Table Of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2019
or
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
(State or other jurisdiction of incorporation or organization)
45-5538095
(I.R.S. Employer Identification No.)
14000 Carlson Parkway, Plymouth, Minnesota 55441
(Address of principal executive offices, including 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
None
Trading symbol(s)
N/A
Name of each exchange on which registered
N/A
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
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 ☐
Non-accelerated filer ☐
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 Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed
second fiscal quarter was approximately: $144,783,040.
As of March 9, 2020, the registrant had 50,751,615 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III is incorporated by reference from the Company’s definitive Proxy Statement for the Annual
Meeting of Shareholders, or an amendment to this Form 10-K, which it intends to file with the SEC within 120 days after the fiscal year
end covered by this report.
Table Of Contents
TILE SHOP HOLDINGS, INC. FORM 10-K
TABLE OF CONTENTS
PART I
BUSINESS
RISK FACTORS
ITEM 1.
ITEM
1A.
ITEM
1B.
ITEM 2.
ITEM 3.
ITEM 4. MINE SAFETY DISCLOSURES
PROPERTIES
LEGAL PROCEEDINGS
UNRESOLVED STAFF COMMENTS
PART II
ITEM
7A.
ITEM 8.
ITEM 9.
ITEM
9A.
ITEM
9B.
PART III
ITEM
10.
ITEM
11.
ITEM
12.
ITEM
13.
ITEM
14.
PART IV
ITEM
15.
ITEM
16.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
SELECTED FINANCIAL DATA
ITEM 6.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
SIGNATURES
POWER OF ATTORNEY
1
5
14
14
14
15
16
18
20
30
31
31
31
32
33
33
34
34
34
35
35
64
65
Table Of Contents
ITEM 1. BUSINESS
Overview
PART I
The Tile Shop, LLC (“The Tile Shop”) was founded in 1985 and Tile Shop Holdings, Inc. (“Holdings,” and together with its wholly
owned subsidiaries, including The Tile Shop, the “Company” or “we”) was incorporated in Delaware in June 2012. We are a specialty
retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States. Our
assortment includes approximately 6,000 products from around the world. Natural stone products include marble, travertine, granite,
quartz, sandstone, slate, and onyx tiles. Man-made products include ceramic, porcelain, glass, cement, wood look, and metal tiles. The
majority of our tile products are sold under our proprietary Rush River and Fired Earth brand names. We purchase our tile products,
accessories and tools directly from our global network of suppliers. We manufacture our own setting and maintenance materials, such as
thinset, grout and sealer under our Superior brand name, as well as work with other suppliers to manufacture private label products. As of
December 31, 2019, we operated 142 stores in 31 states and the District of Columbia, with an average size of approximately 20,000
square feet.
We believe that our long-term vendor 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 believe that we are a leading
retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States.
In 2019, we reported net sales and loss from operations of $340.4 million and $1.4 million, respectively. Our 2018 and 2017 net sales
were $357.3 million and $344.6 million, respectively, and our 2018 and 2017 income from operations was $18.1 million and $25.8
million, respectively. We opened four new stores, relocated one store, and closed two stores in 2019. We plan to open one new store in
2020. As of December 31, 2019 and 2018, we had total assets of $399.8 million and $297.6 million, respectively.
Competitive Strengths
We believe that the following factors differentiate us from our competitors and position us to continue to grow our specialty retailer
business.
Broad Product Assortment at Attractive Prices – We offer approximately 6,000 natural stone and made-made tile products, setting and
maintenance materials, accessories, and tools. We are able to maintain competitive prices by purchasing tile and accessories directly from
producers and manufacturing our own setting and maintenance materials.
Customer Service and Satisfaction – Our sales personnel are highly-trained and knowledgeable about the technical and design aspects of
our products. In addition, we provide one-on-one installation training as required to meet customer needs. We accept returns up to three
months following the date of the sale, with no restocking fees.
Inspiring Customer Experience – In each store, our products are brought to life by showcasing a broad array of the items we offer in up
to 50 different vignettes of bathrooms, kitchens, fireplaces, foyers, and other distinct spaces. Our stores are spacious, well-lit, and
organized by product type to simplify our customers’ shopping experience.
Global Sourcing Capabilities – We have long-standing relationships with our tile suppliers throughout the world and work with them to
design products exclusively for us. We believe that these direct relationships differentiate us from our competitors.
Proprietary Branding – We sell the majority of our products under our proprietary brand names, which helps us to differentiate our
products from those of our competitors. We offer products across a range of price points and quality levels, which allows us to target
discrete market segments and to appeal to diverse groups of customers.
Centralized Distribution System – We service our store locations from five distribution centers. Our distribution centers, located in
Michigan, Oklahoma, New Jersey, Virginia, and Wisconsin, are located to cost effectively service our existing stores.
Strategic Plan
We are committed to carrying the best assortment, offering the best service, and showcasing the best presentation in our industry. These
principles have always been core to our strategy and will continue to be as we move into 2020. Over the last two years we have made a
number of different investments to position the Company for long-term growth. As we move into 2020, we are focused on internal
execution and generating a profitable return on these investments.
1
Table Of Contents
Key elements of our 2020 strategy include:
Focused Retail Execution – Over the last year, we have implemented a number of enhancements to our new enterprise resource planning
(“ERP”) system and now have reporting that provides visibility to key business trends giving our store, regional, and corporate
management teams the tools needed to pinpoint inefficiencies and take corrective action. We have defined critical success measures for
each of our stores, worked with our store leaders to develop action plans, and have the support structure in place to help our teams
achieve their goals.
Growing Professional Sales – We are committed to providing the best service to our professional customers and the customers they
serve. We have a seasoned team of pro market managers in place with the experience to effectively cultivate relationships with
professional customers. Our loyalty program continues to gain traction and we believe the rewards available to professional customers
provide a meaningful incentive for pros to grow their business with us. We also plan to add several new products for professional
customers in 2020 to help augment our existing pro product offerings.
Disciplined Expense Management – Over the last six months, we have identified and implemented a number of different initiatives to
reduce the level of our brand advertising, information technology (“IT”) consulting, staffing, and public company costs. We are
committed to these initiatives and will explore other expense savings opportunities in pursuit of our return to profitability.
Sales Model
We principally sell our products directly to homeowners and professionals. With regard to individual customers, we believe that due to
the average cost and relative infrequency of a tile purchase, many of our individual customers conduct extensive research using multiple
channels before making a purchase decision. Our sales strategy emphasizes customer service by providing comprehensive and convenient
educational tools on our website and in our stores for our customers to learn about our products and the tile installation process. Our
website contains a broad range of information regarding our tile products, setting and maintenance materials, and accessories. Customers
can order samples, view catalogs, or purchase products from our stores. Customers can choose to have their purchases delivered or
picked up at one of our stores. We believe this strategy also positions us well with professional customers who are influenced by the
preferences of individual homeowners.
Our stores are designed to emphasize our products in a visually appealing showroom format. Our average store is approximately 20,000
square feet, with a majority of the square footage devoted to the showroom. Several thousand square feet is used for warehouse space,
which is used primarily to hold customer orders waiting to be picked up or delivered. Our stores are typically accessible from major
roadways and have significant visibility to passing traffic. We can adapt to a range of existing buildings, whether free-standing or in
shopping centers. All of our stores are leased.
Unlike many of our competitors, we devote a substantial portion of our store space to showrooms, including samples of our
approximately 6,000 products and up to 50 different vignettes of bathrooms, kitchens, fireplaces, foyers, and other distinct spaces that
showcase our products. Our showrooms are designed to provide our customers with a better understanding of how to integrate various
types of tile in order to create an attractive presentation in their homes. Many stores are also equipped with a training center designed to
teach customers how to properly install tile.
A staffing model for a typical store consists of a manager, an assistant manager, sales associates, and a warehouse leader. Our store
managers are responsible for store operations and for overseeing our customers’ shopping experience. We offer financing to customers
through a branded credit card provided by a third-party consumer finance company.
Marketing
We utilize a variety of marketing strategies and programs to acquire and retain customers, including both consumers and trade
professionals. Our advertising primarily consists of digital media, direct marketing, including email and postal mail, in store events, and
mobile and traditional media vehicles, including newspaper circular/print ads, radio, video and out-of-home advertising. We continually
test and learn from new media and adjust our programs based on performance.
Our website, TileShop.com, supports desktop, tablet, and mobile devices and is designed for consumers, trade professionals and industry
stakeholders to learn about our brand, our value propositions, and our product assortment and installation techniques, and to look up our
store locations and account information. On social media, #TheTileShop provides current and prospective customers a high level of brand
engagement and enables customers to share their finished projects in our inspiration gallery.
Products
We offer an extensive and complete assortment of natural stone and man-made tile products, sourced directly from our suppliers. Natural
stone products include marble, travertine, granite, quartz, sandstone, slate, and onyx tiles. Man-made products include
2
Table Of Contents
ceramic, porcelain, glass, cement, wood look, and metal tiles. Our wide assortment of accessories, including trim pieces, mosaics,
pencils, listellos, and other unique products, encourages our customers to make a fashion statement with their tile project and helps us to
deliver a high level of customer satisfaction and drive repeat business. We also offer a broad range of setting and maintenance materials,
such as thinset, grout, sealers, and accessories, including installation tools, shower and bath shelves, drains, and similar products. We also
offer customers delivery service through third-party freight providers. We sell most of our products under our proprietary brand names,
including Superior Adhesives & Chemicals, Superior Tools & Supplies, Rush River, and Fired Earth. In total, we offer approximately
6,000 different tile products, setting and maintenance materials, and accessory products. The percentage of our net sales represented by
each product category was as follows for the years ended December 31, 2019 and 2018:
Man-made tiles
Natural stone tiles
Setting and maintenance materials
Accessories
Delivery service
Suppliers
Years Ended December 31,
2019
2018
47 %
29
13
10
1
100 %
46 %
28
14
10
2
100 %
We have long-standing relationships with our suppliers throughout the world and work with them to design and manufacture products
exclusively for us. We believe that these direct relationships differentiate us from our competitors.
We currently purchase tile products from approximately 200 different suppliers. Our top ten tile suppliers accounted for 49% of our tile
purchases in 2019. Our largest supplier accounted for approximately 12% of our total purchases in 2019. We believe that alternative and
competitive suppliers are available for many of our products. The percentage of our total purchases from the following continents was as
follows for the years ended December 31, 2019 and 2018:
Europe (including Turkey)
North America
Asia
South America
Years Ended December 31,
2019
2018
36 %
32
23
9
100 %
31 %
21
43
5
100 %
During 2018, we made the decision to diversify our source of supply and shift sourcing of certain products manufactured in China to
other parts of the world. We successfully completed this work in 2019 which resulted in a decrease in the volume of products purchased
from Asia and an increase in the percentage of products purchased from suppliers based in Europe, North America, and South America.
Distribution and Order Fulfillment
We take possession of our products in the country of origin and arrange for transportation to our five distribution centers located in
Michigan, Oklahoma, New Jersey, Virginia and Wisconsin. We also manufacture many of our setting and maintenance materials in
Michigan, Oklahoma, Virginia, and Wisconsin. We maintain a large inventory of products in order to quickly fulfill customer orders.
We fulfill customer orders primarily by shipping our products to our stores where customers can either pick them up or arrange for home
delivery. We continue to evaluate logistics alternatives to best serve our store base and our customers. We believe that our existing
distribution facilities will continue to play an integral role in our growth strategy, and we expect to establish one or more additional
distribution centers to support geographic expansion of our store base and to support our store growth plans.
Competition
The retail tile market is highly-fragmented. We compete directly with regional and local specialty retailers of tile, factory-direct stores, a
large number of privately-owned, single-site stores, and online-only competitors. In addition, we compete with large national home
improvement centers that offer a wide range of home improvement products, including flooring. We also compete indirectly with
companies that sell other types of floor coverings, including wood floors, carpet, and vinyl. The barriers of entry into the retail tile
industry are relatively low and new or existing tile retailers could enter our markets and increase the competition that we face. Many
3
Table Of Contents
of our competitors enjoy competitive advantages over us, such as greater name recognition, longer operating histories, more varied
product offerings, and greater financial, technical, and other resources.
We believe that the key competitive factors in the retail tile industry include:
·
·
·
·
·
·
product assortment;
product presentation;
customer service;
store location;
availability of inventory; and
price.
We believe that we compete favorably with respect to each of these factors by providing a highly diverse selection of products to our
customers, at an attractive value, in appealing and convenient store locations, with exceptional customer service and on-site instructional
opportunities. Further, while some larger factory-direct competitors manufacture their own products, many of our competitors do not
maintain their own inventory and instead purchase their tile from domestic manufacturers or distributors when they receive an order from
a customer. We also believe that we offer a broader range of products and stronger in-store customer support than these competitors.
Employees
As of December 31, 2019, we had 1,638 employees, 1,531 of whom were full-time and none of whom were represented by a union. Of
these employees, 1,228 work in our stores, 88 work in corporate, store support, infrastructure or similar functions, and 322 work in
distribution and manufacturing facilities. We believe that we have good relations with our employees.
Intellectual Property and Trademarks
We have registered and unregistered trademarks for all of our brands, including 25 registered trademarks. We regard our intellectual
property as having significant value and our brands are an important factor in the marketing of our products. Accordingly, we have taken,
and continue to take, appropriate steps to protect our intellectual property.
Government Regulation
We are subject to extensive and varied federal, state and local government regulation in the jurisdictions in which we operate, including
laws and regulations relating to our relationships with our employees, public health and safety, zoning, and fire codes. We operate each of
our stores, offices, distribution and manufacturing facilities in accordance with standards and procedures designed to comply with
applicable laws, codes, and regulations.
Our operations and properties are also subject to federal, state and local laws and regulations relating to the use, storage, handling,
generation, transportation, treatment, emission, release, discharge and disposal of hazardous materials, substances, and wastes and
relating to the investigation and cleanup of contaminated properties, including off-site disposal locations. We do not incur significant
costs complying with environmental laws and regulations. However, we could be subject to material costs, liabilities, or claims relating to
environmental compliance in the future, especially in the event of changes in existing laws and regulations or in their interpretation.
Products that we import into the United States are subject to laws and regulations imposed in conjunction with such importation,
including those issued and enforced by U.S. Customs and Border Protection. We work closely with our suppliers to ensure compliance
with the applicable laws and regulations in these areas.
Financial Information about Geographic Areas
A majority of our revenues and profits are generated within the United States and nearly all of our long-lived assets are located within the
United States as well. We have also established a sourcing office based in China.
Available Information
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Exchange
Act requires us to file periodic reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”).
The SEC maintains a website that contains reports, proxy and information statements, and other information
4
Table Of Contents
regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s website at
http://www.sec.gov.
We maintain a website at www.tileshop.com, the contents of which are not part of or incorporated by reference into this report. We make
our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports
available on our website, free of charge, as soon as reasonably practicable after such reports have been filed with or furnished to the SEC.
Our Code of Business Conduct and Ethics, as well as any waivers from and amendments to the Code of Business Conduct and Ethics, is
also posted on our website.
ITEM 1A. RISK FACTORS
The following are significant factors known to us that could adversely affect our business, financial condition, or operating results, as
well as adversely affect the value of an investment in our common stock. These risks could cause our actual results to differ materially
from our historical experience and from results predicted by forward-looking statements. All forward-looking statements made by us are
qualified by the risks described below. There may be additional risks that are not presently material or known. You should carefully
consider each of the following risks and all other information set forth in this report.
Our ability to grow and remain profitable may be limited by direct or indirect competition in the highly-competitive retail tile industry.
The retail tile industry in the United States is highly competitive. Participants in the tile industry compete primarily based on product
variety, customer service, store location, and price. There can be no assurance that we will be able to continue to compete favorably with
our competitors in these areas. Our store competitors include large national home centers, regional and local specialty retailers of tile,
factory-direct stores, privately-owned, single-site stores and online-only competitors. We also compete indirectly with companies that sell
other types of floor coverings, including wood floors, carpet, and vinyl sheet. In the past, we have faced periods of heightened
competition that materially affected our results of operations. Certain of our competitors have greater name recognition, longer operating
histories, more varied product offerings, and substantially greater financial and other resources than us. Accordingly, we may face periods
of intense competition in the future that could have a material adverse effect on our planned growth and future results of operations.
Moreover, the barriers to entry into the retail tile industry are relatively low. New or existing retailers could enter our markets and
increase the competition that we face. In addition, manufacturers and suppliers of tile and related products, including those whose
products we currently sell, could enter the United States retail tile market and start directly competing with us. Further, the retail industry
in general is subject to rapid technological change, which may increase the amount of capital we spend in the future as we work to sustain
and grow our technological infrastructure and digital commerce capabilities in order to remain competitive. Competition in existing and
new markets may also prevent or delay our ability to gain relative market share. Any of the developments described above could have a
material adverse effect on our planned growth and future results of operations.
If we fail to successfully manage the challenges that our planned growth poses or encounter unexpected difficulties during our
expansion, our revenues and profitability could be materially adversely affected.
One of our long-term objectives is to increase revenue and profitability through market share gains. Our ability to achieve market share
growth, however, is contingent upon our ability to open new stores and achieve operating results in new stores at the same level as our
similarly situated current stores. We anticipate opening one new store in 2020. There can be no assurance that we will be able to open
stores in new markets at the rate required to achieve market leadership in such markets, identify and obtain favorable store sites, arrange
favorable leases for stores, obtain governmental and other third-party consents, permits, and licenses needed to open or operate stores in a
timely manner, train and hire a sufficient number of qualified managers for new stores, attract a strong customer base and brand
familiarity in new markets, or successfully compete with established retail tile stores in the new markets that we enter. Failure to open
new stores in an effective and cost-efficient manner could place us at a competitive disadvantage as compared to retailers who are more
adept than us at managing these challenges, which, in turn, could negatively affect our overall operating results.
Our same store sales fluctuate due to a variety of economic, operating, industry and environmental factors and may not be a fair
indicator of our overall performance.
Our same store sales have experienced fluctuations, which can be expected to continue. Numerous factors affect our same store sales
results, including, among others, the timing of new and relocated store openings, the relative proportion of new and relocated stores to
mature stores, cannibalization resulting from the opening of new stores in existing markets, changes in advertising and other operating
costs, the timing and level of markdowns, changes in our product mix, weather conditions, retail trends, the retail sales environment,
economic conditions, inflation, the impact of competition, and our ability to execute our business strategy. As a result, same store sales or
operating results may fluctuate and may cause the price of our securities to fluctuate significantly. Therefore, we believe that period-to-
period comparisons of our same store sales may not be a reliable indicator of our future overall operating performance.
5
Table Of Contents
We intend to open additional stores in both our existing markets and new markets, which poses both the possibility of diminishing
sales by existing stores in our existing markets and the risk of a slow ramp-up period for stores in new markets.
Our expansion strategy includes plans to open one new store in an existing market during 2020. In future periods, we intend to continue
opening stores in new and existing markets. Because our stores typically draw customers from their local areas, additional stores may
draw customers away from nearby existing stores and may cause same store sales performance at those existing stores to decline, which
may adversely affect our overall operating results. Additionally, stores in new markets typically have a ramp-up period before sales
become steady enough for such stores to be profitable. Our ability to open additional stores will be dependent on our ability to promote
and/or recruit enough qualified store managers, assistant store managers, and sales associates. The time and effort required to train and
supervise a large number of new managers and associates and integrate them into our culture may divert resources from our existing
stores. If we are unable to profitably open additional stores in both new and existing markets and limit the adverse impact of those new
stores on existing stores, our same store sales and overall operating results may be reduced during the implementation of our expansion
strategy.
Our expansion strategy will be dependent upon, and limited by, the availability of adequate capital.
Our expansion strategy will require adequate capital for, among other purposes, opening new stores, distribution centers, and
manufacturing facilities, as well as entering new markets. Such expenditures will include researching real estate and consumer markets,
leases, inventory, property and equipment costs, integration of new stores and markets into company-wide systems and programs, and
other costs associated with new stores and market entry expenses and growth. If cash generated internally is insufficient to fund capital
requirements, we will require additional debt or equity financing. Adequate financing may not be available or, if available, may not be
available on terms satisfactory to us. In addition, our credit facility may limit the amount of capital expenditures that we may make
annually, depending on our rent adjusted leverage ratio. If we fail to obtain sufficient additional capital in the future or we are unable to
make capital expenditures under our credit facility, we could be forced to curtail our expansion strategies by reducing or delaying capital
expenditures relating to new stores and new market entry. As a result, there can be no assurance that we will be able to fund our current
plans for the opening of new stores or entry into new markets.
If we fail to identify and maintain relationships with a sufficient number of suppliers, our ability to obtain products that meet our
high quality standards at attractive prices could be adversely affected.
We purchase flooring and other products directly from suppliers located around the world. However, we do not have long-term
contractual supply agreements with our suppliers that obligate them to supply us with products exclusively or at specified quantities or
prices. As a result, our current suppliers may decide to sell products to our competitors and may not continue selling products to us. In
order to retain the competitive advantage that we believe results from these relationships, we need to continue to identify, develop and
maintain relationships with qualified suppliers that can satisfy our high standards for quality and our requirements for flooring and other
products in a timely and efficient manner at attractive prices. The need to develop new relationships will be particularly important as we
seek to expand our operations and enhance our product offerings in the future. The loss of one or more of our existing suppliers or our
inability to develop relationships with new suppliers could reduce our competitiveness, slow our plans for further expansion, and cause
our net sales and operating results to be adversely affected.
We source the approximately 6,000 products that we stock and sell from approximately 200 domestic and international suppliers. We
source a large number of those products from foreign manufacturers, including 49% of our products from a group of ten suppliers located
in Asia, Europe and the United States. Our largest supplier accounted for approximately 12% of our total purchases in 2019. We generally
take title to these products sourced from foreign suppliers overseas and are responsible for arranging shipment to our distribution centers.
Financial instability among key suppliers, political instability, trade restrictions, tariffs, currency exchange rates, and transport capacity
and costs are beyond our control and could negatively impact our business if they seriously disrupt the movement of products through our
supply chain or increase the costs of our products.
Our reliance on foreign suppliers increases our risks of not obtaining adequate, timely and cost effective products and to the risks
involved in foreign operations and foreign currency translation.
The risks associated with direct sourcing from overseas manufacturers may be higher than the risks associated with our traditional
domestic suppliers. Foreign sourcing subjects us to a number of risks, including long lead times; work stoppages; shipping delays and
interruptions; product quality issues; employee rights issues; other social concerns; public health epidemics, such as the ongoing
coronavirus outbreak emanating from China, the impact of which is uncertain and which, if it persists for an extended period of time,
could disrupt our global supply chain and result in significant expenses or delays outside of our control, or pandemics; political
instability; acts of terrorism; economic disruptions; the imposition of tariffs, duties, quotas, import and export controls and other trade
restrictions; changes in governmental policies, including potential adverse changes in tax laws and regulations; uncertainty surrounding
the enforcement of laws (if any) relating to the protection of intellectual property or data security; and other events. Any of these events
could have a material adverse effect on us.
6
Table Of Contents
In addition, a novel strain of coronavirus, COVID-19, surfaced in Wuhan, China in December 2019, resulting in increased travel
restrictions and extended shutdown of certain businesses in the region. The impact of COVID-19 on our business is uncertain at this time
and will depend on future developments; however, prolonged closures in China may disrupt our operations or the operations of certain of
our suppliers, which could negatively impact our business.
In addition, reductions in the value of the U.S. dollar or revaluation of foreign currencies used could ultimately increase the prices that we
pay for our products. All of our products manufactured overseas and imported into the U.S. are subject to duties collected by the U.S.
Customs and Border Protection. We may be subjected to additional duties, significant monetary penalties, the seizure and forfeiture of
the products we are attempting to import or the loss of import privileges if we or our suppliers are found to be in violation of U.S. laws
and regulations applicable to the importation of our products. If duties were to be significantly increased, it could have a material adverse
impact on us.
Our ability to offer compelling products, particularly products made of unique stone, depends on the continued availability of
sufficient suitable natural products.
Our business strategy depends on offering a wide assortment of compelling products to our customers. We sell, among other things,
products made from various natural stones from quarries throughout the world. Our ability to obtain an adequate volume and quality of
hard-to-find products depends on our suppliers’ ability to furnish those products, which, in turn, could be affected by many things,
including the exhaustion of stone quarries. If our suppliers cannot deliver sufficient products, and we cannot find replacement suppliers,
our net sales and operating results may be adversely affected.
If customers are unable to obtain third-party financing at satisfactory rates, sales of our products could be materially adversely
affected.
Our business, financial condition, and results of operations have been, and may continue to be, affected by various economic factors.
Deterioration in the current economic environment could lead to reduced consumer and business spending, including by our customers. It
may also cause customers to shift their spending to products that we either do not sell or that generate lower profitability for us. Further,
reduced access to credit may adversely affect the ability of consumers to purchase our products. This potential reduction in access to
credit may adversely impact our ability to offer customers credit card financing through third-party credit providers on terms similar to
those offered currently, or at all. In addition, economic conditions, including decreases in access to credit, may result in financial
difficulties leading to restructuring, bankruptcies, liquidations and other unfavorable events for our customers, which may adversely
impact our industry, business, and results of operations.
Any failure by us to successfully anticipate consumer trends may lead to loss of consumer acceptance of our products, resulting in
reduced revenues.
Our success depends on our ability to anticipate and respond to changing trends in the tile industry and consumer demands in a timely
manner. If we fail to identify and respond to emerging trends, consumer acceptance of our merchandise and our image with current or
potential customers may be harmed, which could reduce our revenue potential. Additionally, if we misjudge market trends, we may
significantly overstock unpopular products and be forced to reduce the sales price of such products, which would have a negative impact
on our gross profit and cash flow. Conversely, shortages of products that prove popular could cause customers to seek alternative sources
of such products, as well as other products they may have purchased from us, which could also reduce our revenues.
We depend on a few key employees, and if we lose the services of these employees, we may not be able to run our business
effectively.
Our future success depends in part on our ability to attract and retain key executive, merchandising, marketing, and sales personnel. We
have had changes in our senior management team over the past two years and have promoted or hired new employees to fill certain roles.
Our inability to effectively integrate the newly-hired senior managers into our business processes, controls, systems and culture could
have a material adverse effect on us. If any of our key employees ceases to be employed by us, we would have to hire additional qualified
personnel and could experience delays in filling those roles. Our ability to successfully hire other experienced and qualified key
employees cannot be assured and may be difficult because we face competition for these professionals from our competitors, our
suppliers and other companies operating in our industry. As a result, the loss or unavailability of any of our key employees could have a
material adverse effect on us.
If we fail to hire, train, and retain qualified store managers, sales associates, and other employees, our enhanced customer service
could be compromised and we could lose sales to our competitors.
7
Table Of Contents
A key element of our competitive strategy is to provide product expertise to our customers through our extensively trained,
commissioned sales associates. If we are unable to attract and retain qualified personnel and managers as needed in the future, including
qualified sales personnel, our level of customer service may decline, which may decrease our revenues and profitability.
The burden of debt under our existing credit facility and additional debt could adversely affect us, make us more vulnerable to
adverse economic or industry conditions, and prevent us from fulfilling our debt obligations or from funding our strategies.
We entered into a credit facility with Bank of America, N.A., Fifth Third Bank and Citizens Bank on September 18, 2018. As of
December 31, 2019, we had borrowed approximately $63.0 million on our revolving line of credit, leaving $35.7 million available for
future borrowings. The terms of our credit facility and the burden of the indebtedness incurred thereunder could have serious
consequences for us, such as:
·
·
·
·
limiting our ability to obtain additional financing to fund our working capital, capital expenditures, debt service requirements,
expansion strategy, or other needs;
placing us at a competitive disadvantage compared to competitors with less debt;
increasing our vulnerability to, and reducing our flexibility in planning for, adverse changes in economic, industry, and
competitive conditions; and
increasing our vulnerability to increases in interest rates if borrowings under the credit facility are subject to variable interest
rates.
Additionally, any future increase in the level of our indebtedness will likely increase our interest expense, which could negatively impact
our profitability. Current interest rates on borrowings under our credit facility are variable and include the use of the London Interbank
Offered Rate (“LIBOR”). In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends
to phase out LIBOR by the end of 2021. In addition, other regulators have suggested reforming or replacing other benchmark rates. The
expected phase out of LIBOR could cause market volatility or disruption and may adversely affect our access to the capital markets and
cost of funding. Furthermore, while our credit facility contains “fallback” provisions providing for alternative rate calculations in the
event LIBOR is unavailable, these “fallback” provisions may not adequately address the actual changes to LIBOR or successor rates.
Our credit facility also contains negative covenants that limit our ability to engage in specified types of transactions. These covenants
limit our ability to, among other things:
·
·
·
·
·
·
·
·
·
·
incur indebtedness;
create liens;
engage in mergers or consolidations;
sell assets (including pursuant to sale and leaseback transactions);
make investments, acquisitions, loans, or advances;
engage in certain transactions with affiliates;
enter into agreements limiting subsidiary distributions;
enter into agreements limiting the ability to create liens;
amend our organizational documents in a way that has a material effect on the lenders or administrative agent under our credit
facility; and
change our lines of business.
A breach of any of these covenants could result in an event of default under our credit facility. Upon the occurrence of an event of
default, the lender could elect to declare all amounts outstanding under such facility to be immediately due and payable and terminate all
commitments to extend further credit, or seek amendments to our debt agreements that would provide for terms more favorable to such
lender and that we may have to accept under the circumstances. If we were unable to repay those amounts, the lender under our credit
facility could proceed against the collateral granted to it to secure that indebtedness.
If we are unable to renew or replace current store leases, or if we are unable to enter into leases for additional stores on favorable
terms, or if one or more of our current leases is terminated prior to expiration of its stated term and we cannot find suitable
alternate store locations, our growth and profitability could be negatively impacted.
We currently lease all of our store locations and certain distribution center locations. Many of our current leases provide us with the
unilateral option to renew for several additional rental periods at specific rental rates. Our ability to renegotiate favorable terms on an
8
Table Of Contents
expiring lease or to negotiate favorable terms for a suitable alternate location, and our ability to negotiate favorable lease terms for
additional store locations, could depend on conditions in the real estate market, competition for desirable properties, our relationships
with current and prospective landlords, or other factors that are not within our control. Any or all of these factors and conditions could
negatively impact our growth and profitability.
Compliance with laws or changes in existing or new laws and regulations or regulatory enforcement priorities could adversely affect
our business.
We must comply with various laws and regulations at the local, regional, state, federal, and international levels. These laws and
regulations change frequently, and such changes can impose significant costs and other burdens of compliance on our business and
suppliers. Any changes in regulations, the imposition of additional regulations, or the enactment of any new legislation that affects
employment/labor, trade, product safety, transportation/logistics, energy costs, health care, tax, environmental issues, or compliance with
the Foreign Corrupt Practices Act could have an adverse impact on our financial condition and results of operations. Changes in
enforcement priorities by governmental agencies charged with enforcing existing laws and regulations could increase our cost of doing
business.
We may also be subject to audits by various taxing authorities. Changes in tax laws in any of the multiple jurisdictions in which we
operate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could result in an
unfavorable change in our effective tax rate, which could have an adverse effect on our business and results of operations.
If our suppliers do not use ethical business practices or comply with applicable laws and regulations, our reputation could be harmed
due to negative publicity and we could be subject to legal risk.
We do not control the operations of our suppliers. Accordingly, we cannot guarantee that our suppliers will comply with applicable
environmental, labor and other laws and regulations or operate in a legal, ethical, and responsible manner. Violation of environmental,
labor or other laws by our suppliers or their failure to operate in a legal, ethical, or responsible manner could reduce demand for our
products if, as a result of such violation or failure, we attract negative publicity. Further, such conduct could expose us to legal risks as a
result of the purchase of products from non-compliant suppliers.
Our results may be adversely affected by fluctuations in material and energy costs.
Our results may be affected by the prices of the materials used in the manufacture of tile, setting and maintenance materials, and related
accessories that we sell. These prices may fluctuate based on a number of factors beyond our control, including: oil prices, changes in
supply and demand, general economic conditions, labor costs, competition, import duties, tariffs, currency exchange rates, and
government regulation. In addition, energy costs have fluctuated dramatically in the past and may fluctuate in the future. These
fluctuations may result in an increase in our transportation costs for distribution from the manufacturer to our distribution centers and
from our regional distribution centers to our stores, utility costs for our distribution and manufacturing centers and stores, and overall
costs to purchase products from our suppliers.
We may not be able to adjust the prices of our products, especially in the short-term, to recover any cost increases in materials and
energy. A continual rise in material and energy costs could adversely affect consumer spending and demand for our products and increase
our operating costs, both of which could have a material adverse effect on our financial condition and results of operations.
Our success is highly dependent on our ability to provide timely delivery to our customers, and any disruption in our delivery
capabilities or our related planning and control processes may adversely affect our operating results.
Our success is due in part to our ability to deliver products quickly to our customers, which requires successful planning and distribution
infrastructure, including ordering, transportation and receipt processing, and the ability of suppliers to meet distribution requirements.
Our ability to maintain this success depends on the continued identification and implementation of improvements to our planning
processes, distribution infrastructure, and supply chain. We also need to ensure that our distribution infrastructure and supply chain keep
pace with our anticipated growth and increased number of stores. The cost of these enhanced processes could be significant and any
failure to maintain, grow, or improve them could adversely affect our operating results. Our business could also be adversely affected if
there are delays in product shipments due to freight difficulties, strikes, or other difficulties at our suppliers’ principal transport providers,
or otherwise.
Our success depends on the effectiveness of our marketing strategy.
We believe that our growth was achieved in part through the effectiveness of our marketing strategies. Prior to 2018, we used internet,
print, and radio advertisements containing discounts and promotional offers to encourage customers to visit our stores. A significant
portion of our advertising was invested to support the opening of new stores and directed at professional customers. Beginning in late
2017, we de-emphasized the use of discount offers to attract customers. Limited use of discount and promotional offers in future
9
Table Of Contents
periods could fail to attract customers, resulting in a decrease in store traffic. We may need to further increase our marketing expense to
support our business strategies in the future. If our marketing strategies fail to draw customers in the future, or if the cost of advertising or
other marketing materials increases significantly, we could experience declines in our net sales and operating results.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value
added or similar transactional taxes, and we could be subject to liability with respect to past or future sales, which could
adversely affect our results of operations.
The application of sales tax and other indirect taxes on cross border sales by remote sellers is continuing to change and evolve. In
June 2018, the U.S. Supreme Court decided South Dakota v. Wayfair, Inc., a case challenging the prior law under which sellers
were not required to collect sales and use tax unless they have a physical presence in the buyer’s state. This decision will now
allow states to adopt new or enforce existing laws requiring sellers to collect and remit sales and use tax, even in states in which
the seller has no presence. The adoption or enforcement of any such legislation could result in additional sales and use tax
collection responsibility for certain of our businesses. A number of states have already begun requiring sales and use tax
collection by remote sellers. We are in the process of determining how and when our collection practices may need to change in
the relevant jurisdictions. It is possible that one or more jurisdictions may assert that we have liability for periods for which
certain of our businesses have not collected sales, use or other similar taxes, and if such an assertion or assertions were successful
it could result in tax liabilities, including for past sales taxes and penalties and interest, which could materially adversely affect
our business, financial condition and operating results.
Natural disasters, changes in climate and geo-political events could adversely affect our operating results.
The threat or occurrence of one or more natural disasters or other extreme weather events, whether as a result of climate change or
otherwise, and the threat or outbreak of terrorism, civil unrest, a public health epidemic, such as the coronavirus, or pandemic, or other
hostilities, conflicts or similar adverse events could materially adversely affect our financial performance. These events may result in
damage to, or destruction or closure of, our stores, distribution centers and other properties. Such events can also adversely affect our
work force and prevent employees and customers from reaching our stores and other properties, can modify consumer purchasing
patterns and decrease disposable income, and can disrupt or disable portions of our supply chain and distribution network.
Our ability to control labor costs is limited, which may negatively affect our business.
Our ability to control labor costs is subject to numerous external factors, including prevailing wage rates, the impact of legislation or
regulations governing healthcare benefits or labor relations, and health and other insurance costs. If our labor and/or benefit costs
increase, we may not be able to hire or maintain qualified personnel to the extent necessary to execute our competitive strategy, which
could adversely affect our results of operations.
Our business operations could be disrupted if we are unable to protect the integrity and security of our customer information.
In connection with payment card sales and other transactions, including bank cards, debit cards, credit cards and other merchant cards, we
process and transmit confidential banking and payment card information. Additionally, as part of our normal business activities, we
collect and store sensitive personal information related to our employees, customers, suppliers and other parties. Despite our security
measures, our information technology and infrastructure may be vulnerable to criminal cyber-attacks or security incidents due to
employee error, malfeasance or other vulnerabilities. Any such incidents could compromise our networks or disrupt critical systems, and
the information stored there, such as personal identification information or funds, could be accessed, publicly disclosed, lost or stolen.
Third parties may have the technology and know-how to breach the security of this information, and our security measures and those of
our banks, merchant card processing and other technology suppliers may not effectively prohibit others from obtaining improper access
to this information. The techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not
recognized until launched against a target; accordingly, we may be unable to anticipate these techniques or implement adequate
preventative measures.
Many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These
mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our customers to lose
confidence in the effectiveness of our data security measures. Any security breach, whether successful or not, would harm our reputation
and could cause the loss of customers. In addition, any such breach could subject us to litigation, government enforcement actions,
regulatory penalties or costly response measures. Any such occurrence could have a material adverse effect on us.
If our management information systems experience disruptions, it could disrupt our business and reduce our net sales.
We depend on our management information systems to integrate the activities of our stores, to process orders, to manage inventory, to
purchase merchandise and to sell and ship goods on a timely basis. We may experience operational problems with our information
systems, as well as loss of funds, intellectual property or other proprietary information, as a result of system failures, viruses,
10
Table Of Contents
computer “hackers” or other causes. We may incur significant expenses in order to repair any such operational problems and could suffer
reputational damage. Any significant disruption or slowdown of our systems could cause information, including data related to customer
orders, to be lost or delayed, which could result in delays in the delivery of products to our stores and customers or lost sales.
Accordingly, if our network is disrupted, we may experience delayed communications within our operations and between our customers
and ourselves. Any such occurrence could have a material adverse effect on us.
The selection and implementation of information technology initiatives may impact our operational efficiency and productivity.
In order to better manage our business, we expect to invest in our information systems. In doing so, we must select the correct
investments and implement them in an efficient manner. The costs, potential problems and interruptions associated with implementing
technology initiatives could disrupt or reduce the efficiency of our operations. Furthermore, these initiatives might not provide the
anticipated benefits or provide them in a delayed or more costly manner. Accordingly, issues relating to our selection and implementation
of information technology initiatives may negatively impact our business and operating results.
Implementation of our new ERP system has adversely impacted and could continue to negatively affect our business.
We rely extensively on our IT systems to assist us in managing our business and summarizing our operational results. On January 1,
2019, we deployed a company-wide new 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.
We identified material weaknesses in internal control over financial reporting that pertain to our ERP system conversion on January 1,
2019, as described below, which has caused us to incur increased costs, diverted our management’s and employees’ attention and
resources, and negatively impacted our business. 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 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 SEC. 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 delisting from The Nasdaq Stock Market
LLC (“Nasdaq”) and our previously-announced plan to deregister our common stock. We cannot ensure that we will not identify
additional material weaknesses in our internal control over financial reporting in the future.
We have delisted our common stock from the Nasdaq Stock Market and intend to deregister our common stock under the Exchange
Act.
As previously disclosed, we have voluntarily delisted our common stock from Nasdaq and intend to deregister our common stock under
the Exchange Act. Our common stock is currently quoted on the Pink tier of the OTC Markets under the symbol “TTSH”. Following our
proposed deregistration, it may thereafter continue to 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.
11
Table Of Contents
In November 2019, a class action and derivative lawsuit was filed in the Court of Chancery of the State of Delaware against us and our
directors, which prevented us from filing a Form 15 to complete our proposed deregistration. As such, we are required to continue filing
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, and remain subject to all other requirements associated with being an Exchange Act-registered company. However, we
continue to believe that the proposed deregistration, and the associated expected cost savings, is in our and our stockholders’ best
interests.
Following our delisting and proposed deregistration, the combination of the reduced amount of information regarding us available to
stockholders and potential investors and the likelihood of reduced liquidity in the over-the-counter trading environment may impact the
value of our common stock.
Our insurance coverage and self-insurance reserves may not cover future claims.
We maintain various insurance policies for employee health and workers’ compensation. We are self-insured on certain health insurance
plans and are responsible for losses up to a certain limit for these respective plans. We are also self-insured with regard to workers’
compensation coverage, in which case we are responsible for losses up to certain retention limits on both a per-claim and aggregate basis.
For policies under which we are responsible for losses, we record a liability that represents our estimated cost of claims incurred and
unpaid as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors,
including historical trends and economic conditions, and is closely monitored and adjusted when warranted by changing circumstances.
Fluctuating healthcare costs, our significant growth rate and changes from our past experience with workers’ compensation claims could
affect the accuracy of estimates based on historical experience. Should a greater amount of claims occur compared to what was estimated
or employee health insurance costs increase beyond what was expected, our accrued liabilities might not be sufficient, and we may be
required to record additional expense. Unanticipated changes may produce materially different amounts of expense than that reported
under these programs, which could adversely impact our operating results.
We are involved in legal proceedings and, while we cannot predict the outcomes of such proceedings and other contingencies with
certainty, some of these outcomes could adversely affect our business, financial condition and results of operations.
We are, and may become, involved in shareholder, consumer, employment, tort or other litigation. We cannot predict with certainty the
outcomes of these legal proceedings. The outcome of some of these legal proceedings could require us to take, or refrain from taking,
actions which could negatively affect our operations or could require us to pay substantial amounts of money adversely affecting our
financial condition and results of operations. Additionally, defending against lawsuits and proceedings may involve significant expense
and diversion of management's attention and resources.
The market price of our securities may decline and/or be volatile.
The market price of our common stock has fluctuated significantly in the past and may continue to fluctuate in the future. Future
fluctuations could be based on various factors in addition to those otherwise described in this report, including:
·
·
·
·
·
·
·
our operating performance and the performance of our competitors;
the public’s reaction to our filings with the SEC, our press releases and other public announcements; including our delisting
from Nasdaq and current quotation on the Pink tier of the OTC Markets and our previously-announced plan to deregister our
common stock;
changes in recommendations or earnings estimates by research analysts who follow us or other companies in our industry;
variations in general economic conditions;
actions of our current stockholders, including purchases or sales of common stock by our directors and executive officers;
the arrival or departure of key personnel; and
other developments affecting us, our industry or our competitors.
In addition, the stock market may experience significant price and volume fluctuations. These fluctuations may be unrelated to the
operating performance of particular companies but may cause declines in the market price of our common stock. The price of our
common stock could fluctuate based upon factors that have little or nothing to do with our company or its performance.
We suspended our quarterly dividend program and cancelled our stock repurchase program; as such, only appreciation in the price of
our common stock will provide a return to our stockholders.
12
Table Of Contents
In October 2019, we suspended our quarterly cash dividend program and cancelled our share repurchase program to focus on debt
reduction and continued investment in strategic initiatives. Any future determination with respect to the payment of dividends or stock
repurchases is at the discretion of our Board of Directors and is dependent upon our financial condition, results of operations, capital
requirements, general business conditions, tax treatment of dividends in the United States, potential future contractual restrictions
contained in credit agreements and other agreements and other factors deemed relevant by our Board of Directors. Our election not to pay
a quarterly dividend or repurchase stock may negatively impact our reputation, our stock price, and investor confidence in us.
We are a holding company with no business operations of our own and depend on cash flow from The Tile Shop to meet our
obligations.
We are a holding company with no business operations of our own or material assets other than the equity of our subsidiaries. All of our
operations are conducted by our subsidiaries, including The Tile Shop. As a holding company, we will require dividends and other
payments from our subsidiaries to meet cash requirements. The terms of any future credit facility may restrict our subsidiaries from
paying dividends and otherwise transferring cash or other assets to us, although our current facility does not restrict this action. If there is
an insolvency, liquidation, or other reorganization of any of our subsidiaries, our stockholders likely will have no right to proceed against
their assets. Creditors of those subsidiaries will be entitled to payment in full from the sale or other disposal of the assets of those
subsidiaries before we, as an equity holder, would be entitled to receive any distribution from that sale or disposal. If The Tile Shop is
unable to pay dividends or make other payments to us when needed, we will be unable to satisfy our obligations.
Concentration of ownership may have the effect of delaying or preventing a change in control.
Our directors and executive officers, together with their affiliates, beneficially hold approximately 31% of our outstanding shares of
common stock. As a result, these stockholders, if acting together, have the ability to influence the outcome of corporate actions requiring
stockholder approval. This concentration of ownership may have the effect of delaying or preventing a change in control and might
adversely affect the market price of our securities.
Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair
a takeover attempt.
Our certificate of incorporation and bylaws contain provisions that, alone or together, could have the effect of delaying or preventing
hostile takeovers or changes in control or changes in our management without the consent of our Board of Directors. These provisions
include:
·
·
·
·
·
·
·
·
·
·
·
a classified Board of Directors with three-year staggered terms, which may delay the ability of stockholders to change the
membership of a majority of our Board of Directors;
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of the Board of
Directors or the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our
Board of Directors;
the ability of our Board of Directors to determine whether to issue shares of preferred stock and to determine the price and other
terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to
significantly dilute the ownership of a hostile acquirer;
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special
meeting of our stockholders;
the requirement that a special meeting of stockholders may be called only by the chairman of the Board of Directors, the Chief
Executive Officer, or the Board of Directors, which may delay the ability of our stockholders to force consideration of a
proposal or to take action, including the removal of directors;
limiting the liability of, and providing indemnification to, our directors and officers;
controlling the procedures for the conduct and scheduling of stockholder meetings;
providing the Board of Directors with the express power to postpone previously scheduled annual meetings of stockholders and
to cancel previously scheduled special meetings of stockholders;
providing that directors may be removed prior to the expiration of their terms by stockholders only for cause; and
advance notice procedures that stockholders must comply with in order to nominate candidates to our Board of Directors or to
propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from
conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
13
Table Of Contents
As a Delaware corporation, we are also subject to provisions of Delaware law. Any provision of our certificate of incorporation or bylaws
or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive
a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common
stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2019, we operated 142 stores located in 31 states and the District of Columbia with an average square footage of
approximately 20,000 square feet. The table below sets forth the store locations (alphabetically by state) of our 142 stores in operation as
of December 31, 2019.
Stores
State
Arizona
Arkansas
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
State
4
Illinois
1
Indiana
4
Iowa
3 Kansas
1 Kentucky
1 Maryland
5 Massachusetts
4 Michigan
Stores
State
12 Minnesota
4 Missouri
1 Nebraska
1 New Jersey
3 New Mexico
5 New York
4 North Carolina
7 Ohio
Stores
State
7 Oklahoma
5 Pennsylvania
1 Rhode Island
6 South Carolina
1 Tennessee
8 Texas
5 Virginia
8 Wisconsin
Total
Stores
2
5
1
2
4
17
7
3
142
We lease all of our stores. Our approximately 15,000 square foot headquarters in Plymouth, Minnesota is attached to our store. We own
four regional facilities used for distribution of purchased product and manufacturing of setting and maintenance materials, located in
Spring Valley, Wisconsin; Ottawa Lake, Michigan; Ridgeway, Virginia; and Durant, Oklahoma, which consist of 69,000, 271,000,
134,000, and 260,000 square feet, respectively. We also lease a distribution facility in Dayton, New Jersey that is 103,000 square feet.
We believe that our material property holdings are suitable for our current operations and purposes. We intend to open one new store in
2020.
ITEM 3. LEGAL PROCEEDINGS
We are, from time to time, party to lawsuits, threatened lawsuits, disputes and other claims arising in the normal course of business. We
assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available.
Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our
consolidated financial statements. These legal accruals may be increased or decreased to reflect any relevant developments on a
quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we do not record an accrual, consistent with
applicable accounting guidance. Based on information currently available to us, advice of counsel, and available insurance coverage,
we believe that our established accruals are adequate and the liabilities arising from the legal proceedings will not have a material
adverse effect on our consolidated financial condition. However, in light of the inherent uncertainty in legal proceedings, there can be
no assurance that the ultimate resolution of a matter will not exceed established accruals. As a result, the outcome of a particular matter
or a combination of matters may be material to our results of operations for a particular period, depending upon the size of the loss or
our income for that particular period.
We have voluntarily delisted our common stock from Nasdaq and intend to deregister our common stock under the Exchange Act, subject
to applicable law and any orders or injunctions issued in the litigation described below.
On November 5, 2019, a class action and derivative lawsuit was filed in the Court of Chancery of the State of Delaware against us and
our directors by a plaintiff’s law firm with K-Bar Holdings LLC listed as plaintiff. The complaint was filed again by the same law firm
on November 7, 2019 with Wynnefield Capital, Inc. as the plaintiff. The complaint alleges breaches of fiduciary duty in connection
with our decision to delist from Nasdaq and deregister our common stock under the Exchange Act and directors’ purchases of common
stock. The complaint includes derivative claims and seeks injunctive relief to prevent us from deregistering our common stock,
injunctive relief to prevent additional stock purchases, and unspecified damages. A hearing was scheduled for February 21, 2020 for the
court to consider whether a preliminary injunction should be issued to continue the temporary restraining order (“TRO”) that was
entered by the court on November 8, 2019. The TRO prohibits us from filing a Form 15 to complete the proposed
14
Table Of Contents
deregistration and additional stock purchases by directors. We have determined to forego the preliminary injunction hearing and
proceed directly to a full trial on the merits, which is currently scheduled for April 13-14, 2020.
We believe that the K-Bar and Wynnefield Capital complaint contains numerous false and misleading statements that create a narrative
regarding our delisting and proposed deregistration that is untrue. We further believe, and have made filings with the court indicating
that, subsequent filings and statements made with the court by plaintiffs’ counsel Bernstein Litowitz Berger & Grossmann have been
false and misleading and sought to distort the record in the case. We plan to continue to contest the litigation vigorously.
As a result of the delay in filing the Form 15, we are required to continue filing 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, and remain subject to all other
requirements associated with being an Exchange Act-registered company. If the TRO expires or is lifted, we will be required to reassess
if we are eligible to file the Form 15 at that time.
We continue to believe that the delisting and proposed deregistration are in the best interests of us and our stockholders. We believe
that it is unfortunate that our ability to achieve the expected cost savings from the deregistration has been impeded by the litigation and
continue to contest the litigation vigorously.
ITEM 4. MINE SAFETY DISCLOSURES
None.
15
Table Of Contents
Part II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock previously traded on Nasdaq under the symbol “TTS”. We voluntarily delisted our common stock from Nasdaq in
November 2019 and, since then, our common stock has been quoted on The OTC Pink Market under the symbol “TTSH”. The following
table shows, for the period indicated, the high and low closing bid quotations for the Company’s common stock as reported by Yahoo
Finance. The quotations represent inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
November 11, 2019 – December 31, 2019
$
High
1.85 $
Low
1.25
As of March 9, 2020, we had approximately 464 holders of record of our common stock. This figure does not include the number of
persons whose securities are held in nominee or “street” name accounts through brokers.
As of March 9, 2020, we had 50,751,615 shares of common stock outstanding. The last reported sales price for our common stock on
March 9, 2020 was $1.42.
Dividends Paid Per Share
Date Paid
March 16, 2018
May 11, 2018
August 10, 2018
November 9, 2018
March 15, 2019
May 17, 2019
August 9, 2019
$
$
$
$
$
$
$
Amount
0.05
0.05
0.05
0.05
0.05
0.05
0.05
We suspended dividend payments on October 18, 2019.
Securities Authorized for Issuance Under Equity Compensation Plans
For information on our equity compensation plans, refer to Item 12, “Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.”
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
October 1, 2019 - October 31, 2019
November 1, 2019 - November 30, 2019
December 1, 2019 - December 31, 2019
Total Number of
Shares Purchased
Average Price
Paid per Share
0.40 (1)
0.62 (2)
0.00 (3)
0.26
65,161 (1) $
7,570 (2)
47,592 (3)
120,323
$
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(4)
-
-
-
-
(1) We withheld a total of 8,479 shares to satisfy tax withholding obligations due upon the vesting of restricted stock grants, as allowed
by the 2012 Omnibus Award Plan (the “2012 Plan”). We did not pay cash to repurchase these shares, nor were these repurchases part
of a publicly announced plan or program. We repurchased the remaining 56,682 shares pursuant to the terms of
16
Table Of Contents
the underlying restricted stock agreements, as allowed by the 2012 Plan. We 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) We withheld a total of 2,570 shares to satisfy tax withholding obligations due upon the vesting of restricted stock grants, as allowed
by the 2012 Plan. We did not pay cash to repurchase these shares, nor were these repurchases part of a publicly announced plan or
program. We repurchased the remaining 5,000 shares pursuant to the terms of the underlying restricted stock agreements, as allowed
by the 2012 Plan. We 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) We repurchased these shares pursuant to the terms of the underlying restricted stock agreements, as allowed by the 2012 Plan. We
paid $0.0001 per share, the par value, to repurchase these shares. These repurchases were not part of a publicly announced plan or
program.
(4) On April 29, 2019, our 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, at which time
approximately $4.5 million remained available for purchases under the Program.
17
Table Of Contents
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information derived from (i) our audited financial statements included
elsewhere in this report as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018, and 2017 and (ii) our
audited financial statements not included elsewhere in this report as of December 31, 2017, 2016, and 2015 and for the years ended
December 31, 2016 and 2015. The following selected financial data should be read in conjunction with the section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the related
notes appearing elsewhere in this report.
$
$
$
$
$
$
Statement of Income Data
Net sales
Cost of sales
Gross profit
Selling, general and administrative
expenses
(Loss) income from operations
Interest expense
Other income
(Loss) income before income taxes
Benefit (provision) for income taxes
Net (loss) income
(Loss) earnings per share
Weighted average shares
outstanding (diluted)
Balance Sheet Data
Cash and cash equivalents
Inventories
Total assets
Total debt and lease
obligations, including current maturities(1)
Total stockholders' equity
Working capital
Cash Flow Data
Net cash provided by operating
activities
Net cash used in investing activities
Net cash (used in) provided by
financing activities
Other Selected Financial Data
(unaudited)
Dividends paid per share
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Gross margin rate(3)
Operating (loss) income margin(4)
Same stores sales (decline) growth(5)
Stores open at end of period
2019
340,351
104,232
236,119
237,476
(1,357)
(3,792)
12
(5,137)
674
(4,463)
(0.09)
50,624
9,104
97,620
399,814
221,718
130,899
52,329
38,563
(26,390)
(8,622)
As of December 31, or for the year ended December 31,
2017
(in thousands, except per share)
2016
2018
$
$
$
$
$
$
$
$
$
$
357,254
105,915
251,339
233,201
18,138
(2,690)
152
15,600
(5,158)
10,442
0.20
52,089
5,557
110,095
297,630
53,576
146,347
79,774
18,170
(34,143)
14,931
$
$
$
$
$
344,600
108,378
236,222
210,376
25,846
(1,857)
170
24,159
(13,340)
10,819
0.21
51,928
6,621
85,259
270,725
27,712
143,874
43,525
45,691
(40,549)
(10,620)
$
$
$
$
$
324,157
97,261
226,896
193,983
32,913
(1,715)
141
31,339
(12,876)
18,463
0.36
51,880
6,067
74,295
265,273
29,208
138,899
36,013
53,552
(27,252)
(23,866)
2015
292,987
89,377
203,610
174,384
29,226
(2,584)
130
26,772
(11,076)
15,696
0.31
51,305
10,330
69,878
245,007
56,812
115,201
47,497
60,264
(18,994)
(36,688)
0.15
34,846
$
0.20
49,355
$
0.20
55,411
$
-
60,429
$
-
57,137
10.2 %
69.4 %
(0.4)%
(4.6)%
142
13.8 %
70.4 %
5.1 %
(0.6)%
140
16.1 %
68.5 %
7.5 %
0.5 %
138
18.6 %
70.0 %
10.2 %
7.6 %
123
19.5 %
69.5 %
10.0 %
7.4 %
114
18
Table Of Contents
(1) On January 1, 2019, we adopted Accounting Standards Codification (“ASC”) 842 which requires organizations that lease assets to
recognize the rights and obligations created by those leases on the consolidated balance sheet. 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. The change in life assigned to certain leasehold
improvements triggered by the Company’s election to apply the hindsight partial expedient 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. See Notes 1 and 7 to our consolidated financial statements
included in this report for further details.
(2) 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. Prior to 2018, we also adjusted for special charges, including equity-related transaction costs, litigation and
investigation costs, and the write-off of debt issuance costs. We have modified the Adjusted EBITDA presentation for the years
ended December 31, 2015 through December 31, 2017 to conform to the current presentation. Adjusted EBITDA margin is equal to
Adjusted EBITDA divided by net sales. We believe that these non-GAAP measures of financial results provide useful information
to management and investors regarding certain financial and business trends relating to our financial condition and results of
operations. Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend
analyses, for purposes of determining management incentive compensation, for budgeting and planning purposes, and for assessing
the effectiveness of capital allocation over time. These measures are used in monthly financial reports prepared for management
and our Board of Directors. We believe that the use of these non-GAAP financial measures provides an additional tool for investors
to use in evaluating ongoing operating results and trends and in comparing our financial measures with other specialty retailers,
many of which present similar non-GAAP financial measures to investors.
(3) Gross margin rate is gross profit divided by net sales.
(4) Operating (loss) income margin is (loss) income from operations divided by net sales.
(5)
Same store sales (decline) growth is the 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 same stores sales
growth calculation. Same store sales growth (decline) amounts include total charges to customers less any actual returns. We
include the change in the allowance for anticipated sales returns applicable to comparable stores in the same store sales calculation.
Same store sales data reported by other companies may be prepared on a different basis and therefore may not be useful for
purposes of comparing our results to those of other businesses. Company management believes the comparable store sales (decline)
growth metric provides useful information to both management and investors to evaluate the Company’s performance, the
effectiveness of its strategy and its competitive position.
Reconciliation of Non-GAAP Adjusted EBITDA to GAAP Net Income (Loss)
The reconciliation of Adjusted EBITDA to net income (loss) for the years ended December 31, 2015 through December 31, 2019 is as
follows:
2019
2018
2017(1)
2016(1)
2015(1)
Years Ended December 31,
Net (loss) income
Interest expense
Income taxes
Depreciation & amortization
Stock based compensation
Adjusted EBITDA
$
$
(4,463)
3,792
(674)
33,546
2,645
34,846
$
$
10,442
2,690
5,158
28,396
2,669
49,355
$
10,819
1,857
13,340
26,239
3,156
55,411
$
$
18,463
1,715
12,876
23,042
4,333
60,429
$
$
15,696
2,584
11,076
22,236
5,545
57,137
(in thousands)
$
(1) Prior to 2018, we also adjusted for special charges, including equity-related transaction costs, litigation and investigation costs, and
the write-off of debt issuance costs. We have modified the Adjusted EBITDA presentation for the years ended December 31, 2015
through December 31, 2017 to conform to the current presentation.
19
Table Of Contents
Adjusted EBITDA as a percentage of net sales for the years ended December 31, 2015 through December 31, 2019 is as follows:
Net (loss) income
Interest expense
Income taxes
Depreciation & amortization
Stock based compensation
Adjusted EBITDA
Years Ended December 31,
2019(2)
2018(2)
(1.3)%
1.1
(0.2)
9.9
0.8
10.2 %
2.9 %
0.8
1.4
7.9
0.7
13.8 %
2017(1)(2)
% of net sales
3.1 %
0.5
3.9
7.6
0.9
16.1 %
2016(1)
2015(1)(2)
5.7 %
0.5
4.0
7.1
1.3
18.6 %
5.4
0.9
3.8
7.6
1.9
19.5
%
%
(1) Prior to 2018, we also adjusted for special charges, including equity-related transaction costs, litigation and investigation costs, and
the write-off of debt issuance costs. We have modified the Adjusted EBITDA presentation for the years ended December 31, 2015
through December 31, 2017 to conform to the current presentation.
(2) Amounts do not foot due to rounding.
Our management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in
accordance with GAAP. The principal limitations of these non-GAAP financial measures are that they exclude 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 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.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis together with “Selected Financial Data” and our consolidated financial
statements and related notes included elsewhere in this report. Among other things, those historical consolidated financial statements
include more detailed information regarding the basis of presentation for the financial data than is included in the following discussion.
This report contains “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995. In some cases, you can identify these statements by 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, although 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 report relate to, among other things, 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 ability to successfully implement our strategic plan and the anticipated benefits of our strategic plan; the
effectiveness of our marketing strategy; our expectations regarding financing arrangements and our ability to obtain additional capital;
supply costs and expectations, including the continued availability of sufficient products from our suppliers and the potential impact of
the ongoing coronavirus outbreak emanating from China; our expectations with respect to ongoing compliance with the terms of our
credit facility, including the potential impact of the phase out of LIBOR; the effect of regulations on us and our industry, and our
suppliers’ compliance with such regulations; our expectations regarding the effects of employee recruiting, training, mentoring, and
retention; the potential impact of cybersecurity breaches or disruptions to our management information systems; our ability to
successfully implement our information technology initiatives, including our ERP system; our ability to remediate material weaknesses in
our internal control over financial reporting; our proposed deregistration; the outcome of pending stockholder litigation; and costs and
adequacy of insurance.
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;
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;
20
Table Of Contents
·
·
·
changes in general economic, business and industry conditions;
our ability to introduce new products that satisfy market demand; and
legal, regulatory, and tax developments, including additional requirements imposed by changes in domestic and foreign laws and
regulations.
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. Such risks and
uncertainties also include those set forth in Item 1A, “Risk Factors,” of this report. These statements are based on the beliefs and
assumptions of our management based on information currently available to management. Our forward-looking statements speak only as
of the time that they are made and do not necessarily reflect our outlook at any other point in time. Except as required by law, we
undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or for
any other reason.
Overview
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
December 31, 2019, we operated 142 stores in 31 states and the District of Columbia, with an average size of approximately 20,000
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 and 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, setting and maintenance materials, and related
accessories in the United States.
We opened four new stores, relocated one store, and closed two stores in 2019. We plan to open one new store in 2020. We believe that
there will continue to be additional expansion opportunities in the United States and Canada. We expect comparable store sales growth
and store unit growth will drive profitability and operational efficiencies.
The table below sets forth information about our net sales, operating income and stores opened from 2017 to 2019.
Net sales
(Loss) income from operations
Net cash provided by operating activities
New stores opened during period
Recent Developments
2019
For the year ended December 31,
2018
(in thousands, except store data)
2017
$
$
$
340,351
(1,357)
38,563
4
$
$
$
357,254 $
18,138 $
18,170 $
2
344,600
25,846
45,691
15
We have voluntarily delisted our common stock from Nasdaq and intend to deregister our common stock under the Exchange Act, subject
to applicable law and any orders or injunctions issued in the litigation described in this report.
Key Components of our Consolidated Statements of Operations
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.
Comparable store sales growth is the 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.
21
Table Of Contents
Company management believes the comparable store sales (decline) growth metric provides useful information to both management and
investors to evaluate the Company’s performance, the effectiveness of its strategy and its competitive position.
Cost of Sales – Cost of sales consists primarily of material costs, freight, custom and duty 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.
Gross Profit – Gross profit is net sales less cost of sales. Gross margin rate is the percentage determined by dividing gross profit by net
sales.
Selling, General and Administrative Expenses – Selling, general and administrative expenses consist primarily of compensation costs,
occupancy, utilities, maintenance costs, advertising cost, shipping and transportation expenses to move inventory from our distribution
centers to our stores, and depreciation and amortization.
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.
Income Taxes – We are subject to income tax in the United States as well as other tax jurisdictions in which we conduct business.
22
Table Of Contents
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
(Loss) income from operations
Interest expense
Other income
(Loss) income before income taxes
Benefit (provision) for income taxes
Net (loss) income
2019
% of sales
2018
% of sales
(in thousands)
$
$
340,351
104,232
236,119
237,476
(1,357)
(3,792)
12
(5,137)
674
(4,463)
100.0 % $
30.6 %
69.4 %
69.8 %
(0.4)%
(1.1)%
0.0 %
(1.5)%
0.2 %
(1.3)% $
357,254
105,915
251,339
233,201
18,138
(2,690)
152
15,600
(5,158)
10,442
100.0 %
29.6 %
70.4 %
65.3 %
5.1 %
(0.8)%
0.0 %
4.4 %
(1.4)%
2.9 %
Net Sales – Net sales for fiscal year 2019 decreased $16.9 million, or 4.7%, in fiscal year 2019 compared to fiscal year 2018, primarily
due to a decrease in sales at comparable stores of 4.6% during fiscal year 2019. The decrease in sales at comparable stores was primarily
due to weaker store traffic and customer issues following the implementation of a new enterprise resource planning system on January 1,
2019. Net sales for the fourth quarter of fiscal year 2019 decreased $5.4 million, or 6.4%, over the fourth quarter of fiscal year 2018,
primarily due to a decrease in sales at comparable stores of 6.6% during the fourth quarter of fiscal year 2019. The decrease in
comparable store sales for the fourth quarter was attributable to weaker store traffic.
Gross Profit – Gross profit decreased $15.2 million, or 6.1%, in fiscal year 2019 compared to fiscal year 2018. The gross margin rate
was 69.4% and 70.4% for fiscal years 2019 and 2018, respectively. Gross profit decreased $5.2 million, or 8.9% in the fourth quarter of
fiscal year 2019 compared to the fourth quarter of fiscal year 2018. The gross margin rate was 68.4% and 70.3% during the fourth quarter
of fiscal years 2019 and 2018, respectively. The decrease in gross profit for the year and the fourth quarter was attributable to higher
levels of discounts, an increase in shrink and damaged inventory write-offs, and a lower freight collection rate.
Selling, General and Administrative Expenses – Selling, general and administrative expenses increased $4.3 million, or 1.8%, in fiscal
year 2019 compared to fiscal year 2018. The increase was primarily due to higher levels of occupancy expenses, information technology
consulting expenses related to the implementation of our new enterprise resource planning system, and advertising costs that were
partially offset by lower levels of variable store compensation expenses. Selling, general and administrative expenses decreased $0.1
million, or 0.2%, from $58.3 million in the fourth quarter of fiscal year 2018 to $58.2 million in the fourth quarter of fiscal year
2019. The decrease in selling, general and administrative expenses was driven primarily by a decrease in variable store compensation
expenses.
Pre-opening Costs –During fiscal years 2019 and 2018, we recorded pre-opening costs of $0.6 million and $0.1 million, respectively.
The increase in pre-opening costs was due to an increase in the number of stores opened in 2019.
Income from Operations – Income from operations decreased by $19.5 million, or 107.5%, in fiscal year 2019 compared to fiscal year
2018. Operating income margin decreased to (0.4)% in fiscal year 2019, compared to 5.1% for fiscal year 2018 due to the decrease in
sales and lower gross margin rate, and higher selling, general and administrative expenses.
Interest Expense – Interest expense increased $1.1 million, or 41.0%, for fiscal year 2019 compared to fiscal year 2018. The increase is
due to an increase in our average debt balance during fiscal year 2019.
Provision for Income Taxes – The income tax provision decreased $5.8 million for fiscal year 2019 compared to fiscal year 2018. The
income tax provision decreased $2.0 million in the fourth quarter of fiscal year 2019 compared to the fourth quarter of fiscal
year 2018. The decrease in tax provision for both the year and the fourth quarter is primarily due to the lower level of pretax income in
2019.
23
Table Of Contents
Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Interest expense
Other income
Income before income taxes
Provision for income taxes
Net income
(1) Amounts do not foot due to rounding.
2018
% of sales(1)
2017
% of sales(1)
(in thousands)
$
$
357,254
105,915
251,339
233,201
18,138
(2,690)
152
15,600
(5,158)
10,442
100.0 % $
29.6 %
70.4 %
65.3 %
5.1 %
(0.8)%
0.0 %
4.4 %
(1.4)%
2.9 % $
344,600
108,378
236,222
210,376
25,846
(1,857)
170
24,159
(13,340)
10,819
100.0 %
31.5 %
68.5 %
61.0 %
7.5 %
(0.5)%
0.0 %
7.0 %
(3.9)%
3.1 %
Net Sales – Net sales for fiscal year 2018 increased $12.7 million, or 3.7%, over fiscal year 2017, primarily due to a $14.8 million
increase in net sales from new stores not included in the comparable store base, partially offset by a decrease of $2.1 million in net sales
generated by comparable stores. Comparable store sales declined 0.6% for fiscal year 2018, compared to a comparable store sales growth
of 0.5% for fiscal year 2017. The decrease in net sales at comparable stores was primarily attributable to weaker store traffic, which was
caused in part by our shift in promotional strategy. Net sales for the fourth quarter of fiscal year 2018 increased $5.4 million, or 6.8%,
over the fourth quarter of fiscal year 2017, primarily due to comparable store sales growth of 5.0% during the fourth quarter of fiscal year
2018. The increase in sales at comparable stores for the fourth quarter of fiscal year 2018 is attributable to an increase in the average
order value due to decreased promotional activity and an increase in the average selling price of products added to our assortment over
the last twelve months.
Gross Profit – Gross profit increased $15.1 million, or 6.4%, for fiscal year 2018 compared to fiscal year 2017. The gross margin rate
was 70.4% and 68.5% for fiscal years 2018 and 2017, respectively. Gross profit increased $6.5 million in the fourth quarter of fiscal year
2018 compared to the fourth quarter of fiscal year 2017. The gross margin rate was 70.3% and 66.8% during the fourth quarter of fiscal
years 2018 and 2017, respectively. The increase in gross profit for the year and the fourth quarter was attributable to the increase in sales
and the gross margin rate. The improvement in the gross margin rate for the year and the fourth quarter was primarily due to decreased
promotional activity.
Selling, General and Administrative Expenses – Selling, general and administrative expenses increased $22.8 million, or 10.8%, in
fiscal year 2018 compared to fiscal year 2017. The $22.8 million increase was primarily due to an increase in variable selling expenses
and $8.6 million of planned strategic investments for store and distribution center compensation, regional sales leadership, pro market
managers, and developing customer relationship management capabilities. Selling, general and administrative expenses increased $2.1
million, or 3.8%, from $56.1 million in the fourth quarter of fiscal year 2017 to $58.3 million in the fourth quarter of fiscal year
2018. The $2.1 million increase was primarily due to $1.7 million in investments in the previously mentioned strategic initiatives.
Pre-opening Costs –During fiscal years 2018 and 2017, we recorded pre-opening costs of $0.1 million and $1.7 million, respectively.
The decrease in pre-opening costs was due to a decrease in the number of new store openings in 2018.
Income from Operations – Income from operations decreased by $7.7 million, or 29.8%, for fiscal year 2018 compared to fiscal year
2017. The decrease is attributable to an increase in selling, general and administrative expenses, partially offset by an increase in gross
profit. Operating income margin decreased to 5.1% for fiscal year 2018, compared to 7.5% for fiscal year 2017 due to increased selling,
general and administrative expenses that outpaced sales growth and a higher gross margin rate.
Interest Expense – Interest expense increased $0.8 million, or 44.9%, for fiscal year 2018 compared to fiscal year 2017. The increase is
due to an increase in the interest rates and an increase in our average debt balance during fiscal year 2018.
Provision for Income Taxes – The income tax provision decreased $8.2 million for fiscal year 2018 compared to fiscal year 2017. Our
effective tax rate was 33.1% in 2018 and 55.2% in 2017. The decrease in the effective tax rate is primarily attributable to the Tax Act,
which reduced the U.S federal statutory tax rate from 35% in 2017 to 21% in 2018. Income tax expense in the fourth quarter of fiscal
year 2017 also included a $4.6 million charge to reduce the value of our deferred tax assets in accordance with the Tax Act. Income tax
expense in fiscal year 2018 includes $1.2 million of stock based compensation tax shortfall charges.
24
Table Of Contents
Non-GAAP Measures
We calculate Adjusted EBITDA by taking net income calculated in accordance with GAAP and adjusting for interest expense, income
taxes, depreciation and amortization, and stock based compensation expense.
We believe that this non-GAAP measure of financial results 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 measure
to compare our performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation,
for budgeting and planning purposes, and for assessing the effectiveness of capital allocation over time. This 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
measures with other specialty retailers, many of which present a similar non-GAAP financial measure to investors.
The reconciliation of Adjusted EBITDA to net (loss) income for the years ended December 31, 2015 through December 31, 2019 is as
follows:
Net (loss) income
Interest expense
Income taxes
Depreciation & amortization
Stock based compensation
Adjusted EBITDA
2019
2018
Years Ended December 31,
2017(1)
(in thousands)
2016(1)
2015(1)
$
$
(4,463) $
3,792
(674)
33,546
2,645
34,846 $
10,442 $
2,690
5,158
28,396
2,669
49,355 $
10,819 $
1,857
13,340
26,239
3,156
55,411 $
18,463 $
1,715
12,876
23,042
4,333
60,429 $
15,696
2,584
11,076
22,236
5,545
57,137
(1) Prior to 2018, we also adjusted for special charges, which consisted of equity-related transaction costs, litigation and investigation
costs, and the write-off of debt issuance costs. We have modified the Adjusted EBITDA presentation for the years ended December
31, 2015 through December 31, 2017 to conform to the current presentation.
Adjusted EBITDA as a percentage of net sales for the years ended December 31, 2015 through December 31, 2019 is as follows:
Net (loss) income
Interest expense
Income taxes
Depreciation & amortization
Stock based compensation
Adjusted EBITDA
(1.3)%
1.1
(0.2)
9.9
0.8
10.2 %
2019(2)
2018(2)
Years Ended December 31,
2017(1)(2)
% of net sales
3.1 %
0.5
3.9
7.6
0.9
16.1 %
2.9 %
0.8
1.4
7.9
0.7
13.8 %
2016(1)
2015(1)(2)
5.7 %
0.5
4.0
7.1
1.3
18.6 %
5.4 %
0.9
3.8
7.6
1.9
19.5 %
(1) Prior to 2018, we also adjusted for special charges, which consisted of equity-related transaction costs, litigation and investigation
costs, and the write-off of debt issuance costs. We have modified the Adjusted EBITDA presentation for the years ended December
31, 2015 through December 31, 2017 to conform to the current presentation.
(2) Amounts do not foot due to rounding.
We calculate pretax return on capital employed by taking income (loss) from operations divided by capital employed. Capital employed
equals total assets less accounts payable, income taxes payable, other accrued liabilities, deferred rent, lease liability and other long-term
liabilities. We believe this non-GAAP measure is useful in assessing the effectiveness of our capital allocation over time. Other
companies may calculate pretax return on capital employed differently, which limits the usefulness of the measure for comparative
purposes.
25
Table Of Contents
($ in thousands)
(Loss) income from operations
Total Assets
Less: Accounts payable
Less: Income tax payable
Less: Other accrued liabilities
Less: Lease liability(2)
Less: Other long-term liabilities
Capital Employed
Pretax Return on Capital Employed
December 31,
2019(1)
$
(1,357)
$
415,107
(23,362)
(49)
(26,146)
(162,077)
(3,816)
199,657
2018(1)
18,138
288,722
(27,785)
(111)
(27,269)
(42,974)
(4,091)
186,492
(0.7)%
9.7 %
(1) Income statement accounts represent the activity for the fiscal year 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.
Our management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in
accordance with GAAP. The principal limitations of these non-GAAP financial measures are that they exclude 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 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.
Liquidity and Capital Resources
Our principal liquidity requirements have been for working capital and capital expenditures. Our principal sources of liquidity are $9.1
million of cash and cash equivalents at December 31, 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, and general corporate purposes.
On September 18, 2018, we 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 $100.0 million revolving line of
credit through September 18, 2023. Borrowings pursuant to the Credit Agreement initially bear interest at a LIBOR or base rate. The
LIBOR-based rate ranges from LIBOR plus 1.50% to 2.25% depending on our rent adjusted leverage ratio. The base rate is equal to
the greatest of (a) the Federal funds rate plus 0.50%, (b) the Bank of America “prime rate,” and (c) the Eurodollar rate plus 1.00%, in
each case plus 0.50% to 1.25% depending on our rent adjusted leverage ratio. At December 31, 2019, the LIBOR-based interest rate
was 4.01% and the base rate was 6.00%. Borrowings outstanding consisted of $63.0 million on the revolving line of credit as of
December 31, 2019. We also have standby letters of credit outstanding related to our workers’ compensation and medical insurance
policies. As of December 31, 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 December 31, 2019, which may be used to support our
growth and for working capital purposes.
The Credit Agreement is secured by virtually all of our assets, 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 were in compliance with the covenants as of December 31, 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 12 months.
26
Table Of Contents
Capital Expenditures
The following table summarizes our capital expenditures for the fiscal years ended December 31, 2019, 2018 and 2017.
2019
Years Ended December 31,
2018
(in millions)
2017
New store building and existing store remodels
Information technology infrastructure
Distribution and manufacturing facilities
General corporate
$
$
20.0 $
4.9
2.0
0.1
27.0 $
25.3 $
7.2
2.6
0.2
35.3 $
26.2
7.1
3.1
4.2
40.6
Our future capital requirements will vary based on the number of additional stores, distribution centers, and manufacturing facilities that
we open and the number of stores that we choose to renovate. Our decisions regarding opening, relocating, or renovating stores, and
whether to engage in strategic acquisitions, will be based in part on macroeconomic factors and the general state of the U.S. economy, as
well as the local economies in the markets in which our stores are located. We intend to open one store during 2020. Total capital
expenditures are expected to be approximately $10 million to $13 million in fiscal year 2020.
Cash Flows
The following table summarizes our cash flow for the years ended December 31, 2019, 2018 and 2017.
2019
For the year ended December 31,
2018
(in thousands)
2017
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Operating Activities
$
38,563 $
(26,390)
(8,622)
18,170 $
(34,143)
14,931
45,691
(40,549)
(10,620)
Cash flows from operating activities provide us with a significant source of liquidity. Net cash provided by operating activities was $38.6
million, $18.2 million, and $45.7 million in fiscal years 2019, 2018 and 2017, respectively. The increase in operating cash flows in fiscal
year 2019 compared to fiscal year 2018 was primarily due to a $12.5 million decrease in inventory. In fiscal year 2018, inventory
increased by $24.8 million. The decrease in operating cash flows in fiscal year 2018 compared to fiscal year 2017 was primarily due to a
$24.8 million increase in inventory and an $8.2 million decrease in accounts payable.
Investing Activities
Net cash used in investing activities was $26.4 million, $34.1 million and $40.5 million in fiscal years 2019, 2018 and 2017,
respectively. Net cash used in investing activities was primarily for investing in new stores and store remodels, store merchandising,
information technology, and our distribution centers, which included the expansion of our internal fleet.
Financing Activities
Net cash (used in) provided by financing activities was $(8.6 million), $14.9 million and $(10.6 million) in fiscal years 2019, 2018 and
2017, respectively. Cash used in financing activities during fiscal year 2019 included $53.2 million of payments of long-term debt and
financing lease obligations, $10.5 million of share repurchases and $7.7 million of dividends paid, which were partially offset by $63.0
million of advances on our revolving line of credit. Cash provided by financing activities during fiscal year 2018 included $129.1 million
in advances on our revolving line of credit, which was partially offset by $103.3 million in payments of long-term debt and capital lease
obligations and an aggregate of $10.4 million in dividends paid to stockholders. Cash used in financing activities during fiscal year 2017
was primarily for payments of long-term debt and capital lease obligations of $36.6 million and an aggregate of $10.4 million in
dividends paid to stockholders, offset by advances on our line of credit of $35.0 million.
Off-balance Sheet Arrangements
As of December 31, 2019 and 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.
27
Table Of Contents
Contractual Arrangements
The following table summarizes certain of our contractual obligations at December 31, 2019 and the effect such obligations are expected
to have on our liquidity and cash flows in future periods:
Payment Due by Period
Total
Less than 1
Year
2-3 Years
(in thousands)
4-5 Years
5+ Years
Long-term debt, including principal and interest (1)
Operating lease obligations (2)
Financing lease obligations (3)
Self-insurance (4)
Total contractual obligations
$
$
72,474 $
191,162
521
2,531
266,688 $
2,526 $
35,907
216
1,427
40,076 $
5,053 $
66,714
305
744
72,816 $
64,895 $
47,515
-
227
112,637 $
-
41,026
-
133
41,159
(1)
(2)
(3)
(4)
Includes total interest of $9.5 million, comprised of $2.5 million of interest for the period of less than 1 year, $5.1 million of
interest for the period of 1 – 3 years, $1.9 million of interest for the period of 4 – 5 years, and $0.0 million of interest for the period
of 5+ years.
Includes the base or current renewal period for our operating leases.
Includes total interest of $0.1 million, comprised of $0.1 million of interest for the period of less than 1 year, $0.0 million of
interest for the period of 1 – 3 years, $0.0 million of interest for the period of 4 – 5 years, and $0.0 million of interest for the period
of 5+ years.
Self-insurance includes our employee health and workers’ compensation insurance policies.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of our financial statements and related disclosures
requires us to make estimates, assumptions, and judgments that affect the reported amount of assets, liabilities, revenues, costs and
expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be
reasonable under the circumstances, but all such estimates and assumptions are inherently uncertain and unpredictable. We evaluate our
estimates and assumptions on an ongoing basis. Actual results may differ from those estimates and assumptions, and it is possible that
other professionals, applying their own judgment to the same facts and circumstances, could develop and support alternative estimates
and assumptions that would result in material changes to our operating results and financial condition. Our most critical accounting
policies are summarized below. For further information on our critical and other significant accounting policies, see the notes to the
consolidated financial statements included in this report.
Recognition of Revenue
Revenues are recognized when control of promised goods or services is transferred to our customers, in an amount that reflects the
consideration received in exchange for those goods or services. We recognize service revenue, which consists primarily of freight charges
for home delivery, when the service has been rendered. 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. Net sales are reduced by an allowance for anticipated sales returns that we estimate based
on historical returns. Our process to establish a sales return reserve contains uncertainties because it requires management to make
assumptions and to apply judgment to estimate future sales returns and exchanges. The customer may receive a refund or exchange the
original product for a replacement of equal or similar quality for a period of three months from the time of original purchase. Products
received back under this policy are reconditioned pursuant to state laws and resold. We believe our estimate for sales returns is an
accurate reflection of future returns. Actual return trends have not varied significantly from estimated amounts in prior periods. However,
if the nature of sales returns changes significantly, our sales could be adversely impacted.
Inventory Valuation and Shrinkage
Our inventory consists of manufactured items and purchased merchandise held for resale. Inventories are stated at the lower of cost
(determined using the weighted-average cost method) or net realizable value. We capitalize the cost of inbound freight, duties, and
receiving and handling costs to bring purchased materials into our distribution network. The labor and overhead costs incurred in
connection with the production process are included in the value of manufactured finished goods. We provide 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. These estimates have calculations that require management to
make assumptions based on the current rate of sales, age, salability and profitability of inventory, historical percentages that can be
affected by changes in our merchandising mix, customer preferences, rates of sell through and changes in actual shrinkage trends. We
28
Table Of Contents
do not believe there is a reasonable likelihood that there will be a material change in the assumptions we use to calculate our inventory
provisions. However, if actual results are not consistent with our estimates and assumptions, we may be exposed to losses that could be
material.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation, which is amortized over the useful life of the assets.
Leasehold improvements are amortized over the shorter of their estimated useful lives or lease period (including expected renewal
periods). Property, plant, equipment, and right of use assets are evaluated for impairment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows
independent of other assets. An impairment loss is recognized when estimated undiscounted future cash flows from the operations and/or
disposition of the assets are less than the carrying amount. Measurement of an impairment loss is based on the excess of the carrying
amount of the asset group over its fair value. Fair value is measured using discounted cash flows or independent opinions of value, as
appropriate.
If actual results are not consistent with our estimates and assumptions used in determining future cash flows and asset fair values, we may
be exposed to losses that could be material.
Income Taxes
Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We estimate the degree to which
tax assets and loss carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for
such tax assets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax
asset will not be realized in future periods. If it becomes more likely than not that a tax asset will be used, the related valuation allowance
on such assets would be reduced.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued a final standard that primarily requires organizations
that lease assets to recognize the rights and obligations created by those leases on the consolidated 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. We adopted 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.
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. The 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 the application of the hindsight
practical expedient, we considered recent investments in leased properties and the 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. 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 deferred tax assets and a corresponding
adjustment to retained earnings. The adoption of this standard did not have a material impact on net income or cash flows for the year
ended December 31, 2019. See Note 7 to our consolidated financial statements included in this report for further details.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued a final standard on accounting for credit losses. The new standard was initially effective for us in fiscal
2020, and requires a change in credit loss calculations using the expected loss method. In November 2019, the FASB issued
29
Table Of Contents
Accounting Standards Update 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and
Leases (Topic 842): Effective Dates,” which, among other things, defers the effective date of Accounting Standards Update 2016-13, the
standard on accounting for credit losses, for public filers that are considered smaller reporting companies as defined by the SEC to fiscal
years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted. We intend to early
adopt the standard effective January 1, 2020. We have evaluated the effect of the new standard on our consolidated financial statements
and related disclosures, and have determined the impact will be immaterial.
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 our fiscal year 2020. We have evaluated the effect of the standard on our
consolidated financial statements and related disclosures, and have determined the impact will be immaterial.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. These risks primarily include inflation, interest rate risk, and credit
concentration risk.
Inflation
Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our operating results. Although
we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation
in the future may have an adverse effect on our ability to maintain current levels of gross profit and selling, general and administrative
expenses as a percentage of revenues if the selling prices of our products do not increase with these increased costs.
Interest Rate Risk
We are exposed to interest rate risk through the investment of our cash and cash equivalents. Changes in interest rates affect the interest
income that we earn in connection with these investments, and therefore impact our cash flows and results of operation. We are also
exposed to interest rate risk in connection with borrowings under our credit facility. Borrowings under our revolving credit facility bear
interest at either a base rate or a LIBOR-based rate, at our option. The LIBOR-based rate ranges from LIBOR plus 1.50% to 2.25%,
depending on our rent adjusted leverage ratio. The base rate is equal to the greatest of: (a) the Federal funds rate plus 0.50%, (b) the Bank
of America “prime rate,” and (c) the Eurodollar rate plus 1.00%, in each case plus 0.50% to 1.25% depending on our rent adjusted
leverage ratio. The base rate was 6.00% at December 31, 2019. Based upon balances and interest rates as of December 31, 2019, holding
other variables constant, a one percentage point increase in interest rates for the next 12-month period would decrease pre-tax earnings
and cash flow by approximately $0.6 million. Conversely, a one percentage point decrease in interest rates for the next 12-month period
would result in an increase to pre-tax earnings and cash flow of approximately $0.6 million.
We currently do not engage in any interest rate hedging activity. We do not, and do not intend to, engage in the practice of trading
derivative securities for profit.
Credit Concentration Risk
Financial instruments, which may subject us to concentration of credit risk, consist principally of cash deposits. We maintain cash
balances at financial institutions with strong credit ratings. However, the amounts invested with financial institutions are generally in
excess of FDIC insurance limits.
Foreign Currency Exchange Rate Risk
We are exposed to risks from foreign currency exchange rate fluctuations on the translation of our subsidiary based in China and on the
purchase of goods in Chinese yuan. Purchases made in Chinese yuan were less than 15% of our total inventory purchases in both 2019
and 2018. Our exposure to foreign currency rate fluctuations is not significant to our financial condition or results of operations.
We currently do not engage in any exchange rate hedging activity and currently have no intention to do so in the foreseeable future.
However, in the future, in an effort to mitigate losses associated with these risks, we may at times engage in these transactions.
30
Table Of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and the reports of our independent registered public accounting firm, as listed under Item 15,
“Exhibits, Financial Statement Schedules,” are included as a separate section of this report beginning on page 35 and are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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 Exchange Act, is recorded, processed, summarized and reported within the time periods specified in
the rules and forms of the SEC, 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 December 31, 2019 and have
concluded that our disclosure controls and procedures were not effective as of December 31, 2019 due to material weaknesses in our
internal control over financial reporting as described below.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule
13a-15(f) promulgated under the Exchange Act. Internal control over financial reporting is a process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements
for external purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that: (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of an issuer’s assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP, and that an issuer’s receipts and expenditures are being made only in accordance with authorizations of its management and
directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of an issuer’s assets that could have a material effect on the consolidated financial statements. A material weakness is a significant
deficiency, or combination of significant deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, the application
of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in
conditions, or that compliance with the policies or procedures may deteriorate.
As required by Rule 13a-15(c) promulgated under the Exchange Act, our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2019.
Management’s assessment was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control - Integrated Framework (2013 Framework) (“COSO”). Based on management’s assessment, management has concluded
that our internal control over financial reporting was not effective as of December 31, 2019 due to the material weakness in our internal
control over financial reporting, as follows.
On January 1, 2019, we implemented a ERP system on a company-wide basis. As previously disclosed, during the year ended December
31, 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:
·
·
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 IT general controls (ITGCs) 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. Our
31
Table Of Contents
business process controls (automated and manual) are dependent on the affected ITGCs and, therefore, are also deemed
ineffective because they are adversely impacted by the ineffective ITGCs.
Ernst & Young, LLP, our independent registered public accounting firm, has issued an adverse report on our internal control over
financial reporting as of December 31, 2019. See “Report of Independent Registered Public Accounting Firm – Opinion on Internal
Control over Financial Reporting” of this report.
Planned Remediation of Material Weaknesses
We have adjusted, and intend to consider further adjustments to, our previously disclosed plans relating to addressing these material
weaknesses. As previously disclosed, we voluntarily delisted our common stock from Nasdaq in November 2019 and intend to deregister
our common stock under the Exchange Act. 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
There were no changes in internal control over financial reporting (as defined by Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, intends that our disclosure controls and procedures
and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives. However, our
management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all
errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because
of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or
more people or by management override of the controls. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of
compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system,
misstatements due to error or fraud may occur and not be detected.
ITEM 9B. OTHER INFORMATION
None.
32
Table Of Contents
PART III
Certain information required by Part III is incorporated by reference from our definitive Proxy Statement for the Annual Meeting of
Shareholders, or an amendment to this Form 10-K, which we intend to file with the SEC within 120 days after the fiscal year end covered
by this report. Except for those portions specifically incorporated in this Form 10-K by reference to the Proxy Statement, no other
portions of the Proxy Statement are deemed to be filed as part of this Form 10-K.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following sections of the Proxy Statement are incorporated herein by reference:
·
·
·
·
Proposal 1 – Election of Directors
Information about our Executive Officers
Certain Relationships and Related Transactions
Delinquent Section 16(a) Reports
We have adopted a Code of Business Conduct and Ethics that applies to all of our officers, directors and employees. The Code of
Business Conduct and Ethics is available on the “Investor Relations” section of our website, at http://investors.tileshop.com, under the
“Corporate Governance—Governance Documents” heading. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-
K regarding an amendment to, or waiver from, a provision of our Code of Ethics and Business Conduct by posting such information on
our website at the web address and location specified above within four business days following the date of the amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION
The following sections of the Proxy Statement are incorporated herein by reference:
·
·
·
·
·
Executive Compensation
Director Compensation
Proposal 1 – Election of Directors – Committees of the Board of Directors – Compensation Committee Interlocks and Insider
Participation
Pay Ratio
Proposal 1 – Election of Directors – Information Regarding the Board of Directors and Corporate Governance – Oversight of
Risk Management
33
Table Of Contents
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following section of the Proxy Statement is incorporated herein by reference:
(cid:0) Security Ownership of Certain Beneficial Owners and Management
EQUITY COMPENSATION PLAN INFORMATION
The following table presents our equity compensation plan information as of December 31, 2019:
Equity compensation plans approved by stockholders
Equity compensation plans not approved by
stockholders
Total
(a)
(b)
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
1,253,994 (1)
-
1,253,994
Weighted-average
exercise price of
outstanding
options, warrants
and rights ($)
11.34
-
11.34
(c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities reflected
in column (a))
1,461,784
-
1,461,784
(1)
Represents shares of common stock to be issued upon exercise of currently outstanding options to purchase common stock
granted pursuant to our 2012 Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The following sections of the Proxy Statement are incorporated herein by reference:
(cid:0) Proposal 1 – Election of Directors – Information Regarding the Board of Directors and Corporate Governance – Independence
of the Board of Directors
(cid:0) Certain Relationships and Related Transactions
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following section of the Proxy Statement is incorporated herein by reference:
(cid:0) Proposal 2 – Ratification of Appointment of Independent Registered Public Accounting Firm
34
Table Of Contents
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a) Documents filed as part of report
1. Financial Statements
The following consolidated financial statements of the Company and its subsidiaries are filed as part of this Form 10-K:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets for the years ended December 31, 2019 and 2018
(i)
(ii)
(iii) Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017
(iv) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018, and 2017
(iv) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018, and 2017
(v)
(vi) Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017
2. Financial Statement Schedules
The information required to be disclosed within Schedule II – Valuation and Qualifying Accounts is provided within the Consolidated
Financial Statements of the Company filed as part of this Form 10-K.
3. Exhibits
See “Exhibit Index” immediately preceding the signature page of this Form 10-K, which is incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
35
#
36
39
40
41
42
43
44
Table Of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Tile Shop Holdings, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Tile Shop Holdings, Inc. and Subsidiaries (the Company) as of
December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity
and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our
report dated March 13, 2020 expressed an adverse opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to
the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842), as amended, effective January 1, 2019, using the
modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2013.
/s/Ernst & Young LLP
Minneapolis, Minnesota
March 13, 2020
36
Table Of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Tile Shop Holdings, Inc. and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited Tile Shop Holdings, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weaknesses described below on
the achievement of the objectives of the control criteria, Tile Shop Holdings, Inc. and Subsidiaries (the Company) has not maintained
effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or
detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment.
Management has identified material weaknesses related to (i) the ineffective design and implementation of effective controls with respect
to an enterprise resource planning (ERP) system conversion in 2019 and (ii) the ineffective design and implementation of information
technology general controls (ITGCs) for the ERP system that are relevant to the preparation of financial statements. The business process
controls (automated and manual) are dependent on the affected ITGCs and, therefore, are also deemed ineffective because they are
adversely impacted by the ineffective ITGCs.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the 2019 consolidated financial statements of the Company. These material weaknesses were considered in determining the nature, timing
and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our report dated
March 13, 2020, which expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
37
Table Of Contents
/s/Ernst & Young LLP
Minneapolis, Minnesota
March 13, 2020
38
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2019 and 2018
(dollars in thousands, except share and per share data)
December 31,
2019
December 31,
2018
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Receivables, net
Inventories
Income tax receivable
Other current assets, net
Total Current Assets
Property, plant and equipment, net
Right of use asset
Deferred tax assets
Other assets
Total Assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Income tax payable
Current portion of lease liability
Other accrued liabilities
Total Current Liabilities
Long-term debt, net
Long-term lease liability, net
Financing lease obligation, net
Deferred rent
Other long-term liabilities
Total Liabilities
$
$
$
Stockholders’ Equity:
Common stock, par value: $0.0001; authorized: 100,000,000 shares; issued and
outstanding: 50,806,674 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
Accumulated deficit
Accumulated other comprehensive loss
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
$
See accompanying Notes to Consolidated Financial Statements.
40
9,104 $
815
3,370
97,620
3,090
8,180
122,179
130,461
137,737
7,196
2,241
399,814 $
18,181 $
87
26,993
24,589
69,850
63,000
131,451
274
-
4,340
268,915
5
-
156,482
(25,518)
(70)
130,899
399,814 $
5,557
825
3,084
110,095
3,548
7,181
130,290
158,356
-
7,225
1,759
297,630
25,853
179
-
24,484
50,516
53,000
-
436
43,579
3,752
151,283
5
-
172,255
(25,857)
(56)
146,347
297,630
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
For the years ended December 31, 2019, 2018 and 2017
(dollars in thousands, except share and per share data)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
(Loss) income from operations
Interest expense
Other income
(Loss) income before income taxes
Benefit (provision) for income taxes
Net (loss) income
(Loss) income per common share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
2019
2018
2017
340,351 $
104,232
236,119
237,476
(1,357)
(3,792)
12
(5,137)
674
(4,463) $
357,254 $
105,915
251,339
233,201
18,138
(2,690)
152
15,600
(5,158)
10,442 $
344,600
108,378
236,222
210,376
25,846
(1,857)
170
24,159
(13,340)
10,819
(0.09) $
(0.09) $
0.20 $
0.20 $
0.21
0.21
$
$
$
$
50,624,309
50,624,309
51,907,619
52,089,160
51,700,045
51,927,877
Dividends declared per share
$
0.15 $
0.20 $
0.20
See accompanying Notes to Consolidated Financial Statements.
41
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the years ended December 31, 2019, 2018 and 2017
(dollars in thousands)
Net (loss) income
Currency translation adjustment
Other comprehensive (loss) income
Comprehensive (loss) income
2019
2018
2017
$
$
(4,463) $
(14)
(14)
(4,477) $
10,442 $
(55)
(55)
10,387 $
10,819
45
45
10,864
See accompanying Notes to Consolidated Financial Statements.
42
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(dollars in thousands, except share data)
Balance at January 1, 2017
Issuance of restricted shares
Cancellation of restricted shares
Stock based compensation
Stock option exercises
Tax withholdings related to net share
settlements of stock based compensation
awards
Dividends paid ($0.20 per share)
Foreign currency translation adjustments
Net income
Balance at December 31, 2017
Adoption of revenue recognition standard
(see Note 2)
Issuance of restricted shares
Cancellation of restricted shares
Stock based compensation
Tax withholdings related to net share
settlements of stock based compensation
awards
Dividends paid ($0.20 per share)
Foreign currency translation adjustments
Net income
Balance at December 31, 2018
Adoption of lease standard (see Note 1 and
Note 7)
Issuance of restricted shares
Cancellation of restricted shares
Repurchases of common stock
Stock based compensation
Tax withholdings related to net share
settlements of stock based compensation
awards
Dividends paid ($0.15 per share)
Foreign currency translation adjustments
Net loss
Balance at December 31, 2019
Common stock
Shares
51,607,143 $
324,184
(87,849)
-
313,372
-
-
-
-
52,156,850 $
-
682,646
(131,617)
-
-
-
-
-
52,707,879 $
-
781,697
(375,879)
(2,307,023)
-
-
-
-
-
50,806,674 $
Amount
5 $
-
-
-
-
-
-
-
-
5 $
-
-
-
-
-
-
-
-
5 $
-
-
-
-
-
-
-
-
-
5 $
Additional
paid-in-
capital
185,998 $
-
-
3,156
1,639
Retained
earnings
(deficit)
(47,058) $
-
-
-
-
(318)
(10,366)
-
-
180,109 $
-
-
-
10,819
(36,239) $
-
-
-
2,669
(119)
(10,404)
-
-
172,255 $
-
-
-
(10,456)
2,645
(256)
(7,706)
-
-
156,482 $
(60)
-
-
-
-
-
-
10,442
(25,857) $
4,802
-
-
-
-
-
-
-
(4,463)
(25,518) $
See accompanying Notes to Consolidated Financial Statements.
43
Accumulated other
comprehensive
(loss) income
(46) $
-
-
-
-
-
-
45
-
(1) $
-
-
-
-
-
-
(55)
-
(56) $
-
-
-
-
-
-
-
(14)
-
(70) $
Total
138,899
-
-
3,156
1,639
(318)
(10,366)
45
10,819
143,874
(60)
-
-
2,669
(119)
(10,404)
(55)
10,442
146,347
4,802
-
-
(10,456)
2,645
(256)
(7,706)
(14)
(4,463)
130,899
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 2019, 2018 and 2017
(dollars in thousands)
Cash Flows From Operating Activities
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
2019
For the years ended,
2018
2017
$
(4,463) $
10,442 $
10,819
Depreciation & amortization
Amortization of debt issuance costs
Loss on disposals of property, plant and equipment
Impairment charges of property, plant and equipment
Change in leases
Stock based compensation
Deferred income taxes
Changes in operating assets and liabilities:
Receivables
Inventories
Prepaid expenses and other assets
Accounts payable
Income tax receivable / payable
Accrued expenses and other liabilities
Net cash provided by operating activities
Cash Flows From Investing Activities
Purchases of property, plant and equipment
Proceeds from insurance
Proceeds from the sale of property, plant and equipment
Net cash used in investing activities
Cash Flows From Financing Activities
Payments of long-term debt and financing lease obligations
Advances on line of credit
Dividends paid
Repurchases of common stock
Proceeds from exercise of stock options
Employee taxes paid for shares withheld
Debt issuance costs
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash
Net change in cash and cash equivalents
Cash, cash equivalents and restricted cash beginning of period
Cash, cash equivalents and restricted cash end of period
Cash and cash equivalents
Restricted cash
Cash, cash equivalents and restricted cash end of period
33,546
595
399
-
(1,900)
2,645
(1,621)
(286)
12,475
(184)
(4,503)
357
1,503
38,563
(27,000)
610
-
(26,390)
(53,204)
63,000
(7,706)
(10,456)
-
(256)
-
(8,622)
(14)
3,537
6,382
9,919 $
9,104 $
815
9,919 $
98 $
$
$
$
$
28,396
756
353
652
2,386
2,669
4,429
(703)
(24,836)
(2,410)
(8,201)
2,229
2,008
18,170
(35,287)
1,033
111
(34,143)
(103,267)
129,095
(10,404)
-
-
(119)
(374)
14,931
(52)
(1,094)
7,476
6,382 $
5,557 $
825
6,382 $
3,974 $
2,625
1,507
26,239
691
210
1,072
3,884
3,156
9,737
33
(10,964)
4,159
12,048
(4,159)
(11,234)
45,691
(40,556)
-
7
(40,549)
(36,575)
35,000
(10,366)
-
1,639
(318)
-
(10,620)
6
(5,472)
12,948
7,476
6,621
855
7,476
636
1,822
7,603
Supplemental disclosure of cash flow information
Purchases of property, plant and equipment included in accounts payable and
accrued expenses
Cash paid for interest
Cash paid for income taxes, net of refunds
3,735
471
See accompanying Notes to Consolidated Financial Statements.
44
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Nature of Business
Tile Shop Holdings, Inc. (“Holdings”, and together with its wholly owned subsidiaries, the “Company”) was incorporated in Delaware in
June 2012. On August 21, 2012, Holdings consummated the transactions contemplated pursuant to that certain Contribution and Merger
Agreement dated as of June 27, 2012, among Holdings, JWC Acquisition Corp., a publicly-held Delaware corporation (“JWCAC”), The
Tile Shop, LLC, a privately-held Delaware limited liability company (“The Tile Shop”), and certain other parties. Through a series of
transactions, The Tile Shop was contributed to and became a subsidiary of Holdings and Holdings effected a business combination with
and became a successor issuer to JWCAC.
The Company is a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the
United States. Natural stone products include marble, travertine, granite, quartz, sandstone, slate, and onyx tiles. Man-made products
include ceramic, porcelain, glass, cement, wood look, and metal tiles. The majority of the tile products are sold under the Company's
proprietary Rush River and Fired Earth brand names. The Company purchases tile products, accessories and tools directly from its
network of suppliers. The Company manufactures its own setting and maintenance materials, such as thinset, grout and sealer, under the
Superior brand name. As of December 31, 2019, the Company operated 142 stores in 31 states and the District of Columbia, with an
average size of approximately 20,000 square feet. The Company also has a sourcing office located in China.
Basis of Presentation
The consolidated financial statements of Holdings include the accounts of its wholly owned subsidiaries and variable interest entities, for
which the Company is the primary beneficiary. See Note 13, “New Markets Tax Credit,” for the discussion of financing arrangements
involving certain entities that are variable interest entities that are included in these consolidated financial statements. All significant
intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”)
requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. The
Company’s estimates and judgments are based on historical experience and various other assumptions that it believes are reasonable
under the circumstances. The amount of assets and liabilities reported on the Company's balance sheets and the amounts of income and
expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, the
accounting for revenue recognition and related reserves for sales returns, useful lives of property, plant and equipment, determining
impairment of property, plant and equipment, accounting for leases, valuation of inventory, and income taxes. Actual results may differ
from these estimates.
Cash and Cash Equivalents
The Company had cash and cash equivalents of $9.1 million and $5.6 million at December 31, 2019 and 2018, respectively. The
Company considers all highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents. The
Company accepts a range of debit and credit cards, and these transactions are generally transmitted to a bank for reimbursement within
24 hours. The payments due from the banks for these debit and credit card transactions are generally received, or settled, within 24 to 48
hours of the transmission date. The Company considers all debit and credit card transactions that settle in less than seven days to be cash
and cash equivalents. Amounts due from the banks for these transactions classified as cash and cash equivalents totaled $1.5 million and
$0.8 million at December 31, 2019 and 2018, respectively.
Restricted Cash
Cash and cash equivalents that are restricted as to withdrawal or are under the terms of use for current operations are included in the
restricted balance on the balance sheet.
Trade Receivables
Trade receivables are carried at original invoice amount less an estimate made for doubtful accounts. Management determines the
allowance for doubtful accounts on a specific identification basis as well as by using historical experience applied to an aging of
accounts. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are
recorded when received. The allowance for doubtful accounts was $0.3 million and $0.1 million as of December 31, 2019 and 2018,
respectively. The Company does not accrue interest on accounts receivable.
45
Table Of Contents
Inventories
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company’s inventory consists of manufactured items and purchased merchandise held for resale. Inventories are stated at the lower
of cost (determined using the weighted-average cost method) or net realizable value. The Company capitalizes the cost of inbound
freight, duties, and receiving and handling costs to bring purchased materials into its distribution network. The labor and overhead costs
incurred in connection with the production process are included in the value of manufactured finished goods.
Inventories were comprised of the following as of the following at December 31:
Finished goods
Raw materials
Total
2019
2018
(in thousands)
$
$
95,435 $
2,185
97,620 $
107,981
2,114
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. These
estimates have calculations that require management to make assumptions based on the current rate of sales, age, salability and
profitability of inventory, historical percentages that can be affected by changes in our merchandising mix, customer preferences, rates of
sell through and changes in actual shrinkage trends. The provision for losses related to shrinkage and other amounts was $0.2 million and
$0.3 million as of December 31, 2019 and 2018, respectively.
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial
statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected
profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined to be
more likely than not that the benefit of such deferred tax asset will not be realized in future periods. If it becomes more likely than not
that a tax asset will be used, the related valuation allowance on such assets would be reduced.
The Company records interest and penalties relating to uncertain tax positions in income tax expense. As of December 31, 2019 and
2018, the Company has not recognized any liabilities for uncertain tax positions nor has the Company accrued interest and penalties
related to uncertain tax positions.
Revenue Recognition
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. The Company recognizes service revenue, which consists
primarily of freight charges for home delivery, when the service has been rendered. The Company is required to charge and collect sales
and other taxes on sales to the Company's customers and remit these taxes back to government authorities. Total revenues do not include
sales tax because the Company is a pass-through conduit for collecting and remitting sales tax. Sales are reduced by an allowance for
anticipated sales returns that the Company estimates based on historical returns.
The Company generally requires customers to pay a deposit when purchasing inventory that is not regularly carried at the store location,
or not currently in stock. These deposits are included in other accrued liabilities until the customer takes possession of the merchandise.
Sales Return Reserve
Customers may return purchased items for an exchange or refund. The process to establish a sales return reserve contains uncertainties
because it requires management to make assumptions and to apply judgment to estimate future returns and exchanges. The customer may
receive a refund or exchange the original product for a replacement of equal or similar quality for a period of three months from the time
of original purchase. Products received back under this policy are reconditioned pursuant to state laws and resold. The Company records
a reserve for estimated product returns, based on historical return trends together with current product sales performance.
46
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Cost of Sales and Selling, General and Administrative Expenses
The primary costs classified in each major expense category are:
Cost of Sales
· Materials cost;
·
Shipping and transportation expenses to bring products into the Company's distribution centers;
·
·
·
·
·
Custom and duty expenses;
Customer shipping and handling expenses;
Physical inventory losses;
Costs incurred at distribution centers in connection with the receiving process; and
Labor and overhead costs incurred to manufacture inventory
Selling, General & Administrative Expenses
·
·
·
·
·
All compensation costs for store, corporate and distribution employees;
Occupancy, utilities and maintenance costs of store and corporate facilities;
Shipping and transportation expenses to move inventory from the Company's distribution centers to the Company's stores;
Depreciation and amortization; and
Advertising costs
Stock Based Compensation
The Company recognizes expense for its stock based compensation based on the fair value of the awards on the grant date. The Company
may issue incentive awards in the form of stock options, restricted stock awards and other equity awards to employees and non-employee
directors. Compensation expense is recognized on a straight-line basis over the requisite service period, net of actual forfeitures. Certain
awards are also subject to forfeiture if the Company fails to attain its Adjusted EBITDA targets. The Company adjusts the cumulative
expense recognized on awards with performance conditions based on a probability of achieving the performance condition.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash
equivalents and bank deposits. By their nature, all such instruments involve risks including credit risks of non-performance by
counterparties. A substantial portion of the Company's cash and cash equivalents and bank deposits are invested with banks with high
investment grade credit ratings.
Segments
The Company’s operations consist primarily of retail sales of natural stone and man-made tiles, setting and maintenance materials, and
related accessories in stores located in the United States. The Company’s chief operating decision maker only reviews the consolidated
results of the Company and accordingly, the Company has concluded it has one reportable segment.
Advertising Costs
Advertising costs were $9.2 million, $8.3 million and $9.5 million for the years ended December 31, 2019, 2018 and 2017, respectively,
and are included in selling, general and administrative expenses in the consolidated statements of operations. The Company’s advertising
consists primarily of digital media, direct marketing, events and traditional print media that is expensed at the time the media is
distributed.
47
Table Of Contents
Pre-opening Costs
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company’s pre-opening costs are those typically associated with the opening of a new store and generally include rent expense,
compensation costs and promotional costs. The Company expenses pre-opening costs as incurred which are recorded in selling, general
and administrative expenses. During the years ended December 31, 2019, 2018 and 2017, the Company reported pre-opening costs of
$0.6 million, $0.1 million and $1.7 million, respectively.
Property, Plant and Equipment
Property, plant and equipment and leasehold improvements are recorded at cost. Improvements are capitalized while repairs and
maintenance costs are charged to selling, general and administrative expenses when incurred. Property, plant and equipment are
depreciated or amortized using the straight-line method over each asset’s estimated useful life. Leasehold improvements and fixtures at
leased locations are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.
The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and any gain or loss
thereon is included in other income and expense.
Buildings and building improvements
Leasehold improvements
Furniture and fixtures
Machinery and equipment
Computer equipment and software
Vehicles
Asset life (in years)
40
–
–
–
–
5
26
7
10
7
8
2
5
3
The Company evaluates potential impairment losses on long-lived assets used in operations when events and circumstances indicate that
the assets may be impaired, and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts
of those assets. If impairment exists and the undiscounted cash flows estimated to be generated by those assets are less than the carrying
amount of those assets, an impairment loss is recorded based on the difference between the carrying value and fair value of the
assets. During the fiscal years ended December 31, 2018 and 2017, the Company recorded asset impairment charges of $0.7 million and
$1.1 million, which were classified in selling, general and administrative expenses. No impairment charges were recorded during the year
ended December 31, 2019.
Internal Use Software
The Company capitalizes software development costs incurred during the application development stage related to new software or major
enhancements to the functionality of existing software that is developed solely to meet the Company’s internal operational needs and
when there are no plans to market the software externally. Costs capitalized include external direct costs of materials and services and
internal compensation costs. Any costs during the preliminary project stage or related to training or maintenance are expensed as
incurred. Capitalization ceases when the software project is substantially complete and ready for its intended use. The capitalization and
ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, technological and economic feasibility, and estimated economic life. As of December 31,
2019 and 2018, $11.1 million and $3.2 million was included in computer equipment and software, respectively. The internal use software
costs are amortized over estimated useful lives of three to seven years. There was $1.6 million, $0.3 million and $0.2 million of
amortization expense related to capitalized software during the years ended December 31, 2019, 2018 and 2017, respectively.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in right of use assets and lease liabilities
on the consolidated balance sheets. The right of use assets and lease liabilities are recognized as the present value of the future minimum
lease payments over the lease 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 right of use asset is also adjusted for any lease payments 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 its own discretion. The Company
regularly evaluates the renewal options and when they are reasonably certain of exercise, the Company includes the renewal period in its
lease term.
Certain lease arrangements contain provisions requiring the Company to restore the leased property to its original condition at the end of
the lease. The fair values of these obligations are recorded as liabilities on a discounted basis, which occurs at the time the
48
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Company enters into the lease arrangement. In the estimation of fair value, the Company uses assumptions and judgements regarding
such factors as the existence of a legal obligation for an asset retirement obligation, estimated amounts and timing of settlements,
discount rates and inflation rates. The costs associated with these liabilities are capitalized and depreciated over the lease term and the
liabilities are accreted over the same period. Asset retirement obligations were $1.9 million and $1.5 million as of December 31, 2019
and 2018, respectively, and are included in other long-term liabilities.
Self-Insurance
The Company is self-insured for certain employee health and workers’ compensation claims. The Company estimates a liability for
aggregate losses below stop-loss coverage limits based on estimates of the ultimate costs to be incurred to settle known claims and claims
not reported as of the balance sheet date. The estimated liability is not discounted and is based on a number of assumptions and factors
including historical trends, and economic conditions. As of December 31, 2019 and 2018, an accrual of $0.6 million related to estimated
employee health claims was included in other current liabilities. As of December 31, 2019 and 2018, an accrual of $1.9 million and $1.6
million related to estimated workers’ compensation claims was included in other current liabilities, respectively.
The Company has standby letters of credit outstanding related to the Company's workers’ compensation and employee health insurance
policies. As of December 31, 2019 and 2018, the standby letters of credit totaled $1.3 million and $1.1 million, respectively.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued a final standard that primarily requires organizations
that lease assets to recognize the rights and obligations created by those leases on the consolidated 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. We adopted 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.
This standard provides a number of optional practical expedients in transition. The Company elected the package of three practical
expedients permitted under the transition guidance within this standard, which among other things, allows the Company to carryforward
the historical lease classification. The Company did not separate non-lease components from lease components by class of underlying
assets and the Company did not apply the recognition requirements of the standard to short-term leases, as allowed by the standard.
The Company also elected to apply the hindsight practical expedient. The 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 the application of
the hindsight practical expedient, the Company considered recent investments in leased properties and the 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, the Company 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.
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 deferred tax assets and a
corresponding adjustment to retained earnings. The adoption of this standard did not have a material impact on net income or cash flows
for the year ended December 31, 2019. See Note 7 for further details.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued a final standard on accounting for credit losses. The new standard was initially effective for the Company
in fiscal 2020, and requires a change in credit loss calculations using the expected loss method. In November 2019, the FASB issued
Accounting Standards Update 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and
Leases (Topic 842): Effective Dates,” which, among other things, defers the effective date of Accounting Standards Update 2016-13, the
standard on accounting for credit losses, for public filers that are considered smaller reporting companies as defined by the SEC to fiscal
years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted. The Company
intends to early adopt the standard effective January 1, 2020. The Company has evaluated the effect of the new standard on its
consolidated financial statements and related disclosures, and has determined the impact will be immaterial.
49
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 the 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. The Company has evaluated the effect of the
standard on its consolidated financial statements and related disclosures, and has determined the impact will be immaterial.
Note 2: Revenues
On January 1, 2018, 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. The adoption of Topic 606 had a
cumulative impact adjustment to opening retained earnings of $0.1 million as of January 1, 2018 and did not have an impact on revenues
recognized for the year ended December 31, 2018.
Revenue Recognition
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 revenue.
The following table presents revenues disaggregated by product category:
Man-made tiles
Natural stone tiles
Setting and maintenance materials
Accessories
Delivery service
2019
Years Ended December 31,
2018
47 %
29
13
10
1
100 %
46 %
28
14
10
2
100 %
The Company generates revenues by selling tile products, setting and maintenance materials, accessories, and delivery services to its
customers through its store 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 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 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 $7.7 million and $7.4 million as of December 31, 2019 and 2018, respectively. Revenues
50
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
recognized during the year ended December 31, 2019 included in the customer deposit balance as of the beginning of the period were
$7.4 million.
The Company extends financing to qualified professional customers who apply for credit. The accounts receivable balance was $3.4
million and $3.1 million as of December 31, 2019 and 2018, respectively. Customers who qualify for an account receive 30-day payment
terms. 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. The Company presents the sales returns reserve as an other current accrued liability and the estimated
value of the inventory that will be returned as an other current asset in the Consolidated Balance Sheet. The components of the sales
returns reserve reflected in the Consolidated Balance Sheet as of December 31, 2019 and 2018 are as follows:
Other current liabilities
Other current assets
Sales returns reserve, net
Note 3: Property Plant and Equipment:
Property, plant and equipment consisted of the following at December 31:
Land
Building and building improvements
Leasehold improvements
Furniture and fixtures
Machinery and equipment
Computer equipment and software
Vehicles
Construction in progress
Total property, plant and equipment
Less accumulated depreciation
Total property, plant and equipment, net
(in thousands)
December 31,
2019
December 31,
2018
$
$
5,434 $
1,659
3,775 $
5,154
1,498
3,656
2019
2018
(in thousands)
$
$
904 $
25,733
97,077
146,913
30,420
45,473
4,722
2,159
353,401
(222,940)
130,461 $
904
25,608
88,454
140,612
29,424
33,947
4,125
11,089
334,163
(175,807)
158,356
Depreciation expense on property and equipment, including financing leases, was $33.5 million, $28.4 million and $26.2 million for the
years ended December 31, 2019, 2018 and 2017, respectively. Property, plant and equipment is measured at fair value when an
impairment is recognized and the related assets are written down to fair value. During the years ended December 31, 2018 and 2017, the
Company recorded asset impairment charges of $0.7 million and $1.1 million, respectively. No impairment charges were recorded during
the year ended December 31, 2019.
51
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4: Accrued Liabilities
Accrued liabilities consisted of the following at December 31:
Customer deposits
Sales return reserve
Accrued wages and salaries
Payroll and sales taxes
Other current liabilities
Total accrued liabilities
Note 5: Long-term Debt
Long-term debt, net of debt issuance costs, consisted of the following at December 31:
2019
2018
(in thousands)
7,727 $
5,434
4,064
2,764
4,600
24,589 $
7,383
5,154
3,689
2,929
5,329
24,484
$
$
2019
2018
(in thousands)
Total debt obligations
Less: current portion
Debt obligations, net of current portion
$
$
63,000 $
-
63,000 $
Approximate annual aggregate maturities of long-term debt are as follows (in thousands):
Fiscal year
2020
2021
2022
2023
2024
Thereafter
Total future maturities payments
$
$
53,000
-
53,000
-
-
-
63,000
-
-
63,000
On September 18, 2018, Holdings and its operating subsidiary, The Tile Shop, 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 LIBOR or base rate. The LIBOR-based rate ranges from LIBOR plus 1.50% to 2.25% depending
on the Company’s rent adjusted leverage ratio. The base rate is equal to the greatest of (a) the Federal funds rate plus 0.50%, (b) the
Bank of America “prime rate,” and (c) the Eurodollar rate plus 1.00%, in each case plus 0.50% to 1.25% depending on our rent adjusted
leverage ratio. At December 31, 2019, the LIBOR-based interest rate was 4.01% and the base rate was 6.00%.
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
December 31, 2019.
Borrowings outstanding consisted of $63.0 million on the revolving line of credit as of December 31, 2019. In addition, the Company
has standby letters of credit outstanding related to its workers compensation and medical insurance policies. As of December 31, 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 December 31, 2019, which may be used to support the Company’s growth and for working
capital purposes.
52
Table Of Contents
Note 6: Commitments and Contingencies
Legal proceedings:
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company is, from time to time, party to lawsuits, threatened lawsuits, disputes and other claims arising in the normal course of
business. The Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest
information available. Where it is probable that the Company will incur a loss and the amount of the loss can be reasonably estimated,
the Company records a liability in its consolidated financial statements. These legal accruals may be increased or decreased to reflect
any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, the Company
does not record an accrual, consistent with applicable accounting guidance. Based on information currently available to the Company,
advice of counsel, and available insurance coverage, the Company believes that its established accruals are adequate and the liabilities
arising from the legal proceedings will not have a material adverse effect on its consolidated financial condition. However, in light of
the inherent uncertainty in legal proceedings, there can be no assurance that the ultimate resolution of a matter will not exceed
established accruals. As a result, the outcome of a particular matter or a combination of matters may be material to the Company’s
results of operations for a particular period, depending upon the size of the loss or the Company’s income for that particular period.
On November 5, 2019, a class action and derivative lawsuit was filed in the Court of Chancery of the State of Delaware against the
Company and its directors by a plaintiff’s law firm with K-Bar Holdings LLC listed as plaintiff. The complaint was filed again by the
same law firm on November 7, 2019 with Wynnefield Capital, Inc. as the plaintiff. The complaint alleges breaches of fiduciary duty in
connection with the Company’s decision to delist from Nasdaq and deregister its common stock under the Exchange Act and directors’
purchases of common stock. The complaint includes derivative claims and seeks injunctive relief to prevent the Company from
deregistering its common stock, injunctive relief to prevent additional stock purchases, and unspecified damages. A hearing was
scheduled for February 21, 2020 for the court to consider whether a preliminary injunction should be issued to continue the temporary
restraining order (“TRO”) that was entered by the court on November 8, 2019. The TRO prohibits the Company from filing a Form 15
to complete the proposed deregistration and additional stock purchases by directors. The Company has determined to forego the
preliminary injunction hearing and proceed directly to a full trial on the merits, which is currently scheduled for April 13-14, 2020. The
Company plans to continue to contest the litigation vigorously.
Note 7: Leases
The Company leases its retail stores, certain distribution space, and office space. Leases generally have a term of ten to fifteen years, and
contain renewal options. Assets acquired under operating leases are included in the Company’s right of use assets in the accompanying
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 expected lease term.
Leases (in thousands)
Assets
Operating lease assets
Financing lease assets
Total leased assets
Liabilities
Current
Operating
Financing
Noncurrent
Operating
Financing
Total lease liabilities
Classification
December 31, 2019
Right of use asset
Property, plant and equipment, net of accumulated depreciation
Current portion of lease liability
Other accrued liabilities
Long-term lease liability, net
Financing lease obligation, net
53
$
$
$
$
137,737
113
137,850
26,993
162
131,451
274
158,880
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Lease cost (in thousands)
Operating lease cost
Financing lease cost
Classification
SG&A expenses
Amortization of leased assets
Interest on lease liabilities
Depreciation and amortization
Interest expense
Variable lease cost(1)
Short term lease cost
Net lease cost
SG&A expenses
SG&A expenses
Year Ended December 31,
2019
32,571
49
76
13,529
876
47,101
$
$
(1) Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for the Company’s leased
facilities.
Operating Leases
Financing Leases
Total
Maturity of Lease Liabilities (in thousands)
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: interest
Present value of lease liabilities
$
$
Other Information (in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Operating cash flows from financing leases
Financing cash flows from financing leases
Lease right-of-use assets obtained or modified in exchange for lease obligations
Lease Term and Discount Rate
Weighted-average remaining term (years)
Operating leases
Financing leases
Weighted-average discount rate
Operating leases
Financing leases
35,907 $
34,819
31,895
27,084
20,431
41,026
191,162
(32,718)
158,444 $
$
$
$
$
216 $
215
90
-
-
-
521
(85)
436 $
36,123
35,034
31,985
27,084
20,431
41,026
191,683
(32,803)
158,880
Year Ended December 31,
2019
December 31, 2019
35,054
64
204
5,993
6.8
2.4
6.23 %
14.73 %
Disclosures Related to Periods Prior to the Adoption of the New Lease Standard
Capital Leases:
The Company has one store lease that is accounted for as a capital lease. This lease expires in 2022. Assets acquired under capital leases
are included in property, plant and equipment.
Operating Leases:
The Company leases buildings and office space under various operating lease agreements. In addition to rent, most leases require
payments of real estate taxes, insurance, and common area maintenance. The leases generally have an initial lease term of ten to fifteen
years and contain renewal options and escalation clauses. For leases that contain fixed escalation of the minimum rent or rent holidays,
rent expense is recognized on a straight-line basis through the end of the lease term including assumed renewals. The difference between
the straight-line rent amounts and amounts payable under the leases is recorded as deferred rent. For the years ended December 31, 2018
and 2017, rent expense was $35.4 million, and $33.8 million, respectively.
54
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8: 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:
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 or liabilities 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 December 31, 2019 and 2018 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.
Assets
Cash and cash equivalents
Restricted cash
Pricing
Category
Level 1
Level 1
Fair Value at
December 31, 2019 December 31, 2018
(in thousands)
9,104 $
815
5,557
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 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.
Fair value measurements also apply to certain non-financial assets and liabilities measured at fair value on a nonrecurring
basis. Property, plant and equipment is measured at fair value when an impairment is recognized and the related assets are written down
to fair value. During the years ended December 31, 2018 and 2017, 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 $0.7 million and $1.1 million charge to write-down
these assets to their estimated fair value, respectively. 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 level 3 inputs. No impairment charges were recorded
during the year ended December 31, 2019.
The carrying value of the Company’s borrowings under its credit agreement approximates fair value based upon level 2 inputs of the
market interest rates available to the Company for debt obligations with similar risks and maturities.
55
Table Of Contents
Note 9: Related Party Transactions
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
On July 9, 2018, Fumitake Nishi, a former Company employee and the brother-in-law of Robert A. Rucker, our former Interim Chief
Executive Officer and President, and former member of the Company’s Board, 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 years ended December 31, 2019, 2018 and 2017, the
Company purchased $5.1 million, $12.0 million, and $12.8 million of products from Nanyang, respectively. As of December 31, 2019
and 2018, the accounts payable due to Nanyang was $1.4 million and $1.2 million, respectively. 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 has 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.
The Company employed Adam Rucker, son of Robert A. Rucker, our former Interim Chief Executive Officer and President, and former
member of our Board of Directors, as a Director of Information Technology through December 12, 2018. He was paid $29,025 severance
in 2019. In fiscal years 2018 and 2017, the Company paid Adam Rucker a total of $112,000 and $120,000, respectively. Adam Rucker
also received the standard benefits provided to other Company employees during fiscal years 2018 and 2017.
Note 10: Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted-average number of 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 common shares outstanding during the period. However, these shares have been excluded
from the calculation of diluted net loss per share of the year ended December 31, 2019, as their effect was antidilutive as a result of the
net loss incurred for that period. Therefore, dilutive weighted average number of shares outstanding and diluted net loss per share were
the same as basic weighted average number of shares outstanding and basic net loss per share for the year ended December 31, 2019.
Basic and diluted net income per share was calculated as follows:
2019
2018
(in thousands, except share and per share data)
2017
Net (loss) income
Weighted-average shares outstanding - basic
Dilutive common stock equivalents
Weighted-average shares outstanding - diluted
Basic net (loss) income per share
Diluted net (loss) income per share
Antidilutive Shares
Note 11: Equity Incentive Plans
2012 Plan:
$
(4,463) $
10,442 $
50,624,309
-
50,624,309
51,907,619
181,541
52,089,160
$
$
(0.09) $
(0.09) $
0.20 $
0.20 $
2,251,652
1,508,616
10,819
51,700,045
227,832
51,927,877
0.21
0.21
445,490
Under the 2012 Omnibus Award Plan, 5,000,000 shares of the Company’s common stock are reserved for issuance pursuant to a variety
of stock based compensation awards, including stock options, and restricted stock awards.
Stock Options:
During the years ended December 31, 2019 and 2018, the Company granted stock options to its employees that included service
condition requirements. The options provide for certain acceleration of vesting and cancellation of options under different circumstances,
such as a change in control, death, disability and termination of service. The Company recognizes compensation expense on a straight-
line basis over the requisite service period, net of actual forfeitures.
56
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The assumptions
used in the option valuation models are outlined in the following table:
Risk-free interest rate
Expected life (in years)
Expected volatility
Dividend yield
2019
2.50%
6
56%
3%
2018
2017
5
2.75% –
–
55% –
–
2%
3.08% 1.89% –
–
51% –
–
1%
6
57%
4%
5
2.12%
6
55%
2%
The computation of the expected volatility assumptions used in the option valuation models was based on historical volatilities of the
Company. The Company used the “simplified” method to calculate the expected term of options granted due to the lack of adequate
historical data. The risk-free interest rate was based on the U.S. Treasury yield at the time of grant. The expected dividend yield was
determined using the historical dividend payout and a trailing twelve month closing stock price on the grant date. To the extent that actual
outcomes differ from the Company's assumptions, the Company is not required to true up grant-date fair value-based expense to final
intrinsic values. The weighted average fair value of stock options granted was $2.57, $3.10, and $5.88 during the years ended December
31, 2019, 2018 and 2017, respectively.
Stock based compensation related to options for the years ended December 31, 2019, 2018 and 2017 was $0.7 million, $1.0 million, and
$1.9 million, respectively, and was included in selling, general and administrative expenses in the consolidated statements of operations.
As of December 31, 2019, the total future compensation cost related to non-vested options not yet recognized in the consolidated
statement of operations was $0.9 million and is expected to be recognized over a weighted-average period of 2.3 years.
The following table summarizes stock option activity:
Balance, January 1, 2017
Granted
Exercised
Cancelled/Forfeited
Balance, December 31, 2017
Granted
Exercised
Cancelled/Forfeited
Balance, December 31, 2018
Granted
Exercised
Cancelled/Forfeited
Balance, December 31, 2019
Exercisable at December 31, 2019
Vested and expected to vest, December 31, 2019
Weighted
Average
Exercise
Price
13.84 $
13.49 $
10.07 $
13.04 $
14.74 $
7.19 $
- $
18.59 $
12.34 $
6.26 $
- $
10.66 $
11.34 $
12.60 $
11.34 $
Weighted
Avg. Grant
Date
Fair Value
6.71
5.88
5.44
6.29
6.95
3.10
-
8.69
5.80
2.57
-
4.81
5.31
6.03
5.31
Shares
2,360,541 $
305,150 $
(313,372) $
(619,755) $
1,732,564 $
176,380 $
- $
(520,865) $
1,388,079 $
334,134 $
- $
(468,219) $
1,253,994 $
902,259 $
1,253,994 $
Weighted Avg.
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
(in thousands)
5.7 $
15,971
4.5 $
365
4.9 $
4.7 $
3.5
4.7 $
-
-
-
The aggregate intrinsic value is the difference between the exercise price and the closing price of the Company’s stock on December 31.
No stock options were exercised during fiscal year 2019.
57
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Options outstanding as of December 31, 2019 were as follows:
Range of Exercise Price
$5.00
$10.01
$15.01
$20.01
$25.01
to
to
to
to
to
$10.00
$15.00
$20.00
$25.00
$30.00
Restricted Stock:
Options
Exercise Price
Remaining Contractual
Life-Years
Weighted Average
753,435 $
266,959 $
143,000 $
57,600 $
33,000 $
8.24
11.90
17.86
22.85
29.44
5.90
1.99
3.67
4.17
3.56
The Company awards restricted common shares to selected employees and non-employee directors. Recipients are not required to
provide any consideration upon vesting of the award. Restricted share 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 its Adjusted EBITDA targets. The restricted common shares are valued
at the 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.
The following table summarizes restricted stock activity:
Nonvested, January 1, 2017
Granted
Vested
Forfeited
Nonvested, December 31, 2017
Granted
Vested
Forfeited
Nonvested, December 31, 2018
Granted
Vested
Forfeited
Nonvested, December 31, 2019
Shares
Weighted Avg.
Grant Date
Fair Value
85,884 $
324,184 $
(47,051) $
(87,849) $
275,168 $
682,646 $
(63,680) $
(131,617) $
762,517 $
781,697 $
(170,677) $
(375,879) $
997,658 $
19.25
13.55
19.93
17.71
13.03
6.61
15.88
8.70
7.80
4.36
7.95
7.39
5.23
The total expense associated with restricted stock for the years ended December 31, 2019, 2018, and 2017 was $1.9 million, $1.7
million, and $1.2 million, respectively. As of December 31, 2019, there was $4.0 million of total unrecognized expense related to
unvested restricted stock awards, which are expected to vest, and will be expensed over a weighted-average period of 2.6 years. The fair
value of restricted stock granted in fiscal years 2019 and 2018 was $3.4 million and $4.5 million, respectively. The total fair value of
restricted stock that vested in fiscal years 2019 and 2018 was $0.7 million and $1.2 million, respectively. Using the closing stock price
of $1.69 on December 31, 2019, the number of restricted shares outstanding and expected to vest was 997,658, with an intrinsic value of
$1.7 million.
58
Table Of Contents
Note 12: Income Taxes
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The components of the provision for income taxes consist of the following:
Current
Federal
State
International
Total Current
Deferred
Federal
State
International
Total Deferred
Total (Benefit) Provision for Income Taxes
2019
Years Ended December 31,
2018
(in thousands)
2017
$
324 $
479
144
947
(1,296)
(261)
(64)
(1,621)
$
(674) $
734 $
638
23
1,395
2,839
844
80
3,763
5,158 $
2,721
872
30
3,623
9,354
363
-
9,717
13,340
A majority of the Company's income is from domestic operations.
The following table reflects the effective income tax rate reconciliation for the years ended December 31, 2019, 2018 and 2017:
Federal statutory rate
Tax reform
State income taxes, net of the federal tax benefit
Stock based compensation
Remeasurement of deferred tax assets
Tax credits
Uncollectible state receivables
Other
Effective tax rate
2019
2018
2017
21.0 %
-
3.7
(7.3)
(1.1)
2.6
(5.6)
(0.2)
13.1 %
21.0 %
(1.1)
5.7
7.6
0.3
(0.8)
-
0.4
33.1 %
35.0 %
18.9
4.1
(2.0)
(0.1)
-
-
(0.8)
55.1 %
The Company’s effective tax rate for 2019 was 13.1%, compared to 33.1% in 2018, a decrease of 20.0%. Income tax expense in 2018
included stock based compensation charges, which increased the Company’s effective tax rate by 7.6%. Income tax benefit in 2019
includes stock based compensation tax shortfall charges and the write-off of uncollectable state receivables, which decreased the
Company’s effective tax rate by 12.9%.
The Company’s effective tax rate for 2018 was 33.1%, compared to 55.1% in 2017, a decrease of 22.0%. The decrease in the effective
tax rate was primarily attributable to the reduction of the U.S. federal statutory tax rate from 35% in 2017 to 21% in 2018 and a charge in
2017 to reduce the value of the Company’s deferred tax assets in accordance with the 2017 Tax Cuts and Jobs Act. Income tax expense in
2018 includes stock based compensation tax shortfall charges, which increased the Company’s effective tax rate by 7.6%.
59
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Components of net deferred income taxes were as follows at December 31:
Deferred income tax assets:
Section 743 carryforward
Leasehold improvement reimbursements(1)
Inventory
Deferred rent(1)
Stock based compensation
Operating lease liabilities(1)
Net operating loss & credit carryforwards
Other
Total deferred income tax assets
Deferred income tax liabilities
Depreciation
Operating lease right-of-use assets(1)
Other
Total deferred income tax liabilities
Net deferred income tax assets
2019
2018
(in thousands)
$
$
$
12,915 $
-
1,829
-
1,290
41,203
3,495
2,120
62,852 $
15,279
37,910
2,467
55,656
7,196 $
14,730
3,719
1,635
5,960
1,239
-
-
1,724
29,007
19,821
-
1,961
21,782
7,225
(1) See Note 1: Summary of Significant Accounting Policies, regarding the impact of the adoption of ASC Topic 842: Leases
As of December 31, 2019, the Company had $3.0 million of federal and $0.5 million of state tax effected net operating losses and tax
credit carryovers, with all amounts before limitation impacts and valuation allowances. The federal tax attribute carryovers will expire
after twenty years to indefinite carryover period, and the state after five years to indefinite carryover period.
The Company has recognized the tax consequences of all foreign unremitted earnings and management has no specific plans to
indefinitely reinvest the unremitted earnings of its foreign subsidiary as of December 31, 2019. As of December 31, 2019, the total
undistributed earnings of the Company's non-U.S. subsidiary was approximately $0.4 million. The Company has provided no deferred
taxes on withholding taxes, state taxes, and foreign currency gains and losses due on the repatriation of those earnings.
The Company records interest and penalties through income tax relating to uncertain tax positions. As of December 31, 2019, 2018 and
2017, the Company has not recognized any liabilities for uncertain tax positions nor has the Company accrued interest and penalties
related to uncertain tax positions.
The Company's federal income tax returns for fiscal years 2016 through 2018 tax years are still subject to examination in the U.S. Various
state and foreign jurisdiction tax years remain open to examination. The Company believes that any potential assessment would be
immaterial to its consolidated financial statements.
Note 13: New Markets Tax Credit
2016 New Markets 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 made a capital contribution to, and Tile Shop Lending, Inc.
(“Tile Shop Lending”) made a loan 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, 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
60
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 $3.2 million to the Investment Fund and, by virtue of such contribution, is entitled to
substantially all of the tax benefits derived from the 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
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 CDEs 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 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 underlying 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
contributed $3.2 million, net of syndication fees, to the Investment Fund. The Company incurred $1.3 million of syndication fees in
connection with this transaction. 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 December 31,
2019, the balance of the contribution liability for this arrangement was $1.8 million, of which $0.4 million was classified as other accrued
liabilities on the consolidated balance sheet and $1.4 million was 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 the 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. As of December 31, 2019, the remaining balance in the Investment
Fund was $0.8 million.
2013 New Markets 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 the $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 underlying economics of the project; and the fact that the Company is obligated to absorb
losses of The Tile Shop Investment 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
contributed $5.6 million, net of syndication fees, to the Investment Fund. The Company incurred $1.2 million of
61
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
syndication fees in connection with this transaction. 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
December 31, 2019, the balance of the contribution liability for this arrangement was $0.4 million, and classified as other accrued
liabilities on the consolidated balance sheet.
Note 14: Retirement Savings Plan
The Company has a 401(k) profit sharing plan covering substantially all full-time employees. Employee contributions are limited to the
maximum amount allowable by the Internal Revenue Code. The Company matched $1.6 million, $1.6 million, and $1.4 million of
employee contributions in 2019, 2018, and 2017, respectively, and made no discretionary contributions for any of the years presented.
Note 15: Quarterly Financial Data (Unaudited)
Quarterly results of operations for the years ended December 31, 2019 and 2018 are summarized below (in thousands, except per share
amounts):
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2019
Net sales
Gross profit
Income (loss) from operations
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
2018
Net sales
Gross profit
Income from operations
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
$
$
86,908 $
61,842
2,894
1,320
0.03
0.03
91,134 $
64,038
6,111
4,011
0.08
0.08
62
88,903 $
61,360
798
(154)
0.00
0.00
92,914 $
65,312
7,442
4,958
0.10
0.10
85,944 $
59,169
(635)
(1,383)
(0.03)
(0.03)
89,259 $
63,011
3,880
2,553
0.05
0.05
78,596
53,748
(4,414)
(4,246)
(0.09)
(0.09)
83,947
58,978
705
(1,080)
(0.02)
(0.02)
Table Of Contents
TILE SHOP HOLDINGS, INC.
EXHIBIT INDEX
Exhibit No.
2.1
3.1
3.2
4.1
4.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8
10.9*
10.10*
10.11*
10.12
10.13
10.14
10.15
Description
Contribution and Merger Agreement, dated June 27, 2012, by and among JWC Acquisition Corp., The Tile Shop,
LLC, members of The Tile Shop, LLC, Nabron International, Inc., Tile Shop Holdings, Inc., and Tile Shop Merger
Sub, Inc. – incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by JWC Acquisition Corp.
on June 27, 2012.
Certificate of Incorporation of Tile Shop Holdings, Inc. – incorporated by reference to Exhibit 3.1 to the Registrant’s
Form S-4 (Reg. No. 333-182482) dated July 2, 2012.
Bylaws of Tile Shop Holdings, Inc. – incorporated by reference to Exhibit 3.2 to the Registrant’s Form S-4 (Reg. No.
333-182482) dated July 2, 2012.
Specimen Common Stock Certificate – incorporated by reference to Exhibit 4.1 of Amendment No. 1 to the
Registrant’s Form S-4 (Reg. No. 333-182482) dated July 23, 2012.
Description of Tile Shop Holdings, Inc.’s Registered Securities – filed herewith.
Tile Shop Holdings, Inc. 2012 Omnibus Award Plan (f/k/a 2012 Equity Award Plan) – incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 26, 2013.
Amended and Restated Amendment No. 1 to the Tile Shop Holdings, Inc. 2012 Omnibus Award Plan (f/k/a 2012
Equity Award Plan) – incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed
July 26, 2013.
Form of Indemnification Agreement by and between Tile Shop Holdings, Inc. and each of its directors and executive
officers – incorporated by reference to Exhibit 10.13 of Amendment No. 1 to the Registrant’s Form S-4 (Reg. No. 333-
182482) dated July 23, 2012.
Tile Shop Holdings, Inc. Form of Incentive Stock Option Agreement – incorporated by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K filed July 26, 2013.
Tile Shop Holdings, Inc. Form of Nonstatutory Stock Option Agreement – incorporated by reference to Exhibit 10.4 to
the Registrant’s Current Report on Form 8-K filed July 26, 2013.
Tile Shop Holdings, Inc. Form of Stock Restriction Agreement – incorporated by reference to Exhibit 10.5 to the
Registrant’s Current Report on Form 8-K filed July 26, 2013.
Offer Letter Agreement, dated June 30, 2014, between Tile Shop Holdings, Inc. and Kirk Geadelmann – incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 3, 2014.
Stipulation of Settlement, among Tile Shop Holdings, Inc., Beaver County Employees’ Retirement Fund and the other
parties thereto, dated January 13, 2017 – incorporated by reference to Exhibit 10.1 to the Registrant’s Amendment to
Current Report on Form 8-K filed January 20, 2017.
Amendment to Offer Letter Agreement, dated April 21, 2017, between Tile Shop Holdings, Inc. and Kirk Geadelmann
– incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2017.
Tile Shop Holdings, Inc. Form of Stock Restriction Agreement – incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017.
Employment Agreement, dated February 19, 2018, between Tile Shop Holdings, Inc. and Cabell Lolmaugh –
incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 21, 2018.
Credit Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., as guarantor, The Tile
Shop, LLC, Tile Shop Lending, Inc., and 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 issuer
– incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed September 19, 2018.
Security Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC,
Tile Shop Lending, Inc., and certain subsidiaries of Tile Shop Holdings, Inc. or The Tile Shop, LLC, as grantors, and
Bank of America, N.A., as Administrative Agent – incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K filed September 19, 2018.
Securities Pledge Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop,
LLC, Tile Shop Lending, Inc., and certain subsidiaries of Tile Shop Holdings, Inc. or The Tile Shop, LLC, as pledgors,
and Bank of America, N.A., as Administrative Agent – incorporated by reference to Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K filed September 19, 2018.
Guaranty 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, and the other guarantors from time to time party thereto, as
guarantors, and Bank of America, N.A., as Administrative Agent – incorporated by reference to Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K filed September 19, 2018.
63
Table Of Contents
10.16*
10.17*
10.18*
10.19*
21.1
23.1
24.1
31.1
31.2
32.1**
32.2**
99.1
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Employment Agreement, dated September 6, 2019, by and between Tile Shop Holdings, Inc. and Nancy DiMattia –
incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2019.
Employment Agreement, dated September 6, 2019, by and between the Tile Shop Holdings, Inc. and Mark Davis –
incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2019.
Amendment to Terms of Employment, dated September 6, 2019, by and between Tile Shop Holdings, Inc. and Kirk
Geadelmann – incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2019.
Agreement Regarding Stock Options, dated December 19, 2019, by and between Tile Shop Holdings, Inc. and Kirk
Geadelmann – filed herewith.
Subsidiaries of Tile Shop Holdings, Inc. – incorporated by reference to Exhibit 21.1 to the Registrant’s Annual Report
on Form 10-K for the year ended December 31, 2017.
Consent of Ernst & Young LLP, independent registered public accounting firm – filed herewith.
Power of Attorney (included on the “Signatures” page of this Annual Report on Form 10-K) – filed herewith.
Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – filed herewith.
Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – filed herewith.
Certification by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – furnished
herewith.
Certification by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – furnished
herewith.
Director Standstill Commitment – incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on
Form 8-K filed on January 13, 2020.
XBRL Instance Document – filed herewith.
XBRL Taxonomy Extension Schema Document – filed herewith.
XBRL Taxonomy Extension Calculation Linkbase Document – filed herewith.
XBRL Taxonomy Extension Definition Linkbase Document – filed herewith.
XBRL Taxonomy Extension Label Linkbase Document – filed herewith.
XBRL Taxonomy Extension Presentation Linkbase Document – filed herewith.
______________________
*
**
Management compensatory plan or arrangement.
These certifications are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by
reference in any filing we make under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended.
64
Table Of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
88
Date: March 13, 2020
TILE SHOP HOLDINGS, INC.
/s/ CABELL H. LOLMAUGH
Cabell H. Lolmaugh
Chief Executive Officer
65
Table Of Contents
POWER OF ATTORNEY
Each person whose signature appears below constitutes CABELL H. LOLMAUGH, NANCY DIMATTIA and MARK B.
DAVIS, or any of them, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for
him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all said attorney-in-fact and agent, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature
/s/ CABELL H. LOLMAUGH
Cabell H. Lolmaugh
Chief Executive Officer, Director
(Principal Executive Officer)
/s/ NANCY DIMATTIA
Nancy DiMattia
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ MARK B. DAVIS
Mark B. Davis
Vice President Investor Relations and Chief
Accounting Officer
(Principal Accounting Officer)
/s/ PETER H. KAMIN
Peter H. Kamin
Director and Chairman of the Board of Directors
/s/ PETER J. JACULLO
Peter J. Jacullo, Director
/s/ TODD KRASNOW
Todd Krasnow, Director
/s/ PHILIP B. LIVINGSTON
Philip B. Livingston, Director
66
Date
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
EXHIBIT 4.2
DESCRIPTION OF TILE SHOP HOLDINGS, INC. COMMON STOCK
The following summarizes the terms and provisions of the common stock of Tile Shop Holdings, Inc., a Delaware
corporation (the “Company”), which common stock is registered under Section 12 of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). The following summary does not purport to be complete and is qualified in
its entirety by reference to the Company’s Certificate of Incorporation and By-Laws, which the Company has previously
filed with the Securities and Exchange Commission, and applicable Delaware law.
Authorized Capital
The Company’s authorized capital stock consists of 100,000,000 shares of common stock, $0.0001 par value per share
(the “Common Stock”), and 10,000,000 shares of preferred stock, $0.0001 par value per share (the “Preferred Stock”).
Under Delaware law, stockholders generally are not personally liable for a corporation’s acts or debts.
Common Stock
Dividend Rights
Subject to preferences that may be applicable to any then-outstanding shares of Preferred Stock, the holders of
Common Stock are entitled to receive such dividends, if any, as may be declared from time to time by the Company’s
Board of Directors out of legally available funds.
Voting Rights
Holders of Common Stock are entitled to one vote for each share held of record on all matters to be voted on by the
stockholders, including the election of directors. There is no cumulative voting with respect to the election of directors.
Directors are elected by a plurality of the votes cast by the holders of Common Stock. Except as otherwise required by
law or the Company’s Certificate of Incorporation or By-Laws, all other matters brought to a vote of the holders of
Common Stock are determined by a majority of the votes cast and, except as may be provided with respect to any other
outstanding class or series of the Company’s stock, the holders of shares of Common Stock possess the exclusive
voting power.
Liquidation
In the event of the Company’s liquidation, dissolution or winding up, the holders of Common Stock will be entitled to
share ratably in the net assets legally available for distribution to stockholders after the payment of all of the
Company’s known debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of
any then-outstanding shares of Preferred Stock.
Rights and Preferences
All outstanding shares of Common Stock are duly authorized, fully paid and non-assessable. Holders of Common Stock
have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund provisions
applicable to the Common Stock. The rights, preferences, and privileges of the holders of Common Stock are subject
to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock that the
Company may designate in the future.
Quotation
The Common Stock is quoted on the Pink tier of the OTC Markets under the symbol “TTSH.”
Preferred Stock
The Board of Directors has the authority, without further action by the holders of Common Stock, to issue up to
10,000,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions
thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the
designation of such series, any or all of which may be greater than the rights of Common Stock. The issuance of
Preferred Stock could adversely affect the voting power of holders of Common Stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation. In addition, the issuance of Preferred Stock
could have the effect of delaying, deferring, or preventing a change of control of the Company or other corporate
action. The Company has no outstanding shares of Preferred Stock.
Anti-Takeover Effects of Provisions of Delaware Law and the Company’s Certificate of Incorporation and By-
Laws
Certificate of Incorporation and By-Laws
The Company’s Certificate of Incorporation provides for the Company’s Board of Directors to be divided into three
classes with staggered three-year terms. Only one class of directors will be elected at each annual meeting of
stockholders, with the other classes continuing for the remainder of their respective three-year terms. Because the
Company’s stockholders do not have cumulative voting rights, its stockholders holding a majority of the shares of
Common Stock outstanding will be able to elect all of its directors. The Company’s Certificate of Incorporation and
By-Laws provide that all stockholder actions must be effected at a duly called meeting of stockholders and not by a
consent in writing, and that only the Company’s Board of Directors, Chairperson of the Board of Directors, Chief
Executive Officer or President may call a special meeting of stockholders.
The Company’s Certificate of Incorporation provides that certain provisions of the Company’s Certificate of
Incorporation, including those relating to the issuance of Preferred Stock, classification of the Board of Directors, and
the inability of the stockholders to take action by written consent or call a special meeting, may only be altered,
amended, repealed or replaced only with the affirmative vote of the holders of at least 75% of the voting power of all of
the then-outstanding shares of capital stock of the Company entitled to vote generally in the election of directors. The
Company’s Certificate of Incorporation and By-Laws further provide that the Company’s By-Laws may be altered,
amended, repealed or replaced by the Board of Directors without stockholder approval, to the extent permitted by law;
provided, however, that the stockholders may amend the By-Laws with the affirmative vote of the holders of at least
75% of the voting power of all of the then-outstanding shares of capital stock of the Company entitled to vote generally
in the election of directors. The Company’s Certificate of Incorporation and By-Laws also provide that stockholders
may only remove a director for cause and only by the affirmative vote of the holders of at least 75% of the voting
power of all of the then-outstanding shares of capital stock of the Company entitled to vote generally in the election of
directors. The Company’s Certificate of Incorporation and By-Laws allow the Company’s directors to establish the size
of the Board of Directors and fill vacancies on the Board, including those created by an increase in the number of
directors (subject to the rights of the holders of any series of Preferred Stock to elect additional directors under
specified circumstances). The Company’s By-Laws establish advance notice procedures for stockholders to submit
proposals and nominations of candidates for election to the Board of Directors to be brought before a stockholders’
meeting. The combination of the classification of the Board of Directors, the lack of cumulative voting or the ability of
stockholders to take action by written consent or call a special meeting, the 75% stockholder voting requirements, the
limitations on removing directors without cause, the ability of the Board of Directors to fill vacancies, and the advance
notice provisions make it difficult for the Company’s existing stockholders to replace its Board of Directors, as well as
for another party to obtain control of the Company by replacing its Board of Directors. Because the Company’s Board
of Directors has the power to retain and discharge its officers, these provisions could also make it more difficult for
existing stockholders or another party to effect a change in management. In addition, the authorization of undesignated
Preferred Stock makes it possible for the Company’s Board of Directors to issue Preferred Stock with voting or other
rights or preferences that could impede the success of any attempt to change the Company’s control.
These provisions may have the effect of deterring hostile takeovers or delaying changes in the Company’s control or
management.
Delaware Anti-Takeover Law
The Company is not currently subject to Section 203 of the Delaware General Corporation Law (“Section 203”), which
generally prohibits a public Delaware corporation from engaging in a “business combination” with an “interested
stockholder” for a period of three years after the date of the transaction in which the person became an interested
stockholder unless:
·
·
·
prior to the date of the transaction, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an interested stockholder;
upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of shares outstanding (but not the
outstanding voting stock owned by the interested stockholder) those shares owned by (i) persons who are
directors and also officers and (ii) employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange
offer; or
on or after such date, the business combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-
thirds of the outstanding voting stock that is not owned by the interested stockholder.
In general, Section 203 defines “business combination” to include the following:
·
·
·
·
·
any merger or consolidation involving the corporation and the interested stockholder;
any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of
transactions), except proportionately as a stockholder of such corporation, to or with the interested
stockholder, of assets of the corporation, which assets have an aggregate market value equal to 10% or more of
either the aggregate market value of all the assets of the corporation determined on a consolidated basis or the
aggregate market value of all the outstanding stock of the corporation;
subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any
stock of the corporation to the interested stockholder;
subject to certain exceptions, any transaction involving the corporation that has the effect, directly or
indirectly, of increasing the interested stockholder’s proportionate share of the stock of any class or series, or
securities convertible into the stock of any class or series, of the corporation; and
any receipt by the interested stockholder of the benefit, directly or indirectly (except proportionately as a
stockholder of such corporation), of any loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
In general, Section 203 defines an “interested stockholder” as an entity or person that, together with the person’s
affiliates and associates, beneficially owns, or within three years prior to the time of determination of interested
stockholder status did own, 15% or more of the outstanding voting stock of the corporation.
Authorized and Unissued Shares
The Company’s authorized and unissued shares of Common Stock are available for future issuance without stockholder
approval except as may otherwise be required by applicable regulations or Delaware law. The Company may issue
additional shares for a variety of purposes, including future offerings to raise additional capital, to fund acquisitions and
as employee and consultant compensation. The existence of authorized but unissued shares
of Common Stock could render more difficult, or discourage an attempt, to obtain control of the Company by means of
a proxy contest, tender offer, merger or otherwise.
The issuance of shares of Preferred Stock by the Company could have certain anti-takeover effects under certain
circumstances, and could enable the Board of Directors to render more difficult or discourage an attempt to obtain
control of the Company by means of a merger, tender offer or other business combination transaction directed at the
Company by, among other things, placing shares of Preferred Stock with investors who might align themselves with the
Board of Directors.
KIRK GEADELMANN STOCK OPTION MODIFICATION
EXHIBIT 10.19
Tile Shop Holdings, Inc. (the “Company”) and Kirk Geadelmann (“Geadelmann”) are parties to that certain
Amendment to Terms of Employment and Waiver of Claims and General Release (the “Amendment and Release”),
entered into as of September 6, 2019. For good and valuable consideration, Company and Geadelmann further agree as
follows:
·
·
·
·
·
Geadelmann’s employment with the Company is voluntarily ending on December 6, 2019 (“Termination
Date”).
In consideration for Geadelmann signing this Exhibit 10.19, the Company shall permit Geadelmann to
exercise all stock options held by Geadelmann and vested on the Termination Date for a period of one (1) year
following the Termination Date.
Geadelmann, along with his heirs, executors, administrators, successors, and assigns, reaffirms his agreement
with and acceptance of all of the terms and provisions contained in the Agreement and Release, including
without limitation those contained in Section 2 of the Agreement and Release, as of the date of Geadelmann’s
signature on this document.
Geadelmann has been advised that Geadelmann has twenty-one (21) days from the date on which Geadelmann
received this Exhibit 10.19 to consider whether Geadelmann wishes to sign it. However, the Company will not
accept, and Geadelmann may not execute, this Exhibit 10.19 until on or after the Termination
Date. Geadelmann is also advised to consult with an attorney prior to signing this document.
Geadelmann may cancel this Exhibit 10.19, but only this Exhibit 10.19 and specifically not the Amendment
and Release, within fifteen (15) days after signing it. This Exhibit 10.19 will not become effective or
enforceable until such rescission period has passed. If Geadelmann decides to rescind this Exhibit 10.19,
Geadelmann must mail or hand deliver the notice of rescission to: Cabell Lolmaugh, Chief Executive Officer
and President, Tile Shop Holdings, Inc., 14000 Carlson Parkway, Plymouth MN 55441. If Geadelmann mails
the notice of rescission, the notice must be postmarked within the fifteen (15) day period and must be sent via
certified mail, return receipt requested, as addressed above. If Geadelmann exercises the right to rescind this
Exhibit 10.19, this Exhibit 10.19 shall immediately be null and void and Geadelmann will not receive the
valuable consideration described herein.
IN WITNESS WHEREOF, the parties have caused this Exhibit 10.19 to the Agreement and Release to be duly
executed and delivered as of the day and year indicated below.
EMPLOYEE
TILE SHOP HOLDINGS, INC.
/s/ Kirk Geadelmann____________
Name: Kirk Geadelmann
Date Signed: December 19, 2019
By: /s/ Cabell Lolmaugh_______________
Name: Cabell Lolmaugh
Title: President and CEO
Date Signed: December 19, 2019
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-183455 and 333-
190088) pertaining to the 2012 Omnibus Award Plan of Tile Shop Holdings, Inc. of our reports dated March 13, 2020,
with respect to the consolidated financial statements of Tile Shop Holdings, Inc. and Subsidiaries, and the effectiveness
of internal control over financial reporting of Tile Shop Holdings, Inc. and Subsidiaries included in this Annual Report
(Form 10-K) for the year ended December 31, 2019.
EXHIBIT 23.1
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 13, 2020
EXHIBIT 31.1
302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Cabell H. Lolmaugh, certify that:
1.
I have reviewed this annual report on Form 10-K of Tile Shop Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 13, 2020
/s/ CABELL H. LOLMAUGH
Cabell H. Lolmaugh
Chief Executive Officer
EXHIBIT 31.2
302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Nancy DiMattia, certify that:
1.
I have reviewed this annual report on Form 10-K of Tile Shop Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 13, 2020
/s/ Nancy DiMattia
Nancy DiMattia,
Chief Financial Officer
Certification Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
Pursuant to 18 U.S.C. §1350 (as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002), I, Cabell H.
Lolmaugh, the Chief Executive Officer of Tile Shop Holdings, Inc. (the “Company”), hereby certify that the Annual
Report on Form 10-K of the Company for the year ended December 31, 2018 (“the Report”) fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the
Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will
be retained by the Company and furnished to the SEC or its staff upon request.
Date: March 13, 2020
/s/ CABELL H. LOLMAUGH
Cabell H. Lolmaugh
Chief Executive Officer
Certification Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
Pursuant to 18 U.S.C. §1350 (as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002), I, Kirk L.
Geadelmann, the Chief Financial Officer of Tile Shop Holdings, Inc. (the “Company”), hereby certify that the Annual
Report on Form 10-K of the Company for the year ended December 31, 2018 (“the Report”) fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the
Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will
be retained by the Company and furnished to the SEC or its staff upon request.
Date: March 13, 2020
/s/ Nancy DiMattia
Nancy DiMattia,
Chief Financial Officer