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
ended July 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. 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. In May 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
the Bankruptcy Court. As allowed by state and local jurisdictions, our stores
gradually reopened as of the end of June 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 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. We emerged from our Chapter 11 proceedings on
December 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.

September 2022 Private Placement

•


Since the Company's emergence from bankruptcy in December 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. In May
2022, the Company entered into a new asset-based credit facility in order to
bolster its liquidity.

•


Subsequent to May 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. On September 20, 2022, the Company and Tuesday 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"). On September 20, 2022, the Private
Placement closed with TASCR Ventures, LLC (the "SPV"), a special purpose entity
formed by Retail Ecommerce Ventures LLC ("REV") and Ayon 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.

•


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. On September 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 of October 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).

•


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. On September 28, 2022, each of Anthony F.
                                       27
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Crudele, Marcelo Podesta and Reuben E. Slone resigned from the board of
directors and Andrew T. Berger, Michael Onghai and Z. John Zhang were elected as
directors in accordance with the Note Purchase Agreement. On October 31, 2022,
Mr. Harris resigned from the Company's board of directors.

•

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.

•


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
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 full valuation allowance the Company has set up previously
on its deferred tax asset.

Key Metrics for the Three Months Ended October 1, 2022

Key operating metrics for continuing operations for the three months ended October 1, 2022 include:

•

Net sales for the three months ended October 1, 2022 were $157.1 million, a decrease of $19.8 million or 11.2%, compared to $176.9 million for the three months ended September 30, 2021.

•

Gross margin for the three months ended October 1, 2022 was 22.0%, compared to 28.8% for the three months ended September 30, 2021.

•


Selling, general and administrative expenses ("SG&A") for the three months ended
October 1, 2022 increased $0.2 million or 0.4% to $60.5 million, from $60.3
million for the three months ended September 30, 2021. As a percentage of sales
for the three months ended October 1, 2022, SG&A was 38.5% compared to 34.1% for
the three months ended September 30, 2021.

•

Restructuring and impairment charges were not incurred for the three months ended October 1, 2022, compared to a charge $2.4 million for the three months ended September 30, 2021.

•

Reorganization items were not incurred for the three months ended October 1, 2022, compared to a net charge of $1.3 million for the three months ended September 30, 2021.

•


Our net loss for the three months ended October 1, 2022 was $28.2 million, or
diluted net loss per share of $0.29 compared to a net loss for the three months
ended September 30, 2021 of $14.6 million, or diluted loss per share of $0.17.

•


As shown under the heading "Non-GAAP Financials Measures" below, EBITDA for the
three months ended October 1, 2022 was a negative $22.7 million compared to a
negative $9.5 million for the three months ended September 30, 2021. Adjusted
EBITDA for the three months ended October 1, 2022 was a negative $20.0 million
compared to a negative $5.7 million for the three months ended September 30,
2021.

                                       28

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Key balance sheet and liquidity metrics for the three months ended October 1, 2022 include:

•


Cash, cash equivalents, and restricted cash decreased by $0.9 million to $6.9
million at October 1, 2022 from $7.8 million at July 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.

•


As of October 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.

•


Inventory levels decreased by $16.0 million at October 1, 2022 to $132.5 million
from $148.5 million at July 2, 2022. As of October 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

September 30, 2021 Ended July 2,


                                                                                                  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 October 1, 2022 Compared to the Three Months Ended September 30, 2021



Net sales for the three months ended October 1, 2022 were $157.1 million, with a
decrease of 11.2%, compared to $176.9 million for the three months ended
September 30, 2021, primarily driven by economic conditions, inflation and
recession rumors. Comparable store sales for the three months ended October 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 ended October 1, 2022 was $34.6 million, a
decrease of 32.1% compared to $51.0 million for the three months ended September
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 ended October 1, 2022.

SG&A increased $0.2 million to $60.5 million in the three months ended October
1, 2022, compared to $60.3 million for the three months ended September 30,
2021. As a percentage of net sales, SG&A increased 440 basis points to 38.5% for
the three months ended October 1, 2022, compared to 34.1% for the three months
ended September 30, 2021, due to deleveraging related to the sales decrease.

Restructuring and impairment charges were not incurred during the three months
ended October 1, 2022, compared to net charge of $2.4 million during the three
months ended September 30, 2021. During the three months ended September 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 ended October 1, 2022
as compared to an operating loss of $11.7 million for the three months ended
September 30, 2021.

Interest expense increased $0.3 million to $2.0 million for the three months
ended October 1, 2022 compared to $1.7 million for the three months ended
September 30, 2021. Interest expense for the three months ended October 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 ended September 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 ended October 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 ended
September 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
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Income tax expense for the three months ended October 1, 2022 was $149.0
thousand compared to an income tax benefit of $49.0 thousand in the three months
ended September 30, 2021. The effective tax rates for the three months ended
October 1, 2022 and September 30, 2021 were (0.5%) and 0.3%, respectively.
Income tax expense is driven mainly by Texas franchise tax and Oregon 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 ended October 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 in September 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 ended September
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 September 30, 2021, adjustments included restructuring and impairment charges related to software impairment charges and employee retention cost. See note 2 to our unaudited consolidated financial statements herein for further discussion.



(3) For the three months ended September 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 ended October 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 in September 2022.
See note 3 to our unaudited consolidated financial statements herein for further
discussion.

(5) For the three months ended October 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 ended October 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
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unaudited consolidated financial statements herein for further discussion. For
the three months ended September 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 October 1, 2022

Cash Flows from Operating Activities



In the three months ended October 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 ended October 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 ended September 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 ended October 1, 2022
and three months ended September 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 ended
October 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 ended September 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



On May 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 1903P Loan 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 the July 2022 borrowing, the Company experienced a further
deterioration in its financial condition and liquidity and began to withhold
payments from vendors beginning in late August 2022 and until completion of the
Private Placement on September 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.

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

                                       31

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defined as cash and cash equivalents plus the $25.3 million availability for borrowing under our New ABL Facility and less $5.6 million in credit cards receivables, was $26.6 million as of October 1, 2022.

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 our Dallas 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 October 1, 2022.

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 July 2, 2022.

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 the SEC. 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 of October 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 ended July 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 at October 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



On September 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 on
September 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
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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 ended October 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 ended July 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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