FRAN Francescas Holdings Corporation

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements concern our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. These statements may include words such as “aim”, “anticipate”, “assume”, “believe”, “can have”, “could”, “due”, “estimate”, “expect”, “goal”, “intend”, “likely”, “may”, “objective”, “plan”, “potential”, “positioned”, “predict”, “should”, “target”, “will”, “would” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements we make relating to our estimated and projected earnings, sales, costs, expenditures, cash flows, growth rates, market share and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements.

These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. These statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in many cases beyond our control. All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. These risks and uncertainties include, but are not limited to, the following: our business is subject to the risk that our exploration of strategic alternatives may not improve our liquidity or financial position; risks arising from the COVID-19 pandemic and our ability to begin and continue making contractual rent payments as required under the terms of the agreements governing our boutique and distribution facility leases or to secure relief from our landlords for such payments, , including the related impact on our liquidity, changes in commercial and consumer spending and economic conditions generally, the duration or reinstitution of government-mandated and voluntary shutdowns and the speed with which our boutiques can safely be reopened and our ecommerce and distribution facilities can return to normal capacity and the level of customer demand following reopening; our ability to continue as a going concern; our ability to satisfy covenant requirements under our Amended ABL Credit Agreement and Term Loan Credit Agreement and to make payments of principal and interest as they come due; the risk that we may not be able to successfully execute our turnaround plan; the risk that we cannot anticipate, identify and respond quickly to changing fashion trends and customer preferences or changes in consumer environment, including changing expectations of service and experience in boutiques and online, and evolve our business model; our ability to attract a sufficient number of customers to our boutiques or sell sufficient quantities of our merchandise through our ecommerce website; our ability to successfully open, close, refresh, and operate new boutiques each year; our ability to efficiently source and distribute additional merchandise quantities necessary to support our growth; and the impact of potential tariff increases or new tariffs. For additional information regarding these and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward looking statements, please refer to “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 and filed with the Securities and Exchange Commission (“SEC”) on May 1, 2020 (“Fiscal Year 2019 10-K”), “Item 1A. Risk Factors” in this report, and any risk factors contained in subsequent Quarterly Reports on Form 10-Q or other filings we file with the SEC, as well as our disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our Fiscal Year 2019 10-K.

We derive many of our forward-looking statements from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in this report as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.

Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update or revise any forward-looking statements after the date of this report whether as a result of new information, future developments or otherwise.

Overview

Unless the context otherwise requires, the “Company,” “we,” “our,” “ours,” “us” and “francesca’s^®” refer to Francesca’s Holdings Corporation and its consolidated subsidiaries.

francesca’s^® is a specialty retailer which operates a nationwide-chain of boutiques providing customers a unique, fun and personalized shopping experience. The merchandise assortment we offer is a diverse and balanced mix of apparel, jewelry, accessories and gifts. We aim to offer a differentiated shopping experience and quality, on-trend merchandise at a compelling value, across a wide variety of geographic markets and shopping venues. As of August 1, 2020, francesca’s^® operated 700 boutiques in 47 states throughout the United States and the District of Columbia and also served its customers through www.francescas.com, our ecommerce website. The information contained on our ecommerce website is not incorporated by reference into this Quarterly Report on Form 10-Q and you should not consider information contained on our ecommerce website to be part of this Quarterly Report on Form 10-Q.

Recent Developments

As previously disclosed, the COVID-19 pandemic has and continues to result in an overall disruption in our operations and supply chain. As of September 4, 2020, nine boutiques were still temporarily closed, most of which are located in California. The majority of reopened boutiques are operating at reduced capacity and hours in accordance with local regulations. All boutiques strictly adhere to current Centers for Disease Control and Prevention recommendations and local regulations to protect the health and safety of our sales associates and customers. Additionally, as of September 4, 2020, our ecommerce and distribution facility continue to operate at reduced capacity due to social distancing measures that have been put in place. As a result, our revenues, results of operations and cash flows continue to be materially adversely impacted which raises substantial doubt about our ability to continue as a going concern.

We continue to take aggressive and prudent actions to drive sales and monetize existing inventory, reduce expenses, and manage cash flows. These actions include making limited payments of accounts payables, paying approximately 50% and 40% of our total lease obligations for the months of August and September of fiscal year 2020, respectively, and limiting new inventory purchases to preserve cash on hand. Additionally, we currently expect to continue making partial lease payments for the remainder of the fiscal year, subject to negotiations with our landlords and cash flows. We also expect to receive an income tax refund of $10.7 million related to certain provisions under the Corona Aid, Relief, and Economic Security Act (“CARES Act”) during fiscal year 2020. This refund is required to be used to repay any then outstanding borrowings under the Company’s Amended ABL Credit Agreement in accordance with the certain letter agreement entered into between the Company and the Amended ABL Credit Agreement lenders on May 1, 2020.

As of September 4, 2020, our cash and cash equivalents totaled $18.2 million. Further, as of September 4, 2020, we had $12.2 million of borrowings outstanding, net of $0.8 million in debt issuance costs, with $3.0 million in combined borrowing base availability under our ABL Credit Agreement and Term Loan Credit Agreement (discussed below). Our borrowing availability is subject to compliance with the covenants under the Amended ABL Credit Agreement, First JPM Letter Agreement, and Second JPM Letter Agreement (all of which are discussed below), including that no loans will be made under the Amended ABL Credit Agreement unless our aggregate amount of cash and cash equivalents is less than $3.0 million.

As previously disclosed, we deferred lease payments for April, May, and June of fiscal year 2020 on all our leased locations in order to preserve our liquidity. As of August 1, 2020, we have substantially completed the negotiation with our landlords to secure rent abatements and / or deferrals for such months. The terms of rent abatements and / or deferrals vary by landlord; however, most rent deferrals are payable in equal monthly installments over a twelve month period beginning on January 1, 2021.We record the impact of these rent abatements and deferrals when the agreement has been fully executed. We are currently in negotiations with our landlords to secure additional rent abatements and / or deferrals for our partial lease payments for August and September of fiscal year 2020 and will continue to engage in such negotiations for any partial lease payments made for the remainder of the fiscal year.

In accordance with a Staff Q&A issued by the Financial Accounting Standards Board in April 2020, COVID-19 related lease abatements and deferrals that do not result in substantial change in our lease obligations are accounted for as if no changes were made to the lease contracts. As of August 1, 2020, our deferred lease obligations totaled $12.7 million, which are included in operating lease liabilities on the unaudited consolidated balance sheet, and our deferred real estate taxes and insurance totaled $1.9 million, which are included in accounts payable in the unaudited consolidated balance sheet. Additionally, we recorded $0.5 million of lease abatements from certain landlords during the thirteen and twenty-six weeks ended August 1, 2020. While the lease deferrals do not have an impact on GAAP single lease expense, they are expected to have a positive impact on our cash flows in fiscal year 2020.

Lease abatements and deferrals that result in substantial change in our obligations due to additional terms incorporated as part of the COVID relief, including but not limited to lease term extension, were treated as a modification of the lease. While the lease deferrals do not have an impact on GAAP single lease expense, they are expected to have a positive impact on our cash flows in fiscal year 2020.

The COVID-19 pandemic has also resulted in lower than expected sales and profitability for our boutiques as a result of a decrease in boutique traffic and the temporary boutique closures which indicates that our long-lived assets may be impaired. As a result of our asset impairment assessments, we recorded $7.5 million of non-cash asset impairment charges in the twenty-six weeks ended August 1, 2020. Of the total amount, $6.8 million was related to the write-down of operating lease right-of-use (“ROU”) assets for 107 underperforming boutiques and $0.7 million was related to the write-down of property and equipment for 41 underperforming boutiques. No asset impairment charges were recorded in the thirteen weeks ended August 1, 2020.

While our results of operations have been significantly impacted and we anticipate our future results will continue to be adversely impacted, the full extent to which the COVID-19 pandemic impacts our future results will depend on future developments, which are highly uncertain and cannot be predicted with certainty, including new information which may emerge concerning the severity of the COVID-19 pandemic in the United States, actions taken to contain it or treat its impact, any possible resurgence of COVID-19 that may occur after the initial outbreak subsides, and how quickly and to what extent normal economic and operating conditions can resume.

On May 1, 2020, we entered into a letter agreement (the “First JPM Letter Agreement”) in connection with our Amended ABL Credit Agreement (as defined below) and a letter agreement (the “First Tiger Letter Agreement”) in connection with our Term Loan Credit Agreement (as defined below), in each case, to obtain a waiver from our lenders of any default or event of default arising from our failure to (i) deliver annual audited consolidated financial statements for the fiscal year ended February 1, 2020 without a “going concern” or a like qualification or exception and (ii) pay rent on leased locations for the months of April, May, and June of fiscal year 2020. The First JPM Letter Agreement and the First Tiger Letter Agreement contain certain conditions and covenants, including that, in the case of the First JPM Letter Agreement, we are required to use the entire $10.7 million income tax refund requested under the CARES Act to repay any then outstanding borrowings under the Amended ABL Credit Agreement and providing that no loans will be made under the ABL Credit Agreement unless our aggregate amount of cash and cash equivalents is less than $3.0 million.

In addition, as a result of the delayed filing of our Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 2020, on June 25, 2020, the Borrowers (as defined below) entered into a letter agreement (the “Second JPM Letter Agreement”) in connection with its Amended ABL Credit Agreement to amend the Amended ABL Credit Agreement to grant the Borrowers a 45 day extension to deliver quarterly consolidated financial statements for the fiscal quarter ended May 2, 2020 and waive any Default (as defined in the Amended ABL Credit Agreement) arising from the failure of the Borrowers to timely deliver quarterly consolidated financial statements for the fiscal quarter ended May 2, 2020. We delivered our financial statements for the fiscal quarter ended May 2, 2020 to JPMorgan and Tiger Finance, LLC on July 31, 2020. Additionally, the Second JPM Letter Agreement also amends the Amended ABL Credit Agreement to lower the minimum amount of Liquidity (as defined in the Amended ABL Credit Agreement) that triggers a Dominion Period (as defined in the Amended ABL Credit Agreement) from $15.0 million to $10.0 million and remove the requirement that unrestricted cash and cash equivalents not exceed 80% of total Liquidity, in each case, for a period of 60 days after the date of the Second JPM Letter Agreement. Further, on June 25, 2020, the Borrowers entered into a letter agreement in connection with its Term Loan Credit Agreement (the “Second Tiger Letter Agreement”) with similar terms to the Second JPM Letter Agreement discussed in this paragraph.

If we are unable to meet our financial covenants or if we have an event of default under either agreement, our lenders could instruct the administrative agent under such credit facilities to exercise available remedies including, declaring the principal of and accrued interest on all outstanding indebtedness due and payable immediately and terminating all remaining commitments and obligations under the Amended ABL Credit Agreement and Term Loan Credit Agreement. Although the lenders under our credit facilities may waive the defaults or forebear the exercise of remedies, they are not obligated to do so. Failure to obtain such a waiver would have a material adverse effect on our liquidity, financial condition and results of operations and may result in filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring plan.

During the thirteen weeks ended August 1, 2020, our net sales decreased 29% to $75.7 million from $106.0 million, loss from operations increased by $14.1 million from an income from operations of $1.4 million to a loss of $12.7 million, and net income decreased to a net loss of $17.2 million, or $5.80 loss per diluted share, from a net income of $1.8 million, or $0.61 earnings per diluted share over the comparable prior year period.

During the twenty-six weeks ended August 1, 2020, our net sales decreased 38% to $119.5 million from $193.1 million, loss from operations increased by $39.8 million from $8.3 million to $48.0 million, and net loss increased to $32.5 million, or $11.06 loss per diluted share, from $8.3 million, or $2.87 loss per diluted share, over the comparable prior year period.

As a result of the challenging conditions described above, we have engaged FTI Capital Advisors (“FTI”) to assist with management’s evaluation and pursuit of available strategic alternatives.  We, with FTI’s assistance, are evaluating various alternatives to improve our liquidity and financial position, including but not limited to, further lease concessions and deferrals, further reductions of operating and capital expenditures, raising additional capital including seeking a refinancing of our debt, and restructuring our debt and liabilities through a private restructuring or a restructuring under the protection of applicable bankruptcy laws.  However, there can be no assurance that we will be able improve our financial position and liquidity, complete a refinancing, raise additional capital or successfully restructure our indebtedness and liabilities.  Our strategic plans are not yet finalized and are subject to numerous uncertainties including negotiations with creditors and investors and conditions in the credit and capital markets.  

Thirteen Weeks Ended August 1, 2020 Compared to Thirteen Weeks Ended August 3, 2019

Net Sales

Net sales decreased 29% to $75.7 million in the thirteen weeks ended August 1, 2020 from $106.0 million in the thirteen weeks ended August 3, 2019. This decrease was primarily due to a decrease in traffic and the temporary closure of a majority of our boutiques as a result of the COVID-19 pandemic. As of August 1, 2020, 29 of our boutiques were still temporarily closed, most of which were located in California. This decrease was partially offset by an increase in ecommerce sales due to an increase in conversion rate partially offset by lower average unit retail as a result of aggressive markdowns and promotions.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs decreased 5% to $62.5 million in the thirteen weeks ended August 1, 2020 from $65.5 million in the thirteen weeks ended August 3, 2019. Cost of merchandise and shipping expenses increased by $1.4 million primarily due to increased ecommerce shipping expenses associated with the increase in our ecommerce sales. Occupancy costs decreased by $4.4 million primarily driven by lower boutique lease and depreciation expenses as a result of prior period impairment charges which caused a decrease in the remaining book value of boutique long-lived assets. Additionally, lease expense decreased $1.2 million primarily due to the early termination of certain leases triggered by kick out provisions and COVID-19 related lease abatements received from certain landlords.

As a percentage of net sales, cost of goods sold and occupancy costs increased to 82.5% in the thirteen weeks ended August 1, 2020 from 61.8% in the thirteen weeks ended August 3, 2019, an unfavorable variance of 2,070 basis points. This change was primarily driven by the decrease in merchandise margin as a result of aggressive markdowns and promotions in order to clear aged merchandise and to drive traffic to boutiques and the ecommerce website. Additionally, occupancy costs deleveraged as a result of lower sales but was partially offset by the decrease in lease and depreciation expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 33% to $26.0 million in the thirteen weeks ended August 1, 2020 from $38.9 million in the thirteen weeks ended August 3, 2019. This decrease was primarily due to a $9.6 million decrease in boutique and corporate payroll costs primarily as a result of minimum employee coverage at the boutiques as well as a temporary furlough of substantially all of the Company’s employees during a portion of the quarter, and a $1.7 million decrease in boutique and corporate bonus expenses. Additionally, merchant processing fees decreased $0.5 million due to lower sales, corporate travel expenses decreased $0.4 million as only essential travel occurred as a result of the COVID-19 pandemic, and software and computer services, and corporate depreciation expenses each decreased $0.3 million.

As a percentage of net sales, selling, general and administrative expense decreased to 34.4% in the thirteen weeks ended August 3, 2019 as compared to 36.7% in the thirteen weeks ended August 3, 2019 due to leveraging of expenses.

Income Tax Expense (Benefit)

Income tax expense was $4.0 million while the effective tax rate was 30.2% in the thirteen weeks ended August 1, 2020. We expect that any net operating loss generated for tax purposes for fiscal year 2020 will be carried back to prior years as allowed under the CARES Act and we will be entitled to an income tax refund when we file our fiscal year 2020 income tax return. An income tax benefit is currently reflected in our estimated annual effective tax rate for fiscal year 2020. The income tax benefit in the thirteen weeks ended August 3, 2019 was immaterial due to the full valuation allowance provided on our net deferred tax assets during fiscal year 2019.

Twenty-Six Weeks August 1, 2020 Compared to Twenty-Six Weeks Ended August 3, 2019

Net Sales

Net sales decreased 38% to $119.5 million in the twenty-six weeks ended August 3, 2019 from $193.1 million in the twenty-six weeks ended August 3, 2019. This decrease was primarily due to a decrease in traffic as well as temporary closure of our boutiques from March 25, 2020 essentially through the end of the first quarter as a result of the COVID-19 pandemic. As of August 1, 2020, 29 boutiques were still temporarily closed, most of which were located in California. This decrease was partially offset by an increase in our ecommerce sales as our efforts focused on driving ecommerce sales while our boutiques were temporarily closed. As a result, we saw an increase in ecommerce conversion rates but was offset by a decrease in average unit retail as a result of aggressive markdowns and promotions.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs decreased 11% to $109.1 million in the twenty-six weeks ended August 1, 2020 from $122.3 million in the twenty-six weeks ended August 3, 2019. Cost of merchandise and shipping expenses decreased by $6.9 million primarily due to decreased sales volume, partially offset by increased ecommerce shipping expenses associated with the increase in our ecommerce sales. Occupancy costs decreased by $6.3 million primarily driven by lower boutique lease and depreciation expenses as a result of prior period impairment charges which caused a decrease in the remaining book value of boutique long-lived assets. Additionally, lease expense decreased $1.3 million primarily due to the early termination of certain leases triggered by kick out provisions and COVID-19 related rent abatements received from certain landlords.

As a percentage of net sales, cost of goods sold and occupancy costs increased to 91.3% in the twenty-six weeks ended August 1, 2020 from 63.3% in the twenty-six weeks ended August 3, 2019, an unfavorable variance of 2,800 basis points. This change was primarily driven by the decrease in merchandise margin as a result of aggressive markdowns and promotions to clear aged merchandise and to drive traffic to boutiques and the ecommerce website. Additionally, occupancy costs deleveraged as a result of lower sales but was partially offset by the decrease in lease and depreciation expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 35% to $51.0 million in the twenty-six weeks ended August 1, 2020 from $78.9 million in the twenty-six weeks ended August 3, 2019. This decrease was primarily due to a $21.8 million decrease in boutique and corporate payroll costs primarily as a result of minimum coverage at the boutiques as well as a temporary furlough of substantially all employees during a portion of the year-to-date period, and a $2.7 million decrease in boutique and corporate bonus expenses. Additionally, professional fees decreased $1.3 million as the prior year period included consulting expenses associated with our turnaround plan, merchant processing fees decreased $1.1 million due to lower sales, corporate travel expenses decreased $0.5 million as only essential travel occurred as a result of the COVID-19 pandemic and corporate depreciation expense decreased $0.5 million.

As a percentage of net sales, selling, general and administrative expense increased to 42.7% in the twenty-six weeks ended August 1, 2020 as compared to 40.9% in the twenty-six weeks ended August 3, 2019 due to deleveraging of expenses as a result of lower sales.

Impairment Charges

We recorded non-cash asset impairment charges of $7.5 million in the twenty-six weeks ended August 1, 2020. Of the total amount, $6.8 million were related to the write-down of operating lease ROU assets for 107 underperforming boutiques and $0.7 million were related to the write-down of property and equipment for 41 underperforming boutiques. This compares to $0.2 million of non-cash asset impairment charges in the twenty-six weeks ended August 3, 2019.

Income Tax Expense (Benefit)

Income tax benefit was $16.3 million while the effective income tax benefit rate was 33.5% in the twenty-six weeks ended August 1, 2020. We expect that any net operating loss generated for tax purposes for fiscal year 2020 will be carried back to prior years as allowed under the CARES Act and we will be entitled to an income tax refund when we file our fiscal year 2020 income tax return. An income tax benefit is currently reflected in our estimated annual effective tax rate for fiscal year 2020. Additionally, the income tax benefit for the twenty-six weeks ended August 1, 2020 included a $10.7 million income tax refund filed with the IRS in April 2020 related to net operating loss for fiscal year 2018 that may be carried back to prior years also under the CARES Act. The income tax expense in the twenty-six weeks ended August 3, 2019 was immaterial due to the full valuation allowance provided on our net deferred tax assets during fiscal year 2019.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operations and borrowings under our Amended ABL Credit Agreement (see “Asset Based Revolving Credit Facility” below for more information). Our primary cash needs are for funding normal working capital requirements, the operation of our existing boutiques and ecommerce website, the implementation of our turnaround plan, and payments of interest and principal, if any, under our Amended ABL Credit Agreement and Term Loan Credit Agreement (see “Term Loan Credit Agreement” below for more information). We may use cash or our asset based revolving credit facility to issue letters of credit to support merchandise receipts or for other corporate purposes. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts payable, operating lease liabilities and other current liabilities. Our working capital position benefits from the fact that we generally collect cash from sales to customers the day of or, in the case of credit or debit card transactions, within several days of the related sales and we typically have up to 45 days to pay our inventory vendors and up to 60 days to pay other vendors.

As discussed in the “Overview – Recent Developments,” our revenues, results of operations and cash flows have been materially adversely impacted by the COVID-19 pandemic, which raises substantial doubt about our ability to continue as a going concern for the next twelve months. In response to such events, we continue to take aggressive and prudent actions to drive sales and monetize existing inventory, reduce expenses, and manage cash flows. These actions include making limited payments of accounts payables, paying approximately 50% and 40% of our total lease obligations for the months of August and September of fiscal year 2020, respectively, and limiting new inventory purchases to preserve cash on hand. Additionally, we currently expect to make partial lease payments for the remainder of fiscal year 2020, subject to negotiations with our landlords and cash flows. We also expect to receive an income tax refund of $10.7 million related to certain provisions under the CARES Act during fiscal year 2020. This refund is required to be used to repay any then outstanding borrowings under the Company’s Amended ABL Credit Agreement in accordance with the First JPM Letter Agreement. With the assistance of FTI, we are also evaluating various alternatives to improve our liquidity and financial position. See the “Overview – Recent Developments” above for additional information.

At August 1, 2020, we had $20.2 million of cash and cash equivalents, and $12.1 million of borrowings outstanding, net of $0.9 million in debt issuance costs, and $1.0 million in combined borrowing base availability under our ABL Credit Agreement and Term Loan Credit Agreement. Our borrowing availability is subject to compliance with the covenants under the Amended ABL Credit Agreement, First JPM Letter Agreement, and Second JPM Letter Agreement, including that no loans will be made under the Amended ABL Credit Agreement unless our aggregate amount of cash and cash equivalents is less than $3.0 million.

As of September 4, 2020, our cash and cash equivalents totaled $18.2 million. Further, as of September 4, 2020, we had $12.2 million of borrowings outstanding, net of $0.8 million in debt issuance costs, with $3.0 million in combined borrowing base availability under our ABL Credit Agreement and Term Loan Credit Agreement. Our borrowing availability is subject to compliance with the covenants under the Amended ABL Credit Agreement, First JPM Letter Agreement, and Second JPM Letter Agreement, including that no loans will be made under the Amended ABL Credit Agreement unless our aggregate amount of cash and cash equivalents is less than $3.0 million.

Operating Activities

Operating activities consist of net (loss) income adjusted for non-cash items, including depreciation and amortization, deferred taxes, and the effect of working capital changes. Net cash provided by operating activities was $0.6 million in the twenty-six weeks ended August 1, 2020 compared to $5.4 million in the twenty-six weeks ended August 3, 2019. This decrease was primarily due to the increase in net loss as a result of the temporary closure of all of our boutiques as a result of the COVID-19 pandemic that lasted substantially through the end of the first quarter of fiscal year 2020 as well as a decrease in boutique traffic. Additionally, income tax receivable increased to $17.3 million as of August 1, 2020 from $1.9 million as of August 3, 2019 due to income tax refunds we expect to receive under the net operating loss carryback provision of the CARES Act. These changes were partially offset by delaying certain payments of our accounts payable and lease obligations in order to preserve our liquidity.

Our total capital expenditures for the twenty-six weeks ended August 1, 2020 and August 3, 2019 were $1.3 million and $3.4 million, respectively. A majority of our spending in the twenty-six weeks ended August 1, 2020 was associated with one boutique opening, which was already set to be opened prior to this fiscal year, and relocation of existing boutiques expected to occur during the remainder of the year. As previously disclosed, we have substantially decreased, and expect to continue to substantially decrease, our investments in new boutiques, remodels and relocations in fiscal year 2020 until the desired results of our turnaround plan are achieved. For the twenty-six weeks ended August 3, 2019, our capital expenditures were mostly related to the payment of prior year accrued constructions costs related to remodels.

All capital expenditures in fiscal year 2020 have been temporarily suspended, except for necessary investments. We expect to resume this spending upon stabilization of our business and the general macro environment.

Financing Activities

Financing activities consist of borrowings and repayments under our Amended ABL Credit Agreement.

Net cash provided by financing activities in the twenty-six weeks ended August 1, 2020 consisted of $5.0 million in borrowings under our Amended ABL Credit Agreement, of which $2.0 million was repaid during the twenty-six weeks ended August 1, 2020. Net cash used in financing activities in the twenty-six weeks ended August 3, 2019 consisted of $5.0 million in borrowings under our ABL Credit Agreement that was subsequently repaid and a $0.1 million payment of debt issuance costs associated with our Term Loan Credit Agreement.

Credit Facilities

Asset Based Revolving Credit Facility

On May 25, 2018, Francesca’s Holdings Corporation ( “Holdings”), as guarantor, certain of its subsidiaries, as borrowers (the “Borrowers”), and certain of its subsidiaries as guarantors (together with Holdings, and the Borrowers, the “Loan Parties”), entered into an asset based lending credit agreement (“ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and the lenders party thereto. The ABL Credit Agreement provided for Aggregate Revolving Commitments (as defined in the ABL Credit Agreement) of $50.0 million (including up to $10.0 million for letters of credit) and was scheduled to mature on May 25, 2023.

On August 13, 2019, concurrent with entering into the Term Loan Credit Agreement (described below), the Loan Parties entered into the first amendment to ABL Credit Agreement (the “First Amendment to ABL Credit Agreement” and together with the ABL Credit Agreement, the “Amended ABL Credit Agreement”). The Amended ABL Credit Agreement provides for Aggregate Revolving Commitments (as defined in the Amended ABL Credit Agreement) of $40.0 million and matures on the earlier of (a) May 23, 2023 and (b) the date that is 90 days prior to any scheduled maturity of the Term Loan.

Availability under the Amended ABL Credit Agreement is subject to a customary borrowing base, as reasonably determined by the applicable agent, comprised of: (a) a specified percentage of the Borrower’s credit card accounts (as defined in the Amended ABL Credit Agreement); and (b) a specified percentage of the Borrower’s eligible inventory (as defined in the Amended ABL Credit Agreement), and reduced by (c) certain customary reserves and adjustments (as defined in the Amended ABL Credit Agreement). The combined borrowing base is the lesser of (i) the sum of the (a) the Revolving Loan Cap (as defined in the Amended ABL Agreement), which is the lesser of (x) $34.0 million and (y) the borrowing base under the Amended ABL Credit Agreement, plus, (b) any outstanding amount under the Term Loan Credit Agreement and (ii) the Term Loan Credit Agreement borrowing base (described below). On May 1, 2020, we entered into the First JPM Letter Agreement and on June 25, 2020, we entered into the Second JPM Letter Agreement. See the “Overview – Recent Developments” above for additional information.

All obligations of each Loan Party under the Amended ABL Credit Agreement continue to be unconditionally guaranteed by the Company and each of the Company’s existing and future direct and indirect wholly owned domestic subsidiaries, including the Borrowers. All obligations under the Amended ABL Credit Agreement, and the guarantees of those obligations (as well as banking services obligations and any interest rate hedging or other swap agreements), are secured by substantially all of the assets of the Company and each of the Company’s existing and future direct and indirect wholly owned domestic subsidiaries. Additionally, the Amended ABL Credit Agreement contains customary events of default and requires the Loan Parties to comply with certain financial covenants, including a restriction on the amount of capital expenditures that the Loan Parties may make through 2021, subject to certain exceptions. In addition, the Company may declare or make dividend payments, subject to the satisfaction of the Payment Conditions (as defined in the Amended ABL Credit Agreement). The Amended ABL Credit Agreement also requires that the auditor’s report on our audited financial statements does not contain a “going concern” or like qualification or exception. We obtained a waiver of such requirement for fiscal year 2019 in connection with the First JPM Letter Agreement and First Tiger Letter Agreement. See the “Overview – Recent Developments” section above for additional information.

Borrowings under the Amended ABL Credit Agreement bear interest at a rate equal to an applicable margin plus, at the option of the Borrowers, either (a) in the case of base rate borrowings, a rate equal to the highest of (1) the prime rate of JPMorgan Chase Bank, N.A., (2) the federal funds rate plus 1/2 of 1.00%, and (3) LIBOR for an interest period of one month plus 1.00% (subject to a 0.0% LIBOR floor), provided that that the interest rate for base rate borrowings (including the addition of the applicable margin) shall be no less than 1.50% per annum, or (b) in the case of LIBOR borrowings, a rate equal to the LIBOR for the interest period relevant to such borrowing subject to a 0.00% floor. The applicable margin for borrowings under the Amended ABL Credit Agreement ranges from -0.50% to 0.00% per annum with respect to base rate borrowings and from 1.25% to 1.75% per annum with respect to LIBOR borrowings, in each case based upon the achievement of specified levels of the Fixed Charge Coverage Ratio (as defined in the Amended ABL Credit Agreement). The Amended ABL Credit Agreement also requires the Borrowers to pay a commitment fee for the unused portion of the revolving credit facility of 0.20% per annum. The average effective interest rate for borrowings under the Amended ABL Credit Agreement was 3.0% in each of the thirteen and twenty-six weeks ended August 1, 2020 and was 4.2% in each of the thirteen and twenty-six weeks ended August 3, 2019.

The Amended ABL Credit Agreement contains customary affirmative and negative covenants, including limitations, subject to customary exceptions, on the ability of the Company and its subsidiaries to (i) incur additional debt; (ii) create liens; (iii) make certain investments, acquisitions, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or make other restricted payments; (vi) prepay other indebtedness; (vii) engage in mergers or consolidations; (viii) change the business conducted by the Company and its subsidiaries; (ix) engage in certain transactions with affiliates; (x) enter into agreements that restrict dividends from subsidiaries or the ability of subsidiaries to grant liens upon their assets; and (xi) amend certain charter documents and material agreements governing subordinated and junior indebtedness. The inclusion of a going concern qualification in the report of our independent registered public accountant on our audited financial statements for the fiscal year ended February 1, 2020, our non-payment of rent on our leased locations for the months of April, May, and June of fiscal year 2020, and our failure to timely deliver quarterly consolidated financial statements for the fiscal quarter ended May 2, 2020 resulted in a violation of certain covenants under our Amended ABL Credit Agreement. However, we were able to obtain a waiver of such violations from the lenders under such agreement. See the “Overview – Recent Developments” section above for additional information on the First JPM Letter Agreement and Second JPM Letter Agreement.

The Amended ABL Credit Agreement also contains customary events of default, including: (i) failure to pay principal, interest, fees or other amounts under the Amended ABL Credit Agreement when due taking into account any applicable grace period; (ii) any representation or warranty proving to have been materially incorrect when made or deemed made; (iii) a cross default with respect to other material indebtedness; (iv) bankruptcy and insolvency events; (v) unsatisfied material final judgments; (vi) a “change of control”; (vii) certain defaults under the Employee Retirement Income Security Act of 1974; (viii) the invalidity or impairment of any loan document or any security interest; and (ix) breach of covenants in the Amended ABL Credit Agreement and other loan documents.

As of August 1, 2020, we had $3.0 million in borrowings outstanding under the Amended ABL Credit Agreement and had $1.0 million in combined borrowing base availability under the Amended ABL Credit Agreement and Term Loan Credit Agreement, subject to compliance with the covenants under the Amended ABL Credit Agreement, First JPM Letter Agreement, and Second JPM Letter Agreement, including that no loans will be made under the Amended ABL Credit Agreement unless the our aggregate amount of cash and cash equivalents is less than $3.0 million. See the “Overview – Recent Developments,” section above for additional information as our liquidity has been materially adversely impacted by the COVID-19 pandemic.

Term Loan Credit Agreement

On August 13, 2019, the Loan Parties, entered into the term loan credit agreement (“Term Loan Credit Agreement”) with Tiger Finance, LLC, as administrative agent and the lenders party thereto. The Term Loan Credit Agreement provides for an aggregate term loan of $10.0 million and matures on August 13, 2022. On May 1, 2020, we entered into the First Tiger Letter Agreement. See the “Overview – Recent Developments” section above for additional information as our liquidity has been materially adversely impacted by the COVID-19 pandemic.

The Term Loan Credit Agreement is subject to a combined borrowing base together with the Company’s existing asset based revolving credit facility under the Amended ABL Credit Agreement. This borrowing base is comprised of: (a) a specified percentage of the Borrower’s credit card accounts (as defined in the Term Loan Credit Agreement); and (b) a specified percentage of the Borrower’s eligible inventory (as defined in the Term Loan Credit Agreement), and reduced by (c) certain customary reserves and adjustments (as defined in the Term Loan Credit Agreement).

All obligations of each Loan Party under the Term Loan Credit Agreement are unconditionally guaranteed by the Company and each of the Company’s existing and future direct and indirect wholly owned domestic subsidiaries, including the Borrowers. All obligations under the Term Loan Credit Agreement, and the guarantees of those obligations, are secured on a junior lien basis by substantially all of the assets of the Company and each of the Company’s existing and future direct and indirect wholly owned domestic subsidiaries.

Borrowings under the Term Loan Credit Agreement bear interest at a rate equal to LIBOR for the interest period relevant to the Term Loan, subject to a 0.00% floor, plus 8.00%, provided that the interest rate on the Term Loan will not be less than 10.00%. The Term Loan Credit Agreement also requires the Borrowers to pay an annual agency fee of $50,000. For each of the thirteen and twenty-six weeks ended August 1, 2020, the average effective interest rate for borrowings under the Term Loan was 10.0%.

The Term Loan Credit Agreement contains customary affirmative and negative covenants, including limitations, subject to customary exceptions, on our and our subsidiaries ability to (i) incur additional debt; (ii) create liens; (iii) make certain investments, acquisitions, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or make other restricted payments; (vi) prepay other indebtedness; (vii) engage in mergers or consolidations; (viii) change the business conducted by the Company and its subsidiaries; (ix) engage in certain transactions with affiliates; (x) enter into agreements that restrict dividends from subsidiaries or the ability of subsidiaries to grant lines upon their assets; and (xi) amend certain charter documents and material agreements governing subordinated and junior indebtedness. In addition, the Term Loan Credit Agreement limits the amount of capital expenditures that the Loan Parties may make through the fiscal year ending in 2021, provided that the Loan Parties may make unlimited amounts of capital expenditures if certain payment conditions are met.

On May 1, 2020, we entered into the First Tiger Letter Agreement and on June 25, 2020, we entered into the Second Tiger Letter Agreement. See the “Overview – Recent Developments” above for additional information.

As of August 1, 2020, we had $10.0 million of outstanding borrowings under the Term Loan Credit Agreement and had a combined borrowing base availability of $1.0 million under the Term Loan Credit Agreement and Amended ABL Credit Agreement, subject to compliance with the covenants under the Term Loan Agreement, Amended ABL Credit Agreement, First Tiger Letter Agreement, First JPM Letter Agreement, Second Tiger Letter Agreement, and Second JPM Letter Agreement, including that no loans will be made under the Amended ABL Credit Agreement unless the our aggregate amount of cash and cash equivalents is less than $3.0 million.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities at the date of the financial statements. A summary of the Company’s significant accounting policies is included in Note 1 to the Company’s annual consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2020.

Certain of the Company’s accounting policies and estimates are considered critical, as these policies and estimates are the most important to the depiction of the Company’s consolidated financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended February 1, 2020. There were no significant changes to any of our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, please refer to Note 1 to our unaudited consolidated financial statements included in Part I of this Report, which is incorporated herein by reference.

Off Balance Sheet Arrangements

We are not party to any off balance sheet arrangements.