Nature of Operations and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Jul. 02, 2022

Accounting Policies [Abstract]

Principles of Consolidation and Basis of Presentation

Principles of Consolidation and Basis of Presentation—The accompanying consolidated financial statements include the accounts of Tuesday Morning Corporation, and its wholly‑owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. We have one operating segment and one reportable segment as our chief operating decision maker, the Executive Committee composed of the Chief Executive Officer, Chief Finance Officer, and other senior executives, reviews financial information on a consolidated basis for purposes of allocating resources and evaluating financial performance. Certain reclassifications were made to prior period amounts to conform to the current period presentation. None of the reclassifications affected our net earnings/(loss) in any period. We do not present a separate statement of comprehensive income, as we have no other comprehensive income items. On February 23, 2022, the board of directors of the Company approved a change in the fiscal year end from a calendar year ending on June 30 to a 52-53-week year ending on the Saturday closest to June 30, effective beginning with fiscal year 2022. In a 52-week fiscal year, each of the Company’s quarterly periods will comprise 13 weeks. The additional week in a 53- week fiscal year is added to the fourth quarter, making such quarter consist of 14 weeks. The Company made the fiscal year change on a prospective basis and will not adjust operating results for prior periods.

Use of Estimates

(b)Use of Estimates—The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP'') requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

(c)Cash and Cash Equivalents—Cash and cash equivalents include credit card receivables and all highly liquid instruments with original maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value. At July 2, 2022, and June 30, 2021, credit card receivables from third party consumer credit card providers were $6.3 million and $3.2 million, respectively. Such receivables generally are collected within one week of the balance sheet date.

Restricted Cash

(d)Restricted Cash—There was no restricted cash as of July 2, 2022. Restricted cash was $22.3 million, as of June 30, 2021, which was held in the Unsecured Creditor Claims Fund (defined below in Note 2).

Inventories

(e)Inventories—Inventories, consisting of finished goods, are stated at the lower of cost or net realizable value using the retail inventory method for store inventory and the specific identification method for warehouse inventory. We have a perpetual

inventory system that tracks on-hand inventory and inventory sold at a stock-keeping unit (“SKU”) level. Inventory is relieved and cost of sales is recorded based on the current calculated cost of the item sold. Buying, distribution, freight and certain other costs are capitalized as part of inventory and are charged to cost of sales as the related inventory is sold. We charged $112.2 million, $95.1 million, and $97.8 million of such capitalized inventory costs to cost of sales for the fiscal years ended July 2, 2022, June 30, 2021, and June 30, 2020, respectively. We have capitalized $29.0 million and $24.2 million of such costs in inventory at July 2, 2022, and June 30, 2021, respectively.

Stores conduct annual physical inventories, staggered during the second half of the fiscal year. During periods in which physical inventory observations do not occur, we utilize an estimate for recording inventory shrink based on the historical results of our previous physical inventories. The estimated shrink rate may require a favorable or unfavorable adjustment to costs of sales based on actual results to the extent that our subsequent actual physical inventory yields a different result. Although inventory shrink rates have not fluctuated significantly in recent years, if the actual rate were to differ from our estimates, then an adjustment to inventory shrink would be required.

We review our inventory during and at the end of each quarter to ensure that all necessary pricing actions are taken to adequately value our inventory at the lower of cost or net realizable by recording permanent markdowns to our on-hand inventory. Management believes these markdowns result in the appropriate prices necessary to stimulate demand for the merchandise. Actual recorded permanent markdowns could differ materially from management’s initial estimates based on future customer demand or economic conditions.

Property and Equipment

(f)Property and Equipment—Property and equipment are recorded at cost less accumulated depreciation. Furniture, fixtures, leasehold improvements, finance leases and equipment are depreciated on a straight‑line basis over the estimated useful lives of the assets as follows:

Estimated Useful Lives

Furniture and fixtures	3 to 7 years
Leasehold improvements	Shorter of useful life or lease term
Equipment	5 to 10 years
Assets under finance lease	Shorter of useful life or lease term
Software	3 to 10 years

Upon sale or retirement of an asset, the related cost and accumulated depreciation are removed from our balance sheet and any gain or loss is recognized in the statement of operations. Expenditures for maintenance, minor renewals and repairs are expensed as incurred, while major replacements and improvements are capitalized.

Deferred Financing Costs

(g)Deferred Financing Costs— Deferred financing costs represent costs paid in connection with obtaining bank and other long‑term financing. These costs for the term loan are reported in the balance sheet as a direct deduction from the face amount of the term loan and the ABL credit agreements (defined in Note 3 below) are presented as deferred financing costs in the balance sheet.

Income Taxes

(h)Income Taxes—Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the date of enactment. Valuation allowances are established against deferred tax assets when it is more likely than not that the realization of those deferred tax assets will not occur. Valuation allowances are released when positive evidence becomes available that future taxable income is sufficient to utilize the underlying deferred tax assets.

We file our annual federal income tax return on a consolidated basis. Furthermore, we recognize uncertain tax positions when we have determined it is more likely than not that a tax position will be sustained upon examination. However, new information may become available, or applicable laws or regulations may change, thereby resulting in a favorable or unfavorable adjustment to amounts recorded.

On March 27, 2020, in an effort to mitigate the economic impact of the COVID-19 pandemic, the U.S. Congress enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act included certain corporate income tax provisions, which among other things, included a five-year carryback of net operating losses and acceleration of the corporate AMT credit. The Company has evaluated the CARES Act and it did not have a material impact on the income tax provision. The CARES Act also contains provisions for deferral of the employer portion of social security taxes incurred through the end of

calendar 2020 and an employee retention credit, a refundable payroll credit for 50% of wages and health benefits paid to employees not providing services due to the pandemic. As a result of the CARES Act, we continued to defer qualified payroll taxes through December 31, 2020. As of July 2, 2022, we have $2.6 million in current qualified deferred payroll taxes in “Accrued Liabilities" in the Consolidated Balance Sheets, which are due December 31, 2022.

Self Insurance Reserves

(i)Self-Insurance Reserves—We use a combination of insurance and self‑insurance plans to provide for the potential liabilities associated with workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Our stop loss limits per claim are $500,000 for workers’ compensation, $250,000 for general liability, and $150,000 for medical. Liabilities associated with the risks that are retained by us are estimated, in part, by historical claims experience, severity factors and the use of loss development factors by third-party actuaries.

The insurance liabilities we record are primarily influenced by the frequency and severity of claims and include a reserve for claims incurred but not yet reported. Our estimated reserves may be materially different from our future actual claim costs, and, when required adjustments to our estimate reserves are identified, the liability will be adjusted accordingly in that period. Our self‑insurance reserves for workers’ compensation, general liability and medical were $6.9 million, $0.6 million, and $1.0 million, respectively, at July 2, 2022, and $7.3 million, $1.2 million, and $1.0 million, respectively, at June 30, 2021.

We recognize insurance expenses based on the date of an occurrence of a loss including the actual and estimated ultimate costs of our claims. Claims are paid from our reserves and our current period insurance expense is adjusted for the difference in prior period recorded reserves and actual payments as well as changes in estimated reserves. Current period insurance expenses also include the amortization of our premiums paid to our insurance carriers. Expenses for workers’ compensation, general liability and medical insurance were $2.3 million, $3.4 million and $7.0 million, respectively, for the fiscal year ended July 2, 2022, $1.4 million, $3.7 million, and $7.8 million, respectively, for the fiscal year ended June 30, 2021, and $2.7 million, $3.3 million and $8.7 million, respectively, for the fiscal year ended June 30, 2020.

Revenue Recognition

(j)Revenue Recognition—Our revenue is earned from sales of merchandise within our stores and is recorded at the point of sale and conveyance of merchandise to customers. Revenue is measured based on the amount of consideration that we expect to receive, reduced by point of sale discounts and estimates for sales returns, and excludes sales tax. Payment for our sales is due at the time of sale.

We maintain a reserve for estimated sales returns, and we use historical customer return behavior to estimate our reserve requirements. No impairment of the returns asset was indicated or recorded for the fiscal year ended July 2, 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 Consolidated Statements of Operations. Breakage income recognized was $0.7 million, $0.4 million, and $0.8 million for the fiscal years ended July 2, 2022, June 30, 2021, and 2020, respectively. The gift card liability totals $1.1 million and $1.0 million included in “Accrued Liabilities” in the Consolidated Balance Sheets at July 2, 2022 and June 30, 2021, respectively (See Note 5).

Advertising

(k)Advertising—Costs for direct mail, television, radio, newspaper, digital and other media are expensed as the advertised events take place. Advertising expenses for the fiscal years ended July 2, 2022, June 30, 2021, and 2020 were $6.6 million, $8.3 million, and $18.6 million, respectively. We do not and did not receive consideration from vendors to support our advertising expenditures during fiscal 2022, 2021 and 2020.

Share-Based Compensation

(l)Share‑Based Compensation— The Company accounts for share-based compensation in accordance ASC 718, Compensation-Stock Compensation, which requires the fair value of share-based payments to be recognized in the consolidated financial statements as share-based compensation expense over the requisite service period. For time-based awards, share-based compensation expense is recognized on a straight-line basis, net of forfeitures, over the requisite service period for awards that actually vest. For performance-based awards, share-based compensation expense is estimated based on achievement of the performance condition and is recognized using the accelerated attribution method over the requisite service period for awards that actually vest. Share-based compensation expense is recorded in the selling, general and administrative expenses line in the consolidated statements of operations. ASC 718 also provides guidance for determining whether certain financial instruments awarded in share-based payment transactions are liabilities. The guidance requires that instruments that include conditions other than service, performance or market conditions that affect their fair value, exercisability or vesting be classified as a liability and be remeasured at fair value at each fiscal period (See Note 7 for further discussion on share-based compensation).

During fiscal years ended July 2, 2022, and June 30, 2021, no stock options were granted. The fair value of each stock option granted during the fiscal year ended June 30, 2020, was estimated at the date of grant using a Black‑Scholes option pricing model, using the following assumptions:

	Fiscal Years Ended
	July 2,		June 30,		June 30,
	2022		2021		2020
Risk-free interest rate		—		—	2.4%
Expected term (years)		—		—	4.6
Expected stock volatility		—		—	64.8%
Expected dividend yield		—		—	0.0%

•Risk‑free interest rate - the risk‑free interest rate is the constant maturity risk-free interest rate for U.S. Treasury instruments with terms consistent with the expected lives of the awards.

•Expected term - the expected term of an option is based on our historical review of employee exercise behavior based on the employee class (executive or non‑executive) and based on our consideration of the remaining contractual term if limited exercise activity existed for a certain employee class.

•Expected stock volatility - the expected stock volatility is based on both the historical volatility of our stock based on our historical stock prices and implied volatility of our traded stock options.

•Expected dividend yield - the expected dividend yield is based on our expectation of not paying dividends on our common stock for the foreseeable future.

Net Earnings/(Loss) Per Common Share

(m)Net Earnings/(Loss) Per Common Share—Basic net earnings/(loss) per common share for the fiscal years ended July 2, 2022, June 30, 2021, and 2020, was calculated by dividing net earnings/(loss) by the weighted average number of common shares outstanding for each period. Diluted net earnings/(loss) per common share for the fiscal years ended July 2, 2022, June 30, 2021, and 2020 was calculated by dividing net earnings/(loss) by the weighted average number of common shares including the impact of dilutive common stock equivalents and warrants (unless anti-dilutive) as shown in Note 10.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

(n)Impairment of Long‑Lived Assets and Long‑Lived Assets to Be Disposed Of—Long‑lived assets, principally property and equipment, including leasehold improvements, and lease right-of-use ("ROU") assets are reviewed for impairment when, in management’s judgment, events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. If the carrying value of the asset or asset group exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the asset group, the Company will write the carrying value down to the fair value in the period identified. Since there is typically no active market for our long-lived tangible assets, we estimate fair values based on the expected future cash flows. We estimate future cash flows based on store-level historical results, current trends, and operating and cash flow projections. We also perform an entity-wide assessment for impairment of shared assets such as our distribution center and corporate right of use assets using the residual cash flow method. While we believe our estimates and judgments about future cash flows are reasonable, future impairment charges may be required if the expected cash flow estimates, as projected, do not occur or if events change requiring us to revise our estimates.

Assets subject to fair value measurement under ASC 820, “Fair Value Measurement”, are categorized into one of three different levels of the fair value hierarchy depending on the observability of the inputs employed in the measurement, as follows:

•Level 1 – observable inputs that reflect quoted prices (unadjusted) for identical assets in active markets.

•Level 2 – inputs that reflect quoted prices for identical assets in markets which are not active; quoted prices for similar assets in active markets; inputs other than quoted prices that are observable for the asset; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•Level 3 – unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. See Note 4 and Note 8 for additional information.

Intellectual Property

(o)Intellectual Property—Our intellectual property primarily consists of indefinite-lived trademarks. We evaluate annually whether the trademarks continue to have an indefinite life. Trademarks and other intellectual property are reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present.

Due to change in the Company’s management in the fourth quarter of fiscal 2021 and their future strategy related to the reduced use of certain intellectual properties, the Company concluded the related assets no longer held value which resulted in a $1.6 million impairment of the intangible assets.

Asset Retirement Obligations

(p)Asset Retirement Obligations—We account for asset retirement obligations (“ARO”) in accordance with ASC 410, Asset Retirement and Environmental Obligations, which requires the recognition of a liability for the fair value of a legally required asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. Our ARO liabilities are associated with the disposal and retirement of leasehold improvements and removal of installed equipment, resulting from contractual obligations, at the end of a lease to restore a facility to a condition specified in the lease agreement.

For leases that contractually result in an ARO, we record the net present value of the ARO liability and also record a related capital asset, in an equal amount. The estimated ARO liability is based on a number of assumptions, including costs to return facilities back to specified conditions, inflation rates and discount rates. Accretion expense related to the ARO liability is recognized as operating expense in our Consolidated Statements of Operations. The capitalized asset is depreciated on a straight-line basis over the useful life of the related leasehold improvements. Upon ARO fulfillment, any difference between the actual retirement expense incurred and the recorded estimated ARO liability is recognized as an operating gain or loss in our Consolidated Statements of Operations. Our ARO liability, which totaled $1.1 million as of July 2, 2022, is included in “Other liabilities—non-current” on our Consolidated Balance Sheet at July 2, 2022. Our ARO liability, which totaled $1.0 million as of June 30, 2021, is included in “Other liabilities—non-current” on our Consolidated Balance Sheet at June 30, 2021.

Leases

(q)Leases—We adopted ASU No. 2016-02, “Leases (Topic 842)” (“ASC 842”) effective July 1, 2019 using the modified retrospective adoption method, which resulted in an adjustment to opening retained earnings of $0.6 million as of July 1, 2019 to recognize impairment of the opening right-of-use asset balance for two stores for which assets had been previously impaired under ASC 360, “Property, Plant, and Equipment.” We utilized the simplified transition option available in ASC 842, which allowed the continued application of the legacy guidance in ASC 840, including disclosure requirements, in the comparative periods presented in the year of adoption.

We conduct substantially all operations from leased facilities, including our corporate offices in Dallas and the Dallas warehouse, distribution, and retail complex, which were leased on December 31, 2020, subsequent to the sale and leaseback of those facilities on that date. Our retail store locations, our corporate office and our distribution center are under operating leases that will expire over the next 1 to 10 years. Many of our leases include options to renew at our discretion. We include the lease renewal option periods in the calculation of our operating lease assets and liabilities when it is reasonably certain that we will renew the lease. We also lease certain equipment under finance leases that generally expire within 5 years.

In addition, subsequent to the petition date noted above, we commenced negotiations with our landlords on substantially all of our ongoing leases, resulting in significant modifications and remeasurement recorded in the fiscal 2021. As a result of the remeasurements and terminations of rejected leases, we reduced our operating lease ROU assets by approximately $31.0 million and our operating lease liabilities by approximately $124.0 million, recording a gain of approximately $93 million, which would have been reduced by the $80.1 million impairment loss recorded on ROU assets in fiscal 2020, if the liability had been adjusted in the same fiscal year. The results of our fourth quarter fiscal 2020 impairment analysis indicated an impairment of our property and equipment as well as operating lease ROU assets at approximately 200 of our stores along with property and equipment of our Phoenix distribution center facility totaling $80.1 million, which is included in restructuring costs in the consolidated statement of operations for fiscal 2020. The impairments were the result of closing plans for these stores and the Phoenix distribution center. The $93 million gain was further reduced by an amount of estimated claims allowable by the bankruptcy court, resulting in a $66 million net gain which is included in Reorganization items, net (see Note 2) in the Consolidated Statement of Operations.

Legal Proceedings

(r)Legal Proceedings— Information related to the Chapter 11 Cases that were filed on May 27, 2020, is included in Note 1 (under the heading “Emergence from Chapter 11 Bankruptcy Proceedings”) and Note 2 in the Notes to Consolidated Financial Statements.

In addition, we are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established when a loss is considered probable and are based on management’s best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.

Recent Accounting Pronouncements

(s)Accounting Pronouncements Recently Adopted— In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. We adopted this standard in the first quarter of fiscal 2022 and it did not result in a material impact to the Company’s consolidated financial statements.

In March 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815w-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). This update is intended to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange and is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for all entities, including adoption in an interim period. We adopted this standard in the first quarter of fiscal 2022 and it did not result in a material impact to the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. The guidance was effective upon issuance and may be applied prospectively to contract modifications made, hedging relationships entered into, and other transactions affected by reference rate reform, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected. We do not have any receivables, hedging relationships, or lease agreements that reference LIBOR or another reference rate expected to be discontinued. We are currently evaluating the impact of the new guidance on our consolidated financial statements; however, we have determined that, of our current debt commitments as outlined in detail in Note 3, only the obligations under the Post-Emergence ABL Facility may be impacted by ASU 2020-04. Our Term Loan described in Note 3 has fixed interest rate and our New ABL Credit Agreement bears interest at a variable rate based on adjusted term Secured Overnight Financing Rate ("SOFR").