tts-20190930 10Q_Taxonomy2019

 









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

_____________________________



FORM 10-Q

_____________________________

(Mark One)



 

 

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



For the quarterly period ended September 30, 2019



OR





 

 

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



 For the transition period from – to –

 

Commission file number: 001-35629

_____________________________



TILE SHOP HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

_____________________________





 

Delaware  

45-5538095

(State or other jurisdiction of incorporation)

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







 

14000 Carlson Parkway

 

Plymouth, Minnesota 

55441

(Address of principal executive offices)  

(Zip Code)



(763) 852-2950 

(Registrant’s telephone number, including area code)

_____________________________



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



 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.0001 par value

TTS

The Nasdaq Stock Market LLC



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



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



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





 

 

 

 

 

Large  accelerated  filer

Accelerated  filer

Non-accelerated filer

Smaller  reporting  company



Emerging growth company



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



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



As of October 28, 2019, there were 50,883,029 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.



 



 

 


 

Table of Contents

 

TILE SHOP HOLDINGS, INC.

Table of Contents

 



 

 



 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements



Consolidated Balance Sheets



Consolidated Statements of Income



Consolidated Statements of Comprehensive Income



Consolidated Statements of Stockholders’ Equity (Deficit)



Consolidated Statements of Cash Flows



Notes to Consolidated Financial Statements

Item 2.

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

18 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25 

Item 4.

Controls and Procedures

25 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

26 

Item 1A.

Risk Factors

26 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28 

Item 3.

Defaults Upon Senior Securities

28 

Item 4.

Mine Safety Disclosures

28 

Item 5.

Other Information

28 

Item 6.

Exhibits

29 

Signatures

30 



 

 

2


 

Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

  

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

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

 





 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2019

 

2018



 

(unaudited)

 

(audited)

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,371 

 

$

5,557 

Restricted cash

 

 

825 

 

 

825 

Receivables, net

 

 

4,611 

 

 

3,084 

Inventories

 

 

100,080 

 

 

110,095 

Income tax receivable

 

 

3,854 

 

 

3,548 

Other current assets, net

 

 

7,042 

 

 

7,181 

Total Current Assets

 

 

124,783 

 

 

130,290 

Property, plant and equipment, net

 

 

137,151 

 

 

158,356 

Right of use asset

 

 

143,789 

 

 

 -

Deferred tax assets

 

 

5,385 

 

 

7,225 

Other assets

 

 

1,251 

 

 

1,759 

Total Assets

 

$

412,359 

 

$

297,630 



 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

19,855 

 

$

25,853 

Income tax payable

 

 

13 

 

 

179 

Current portion of lease liability

 

 

26,653 

 

 

 -

Other accrued liabilities

 

 

25,871 

 

 

24,484 

Total Current Liabilities

 

 

72,392 

 

 

50,516 

Long-term debt

 

 

63,000 

 

 

53,000 

Long-term lease liability, net

 

 

138,489 

 

 

 -

Financing lease obligation, net

 

 

317 

 

 

436 

Deferred rent

 

 

 -

 

 

43,579 

Other long-term liabilities

 

 

3,482 

 

 

3,752 

Total Liabilities

 

 

277,680 

 

 

151,283 



 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

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

 

 

 

 

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

 

 

 -

 

 

 -

Additional paid-in-capital

 

 

156,037 

 

 

172,255 

Accumulated deficit

 

 

(21,272)

 

 

(25,857)

Accumulated other comprehensive income (loss)

 

 

(91)

 

 

(56)

Total Stockholders' Equity

 

 

134,679 

 

 

146,347 

Total Liabilities and Stockholders' Equity

 

$

412,359 

 

$

297,630 



See accompanying Notes to Consolidated Financial Statements.



 

3


 

Table of Contents

 

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Income

(dollars in thousands, except per share data)

(unaudited)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2019

 

2018

 

2019

 

2018

Net sales

 

$

85,944 

 

$

89,259 

 

$

261,755 

 

$

273,307 

Cost of sales

 

 

26,775 

 

 

26,248 

 

 

79,384 

 

 

80,946 

Gross profit

 

 

59,169 

 

 

63,011 

 

 

182,371 

 

 

192,361 

Selling, general and administrative expenses

 

 

59,804 

 

 

59,131 

 

 

179,314 

 

 

174,928 

(Loss) income from operations

 

 

(635)

 

 

3,880 

 

 

3,057 

 

 

17,433 

Interest expense

 

 

(1,027)

 

 

(715)

 

 

(2,948)

 

 

(1,866)

Other income

 

 

 

 

40 

 

 

22 

 

 

112 

(Loss) income before income taxes

 

 

(1,657)

 

 

3,205 

 

 

131 

 

 

15,679 

Benefit from (provision for) income taxes

 

 

274 

 

 

(652)

 

 

(348)

 

 

(4,157)

Net (loss) income

 

$

(1,383)

 

$

2,553 

 

$

(217)

 

$

11,522 



 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03)

 

$

0.05 

 

$

(0.00)

 

$

0.22 

Diluted

 

$

(0.03)

 

$

0.05 

 

$

(0.00)

 

$

0.22 



 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

49,769,739 

 

 

51,920,830 

 

 

50,901,289 

 

 

51,896,678 

Diluted

 

 

49,769,739 

 

 

52,303,777 

 

 

50,901,289 

 

 

52,056,136 



 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.05 

 

$

0.05 

 

$

0.15 

 

$

0.15 



See accompanying Notes to Consolidated Financial Statements.

 

 

4


 

Table of Contents

 

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(unaudited)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2019

 

2018

 

2019

 

2018

Net (loss) income

 

$

(1,383)

 

$

2,553 

 

$

(217)

 

$

11,522 

Currency translation adjustment

 

 

(37)

 

 

(37)

 

 

(35)

 

 

(44)

Other comprehensive loss

 

 

(37)

 

 

(37)

 

 

(35)

 

 

(44)

Comprehensive (loss) income

 

$

(1,420)

 

$

2,516 

 

$

(252)

 

$

11,478 



See accompanying Notes to Consolidated Financial Statements.



 

5


 

Table of Contents

 

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)

(dollars in thousands, except share data)

(unaudited)









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 



 

Shares

 

Amount

 

Additional
paid-in
capital

 

Retained
earnings
(deficit)

 

Accumulated
other
comprehensive
income (loss)

 

Total

Balance at June 30, 2018

 

52,508,090 

 

$

 

$

176,124 

 

$

(27,331)

 

$

(8)

 

$

148,790 

Issuance of restricted shares

 

199,843 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Cancellation of restricted shares

 

(29,349)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Stock based compensation

 

 -

 

 

 -

 

 

735 

 

 

 -

 

 

 -

 

 

735 

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

 

 -

 

 

 -

 

 

(52)

 

 

 -

 

 

 -

 

 

(52)

Dividends paid

 

 -

 

 

 -

 

 

(2,600)

 

 

 -

 

 

 -

 

 

(2,600)

Foreign currency translation adjustments

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(37)

 

 

(37)

Net income

 

 -

 

 

 -

 

 

 -

 

 

2,553 

 

 

 -

 

 

2,553 

Balance at September 30, 2018

 

52,678,584 

 

$

 

$

174,207 

 

$

(24,777)

 

$

(45)

 

$

149,390 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

50,615,489 

 

$

 

$

157,961 

 

$

(19,889)

 

$

(54)

 

$

138,023 

Issuance of restricted shares

 

309,305 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Cancellation of restricted shares

 

(112,740)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Stock based compensation

 

 -

 

 

 -

 

 

660 

 

 

 -

 

 

 -

 

 

660 

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

 

 -

 

 

 -

 

 

(90)

 

 

 -

 

 

 -

 

 

(90)

Dividends paid

 

 -

 

 

 -

 

 

(2,494)

 

 

 -

 

 

 -

 

 

(2,494)

Foreign currency translation adjustments

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(37)

 

 

(37)

Net income

 

 -

 

 

 -

 

 

 -

 

 

(1,383)

 

 

 -

 

 

(1,383)

Balance at September 30, 2019

 

50,812,054 

 

$

 

$

156,037 

 

$

(21,272)

 

$

(91)

 

$

134,679 



See accompanying Notes to Consolidated Financial Statements.



 

6


 

Table of Contents

 

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)

(dollars in thousands, except share data)

(unaudited)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 



 

Shares

 

Amount

 

Additional
paid-in
capital

 

Retained
earnings
(deficit)

 

Accumulated
other
comprehensive
income (loss)

 

Total

Balance at December 31, 2017

 

52,156,850 

 

$

 

$

180,109 

 

$

(36,239)

 

$

(1)

 

$

143,874 

Adoption of revenue recognition standard

 

 -

 

 

 -

 

 

 -

 

 

(60)

 

 

 -

 

 

(60)

Balance at January 1, 2018

 

52,156,850 

 

$

 

$

180,109 

 

$

(36,299)

 

$

(1)

 

$

143,814 

Issuance of restricted shares

 

595,125 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Cancellation of restricted shares

 

(73,391)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Stock based compensation

 

 -

 

 

 -

 

 

1,950 

 

 

 -

 

 

 -

 

 

1,950 

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

 

 -

 

 

 -

 

 

(52)

 

 

 -

 

 

 -

 

 

(52)

Dividends paid

 

 -

 

 

 -

 

 

(7,800)

 

 

 -

 

 

 -

 

 

(7,800)

Foreign currency translation adjustments

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(44)

 

 

(44)

Net income

 

 -

 

 

 -

 

 

 -

 

 

11,522 

 

 

 -

 

 

11,522 

Balance at September 30, 2018

 

52,678,584 

 

$

 

$

174,207 

 

$

(24,777)

 

$

(45)

 

$

149,390 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

52,707,879 

 

$

 

$

172,255 

 

$

(25,857)

 

$

(56)

 

$

146,347 

Adoption of lease standard (see Note 1)

 

 -

 

 

 -

 

 

 -

 

 

4,802 

 

 

 -

 

 

4,802 

Balance at January 1, 2019

 

52,707,879 

 

$

 

$

172,255 

 

$

(21,055)

 

$

(56)

 

$

151,149 

Issuance of restricted shares

 

666,753 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Cancellation of restricted shares

 

(255,555)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Repurchase of common stock

 

(2,307,023)

 

 

 -

 

 

(10,455)

 

 

 -

 

 

 -

 

 

(10,455)

Stock based compensation

 

 -

 

 

 -

 

 

2,169 

 

 

 -

 

 

 -

 

 

2,169 

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

 

 -

 

 

 -

 

 

(226)

 

 

 -

 

 

 -

 

 

(226)

Dividends paid

 

 -

 

 

 -

 

 

(7,706)

 

 

 -

 

 

 -

 

 

(7,706)

Foreign currency translation adjustments

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(35)

 

 

(35)

Net income

 

 -

 

 

 -

 

 

 -

 

 

(217)

 

 

 -

 

 

(217)

Balance at September 30, 2019

 

50,812,054 

 

$

 

$

156,037 

 

$

(21,272)

 

$

(91)

 

$

134,679 



 

See accompanying Notes to Consolidated Financial Statements.

 

 

7


 

Table of Contents

 

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 (dollars in thousands)

(unaudited)



 



 

 

 

 

 

 



 

 

 

 

 

 



 

Nine Months Ended



 

September 30,



 

2019

 

2018

Cash Flows From Operating Activities

 

 

 

 

 

 

Net (loss) income

 

$

(217)

 

$

11,522 

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

 

 

 

 

 

 

Depreciation & amortization

 

 

24,508 

 

 

21,180 

Amortization of debt issuance costs

 

 

446 

 

 

607 

Loss on disposals of property, plant and equipment

 

 

90 

 

 

76 

Impairment charges on property, plant and equipment

 

 

 -

 

 

319 

Change in leases

 

 

(1,267)

 

 

2,345 

Stock based compensation

 

 

2,169 

 

 

1,950 

Deferred income taxes

 

 

190 

 

 

1,415 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Receivables

 

 

(1,527)

 

 

(1,342)

Inventories

 

 

10,015 

 

 

(21,051)

Prepaid expenses and other assets

 

 

47 

 

 

(2,374)

Accounts payable

 

 

(3,307)

 

 

(6,550)

Income tax receivable / payable

 

 

(362)

 

 

2,520 

Accrued expenses and other liabilities

 

 

2,827 

 

 

5,104 

Net cash provided by operating activities

 

 

33,612 

 

 

15,721 

Cash Flows From Investing Activities

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(22,839)

 

 

(22,893)

Proceeds from insurance

 

 

610 

 

 

13 

Net cash used in investing activities

 

 

(22,229)

 

 

(22,880)

Cash Flows From Financing Activities

 

 

 

 

 

 

Payments of long-term debt and financing lease obligations

 

 

(43,153)

 

 

(95,235)

Advances on line of credit

 

 

53,000 

 

 

114,095 

Dividends paid

 

 

(7,706)

 

 

(7,800)

Repurchases of common stock

 

 

(10,455)

 

 

 -

Employee taxes paid for shares withheld

 

 

(226)

 

 

(52)

Debt issuance costs

 

 

 -

 

 

(374)

Net cash (used in) provided by financing activities

 

 

(8,540)

 

 

10,634 

Effect of exchange rate changes on cash

 

 

(29)

 

 

(11)

Net change in cash

 

 

2,814 

 

 

3,464 

Cash, cash equivalents and restricted cash beginning of period

 

 

6,382 

 

 

7,476 

Cash, cash equivalents and restricted cash end of period

 

$

9,196 

 

$

10,940 



 

 

 

 

 

 

Cash and cash equivalents

 

$

8,371 

 

$

10,105 

Restricted cash

 

 

825 

 

 

835 

Cash, cash equivalents and restricted cash end of period

 

$

9,196 

 

$

10,940 



 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

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

 

$

1,320 

 

$

2,229 

Cash paid for interest

 

 

2,853 

 

 

1,846 

Cash paid for income taxes, net

 

 

471 

 

 

240 



 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

8


 

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

 

Note 1: Background



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



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



The accompanying Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for comprehensive financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature, including the elimination of all intercompany transactions. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019.



These statements should be read in conjunction with the Consolidated Financial Statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The accounting policies used in preparing these Consolidated Financial Statements are the same as those described in Note 1 to the Consolidated Financial Statements in such Form 10-K.



Recently Adopted Accounting Pronouncements



In February 2016, the Financial Accounting Standards Board (“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.  The Company 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. 



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 the Company’s 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.



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.  Its election of the hindsight practical expedient resulted in the shortening of lease terms for certain existing leases and the useful lives of corresponding leasehold improvements.  In its application of the hindsight practical expedient, the Company considered recent investments in leased properties and its overall real estate strategy, which resulted in the determination that most renewal options would not be 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

 

9


 

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

 

deferred tax assets and a corresponding adjustment to retained earnings that was recorded during the nine months ended September 30, 2019. The adoption of this standard did not have a material impact on net income or cash flows during the three and nine months ended September 30, 2019. See Note 8 for further details.



Accounting Pronouncements Not Yet Adopted



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



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





Note 2: Revenues



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



The following table presents revenues disaggregated by product category:





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



For the three months ended

 

For the nine months ended



September 30,

 

September 30,



2019

 

2018

 

2019

 

2018

Man-made tiles

47 

%

 

47 

%

 

47 

%

 

46 

%

Natural stone tiles

28 

 

 

28 

 

 

28 

 

 

28 

 

Setting and maintenance materials

13 

 

 

13 

 

 

13 

 

 

13 

 

Accessories

10 

 

 

10 

 

 

11 

 

 

11 

 

Delivery service

 

 

 

 

 

 

 

Total

100 

%

 

100 

%

 

100 

%

 

100 

%



The Company generates revenues by selling tile products, setting and maintenance materials, accessories, and delivery services to its customers through its store locations.  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

 

10


 

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

 

of a reporting period, revenue will be recognized based on the transaction price allocated to the goods delivered and services rendered. The customer deposit balance was $7.8 million and $7.4 million as of September 30, 2019 and December 31, 2018, respectively.  Revenues recognized during the nine months ended September 30, 2019 that were included in the customer deposit balance as of the beginning of the period were $7.1 million.



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



Customers may return purchased items for an exchange or refund.  The Company records a reserve for estimated product returns based on the historical returns trends and the current product sales performance.  Historically, the sales returns reserve was presented net of cost of sales in other current liabilities. The Company presents the sales returns reserve as an other current liability and the estimated value of the inventory that will be returned as an other current asset in the consolidated balance sheet.  The components of the sales returns reserve reflected in the consolidated balance sheet as of September 30, 2019 and December 31, 2018 are as follows:







 

 

 

 

 

 



 

(in thousands)



 

September 30,

 

December 31,



 

2019

 

2018

Other current liabilities

 

$

5,224 

 

$

5,154 

Other current assets

 

 

1,601 

 

 

1,498 

Sales returns reserve, net

 

$

3,623 

 

$

3,656 









Note 3: Inventories



Inventories are stated at the lower of cost (determined on the weighted-average cost method) or net realizable value. Inventories consist primarily of merchandise held for sale. Inventories were comprised of the following as of September 30, 2019 and December 31, 2018:





 

 

 

 

 

 



 

 

 

 

 

 



 

(in thousands)



 

September 30,

 

December 31,



 

2019

 

2018

Finished goods

 

$

96,094 

 

$

98,776 

Raw materials

 

 

2,300 

 

 

2,114 

Finished goods in transit

 

 

1,686 

 

 

9,205 

Total

 

$

100,080 

 

$

110,095 



The Company provides provisions for losses related to shrinkage and other amounts that are otherwise not expected to be fully recoverable. These provisions are calculated based on historical shrinkage, selling price, margin and current business trends. The provision for losses related to shrinkage and other amounts was $0.8 million and $0.3 million as of September 30, 2019 and December 31, 2018, respectively. 



Note 4: Income Taxes



The Company's effective tax rate on net income (loss) before income taxes for the three months ended September 30, 2019 and 2018 was 16.5% and 20.3%, respectively. The Company’s effective tax rate on net income (loss) before income taxes for the nine months ended September 30, 2019 and 2018 was 265.7% and 26.5%, respectively. For the three months ended September 30, 2019 and 2018, the Company recorded a benefit from income taxes of $0.3 million and a provision for income taxes of $0.7 million, respectively. For the nine months ended September 30, 2019 and 2018, the Company recorded a provision for income taxes of $0.3 million and $4.2 million, respectively. The decrease in the provision for income taxes is due to lower pretax earnings.



The Company records interest and penalties relating to uncertain tax positions in income tax expense. As of September 30, 2019 and 2018, the Company has not recognized any liabilities for uncertain tax positions, nor have interest and penalties related to uncertain tax positions been accrued.

 

 

11


 

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

 

Note 5: Earnings Per Share



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



Basic and diluted earnings per share were calculated as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



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



 

For the three months ended

 

For the nine months ended



 

September 30,

 

September 30,



 

2019

 

2018

 

2019

 

2018

Net (loss) income

 

$

(1,383)

 

$

2,553 

 

$

(217)

 

$

11,522 

Weighted average shares outstanding - basic

 

 

49,769,739 

 

 

51,920,830 

 

 

50,901,289 

 

 

51,896,678 

Effect of dilutive securities attributable to stock based awards

 

 

 -

 

 

382,947 

 

 

 -

 

 

159,458 

Weighted average shares outstanding - diluted

 

 

49,769,739 

 

 

52,303,777 

 

 

50,901,289 

 

 

52,056,136 

(Loss) income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03)

 

$

0.05 

 

$

(0.00)

 

$

0.22 

Diluted

 

$

(0.03)

 

$

0.05 

 

$

(0.00)

 

$

0.22 

Anti-dilutive securities excluded from earnings per share calculation

 

 

5,047,633 

 

 

1,730,948 

 

 

2,614,058 

 

 

2,116,198 



















Note 6: Other Accrued Liabilities



Other accrued liabilities consisted of the following:







 

 

 

 

 

 



 

 

 

 

 

 



 

(in thousands)



 

September 30,

 

December 31,



 

2019

 

2018

Customer deposits

 

$

7,810 

 

$

7,383 

Sales returns reserve

 

 

5,224 

 

 

5,154 

Payroll and sales taxes

 

 

4,213 

 

 

2,929 

Accrued wages and salaries

 

 

3,336 

 

 

3,689 

Other current liabilities

 

 

5,288 

 

 

5,329 

Total other accrued liabilities

 

$

25,871 

 

$

24,484 

 

Note 7: Long-term Debt



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



The Credit Agreement is secured by virtually all of the assets of the Company, including but not limited to, inventory, receivables, equipment and real property. The Credit Agreement contains customary events of default, conditions to borrowings, and restrictive covenants, including restrictions on the Company’s ability to dispose of assets, make acquisitions, incur additional debt, incur liens, or make investments. The Credit Agreement also includes financial and other covenants, including covenants to maintain certain fixed charge coverage ratios and consolidated total rent adjusted leverage ratios.  The Company was in compliance with the covenants as of September 30, 2019.  



 

12


 

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

 

Note 8: 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)

Classification

 

 

September 30, 2019

Assets

 

 

 

 

Operating lease assets

Right of use asset

 

$

143,789 

Financing lease assets

Property, plant and equipment, net of accumulated depreciation

 

 

126 

Total leased assets

 

 

$

143,915 



 

 

 

 

Liabilities

 

 

 

 

Current

 

 

 

 

Operating

Current portion of lease liability

 

$

26,653 

Financing

Other accrued liabilities

 

 

156 

Noncurrent

 

 

 

 

Operating

Long-term lease liability, net

 

 

138,489 

Financing

Other long-term liabilities

 

 

317 

Total lease liabilities

 

 

$

165,615 







 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

Three Months Ended

 

 

Nine Months Ended

Lease cost (in thousands)

Classification

 

September 30, 2019

Operating lease cost

SG&A expenses

 

$

8,258 

 

$

24,268 

Financing lease cost

 

 

 

 

 

 

 

Amortization of leased assets

Depreciation and amortization

 

 

13 

 

 

37 

Interest on lease liabilities

Interest expense

 

 

19 

 

 

59 

Variable lease cost(1)

SG&A expenses

 

 

3,470 

 

 

10,177 

Short term lease cost

SG&A expenses

 

 

197 

 

 

679 

Net lease cost

 

 

$

11,957 

 

$

35,220 

(1) Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for the Company’s leased facilities.









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Maturity of Lease Liabilities (in thousands)

 

Operating Leases

 

Financing Leases

 

Total

2019

 

$

8,996 

 

$

54 

 

$

9,050 

2020

 

 

35,907 

 

 

216 

 

 

36,123 

2021

 

 

34,819 

 

 

215 

 

 

35,034 

2022

 

 

31,895 

 

 

90 

 

 

31,985 

2023

 

 

27,084 

 

 

 -

 

 

27,084 

Thereafter

 

 

61,354 

 

 

 -

 

 

61,354 

Total lease payments

 

 

200,055 

 

 

575 

 

 

200,630 

Less: interest

 

 

(34,913)

 

 

(102)

 

 

(35,015)

Present value of lease liabilities

 

$

165,142 

 

$

473 

 

$

165,615 







 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended

Other Information (in thousands)

 

September 30, 2019

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

8,798 

 

$

26,109 

Operating cash flows from financing leases

 

$

15 

 

$

50 

 

13


 

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

 

Financing cash flows from financing leases

 

$

(51)

 

$

(153)

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

 

$

 -

 

$

5,993 











 

 

 

 



 

 

 

 

Lease Term and Discount Rate

 

 

September 30, 2019

 

Weighted-average remaining term (years)

 

 

 

 

Operating leases

 

 

6.3 

 

Financing leases

 

 

2.7 

 

Weighted-average discount rate

 

 

 

 

Operating leases

 

 

6.22 

%