UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

_____________________________



FORM 10-Q

_____________________________

(Mark One)



 

☒ 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September 30, 20182019



OR





 

☐ 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



 For the transition period from – to –

 

Commission file number: 001-35629

_____________________________



TILE SHOP HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

_____________________________





 

Delaware  

45-5538095

(State or other jurisdiction of incorporation)

(I.R.S. Employer Identification No.)







 

14000 Carlson Parkway

 

Plymouth, Minnesota 

55441

(Address of principal executive offices)  

(Zip Code)



(763) 852-2950 

(Registrant’s telephone number, including area code)

_____________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.0001 par value

TTS

The Nasdaq Stock Market LLC



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes    ☐ No



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes    ☐ No



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.





 

 

 

 

 

Large  accelerated  filer

Accelerated  filer

Non-accelerated filer

Smaller  reporting  company



Emerging growth company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes    ☒ No



As of October 22, 2018,28, 2019, there were 52,759,55850,883,029 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.



 



 

 


 

Table of Contents

 

TILE SHOP HOLDINGS, INC.

Table of Contents

 



 

 



 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

23 



Consolidated Balance Sheets



Consolidated Statements of Income



Consolidated Statements of Comprehensive Income



Consolidated Statements of Stockholders’ Equity (Deficit)

67 



Consolidated Statements of Cash Flows

78 



Notes to Consolidated Financial Statements

89 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

1718 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25 

Item 4.

Controls and Procedures

25 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

2526 

Item 1A.

Risk Factors

2526 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

2628 

Item 3.

Defaults Upon Senior Securities

2628 

Item 4.

Mine Safety Disclosures

2628 

Item 5.

Other Information

2628 

Item 6.

Exhibits

2729 

Signatures

2830 



 

 

2


 

Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

  

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except share and per share data)

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

2018

 

2017

 

2019

 

2018

 

(unaudited)

 

(audited)

 

(unaudited)

 

(audited)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,105 

 

$

6,621 

 

$

8,371 

 

$

5,557 

Restricted cash

 

835 

 

855 

 

825 

 

825 

Receivables, net

 

3,723 

 

2,381 

 

4,611 

 

3,084 

Inventories

 

106,310 

 

85,259 

 

100,080 

 

110,095 

Income tax receivable

 

3,362 

 

5,726 

 

3,854 

 

3,548 

Other current assets, net

 

 

6,921 

 

 

4,717 

 

 

7,042 

 

 

7,181 

Total Current Assets

 

 

131,256 

 

 

105,559 

 

 

124,783 

 

 

130,290 

Property, plant and equipment, net

 

153,453 

 

151,405 

 

137,151 

 

158,356 

Right of use asset

 

143,789 

 

 -

Deferred tax assets

 

10,239 

 

11,654 

 

5,385 

 

7,225 

Other assets

 

 

1,952 

 

 

2,107 

 

 

1,251 

 

 

1,759 

Total Assets

 

$

296,900 

 

$

270,725 

 

$

412,359 

 

$

297,630 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

25,725 

 

$

30,771 

 

$

19,855 

 

$

25,853 

Current portion of long-term debt

 

 -

 

8,833 

Income tax payable

 

172 

 

17 

 

13 

 

179 

Current portion of lease liability

 

26,653 

 

 -

Other accrued liabilities

 

 

27,790 

 

 

22,413 

 

 

25,871 

 

 

24,484 

Total Current Liabilities

 

 

53,687 

 

 

62,034 

 

 

72,392 

 

 

50,516 

Long-term debt, net

 

46,000 

 

18,182 

Capital lease obligation, net

 

473 

 

576 

Long-term debt

 

63,000 

 

53,000 

Long-term lease liability, net

 

138,489 

 

 -

Financing lease obligation, net

 

317 

 

436 

Deferred rent

 

43,419 

 

41,290 

 

 -

 

43,579 

Other long-term liabilities

 

 

3,931 

 

 

4,769 

 

 

3,482 

 

 

3,752 

Total Liabilities

 

 

147,510 

 

 

126,851 

 

 

277,680 

 

 

151,283 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (see Note 11)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.0001; authorized: 100,000,000 shares; issued and outstanding: 52,678,584 and 52,156,850 shares, respectively

 

 

Common stock, par value $0.0001; authorized: 100,000,000 shares; issued and outstanding: 50,812,054 and 52,707,879 shares, respectively

 

 

Preferred stock, par value $0.0001; authorized: 10,000,000 shares; issued and outstanding: 0 shares

 

 -

 

 -

 

 -

 

 -

Additional paid-in-capital

 

174,207 

 

180,109 

 

156,037 

 

172,255 

Accumulated deficit

 

(24,777)

 

(36,239)

 

(21,272)

 

(25,857)

Accumulated other comprehensive income (loss)

 

 

(45)

 

 

(1)

 

 

(91)

 

 

(56)

Total Stockholders' Equity

 

 

149,390 

 

 

143,874 

 

 

134,679 

 

 

146,347 

Total Liabilities and Stockholders' Equity

 

$

296,900 

 

$

270,725 

 

$

412,359 

 

$

297,630 



See accompanying Notes to Consolidated Financial Statements.



 

3


 

Table of Contents

 

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Income

(dollars in thousands, except per share data)

(unaudited)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

2018

 

2017

 

2018

 

2017

 

2019

 

2018

 

2019

 

2018

Net sales

 

$

89,259 

 

$

84,421 

 

$

273,307 

 

$

266,020 

 

$

85,944 

 

$

89,259 

 

$

261,755 

 

$

273,307 

Cost of sales

 

 

26,248 

 

 

27,759 

 

 

80,946 

 

 

82,265 

 

 

26,775 

 

 

26,248 

 

 

79,384 

 

 

80,946 

Gross profit

 

 

63,011 

 

 

56,662 

 

 

192,361 

 

 

183,755 

 

 

59,169 

 

 

63,011 

 

 

182,371 

 

 

192,361 

Selling, general and administrative expenses

 

 

59,131 

 

 

52,285 

 

 

174,928 

 

 

154,245 

 

 

59,804 

 

 

59,131 

 

 

179,314 

 

 

174,928 

Income from operations

 

 

3,880 

 

 

4,377 

 

 

17,433 

 

 

29,510 

(Loss) income from operations

 

 

(635)

 

 

3,880 

 

 

3,057 

 

 

17,433 

Interest expense

 

 

(715)

 

 

(505)

 

 

(1,866)

 

 

(1,438)

 

(1,027)

 

(715)

 

(2,948)

 

(1,866)

Other income

 

 

40 

 

 

34 

 

 

112 

 

 

132 

 

 

 

 

40 

 

 

22 

 

 

112 

Income before income taxes

 

 

3,205 

 

 

3,906 

 

 

15,679 

 

 

28,204 

Provision for income taxes

 

 

(652)

 

 

(1,468)

 

 

(4,157)

 

 

(10,034)

Net income

 

$

2,553 

 

$

2,438 

 

$

11,522 

 

$

18,170 

(Loss) income before income taxes

 

 

(1,657)

 

 

3,205 

 

 

131 

 

 

15,679 

Benefit from (provision for) income taxes

 

 

274 

 

 

(652)

 

 

(348)

 

 

(4,157)

Net (loss) income

 

$

(1,383)

 

$

2,553 

 

$

(217)

 

$

11,522 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income per common share:

 

 

 

 

 

 

 

 

Basic

 

$

0.05 

 

$

0.05 

 

$

0.22 

 

$

0.35 

 

$

(0.03)

 

$

0.05 

 

$

(0.00)

 

$

0.22 

Diluted

 

$

0.05 

 

$

0.05 

 

$

0.22 

 

$

0.35 

 

$

(0.03)

 

$

0.05 

 

$

(0.00)

 

$

0.22 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

51,920,830 

 

 

51,757,248 

 

 

51,896,678 

 

 

51,638,864 

 

49,769,739 

 

51,920,830 

 

50,901,289 

 

51,896,678 

Diluted

 

 

52,303,777 

 

 

52,053,655 

 

 

52,056,136 

 

 

52,011,208 

 

49,769,739 

 

52,303,777 

 

50,901,289 

 

52,056,136 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.05 

 

$

0.05 

 

$

0.15 

 

$

0.15 

 

$

0.05 

 

$

0.05 

 

$

0.15 

 

$

0.15 



See accompanying Notes to Consolidated Financial Statements.

 

 

4


 

Table of Contents

 

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(unaudited)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Net income

 

$

2,553 

 

$

2,438 

 

$

11,522 

 

$

18,170 

Currency translation adjustment

 

 

(37)

 

 

22 

 

 

(44)

 

 

30 

Other comprehensive (loss) income

 

 

(37)

 

 

22 

 

 

(44)

 

 

30 

Comprehensive income

 

$

2,516 

 

$

2,460 

 

$

11,478 

 

$

18,200 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2019

 

2018

 

2019

 

2018

Net (loss) income

 

$

(1,383)

 

$

2,553 

 

$

(217)

 

$

11,522 

Currency translation adjustment

 

 

(37)

 

 

(37)

 

 

(35)

 

 

(44)

Other comprehensive loss

 

 

(37)

 

 

(37)

 

 

(35)

 

 

(44)

Comprehensive (loss) income

 

$

(1,420)

 

$

2,516 

 

$

(252)

 

$

11,478 



See accompanying Notes to Consolidated Financial Statements.



 

5


 

Table of Contents

 

TileTile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)

(dollars in thousands, except share data)

(unaudited)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Additional
paid-in
capital

 

Treasury
units

 

Retained
earnings
(deficit)

 

Accumulated
other
comprehensive
income (loss)

 

Total

 

Shares

 

Amount

 

Additional
paid-in
capital

 

Retained
earnings
(deficit)

 

Accumulated
other
comprehensive
income (loss)

 

Total

Balance at December 31, 2016

 

51,607,143 

 

$

 

$

185,998 

 

$

 -

 

$

(47,058)

 

$

(46)

 

$

138,899 

Issuance of restricted shares

 

324,184 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Cancellation of restricted shares

 

(87,849)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Stock based compensation

 

 -

 

 

 -

 

 

3,156 

 

 

 -

 

 

 -

 

 

 -

 

 

3,156 

Stock option exercises

 

313,372 

 

 

 -

 

 

1,639 

 

 

 -

 

 

 -

 

 

 -

 

 

1,639 

Tax withholdings related to net share settlements of stock based compensation awards

 

 -

 

 

 -

 

 

(318)

 

 

 -

 

 

 -

 

 

 -

 

 

(318)

Dividends paid

 

 -

 

 

 -

 

 

(10,366)

 

 

 -

 

 

 -

 

 

 -

 

 

(10,366)

Foreign currency translation adjustments

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

45 

 

 

45 

Net income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

10,819 

 

 

 -

 

 

10,819 

Balance at December 31, 2017

 

52,156,850 

 

$

 

$

180,109 

 

$

 -

 

$

(36,239)

 

$

(1)

 

$

143,874 

Adoption of revenue recognition standard (see Note 1)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(60)

 

 

 -

 

 

(60)

Balance at June 30, 2018

 

52,508,090 

 

$

 

$

176,124 

 

$

(27,331)

 

$

(8)

 

$

148,790 

Issuance of restricted shares

 

595,125 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

199,843 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Cancellation of restricted shares

 

(73,391)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

(29,349)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Stock based compensation

 

 -

 

 

 -

 

 

1,950 

 

 

 -

 

 

 -

 

 

 -

 

 

1,950 

 

 -

 

 

 -

 

 

735 

 

 

 -

 

 

 -

 

 

735 

Tax withholdings related to net share settlements of stock based compensation awards

 

 -

 

 

 -

 

 

(52)

 

 

 -

 

 

 -

 

 

 -

 

 

(52)

 

 -

 

 

 -

 

 

(52)

 

 

 -

 

 

 -

 

 

(52)

Dividends paid

 

 -

 

 

 -

 

 

(7,800)

 

 

 -

 

 

 -

 

 

 -

 

 

(7,800)

 

 -

 

 

 -

 

 

(2,600)

 

 

 -

 

 

 -

 

 

(2,600)

Foreign currency translation adjustments

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(44)

 

 

(44)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(37)

 

 

(37)

Net income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

11,522 

 

 

 -

 

 

11,522 

 

 -

 

 

 -

 

 

 -

 

 

2,553 

 

 

 -

 

 

2,553 

Balance at September 30, 2018

 

52,678,584 

 

$

 

$

174,207 

 

$

 -

 

$

(24,777)

 

$

(45)

 

$

149,390 

 

52,678,584 

 

$

 

$

174,207 

 

$

(24,777)

 

$

(45)

 

$

149,390 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

50,615,489 

 

$

 

$

157,961 

 

$

(19,889)

 

$

(54)

 

$

138,023 

Issuance of restricted shares

 

309,305 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Cancellation of restricted shares

 

(112,740)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Stock based compensation

 

 -

 

 

 -

 

 

660 

 

 

 -

 

 

 -

 

 

660 

Tax withholdings related to net share settlements of stock based compensation awards

 

 -

 

 

 -

 

 

(90)

 

 

 -

 

 

 -

 

 

(90)

Dividends paid

 

 -

 

 

 -

 

 

(2,494)

 

 

 -

 

 

 -

 

 

(2,494)

Foreign currency translation adjustments

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(37)

 

 

(37)

Net income

 

 -

 

 

 -

 

 

 -

 

 

(1,383)

 

 

 -

 

 

(1,383)

Balance at September 30, 2019

 

50,812,054 

 

$

 

$

156,037 

 

$

(21,272)

 

$

(91)

 

$

134,679 



See accompanying Notes to Consolidated Financial Statements.



 

6


 

Table of Contents

 

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)

(dollars in thousands, except share data)

(unaudited)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 



 

Shares

 

Amount

 

Additional
paid-in
capital

 

Retained
earnings
(deficit)

 

Accumulated
other
comprehensive
income (loss)

 

Total

Balance at December 31, 2017

 

52,156,850 

 

$

 

$

180,109 

 

$

(36,239)

 

$

(1)

 

$

143,874 

Adoption of revenue recognition standard

 

 -

 

 

 -

 

 

 -

 

 

(60)

 

 

 -

 

 

(60)

Balance at January 1, 2018

 

52,156,850 

 

$

 

$

180,109 

 

$

(36,299)

 

$

(1)

 

$

143,814 

Issuance of restricted shares

 

595,125 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Cancellation of restricted shares

 

(73,391)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Stock based compensation

 

 -

 

 

 -

 

 

1,950 

 

 

 -

 

 

 -

 

 

1,950 

Tax withholdings related to net share settlements of stock based compensation awards

 

 -

 

 

 -

 

 

(52)

 

 

 -

 

 

 -

 

 

(52)

Dividends paid

 

 -

 

 

 -

 

 

(7,800)

 

 

 -

 

 

 -

 

 

(7,800)

Foreign currency translation adjustments

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(44)

 

 

(44)

Net income

 

 -

 

 

 -

 

 

 -

 

 

11,522 

 

 

 -

 

 

11,522 

Balance at September 30, 2018

 

52,678,584 

 

$

 

$

174,207 

 

$

(24,777)

 

$

(45)

 

$

149,390 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

52,707,879 

 

$

 

$

172,255 

 

$

(25,857)

 

$

(56)

 

$

146,347 

Adoption of lease standard (see Note 1)

 

 -

 

 

 -

 

 

 -

 

 

4,802 

 

 

 -

 

 

4,802 

Balance at January 1, 2019

 

52,707,879 

 

$

 

$

172,255 

 

$

(21,055)

 

$

(56)

 

$

151,149 

Issuance of restricted shares

 

666,753 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Cancellation of restricted shares

 

(255,555)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Repurchase of common stock

 

(2,307,023)

 

 

 -

 

 

(10,455)

 

 

 -

 

 

 -

 

 

(10,455)

Stock based compensation

 

 -

 

 

 -

 

 

2,169 

 

 

 -

 

 

 -

 

 

2,169 

Tax withholdings related to net share settlements of stock based compensation awards

 

 -

 

 

 -

 

 

(226)

 

 

 -

 

 

 -

 

 

(226)

Dividends paid

 

 -

 

 

 -

 

 

(7,706)

 

 

 -

 

 

 -

 

 

(7,706)

Foreign currency translation adjustments

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(35)

 

 

(35)

Net income

 

 -

 

 

 -

 

 

 -

 

 

(217)

 

 

 -

 

 

(217)

Balance at September 30, 2019

 

50,812,054 

 

$

 

$

156,037 

 

$

(21,272)

 

$

(91)

 

$

134,679 

See accompanying Notes to Consolidated Financial Statements.

7


Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 (dollars in thousands)

(unaudited)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2018

 

2017

 

2019

 

2018

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

11,522 

 

$

18,170 

Net (loss) income

 

$

(217)

 

$

11,522 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation & amortization

 

21,180 

 

19,395 

 

24,508 

 

21,180 

Amortization of debt issuance costs

 

607 

 

526 

 

446 

 

607 

Loss on disposals of property, plant and equipment

 

76 

 

205 

 

90 

 

76 

Impairment charges on property, plant and equipment

 

319 

 

 -

 

 -

 

319 

Deferred rent

 

2,345 

 

2,911 

Change in leases

 

(1,267)

 

2,345 

Stock based compensation

 

1,950 

 

2,759 

 

2,169 

 

1,950 

Deferred income taxes

 

1,415 

 

3,472 

 

190 

 

1,415 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

(1,342)

 

(249)

 

(1,527)

 

(1,342)

Inventories

 

(21,051)

 

3,369 

 

10,015 

 

(21,051)

Prepaid expenses and other assets

 

(2,374)

 

4,163 

 

47 

 

(2,374)

Accounts payable

 

(6,550)

 

5,421 

 

(3,307)

 

(6,550)

Income tax receivable / payable

 

2,520 

 

(1,163)

 

(362)

 

2,520 

Accrued expenses and other liabilities

 

 

5,104 

 

 

(9,624)

 

 

2,827 

 

 

5,104 

Net cash provided by operating activities

 

 

15,721 

 

 

49,355 

 

 

33,612 

 

 

15,721 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(22,893)

 

(28,031)

 

(22,839)

 

(22,893)

Proceeds from the sale of property, plant and equipment

 

 

13 

 

 

 -

Proceeds from insurance

 

 

610 

 

 

13 

Net cash used in investing activities

 

 

(22,880)

 

 

(28,031)

 

 

(22,229)

 

 

(22,880)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

Payments of long-term debt and capital lease obligations

 

(95,235)

 

(44,672)

Payments of long-term debt and financing lease obligations

 

(43,153)

 

(95,235)

Advances on line of credit

 

114,095 

 

30,000 

 

53,000 

 

114,095 

Dividends paid

 

(7,800)

 

(7,764)

 

(7,706)

 

(7,800)

Proceeds from exercise of stock options

 

 -

 

1,635 

Repurchases of common stock

 

(10,455)

 

 -

Employee taxes paid for shares withheld

 

(52)

 

(217)

 

(226)

 

(52)

Debt issuance costs

 

 

(374)

 

 

 -

 

 

 -

 

 

(374)

Net cash provided by (used in) financing activities

 

 

10,634 

 

 

(21,018)

Net cash (used in) provided by financing activities

 

 

(8,540)

 

 

10,634 

Effect of exchange rate changes on cash

 

 

(11)

 

 

30 

 

 

(29)

 

 

(11)

Net change in cash

 

3,464 

 

336 

 

2,814 

 

3,464 

Cash, cash equivalents and restricted cash beginning of period

 

 

7,476 

 

 

12,948 

 

 

6,382 

 

 

7,476 

Cash, cash equivalents and restricted cash end of period

 

$

10,940 

 

$

13,284 

 

$

9,196 

 

$

10,940 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,105 

 

$

12,429 

 

$

8,371 

 

$

10,105 

Restricted cash

 

 

835 

 

 

855 

 

 

825 

 

 

835 

Cash, cash equivalents and restricted cash end of period

 

$

10,940 

 

$

13,284 

 

$

9,196 

 

$

10,940 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment included in accounts payable and accrued expenses

 

$

2,229 

 

$

4,935 

 

$

1,320 

 

$

2,229 

Cash paid for interest

 

1,846 

 

1,453 

 

2,853 

 

1,846 

Cash paid (received) for income taxes, net

 

240 

 

7,575 

Cash paid for income taxes, net

 

471 

 

240 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

78


 

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

 

Note 1: Background



Tile Shop Holdings, Inc. (“Holdings,” and together with its wholly owned subsidiaries, the “Company”) was incorporated in Delaware in June 2012.



The Company is a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States.  The Company manufactures its own setting and maintenance materials, such as thinset, grout, and sealers. The Company’s primary market is retail sales to consumers, contractors, designers and home builders. As of September 30, 2018,2019, the Company had 140 stores in 31 states and the District of Columbia, with an average size of approximately 20,200 square feet. The Company has distribution centers located in Michigan, New Jersey, Oklahoma, Virginia and Wisconsin. The Company has a sourcing operation located in China.



The accompanying Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for comprehensive financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature, including the elimination of all intercompany transactions. Operating results for the three and nine months ended September 30, 20182019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018.2019.



These statements should be read in conjunction with the Consolidated Financial Statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018. The accounting policies used in preparing these Consolidated Financial Statements are the same as those described in Note 1 to the Consolidated Financial Statements in such Form 10-K.



Recently Adopted Accounting Pronouncements



In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued a final standard on revenue from contracts with customers. This new standard introduces a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In 2016, the FASB issued several amendments to the standard.  The Company adopted this standard as of January 1, 2018 using the modified retrospective transition method.  See Note 2 for further details.

In November 2016, the FASB issued new guidance on restricted cash on the statement of cash flows. The new guidance requires the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown in the statement of cash flows. The Company adopted the new standard as of March 31, 2018 using the retrospective transition method. The Company’s restricted cash balance was $0.8 million as of September 30, 2018. Upon adopting the new standard, the Company no longer presents the release of restricted cash as a financing cash inflow. Instead, restricted cash and long-term restricted cash balances are included in the beginning and ending cash, cash equivalents and restricted cash balances in the Consolidated Statement of Cash Flows. In connection with the adoption of this standard, $6.0 million received from restricted cash accounts during the nine months ended September 30, 2017 that was previously presented as a financing cash inflow was reclassified to the beginning cash, cash equivalents and restricted cash balances in the Consolidated Statement of Cash Flows.

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued a standard that primarily requires organizations that lease assets to recognize the rights and obligations created by those leases on the Consolidated Balance Sheet.  The accounting standards updateconsolidated balance sheet.  This standard also requires expanded disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.  The Company adopted this standard is effective in fiscal yearJanuary 1, 2019 with early adoption permitted. using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. 

The Company continues to evaluatedetermines if an arrangement is a lease at inception. Operating leases are included in right of use assets and lease liabilities on the impactconsolidated balance sheets. The right of this standard on its financial statementsuse assets and disclosures, internal controls and accounting policies. This evaluation process includes reviewing all formslease liabilities are recognized as the present value of leases, performing a completeness assessmentthe future minimum lease payments over the lease population.term at commencement date. As most of the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The Companyright of use asset is currently planning on electing the package of practical expedients not to reassess prior conclusions related to contracts containing leases,also adjusted for any lease classificationpayments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease typically at the Company’s own discretion. The Company regularly evaluates the renewal options and is evaluatingwhen they are reasonably certain of exercise, the otherCompany includes the renewal period in its lease term.

This standard provides a number of optional practical expedients availablein transition.  The Company elected the package of three practical expedients permitted under the guidance.transition guidance within this standard, which among other things, allows the Company to carryforward the historical lease classification.  The Company is implementing a third-party supporteddid not separate non-lease components from lease accounting information system to account for its lease population in accordance with this new standardcomponents by class of underlying assets and establishing internal controls over the new system. The Company believesdid not apply the adoptionrecognition requirements of the standard will have a material impact onto short-term leases, as allowed by the standard.

The Company also elected to apply the hindsight practical expedient.  Its election of the hindsight practical expedient resulted in the shortening of lease terms for certain existing leases and the useful lives of corresponding leasehold improvements.  In its Consolidated Balance Sheet as virtually all leases willapplication of the hindsight practical expedient, the Company considered recent investments in leased properties and its overall real estate strategy, which resulted in the determination that most renewal options would not be recognized asreasonably certain in determining the expected lease term.  

Upon adopting this standard, the Company established a right of use asset of $147.2 million and lease obligation.

liabilities of $169.9 million, reduced deferred rent by $44.6 million, and recorded a cumulative effect adjustment to retained earnings of $22.0 million. This retained earnings impact was due to the election of the hindsight practical expedient which resulted in a decrease in the cumulative difference between the straight-line rent expense and rental payments that had been made between the inception of each lease and January 1, 2019. The change in the useful life assigned to certain leasehold improvements resulted in a $15.3 million reduction in fixed assets and retained earnings.  The net impact of the cumulative effect adjustments also resulted in a $1.7 million reduction of

 

89


 

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

 

Note 2: Revenues

On January 1, 2018,deferred tax assets and a corresponding adjustment to retained earnings that was recorded during the Company adopted Accounting Standards Update No. 2014-09 (Topic 606), “Revenue from Contracts with Customers,” using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605.nine months ended September 30, 2019. The adoption of Topic 606 had a cumulative impact adjustment to opening retained earnings of $0.1 million as of January 1, 2018 andthis standard did not have ana material impact on revenues recognized fornet income or cash flows during the three and nine months ended September 30, 2018.2019. See Note 8 for further details.



Revenue RecognitionAccounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued a final standard on accounting for credit losses. The standard is effective for the Company in fiscal year 2020 and requires a change in credit loss calculations using the expected loss method. The Company is evaluating the effect of this standard on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued a final standard which provides guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The standard requires customers of cloud computing services to recognize an intangible asset for the software license and, to the extent that payments attributable to the software license are made over time, a liability is also recognized. The standard also allows customers of cloud computing services to capitalize certain implementation costs. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The standard will become effective for the Company at the beginning of its fiscal year 2020, although early adoption is permitted for all entities. The Company is evaluating the effect of the standard on its consolidated financial statements and related disclosures.

Note 2: Revenues



Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration received in exchange for those goods or services. Sales taxes are excluded from revenues. 



The following table presents revenues disaggregated by product category:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

For the three months ended

 

For the nine months ended

 

September 30,

 

September 30,

September 30,

 

September 30,

 

2018

 

2017

 

2018

 

2017

2019

 

2018

 

2019

 

2018

Man-made tiles

 

47 

%

 

43 

%

 

46 

%

 

43 

%

47 

%

 

47 

%

 

47 

%

 

46 

%

Natural stone tiles

 

28 

 

 

33 

 

28 

 

 

33 

 

28 

 

 

28 

 

 

28 

 

 

28 

 

Setting and maintenance materials

 

13 

 

 

11 

 

13 

 

 

11 

 

13 

 

 

13 

 

 

13 

 

 

13 

 

Accessories

 

10 

 

 

11 

 

11 

 

 

11 

 

10 

 

 

10 

 

 

11 

 

 

11 

 

Delivery service

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

100 

%

 

100 

%

 

100 

%

 

100 

%

100 

%

 

100 

%

 

100 

%

 

100 

%



The Company generates revenues by selling tile products, setting and maintenance materials, accessories, and delivery services to its customers through its store locations and website.locations.  The timing of revenue recognition coincides with the transfer of control of goods and services ordered by the customer which falls into one of three categories described below:



·

Revenue recognized when an order is placed – If a customer places an order in a store and the contents of their order are available, the Company recognizes revenue concurrent with the exchange of goods for consideration from the customer.

 

·

Revenue recognized when an order is picked up – If a customer places an order for items held in a centralized distribution center, the Company requests a deposit from the customer at the time they place the order.  Subsequently when the contents of the customer’s order are delivered to the store, the customer returns to the store and picks up the items that were ordered.  The Company recognizes revenue on this transaction when the customer picks up their order.



·

Revenue recognized when an order is delivered – If a customer places an order in a store or online and requests delivery of their order, the Company prepares the contents of their order, initiates the delivery service, and recognizes revenue once the contents of the customer’s order are delivered.



The Company determines the transaction price of its contracts based on the pricing established at the time a customer places an order.  The transaction price does not include sales tax as the Company is a pass-through conduit for collecting and remitting sales tax.  Any discounts applied to an order are allocated proportionately to the base price of the goods and services ordered.  Deposits made by customers are recorded in other accrued liabilities. Deferred revenues associated with customer deposits are recognized at the time the Company transfers control of the items ordered or renders the delivery service. In the event an order is partially fulfilled as of the end

10


Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

of a reporting period, revenue will be recognized based on the transaction price allocated to the goods delivered and services rendered. The customer deposit balance was $8.1$7.8 million and $7.4 million as of September 30, 20182019 and December 31, 2017.2018, respectively.  Revenues recognized during the nine months ended September 30, 20182019 that were included in the customer deposit balance as of the beginning of the period were $7.8$7.1 million.



9


Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

The Company extends financing toAccounts receivable include amounts due from qualified professional customers who apply for credit.  The accounts receivable balance was $3.7 million and $2.4 million as of September 30, 2018 and December 31, 2017, respectively.  Customers who qualify for an account receive 30-day payment terms. The accounts receivable balance was $4.6 million and $3.1 million at September 30, 2019 and December 31, 2018, respectively. The Company expects that the customer will pay for the goods and services ordered within one year from the date the order is placed.  Accordingly, the Company qualifies for the practical expedient outlined in ASC 606-10-32-18 and does not adjust the promised amount of consideration for the effects of the financing component. 



Customers may return purchased items for an exchange or refund.  The Company records a reserve for estimated product returns based on the historical returns trends and the current product sales performance.  Historically, the sales returns reserve was presented net of cost of sales in other current liabilities. Upon adoption of Topic 606, theThe Company presents the sales returns reserve as an other current liability and the estimated value of the inventory that will be returned as an other current asset in the Consolidated Balance Sheet.consolidated balance sheet.  The components of the sales returns reserve reflected in the Consolidated Balance Sheetconsolidated balance sheet as of September 30, 20182019 and December 31, 20172018 are as follows:







 

 

 

 

 

 



 

(in thousands)



 

September 30,

 

December 31,



 

2019

 

2018

Other current liabilities

 

$

5,224 

 

$

5,154 

Other current assets

 

 

1,601 

 

 

1,498 

Sales returns reserve, net

 

$

3,623 

 

$

3,656 





 

 

 

 

 

 



 

(in thousands)



 

September 30,

 

December 31,



 

2018

 

2017(1)

Other current liabilities

 

$

5,525 

 

$

3,139 

Other current assets

 

 

1,596 

 

 

 -

Sales returns reserve, net

 

$

3,929 

 

$

3,139 

(1) As of December 31, 2017, the sales returns reserve of $3.1 million was presented net of the expected value of inventory to be returned of $0.9 million.



Note 3: Inventories



Inventories are stated at the lower of cost (determined on the weighted-average cost method) or net realizable value. Inventories consist primarily of merchandise held for sale. Inventories were comprised of the following as of September 30, 20182019 and December 31, 2017:

2018:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

(in thousands)

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

2018

 

2017

 

2019

 

2018

Finished goods

 

$

94,528 

 

$

65,843 

 

$

96,094 

 

$

98,776 

Raw materials

 

2,144 

 

1,660 

 

2,300 

 

2,114 

Finished goods in transit

 

 

9,638 

 

 

17,756 

 

 

1,686 

 

 

9,205 

Total

 

$

106,310 

 

$

85,259 

 

$

100,080 

 

$

110,095 



The Company provides provisions for losses related to shrinkage and other amounts that are otherwise not expected to be fully recoverable. These provisions are calculated based on historical shrinkage, selling price, margin and current business trends. The provision for losses related to shrinkage and other amounts was $0.5$0.8 million and $0.2$0.3 million as of September 30, 20182019 and December 31, 2017,2018, respectively. 



Note 4: Income taxesTaxes



On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, including, but not limited to, a reduction of the corporate incomeThe Company's effective tax rate to 21%on net income (loss) before income taxes for the three months ended September 30, 2019 and 2018 was 16.5% and 20.3%, respectively. The Company’s effective January 1,tax rate on net income (loss) before income taxes for the nine months ended September 30, 2019 and 2018 was 265.7% and a one-time mandatory transition tax on accumulated foreign earnings, a tax on global intangible low taxed income (“GILTI”)26.5%, andrespectively. For the repeal of the domestic manufacturing deduction for 2018. The Company recognized the effect of the tax law changes in the period of enactment, including determining the transition tax, re-measuring the Company’s U.S. deferred tax assetsthree months ended September 30, 2019 and liabilities and reassessing the net realizability of the Company’s deferred tax assets and liabilities. Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, (“SAB 118”) allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. During the third quarter of 2018, the Company recorded an adjustmenta benefit from income taxes of $0.3 million and a provision for income taxes of $0.7 million, respectively. For the nine months ended September 30, 2019 and 2018, the Company recorded a provision for income taxes of $0.3 million and $4.2 million, respectively. The decrease in the provision for income taxes is due to its provisional estimates resulting in a $0.2 million reductionlower pretax earnings.

The Company records interest and penalties relating to uncertain tax positions in income tax expense concurrent with the filingexpense. As of its 2017 federal income tax return. Since the Tax Act was passed late in the fourth quarter of 2017,September 30, 2019 and ongoing guidance and accounting interpretation is expected throughout 2018, the Company considers the accounting of the state deferredhas not recognized any liabilities for uncertain tax re-measurementspositions, nor have interest and other itemspenalties related to be provisional due to the forthcoming guidance and the Company’s ongoing analysisuncertain tax positions been accrued.

 

1011


 

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

 

of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with SAB 118. While the Company does not expect to incur a current tax on GILTI relative to 2018 operations, the Company has not yet elected an accounting policy related to GILTI.

The Company's effective tax rate on net income before income taxes for the three months ended September 30, 2018 and 2017 was 20.3% and 37.6%, respectively. The difference between the Company’s effective tax rate for the three months ended September 30, 2018 of 20.3% and the expected federal statutory rate of 21.0% is primarily due to favorable adjustments from the filing of the 2017 federal income tax return, partially offset by state income taxes.  The Company’s effective tax rate on net income before taxes for the nine months ended September 30, 2018 and 2017 was 26.5% and 35.6%, respectively. The difference between the Company’s effective rate for the nine months ended September 30, 2018 of 26.5% and the expected federal statutory rate of 21.0% for the three and nine months ended September 30, 2018 is primarily due to state income taxes. 

For the three months ended September 30, 2018 and 2017, the Company recorded a provision for income taxes of $0.7 million and $1.5 million, respectively. For the nine months ended September 30, 2018 and 2017, the Company recorded a provision for income taxes of $4.2 million and $10.0 million, respectively. The decrease in the provision for income taxes for both the three and nine months ended September 30, 2018 is due to lower pretax earnings as well as the decrease in the corporate tax rate.

The Company records interest and penalties relating to uncertain tax positions in income tax expense. As of September 30, 2018 and 2017, the Company has not recognized any liabilities for uncertain tax positions, nor have interest and penalties related to uncertain tax positions been accrued.

Note 5: Earnings Per Share



Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, after taking into consideration all dilutive potential shares outstanding during the period.



Basic and diluted earnings per share were calculated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(all amounts in thousands except share and per share data)

(all amounts in thousands except share and per share data)

 

For the three months ended

 

For the nine months ended

 

For the three months ended

 

For the nine months ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

2018

 

2017

 

2018

 

2017

 

2019

 

2018

 

2019

 

2018

Net income

 

$

2,553 

 

$

2,438 

 

$

11,522 

 

$

18,170 

Net (loss) income

 

$

(1,383)

 

$

2,553 

 

$

(217)

 

$

11,522 

Weighted average shares outstanding - basic

 

 

51,920,830 

 

 

51,757,248 

 

 

51,896,678 

 

 

51,638,864 

 

49,769,739 

 

51,920,830 

 

50,901,289 

 

51,896,678 

Effect of dilutive securities attributable to stock based awards

 

 

382,947 

 

 

296,407 

 

 

159,458 

 

 

372,344 

 

 

 -

 

 

382,947 

 

 

 -

 

 

159,458 

Weighted average shares outstanding - diluted

 

 

52,303,777 

 

 

52,053,655 

 

 

52,056,136 

 

 

52,011,208 

 

 

49,769,739 

 

 

52,303,777 

 

 

50,901,289 

 

 

52,056,136 

Income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05 

 

$

0.05 

 

$

0.22 

 

$

0.35 

 

$

(0.03)

 

$

0.05 

 

$

(0.00)

 

$

0.22 

Dilutive

 

$

0.05 

 

$

0.05 

 

$

0.22 

 

$

0.35 

Diluted

 

$

(0.03)

 

$

0.05 

 

$

(0.00)

 

$

0.22 

Anti-dilutive securities excluded from earnings per share calculation

 

 

1,730,948 

 

 

511,122 

 

 

2,116,198 

 

 

298,721 

 

5,047,633 

 

1,730,948 

 

2,614,058 

 

2,116,198 





Note 6: Other Accrued Liabilities



Other accrued liabilities consisted of the following:





 

 

 

 

 

 



 

 

 

 

 

 



 

(in thousands)



 

September 30,

 

December 31,



 

2018

 

2017

Customer deposits

 

$

8,062 

 

$

8,064 

Sales returns reserve

 

 

5,525 

 

 

3,139 

Accrued wages and salaries

 

 

3,631 

 

 

2,853 

Payroll and sales taxes

 

 

3,650 

 

 

2,491 

Other current liabilities

 

 

6,922 

 

 

5,866 

Total other accrued liabilities

 

$

27,790 

 

$

22,413 

11




Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)



 

 

 

 

 

 



 

 

 

 

 

 



 

(in thousands)



 

September 30,

 

December 31,



 

2019

 

2018

Customer deposits

 

$

7,810 

 

$

7,383 

Sales returns reserve

 

 

5,224 

 

 

5,154 

Payroll and sales taxes

 

 

4,213 

 

 

2,929 

Accrued wages and salaries

 

 

3,336 

 

 

3,689 

Other current liabilities

 

 

5,288 

 

 

5,329 

Total other accrued liabilities

 

$

25,871 

 

$

24,484 

 

Note 7: Long-term Debt



On September 18, 2018, Holdings and its operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Bank of America, N.A., Fifth Third Bank and Citizens Bank (the “Credit Agreement”). The Credit Agreement provides the Company with a senior credit facility consisting of a $100.0 million revolving line of credit through September 18, 2023. Borrowings pursuant to the Credit Agreement initially bear interest at a rate of adjusted LIBOR plus 1.75% and may bear interest in a range between adjusted LIBOR plus 1.50% to adjusted LIBOR plus 2.25%, depending on The Tile Shop’s consolidated total rent adjusted leverage ratio. At September 30, 20182019 the base interest rate was 6.00% and the LIBOR-based interest rate was 4.01%4.02%. Borrowings outstanding consisted of $63.0 million on the revolving line of credit as of September 30, 2019.  In addition, the Company has standby letters of credit outstanding related to its workers compensation and medical insurance policies. As of September 30, 2019 and 2018, the standby letters of credit totaled $1.3 million and $1.1 million, respectively. There was $35.7 million available for borrowing on the revolving line of credit as of September 30, 2019, which may be used to support the Company’s growth and for working capital purposes.



The Credit Agreement is secured by virtually all of the assets of the Company, including but not limited to, inventory, receivables, equipment and real property. The Credit Agreement contains customary events of default, conditions to borrowings, and restrictive covenants, including restrictions on the Company’s ability to dispose of assets, make acquisitions, incur additional debt, incur liens, or make investments. The Credit Agreement also includes financial and other covenants, including covenants to maintain certain fixed charge coverage ratios and consolidated total rent adjusted leverage ratios.  The Company was in compliance with the covenants as of September 30, 2018.2019.  

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Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Note 8: Leases



The Credit Agreement supersedesCompany leases its retail stores, certain distribution space, and replacesoffice space. Leases generally have a term of ten to fifteen years, and contain renewal options. Assets acquired under operating leases are included in its entirety the Company’s prior senior secured credit facility with Fifth Third Bank dated June 2, 2015, as amended on April 5, 2018, July 17, 2017, February 10, 2017 and December 9, 2016. The Company drew on the revolving lineright of credit pursuant to the Credit Agreement to refinance all of the existing term loan, revolving line of credit and interest outstanding under the Company’s prior credit facility, as well as pay $0.4 million in debt issuance costs in connection with the Credit Agreement. Debt issuance costs are classified as other current assets and otheruse assets in the Consolidated Balance Sheet and amortized on a straight line basis over theaccompanying consolidated balance sheet. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants. The depreciable life of assets and leasehold improvements is limited by the Credit Agreement.  The Company recorded a $0.1 million charge in interest expense to write-off of certain unamortized deferred financing fees associated with the June 2, 2015 credit facility as of the date of the payoff.expected lease term.



Leases (in thousands)

Classification

September 30, 2019

Assets

Operating lease assets

Right of use asset

$

143,789 

Financing lease assets

Property, plant and equipment, net of accumulated depreciation

126 

Total leased assets

$

143,915 

Liabilities

Current

Operating

Current portion of lease liability

$

26,653 

Financing

Other accrued liabilities

156 

Noncurrent

Operating

Long-term lease liability, net

138,489 

Financing

Other long-term liabilities

317 

Total lease liabilities

$

165,615 

Borrowings outstanding consisted



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

Three Months Ended

 

 

Nine Months Ended

Lease cost (in thousands)

Classification

 

September 30, 2019

Operating lease cost

SG&A expenses

 

$

8,258 

 

$

24,268 

Financing lease cost

 

 

 

 

 

 

 

Amortization of leased assets

Depreciation and amortization

 

 

13 

 

 

37 

Interest on lease liabilities

Interest expense

 

 

19 

 

 

59 

Variable lease cost(1)

SG&A expenses

 

 

3,470 

 

 

10,177 

Short term lease cost

SG&A expenses

 

 

197 

 

 

679 

Net lease cost

 

 

$

11,957 

 

$

35,220 

(1) Variable lease costs consist primarily of $46.0 million on the revolving line of credit as of September 30, 2018.  In addition, the Company has standby letters of credit outstanding related to its workers compensationtaxes, insurance, and medical insurance policies.  As of September 30, 2018 and 2017, the standby letters of credit totaled $1.1 million. There was $52.9 million availablecommon area or other maintenance costs for borrowing on the revolving line of credit as of September 30, 2018, which may be used to support the Company’s growth and for working capital purposes.leased facilities.



Long-term debt consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2018

 

December 31, 2017



 

 

 

Unamortized

 

 

 

Unamortized



 

 

 

Debt Issuance

 

 

 

Debt Issuance



 

Principal

 

Costs

 

Principal

 

Costs

Term note payable - interest at 3.06% at December 31, 2017

 

$

 -

 

$

 -

 

$

11,346 

 

$

(36)

Commercial bank credit facility

 

 

46,000 

 

 

 -

 

 

15,000 

 

 

 -

Variable interest rate bonds (interest at 1.69% at December 31, 2017)

 

 

 -

 

 

 -

 

 

705 

 

 

 -

Total debt obligations

 

 

46,000 

 

 

 -

 

 

27,051 

 

 

(36)

Less: current portion

 

 

 -

 

 

 -

 

 

8,855 

 

 

(22)

Debt obligations, net of current portion

 

$

46,000 

 

$

 -

 

$

18,196 

 

$

(14)



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Maturity of Lease Liabilities (in thousands)

 

Operating Leases

 

Financing Leases

 

Total

2019

 

$

8,996 

 

$

54 

 

$

9,050 

2020

 

 

35,907 

 

 

216 

 

 

36,123 

2021

 

 

34,819 

 

 

215 

 

 

35,034 

2022

 

 

31,895 

 

 

90 

 

 

31,985 

2023

 

 

27,084 

 

 

 -

 

 

27,084 

Thereafter

 

 

61,354 

 

 

 -

 

 

61,354 

Total lease payments

 

 

200,055 

 

 

575 

 

 

200,630 

Less: interest

 

 

(34,913)

 

 

(102)

 

 

(35,015)

Present value of lease liabilities

 

$

165,142 

 

$

473 

 

$

165,615 



 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended

Other Information (in thousands)

 

September 30, 2019

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

8,798 

 

$

26,109 

Operating cash flows from financing leases

 

$

15 

 

$

50 

13


Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Financing cash flows from financing leases

 

$

(51)

 

$

(153)

Lease right-of-use assets obtained or modified in exchange for lease obligations

 

$

 -

 

$

5,993 

Lease Term and Discount Rate

September 30, 2019

Weighted-average remaining term (years)

Operating leases

6.3 

Financing leases

2.7 

Weighted-average discount rate

Operating leases

6.22 

%

Financing leases

14.73 

%





Note 8:9: Fair Value of Financial Instruments



Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, the Company uses a three-tier valuation hierarchy based upon observable and non-observable inputs:



12


Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Level 1 – Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.



Level 2 – Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

·

Quoted prices for similar assets or liabilities in active markets;

·

Quoted prices for identical or similar assets in non-active markets;

·

Inputs other than quoted prices that are observable for the asset or liability; and

·

Inputs that are derived principally from or corroborated by other observable market data.



Level 3 – Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment.



The following table sets forth by Level within the fair value hierarchy the Company’s financial assets that were accounted for at fair value on a recurring basis at September 30, 20182019 and December 31, 20172018 according to the valuation techniques the Company uses to determine their fair values. There have been no transfers of assets among the fair value hierarchies presented.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pricing

 

Fair Value at

 

Pricing

 

Fair Value at

 

Category

 

September 30, 2018

 

December 31, 2017

 

Category

 

September 30, 2019

 

December 31, 2018

Assets

 

(in thousands)

 

(in thousands)

Cash and cash equivalents

 

Level 1

 

$

10,105 

 

$

6,621 

 

Level 1

 

$

8,371 

 

$

5,557 

Restricted cash

 

Level 1

 

 

835 

 

855 

 

Level 1

 

825 

 

825 



The following methods and assumptions were used to estimate the fair value of each class of financial instrument.  There have been no changes in the valuation techniques used by the Company to value the Company’s financial instruments.



·

Cash and cash equivalents: Consists of cash on hand and bank deposits.  The value was measured using quoted market prices in active markets.  The carrying amount approximates fair value.



·

Restricted cash: Consists of cash and cash equivalents held in bank deposit accounts restricted as to withdrawal or that are under the terms of use for current operations.  The value was measured using quoted market prices in active markets.  The carrying amount approximates fair value.



14


Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Fair value measurements also apply to certain non-financial assets and liabilities measured at fair value on a nonrecurring basis.  Property, plant and equipment isand right of use assets are measured at fair value when an impairment is recognized and the related assets are written down to fair value. The Company measured the fair value of these assets based on projected cash flows and an estimated risk-adjusted rate of return. Projected cash flows are considered levelLevel 3 inputs. 

During the nine months ended September 30, 2018, the Company identified property, plant and equipment that would be disposed of prior to the end of their useful lives, which resulted in the recognition of a $0.3 million charge to write-down these assets to their estimated fair value. NoThe Company did not recognize any significant impairment charges were recorded during the three months ended September 30, 2018. No impairment charges were recordedlosses during the three and nine months ended September 30, 2017.2019. 



The carrying value of the Company’s borrowings under its credit agreementCredit Agreement approximate fair value based upon Level 2 inputs of the market interest rates available to the Company for debt obligations with similar risks and maturities.



Note 9:10: Equity Incentive Plans



Stock options:



The Company measures and recognizes compensation expense for all stock based awards at fair value. The financial statements for the three and nine months ended September 30, 20182019 and 20172018 include compensation costexpense for the portion of outstanding awards that

13


Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

vested during those periods. The Company recognizes stock based compensation costsexpenses on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Total stock based compensation expense related to stock options was $0.3$0.2 million and $0.6$0.3 million for the three months ended September 30, 20182019 and 2017,2018, respectively. Total stock based compensation expense related to stock options was $0.7 million and $1.7 million for both the nine months ended September 30, 20182019 and 2017, respectively.2018. Stock based compensation expense pertaining to stock options is included in selling, general and administrative expenses in the accompanying Consolidated Statementsconsolidated statements of Income.income.



As of September 30, 2018,2019, the Company had outstanding stock options to purchase 1,716,2991,443,382 shares of common stock at a weighted average exercise price of $14.27.$10.96.



Restricted stock:



The Company awards restricted common shares to selected employees and to non-employee directors. Recipients are not required to provide any consideration other than continued service.upon vesting of the award. Restricted stock awards are subject to certain restrictions on transfer, and all or part of the shares awarded may be subject to forfeiture upon the occurrence of certain events, including employment termination. Certain awards are also subject to forfeiture if the Company fails to attain certain performance targets. The restricted stock is valued at its grant date fair value and expensed over the requisite service period or the vesting term of the awards. The Company adjusts the cumulative expense recognized on awards with performance conditions based on the probability of achieving the performance condition. Total stock based compensation expense related to restricted stock was $0.5 million and $0.4 million for both the three months ended September 30, 20182019 and 2017, respectively.2018.  Total stock based compensation expense related to restricted stock was $1.2$1.5 million and $1.1$1.2 million for the ninethree months ended September 30, 20182019 and 2017,2018, respectively. Stock based compensation expense pertaining to restricted stock awards is included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income.



As of September 30, 2018,2019, the Company had 753,1131,031,723 outstanding restricted common shares.

 

Note 10:11: New Market Tax Credit



2016 New Market Tax Credit



In December 2016, the Company entered into a financing transaction with U.S. Bank Community, LLC (“U.S. Bank”) related to a $9.2 million expansion of the Company’s facility in Durant, Oklahoma. U.S. Bank madeIn this transaction, which was conducted under a capital contribution to, andqualified New Markets Tax Credit (“NMTC”) program, Tile Shop Lending, Inc. (“Tile Shop Lending”) made a loanloaned $6.7 million to Twain Investment Fund 192 LLC (the “Investment Fund”) under a qualified New Markets Tax Credit (“NMTC”) program. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and is intended to induce capital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their Federal income taxes for up to 39% of qualified investments in the equity of community development entities (“CDEs”). CDEs are privately managed investment institutions that are certified to make qualified low-income community investments.

In this transaction, Tile Shop Lending loaned $6.7 million to the Investment Fund at an interest rate of 1.37% per year and with a maturity date of December 31, 2046. The Investment Fund then contributed the loan to a CDE,community development entity (a “CDE”), which, in turn, loaned the funds on similar terms to Tile Shop of Oklahoma, LLC, an indirect, wholly-owned subsidiary of Holdings. The proceeds of the loans from the CDEs (including loans representing the capital contribution made by U.S. Bank, net of syndication fees) were used to partially fund the distribution center project.   

In December 2016, U.S. Bank also contributed $3.1$3.2 million to the Investment FundsFund and, by virtue of such contribution, is entitled to substantially all of the tax benefits derived from the NMTCs,NMTC, while the Company effectively received net loan proceeds equal to U.S. Bank’s contributions to the Investment Fund. This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase U.S. Bank’s interest. The Company believes that U.S. Bank will exercise the put option in December 2023 at the end of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required to be in compliance with various regulations and

15


Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify U.S. Bank for any loss or recapture of NMTCs related to the financing until such time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement.  



The Company has determined that the financing arrangement with the Investment Fund and CDEsthe CDE contains a variable interest entity (“VIE”). The ongoing activities of the Investment Fund – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the

14


Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Investment Fund. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to the structure; U.S. Bank’s lack of a material interest in the underling economics of the project; and the fact that the Company is obligated to absorb losses of the Investment Fund. The Company concluded that it is the primary beneficiary of the VIE and consolidated the Investment Fund, as a VIE, in accordance with the accounting standards for consolidation. In 2016, U.S. Bank’s contributions of $3.1$3.2 million, net of syndicationssyndication fees, were included in cash, restricted cash, other accrued liabilities and other long-term liabilities in the Consolidated Balance Sheet.consolidated balance sheet. The Company incurred $1.2$1.3 million of syndication fees in connection with this transaction, which were classified as other current assets and other non-current assets in the Consolidated Balance Sheet.consolidated balance sheet. The Company is recognizing the benefit of this net $1.9 million contribution over the seven-year compliance period as it is being earned through the on-going compliance with the conditions of the NMTC program. As of September 30, 2018,2019, the balance of the contribution liability was $2.4$1.9 million, of which $0.5 million iswas classified as other accrued liabilities on the Consolidated Balance Sheet and $1.9$1.4 million iswas classified as other long-term liabilities on the Consolidated Balance Sheet.



The Company is able to request reimbursement for certain expenditures made in connection with the expansion of theits distribution center in Durant, Oklahoma from the Investment Fund. Expenditures that qualify for reimbursement include building costs, equipment purchases, and other expenditures tied to the expansion of the facility. During the fiscal year ended December 31, 2017, the Company received reimbursements totaling $6.0 million from the Investment Fund. As of September 30, 2018,2019, the balance in the Investment Fund available for reimbursement to the Company was $0.8 million.



2013 New Market Tax Credit



In July 2013, the Company entered into a financing transaction with U.S. Bank and Chase Community Equity (“Chase”, and collectively with US. Bank, the “investors”) related to athe $19.1 million acquisition, rehabilitation, and construction of the Company’s distribution center and manufacturing facilities in Durant, Oklahoma.  In this transaction, Tile Shop Lending loaned $13.5 million to the Tile Shop Investment Fund LLC.  The investors contributed $5.6 million to the Tile Shop Investment Fund LLC.  The investors are entitled to the tax benefits derived from the NMTC by virtue of their contribution while the Company received the proceeds, net of syndication fees, to apply toward the construction project.  This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase the investors’ interest. The Company believes that the investors will exercise the put option in September 2020 at the end of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify the investors for any loss or recapture of NMTCs related to the financing until such time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement. 



The Company determined that this financing arrangement contains a VIE.  The ongoing activities of the Tile Shop Investment Fund LLC – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the Tile Shop Investment Fund LLC. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to the structure; the investors lack of a material interest in the underling economics of the project; and the fact that the Company is obligated to absorb losses of theThe Tile Shop Investment Fund.Fund LLC. The Company concluded that it is the primary beneficiary of the VIE and consolidated the Tile Shop Investment Fund LLC, as a VIE, in accordance with the accounting standards for consolidation. In 2013, the investors’ contributions, of $5.6 million, net of syndication fees, were included in cash, restricted cash, other accrued liabilities and other long-term liabilities in the Consolidated Balance Sheet.consolidated balance sheet. The Company incurred $1.2 million of syndication fees in connection with this transaction which were classified as other current assets and other non-current assets in the Consolidated Balance Sheet.consolidated balance sheet.  The Company is recognizing the benefit of this net $4.4 million contribution over the seven-year compliance period as it is being earned through the on-going compliance with the conditions of the NMTC program. As of September 30, 2018,2019, the balance of the contribution liability was $1.2$0.6 million, of which $0.6 million iswas classified as other accrued liabilities on the Consolidated Balance Sheet and $0.6 million is classified as other long-term liabilities on the Consolidated Balance Sheet.



Note 11: Commitments and Contingencies

The Company was a nominal defendant in several actions brought derivatively on behalf of the Company by three shareholders.  The plaintiffs alleged that the defendant-directors and/or officers breached their fiduciary duties by failing to adopt adequate internal controls for the Company, by approving false and misleading statements issued by the Company, by causing the Company to violate generally accepted accounting principles and SEC regulations, and by permitting the Company’s primary product to contain illegal amounts of lead. The complaints also alleged claims for insider trading and/or unjust enrichment. The Company moved to dismiss the actions, or in the alternative, to stay the actions.  Before the motions were decided, the parties entered into settlement

 

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Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

 

discussions.  The parties entered into a Stipulation of Settlement dated April 11, 2018 to resolve all claims in the derivative actions.  The settlement also resolved a demand letter dated May 19, 2016 that the Company’s Board of Directors had received from a shareholder about the same matters that were the subjects of the derivative actions.  By Order and Final Judgment entered on August 23, 2018, the Delaware Court of Chancery approved the settlement of the derivative actions and dismissed them with prejudice. Under the terms of settlement, the Board of Directors adopted, and the Company implemented, certain changes to its policies and practices that address related person transactions, insider trading, compliance, and ethics.  The Company also paid plaintiffs and their counsel $1.3 million for attorneys’ fees, expenses, and incentive awards that the Court awarded to them. The Company recognized $1.0 million of legal expense during the third quarter of 2018 concurrent with the Court’s decision regarding the plaintiffs attorneys’ fees.

The Company is also, from time to time, subject to claims and disputes arising in the normal course of business.  In the opinion of management, while the outcome of such claims and disputes cannot be predicted with certainty, the Company’s ultimate liability in connection with these matters is not expected to have a material adverse effect on the results of operations, financial position, or cash flows.

Note 12: Related Party Transactions



On July 9, 2018, Fumitake Nishi, the brother-in-law of the Company’s interim CEOdirector Robert Rucker and a former Company employee, informed the Company he had reacquired a majority of the equity of one of its key vendors, Nanyang Helin Stone Co. Ltd (“Nanyang”).  Nanyang supplies the Company with natural stone products including hand-crafted mosaics, listellos and other accessories. During the twelve months ended December 31, 2016 and 2017,2018, the Company purchased $8.4$12.0 million of products from Nanyang. During the three and nine months ended September 30, 2019, the Company purchased $1.4 million and $12.8$3.5 million of products from Nanyang, respectively. During the nine months ended September 30, 2018, the Company purchased $9.6 million of products from Nanyang.  Mr. Nishi’s employment with the Company was terminated on January 1, 2014 as a result of several violations of the Company’s code of business conduct and ethics policy.  Certain of those violations involved his undisclosed ownership of Nanyang at that time.  



Management and the Audit Committee have evaluated the relationship and determined that it would be in the Company’s best interests to continue purchasing products from Nanyang.  The Company believes Nanyang provides an important combination of quality, product availability and pricing, and relying solely on other vendors to supply similar product to the Company would not be in the Company’s best interests.  The Company and the Audit Committee hashave and will continue to review future purchases from Nanyang and compare the pricing for products purchased from Nanyang to the pricing of same or similar products purchased from unrelated vendors.

Note 13: Share Repurchase

On April 29, 2019, the Board of Directors of the Company authorized a share repurchase program (the “Program”), pursuant to which the Company was able to, from time to time, purchase shares of its common stock for an aggregate repurchase price not to exceed  $15,000,000. The Program began on May 2, 2019 and was to continue indefinitely until the full repurchase amount had been utilized or the Board of Directors terminated the Program.

Share repurchases were as follows:

Nine Months Ended

September 30, 2019

Shares of common stock

2,307,023 

Aggregate purchase price (in thousands)

$

10,455 

The Board of Directors decided to terminate the Program effective October 18, 2019, to focus on debt reduction and continued investment in strategic initiatives.



Note 13:14: Subsequent Events



On October 18, 2018,22, 2019, the Company declared a $0.05announced its intention to delist from the Nasdaq Stock Market (“Nasdaq”), deregister its common stock, suspend the quarterly cash dividend, to stockholders of record as ofand terminate the close of business on October 29, 2018. The dividend will be paid on November 9, 2018.

share repurchase program. 

 

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Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20172018 and our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.



Forward-Looking Statements



This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27Athe “safe harbor” provisions of the Private Securities Litigation Reform Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking1995. In some cases, you can identify these statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “depend,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “will likely result,” “would,” and similar expressions or variations, intendedalthough some forward-looking statements are expressed differently. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q relate to, identifyamong other things, our intentions regarding delisting from Nasdaq and deregistering our common stock, our anticipated new store openings, remodeling plans, and growth opportunities; our business strengths, marketing strategies, competitive advantages and role in our industry and markets; our expectations regarding financing arrangements; our expectations with respect to dividend payments; our expectations with respect to ongoing compliance with the terms of our credit facility; and our expectations with respect to remediation of our identified material weaknesses.

These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from any expected future results, performance, or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the level of demand for our products and our ability to introduce new products that satisfy market demand; our ability to grow and remain profitable in the highly competitive retail tile industry, our ability to access additional capital; our ability to attract and retain qualified personnel; unexpected delays or expenses related to opening new stores and maintaining or renovating existing stores; changes to economic or market conditions and customer preferences; disruptions in our supply chain or inventory management; unanticipated issues with respect to remediation of our identified material weaknesses; and those Risk Factors set forth in Part I, Item IA of our Annual Report on Form 10-K for the year ended December 31, 2018 and the additional Risk Factors set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q.

There is no assurance that our expectations will be realized. If one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated, or projected. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, unexpected delays or expenses related to maintaining or renovating existing stores, changes to our promotional strategy changes to economic or market conditions and customer preferences, disruptions in our supply chain, or inventory management, changes to our product assortment, competitive factors, increases to interest rates or other impacts on our ability to obtain or maintain financing, unanticipated expenses related to operating as a public company and those factors disclosed in the section captioned “Risk Factors” in our Annual Report for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission. Furthermore, such forward-looking statements speak only as of the date of this report.Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.



Overview and Recent Trends



We are a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States. We offer a wide selection of products, attractive prices, and exceptional customer service in an extensive showroom setting. As of September 30, 2018,2019, we operated 140 stores in 31 states and the District of Columbia, with an average size of approximately 20,200 square feet.



We purchase our tile products and accessories directly from suppliers and manufacture our own setting and maintenance materials, such as thinset, grout, and sealers. We believe that our long-term supplier relationships, together with our design, manufacturing and distribution capabilities, enable us to offer a broad assortment of high-quality products to our customers, who are primarily homeowners and professionals, at competitive prices. We have invested significant resources to develop our proprietary brands and product sources, and we believe that we are a leading retailer of natural stone and man-made tiles, accessories, and related materials in the United States.



We believe thatopened one new store and closed one store at the highly-fragmented United States retail tile market provides us with a significant opportunity to expand our store base. We opened 2 new storesend of its lease in the first nine months of 2018,2019, and opened 15two new stores during 2017.2018. Between October 1, 20172018 and September 30, 2018,2019, we opened 6one new store locations.and closed one store. We do not plan to open anyan additional four stores in 2018.2019, of which one is a relocation. We believe that there will continue to be additional expansion opportunities in the United States and Canada. We expect store base growth will drive productivity and operational efficiencies. Our growth plans also require us to maintain significant inventory on-hand in order to fulfill transactions at these new locations.



For the three months ended September 30, 20182019 and 2017,2018, we reported net sales of $89.3$85.9 million and $84.4$89.3 million, respectively. The increasedecrease in sales for the three months ended September 30, 20182019 compared to the three months ended September 30, 20172018 was

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primarily due to a decline in comparable stores sales of 3.5%, or $3.1 million. In addition, net sales of $3.0 million fromgenerated by stores not included in the comparable store base and an increase in comparable stores sales of 2.1%, or $1.8decreased by $0.2 million. 

For the nine months ended September 30, 20182019 and 2017,2018, we reported net sales of $273.3$261.8 million and $266.0$273.3 million, respectively. The increasedecrease in sales for the nine months ended September 30, 20182019 compared to the nine months ended September 30, 20172018 was primarily due to a decline in comparable store sales of 4.0%, or $10.8 million. In addition, net sales of $13.4 million fromgenerated by stores not included in the comparable store base partially offsetdecreased by a decline in comparable store sales of 2.3%, or $6.1$0.8 million.



The increasedecrease in sales at comparable stores for the three months ended September 30, 2018 is attributable to a higher average ticket2019 was due to decreased promotional activity and an increase in the average selling price of products added to our assortment over the last twelve

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months.weaker store traffic. The decrease in sales at comparable stores for the nine months ended September 30, 20182019 was primarily the result ofdue to weaker store traffic due in part toand customer experience issues following the implementation of a new enterprise resource planning system and the launch of our shift in promotional strategy.new website.



The table below sets forth information about our comparable store sales (decline) growth and (decline) for the three and nine months ended September 30, 20182019 and 2017.2018.  







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended

 

For the nine months ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Comparable store sales growth (decline)

 

2.1 

%

 

1.1 

%

 

(2.3)

%

 

2.2 

%



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended

 

For the nine months ended



 

September 30,

 

September 30,



 

2019

 

2018

 

2019

 

2018

Comparable store sales (decline) growth

 

(3.5)

%

 

2.1 

%

 

(4.0)

%

 

(2.3)

%



For the three months ended September 30, 20182019 and 2017,2018, we reported gross profit of $63.0$59.2 million and $56.7$63.0 million, respectively. The gross margin rate was 68.8% and 70.6% for the three months ended September 30, 20182019 and 2017 was 70.6% and 67.1%,2018, respectively. For the nine months ended September 30, 20182019 and 2017,2018, we reported gross profit of $192.4$182.4 million and $183.8$192.4 million, respectively. The gross margin rate was 69.7% and 70.4% for the nine months ended September 30, 20182019 and 2017 was 70.4% and 69.1%,2018, respectively. The improvementdecrease in gross profit for the three and nine months ended September 30, 2018 and 2017 is attributable to an increase in both net sales and gross margin rate.  The increase in the gross margin rate iswas primarily due to decreased promotional activity.higher levels of shrink and damaged inventory write-offs combined with a lower freight collection rate.



For the three months ended September 30, 20182019 and 2017,2018, we reported loss from operations of $0.6 million and income from operations of $3.9 million and $4.4 million, respectively. For the nine months ended September 30, 20182019 and 2017,2018, we reported income from operations of $17.4$3.1 million and $29.5$17.4 million, respectively. The decrease in income from operations was primarily driven by an increasea decrease in occupancy costs from new storesnet sales and strategic investments made in store compensation, regional leadership, website designincreased selling, general and customer relationship management capabilities. 

Inventory increased by $5.9 million from $100.4 million on June  30, 2018 to $106.3 million on September 30, 2018.  The increase was attributable to new products added to our assortment during the quarter.

Long term debt increased $16.5 million from $29.5 million on June  30, 2018 to $46.0 million on September 30, 2018.  The increase was attributable to the expansion of our product assortment resulting in an increase in inventory and capital investments associated with store remodels and merchandising.administrative expenses.



Net cash provided by operating activities was $15.7$33.6 million and $49.4$15.7 million for the nine months ended September 30, 2019 and 2018, and 2017, respectively. The decrease in operating cash flow is due to investments made to expand our product assortment during 2018. Cash flows generated by operating activities and borrowings against our line of credit wererespectively, which was used to fund operations, inventory purchases,new store remodelconstruction activities, store remodels, merchandising, information technology investment and merchandising investments, and dividends. Share repurchases were funded by increased debt during the nine months ended September 30, 2019. We expect to continue to fund our capital expenditures and daily operations from our operating cash flows in future periods. As of September 30, 2018, we had cash of $10.1 million and working capital of $77.6 million compared with cash of $6.6 million and working capital of $43.5 million at December 31, 2017.flows.

 

We repurchased 2.3 million shares for $10.5 million during the nine months ended September 30, 2019.  Our Board of Directors had previously authorized a $15.0 million share repurchase program. The Board of Directors terminated the share repurchase program effective October 18, 2019.

On October 22, 2019, the Company announced its intention to delist from the Nasdaq Stock Market (“Nasdaq”), deregister its common stock, suspend the quarterly cash dividend, and terminate the share repurchase program. The Company intends to file a Form 25 with the Securities and Exchange Commission (the “SEC”) on or about November 1, 2019 in order to delist from Nasdaq. The Company anticipates that the last day of trading on Nasdaq will be on or about November 8, 2019. On or about November 12, 2019, the Company intends to file a Form 15 with the SEC, at which time the Company anticipates that its obligations to file periodic reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including annual, quarterly and current reports on Form 10-K, Form 10-Q and Form 8-K, respectively, will be suspended, and that all requirements associated with being an Exchange Act-registered company, including the requirement to file current and periodic reports, will terminate 90 days thereafter.

Key Components of our Consolidated Statements of Income



Net Sales Net sales represents total charges to customers, net of returns, and includes freight charged to customers. We recognize sales at the time that the customer takes control of the merchandise or final delivery of the product has occurred. We are required to charge and collect sales and other taxes on sales to our customers and remit these taxes back to government authorities. Total revenues do not include sales tax because we are a pass-through conduit for collecting and remitting sales tax. Sales are reduced by a reserve for anticipated sales returns that we estimate based on historical returns.



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Comparable store sales growth is a percentage change in sales of comparable stores period-over-period. A store is considered comparable on the first day of the 13th full month of operation. When a store is relocated, it is excluded from the comparable stores sales growth calculation. Comparable store sales growth amounts include total charges to customers less any actual returns. We include the change in allowance for anticipated sales returns applicable to comparable stores in the comparable store sales calculation.



Cost of Sales–  Cost of sales consists primarily of material costs, freight, customs and duties fees, and storage and delivery of product to the customers, as well as physical inventory losses and costs associated with manufacturing of setting and maintenance materials.



Selling, General, and Administrative Expenses Selling, general, and administrative expenses consists primarily of compensation costs, occupancy, utilities, maintenance costs, advertising costs, shipping and transportation expenses to move inventory from our distribution centers to our stores, depreciation and amortization.



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Pre-opening Costs Our pre-opening costs are those typically associated with the opening of a new store and generally include rent expense, compensation costs and promotional costs. We expense pre-opening costs as incurred and include these costs in selling, general, and administrative expenses.



Provision for Income Taxes We are subject to income tax in the United States as well as other tax jurisdictions in which we conduct business.



Non-GAAP Measure



We calculate Adjusted EBITDA by taking net income calculated in accordance with accounting principles generally accepted in the United States (“GAAP”), and adjusting for interest expense, income taxes, depreciation and amortization, and stock based compensation expense. Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales.



We believe that this non-GAAP measure of financial resultsmeasure provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses this non-GAAP financial measure to compare our performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation, and for budgeting and planning purposes. This non-GAAP financial measure is used in monthly financial reports prepared for management and our Board of Directors. We believe that the use of this non-GAAP financial measure provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial performance with other specialty retailers, many of which present a similar non-GAAP financial measure to investors.



The reconciliation of Adjusted EBITDA to net income for the three and nine months ended September 30, 20182019 and 20172018 is as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 (in thousands)

 

Three Months Ended

 

Three Months Ended

 

September 30,

 

September 30,

 

2018

 

% of net sales

 

2017

 

% of net sales(1)

 

2019

 

% of sales(1)

 

2018

 

% of sales

Net income

 

$

2,553 

 

2.9 

%

 

$

2,438 

 

2.9 

%

Net (loss) income

 

$

(1,383)

 

(1.6)

%

 

$

2,553 

 

2.9 

%

Interest expense

 

715 

 

0.8 

%

 

505 

 

0.6 

%

 

1,027 

 

1.2 

 

 

715 

 

0.8 

 

Income taxes

 

652 

 

0.7 

%

 

1,468 

 

1.7 

%

 

(274)

 

(0.3)

 

 

652 

 

0.7 

 

Depreciation & amortization

 

7,202 

 

8.1 

%

 

6,803 

 

8.1 

%

 

8,308 

 

9.7 

 

 

7,202 

 

8.1 

 

Stock based compensation

 

 

735 

 

0.8 

%

 

 

989 

 

1.2 

%

 

 

660 

 

0.8 

 

 

 

735 

 

0.8 

 

Adjusted EBITDA

 

$

11,857 

 

13.3 

%

 

$

12,203 

 

14.5 

%

 

$

8,338 

 

9.7 

%

 

$

11,857 

 

13.3 

%

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(in thousands)

 (in thousands)

 

Nine Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2018

 

% of net sales

 

 

2017

% of net sales(1)(2)

 

 

2019

 

% of sales(1)

 

2018

 

% of sales

Net income

 

$

11,522 

 

4.2 

%

 

$

18,170 

 

6.8 

%

Net (loss) income

 

$

(217)

 

(0.1)

%

 

$

11,522 

 

4.2 

%

Interest expense

 

1,866 

 

0.7 

%

 

1,438 

 

0.5 

%

 

2,948 

 

1.1 

 

 

1,866 

 

0.7 

 

Income taxes

 

4,157 

 

1.5 

%

 

10,034 

 

3.8 

%

 

348 

 

0.1 

 

 

4,157 

 

1.5 

 

Depreciation & amortization

 

21,180 

 

7.7 

%

 

19,395 

 

7.3 

%

 

24,508 

 

9.4 

 

 

21,180 

 

7.7 

 

Stock based compensation

 

 

1,950 

 

0.7 

%

 

 

2,759 

 

1.0 

%

 

 

2,169 

 

0.8 

 

 

 

1,950 

 

0.7 

 

Adjusted EBITDA

 

$

40,675 

 

14.9 

%

 

$

51,796 

 

19.5 

%

 

$

29,756 

 

11.4 

%

 

$

40,675 

 

14.9 

%

(1)

In prior periods, the Company also adjusted for special charges, including shareholder and other litigation costs. The Company has recast the Adjusted EBITDA presentation for the three and nine months ended September 30, 2017 to conform to the current presentation.(1) Amounts do not foot due to rounding.

(2)

Amounts may not foot due to rounding.



We calculate pretax return on capital employed by taking income from operations divided by capital employed. Capital employed equals total assets less accounts payable, income taxes payable, other accrued liabilities, lease liability, deferred rent and other long-term liabilities.  We believe this non-GAAP financial measure is useful in assessing the effectiveness of our capital allocation over time. Other companies may calculate Pretax Returnpretax return on Capital Employedcapital employed differently, which limits the usefulness of the measure for comparative purposes.



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Table of Contents

The calculation of Pretax Returnpretax return on Capital Employedcapital employed is as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

 

September 30,

 

 

(in thousands)

 

 

2019(1)

 

2018(1)

 

 

September 30,

 

 

2018(1)

 

2017(1)

 

Income from operations (trailing twelve months)

 

$

13,769 

 

$

31,160 

 

Income from Operations (trailing twelve months)

 

$

3,762 

 

$

13,769 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

281,996 

 

 

263,140 

 

 

389,561 

 

 

281,996 

 

Less: Accounts payable

 

(29,015)

 

 

(21,669)

 

 

(25,280)

 

 

(29,015)

 

Less: Income tax payable

 

(71)

 

 

(844)

 

 

(72)

 

 

(71)

 

Less: Other accrued liabilities

 

(26,751)

 

 

(26,482)

 

 

(26,119)

 

 

(26,751)

 

Less: Deferred rent

 

(42,401)

 

 

(38,815)

 

Less: Lease liability(2)

 

(114,490)

 

 

(42,401)

 

Less: Other long-term liabilities

 

 

(4,346)

 

 

(5,409)

 

 

 

(3,669)

 

 

(4,346)

 

Capital Employed

 

 

179,412 

 

 

169,921 

 

 

$

219,931 

 

$

179,412 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax Return on Capital Employed

 

7.7 

%

 

18.3 

%

 

1.7 

%

 

7.7 

%



(1) Income statement accounts represent the activity for the trailing twelve months ended as of each of the balance sheet dates. Balance sheet accounts represent the average account balance for the four quarters ended as of each of the balance sheet dates.

(2) Represents the average lease liability and deferred rent account balances for the four quarters ended as of each of the balance sheet dates.

(1)

Income statement accounts represent the activity for the trailing twelve months ended as of each of the balance sheet dates. Balance sheet accounts represent the average account balance for the four quarters ended as of each of the balance sheet dates.



Our management does not consider these non-GAAP financial measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they excludesexclude significant expenses and income that are required by GAAP to be recognized in our consolidated financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which expenses and income are excluded or included in determining these non-GAAP financial measures. In order to compensate for these limitations, management presents its non-GAAP financial measures in connection with GAAP results. We urge investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures and not to rely on any single financial measure to evaluate our business. 



 

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Results of Operations



Comparison of the three months ended September 30, 20182019 to the three months ended September 30, 20172018





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

(in thousands)

 

2018

 

% of sales(1)

 

2017

 

% of sales

 

2019

 

% of sales(1)

 

2018

 

% of sales(1)

Net sales

 

$

89,259 

 

 

 

 

$

84,421 

 

��

 

 

$

85,944 

 

 

 

 

$

89,259 

 

 

 

Cost of sales

 

 

26,248 

 

29.4 

%

 

 

27,759 

 

32.9 

%

 

 

26,775 

 

31.2 

%

 

 

26,248 

 

29.4 

%

Gross profit

 

 

63,011 

 

70.6 

%

 

 

56,662 

 

67.1 

%

 

 

59,169 

 

68.8 

%

 

 

63,011 

 

70.6 

%

Selling, general and administrative expenses

 

 

59,131 

 

66.2 

%

 

 

52,285 

 

61.9 

%

 

 

59,804 

 

69.6 

%

 

 

59,131 

 

66.2 

%

Income from operations

 

 

3,880 

 

4.3 

%

 

 

4,377 

 

5.2 

%

(Loss) income from operations

 

 

(635)

 

(0.7)

%

 

 

3,880 

 

4.3 

%

Interest expense

 

(715)

 

(0.8)

%

 

(505)

 

(0.6)

%

 

(1,027)

 

(1.2)

%

 

(715)

 

(0.8)

%

Other income

 

 

40 

 

0.0 

%

 

 

34 

 

0.0 

%

 

 

 

0.0 

%

 

 

40 

 

0.0 

%

Income before income taxes

 

 

3,205 

 

3.6 

%

 

 

3,906 

 

4.6 

%

Provision for income taxes

 

 

(652)

 

(0.7)

%

 

 

(1,468)

 

(1.7)

%

Net income

 

$

2,553 

 

2.9 

%

 

$

2,438 

 

2.9 

%

(Loss) income before income taxes

 

 

(1,657)

 

(1.9)

%

 

 

3,205 

 

3.6 

%

Benefit from (provision for) income taxes

 

 

274 

 

0.3 

%

 

 

(652)

 

(0.7)

%

Net (loss) income

 

$

(1,383)

 

(1.6)

%

 

$

2,553 

 

2.9 

%

 (1) Amounts do not foot due to rounding.

(1)

Amounts do not foot due to rounding.



Net Sales Net sales for the third quarter of 2018 increased $4.82019 decreased $3.3 million, or 5.7%3.7%, compared with the third quarter of 2017,2018, primarily due to a $3.0$3.1 million increase in net sales from stores not included in the comparable store base and an increase of $1.8 milliondecrease in net sales generated by comparable stores. Comparable store sales growth was 2.1% for the third quarter of 2018 versus 1.1% for the third quarter of 2017. The increasedecrease in sales at comparable stores for the three months ended September 30, 2018 is attributable to a higher average ticket2019 was due to decreased promotional activity and an increaseweaker store traffic. In addition, net sales generated by stores not included in the average selling price of products added to our assortment over the last twelve months. comparable store base decreased $0.2 million.



Gross Profit Gross profit for the third quarter of 2018 increased $6.32019 decreased $3.8 million, or 11.2%6.1%, compared with the third quarter of 20172018 primarily due to an increasea decrease in net sales and the gross margin rate.sales. The gross margin rate was 70.6%68.8% and 67.1%70.6% for the third quarter ofthree months ended September 30, 2019 and 2018, and 2017, respectively. The improvementdecrease in the gross margin rate was primarily due to decreased promotional activity.higher levels of shrink and damaged inventory write-offs combined with a lower freight collection rate.



Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the third quarter of 20182019 increased $6.8$0.7 million, or 13.1%1.1%, compared with the third quarter of 2017.2018.  The $6.8 million increase in selling, general, and administrative expenses was driven primarilydue to an increase in advertising costs, partially offset by costs associated with openinga decrease in legal and operating 6 new stores during the period from October 1, 2017 through September 30, 2018, investments in store and warehouse staff compensation, and the addition of regional sales leader and pro market manager positions.  Included in the selling, general, and administrative expenses increase during the third quarter of 2018 was $1.9 million of planned strategic investments invariable store compensation regional sales leadership, website design, and customer relationship management capabilities. Additionally, we incurred approximately $1.0 million of incremental legal expense during the third quarter of 2018 to resolve our derivative securities litigation.

Pre-opening Costs During the three months ended September 30, 2017, we incurred pre-opening costs of $0.5 million. We incurred no pre-opening costs during the three months ended September 30, 2018.expense.



Interest Expense Interest expense was $0.7$1.0 million and $0.5$0.7 million for the third quarter of 20182019 and 2017,2018, respectively. The increase was primarily due to higher interest rates and a higher average debt balancebalances and higher interest rates during the third quarter of 2018.2019.  



Provision for Income Taxes Income tax provision decreased $0.8$0.9 million for the third quarter of 20182019 compared with the third quarter of 20172018 due to a decrease in income before income taxes, along with a decrease in our effective tax rate due to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).taxes. Our effective tax rate for the three months ended September 30, 2019 and 2018 was 16.5% and 2017 was 20.3% and 37.6%, respectively. The difference between the Company’s effective tax rate of 20.3% and the expected federal statutory rate of 21.0% is primarily due to favorable adjustments from the filing of the 2017 tax return.



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Table of Contents

Comparison of the nine months ended September 30, 20182019 to the nine months ended September 30, 20172018





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

(in thousands)

 

2018

 

% of sales

 

2017

 

% of sales

 

2019

 

% of sales(1)

 

2018

 

% of sales

Net sales

 

$

273,307 

 

 

 

 

$

266,020 

 

 

 

 

$

261,755 

 

 

 

 

$

273,307 

 

 

 

Cost of sales

 

 

80,946 

 

29.6 

%

 

 

82,265 

 

30.9 

%

 

 

79,384 

 

30.3 

%

 

 

80,946 

 

29.6 

%

Gross profit

 

 

192,361 

 

70.4 

%

 

 

183,755 

 

69.1 

%

 

 

182,371 

 

69.7 

%

 

 

192,361 

 

70.4 

%

Selling, general and administrative expenses

 

 

174,928 

 

64.0 

%

 

 

154,245 

 

58.0 

%

 

 

179,314 

 

68.5 

%

 

 

174,928 

 

64.0 

%

Income from operations

 

 

17,433 

 

6.4 

%

 

 

29,510 

 

11.1 

%

 

 

3,057 

 

1.2 

%

 

 

17,433 

 

6.4 

%

Interest expense

 

(1,866)

 

(0.7)

%

 

(1,438)

 

(0.5)

%

 

(2,948)

 

(1.1)

%

 

(1,866)

 

(0.7)

%

Other income (expense)

 

 

112 

 

0.0 

%

 

 

132 

 

0.0 

%

Other income

 

 

22 

 

0.0 

%

 

 

112 

 

0.0 

%

Income before income taxes

 

 

15,679 

 

5.7 

%

 

 

28,204 

 

10.6 

%

 

 

131 

 

0.1 

%

 

 

15,679 

 

5.7 

%

Provision for income taxes

 

 

(4,157)

 

(1.5)

%

 

 

(10,034)

 

(3.8)

%

 

 

(348)

 

(0.1)

%

 

 

(4,157)

 

(1.5)

%

Net income

 

$

11,522 

 

4.2 

%

 

$

18,170 

 

6.8 

%

Net (loss) income

 

$

(217)

 

(0.1)

%

 

$

11,522 

 

4.2 

%



Net Sales Net sales for the nine months ended September 30, 2018 increased $7.32019 decreased $11.6 million, or 2.7%4.2%, compared with the nine months ended September 30, 2017,2018, primarily due to a $13.4 million increase in net sales from stores not included in the comparable store base, partially offset by a $6.1$10.8 million decrease in net sales generated by comparable stores. The decrease in sales at comparable stores for the nine months ended September 30, 20182019 was primarily the result ofdue to weaker store traffic, duecustomer experience issues

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following the implementation of a new enterprise resource planning system and the launch of our new website. In addition, net sales generated by stores not included in part to our shift in promotional strategy.the comparable store base decreased $0.8 million.



Gross Profit Gross profit for the nine months ended September 30, 2018 increased $8.62019 decreased $10.0 million, or 4.7%5.2%, compared with the nine months ended September 30, 2017 primarily due to an increase in net sales and an increase in the gross margin rate.2018. The gross margin rate was 70.4%69.7% and 69.1%70.4% for the nine months ended September 30, 20182019 and 2017,2018, respectively. The improvementdecrease in the gross margin rate was primarily due to decreased promotional activity.higher levels of shrink and damaged inventory write-offs combined with a lower freight collection rate.



Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the nine months ended September 30, 20182019 increased $20.7$4.4 million, or 13.4%2.5%, compared with the nine months ended September 30, 2017.2018.  The $20.7 million increase in selling, general, and administrative expenses was driven primarily by costs associated with openingdue to a $3.3 million increase in depreciation expense and operating new stores during the period from October 1, 2017 through September 30, 2018,  investments$1.3 million increase in store and warehouse staff compensation, and the addition of regional sales leader and pro market manager positions. Included in the selling, general, and administrative expenses increase during the nine months ended September 30, 2018 was approximately $6.1 million of planned strategic investments in store compensation, regional sales leadership, website design, and customer relationship management capabilities. Additionally, we incurred approximately $1.0 million of incremental legal expense during the nine months ended September 30, 2018 to resolve our derivative securities litigation.

Pre-opening Costs During the nine months ended September 30, 2018 and 2017, we incurred pre-opening costs of $0.1 million and $0.8 million, respectively.advertising expense.



Interest Expense Interest expense was $1.9$2.9 million and $1.4$1.9 million for the nine months ended September 30, 20182019 and 2017,2018, respectively. The increase was due to higher average debt balances and higher interest rates and a higher debt balance during the nine months ended September 30, 2018.2019.



Provision for Income Taxes Income tax provision decreased $5.9$3.8 million for the nine months ended September 30, 20182019 compared with the nine months ended September 30, 20172018 due to a decrease in income before income taxes, along with ataxes. The decrease in our effectivethe tax rateprovision was due to the Tax Act. Our effective tax rate for the nine months ended September 30, 2018 and 2017 was 26.5% and 35.6%, respectively. The difference between the Company’s effective rate for the nine months ended September 30, 2018 of 26.5% and the expected federal statutory rate of 21.0% for the three and nine months ended September 30, 2018 is primarily due to statelower net income taxes.before tax.

 

Liquidity and Capital Resources



Our principal uses of liquidity requirements have been investments infor working capital and capital expenditures. Our principal sources of liquidity are $10.1$8.4 million of cash and cash equivalents at September 30, 2018,2019, our cash flow from operations, and borrowings available under our credit facility. We expect to use this liquidity for opening new stores, purchasing additional merchandise inventory, maintaining our existing stores, reducing outstanding debt, paying dividends to our shareholders and general corporate purposes.



On September 18, 2018, we and our operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Bank of America, N.A., Fifth Third Bank and Citizens Bank (the “Credit Agreement”). The Credit Agreement provides us with a senior credit facility consisting of a $100$100.0 million revolving line of credit through September 18, 2023. Borrowings pursuant to the Credit Agreement

22


Table of Contents

initially bear interest at a rate of adjusted LIBOR plus 1.75% and may bear interest in a range between adjusted LIBOR plus 1.50% to adjusted LIBOR plus 2.25%, depending on The Tile Shop’s consolidated total rent adjusted leverage ratio. At September 30, 2018,2019, the base interest rate was 6.00% and the LIBOR-based interest rate was 4.01%4.02%. Borrowings outstanding consisted of $63.0 million on the revolving line of credit as of September 30, 2019.  We also have standby letters of credit outstanding related to our workers compensation and medical insurance policies. As of September 30, 2019 and 2018, the standby letters of credit totaled $1.3 million and $1.1 million, respectively. There was $35.7 million available for borrowing on the revolving line of credit as of September 30, 2019, which may be used to support our growth and for working capital purposes.



The Credit Agreement is secured by virtually all of theour assets, of the Company, including but not limited to, inventory, receivables, equipment and real property. The Credit Agreement contains customary events of default, conditions to borrowings, and restrictive covenants, including restrictions on our ability to dispose of assets, make acquisitions, incur additional debt, incur liens, or make investments. The Credit Agreement also includes financial and other covenants, including covenants to maintain certain fixed charge coverage ratios and consolidated total rent adjusted leverage ratios.  We arewere in compliance with the covenants as of September 30, 2018.

The Credit Agreement supersedes and replaces in its entirety our prior senior secured credit facility with Fifth Third Bank dated June 2, 2015, as amended on April 5, 2018, July 17, 2017, February 10, 2017 and December 9, 2016. In addition to increasing the line of credit from $75 million under the prior credit facility to $100 million under the Credit Agreement, the Credit Agreement also provides additional flexibility in our fixed charge coverage ratio covenant, which is now 1.25:1.00 (as compared to 1.35:1.00 under the prior credit facility), and in the calculation of the consolidated total rent adjusted leverage ratio, which now is based on six times the trailing four-quarter rent expense (as compared to eight times the trailing four-quarter rent expense under the prior credit facility).

We drew on the line of credit pursuant to the Credit Agreement to refinance all of the existing term loan, revolving line of credit and interest outstanding under our prior credit facility, as well as pay $0.4 million in debt issuance costs in connection with the Credit Agreement. Debt issuance costs are classified as other current assets and other assets in the Consolidated Balance Sheet and amortized on a straight line basis over the life of the Credit Agreement.  We recorded a $0.1 million charge in interest expense to write-off of certain unamortized deferred financing fees associated with the prior credit facility as of the date of the payoff. Borrowings outstanding consisted $46.0 million on the revolving line of credit as of September 30, 2018.  We also have standby letters of credit outstanding related to our workers compensation and medical insurance policies. As of September 30, 2018 and 2017, the standby letters of credit totaled $1.1 million. There was $52.9 million available for borrowing on the revolving line of credit as of September 30, 2018, which may be used to support our growth and for working capital purposes.2019.



We believe that our cash flow from operations, together with our existing cash and cash equivalents, and borrowings available under our credit facility, will be sufficient to fund our operations and anticipated capital expenditures over at least the next 12twelve months.



Capital Expenditures



Capital expenditures were $22.9$22.8 million and $28.0$22.9 million for the nine months ended September 30, 2019 and 2018, and 2017, respectively. The decreaseCapital expenditures made in capital expenditures is primarily due to the decelerated pace of new2019 include investments in store openings in 2018. We opened 2 and 11 new stores during the nine months ended September 30, 2018 and 2017, respectively. During the nine months ended September 30, 2018, capital expenditures primarily consisted of 10merchandising, store remodels, merchandising and fixture investments at all 140 stores, and information technology investments.technology.



23


Table of Contents

Cash flows



The following table summarizes our cash flow data for the nine months ended September 30, 20182019 and 2017.2018.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

(in thousands)

 

Nine Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2018

 

2017

 

2019

 

2018

Net cash provided by operating activities

 

$

15,721 

 

$

49,355 

 

$

33,612 

 

$

15,721 

Net cash used in investing activities

 

(22,880)

 

(28,031)

 

(22,229)

 

(22,880)

Net cash provided by (used in) financing activities

 

10,634 

 

(21,018)

Net cash (used in) provided by financing activities

 

(8,540)

 

10,634 



Operating activities



Net cash provided by operating activities during the nine months ended September 30, 20182019 was $15.7$33.6 million compared with $49.4$15.7 million during the nine months ended September 30, 2017.2018. The decreaseincrease is attributable to a decrease inimproved working capital management, partially offset by lower net income, along with an increase in inventory.income.



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Table of Contents

Investing activities



Net cash used in investing activities totaled $22.2 million for the nine months ended September 30, 2019 compared with $22.9 million for the nine months ended September 30, 2018 compared with $28.0 million for the nine months ended September 30, 2017.2018. Net cash used in investing activities in each period was primarily for capital purchases of store fixtures, equipment, building improvements and leasehold improvements for stores opened or remodeled, asset additions in our distribution and manufacturing facilities, information technology infrastructure, a new enterprise resource planning system, and general corporate information technology assets.



Financing activities



Net cash used in financing activities was $8.5 million for the nine months ended September 30, 2019 compared with net cash provided by financing activities wasof $10.6 million for the nine months ended September 30, 2018 compared with net2018. Net cash used in financing activities of $21.0 million for the nine months ended September 30, 2017. Net cash provided by financing activities during the nine months ended September 30, 2018 included $114.12019 was primarily $43.2 million in advances on the Company’s line of credit which were partially offset by $95.2 million infor payments of long-term debt and capitalfinancing lease obligations, $10.5 million for repurchases of common stock, and $7.8$7.7 million in dividends paid to stockholders.stockholders, offset by advances on the revolving line of credit of $53.0 million.



Cash and cash equivalents totaled $10.1$8.4 million at September 30, 20182019 compared with $6.6$5.6 million at December 31, 2017.2018. Working capital was $77.6$52.4 million at September 30, 20182019 compared with $43.5$79.8 million at December 31, 2017.2018. The decrease in working capital during the third quarter of 2019 was due to the new accounting standard for leases, which added a current portion of lease liability to the consolidated balance sheet.



Off-Balance Sheet Arrangements



As of September 30, 20182019 and December 31, 2017,2018, we did not have any “off-balance sheet arrangements” (as such term is defined in Item 303 of Regulation S-K) that could have a current or future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, capital expenditures or capital resources.



Contractual Arrangements



As of September 30, 2018,2019, there were no material changes to our contractual obligations outside the ordinary course of business.

 

Recently Adopted Accounting Pronouncements



In May 2014,February 2016, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued a final standard on revenue from contracts with customers. This new standard introduces a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In 2016, the FASB issued several amendments to the standard.  We adopted this standard as of January 1, 2018 using the modified retrospective transition method.  See Note 2 in Item 1, Notes to Consolidated Financial Statements in this Form 10-Q for further details.

In November 2016, the FASB issued new guidance on restricted cash on the statement of cash flows. The new guidance requires the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown in the statement of cash flows. We adopted the new standard as of March 31, 2018 using the retrospective transition method. Our restricted cash balance was $0.8 million as of September 30, 2018. Upon adopting the new standard, we no longer present the release of restricted cash as a financing cash inflow. Instead, restricted cash and long-term restricted cash balances will be included in the beginning and ending cash, cash equivalents and restricted cash balances in the statement of cash flows. In connection with the adoption of this standard, $6.0 million received from restricted cash accounts during nine months ended September 30, 2017 that was previously presented as a financing cash inflow was reclassified to cash, cash equivalents and restricted cash in the statement of cash flows.

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued a standard that primarily requires organizations that lease assets to recognize the rights and obligations created by those leases on the Consolidated Balance Sheet.  The accounting standards updateconsolidated balance sheet.  This standard also requires expanded disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.  The standard is effective in fiscal year 2019, with early adoption permitted. We continue to evaluate the impact ofadopted this standard effective January 1, 2019 using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. 

We determine if an arrangement is a lease at inception. Operating leases are included in right of use assets and lease liabilities on our financial statementsthe consolidated balance sheets. The right of use assets and disclosures, internal controls and accounting policies. This evaluation process includes reviewing all formslease liabilities are recognized as the present value of leases, performing a completeness assessmentthe future minimum lease payments over the lease population and analyzing the practical expedients in order to determine the best path of implementing changes to existing processes and controls. We are implementing a third-party supported lease accounting information system to account for our lease population in accordance with this new standard and establishing internal controls over the new system. We believe the adoptionterm at commencement date. As most of the standard will have a material impact on our Consolidated Balance Sheet as virtually all leases will be recognized as a right ofdo not provide an implicit rate, we use asset and lease obligation.

the

 

24


 

Table of Contents

 

incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The right of use asset is also adjusted for any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease typically at our own discretion. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in its lease term.

This standard provides a number of optional practical expedients in transition.  We elected the package of three practical expedients permitted under the transition guidance within this standard, which among other things, allows us to carryforward the historical lease classification.  We did not separate non-lease components from lease components by class of underlying assets and we did not apply the recognition requirements of the standard to short-term leases, as allowed by the standard.

We also elected to apply the hindsight practical expedient.  Our election of the hindsight practical expedient resulted in the shortening of lease terms for certain existing leases and the useful lives of corresponding leasehold improvements.  In our application of the hindsight practical expedient, we considered recent investments in leased properties and our overall real estate strategy, which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.  

Upon adopting this standard, we established a right of use asset of $147.2 million and lease liabilities of $169.9 million, reduced deferred rent by $44.6 million, and recorded a cumulative effect adjustment to retained earnings of $22.0 million. This retained earnings impact was due to the election of the hindsight practical expedient which resulted in a decrease in the cumulative difference between the straight-line rent expense and rental payments that had been made between the inception of each lease and January 1, 2019. We also adjusted the useful life assigned to certain leasehold improvements, which resulted in a $15.3 million reduction in fixed assets and retained earnings.  The net impact of the cumulative effect adjustments also resulted in a $1.7 million reduction of deferred tax assets and a corresponding adjustment to retained earnings that was recorded during the nine months ended September 30, 2019. The adoption of this standard did not have a material impact on net income or cash flows during the three and nine months ended September 30, 2019.

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued a final standard on accounting for credit losses. This standard is effective for us in fiscal year 2020 and requires a change in credit loss calculations using the expected loss method. We are evaluating the effect of this standard on our consolidated financial statements and related disclosures.  

In August 2018, the FASB issued a final standard which provides guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The standard requires customers of cloud computing services to recognize an intangible asset for the software license and, to the extent that payments attributable to the software license are made over time, a liability is also recognized. The standard also allows customers of cloud computing services to capitalize certain implementation costs. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The standard will become effective for us at the beginning of its fiscal year 2020, although early adoption is permitted for all entities. We are evaluating the effect of the standard on our consolidated financial statements and related disclosures.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018.

 

ITEM 4. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that information relating to the Company is accumulated and communicated to management, including our principal officers as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 20182019 and have concluded that suchour disclosure controls and procedures were not effective as of September 30, 2019 due to material weaknesses in our internal control over financial reporting as described below.

On January 1, 2019, we implemented a new enterprise resource planning (“ERP”) system on a company-wide basis. As previously disclosed, during the endnine months ended September 30, 2019, we identified two material weaknesses in internal control over financial reporting that arose from the new ERP system implementation. The two material weaknesses are:

25


Table of the period covered byContents

·

The ineffective design and implementation of effective controls with respect to the ERP system conversion.  Specifically, we did not exercise sufficient corporate governance and oversight, design effective controls over the ERP implementation to ensure appropriate data conversion and data integrity, or provide sufficient end user training to our employees to ensure that our employees could effectively operate the system and carry out their responsibilities.

·

The ineffective design and implementation of information technology (“IT”) general controls for the ERP system that are relevant to the preparation of our financial statements.  Specifically, we did not (i) maintain adequate control over user access to the ERP system to ensure appropriate segregation of duties and to restrict access to financial applications and data; and (ii) maintain adequate documentation practices surrounding management and control of IT changes affecting financial IT applications.

We have adjusted, and intend to consider further adjustments to, our previously disclosed plans relating to addressing these material weaknesses. As discussed in Part I, Item 2 of this Quarterly Report on Form 10-Q.10-Q, we announced on October 22, 2019 our intention to delist our common stock from the Nasdaq and deregister our common stock with the SEC.  Upon the effectiveness of the deregistration with the SEC, our obligations of associated with being an Exchange Act-registered company, including the requirement to file current and periodic reports, will terminate.



Changes in Internal Control over Financial Reporting



No changes to our internal control over financial reporting occurred during the quarter ended September 30, 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

 

PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



The Company was a nominal defendant in several actions brought derivatively on behalf of the Company by three shareholders.  The plaintiffs alleged that the defendant-directors and/or officers breached their fiduciary duties by failing to adopt adequate internal controls for the Company, by approving false and misleading statements issued by the Company, by causing the Company to violate generally accepted accounting principles and SEC regulations, and by permitting the Company’s primary product to contain illegal amounts of lead. The complaints also alleged claims for insider trading and/or unjust enrichment. The Company moved to dismiss the actions, or in the alternative, to stay the actions.  Before the motions were decided, the parties entered into settlement discussions.  The parties entered into a Stipulation of Settlement dated April 11, 2018 to resolve all claims in the derivative actions.  The settlement also resolved a demand letter dated May 19, 2016 that the Company’s Board of Directors had received from a shareholder about the same matters that were the subjects of the derivative actions.  By Order and Final Judgment entered on August 23, 2018, the Delaware Court of Chancery approved the settlement of the derivative actions and dismissed them with prejudice. Under the terms of settlement, the Board of Directors adopted, and the Company implemented, certain changes to its policies and practices that address related person transactions, insider trading, compliance, and ethics.  The Company also paid plaintiffs and their counsel $1.3 million for attorneys’ fees, expenses, and incentive awards that the Court awarded to them. The Company recognized $1.0 million of legal expense during the third quarter of 2018 concurrent with the Court’s decision regarding the plaintiffs attorneys’ fees.

The Company is also,We are, from time to time, subject to claims and disputes arising in the normal course of business.  In the opinion of management, while the outcome of such claims and disputes cannot be predicted with certainty, the Company’sour ultimate liability in connection with these matters is not expected to have a material adverse effect on theour results of operations, financial position, or cash flows.



ITEM 1A. RISK FACTORS



There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.2018 other than with respect to the risk factors discussed below.



Implementation of our new enterprise resource planning system has adversely impacted and could continue to negatively affect our business.

We rely extensively on our information technology (“IT”) systems to assist us in managing our business and summarizing our operational results.  On January 1, 2019 we deployed a company-wide new enterprise resource planning (“ERP”) system.  The new ERP system was implemented to position the Company for long-term growth, further enhance operating efficiencies and provide more effective management of our business operations, including sales order processing, inventory control, purchasing and supply chain management, and financial reporting.   Implementing the new ERP system has been costly and has required, and may continue to require, the investment of significant personnel and financial resources.  In addition to the risks inherent in the conversion to any new IT system, including the loss of information, disruption to our normal operations, and changes in accounting procedures, the implementation of our new ERP system has resulted in operational and reporting disruptions related to the conversion of existing customer orders, processing of new customer orders and maintaining an effective internal control environment.

Failure to properly or adequately address any issues with our new ERP system could result in increased costs and the diversion of management’s and employees’ attention and resources and could materially adversely affect our operating results, internal control over financial reporting and ability to manage our business effectively.  While the ERP system is intended to further improve and enhance our information management systems, the ongoing implementation of this new ERP system exposes us to the risks of integrating that system with our existing systems and processes, including possible continued disruption of our financial reporting.

We have identified two material weaknesses in our internal control over financial reporting which, if not remediated, could result in material misstatements of our financial statements.

We identified material weaknesses in internal control over financial reporting that pertain to our ERP system conversion that took place on January 1, 2019 involving (1) the ineffective design and implementation of effective controls with respect to the ERP system conversion, and (2) the ineffective design and implementation of IT general controls for information systems that are relevant to the preparation of financial statements. A material weakness is a deficiency, or combination of deficiencies, in internal control over

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financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

These material weaknesses could adversely impact our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods specified by the rules and forms of the Securities and Exchange Commission. This failure could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties and materially and adversely impact our business and financial condition. We are adjusting our previously announced plans to address the material weaknesses following our announcement that we plan to delist from Nasdaq and deregister our common stock. We cannot ensure that we will not identify additional material weaknesses in our internal control over financing reporting in the future.

We intend to delist our common stock from the Nasdaq Stock Market and deregister our common stock under the Exchange Act.

As previously disclosed, we have given notice to the Nasdaq Stock Market (“Nasdaq”) of our intent to voluntarily delist our common stock from Nasdaq and to deregister our common stock under the Exchange Act. We intend to file a Form 25 with the SEC on or about November 1, 2019 in order to delist our common stock from Nasdaq, which will terminate the registration of our common stock under Section 12(b) of the Exchange Act ten days thereafter. We anticipate that the last day of trading on Nasdaq will be on or about November 8, 2019.  Our common stock may thereafter be eligible for trading on an over-the-counter market, if one or more brokers chooses to make a market for our common stock; however, there can be no assurances regarding any such trading.

On or about November 12, 2019, we intend to file a Form 15 with the SEC, at which time we anticipate that our obligation to file periodic reports under the Exchange Act, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K will be suspended, and that all requirements associated with being an Exchange Act-registered company, including the requirement to file current and periodic reports, will terminate 90 days thereafter. Accordingly, there will be significantly less information regarding us available to stockholders and potential investors.

Following delisting and deregistration, the combination of this reduced amount of information and the likelihood of reduced liquidity in the over-the-counter trading environment may impact the value of our common stock.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Total Number of Shares Purchased

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Program

 

Maximum Number of Shares that May Yet be Purchased Under Plans or Programs

July 1, 2018 - July 31, 2018

 

2,590 

(1)

$

8.30 

(1)

 -

 

 -

August 1, 2018 - August 31, 2018

 

7,207 

(2)

 

0.00 

(2)

 -

 

 -

September 1, 2018 - September 30, 2018

 

19,552 

(2)

 

0.00 

(2)

 -

 

 -

   

 

29,349 

 

$

0.73 

 

 -

 

 -



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Total Number of Shares Purchased

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Program

 

Approximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs
(in thousands)

 

July 1, 2019 - July 31, 2019

 

48,053 

(1)

$

0.94 

(1)

 -

 

$

4,545 

 

August 1, 2019 - August 31, 2019

 

6,390 

(2)

 

0.00 

(2)

 -

 

 

4,545 

 

September 1, 2019 - September 30, 2019

 

58,297 

(2)

 

0.00 

(2)

 -

 

 

4,545 

 

   

 

112,740 

 

$

0.40 

 

 -

 

$

4,545 

(3)

(1)

TheseA total of 10,994 shares were withheld by the Company to satisfy tax withholding obligations due upon the vesting of restricted stock grants, as allowed by the 2012 Omnibus Incentive Plan. The Company did not pay cash to repurchase these shares, nor were these repurchases part of a publicly announced plan or program. An additional  37,059 shares were repurchased by the Company pursuant to the terms of the underlying restricted stock agreements, as allowed by the 2012 Omnibus Incentive Plan. The Company paid $0.0001 per share, the par value, to repurchase these shares. These repurchases were not part of a publicly announced plan or program.

(2)

These shares were repurchased by the Company pursuant to the terms of the underlying restricted stock agreements, as allowed by the 2012 Omnibus Incentive Plan. The Company paid $0.0001 per share, the par value, to repurchase these shares. These repurchases were not part of a publicly announced plan or program.

(3)

On April 29, 2019, the Company’s Board of Directors authorized a share repurchase program (the “Program”), pursuant to which the Company was able to, from time to time, purchase shares of its common stock for an aggregate repurchase price not to exceed $15.0 million. The Program began on May 2, 2019 and was to continue indefinitely until the full repurchase amount had been utilized or the Board of Directors terminated the Program. The Board of Directors terminated the Program on October 18, 2019.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



Not Applicable.



ITEM 4. MINE SAFETY DISCLOSURES



Not Applicable.



ITEM 5. OTHER INFORMATION



NoneNone.

 

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ITEM 6. EXHIBITS



 

Exhibits

 

3.1

Certificate of Incorporation of Tile Shop Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (Reg. No. 333-182482) filed with the Securities and Exchange Commission on July 2, 2012).

3.2

By-Laws of Tile Shop Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-4 (Reg. No. 333-182482) filed with the Securities and Exchange Commission on July 2, 2012).

10.14.1

Credit Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, Tile Shop Lending, Inc., certain subsidiaries of The Tile Shop, LLC as borrowers, each lender from time to time party thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C issuerSpecimen Common Stock Certificate (incorporated by reference to Exhibit 10.14.1 of Amendment No. 1 to the Company’s Current ReportRegistration Statement on Form 8-KS-4 (Reg. No. 333-182482) filed with the Securities and Exchange Commission on September 19, 2018)July 23, 2012).

10.210.1*

SecurityEmployment Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, Tile Shop Lending, Inc., The Tile Shop of Michigan, LLC,between the Company and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission onNancy DiMattia, dated September 19, 2018).6, 2019.

10.310.2*

Securities PledgeEmployment Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, Tile Shop Lending, Inc., The Tile Shop of Michigan, LLC,between the Company and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission onMark Davis, dated September 19, 2018).6, 2019.

10.410.3*

Guaranty Agreement, dated asAmendment to Terms of September 18, 2018,Employment, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, Tile Shop Lending, Inc., The Tile Shop of Michigan, LLC,between the Company and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission onKirk Geadelmann, dated September 19, 2018).6, 2019.

31.1*

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 20022002..

31.2*

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

32.1**

Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

32.2**

Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

101.INS*

XBRL Instance Document.

101.SCH*

XBRL Taxonomy Extension Schema Document.

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document.



*    Filed herewith

**  Furnished herewith



 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 



 

 

 

 

TILE SHOP HOLDINGS, INC.

 

 

 

 

 

Dated: October 26, 2018November 4, 2019

By:

/s/ ROBERT A. RUCKERCABELL H. LOLMAUGH

 

 

 

Robert A. RuckerCabell H. Lolmaugh

 

 

 

Chief Executive Officer

 



 



 

 

 

Dated: October 26, 2018November 4, 2019

By:

/s/ KIRK L. GEADELMANNNANCY DIMATTIA

 

 

 

Kirk L. GeadelmannNancy DiMattia

 

 

 

Chief Financial Officer

 



 

 

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