 2021.
•Selling, general and administrative expenses (“SG&A”) for the three months ended April 2, 2022 decreased $3.6 million or 6.1% to $55.6 million, from $59.2 million for the three months ended March 31, 2021. As a percentage of sales for the three months ended April 2, 2022, SG&A was 34.8% compared to 38.6% for the three months ended March 31, 2021. Selling, general and administrative expenses (“SG&A”) for the nine months ended April 2, 2022 decreased $1.1 million or 0.6% to $183.5 million, from $184.6 million for the nine months ended March 31, 2021. As a percentage of sales for the nine months ended April 2, 2022, SG&A was 31.2% compared to 35.9% for the nine months ended March 31, 2021.
•Restructuring, impairment and abandonment charges for the three months ended April 2, 2022 were a net benefit of $0.3 million, compared to a charge $1.0 million for the three months ended March 31, 2021. Restructuring, impairment and abandonment charges for the nine months ended April 2, 2022 were $2.6 million, compared to $7.6 million for the nine months ended March 31, 2021, 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 April 2, 2022 were a net benefit of $0.1 million compared to a net charge of $23.6 million for the three months ended March 31, 2021. Reorganization items, net for the nine months ended April 2, 2022 were a loss of $0.9 million compared to a net benefit of $62.2 million for the nine months ended March 31, 2021.
•Our net loss for the three months ended April 2, 2022 was $18.2 million, or diluted net loss per share of $0.21 compared to a net loss for the three months ended March 31, 2021of $37.1 million, or diluted loss per share of $0.55. Our net loss for the nine months ended April 2, 2022 was $30.9 million, or diluted net loss per share of $0.36 compared to a net earnings for the nine months ended March 31, 2021 of $21.8 million, or diluted earnings per share of $0.41.
•As shown under the heading “Non-GAAP Financials Measures” below, EBITDA for the three months ended April 2, 2022 was a negative $12.8 million compared to a negative $31.9 million for the three months ended March 31, 2021. Adjusted EBITDA for the three months ended April 2, 2022 was a negative $11.9 million compared to a negative $6.9 million for the three months ended March 31, 2021. EBITDA for the nine months ended April 2, 2022 was a negative $15.2 million compared to a positive $41.2 million for the nine months ended March 31, 2021. Adjusted EBITDA for the nine months ended April 2, 2022 was negative $8.2 million compared to a negative $12.1 million for the nine months ended March 31, 2021.
25
Key balance sheet and liquidity metrics for the nine months ended April 2, 2022 include:
•Cash, cash equivalents, and restricted cash decreased by $20.4 million to $8.5 million at April 2, 2022 from $28.9 million at June 30, 2021. 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 condensed consolidated financial statements herein for additional information.
•As of April 2, 2022, total liquidity, defined as cash and cash equivalents plus $26.6 million availability for borrowing under our Post-Emergence ABL Facility, was $35.0 million. In addition, we had $54.1 million of borrowings outstanding under our Post-Emergence ABL Facility and $14.6 million of letters of credit outstanding.
•Inventory levels increased by $39.3 million at April 2, 2022 to $176.6 million from $137.4 million at March 31, 2021. As of April 2, 2022, inventory levels increased by 28.6% due to the incremental deceleration in topline performance beginning in March 2022 as well as earlier than expected timing of receipts. Last year, inventory level 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.
Subsequent to April 2, 2022, the Company and its subsidiaries entered into the New ABL Credit Agreement as part of a refinancing. See Note 13 to the condensed consolidated financial statements and “Liquidity and Capital Resources – Liquidity” herein for additional information.
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
April 2, 2022 |
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Three Months Ended
March 31, 2021 |
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Nine Months Ended
April 2, 2022 |
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|
Nine Months Ended
March 31, 2021 |
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|
Fiscal Year Ended June 30, 2021 |
|
Open at beginning of period |
|
492 |
|
|
490 |
|
|
|
490 |
|
|
|
685 |
|
|
|
685 |
|
Opened |
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
Closed |
|
|
(2 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
(197 |
) |
|
|
(197 |
) |
Open at end of period |
|
|
490 |
|
|
|
490 |
|
|
|
490 |
|
|
|
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 second quarter of each fiscal year.
There can be no assurance that the trends in sales or operating results will continue in the future.
Three Months Ended April 2, 2022 Compared to the Three Months Ended March 31, 2021
Net sales for the three months ended April 2, 2022 were $159.6 million, with an increase of 4.1%, compared to $153.3 million for the three months ended March 31, 2021, primarily driven by the two additional days in quarter ended April 2, 2022 as a result of a change from a calendar year as defined in Note 1. Comparable store sales for the three months ended April 2, 2022, increased 0.6% due to 6.7% increase in average ticket offset by a 6.6% decrease in customer transactions primarily due to the Easter shift, lapping stimulus and as a result of general economic impacts starting March 2022 following disruption in Europe and incremental inflationary pressures.
26
Gross margin for the three months ended April 2, 2022 was $38.9 million, a decrease of 19.3% compared to $48.2 million for the three months ended March 31, 2021. As a percentage of net sales, gross margin decreased to 24.4% in the third quarter of fiscal 2022 compared with 31.4% 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 April 2, 2022.
SG&A decreased $3.6 million to $55.6 million in the three months ended April 2, 2022, compared to $59.2 million for the three months ended March 31, 2021 primarily mainly due to lower employee-related incentive pay. As a percentage of net sales, SG&A decreased 380 basis points to 34.8% for the three months ended April 2, 2022, compared to 38.6% for the three months ended March 31, 2021, leveraging of store occupancy cost as percentage of net sales.
Restructuring, impairment and abandonment charges were a net benefit of $0.3 million during the three months ended April 2, 2022, compared to net charge of $1.0 million during the three months ended March 31, 2021. During the three months ended April 2, 2022, adjustments related to compensation adjustments for employee retention cost. During the three months ended March 31, 2021, adjustments include restructuring, impairment and abandonment charges of $1.0 million primarily related to employee retention cost of $0.3 million and severance cost of $0.7 million.
Our operating loss was $16.4 million for the three months ended April 2, 2022 as compared to an operating loss of $12.0 million for the three months ended March 31, 2021, resulting to decline of $4.3 million. The operating loss in the current year was primarily the result of higher supply chain and transportation costs partially offset by lower restructuring, impairment and abandonment charges as discussed above.
Interest expense increased $0.5 million to $1.9 million for the three months ended April 2, 2022 compared to $1.4 million for the three months ended March 31, 2021. Interest expense for the three months ended April 2, 2022 was primarily due to the interest and amortization of financing fees incurred on our Post-Emergence ABL Facility and accrued PIK interest on our Term loan. Interest expense for the three months ended March 31, 2021 was primarily due to accrued PIK interest on the Term Loan along with amortization of financing fees incurred on the Post-Emergence ABL Facility. See Note 3 to our unaudited condensed consolidated financial statements herein for additional information.
Reorganization items, net were a net benefit of $0.1 million for the three months ended April 2, 2022 compared to a net charge of $23.6 million in the three months ended March 31, 2021, related to $0.2 million benefit on claims related cost, offset by $43 thousand of professional and legal fees related to our reorganization. The reorganization items, net charge of $23.6 million in the three months ended March 31, 2021, was due to $19.0 million net charge from the Rights Offering and Backstop Agreement, $0.9 million in claims related costs, and $3.8 million in professional and legal fees related to our reorganization.
Income tax expense for the three months ended April 2, 2022 was $0.1 million to an income tax expense of $0.2 million in the three months ended March 31, 2021. The effective tax rates for the three months ended April 2, 2022 and March 31, 2021 were (0.4%) and (0.5%), 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 three months ended April 2, 2022 was $18.2 million, or diluted net losses per share of $0.21 compared to a net loss for the three months ended March 31, 2021 of $37.1 million, or diluted net losses per share of $0.55.
Nine Months Ended April 2, 2022 Compared to the Nine Months Ended March 31, 2021
Net sales for the nine months ended April 2, 2022 were $587.9 million, an increase of 14.5%, compared to $513.5 million for the nine months ended March 31, 2021, primarily due to more stores in operation for fiscal year 2022 and completion of bankruptcy proceedings. Comparable store sales for the nine months ended April 2, 2022, increased 18.1% due to a 10.5% increase in average ticket and 6.4% increase in customer transactions.
Gross margin for the nine months ended April 2, 2022 was $161.5 million, an increase of 1.4% compared to $159.3 million for the nine months ended March 31, 2021. As a percentage of net sales, gross margin decreased to 27.5% in the nine months ended April 2, 2022 compared with 31.0% in the nine months ended March 31, 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 nine months ended April 2, 2022.
SG&A decreased slightly by $1.1 million to $183.5 million in the nine months ended April 2, 2022, compared to $184.6 million for the nine months ended March 31, 2021 primarily mainly due to lower employee-related incentive pay partially offset by increased share-based compensation. As a percentage of net sales, SG&A decreased 470 basis points to 31.2% for the nine months ended April 2, 2022, compared to 35.9% for the nine months ended March 31, 2021. The decrease in SG&A, as a percentage of net sales, was primarily due to leveraging of store occupancy cost as a percentage of sales.
27
Restructuring, impairment and abandonment charges were $2.6 million during the nine months ended April 2, 2022, compared to $7.6 million during the nine months ended March 31, 2021. During the nine months ended April 2, 2022, charges include a software impairment charge of $2.1 million as well as $0.5 million in employee retention cost. During the nine months ended March 31, 2021, charges include restructuring, impairment and abandonment charges of $7.6 million primarily related to abandonment cost of $5.6 million due to our permanent store and Phoenix, Arizona distribution center closing plans as well as $1.9 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.
Our operating loss was $24.6 million for the nine months ended April 2, 2022 as compared to an operating loss of $32.8 million for the nine months ended March 31, 2021, an improvement of $8.2 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 $1.2 million to $5.5 million for the nine months ended April 2, 2022 compared to $6.7 million for the nine months ended March 31, 2021. Interest expense for the nine months ended April 2, 2022 was primarily due to the interest and amortization of financing fees incurred on our Post-Emergence ABL Facility and accrued PIK interest on our Term loan. Interest expense for the nine months ended March 31, 2021 was primarily due to amortization of financing fees incurred for the Post-Emergence ABL Facility, the DIP ABL Credit Agreement and accrued PIK interest on Term loan. See Note 3 to our unaudited condensed consolidated financial statements herein for additional information.
Reorganization items, net were $0.9 million for the nine months ended April 2, 2022 compared to a net benefit of $62.2 million for the nine months ended March 31, 2021, related to $0.6 million loss of claims related cost and $0.3 million of professional and legal fees related to our reorganization. The net benefit of $62.2 million in the nine months ended March 31, 2021, was primarily due to a net gain of $115.8 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 $33.8 million in professional and legal fees related to our reorganization, $0.9 million in claims related costs as well as $19.0 million in non-cash charges from the Rights Offering.
Income tax expense for the nine months ended April 2, 2022 was $11,000 compared to an income tax expense of $0.7 million in the nine months ended March 31, 2021. The effective tax rates for the nine months ended April 2, 2022 and March 31, 2021 were 0.0% and 3.2%, 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 nine months ended April 2, 2022 was $30.9 million, or diluted net loss per share of $0.36 compared to a net earnings for the nine months ended March 31, 2021 of $21.8 million, or diluted net earnings per share of $0.41.
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.
28
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 |
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Nine Months Ended |
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April 2, |
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March 31, |
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April 2, |
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March 31, |
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2022 |
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2021 |
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|
2022 |
|
|
2021 |
|
Net earnings/(loss) (GAAP) |
$ |
(18,151 |
) |
|
$ |
(37,119 |
) |
|
$ |
(30,860 |
) |
|
$ |
21,844 |
|
Depreciation and amortization |
|
3,369 |
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|
|
3,627 |
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|
|
10,175 |
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|
|
11,933 |
|
Interest expense, net |
|
1,919 |
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|
|
1,404 |
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|
|
5,520 |
|
|
|
6,671 |
|
Income tax expense |
|
69 |
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|
|
172 |
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|
11 |
|
|
|
715 |
|
EBITDA (non-GAAP) |
$ |
(12,794 |
) |
|
$ |
(31,916 |
) |
|
$ |
(15,154 |
) |
|
$ |
41,163 |
|
Share based compensation expense (1) |
|
1,600 |
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|
|
382 |
|
|
|
4,645 |
|
|
|
1,347 |
|
Restructuring, impairment and abandonment charges (2) |
|
(278 |
) |
|
|
1,047 |
|
|
|
2,588 |
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|
|
7,554 |
|
Reorganization items, net (3) |
|
(128 |
) |
|
|
23,597 |
|
|
|
923 |
|
|
|
(62,169 |
) |
Other (4) |
|
(265 |
) |
|
|
— |
|
|
|
(1,219 |
) |
|
|
— |
|
Adjusted EBITDA (non-GAAP) |
$ |
(11,865 |
) |
|
$ |
(6,890 |
) |
|
$ |
(8,217 |
) |
|
$ |
(12,105 |
) |
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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 April 2, 2022, a net benefit in restructuring, impairment and abandonment costs is related to compensation adjustments for employee retention. During the nine months ended April 2, 2022, restructuring, impairment and abandonment charges are primarily related to software abandonment charges and employee retention cost. During the three months ended March 31, 2021, the restructuring, impairment and abandonment charges are primarily related to employee retention costs and severance cost. During the nine months ended March 31, 2021, the charges are primarily related to abandonment costs due to the permanent closure of our stores and Phoenix, Arizona distribution center and severance and employee retention costs. 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 Notes 2 to the condensed consolidated financial statements herein for additional information. |
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(3) For the three months ended April 2, 2022, reorganization items, net benefit from claims related cost, partially offset by professional and legal fees. For the nine months ended April 2, 2022, reorganization items, net charges is from claims-related costs including professional and legal fees. During the three months ended March 31, 2021, reorganization items, net is primarily non-cash charges related to the execution of our Rights Offering (defined in Note 6), professional fees and claims-related costs. For the nine months ended March 31, 2021, reorganization items, net benefit was primarily due to a net gain 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 professional and legal fees related to our reorganization, claims-related costs as well as non-cash charges from the Rights Offering. See Notes 1, 2, 6 and 8 to the condensed consolidated financial statements herein for additional information. |
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(4) For the three and nine months ended April 2, 2022, 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 Nine Months Ended April 2, 2022
Cash Flows from Operating Activities
In the nine months ended April 2, 2022, net cash used in operating activities was $57.6 million, compared to cash used in operating activities of $114.5 million in the same period last year. Net cash used in operating activities in the nine months ended April 2, 2022 was primarily driven by the inventory purchases and payments of operating expenses as part of ordinary course of business. Net cash used in operating activities in the nine months ended March 31, 2021 was primarily driven by the increase in inventory purchases, decrease in payables, reorganization expenses, and bankruptcy court approved pre-petition claims, legal, and professional fees.
Cash Flows from Investing Activities
Net cash used in investing activities for the nine months ended April 2, 2022 of $5.2 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 nine months ended March 31, 2021 of $68.1 million was related primarily from $68.6 million of proceeds from sale-leaseback transactions and $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 $2.3 million of capital expenditures.
Cash Flows from Financing Activities
Net cash provided by financing activities of $42.4 million for the nine months ended April 2, 2022 related primarily to net borrowings under our Post-Emergence ABL Facility. Net cash provided by financing activities of $61.6 million for the nine months ended March 31, 2021 related primarily to $25.0 million in proceeds from the term loan and $40.0 million of proceeds from the Rights Offering, offset by $3.2 million from payments of financing fees.
29
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.
Post-Emergence ABL Credit Agreement
On December 31, 2020, as contemplated by our Plan of Reorganization, the Company and its subsidiaries entered into a Credit Agreement (the “Post-Emergence 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 “Post-Emergence ABL Facility”). The Post-Emergence ABL Credit Agreement included conditions to borrowings, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. The Post-Emergence ABL Credit Agreement required the Company to maintain a minimum fixed charge coverage ratio if borrowing availability fell below certain minimum levels, after the first anniversary of the agreement. For additional information regarding the Post-Emergence ABL Facility, see Note 3 to our unaudited condensed consolidated financial statements herein.
As further described below, on May 9, 2022, we entered into the New ABL Credit Agreement (as defined below) and used a portion of the proceeds from borrowings under the New Facilities (as defined below) to repay all outstanding indebtedness under the Post-Emergence ABL Facility, along with accrued interest, expenses and fees.
New ABL Credit Agreement
On May 9, 2022 (the “Refinancing Closing Date”), Tuesday Morning Corporation (“Parent”), Tuesday Morning, Inc. (the “Borrower”) and each other subsidiary of Parent entered into a Credit Agreement (the “New ABL Credit Agreement”) with the lenders named therein, Wells Fargo Bank, National Association, as administrative agent, and 1903P Loan Agent, LLC, as FILO B documentation agent. The New ABL Credit Agreement provides for (i) a revolving credit facility in an aggregate amount of $110.0 million (the “New ABL Facility”), which includes a $10.0 million sublimit for swingline loans and a $25.0 million sublimit for letters of credit, (ii) a first-in last-out term loan facility in an aggregate amount of $5.0 million (the “FILO A Facility”) and (iii) an additional first-in last-out term loan facility in an aggregate amount of $5.0 million (the “FILO B Facility” and, collectively with the New ABL Facility and the FILO A Facility, the “New Facilities”). Each of the New Facilities will terminate, and outstanding borrowings thereunder will mature, on the earlier of (i) May 9, 2027 and (ii) the date that is 91 days prior to maturity of the Term Loan.
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. In addition, the Borrower and its subsidiaries must maintain borrowing availability under the New ABL Facility at least equal to the greater of (i) $7.5 million and (ii) 7.5% of the Modified Revolving Loan Cap (as defined in the New ABL Credit Agreement). For additional information regarding the New ABL Credit Agreement and the New Facilities, see Note 13 to our unaudited condensed consolidated financial statements herein.
Term Loan Credit Agreement
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 (as amended from time to time, the “Term Loan Credit Agreement”) to provide a term loan of $25.0 million to the Company (the “Term Loan”). 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 Facilities 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 a prepayment price equal to (1) the outstanding principal amount of the Term Loan, plus (2) accrued and unpaid interest to the date of prepayment, plus (3) the prepayment premium, if any. The prepayment premium (which may not be less than zero) is equal to (1) 125% of the original principal amount of the Term Loan, minus (2) the aggregate principal amount of the loans advanced as of the prepayment date, plus all accrued interest thereon accrued as of such date. 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 April 2, 2022, the outstanding principal balance of the Term Loan was $29.5 million, net of debt issuance costs.
On the Refinancing Closing Date, (i) each Consenting Lender agreed to the Loan Repurchase, (ii) concurrently with the consummation of the Loan Repurchase, each Consenting Lender agreed to waive and forgive an amount of the accrued and unpaid interest owed to such Consenting Lender, (iii) it was agreed that immediately, automatically and permanently upon the consummation of the Loan Repurchase, the Term Loans assigned pursuant to the Loan Repurchase would be deemed cancelled and of no further force and effect, and (iv) the Term Loan Credit Agreement was amended to, among other things, (x) require us to maintain the same minimum level of
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borrowing availability under the New ABL Facility as required by the New ABL Credit Agreement, (y) permit the Borrower to borrow on the $5.0 million committed FILO B accordion, subject to certain conditions, on and following November 9, 2022, and (z) require us to maintain a minimum total secured net leverage ratio beginning with the 12-month period ending September 30, 2023.
For additional information regarding the Term Loan, see Note 3 and Note 15 to our unaudited condensed consolidated financial statements herein.
Recent Liquidity Developments and Outlook
At April 2, 2022 we are in compliance with covenants in the Post-Emergence ABL Facility and Term Loan. As of April 2, 2022, we had $54.1 million of borrowings outstanding under our Post-Emergence ABL Facility and, $14.6 million of letters of credit outstanding. We currently have borrowing availability of $26.6 million under our Post-Emergence ABL Facility, as of April 2, 2022. Liquidity, defined as cash and cash equivalents plus the $26.6 million availability for borrowing under our Post-Emergence ABL Facility, was $35.0 million as of April 2, 2022.
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.
On the Refinancing Closing Date, the Borrower borrowed approximately $75.2 million under the New ABL Facility, $5.0 million under the FILO A Facility and $5.0 million under the FILO B Facility (collectively, the “Closing Date Loans”). A portion of the aggregate proceeds from the Closing Date Loans was used to (i) repay all outstanding indebtedness (the “Existing ABL Loans”) under that certain Credit Agreement, dated as of December 31, 2020, among the Company, the Borrower, each of the subsidiary guarantors party thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (the “Existing ABL Credit Agreement”), along with accrued interest, expenses and fees, (ii) purchase of a portion of the principal amount of the outstanding indebtedness (the “Term Loan”) under that certain Credit Agreement, dated as of December 31, 2020, by and among the Company, the Borrower, each of the subsidiary guarantors party thereto, the lenders party thereto (including Tensile Capital Partners Master Fund LP and affiliates of Osmium Partners, LLC) (collectively, the “Term Loan Lenders”), and Alter Domus (US) LLC, as administrative agent (the “Term Loan Credit Agreement”) for the aggregate purchase price of $5.0 million (the “Loan Repurchase”), and (iii) pay transaction costs related to the transactions described in the foregoing clauses (i) and (ii) and the execution and delivery of the New ABL Credit Agreement and related loan documents. The remainder of the proceeds from the Closing Date Loans, as well as the proceeds from future borrowings, will be used for working capital needs and other general corporate purposes.
We currently have $85.2 million of aggregate borrowings outstanding under the New Facilities and aggregate borrowing availability of $26.0 million under the New ABL Facility, in each case as of May 9, 2022. In addition, we have the right to request (i) an additional incremental loan under the FILO B Facility in an aggregate amount not to exceed $5.0 million, which, subject to the satisfaction of certain conditions, the FILO B lenders have committed to provide, and (ii) additional incremental commitments from the FILO B lenders to make additional loans in an aggregate amount not to exceed $5.0 million, subject to the satisfaction of certain conditions.
We incurred capital expenditures of approximately $5.2 million in the first nine months of fiscal 2022. Capital expenditures are anticipated to be $6.7 million total for fiscal year 2022. The amounts include the expected costs to open three new stores, reopen a Hurricane-damaged store, costs to enhance our existing 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, including a $2.0 million limit on such payments imposed by the Term Loan Credit Agreement, and must maintain certain minimum levels of borrowing availability.
Off-Balance Sheet Arrangements and Contractual Obligations
We had no off-balance sheet arrangements as of April 2, 2022.
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 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 April 2, 2022, 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 third quarter of fiscal 2022 were 4.4% of sales compared to 4.0% of sales for the same period last year. Markdowns and damages during the first nine months of fiscal 2022 were 3.3% of sales compared to 3.9% 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 April 2, 2022 would result in a decline in gross margin and diluted earnings per share for the third quarter of fiscal 2022 of $0.9 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.