TUESDAY MORNING CORP/DE - Quarter Report: 2022 October (Form 10-Q)

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Emergence from Chapter 11 Bankruptcy Proceedings

In response to the impacts of the COVID-19 pandemic, on May 27, 2020 (the “Petition Date”), we filed voluntary petitions (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the “Bankruptcy Court”). On December 31, 2020, we legally emerged from bankruptcy following Bankruptcy Court approval and resolution of all material conditions precedent listed in our Plan of Reorganization (as defined below). However, the closing of an equity financing transaction was considered a critical component to the execution of our confirmed Plan of Reorganization, therefore, we continued to apply the requirements of Accounting Standards Codification ("ASC') 852 – Reorganizations until that transaction closed on February 9, 2021. In connection with our legal emergence from bankruptcy on December 31, 2020, the Company completed certain debt financings (including an asset-based revolving credit facility and a term loan) and sale-leaseback transactions of our corporate office and Dallas distribution center properties contemplated by the Plan of Reorganization. The Chapter 11 Cases were jointly administered for procedural purposes. During the pendency of the Chapter 11 Cases, we continued to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In accordance with orders of the Bankruptcy Court, we entered into certain debtor-in-possession financing arrangements to provide financing during the pendency of the Chapter 11 Cases. See "Debtor-In-Possession Financing Arrangements" in Note 3 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended July 2, 2022 for additional information regarding these debtor-in-possession financing arrangements.

In early June 2020, in accordance with orders of the Bankruptcy Court, we commenced the process to close 132 store locations. By the end of July 2020, all of these stores were permanently closed. In mid-July 2020, we began the process to close an additional 65 stores following negotiations with our landlords, and those store closures were completed in August 2020. In total, we permanently closed 197 stores during the first quarter of fiscal 2021. In addition, we closed our Phoenix, Arizona distribution center (“Phoenix distribution center”) in the second quarter of fiscal 2021.

On November 16, 2020, the Company and its subsidiaries filed with the Bankruptcy Court a proposed Revised Second Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Amended Plan”) and a proposed Amended Disclosure Statement (the “Amended Disclosure Statement”) in support of the Amended Plan describing the Amended Plan and the solicitation of votes to approve the same from certain of the Debtors’ creditors with respect to the Chapter 11 Cases. The Amended Plan and the Amended Disclosure Statement contemplated the debt financing transactions described in Note 3 below under the caption “ABL Credit Agreements,” the exchange and Rights Offering (defined in Note 12 below) and the sale-leaseback transactions described in Note 8 below.

On December 23, 2020, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Amended Plan, with certain modifications described in the Confirmation Order (as modified and confirmed, the “Plan of Reorganization”). On December 31, 2020, all of the conditions precedent to the Plan of Reorganization were satisfied and the Company completed the debt financing and sale-leaseback contemplated in the Plan of Reorganization. However, the closing of the Rights Offering was considered a critical component to the execution of our confirmed Plan of Reorganization, therefore, we continued to apply the requirements of Accounting Standards Codification ("ASC") 852 – Reorganizations until that transaction closed on February 9, 2021.

In accordance with the Plan of Reorganization, effective December 31, 2020 (the “Effective Date”), the Company’s board of directors was comprised of nine members, including five continuing directors of the Company, three new directors appointed by the Backstop Party (as defined in Note 12 below) and one director appointed by the equity committee in the Chapter 11 Cases.

Pursuant to the Plan of Reorganization, each outstanding share of the Company’s common stock as of the close of business on January 4, 2021 was exchanged for (1) one new share of the Company’s stock and (2) a share purchase right entitling the holder to purchase its pro rata portion of shares available to eligible holders in the Rights Offering described under the caption “Equity Financing under the Plan of Reorganization” in Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended July 2, 2022. On February 9, 2021, the Company completed the equity financing contemplated by the Plan of Reorganization.

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 the claims for approximately $14 million less than the amounts reserved and retained in the Unsecured Creditor Claim Fund. 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.

See Note 2 regarding Bankruptcy Accounting for further discussion.

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Listing

During the pendency of our bankruptcy proceedings, the Company’s common stock was delisted by the Nasdaq Stock Market, LLC (“Nasdaq”) and began trading on the OTC Pink marketplace under the symbol “TUESQ”. In January 2021, following our emergence from bankruptcy, the Company’s common stock began trading on the OTCQX market under the ticker symbol “TUEM.”

On May 24, 2021, Nasdaq approved our application for the relisting of the Company's common stock on the Nasdaq Capital Market. The Company's common stock was relisted and commenced trading on the Nasdaq Capital Market at the opening of the market on May 25, 2021, under the ticker symbol "TUEM."

On June 6, 2022, the Company received written notice from The Nasdaq Stock Market LLC (“Nasdaq”) that the Company was not in compliance with the Nasdaq’s Listing Rule 5550(a)(2), as the closing bid price of the Company’s common stock had been below $1.00 per share for 30 consecutive business days (the “Minimum Bid Price Requirement”).

Under Nasdaq Rule 5810(c)(3)(A), the Company will have a compliance period of 180 calendar days, or until December 5, 2022, to regain compliance with the Minimum Bid Price Requirement. To regain compliance, during the 180-calendar day compliance period, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for a minimum of 10 consecutive business days. The notification of noncompliance had no immediate effect on the listing of the Company’s common stock, which continues to be listed and traded on The Nasdaq Capital Market under the symbol “TUEM.”

In the event the Company does not regain compliance with the Minimum Bid Price Requirement within the 180-calendar day compliance period, the Company may be eligible for additional time. To qualify, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and will need to provide written notice of its intention to cure the deficiency during an additional 180-calendar day compliance period, by effecting a reverse stock split, if necessary. If the Company meets these requirements, the Company may be granted an additional 180 calendar days. However, if it appears to the staff of Nasdaq that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible, Nasdaq will provide notice that the Company’s securities will be subject to delisting.

The Company committed to Nasdaq to implement a reverse stock split promptly following such stockholder approval in order to regain compliance with the Minimum Bid Price Requirement. On September 28, 2022, the majority stockholder of the Company approved an amendment to the Company’s certificate of incorporation for a reverse stock split at a ratio within the range of 1 share for 20 shares to 1 share for 100 shares, subject to approval of the Board of Directors of the final ratio and timing of the reverse stock split. Pursuant to SEC Rule 14c-2, the approval of the majority stockholder could not become effective until November 14, 2022 (the 20th calendar day following mailing of an information statement to the Company’s stockholders). The reverse stock split remains subject to final board approval and the filing of the certificate of amendment with the Delaware Secretary of State. While the Company expects the reverse stock split to become effective in November, there can be no assurance that the Company will be able to regain compliance with the Minimum Bid Price Requirement or will otherwise be in compliance with other Nasdaq listing criteria.

On November 4, 2022, Andrew T. Berger was appointed as Chief Executive Officer. Mr. Berger previously served as a member of the Audit Committee of the Board of Directors. In connection with his appointment as Chief Executive Officer, Mr. Berger resigned from his position on the Audit Committee. As a result, the Audit Committee has been reduced to two members, each of whom is an independent director pursuant to the Nasdaq Listing Rules. Accordingly, the Company currently is not compliant with Nasdaq Listing Rule 5605(c)(2), which requires that the audit committee of a Nasdaq listed company consist of at least three members, each of whom is an independent director pursuant to the Nasdaq Listing Rules. In accordance with the Nasdaq Listing Rules, on November 7, 2022, the Company notified Nasdaq of Mr. Berger’s appointment as Chief Executive Officer and resignation from the Audit Committee and the resulting non-compliance with Nasdaq Listing Rule 5605(c)(2). The Company also received a letter from Nasdaq indicating the Company was not in compliance with Nasdaq Listing Rule 5605 and noting that the Company would, in accordance with Nasdaq Listing Rule 5605(c)(4)(B), have a cure period until the earlier of its next annual meeting of stockholders or May 3, 2023 to regain compliance.

The Company intends to appoint an additional independent director to the Board of Directors and the Audit Committee as soon as practicable and prior to the expiration of the cure period under Nasdaq Listing Rule 5605(c)(4)(B).

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Updates on the COVID-19 Pandemic

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 stores nationwide, severely reducing revenues, resulting in significant operating losses and the elimination of substantially all operating cash flow. As allowed by state and local jurisdictions, our stores gradually reopened as of the end of June 2020. In accordance with our Plan of Reorganization, described below, we completed the permanent closure of 197 stores in the first quarter of fiscal 2021 and the closure of our Phoenix, Arizona distribution center (“Phoenix distribution center”) in second quarter of fiscal 2021. In addition, as part of our restructuring, we secured financing to pay creditors in accordance with the plan of reorganization and to fund planned operations and expenditures.

The extent to which the COVID-19 pandemic impacts our business, results of operations, cash flows and financial condition will depend on future developments, including future surges in incidences of COVID-19 and the severity of any such resurgence, the rate and efficacy of vaccinations against COVID-19, the length of time that impacts of the COVID-19 pandemic continue, how fast economies will fully recover from the COVID-19 pandemic, the timing and extent of further impacts on 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, and availability and cost of products.

2. BANKRUPTCY ACCOUNTING

Reorganizations require that the condensed consolidated financial statements, for periods subsequent to the filing of the Chapter 11 Cases, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. During the pendency of the Chapter 11 Cases until we qualified for emergence under ASC 852, the condensed consolidated financial statements were prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business and reflect the application of ASC 852. Accordingly, certain expenses, gains and losses that were realized or incurred in the bankruptcy proceedings were recorded in Reorganization items, net in our condensed consolidated statements of operations.

Pursuant to the Plan of Reorganization, an escrow account (the “Unsecured Creditor Claim Fund”) was established for the benefit of holders of allowed general unsecured claims. Upon the closing of the sale and leaseback of the Corporate Office and the Dallas Distribution Center properties and the issuance of the Term Loan (as defined in Note 3 below), net proceeds of $67.5 million, after payment of property taxes, and $18.8 million, respectively, were deposited directly into the Unsecured Creditor Claim Fund that was administered by an independent unsecured claims disbursing agent. The remaining proceeds from the Term Loan that were not deposited into the Unsecured Creditor Claim Fund were deposited into our operating account. In addition, $14.2 million of additional cash was deposited into a segregated bank account at Wells Fargo Bank and was restricted for use in paying compensation for services rendered by professionals on or after the Petition date and prior to the approval of the Effective Date. The closing of the Rights Offering described in Note 12 below provided approximately $40.0 million of cash that was deposited to the Unsecured Creditor Claim Fund and recorded as restricted cash. During the fiscal 2021, all services rendered by professionals were paid and the Wells Fargo Restricted Fund account was closed with all of the applicable funds disbursed. Net cash remaining of $1.9 million was deposited directly into our unrestricted cash account during the fourth quarter of fiscal 2021.

On September 29, 2021, the U.S. Bankruptcy Court issued a 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 the Unsecured Creditor Claim Fund. Upon entry of the Final Decree, the approximately $14 million remaining in the Unsecured Creditor Claim Fund was returned to the Company to make a repayment on its ABL credit facility and the Chapter 11 Cases are final.

As of October 1, 2022, we had zero cash held in the Unsecured Creditor Claim Fund held on the balance sheet for the payment of claims.

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

Restructuring and Impairment Charges

Reorganization Items

3. DEBT

ABL Credit Agreements

On December 31, 2020, 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 provided 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.

Under the terms of the Post-Emergence ABL Credit Agreement, amounts available for advances would be subject to a borrowing base as described in the Post-Emergence ABL Credit Agreement. Under the Post-Emergence ABL Credit Agreement, borrowings initially bore interest at a rate equal to the adjusted LIBOR rate plus a spread of 2.75% or the Commercial Bank Floating Bank rate plus a spread of 1.75%.

The Post-Emergence ABL Facility was secured by a first priority lien on all present and after-acquired tangible and intangible assets of the Company and its subsidiaries other than certain collateral that secures the Term Loan (as defined below). The commitments of the lenders under the Post-Emergence ABL Facility were due to terminate and outstanding borrowings under the Post-Emergence ABL Facility was due to mature on December 31, 2023.

On May 9, 2022, the Company, Tuesday Morning, Inc. (the “Borrower”) and each other subsidiary of the Company (together with the Company and the Borrower, the "Company Credit Parties") entered into a Credit Agreement (the “New ABL Credit Agreement”) with the lenders named therein (the “ABL Lenders”), Wells Fargo Bank, National Association, as administrative agent (the “ABL Administrative Agent”), and 1903P Loan Agent, LLC, as FILO B documentation agent. The New ABL Credit Agreement replaced the Post-Emergence ABL Credit Agreement. 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”). In addition, under the original terms of the New ABL Credit Agreement, the Borrower had the right, on and following November 9, 2022 (the “FILO B Delayed Incremental Loan”), to request (x) an additional incremental loan under the FILO B Facility in an aggregate amount not to exceed $5.0 million, and (y) 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.

On May 9, 2022, 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 the Post-Emergence ABL Facility, along with accrued interest, expenses and fees, (ii) purchase of a portion of the Term Loan 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.

Pursuant to an amendment to the New ABL Credit Agreement dated July 11, 2022, the lenders under the FILO B Facility (the "FILO B Lenders") agreed to make the FILO B Delayed Incremental Loan to the Borrower on July 11, 2022. The amendment also provides that, until certain minimum borrowing availability levels are satisfied as described in the amendment, the Borrower will be subject to additional reporting obligations, the Borrower will retain a third-party business consultant acceptable to the ABL Administrative Agent, and the ABL Administrative Agent may elect to apply amounts in controlled deposit accounts to the repayment of outstanding borrowings under the New ABL Facility. The July 11, 2022 amendments to the New ABL Agreement were accounted for as a debt modification. In addition, pursuant to the amendment, certain subsidiaries of the Borrower agreed to enter into and maintain a supply agreement with Gordon Brothers Retail Partners, LLC (the “Program Agent”), an affiliate of a FILO B Lender, pursuant to which the Program Agent supplies inventory to the Borrower and certain of its subsidiaries.

On September 20, 2022, the New ABL Credit Agreement was further amended in connection with the Private Placement (defined below). The amendment restricts certain actions by the Company for the next two years, including making certain acquisitions and debt prepayments. The amendment requires that the Company engage and retain (at the Company’s expense) Gordon Brothers Retail Partners for a certain period of time for the purpose of performing appraisal validations, monitoring and evaluating the Company’s inventory mix and other services. The amendment also permitted the change in control caused by the issuance of shares to the SPV (as defined below) upon exchange of the Convertible Debt (as defined below) for shares. On September 20, 2022, $7.5 million of the borrowings under the FILO A Facility and FILO B Facility were repaid. See “September 2020 Private Placement” below for additional information.

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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. Pursuant to the New ABL Credit Agreement, 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.

Amounts available for advances under the New Facilities are subject to borrowing bases as described in the New ABL Credit Agreement. Borrowings under the New ABL Facility will bear interest at a rate equal to, at the option of the Borrower, (i) the Adjusted Term SOFR (as defined below) plus a margin ranging from 1.75% to 2.25%, or (ii) the Base Rate (as defined below) plus a margin ranging from 0.75% to 1.25%, in each case with such margins depending on the Borrower’s average quarterly borrowing availability under the New ABL Facility. Borrowings under the FILO A Facility will bear interest at a rate equal to, at the option of the Borrower, (i) the Adjusted Term SOFR plus 3.00%, or (ii) the Base Rate plus 2.00%. Borrowings under the FILO B Facility will bear interest at a rate equal to, at the option of the Borrower, (i) the Adjusted Term SOFR plus a margin of 9.00%, or (ii) the Base Rate plus a margin of 8.00%, in each case with such margins depending on seasonal periods. The “Adjusted Term SOFR” is the term SOFR plus a term SOFR adjustment of 0.10% for loans under the New ABL Facility or a term SOFR adjustment of 0.00% for loans under the FILO A Facility and the FILO B Facility. The “Base Rate” is the greatest of (i) the federal funds effective rate plus 0.50%, (ii) the term SOFR plus 1.00%, and (iii) the prime rate of Wells Fargo Bank, National Association. Each of the Adjusted Term SOFR and the Base Rate is subject to a 0.00% floor with respect to the New ABL Facility and a 1.00% floor for each of the FILO A Facility and the FILO B Facility.

During the three months ended October 1, 2022, we had $2.0 million additional deferred financing costs for the FILO B, classified as long term debt in the condensed consolidated balance sheet.

The New Facilities are secured by a first priority lien on all present and after-acquired tangible and intangible assets of the Company and its subsidiaries other than certain collateral that secures the Term Loan (as defined below). Each of the New Facilities will terminate, and outstanding borrowings thereunder will mature, on the earlier of (i) May 10, 2027, and (ii) the date that is 91 days prior to maturity of the Term Loan.

As of October 1, 2022, we had $31.4 million of borrowings outstanding under the New ABL Facility and, $14.6 million of letters of credit outstanding. We had borrowing availability of $25.3 million under the New ABL Facility as of October 1, 2022.

As of October 1, 2022, we had $6.7 million in deferred financing costs net of amortization for the New ABL Facility, of which $4.1 million was incurred this quarter for the amendment to the New ABL. Of this amount, $3.7 million was paid from the proceeds of the private placement and $0.4 million was accrued as of October 1, 2022.

Term Loan

On December 31, 2020, the Company, Alter Domus (US), LLC, as administrative agent, and the lenders named therein (the "Term Loan Lenders"), including Tensile Capital Partners Master Fund LP ("Tensile") and affiliates of Osmium Partners, LLC, ("Osmium"), 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”).

In accordance with the Plan of Reorganization, on December 31, 2020, three new directors were selected for membership on the Board of Directors by Osmium Partners (Larkspur SPV), LP, ("Larkspur") an affiliate of Tensile and Osmium. Pursuant to the Term Loan Credit Agreement, Tensile and affiliates of Osmium held $19.0 million and $1.0 million, respectively, of the $25.0 million outstanding Term Loan. Representatives of Osmium and Tensile both held seats on the board from December 31, 2020 to September 20, 2022 and therefore Osmium and Tensile were related parties to the Company (see Note 12).

On May 9, 2022, the Company, the Borrower, certain subsidiaries of the Company, certain of the Term Loan Lenders (the “Consenting Lenders”), and Alter Domus (US) LLC, as administrative agent, entered into an amendment to the Term Loan Credit Agreement (the “Term Loan Credit Agreement Amendment”), pursuant to which, among other things, (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) provide that the Borrower and its subsidiaries shall not permit the borrowing availability under the New ABL Facility to be less than the greater of (A) $7.5 million and (B) 7.5% of the Modified Revolving Loan Cap, (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) provide that, commencing with the 12-month period ending September 30, 2023, the Company would be subject to compliance with a total secured leverage ratio.

In July 2022, the Term Loan Credit Agreement was further amended to permit the early borrowing of the FILO B Delayed Incremental Loan and to make other changes to conform to the New ABL Credit Agreement, accounted for as debt modification as there are no changes in the borrowing capacity. In addition, on September 20, 2022, the Term Loan Credit Agreement was further amended to permit the Private Placement to be completed and to make certain other amendments, including removal of the total secured net leverage ratio covenant from the Term Loan Credit Agreement and permitting the change in control caused by the issuance of shares to the SPV upon conversion of the Convertible Debt for shares.

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The amendments to the Term Loan agreement in September 2022 were accounted for as a debt modification. The Term Loan will be carried net of the associated debt issuance costs which will be amortized and recorded as interest expense using the effective interest rate based on the amendments. The third party issuance costs of $0.7 million incurred from the refinancing of the term loan was expensed for the period ended October 1, 2022.

As of October 1, 2022, we have $25.3 million of borrowings outstanding under the Term Loan Credit Agreement, including PIK interest of $0.9 million.

September 2022 Private Placement

On September 20, 2022, the Company, the Borrower, certain members of management of the Company (the “Management Purchasers”), TASCR Ventures, LLC (the “SPV”), a special purpose entity formed by Retail Ecommerce Ventures LLC (“REV”) and Ayon Capital L.L.C., and TASCR Ventures CA, LLC, as collateral agent, entered into an Amended and Restated Note Purchase Agreement dated as of September 20, 2022 (the “Note Purchase Agreement”). Pursuant to the Note Purchase Agreement, on September 20, 2022, the SPV purchased: (i) $7.5 million in aggregate principal amount of a junior secured convertible notes issued by the Company (the “FILO C Convertible Notes”), and (ii) $24.5 million in aggregate principal amount of junior secured convertible notes (the “SPV Convertible Notes”). In addition, the Management Purchasers purchased $3.0 million in aggregate principal amount of junior secured convertible notes issued by the Company (the “Management Convertible Notes” and, together with the SPV Convertible Notes, the “Junior Convertible Notes”). The FILO C Convertible Notes and the Junior Convertible Notes are referred to herein as the “Convertible Debt” and the issuance of the Convertible Debt is referred to herein as the “Private Placement.”

The Convertible Debt was issued by the Company and guaranteed by the Company's subsidiaries.

The Convertible Debt is convertible into shares of the Company’s common stock at a conversion price of $0.077 per share. Accordingly, 415,584,415 shares of the Company’s common stock would be issuable upon conversion in full of the Convertible Debt purchased by the SPV. In addition, 38,961,039 shares of the Company’s common stock would be issuable upon conversion in full of the Convertible Debt to be purchased by the Management Purchasers. Because the Company does not currently have a sufficient number of authorized and unreserved shares of common stock to issue upon conversion of all of the Convertible Debt, as described below, only a portion of the Convertible Debt was immediately convertible into common stock. The remaining portion of the Convertible Debt cannot be converted into common stock unless and until the Company’s certificate of incorporation is amended to increase the number of authorized shares of common stock to permit such conversion and/or provide for a reverse stock split of the common stock. The conversion feature within the Convertible Debt represents an embedded derivative. See "Derivative Liabilities" below for additional information.

The Convertible Debt is subject to customary anti-dilution adjustments for structural events, such as splits, distributions, dividends or combinations, and customary anti-dilution protections with respect to issuances of equity securities at a price below the applicable conversion price of the Convertible Debt. A portion of the Convertible Debt issued to the SPV was immediately convertible for up to 90,000,000 shares of the Company's common stock. On September 21, 2022, the SPV elected to immediately convert a portion of the Convertible Debt into 90,000,000 shares of the Company's common stock, and through such conversion, acquired ownership of a majority of the Company's outstanding common stock. On September 28, 2022, the SPV approved an amendment to the Company's certificate of incorporation to (i) increase the number of authorized shares to allow for conversion in full of the remaining Convertible Debt, and provide such additional authorized shares as deemed appropriate by the Company's board of directors and/or (ii) provide for a reverse stock split of the common stock (the "Certificate of Incorporation Amendment"). See “Listing” under Note 1 above for additional information. Upon conversion in full of the Convertible Debt and based on the Company's outstanding shares on a fully diluted basis as of September 28, 2022, the SPV would hold approximately 75% and the SPV and the Management Purchasers collectively would hold 81% of the total diluted voting power of the Company's common stock (not including any additional Convertible Debt that may be issued as a result of the Company being required or electing to make in-kind payments of interest as described further below). In connection with the conversion of the portion of the Convertible Debt that was immediately convertible, approximately $6.9 million in principal amount of the SPV Convertible Notes were retired. In connection therewith, we recorded a reduction of $2.5 million in debt, $3.9 million from our derivative liability, and loss on extinguishment of $7.7 million, and a resulting impact of $13.5 million from stockholders' equity to reflect the conversion from debt to common stock and amortization of debt issuance cost of $0.6 million.

The conversion of the Convertible Notes to common stock on September 22, 2022, resulted in a change of control of the Company given the SPV held greater than 50% of the outstanding voting common stock and control of the Company’s Board as discussed below.

In connection with the Private Placement, the Company entered into a registration rights agreement with the purchasers of the Convertible Debt, pursuant to which the purchasers received customary shelf registration, piggyback and demand registration rights with respect to the resale of shares of the Company’s common stock acquired upon conversion or exchange of the Convertible Debt.

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In accordance with the terms of the Note Purchase Agreement, the SPV designated each of Tai Lopez, Alexander Mehr, Maya Burkenroad, Sandip Patel and James Harris (collectively, the “SPV Designees”) to serve as directors of the Company effective upon the closing of the Private Placement on September 20, 2022. In connection with the election the SPV Designees to the Company’s board of directors, each of Douglas J. Dossey, Frank M. Hamlin, W. Paul Jones, John Hartnett Lewis and Sherry M. Smith resigned from the Company’s board of directors. Each of the remaining incumbent directors Fred Hand, Anthony F. Crudele, Marcelo Podesta and Reuben E. Slone continued to serve on the board following the closing of the Private Placement. Each of Messrs. Crudele, Podesta and Slone resigned from the board of directors on September 28, 2022 and in connection therewith each of Andrew T. Berger, Michael Onghai and Z. John Zhang were elected as directors. See Note 14 – Subsequent Events below for additional information.

The Nasdaq Stock Market rules would normally require stockholder approval prior to closing the Private Placement; however, the Company requested and has received a financial viability exception to the stockholder approval requirement pursuant to Nasdaq Stock Market Rule 5635(f). The financial viability exception allows an issuer to issue securities upon prior written application to Nasdaq when the delay in securing stockholder approval of such issuance would seriously jeopardize the financial viability of the Company.

As required by Nasdaq rules, the Company’s Audit Committee, which is comprised solely of independent and disinterested directors, expressly approved reliance on the financial viability exception in connection with the Private Placement and related transactions.

The proceeds of the Private Placement were used to (i) repay $7.5 million of the FILO A term loans and FILO B term loans under the New ABL Credit Agreement; (ii) repay of a portion of the Borrower’s revolving loans under the New ABL Credit Agreement; and (iii) payment of transaction costs. In addition, the remaining proceeds will be used for working capital and other general corporate purposes of the Company and its subsidiaries.

In connection with its approval of the Private Placement, the board of directors approved a waiver of the ownership restrictions in Article 11 of the Company’s certificate of incorporation with respect to the securities issuable in the Private Placement. Article 11 generally prohibits any person or group from acquiring more than 4.5% of the Company’s outstanding common stock and restricts transfers in securities owned by holders of 4.5% or more of the Company’s outstanding common stock.

FILO C Convertible Notes. In connection with the Private Placement, pursuant to the Note Purchase Agreement, the SPV purchased the FILO C Convertible Notes. The FILO C Convertible Notes will mature upon the earlier of (i) December 31, 2027, or (ii) the maturity of the FILO B term loan under the ABL Credit Agreement. Interest will accrue on the FILO C Convertible Notes at a rate equal to the secured overnight financing rate (“SOFR”) plus 6.50% and will be payable semiannually. Under the terms of the FILO C Convertible Notes, during the two-year period following the closing of the Private Placement, the Company may elect to pay interest on the FILO C Convertible Notes “in kind” by increasing the principal of the FILO C Convertible Notes by the amount of any such interest payable. The provisions of the intercreditor agreements relating to the FILO C Convertible Notes and other outstanding indebtedness of the Company require such payments to be made “in-kind" subject to certain limited exceptions applicable after the second anniversary of the Private Placement.

The FILO C Convertible Note is secured by the same collateral that secures (i) the revolving loans and FILO A and FILO B term loans under the ABL Credit Agreement (collectively, the "ABL Obligations"), (ii) the term loan issued under the Term Loan Credit Agreement, and (iii) the Junior Convertible Notes. With respect to the collateral as to which borrowings under the New ABL Credit Agreement have a first priority lien, the ABL Obligations have a first priority lien, the lien on such collateral securing the FILO C Convertible Note ranks junior to the lien securing the ABL Obligations and senior to the Term Loan and the Junior Convertible Notes. With respect to the collateral as to which Term Loan has a first priority lien, the lien on such collateral securing the FILO C Note ranks junior to the liens securing the ABL Obligations and the Term Loan and senior to the lien securing the Junior Convertible Notes. With respect to payment priority, the FILO C Convertible Note is subordinate to the ABL Obligations, pari passu with the Term Loan, and senior to the Junior Convertible Notes.

For the three months ended October 1, 2022, we had $0.7 million in deferred financing costs net of amortization for the FILO C Convertible Notes.

The FILO C Convertible Notes contain covenants and events of default that are customary for this type of financing.

Junior Convertible Notes. The Junior Convertible Notes will mature on December 31, 2027. Interest will accrue on the Junior Convertible Notes at a rate equal to SOFR plus 6.50% and will be payable semiannually. Under the terms of the Junior Convertible Notes, during the two-year period following the closing of the Private Placement, the Company may elect to pay interest on the Junior Convertible Notes “in kind.” The provisions of the intercreditor agreements relating to the Junior Convertible Notes and other outstanding indebtedness of the Company will require such payments to be made “in-kind” subject to certain limited exceptions applicable after the second anniversary of the Private Placement.

The Junior Convertible Notes are secured by the same collateral that secures the revolving loans and FILO B term loans under the ABL Credit Agreement, the Term Loan and the FILO C Convertible Notes (the “Other Secured Debt”). The liens securing the Junior Convertible Notes rank junior to the liens securing the Other Secured Debt. With respect to payment priority, the Junior Convertible Notes are subordinated to all of the Other Secured Debt.

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For the three months ended October 1, 2022, we had $1.5 million in deferred financing costs for the SPV Junior Convertible Notes. This amount is net of extinguishment of unamortized issuance cost of $0.6 million proportionate to the conversion of the SPV Convertible Notes to common stock on September 22, 2022.

For the three months ended October 1, 2022, we had $0.3 million in deferred financing costs of Management Convertible Notes.

The Junior Convertible Notes contain covenants and events of default that are customary for this type of financing.
 

As of October 1, 2022, we are in compliance with covenants in the New ABL Facility, the Term Loan, and the Convertible Debt.

Interest Expense

Interest expense for the three months ended October 1, 2022 was $2.0 million, and was comprised of $0.9 million in interest on the New ABL Facility and PIK interest on the Term Loan, the FILO C Convertible Notes, and the Junior Convertible Notes, $0.2 million amortization of financing fees, and $0.9 million commitment fees. Interest expense for the three months ended September 30, 2021 was $1.7 million and was comprised of $1.0 million in interest on the Post-Emergence ABL Facility and PIK interest on the Term Loan, and was comprised of $0.3 million amortization of financing fees and $0.4 million of commitment fees.

The fair value of our long term debt was determined based on observable market data provided by a third party for similar types of debt which are considered Level 2 inputs within the fair value hierarchy. The following table provides the fair values on our long-term debt (in thousands):

4. REVENUE RECOGNITION

Our revenue is earned from sales of merchandise within our stores and is recorded at the point of sale and conveyance of merchandise to customers. Revenue is measured based on the amount of consideration that we expect to receive, reduced by point of sale discounts and estimates for sales returns, and excludes sales tax. Payment is due at the time of sale. We maintain a reserve for estimated returns, as well as a corresponding returns asset in “Other Assets” in the condensed consolidated balance sheets, and we use historical customer return behavior to estimate our reserve requirements. No impairment of the returns asset was identified or recorded as of October 1, 2022. Gift cards are sold to customers in our stores and we issue gift cards for merchandise returns in our stores. Revenue from sales of gift cards and issuances of merchandise credits is recognized when the gift card is redeemed by the customer, or if the likelihood of the gift card being redeemed by the customer is remote (gift card breakage). The gift card breakage rate is determined based upon historical redemption patterns. An estimate of the rate of gift card breakage is applied over the period of estimated performance and the breakage amounts are included in net sales in the condensed consolidated statement of operations. Breakage income recognized was $0.1 million and $0.1 million for the three months ended October 1, 2022 and September 30, 2021, respectively. The gift card liability is included in “Accrued liabilities” in the condensed consolidated balance sheets. We will continue to evaluate whether and how store closures may affect customer behavior with respect to sales returns and gift card redemption and related breakage.

5. ACCRUED LIABILITIES

Self-insurance reserves were primarily comprised of our worker's compensation liability reserve, followed by our medical liability reserve and general liability reserve.

6. COMMON STOCK & SHARE-BASED INCENTIVE PLANS

Increase in Authorized Capital Stock

As provided in the Plan of Reorganization, the Company’s Amended and Restated Certificate of Incorporation (the “Amended and Restated Certificate of Incorporation”) increased the number of authorized shares of the Company’s common stock, par value $0.01 per share, to 200,000,000 shares. The Company had 176,696,648 shares of common stock outstanding as of October 1, 2022. See Note 3 for information regarding the issuance of additional common stock in connection with the Private Placement.

In order to continue to assist the Company in preserving certain tax attributes (the “Tax Benefits”), the Company’s Amended and Restated Certificate of incorporation imposes certain restrictions on the transferability and ownership of the Company’s capital stock (the “Ownership Restrictions”). Subject to certain exceptions, the Ownership Restrictions restrict (i) any transfer that would result in any person acquiring 4.5% or more of our Common Stock, (ii) any transfer that would result in an increase of the ownership percentage of any person already owning 4.5% or more of our Common Stock, or (iii) any transfer during the five-year period following December 31, 2020 that would result in a decrease of the ownership percentage of any person already owning 4.5% or more of our Common Stock. Pursuant to the Company’s Amended and Restated Certificate of Incorporation, any transferee receiving shares of our Common Stock that would result in a violation of the Ownership Restrictions will not be recognized as a stockholder of the Company or entitled to any rights of stockholders. The Company’s Amended and Restated Certificate of Incorporation allows the Ownership Restrictions to be waived by the Company’s board of directors on a case by case basis. The Board of Directors has taken action to waive the restrictions with respect to sale of shares acquired in the Rights Offering by the Backstop Party.

The Ownership Restrictions will remain in effect until the earliest of (i) the repeal of Section 382 of the Internal Revenue Code or any successor statute if the board of directors determines the Ownership Restrictions are no longer necessary for preservation of the Tax Benefits, (ii) the beginning of a taxable year in which the board of directors determines no Tax Benefits may be carried forward, or (iii) such other date as shall be established by the board of directors.

In order to allow completion of the Private Placement, the board of directors waived these restrictions with respect to the securities purchased in the Private Placement. On September 21, 2022, following the closing of the Private Placement, the SPV elected to immediately convert a portion of the Convertible Debt into 90 million shares of the Company’s common stock and acquired majority ownership of the Company’s common stock. As a result, the Company experienced an ownership change as defined in Section 382 of the Internal Revenue Code (Section 382) as of September 22, 2022. Section 382 contains rules that limit the ability of a company that undergoes an ownership change to utilize its net operating loss carryforwards (NOLs), tax credits, and interest limitation carryforwards. The Company has significant NOLs, tax credits, and interest limitation carryforwards that are impacted by the ownership change. The Company has evaluated the financial statement impact of the ownership change under Section 382 in the current quarter, and has determined there is no material impact on the financials due to the valuation allowance the Company has set up previously on its deferred tax asset.

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Share-Based Incentive Plans

For a discussion of our share-based incentive plans, please see Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended July 2, 2022.

Restricted Stock Awards/Units

The Tuesday Morning Corporation 2008 Long-Term Incentive Plan (the “2008 Plan”) and the Tuesday Morning Corporation Long-Term Incentive Plan (the “2014 Plan” and together with the 2008 Plan, the “Plans”) authorize the grant of restricted stock awards to directors, officers, key employees and certain other key individuals who perform services for us and our subsidiaries. Equity awards may no longer be granted under the 2008 Plan. 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 and units may be subject to time-vesting and/or certain performance requirements. If the time-vesting and/or performance requirements are not met, the restricted shares are forfeited. The 2014 Plan also authorizes the grant of time-vesting and performance-based restricted stock units. Restricted stock units do not provide voting and dividend rights. Shares of common stock are issued upon the vesting of restricted units.

In addition to the Plans, the Company has granted certain inducement awards of time-based and performance-based restricted stock units to Fred Hand, Marc Katz and Paul Metcalf. See Note 7 to the consolidated financial statements in our Annual Report on Form 10-K and Note 14 Subsequent Events below for additional information.

As of October 1, 2022, there were 5,536,064 unvested performance-based restricted stock awards and performance-based restricted stock units to be settled in stock.

Cash Settled Awards

We have granted stock-based awards to certain employees, which vest over a period of three to four years, and will be settled in cash (“cash settled awards”). Both performance-based and time-based awards were granted. Except for the performance based awards which have been deemed unlikely to vest, the fair value of the cash settled awards at each reporting period is based on the price of our common stock. The fair value of the cash settled awards will be re-measured at each reporting period until the awards are settled.

The liability associated with the cash settled awards was $0.1 million and $0.2 million at October 1, 2022 and July 2, 2022, respectively.

Share-based Compensation Costs

7. COMMITMENTS AND CONTINGENCIES

Information related to the Chapter 11 Cases that were filed on May 27, 2020 is included in Notes 1 and 2 above.

Like many retailers, the Company has been named in a potential class or collective actions on behalf of groups alleging violations of federal and state wage and hour and other labor statutes, and other statutes. In the normal course of business, we are also party to representative claims under the California Private Attorneys’ General Act and various other lawsuits and regulatory proceedings including, among others, commercial, product, product safety, employee, customer, intellectual property and other claims. Actions against us are in various procedural stages. Many of these proceedings raise factual and legal issues and are subject to uncertainties. In addition, we are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established when a loss is considered probable and are based on management’s best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.

8. LEASES

We conduct substantially all operations from leased facilities. Our retail store locations, our corporate office and our distribution center are under operating leases that will expire over the next 1 to 10 years. Many of our leases include options to renew at our discretion. We include the lease renewal option periods in the calculation of our operating lease assets and liabilities when it is reasonably certain that we will renew the lease. We also lease certain equipment leases that generally expire within three years.

In accordance with the Plan of Reorganization, on December 31, 2020, we sold our corporate office and Dallas distribution center properties and leased back those facilities. The lease of the corporate office is for a term of ten years, and the lease of the distribution center is for an initial term of two and one-half years, with an option to extend the distribution center lease for one additional year. We believe it is reasonably certain the option to extend will be exercised. We determined the sale price represented the fair value of the underlying assets sold and have no continuing involvement with the properties sold other than a normal leaseback. The consideration received for the sale, as reduced by the closing and transaction costs, was $68.5 million, and the net book value of the properties sold was $18.9 million, resulting in a $49.6 million gain, which was recognized as of December 31, 2020. Cash proceeds, net of property taxes, were deposited directly into the Unsecured Creditor Claim Fund (See Note 2).

The two leases, associated with the transaction, were recorded as operating leases. As of October 1, 2022, we will pay approximately $7.4 million in fixed rents and in-substance fixed rents, over the remaining lease term for the corporate office and we will pay approximately $7.5 million in fixed rents and in-substance fixed rents for the Dallas distribution center property over the remaining lease term, including the one-year option period as noted above. Fixed rents and in-substance fixed rents for each lease were discounted using the incremental borrowing rate we established for the respective term of each lease.

In accordance with ASC 842, we determine whether an agreement contains a lease at inception based on our right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. Lease liabilities represent the present value of future lease payments and the right-of-use (“ROU”) assets represent our right to use the underlying assets for the respective lease terms.

The operating lease liability is measured as the present value of the unpaid lease payments and the ROU asset is derived from the calculation of the operating lease liability. As our leases do not generally provide an implicit rate, we use our incremental borrowing rate as the discount rate to calculate the present value of lease payments. The incremental borrowing rate represents an estimate of the interest rate that would be required to borrow over a similar term, on a collateralized basis in a similar economic environment.

Rent escalations occurring during the term of the leases are included in the calculation of the future minimum lease payments and the rent expense related to these leases is recognized on a straight-line basis over the lease term. In addition to minimum lease payments, certain leases require payment of a proportionate share of real estate taxes and certain building operating expenses allocated on a percentage of sales in excess of a specified base. These variable lease costs are not included in the measurement of the ROU asset or lease liability due to unpredictability of the payment amount and are recorded as lease expense in the period incurred. The ROU asset is adjusted to account for previously recorded lease-related expenses such as deferred rent and other lease liabilities.

Our lease agreements do not contain residual value guarantees or significant restrictions or covenants other than those customary in such arrangements.