February 14, 2023 – Tuesday Morning Corporation and six affiliated Debtors (“Tuesday Morning” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Northern District of Texas, lead case number 23-90001 (Judge Edward L. Morris). The Debtors, an off-price retailer specializing in products for the home (487 stores in 40 states as at September 21, 2022), are represented by Deborah M. Perry of Munsch Hardt Kopf & Harr P.C. Further board-authorized engagements include (i) BDO USA  as restructuring advisor, (ii) Piper Sandler as investment banker and (iii) Stretto as claims agent. 

The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Centro Inc. ($1.4mn trade claim), (ii) Home Essentials and Beyond Inc. ($1.1mn trade claim) and (iii) Meyer Corp. ($830k trade claim).

Filing Date Highlights

• Off-Price Retailer (487 Stores) Files Chapter 22 with Over $100.0mn in Liabilities
• Filing Follows $32.0mn September 2022 "Lifeline" from New Owners Distressed E-Commerce Specialist Retail Ecommerce Ventures LLC and Ayon Capital
• In Addition to "Challenging Consumer Environment," Debtors Cite Changes to "Leadership Team" Following Wholesale Changes at Board and C-Suite
• Lines Up $51.5mn of DIP Financing to be Provided by Invictus Global Management, LLC
• Footprint Optimization Effort to Include Closing Stores "In Low-Traffic Regions" 

In a press release announcing the filing, Tuesday Morning notes that: "it is pursuing a financial and operational reorganization to enable the Company to reduce its outstanding liabilities, obtain significant and necessary capital, and ultimately transform into a nimbler retailer that serves heritage markets in a profitable manner….The Company has also obtained a commitment from Invictus Global Management, LLC (together with its affiliates, 'Invictus') to provide $51.5 million of debtor-in-possession ('DIP') financing to support ongoing operations during the proceedings. The DIP financing is subject to approval of the Bankruptcy Court.

During the restructuring process, Tuesday Morning plans to focus on optimizing its store footprint and focusing on its core and heritage markets. The Company intends to close stores in low-traffic regions while allocating the proper resources to remaining stores in high-traffic regions. The Company believes this targeted approach to winding down unprofitable and underperforming stores will position Tuesday Morning to emerge from bankruptcy with a profitable, cash-generating store fleet that serves its most engaged and loyal customers."

The Debtors return to bankruptcy comes notwithstanding the receipt of a $32.0mn lifeline (in the form of convertible debt) from Ayon Capital, LLC (“Ayon”) and Retail Ecommerce Ventures LLC (“REV,” which holds just over 50% of the Debtors' equity) in September 2022.

REV has established itself a something of a ubiquitous player in the distressed e-commerce space, having acquired the e-commerce assets of, inter alia, Pier 1 Imports, Linens ‘n Things, Stein Mart and Modell’s Sporting Goods, out of bankruptcy.

With the September 2022 financing, came a change of control of the Debtors and a wholesale replacement of the Debtors' board (only CEO Fred Hand staying on…and that only until he "decided to retire" six weeks later), with REV's Tai Lopez and Dr. Alex Mehr taking two board slots and REV and Ayon given the authority to fill three more. The Debtors also nominally got three independent directors, albeit also appointed by REV and Ayon.

The injection of financing, then heralded as providing "sufficient liquidity to pay down creditor and supplier obligations and sufficient liquidity to support operations moving forward," seems to have quickly proved insufficient with the Debtors back into the hunt for more capital just two months later citing "lower than forecast sales, increased insurance costs and costs relating to the separation with senior Company executives in November 2022 [resulting in a position where] the Company is facing near-term capital constraints and is actively seeking to raise additional capital." 

Less than two months after the REV and Ayon assumed control of the Debtors, the Debtors were suddenly afflicted by an acute case of the "great retirement-itis," with CEO Fred Hand, Chief Operating Officer (and interim Chief Financial Officer) Mark Katz and "Principal and Chief Merchant" Paul Metcalf all suddenly "deciding to retire." Stepping into the significant void, Andrew T. Berger, with the Debtors since his appointment to the Board as an independent seven weeks earlier) was appointed Chief Executive Officer (and taking over CFO responsibilities for good measure).

DIP Financing

The Debtors have yet to file a debtor-in-possession ("DIP") motion and there is no detail as to the terms of the $51.5mn of DIP financing that the Debtors report is to be supplied by Invictus. Invictus does, however, have an interesting existing relationship with the Debtors, having taken an activist role as an unsecured creditor ($6.0mn of claims) in the first Tuesday Morning bankruptcy; actively buying up claims and going as far as to file an objection seeking contractual (as opposed to federal judgment rate) interest in respect of general unsecured claims that were ultimately made whole in a bankruptcy which actually saw a return to equity (Invictus, had to settle for the federal judgment rate).

Voluntary Delisting

In a December 23, 2022 press release, the Company (NASDAQ: TUEM) announced that it had notified The Nasdaq Stock Market LLC (“Nasdaq”) of its decision to voluntarily delist its common stock from the Nasdaq Capital Market.

The press release notes: "Due to a number of factors, including lower than forecast sales, increased insurance costs and costs relating to the separation with senior Company executives in November 2022, the Company is facing near-term capital constraints and is actively seeking to raise additional capital. With the Company’s liquidity position and the potential benefits of listing in mind, the Board of Directors has determined that the voluntary delisting of the Company’s common stock is in the best interests of the Company and its stockholders.

A subsequently filed February 23rd 8-K confirmed the delisting.

Previous Bankruptcy

On December 31, 2020, the Debtors notified the Court that their Revised Second Amended Plan of Reorganization had become effective as of December 31, 2020 [Docket No. 1938]. The Debtors entered that that turn through the bankruptcy turnstiles with estimated assets of $92.0mn and estimated liabilities of $88.35mn. They also had a then footprint of 687 stores in 39 states.

In a December 23, 2020 press release (also 8-K here) noting the Plan's confirmation, the Debtors stated: “Under the terms of the Plan, the capital structure of the reorganized company is expected to consist of a $110 million asset-backed lending credit facility which will provide working capital and $25 million in principal amount of a new senior subordinated note. Additionally, approximately $40 million in cash proceeds from an upcoming backstopped rights offering will be applied to pay creditors under the Plan.”

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Berger Declaration”), Andrew T. Berger, the Debtors’ chief executive officer, detailed the events leading to Tuesday Morning’s Chapter 11 filing. The Berger Declaration provides: “On February 9, 2021, the Debtors received proceeds of approximately $40 million upon the closing of the rights offering contemplated by the Debtors’ plan of reorganization; however, following the Debtors’ exit from bankruptcy, the Debtors faced numerous challenges.

The Debtors’ business and financial performance are driven by in-person sales at their store locations, and the costs of procuring inventory and transporting such inventory to the stores. The Debtors’ financial performance has been negatively impacted by reduced foot traffic in stores, significant supply-chain disruptions and increased supply chain costs. As a result, the Debtors’ liquidity position has continued to deteriorate over time.

Prepetition Restructuring Initiatives

In May 2022, the Debtors experienced a significant deterioration in their financial condition and liquidity. In response, the Company engaged in an extensive process to obtain additional financing to support the Company’s needs. Through such efforts, the Debtors negotiated and entered into the Prepetition ABL Credit Facility, which replaced the Debtors’ existing ABL credit facility. Following the Debtors entry into the Prepetition ABL Credit Facility in May 2022, the Debtors engaged Piper Sandler to initiate a strategic process to solicit financing to fully fund the Debtors’ business plan, which was focused on improving the functionality of the Debtors’ Distribution Center and reducing logistics costs.

Piper Sandler began such outreach efforts in June 2022 and contacted a range of equity investors, credit funds, commercial banks and strategic players. Throughout the summer of 2022, the Debtors, in consultation with Piper Sandler, and Haynes and Boone, LLP ('Haynes and Boone'), received and negotiated proposals from various parties. Such efforts eventually culminated in the Note Purchase Agreement in September 2022. The Note Purchase Agreement resulted in $35 million in convertible debt financing.

Although the Debtors improved their liquidity position through such financing efforts, the Debtors’ financial position quickly deteriorated in the months leading up to the Petition Date. The Debtors engaged Haynes and Boone, LLP, BDO, and Piper Sandler to advise them in exploring various strategic alternatives. The Debtors, with the assistance of their advisors, determined that although a substantial subset of the Debtors’ stores remain profitable, the Debtors’ revenue and profitability as a whole are insufficient to support their debt service, working capital and capital expenditure requirements and that the Debtors would therefore require additional sources of financing. Left with no other alternative, the Debtors began to consider a chapter 11 process and began engaging in restructuring discussions with their prepetition lenders….

In January 2023, the Debtors received notices of default under the Prepetition ABL Credit Agreement, Prepetition Term Loan Credit Agreement and the Prepetition Convertible Note Purchase Agreement, and the Prepetition ABL Lenders put in place various reserve requirements under the Prepetition ABL Credit Facility. Additionally, by notice dated February 7, 2023, the Prepetition ABL Lenders accelerated the Debtors’ obligations under the Prepetition ABL Credit Facility and terminated the Debtors’ ability to make further borrowings to finance operations.

The Company has too many stores and stores in unprofitable locations. These stores are in the process of being closed and approximately 200 will remain open. Supply chain problems are being addressed and it is contemplated that cost savings will result from the fact that it is likely that Tuesday Morning Corporation will no longer be a publicly held company. With funding by Invictus, Tuesday Morning Corporation and its affiliated entities have the capability to be profitable companies….

As a going concern with approximately 200 profitable stores I believe that the Company will be an attractive acquisition candidate. Under immense timing pressure stemming from the ongoing store closing sales and the Debtors’ liquidity constraints, the Debtors engaged in simultaneous negotiations regarding the terms and final documentation of the Invictus DIP Facility to maximize the value of their estates. After extensive negotiations, the Debtors finalized the terms of the final documentation of the Invictus DIP Facility in the hours immediately preceding the filing of the chapter 11 petitions.

After evaluating alternatives, a special, independent committee of the Debtors’ board of directors, in consultation with the Debtors’ advisors, determined that filing the Chapter 11 Cases with the Invictus DIP Facility is the best and most efficient way to maximize a return for the Debtors, their estates and creditors. With the Invictus DIP funding, the closing of unprofitable stores and other operational improvements already under way, I believe the Debtors can be a viable, successful company.”

Prepetition Indebtedness

The Debtors’ funded debt obligations are comprised of Prepetition ABL Secured Indebtedness, Prepetition Term Loan Lenders’ Secured Indebtedness and Prepetition Convertible Note Secured Indebtedness.

1. Prepetition ABL Secured Indebtedness. Tuesday Morning, Inc., as lead borrower, and each of the remaining Debtors, as guarantors, Wells Fargo Bank, N.A. as administrative agent and 1903P Loan Agent, LLC, as FILO B documentation agent, are parties to the Prepetition ABL Credit Agreement dated as of May 9, 2022. The Prepetition ABL Credit Agreement provided for a senior secured asset based revolving credit facility in an amount up to $110,000,000, including the issuance of $25,000,000 of letters of credit. As of the Petition Date, the Debtors believe that the approximate aggregate amount owed to the Prepetition ABL Agent and the Prepetition ABL Lenders pursuant to the Prepetition ABL Claim Documents is $998,105.14 in revolving credit loans with the outstanding principal amount of $928,715.14 and accrued interest of approximately $69,390.00; FILO B Obligations in the amount of $7,422,050.00 with the outstanding principal amount of $7,375,000.00 and accrued interest of approximately $47,050.00.
2. Prepetition Term Loan Lenders’ Secured Indebtedness. Tuesday Morning, Inc., as lead borrower, and each of the remaining Debtors, as guarantors, Alter Domus (US) LLC, as administrative agent, are parties to that certain Prepetition Term Loan Agreement dated as of December 31, 2020, which provided for a term loan facility in an amount up to $25,000,000. As of the Petition Date, the Debtors believe the Prepetition Term Loan Representative and the Prepetition Term Loan Lenders are owed in an aggregate amount approximately $24,474,459.00 under the Prepetition Term Loan Claim Documents.
3. Prepetition Convertible Note Secured Indebtedness. On September 20, 2022, Tuesday Morning Corporation and TASCR Ventures CA, LLC, as FILO C Collateral Agent for the FILO C secured parties executed that certain Note Purchase Agreement. As of the Petition Date, the Debtors believe that they owe the Prepetition Convertible Notes Agent and the Prepetition Convertible Noteholders an approximate aggregate amount equal to $21,183,000.00, consisting of (i) a series of junior secured convertible notes in the outstanding principal amount of $7,742,479 (the “FILO C Notes”); (ii) a series of junior secured convertible notes in the approximate outstanding amount of $10,353,021 (the “JSC Notes”); and (i) a series of junior secured convertible notes in the approximate outstanding amount of $3,087,500 (the “Management JSC Notes”).

About the Debtors

According to the Debtors: “Tuesday Morning Corporation is one of the original off-price retailers specializing in name-brand, high-quality products for the home, including upscale home textiles, home furnishings, housewares, gourmet food, toys and seasonal décor, at prices generally below those found in boutique, specialty and department stores, catalogs and on-line retailers. Based in Dallas, Texas, the Company opened its first store in 1974 and currently operates 487 stores in 40 states."

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