We encourage you to read this "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") in conjunction with the corresponding section included in our Annual Report on Form 10-K for the year endedJuly 2, 2022 . Background We are one of the original off-price retailers and a leading destination for unique home and lifestyle goods, selling high-quality products at prices generally below those found in boutique, specialty and department stores, catalogs and on-line retailers. Our customers come to us for an ever-changing, exceptional assortment of brand names at great prices. Our strong value proposition has established a loyal customer base, who we engage regularly with social media, email and digital media. The COVID-19 pandemic has had an adverse effect on our business operations, store traffic, employee availability, financial conditions, results of operations, liquidity and cash flow. OnMarch 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. InMay 2020 , we filed voluntary petitions under Chapter 11 of the Bankruptcy Code. During the pendency of our Chapter 11 proceedings, we continued to operate our businesses as "debtors-in-possession" under the jurisdiction of theBankruptcy Court . As allowed by state and local jurisdictions, our stores gradually reopened as of the end ofJune 2020 . In accordance with our bankruptcy plan of reorganization, described below, we completed the permanent closure of 197 stores in the first quarter of fiscal 2021 and the closure of ourPhoenix, 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. We emerged from our Chapter 11 proceedings onDecember 31, 2020 . See Notes 1, 2, 3, 7, 8 and 11 to our consolidated financial statements for additional information regarding our Chapter 11 proceedings and related financings. 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.
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Since the Company's emergence from bankruptcy inDecember 2020 , the Company's results of operations have been negatively impacted by a variety of factors, including pandemic-related disruptions to supply chains and higher supply chain costs resulting from higher freight costs and other supply chain conditions, and reduced store traffic and sales as a result of increased fuel prices. InMay 2022 , the Company entered into a new asset-based credit facility in order to bolster its liquidity.
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Subsequent toMay 2022 , the Company experienced a further significant deterioration in its financial condition and liquidity, and the Company engaged in an extensive process to obtain additional financing to support the Company's capital needs. OnSeptember 20, 2022 , the Company andTuesday Morning, Inc. (the "Borrower") entered into the Note Purchase Agreement, which provided for a$35 million private placement (the "Private Placement") of convertible debt securities (the "Convertible Debt"). OnSeptember 20, 2022 , the Private Placement closed withTASCR Ventures, LLC (the "SPV"), a special purpose entity formed byRetail Ecommerce Ventures LLC ("REV") andAyon Capital L.L.C. ("Ayon"), purchasing$32.0 million in aggregate principal amount of the Convertible Debt. In addition, members of the Company's management team purchased$3.0 million in aggregate principal amount of the Convertible Debt. See Note 3 to our unaudited consolidated financial statements herein for additional information regarding the terms of the Convertible Debt.
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The Convertible Debt is convertible into shares of the Company's common stock at a conversion price of$0.077 per share, subject to anti-dilution adjustments. A portion of the Convertible Debt issued to the SPV was immediately convertible for up to 90 million shares of the Company's common stock. OnSeptember 21, 2022 , the SPV elected to immediately convert a portion of the Convertible Debt into 90 million shares of the Company's common stock, and the SPV acquired a majority of the Company's outstanding common stock. Upon conversion in full of the Convertible Debt and based on the Company's outstanding shares on a fully diluted basis as ofOctober 1, 2022 , the SPV would hold approximately 75% of the total diluted voting power of the Company's common stock (not including any additional Convertible Debt that may be issued if the Company is required or elects to make in-kind payments of interest during the two-year period following closing of the Private Placement).
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In accordance with the terms of the Note Purchase Agreement, the SPV designated each ofTai Lopez ,Alexander Mehr ,Maya Burkenroad ,Sandip Patel andJames Harris (collectively, the "SPV Designees") to serve as directors of the Company effective upon the closing of the Private Placement onSeptember 20, 2022 . In connection with the election the SPV Designees to the Company's board of directors, each ofDouglas J. Dossey ,Frank M. Hamlin ,W. Paul Jones ,John Hartnett Lewis andSherry M. Smith resigned from the Company's board of directors. OnSeptember 28, 2022 , each of Anthony F. 27 -------------------------------------------------------------------------------- Crudele,Marcelo Podesta andReuben E. Slone resigned from the board of directors andAndrew T. Berger ,Michael Onghai andZ. John Zhang were elected as directors in accordance with the Note Purchase Agreement. OnOctober 31, 2022 ,Mr. Harris resigned from the Company's board of directors.
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The Nasdaq Stock Market rules would normally require stockholder approval prior to closing the Private Placement; however, the Company requested and 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.
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As a result of the Private Placement and subsequent conversion of a portion of the convertible debt to common stock, the Company experienced an ownership change as defined in Section 382 of the Internal Revenue Code (Section 382) as ofSeptember 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 full valuation allowance the Company has set up previously on its deferred tax asset.
Key Metrics for the Three Months Ended
Key operating metrics for continuing operations for the three months ended
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Net sales for the three months ended
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Gross margin for the three months ended
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Selling, general and administrative expenses ("SG&A") for the three months endedOctober 1, 2022 increased$0.2 million or 0.4% to$60.5 million , from$60.3 million for the three months endedSeptember 30, 2021 . As a percentage of sales for the three months endedOctober 1, 2022 , SG&A was 38.5% compared to 34.1% for the three months endedSeptember 30, 2021 .
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Restructuring and impairment charges were not incurred for the three months
ended
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Reorganization items were not incurred for the three months ended
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Our net loss for the three months endedOctober 1, 2022 was$28.2 million , or diluted net loss per share of$0.29 compared to a net loss for the three months endedSeptember 30, 2021 of$14.6 million , or diluted loss per share of$0.17 .
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As shown under the heading "Non-GAAP Financials Measures" below, EBITDA for the three months endedOctober 1, 2022 was a negative$22.7 million compared to a negative$9.5 million for the three months endedSeptember 30, 2021 . Adjusted EBITDA for the three months endedOctober 1, 2022 was a negative$20.0 million compared to a negative$5.7 million for the three months endedSeptember 30, 2021 . 28
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Key balance sheet and liquidity metrics for the three months ended
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Cash, cash equivalents, and restricted cash decreased by$0.9 million to$6.9 million atOctober 1, 2022 from$7.8 million atJuly 2, 2022 . The decrease in cash, cash equivalents and restricted cash were primarily driven by payment of financing fees related to our new ABL Facility and Private Placement debt. See Note 3 to our condensed consolidated financial statements herein for additional information.
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As ofOctober 1, 2022 , total liquidity, defined as cash and cash equivalents plus$25.3 million availability for borrowing under our New ABL Facility, and less$5.6 million in credit cards receivable, was$26.6 million . In addition, we had$31.4 million of borrowings outstanding under our New ABL Facility and$14.6 million of letters of credit outstanding.
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Inventory levels decreased by$16.0 million atOctober 1, 2022 to$132.5 million from$148.5 million atJuly 2, 2022 . As ofOctober 1, 2022 , inventory levels decreased by 10.8% due to shift in the timing of holiday inventory build.
Store Data
The following table presents information with respect to our stores in operation during each of the fiscal periods:
Store Openings (Closings) Three Months Ended Three Months Ended Fiscal Year October 1, 2022
2022 Open at beginning of period 489 490 490 Opened - - 3 Closed (2 ) (1 ) (4 ) Open at end of period 487 489 489 New stores are included in the same store sales calculation starting with the sixteenth month following the date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is generally considered the same store for purposes of this computation. Stores that are closed are included in the computation of comparable store sales until the month of closure. Results of Operations
Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in the second quarter of each fiscal year.
There can be no assurance that the trends in sales or operating results will continue in the future.
Three Months Ended
Net sales for the three months endedOctober 1, 2022 were$157.1 million , with a decrease of 11.2%, compared to$176.9 million for the three months endedSeptember 30, 2021 , primarily driven by economic conditions, inflation and recession rumors. Comparable store sales for the three months endedOctober 1, 2022 , decreased 10.4% due to 13.1% decrease in customer transactions offset by a 3.9% increase in average ticket primarily due to incremental inflationary pressures. Gross margin for the three months endedOctober 1, 2022 was$34.6 million , a decrease of 32.1% compared to$51.0 million for the three months endedSeptember 30, 2021 . As a percentage of net sales, gross margin decreased to 22.0% in the first quarter of fiscal 2022 compared with 28.8% in the first quarter of fiscal 2021. The decrease in gross margin as a percentage of net sales was primarily a result of increased recognized costs related to supply chain and transportation expenses in the three months endedOctober 1, 2022 . SG&A increased$0.2 million to$60.5 million in the three months endedOctober 1, 2022 , compared to$60.3 million for the three months endedSeptember 30, 2021 . As a percentage of net sales, SG&A increased 440 basis points to 38.5% for the three months endedOctober 1, 2022 , compared to 34.1% for the three months endedSeptember 30, 2021 , due to deleveraging related to the sales decrease. Restructuring and impairment charges were not incurred during the three months endedOctober 1, 2022 , compared to net charge of$2.4 million during the three months endedSeptember 30, 2021 . During the three months endedSeptember 30, 2021 , adjustments include a software impairment charge of$2.1 million as well as$0.3 million in employee retention cost. Our operating loss was$25.9 million for the three months endedOctober 1, 2022 as compared to an operating loss of$11.7 million for the three months endedSeptember 30, 2021 . Interest expense increased$0.3 million to$2.0 million for the three months endedOctober 1, 2022 compared to$1.7 million for the three months endedSeptember 30, 2021 . Interest expense for the three months endedOctober 1, 2022 was primarily due to the interest and amortization of financing fees incurred on our New ABL Facility. Interest expense for the three months endedSeptember 30, 2021 was primarily due to interest and amortization of financing fees incurred on the Post-Emergence ABL Facility and accrued interest on our term load. See Note 3 to our unaudited condensed consolidated financial statements herein for additional information. Reorganization items were not incurred during the three months endedOctober 1, 2022 since our exit from bankruptcy had concluded in the fiscal year 2022. The reorganization items, net charge of$1.3 million in the three months endedSeptember 30, 2021 , related to$1.1 million loss of claims related cost and$0.2 million of professional and legal fees related to our reorganization. 29 -------------------------------------------------------------------------------- Income tax expense for the three months endedOctober 1, 2022 was$149.0 thousand compared to an income tax benefit of$49.0 thousand in the three months endedSeptember 30, 2021 . The effective tax rates for the three months endedOctober 1, 2022 andSeptember 30, 2021 were (0.5%) and 0.3%, respectively. Income tax expense is driven mainly byTexas franchise tax andOregon commercial activity tax. We currently believe the expected effects on future year effective tax rates to continue to be nominal until the cumulative losses and valuation allowance are fully utilized. Our net loss for the three months endedOctober 1, 2022 was$28.2 million , or diluted net losses per share of$0.29 which included an$8.8 million benefit related to the mark-to-market adjustments of the convertible notes issued in conjunction with the strategic investment received inSeptember 2022 , and an$8.4 million loss related to the extinguishment of debt from conversion of notes into common stock, compared to a net loss for the three months endedSeptember 30, 2021 of$14.6 million , or diluted net losses per share of$0.17 .
Non-GAAP Financial Measures
We define EBITDA as net earnings or net loss before interest, income taxes, depreciation, and amortization. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including certain non-cash items and other items that we believe are not representative of our core operating performance. These measures are not presentations made in accordance with GAAP. EBITDA and Adjusted EBITDA should not be considered as alternatives to net earnings or loss as a measure of operating performance. In addition, EBITDA and Adjusted EBITDA are not presented as, and should not be considered as a measure of liquidity. EBITDA and Adjusted EBITDA should not be considered in isolation, or as substitutes for analysis of our results as reported under GAAP and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by such adjustments. We believe it is useful for investors to see these EBITDA and Adjusted EBITDA measures that management uses to evaluate our operating performance. These non-GAAP financial measures are included to supplement our financial information presented in accordance with GAAP and because we use these measures to monitor and evaluate the performance of our business as a supplement to GAAP measures and we believe the presentation of these non-GAAP measures enhances investors' ability to analyze trends in our business and evaluate our performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The non-GAAP measures presented may not be comparable to similarly titled measures used by other companies.
The following table reconciles net earnings/(loss), the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA, each of which is a non-GAAP financial measure (in thousands):
Three Months Ended October 1, September 30, 2022 2021 Net earnings/(loss) (GAAP)$ (28,163 ) $ (14,603 ) Depreciation and amortization 3,315 3,397 Interest expense, net 2,027 1,716 Income tax expense 149 (49 ) EBITDA (non-GAAP)$ (22,672 ) $ (9,539 ) Share based compensation expense (1) 1,565 1,173 Restructuring and impairment charges (2) - 2,430 Reorganization items, net (3) - 1,292 Gain on derivative (4) (8,780 ) - Loss on extinguishment of debt (5) 8,382 - Other (6) 1,548 (1,017 ) Adjusted EBITDA (non-GAAP)$ (19,957 ) $ (5,661 ) (1) Adjustment includes charges related to share-based compensation programs, which vary from period to period depending on volume, timing and vesting of awards. We adjust for these charges to facilitate comparisons from period to period
(2) For the three months ended
(3) For the three months endedSeptember 30, 2021 , adjustments included claims related cost as well as professional and legal fees related to our reorganization. See note 2 to our unaudited consolidated financial statements herein for further discussion. (4) For the three months endedOctober 1, 2022 , adjustments included non-cash gains related to the mark-to-market adjustments of the derivative liability issued in conjunction with the strategic investment received inSeptember 2022 . See note 3 to our unaudited consolidated financial statements herein for further discussion. (5) For the three months endedOctober 1, 2022 , loss on extinguishment of debt related to the conversion of debt to common stock and repayment of FILO A facility. See note 3 to our unaudited consolidated financial statements herein for further discussion. (6) For the three months endedOctober 1, 2022 , adjustments included third party expenses incurred for the modification of the Term Loan directly expensed, non-cash benefit recognition related to cash settled awards in our long-term incentive plan. See note 3 to our 30 -------------------------------------------------------------------------------- unaudited consolidated financial statements herein for further discussion. For the three months endedSeptember 30, 2021 , adjustments included non-cash benefit recognized related to cash settled awards in our long-term incentive plan.
Liquidity and Capital Resources
Cash flows for the three months ended
Cash Flows from Operating Activities
In the three months endedOctober 1, 2022 , net cash provided by operating activities was$2.3 million , compared to cash used in operating activities of$33.2 million in the same period last year. Net cash used in operating activities in the three months endedOctober 1, 2022 was primarily driven by a reduction in inventory purchases and payments of operating expenses. See "Recent Liquidity Developments and Outlook" below for additional information. Net cash used in operating activities in the three months endedSeptember 30, 2021 was primarily driven by the increase in inventory purchases and payments of operating expenses as part of the ordinary course of business.
Cash Flows from Investing Activities
Net cash used in investing activities for the three months endedOctober 1, 2022 and three months endedSeptember 30, 2021 was$1.3 million and$1.8 million respectively. Investing activity related primarily to capital expenditures in enhancements to our store fleet and new stores, as well as investments in technology.
Cash Flows from Financing Activities
Net cash used in financing activities of$1.9 million for the three months endedOctober 1, 2022 related primarily to net payments under our New ABL Facility, the paydown of FILO A and the prepayment of FILO B, largely offset by the issuance of the Convertible Debt. See note 3 to our unaudited consolidated financial statements herein for further discussion. Net cash provided by financing activities of$10.8 million for the three months endedSeptember 30, 2021 related primarily to net borrowings under our Post-Emergence ABL Facility
Liquidity
Historically, we have financed our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under an asset-based, senior secured revolving credit facility.
New ABL Credit Agreement
OnMay 9, 2022 ,Tuesday Morning, Inc. (the "Borrower") and each other subsidiary of the Company entered into a Credit Agreement (the "New ABL Credit Agreement") with the lenders named therein,Wells Fargo Bank, National Association , as administrative agent, and 1903PLoan Agent, LLC , as FILO B documentation agent. The New ABL Credit Agreement provides for (i) a revolving credit facility in an aggregate amount of$110.0 million (the "New ABL Facility"), which includes a$10.0 million sublimit for swingline loans and a$25.0 million sublimit for letters of credit, (ii) a first-in last-out term loan facility in an aggregate amount of$5.0 million (the "FILO A Facility") and (iii) an additional first-in last-out term loan facility in an aggregate amount of$5.0 million (the "FILO B Facility" and, collectively with the New ABL Facility and the FILO A Facility, the "New Facilities"). Each of the New Facilities will terminate, and outstanding borrowings thereunder will mature, on the earlier of (i)May 10, 2027 and (ii) the date that is 91 days prior to maturity of the Term Loan. The New ABL Credit Agreement includes conditions to borrowings, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. In addition, the Borrower and its subsidiaries must maintain borrowing availability under the New ABL Facility at least equal to the greater of (i)$7.5 million and (ii) 7.5% of the Modified Revolving Loan Cap (as defined in the New ABL Credit Agreement). For additional information regarding the New ABL Credit Agreement and the New Facilities, see Note 3 to our unaudited condensed consolidated financial statements herein.
Recent Liquidity Developments and Outlook
Subsequent to theJuly 2022 borrowing, the Company experienced a further deterioration in its financial condition and liquidity and began to withhold payments from vendors beginning in lateAugust 2022 and until completion of the Private Placement onSeptember 20, 2022 . The proceeds of the Private Placement were used (i) to repay all of the outstanding principal amount of$5.0 million of the FILO A term loans under the New ABL Credit Agreement; (ii) to repay$2.5 million of the FILO B term loans under the New ABL Credit Agreement; (iii) to repay a portion of the revolving loans under the New ABL Credit Agreement; and (iv) to pay transaction costs. The proceeds of the Private Placement will also be used for working capital and other general corporate purposes of the Company and its subsidiaries. AtOctober 1, 2022 we are in compliance with covenants in the New ABL Facility, the Term Loan and the Convertible Debt. As ofOctober 1, 2022 , we had$31.4 million of borrowings outstanding under our New ABL Facility and,$14.6 million of letters of credit outstanding. We currently have borrowing availability of$25.3 million under our New ABL Facility, as ofOctober 1, 2022 . Liquidity, 31
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defined as cash and cash equivalents plus the
Going forward, we expect to fund our operations with funds generated from operating activities, available cash and cash equivalents, and borrowings under the New ABL Facility.
We incurred capital expenditures of approximately$1.1 million , net of landlord contributions in the first three months of fiscal 2023. Capital expenditures are anticipated to be about$5.0 million total for fiscal year 2023. The amounts include costs to enhance our existing store fleet, investment in technology as well as ourDallas distribution center. We do not presently have any plans to pay dividends or repurchase shares of our common stock. Under the terms of the New ABL Credit Agreement and the Term Loan, we are subject to restrictions on our ability to pay dividends or repurchase shares of our common stock, and must maintain certain minimum levels of borrowing availability.
Off-Balance Sheet Arrangements and Contractual Obligations
We had no off-balance sheet arrangements as of
There have been no material changes to our contractual obligations as discussed
in our Annual Report on Form 10-K for the fiscal year ended
Critical Accounting Policies
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared pursuant to the rules and regulations of theSEC . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of certain assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On a recurring basis, we evaluate our significant estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ materially from these estimates. Other than as described in Note 1 of our unaudited condensed consolidated financial statements herein, as ofOctober 1, 2022 and the derivative liability discussed below, there were no changes to our critical accounting policies from those listed in our Annual Report on Form 10-K for the fiscal year endedJuly 2, 2022 . Under the retail inventory method, permanent markdowns result in cost reductions in inventory at the time the markdowns are taken. We also utilize promotional markdowns for specific marketing efforts used to drive higher sales volume and customer transactions for a specified period of time. Promotional markdowns do not impact the value of unsold inventory and thus do not impact cost of sales until the merchandise is sold. Markdowns and damages during the first quarter of fiscal 2023 were 5.0% of sales compared to 3.5% of sales for the same period last year. If our sales forecasts are not achieved, we may be required to record additional markdowns that could exceed historical levels. The effect of a 0.5% markdown in the value of our inventory atOctober 1, 2022 would result in a decline in gross margin and diluted earnings per share for the first quarter of fiscal 2023 of$0.7 million and$0.01 , respectively.
Derivative Liability
OnSeptember 20, 2022 , the Company issued the Convertible Debt, which contains a conversion feature. When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the requirements to be treated as a derivative, as follows: a) one or more underlyings, typically the price of our common stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies for the scope exception for certain contracts involving an issuer's own equity. The scope exception applies if the contract is both a) indexed to its own stock; and b) classified in shareholders' equity in its statement of financial position. We determined that, as of the date of issuance of the Convertible Notes, the conversion feature in the Convertible Notes met the requirements to be treated as a derivative and must be separated from the host instrument. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date, at the date of conversions to equity, and as of each subsequent reporting period. As of the inception date, the Company recorded a derivative liability associated with the conversion option of$22.4 million within our condensed consolidated balance sheets. This amount was reduced by$2.8 million upon re-valuation of the derivative liability on the day of conversion, prior to recording of the conversion. Upon the conversion of a portion of the Convertible Notes onSeptember 22, 2022 , (approximately$6.9 million in principal amount), the Company recorded a reduction of$2.5 million in debt,$3.9 million from our derivative liability, and loss on extinguishment of debt of$7.7 million , and a resulting impact of$13.5 million to stockholders' equity to reflect the conversion from debt to common stock and amortization of debt issuance cost of$0.6 million . Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liabilities recorded as charges or credits to income, in the period in which the changes occur. For bifurcated conversion options that are accounted for as a derivative instrument liabilities, we use the Binomial Lattice model through a Goldman Sachs implementation to estimate the fair value associated with the instrument. This model requires assumptions related to the remaining term of the instrument, risk-free rates of return, our current common stock price and the expected volatility of our Common Stock price over the life of the 32 -------------------------------------------------------------------------------- derivative. The Company determined that as of the assessment date,October 1, 2022 , the fair value of the bifurcated embedded derivatives is$9.8 million . For the three months endedOctober 1, 2022 , the Company recorded a gain on derivative liability of$8.8 million within our condensed consolidated statements of operations, and a resulting decrease to our derivative liability within our condensed consolidated balance sheets. As of the end of each reporting period, we will be required to reassess whether the embedded conversion option in the Convertible Debt continues to meet the bifurcation criteria. If we determine the embedded conversion option in the Convertible Notes no longer meets the bifurcation criteria, we will be required to account for the previously bifurcated conversion option reclassifying the carrying amount of the liability for the conversion option (that is, its fair value on the date of reclassification) to shareholders' equity. Any debt discount recognized when the conversion option was bifurcated from the Convertible Debt instrument shall continue to be amortized. For a further discussion of the judgments we make in applying our accounting policies, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year endedJuly 2, 2022 .
Recent Accounting Pronouncements
Please refer to Note 1 of our unaudited condensed consolidated financial statements herein for a summary of recent accounting pronouncements.
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