TUESDAY MORNING CORP/DE - Quarter Report: 2015 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2015

OR

FOR THE TRANSITION PERIOD FROM          TO         

Commission File Number 0-19658

TUESDAY MORNING CORPORATION

(Exact Name of Registrant as Specified in its Charter)

6250 LBJ Freeway

Dallas, Texas 75240

(Address of principal executive offices) (Zip code)

(972) 387-3562

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  T    No  ¨

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

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

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

Table of Contents

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PART I — FINANCIAL INFORMATION

Tuesday Morning Corporation

Consolidated Balance Sheets

December 31, 2015 (unaudited) and June 30, 2015

(In thousands, except share and per share data)

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

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Tuesday Morning Corporation

Consolidated Statements of Income (unaudited)

(In thousands, except per share data)

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

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Tuesday Morning Corporation

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

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

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Tuesday Morning Corporation

Notes to Condensed Consolidated Financial Statements (unaudited)

The terms “Tuesday Morning,” the “Company,” “we,” “us” and “our” as used in this Quarterly Report on Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries.

1.      Basis of presentation — The unaudited interim consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  These financial statements include all adjustments, consisting only of those of a normal recurring nature, which, in the opinion of management, are necessary to present fairly the results of the interim periods presented and should be read in conjunction with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.  The consolidated balance sheet at June 30, 2015 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.  For further information, refer to the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.  The results of operations for the three and six month periods ended December 31, 2015 are not necessarily indicative of the results to be expected for the full fiscal year ending June 30, 2016, which we refer to as fiscal 2016.

The Company no longer presents a consolidated statement of comprehensive income as there are no other comprehensive income items in either the current or prior fiscal periods.

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

Certain reclassifications were made to prior period amounts to conform to the current period presentation.  None of the reclassifications affected our net income in any period.

2.      Share-based incentive plans — Stock Option Awards.   We have established the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan, as amended (the “1997 Plan”), the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan, as amended (the “2004 Plan”), the Tuesday Morning Corporation 2008 Long-Term Equity Incentive Plan (the “2008 Plan”) and the Tuesday Morning Corporation 2014 Long-Term Incentive Plan (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 1997 Plan, the 2004 Plan, or the 2008 Plan, but equity awards granted under the 1997 Plan, the 2004 Plan and the 2008 Plan are still outstanding.

Stock options were awarded with a strike price at a fair market value equal to the average of the high and low trading prices of our common stock on the date of grant under the 1997 Plan and the 2004 Plan.  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 1997 Plan and the 2004 Plan typically vest over periods of one to five years and expire ten years from the date of grant, while 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.  The exercise prices of stock options outstanding on December 31, 2015, range between $1.24 per share and $21.86 per share.  The 1997 Plan and the 2004 Plan terminated pursuant to their terms as of December 29, 2007 and May 17, 2014, respectively, and we terminated the 2008 Plan as of November 12, 2014 in connection with the approval of the 2014 Plan.  There were approximately 3.4 million shares available for grant under the 2014 Plan at December 31, 2015.

Restricted Stock Awards.   The 1997 Plan, the 2004 Plan, 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 1997 Plan, the 2004 Plan, and the 2008 Plan, but restricted stock awards granted under the 2004 Plan and 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 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.  At December 31, 2007, all shares under the 1997 Plan had been granted and the 1997 Plan terminated pursuant to its terms as of December 29, 2007.  Under the 2004 Plan, the 2008 Plan and the 2014 Plan, as of December 31,

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2015, there were 702,594 shares of restricted stock outstanding, both performance-based and other, with award vesting periods of one to four years and a weighted average grant date fair value of $10.37 per share.

Performance-Based Restricted Stock Awards and Performance-Based Stock Option Awards.    As of December 31, 2015 there were 55,294 performance-based restricted stock awards and performance-based stock option awards outstanding under the 2008 Plan and the 2014 Plan.  

Share-based Compensation Costs.   Share-based compensation costs were recognized as follows (in thousands):

3.      Commitments and contingencies — From time to time, the Company is involved in litigation which is incidental to its business.  In the Company’s opinion, no litigation to which the Company is currently a party is likely to have a material adverse effect on the Company’s consolidated financial condition, results of operations, or cash flows.

4.      Income per common share — The following table sets forth the computation of basic and diluted income per common share (in thousands, except per share amounts):

For the quarters ended December 31, 2015 and December 31, 2014, options representing rights to purchase approximately 2.3 million weighted average shares and 86,517 weighted average shares, respectively, were not included in the diluted income per share calculation, because the assumed exercise of such options would have been anti-dilutive.  For the six months ended December 31, 2015 and December 31, 2014, options representing rights to purchase approximately 2.0 million weighted average shares and 223,015 weighted average shares, respectively, were not included in the diluted income per share calculation, because the assumed exercise of such options would have been anti-dilutive.

5.      Revolving credit facility — New Revolving Credit Facility.  On August 18, 2015, we entered into a new credit agreement providing for an asset-based, five-year senior secured revolving credit facility in the amount of up to $180.0 million which matures on August 18, 2020 (the “New Revolving Credit Facility”), and which replaced our previous revolving credit facility.  The availability of funds under the New Revolving Credit Facility is limited to the lesser of a calculated borrowing base and the lenders’ aggregate commitments under the New Revolving Credit Facility. Our indebtedness under the New Revolving Credit Facility is secured by a lien on substantially all of our assets. The New Revolving Credit Facility contains certain restrictive covenants, which affect, among others, our ability to incur liens or incur additional indebtedness, change the nature of our business, sell assets or merge or consolidate with any other entity, or make investments or acquisitions unless they meet certain requirements. The New Revolving Credit Facility requires that we satisfy a fixed charge coverage ratio at any time that our availability is less than the greater of 10% of our calculated borrowing base or, $12.5 million. Our New Revolving Credit Facility may, in some instances, limit our ability to pay cash dividends and repurchase our common stock. In order for the borrower under the New Revolving Credit Facility, our subsidiary, to make a restricted payment to us for the payment of a dividend or a repurchase of shares, we must, among other things, maintain availability of

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20% of the lesser of our calculated borrowing base or our lenders’ aggregate commitments under the New Revolving Credit Facility on a pro forma basis for a specified period prior to and immediately following the restricted payment.  As of December 31, 2015, we were in compliance with all of the New Revolving Credit Facility covenants.  

At December 31, 2015, we had no amounts outstanding under the New Revolving Credit Facility, $5.8 million of outstanding letters of credit and availability of $132.8 million under the New Revolving Credit Facility.  Letters of credit under the New Revolving Credit Facility are primarily for self-insurance purposes.  We incur commitment fees of up to 0.25% on the unused portion of the New Revolving Credit Facility.  Any borrowing under the New Revolving Credit Facility incurs interest at LIBOR or the prime rate, plus an applicable margin, at our election (except with respect to swing loans, which incur interest solely at the prime rate plus the applicable margin).  These rates are increased or reduced as our average daily availability changes.  Interest expense for the second quarter of the current fiscal year of $0.2 million was comprised of commitment fees of $0.1 million and the amortization of financing fees of $0.1 million.  Interest expense for the second quarter of the prior fiscal year of $0.4 million was comprised of commitment fees of $0.2 million and the amortization of financing fees of $0.2 million.  Interest expense for the six months ended December 31, 2015 of $0.6 million was comprised of commitment fees of $0.3 million and the amortization of financing fees of $0.3 million.   Interest expense for the six months ended December 31, 2014 of $0.7 million was comprised of commitment fees of $0.4 million and the amortization of financing fees of $0.3 million.  

Prior Revolving Credit Facility.  Prior to entering into the New Revolving Credit Facility on August 18, 2015, we were party to a credit agreement providing for an asset based, five year senior secured revolving credit facility in the amount of up to $180.0 million maturing on November 17, 2016. We incurred commitment fees of up to 0.375% on the unused portion of the prior facility. Any borrowing under the prior facility incurred interest at LIBOR or the prime rate, plus an applicable margin, at our election (except with respect to swing loans, which incurred interest solely at the prime rate plus the applicable margin). These rates increased or reduced as our average daily availability changed.

6.      Depreciation — Accumulated depreciation of owned equipment and property at December 31, 2015 and June 30, 2015 was $125.4 million and $122.1 million, respectively.

7.      Income taxes — Tuesday Morning Corporation or one of its subsidiaries files income tax returns in the U.S. federal, state and local taxing jurisdictions.  With a few exceptions, Tuesday Morning Corporation and its subsidiaries are no longer subject to state and local income tax examinations for years on or before June 30, 2010.  The U.S. federal income tax statute of limitations has expired for all taxable years ended on or before June 30, 2011.

The effective tax rates for the quarters ended December 31, 2015 and December 31, 2014 were 5.4% and 1.1%, respectively. The effective tax rates for the six months ended December 31, 2015 and December 31, 2014 were 7.3% and 1.9%, respectively.  A full valuation allowance is currently recorded against the Company’s deferred tax assets as the Company was in a three year cumulative loss position as of June 30, 2015 and June 30, 2014.  A deviation from the customary relationship between income tax expense and pretax income results from utilization of the valuation allowance.

8.      Cash and cash equivalents — Cash and cash equivalents are comprised of cash, 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 December 31, 2015 and June 30, 2015, credit card receivables from third party consumer credit card providers were $3.8 million and $3.7 million, respectively.  Such receivables are generally collected within one week of the balance sheet date.

9.       Recent accounting pronouncements — In November 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-17, Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which requires an entity to classify deferred tax liabilities and assets as noncurrent within a classified balance sheet.  Previous guidance required deferred tax liabilities and assets to be separated into current and noncurrent amounts on the balance sheet.  ASU 2015-17 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016, with early adoption permitted.  This update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.  The Company has adopted ASU 2015-17 early as of the second quarter of fiscal 2016 on a retrospective basis.   Adoption did not have a material impact on the Company’s consolidated results of operations or financial position.

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The following discussion should be read in conjunction with our unaudited interim consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

Business Overview

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.

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 Three Months Ended December 31, 2015

Compared to the Three Months Ended December 31, 2014

Net sales for the second quarter of fiscal 2016 were $319.9 million, an increase of $18.5 million from $301.4 million for the same period last year.  Comparable store sales for the second quarter of fiscal 2016 increased by 8.4% compared to the second quarter of fiscal 2015.  Stores are included in the same store sales calculation at the beginning of the quarter following the anniversary 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.  The increase in comparable store sales for the second quarter of fiscal 2016 was comprised of an 8.5% increase in customer transactions, partially offset by a 0.1% decrease in average ticket. Our comparable store sales increase was partially offset by a decrease in our non-comparable store sales, which decreased a total of $5.7 million, resulting in a 190 basis point negative impact on our increase in net sales. Non-comparable store sales include the net effect of sales from new stores and sales from stores that have closed.  The non-comparable store sales decrease is driven by 43 store closures, partially offset by 15 store openings, which have occurred since the end of the second quarter of fiscal 2015.

                                                                                                                                        Store Openings/Closings

We ended the second quarter of fiscal 2016 with 764 stores, compared to 792 stores at the end of the second quarter of the prior year.  We relocated seven existing stores during the second quarter of fiscal 2016 and five stores in the second quarter of the prior fiscal year.

Gross profit for the second quarter of fiscal 2016 was $112.7 million, an increase of 3.4% compared to $109.0 million in gross profit for the second quarter of fiscal 2015.  Gross profit as a percentage of net sales was 35.2% for the second quarter of fiscal 2016, compared to 36.2% for the second quarter of fiscal 2015.  The decrease in gross margin was primarily due to an increase in markdowns, including the acceleration of certain markdowns, an increase in supply chain and buying costs and slightly lower initial merchandise mark-up, partially offset by favorability in other costs.

Selling, general and administrative expenses increased $7.3 million for the second quarter of fiscal 2016 to $92.1 million, compared to $84.8 million for the second quarter of last year due to costs for our new Phoenix distribution center, increased advertising, higher store rent and depreciation, which were due in part to our strategy to improve store real estate, higher store labor costs, and higher corporate employee and recruiting costs, partially offset by favorable share based compensation expense in the current quarter as compared to the same quarter in the prior year due to executive vacancies in the current quarter.  As a percentage of net sales, selling, general and administrative expenses increased to 28.8% for the second quarter of fiscal 2016 from 28.1% for the second quarter of fiscal 2015.

Our operating income was $20.6 million for the second quarter of fiscal 2016 as compared to operating income of $24.2 million for the second quarter of fiscal 2015.

Income tax expense for the second quarter of fiscal 2016 was $1.1 million compared to $0.3 million for the same period last year.  The effective tax rates for the second quarter of fiscal 2016 and fiscal 2015 were 5.4% and 1.1%, respectively.  A full valuation allowance is currently recorded against the Company’s deferred tax assets, as the Company was in a three year cumulative loss position as of June 30, 2015 and June 30, 2014.  A deviation from the customary relationship between income tax expense and pretax income results from utilization of the valuation allowance.

We had net income of $18.9 million, or $0.43 per share, for the second quarter of fiscal 2016 compared to net income of $23.7 million, or $0.54 per share, for the second quarter of fiscal 2015. 

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 Six Months Ended December 31, 2015

Compared to the Six Months Ended December 31, 2014

Net sales for the first six months of fiscal 2016 were $522.2 million, an increase of $18.6 million from $503.6 million for the same period last year.  Comparable store sales for the first six months of fiscal 2016 increased by 6.5% compared to the same period in fiscal 2015.  Stores are included in the same store sales calculation at the beginning of the quarter following the anniversary 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.  The increase in comparable store sales for the first six months of fiscal 2016 was comprised of a 7.3% increase in customer transactions, partially offset by a 0.8% decrease in average ticket.  Our comparable store sales increase was partially offset by a decrease in our non-comparable store sales, which decreased a total of $12.6 million, resulting in a 250 basis point negative impact on our increase in net sales. Non-comparable store sales include the net effect of sales from new stores and sales from stores that have closed.  The non-comparable store sales decrease is driven by 62 store closures, partially offset by 16 store openings, which have occurred since the beginning of the prior fiscal year.

                                                                                                                                                 Store Openings/Closings

We ended the first six months of fiscal 2016 with 764 stores, compared to 792 stores at the end of the first six months of the prior year.  We relocated 21 existing stores during the first six months of fiscal 2016 and 15 stores in the first six months of the prior fiscal year.

Gross profit for the first six months of fiscal 2016 was $185.4 million, an increase of 2.4% compared to $181.0 million in gross profit for the same period in fiscal 2015.  Gross profit as a percentage of net sales was 35.5% for the first six months of fiscal 2016, compared to 35.9% for the same period in fiscal 2015.  The decrease in gross margin was primarily due to an increase in markdowns, including the acceleration of certain markdowns, an increase in supply chain and buying costs, partially offset by slightly higher initial merchandise mark-up and favorability in other costs.

Selling, general and administrative expenses increased $8.2 million for the first six months of fiscal 2016 to $170.7 million, compared to $162.5 million for the same period in fiscal 2015 due to costs for our new Phoenix distribution center, higher store rent and depreciation, which were due in part to our strategy to improve store real estate, increased advertising, and higher corporate employee and recruiting costs, partially offset by favorable share based compensation expense in the current period as compared to the same period in the prior year due to executive vacancies in the current period.  As a percentage of net sales, selling, general and administrative expenses increased to 32.7% for the first six months of fiscal 2016 from 32.3% for the first six months of fiscal 2015.

Our operating income was $14.6 million for the first six months of fiscal 2016 as compared to operating income of $18.5 million for the same period in fiscal 2015.

Income tax expense for the first six months of fiscal 2016 was $1.0 million compared to $0.3 million for the same period last year.  The effective tax rates for the six months ended December 31, 2015 and December 31, 2014 were 7.3% and 1.9%, respectively.  A full valuation allowance is currently recorded against the Company’s deferred tax assets, as the Company was in a three year cumulative loss position as of June 30, 2015 and June 30, 2014.  A deviation from the customary relationship between income tax expense and pretax income results from utilization of the valuation allowance.

We had net income of $12.8 million, or $0.29 per share, for the first six months of fiscal 2016 compared to net income of $17.4 million, or $0.40 per share, for the first six months of fiscal 2015. 

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Liquidity and Capital Resources

Cash Flows from Operating Activities

Net cash provided by operating activities for the six months ended December 31, 2015 and 2014 was $12.3 million and $8.8 million, respectively.  The $12.3 million of cash provided by operating activities for the six months ended December 31, 2015 was primarily due to net income of $12.8 million adjusted for non-cash items, including depreciation and amortization of $7.8 million, an increase in accrued liabilities of $10.9 million, along with increased deferred rent of $1.4 million, income taxes payable of $0.9 million and share based compensation of $0.9 million, partially offset by a decrease in accounts payable of $0.7 million and an increase in inventory of $22.8 million due to seasonal buying levels and an increased inventory position in preparation for the spring selling season. There were no significant changes to our vendor payment policy during the six months ended December 31, 2015.  The $8.8 million of cash provided by operating activities for the six months ended December 31, 2014 was primarily due to net income of $17.4 million adjusted for non-cash items, including depreciation and amortization of $6.4 million and increased accrued liabilities of $2.3 million, offset by a decrease in accounts payable of $19.2 million.

Cash Flows from Investing Activities

Net cash used in investing activities for the six months ended December 31, 2015 and 2014 relates to capital expenditures.  Capital expenditures are primarily associated with store relocations and expansions, new store openings, capital improvements to existing stores, enhancements to our distribution center facilities, equipment, and systems along with improvements related to our corporate office and equipment.  Cash used in investing activities totaled $20.8 million and $4.2 million for the six months ended December 31, 2015 and 2014, respectively.  The increase in capital expenditures in the current year period as compared to the prior year period is primarily driven by $10.1 million of spending on our new Phoenix distribution center and related information technology and $3.9 million of spending on new, relocated, and expanded stores.

Cash Flows from Financing Activities

Net cash used in financing activities was $0.9 million for the six months ended December 31, 2015, compared to net cash provided by financing activities of $0.6 million for the six months ended December 31, 2014.  The cash used in the current year period for financing activities relates to the payment of financing costs for our new revolving credit facility.  The cash provided by financing activities in the prior year period was due to stock option exercises.

New Revolving Credit Facility

On August 18, 2015 we entered into a new credit agreement providing for an asset-based, five-year senior secured revolving credit facility in the amount of up to $180.0 million which matures on August 18, 2020 (the “New Revolving Credit Facility”), and which replaced our previous revolving credit facility.  The availability of funds under the New Revolving Credit Facility is limited to the lesser of a calculated borrowing base and the lenders’ aggregate commitments under the New Revolving Credit Facility. Our indebtedness under the New Revolving Credit Facility is secured by a lien on substantially all of our assets. The New Revolving Credit Facility contains certain restrictive covenants, which affect, among others, our ability to incur liens or incur additional indebtedness, change the nature of our business, sell assets or merge or consolidate with any other entity, or make investments or acquisitions unless they meet certain requirements. The New Revolving Credit Facility requires that we satisfy a fixed charge coverage ratio at any time that our availability is less than the greater of 10% of our calculated borrowing base or, $12.5 million. Our New Revolving Credit Facility may, in some instances, limit our ability to pay cash dividends and repurchase our common stock. In order for the borrower under the New Revolving Credit Facility, our subsidiary, to make a restricted payment to us for the payment of a dividend or a repurchase of shares, we must, among other things, maintain availability of 20% of the lesser of our calculated borrowing base or our lenders’ aggregate commitments under the New Revolving Credit Facility on a pro forma basis for a specified period prior to and immediately following the restricted payment. As of December 31, 2015, we were in compliance with all of the New Revolving Credit Facility covenants.

At December 31, 2015, we had no amounts outstanding under the New Revolving Credit Facility, $5.8 million of outstanding letters of credit and availability of $132.8 million under the New Revolving Credit Facility.  Letters of credit under the New Revolving Credit Facility are primarily for self-insurance purposes.  We incur commitment fees of up to 0.25% on the unused portion of the New Revolving Credit Facility.  Any borrowing under the New Revolving Credit Facility incurs interest at LIBOR or the prime rate, plus an applicable margin, at our election (except with respect to swing loans, which incur interest solely at the prime rate plus the applicable margin).  These rates are increased or reduced as our average daily availability changes.  Interest expense for the second quarter of the current fiscal year of $0.2 million was comprised of commitment fees of $0.1 million and the amortization of financing fees of $0.1 million.  Interest expense for the second quarter of the prior fiscal year of $0.4 million was comprised of commitment fees of $0.2 million and the amortization of financing fees of $0.2 million.  Interest expense for the six months ended December 31, 2015 of $0.6 million was comprised of commitment fees of $0.3 million and the amortization of financing fees of $0.3 million.   Interest expense for the six months ended December 31, 2014 of $0.7 million was comprised of commitment fees of $0.4 million and the amortization of financing fees of $0.3 million.  

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Liquidity

We finance our operations with funds generated from operating activities, available cash and cash equivalents and borrowings under our revolving credit facility.  Cash and cash equivalents were $35.3 million as of December 31, 2015 and $54.8 million at December 31, 2014.  Our cash flows will continue to be utilized for the operation of our business and the use of any excess cash will be determined by our Board of Directors.  Our borrowings have historically peaked during the second fiscal quarter as we build inventory levels prior to the holiday selling season.  Given the seasonality of our business, the amount of borrowings under our New Revolving Credit Facility may fluctuate materially depending on various factors, including the time of year, our needs and the opportunity to acquire merchandise inventory.  Our primary uses for cash provided by operating activities relate to funding our ongoing business activities and planned capital expenditures.  We may also use available cash to repurchase shares of our common stock. We believe funds generated from our operations, available cash and cash equivalents and borrowings under our New Revolving Credit Facility will be sufficient to fund our operations for the next year.  If our capital resources are not sufficient to fund our operations, we may seek additional debt or equity financing.  However, we can offer no assurances that we will be able to obtain additional debt or equity financing on reasonable terms.

Off-Balance Sheet Arrangements and Contractual Obligations

We had no off-balance sheet arrangements as of December 31, 2015.

As of December 31, 2015, there have been no material changes outside the ordinary course of business from the disclosures relating to contractual obligations contained under “Contractual Obligations” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

Critical Accounting Policies

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited interim consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 from these estimates.

There were no changes to our critical accounting policies during the second quarter of fiscal 2016.

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 during the second quarter of fiscal 2016 were 4.0% of sales compared to 3.5% 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, 2015 would result in a decline in gross profit and net income per share for the second quarter of fiscal 2016 of $1.2 million and $0.03, 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, 2015.

Recent Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-17, Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which requires an entity to classify deferred tax liabilities and assets as noncurrent within a classified balance sheet.  Previous guidance required deferred tax liabilities and assets to be separated into current and noncurrent amounts on the balance sheet.  ASU 2015-17 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016, with early adoption permitted.  This update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.  The Company has adopted ASU 2015-17 early as of the second quarter of fiscal 2016 on a retrospective basis.   Adoption did not have a material impact on the Company’s consolidated results of operations or financial position.

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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995, which are based on management’s current expectations, estimates and projections.  These statements may be found throughout this Quarterly Report on Form 10-Q, particularly in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” among others. Forward-looking statements typically are identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend” and similar words, although some forward-looking statements are expressed differently.  You should consider statements that contain these words carefully because they describe our current expectations, plans, strategies and goals and our current beliefs concerning future business conditions, our future results of operations, our future financial position, and our current business outlook or state other “forward-looking” information.

Readers are referred to Part 1, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2015 for examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements.  These risks, uncertainties and events also include, but are not limited to, the following:

The forward-looking statements made in this Form 10-Q relate only to events as of the date on which the statements are made.  Except as may be required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements were made or to reflect the occurrence of unanticipated events.  Investors are cautioned not to place undue reliance on any forward-looking statements.

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There have been no material changes to the Company’s market risks as disclosed in our Annual Report on Form 10-K filed for the fiscal year ended June 30, 2015.

Disclosure Controls and Procedures

Based on our management’s evaluation (with participation of our principal executive officer and our principal financial officer), our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e)  under the Securities Exchange Act of 1934, as amended) were effective as of December 31, 2015 to provide reasonable assurance that information required to be disclosed by us in this quarterly report on Form 10-Q was (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that their objectives are met and, as set forth above, our chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that their objectives were met.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2015 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II - OTHER INFORMATION

From time to time, the Company is involved in litigation which is incidental to its business.  In the Company’s opinion, no litigation to which the Company is currently a party is likely to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.

We believe there have been no material changes from our risk factors previously disclosed in Part 1, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

Information regarding our repurchases of equity securities during the three months ended December 31, 2015 is provided in the following table:

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX

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