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TILE SHOP HOLDINGS, INC.
DE
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MN
55441
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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, 2021, the Company had 143 stores in 31 states and the District of Columbia, with an average size of approximately 20,000 square feet. The Company has distribution centers located in Michigan, New Jersey, Oklahoma, Virginia and Wisconsin. The Company also has a sourcing office 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, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. These statements should be read in conjunction with the Consolidated Financial Statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 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. Impact of COVID-19 Pandemic In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. COVID-19 has negatively impacted public health and the global economy, disrupted global supply chains, and created volatility in financial markets. The continuing implications of COVID-19 on the Company remain uncertain and will depend on certain future developments, including the duration, scope and severity of the pandemic and the effects of new variants of COVID-19, some of which may be more virulent or transmissible than the initial strain; its impact on the Company’s employees, customers and suppliers; the range and timing of government mandated restrictions and other measures, including the potential impact of the federal vaccination mandate on our labor supply and future results of operations; and the success of the deployment and widespread adoption of approved COVID-19 vaccines and their effectiveness against new variants of COVID-19. This uncertainty could have a material impact on the accounting estimates and assumptions utilized to prepare the Company’s consolidated financial statements in future reporting periods, which could result in a material adverse impact on the Company’s financial position, results of operations and cash flows. Recently Adopted Accounting Pronouncements In the first quarter of fiscal 2021, the Company adopted new accounting requirements related to the measurement of credit losses on financial instruments, including trade receivables. The new standard and subsequent amendments replaced the incurred loss impairment model with a forward-looking expected credit loss model, which will generally result in earlier recognition of credit losses. The Company’s allowance for doubtful accounts represents its estimate of expected credit losses related to its trade receivables. To estimate the allowance for doubtful accounts, the Company leverages information on historical losses, current conditions, and reasonable and supportable forecasts of future conditions. Account balances are written off against the allowance when the Company deems the amount is uncollectible. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. In the first quarter of fiscal 2021, the Company adopted a new accounting standard that simplifies accounting for income taxes. Specifically, the new standard simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. Accounting Pronouncements Not Yet Adopted In March 2020, the Financial Accounting Standards Board (FASB) issued guidance providing optional expedients and exceptions to account for the effects of reference rate reform to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. The optional guidance is effective as of the beginning of the reporting period when the election is made through December 31, 2022. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
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, 2021, the Company had 143 stores in 31 states and the District of Columbia, with an average size of approximately 20,000 square feet. The Company has distribution centers located in Michigan, New Jersey, Oklahoma, Virginia and Wisconsin. The Company also has a sourcing office located in China.
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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, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. These statements should be read in conjunction with the Consolidated Financial Statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 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.
--12-31
Recently Adopted Accounting Pronouncements In the first quarter of fiscal 2021, the Company adopted new accounting requirements related to the measurement of credit losses on financial instruments, including trade receivables. The new standard and subsequent amendments replaced the incurred loss impairment model with a forward-looking expected credit loss model, which will generally result in earlier recognition of credit losses. The Company’s allowance for doubtful accounts represents its estimate of expected credit losses related to its trade receivables. To estimate the allowance for doubtful accounts, the Company leverages information on historical losses, current conditions, and reasonable and supportable forecasts of future conditions. Account balances are written off against the allowance when the Company deems the amount is uncollectible. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. In the first quarter of fiscal 2021, the Company adopted a new accounting standard that simplifies accounting for income taxes. Specifically, the new standard simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. Accounting Pronouncements Not Yet Adopted In March 2020, the Financial Accounting Standards Board (FASB) issued guidance providing optional expedients and exceptions to account for the effects of reference rate reform to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. The optional guidance is effective as of the beginning of the reporting period when the election is made through December 31, 2022. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
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, 2021 2020 2021 2020Man-made tiles 49% 46% 47% 46%Natural stone tiles 27 29 28 29 Setting and maintenance materials 14 14 14 14 Accessories 7 9 8 9 Delivery service 3 2 3 2 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 and online. 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 $16.2 million and $12.2 million as of September 30, 2021 and December 31, 2020, respectively. Revenues recognized during the nine months ended September 30, 2021 that were included in the customer deposit balance as of the beginning of the period were $12.0 million. The Company extends financing to qualified professional customers who apply for credit. Customers who qualify for an account receive 30-day payment terms. The accounts receivable balance was $3.3 million and $3.0 million at September 30, 2021 and December 31, 2020, 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 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. The Company presents the sales returns reserve as an other 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 September 30, 2021 and December 31, 2020 were as follows: (in thousands) September 30, December 31, 2021 2020Other accrued liabilities $ 5,401 $ 4,957Other current assets 1,692 1,516Sales returns reserve, net $ 3,709 $ 3,441
For the three months ended For the nine months ended September 30, September 30, 2021 2020 2021 2020Man-made tiles 49% 46% 47% 46%Natural stone tiles 27 29 28 29 Setting and maintenance materials 14 14 14 14 Accessories 7 9 8 9 Delivery service 3 2 3 2 Total 100% 100% 100% 100%
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Note 3: Inventories Inventories are stated at the lower of cost (determined using the moving 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, 2021 and December 31, 2020: (in thousands) September 30, December 31, 2021 2020Finished goods $ 75,267 $ 72,619Raw materials 1,430 1,677Total $ 76,697 $ 74,296 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 $0.6 million on both September 30, 2021 and December 31, 2020.
(in thousands) September 30, December 31, 2021 2020Finished goods $ 75,267 $ 72,619Raw materials 1,430 1,677Total $ 76,697 $ 74,296
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Note 4: Income Taxes The Company's effective tax rate on net income before taxes for the three months ended September 30, 2021 and 2020 was 26.4% and 28.1%, respectively. The Company’s effective tax rate for the nine months ended September 30, 2021 and 2020 was 24.5% and (126.6)%, respectively. The Company’s effective tax rate during the three and nine months ended September 30, 2020 included adjustments resulting from the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), which gave the Company the ability to carry back federal net operating losses to years with a federal statutory rate of 35%. The Company’s effective tax rate during the nine months ended September 30, 2021 included a $0.4 million tax benefit associated with restricted stock award vestings. The Company records interest and penalties relating to uncertain tax positions in income tax expense. As of both September 30, 2021 and 2020, the Company had not recognized any liabilities for uncertain tax positions, nor had interest and penalties related to uncertain tax positions been accrued.
0.264
0.281
0.245
-1.266
0.35
400000
0
0
0
0
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: (dollars in thousands, except per share data) For the three months ended For the nine months ended September 30, September 30, 2021 2020 2021 2020Net income $ 2,175 $ 1,914 $ 12,966 $ 4,656Weighted average shares outstanding - basic 50,545,761 50,009,000 50,305,455 49,926,083Effect of dilutive securities attributable to stock based awards 838,273 678,558 764,398 395,063Weighted average shares outstanding - diluted 51,384,034 50,687,558 51,069,853 50,321,146Income per common share: Basic$ 0.04 $ 0.04 $ 0.26 $ 0.09Diluted$ 0.04 $ 0.04 $ 0.25 $ 0.09Anti-dilutive securities excluded from earnings per share calculation 772,580 1,640,389 990,461 1,733,475
(dollars in thousands, except per share data) For the three months ended For the nine months ended September 30, September 30, 2021 2020 2021 2020Net income $ 2,175 $ 1,914 $ 12,966 $ 4,656Weighted average shares outstanding - basic 50,545,761 50,009,000 50,305,455 49,926,083Effect of dilutive securities attributable to stock based awards 838,273 678,558 764,398 395,063Weighted average shares outstanding - diluted 51,384,034 50,687,558 51,069,853 50,321,146Income per common share: Basic$ 0.04 $ 0.04 $ 0.26 $ 0.09Diluted$ 0.04 $ 0.04 $ 0.25 $ 0.09Anti-dilutive securities excluded from earnings per share calculation 772,580 1,640,389 990,461 1,733,475
2175000
1914000
12966000
4656000
50545761
50009000
50305455
49926083
838273
678558
764398
395063
51384034
50687558
51069853
50321146
0.04
0.04
0.26
0.09
0.04
0.04
0.25
0.09
772580
1640389
990461
1733475
Note 6: Other Accrued Liabilities Other accrued liabilities consisted of the following: (in thousands) September 30, December 31, 2021 2020Customer deposits $ 16,157 $ 12,225Sales returns reserve 5,401 4,957Accrued wages and salaries 8,334 6,561Payroll and sales taxes 5,484 4,958Other current liabilities 5,832 5,405Total other accrued liabilities $ 41,208 $ 34,106
(in thousands) September 30, December 31, 2021 2020Customer deposits $ 16,157 $ 12,225Sales returns reserve 5,401 4,957Accrued wages and salaries 8,334 6,561Payroll and sales taxes 5,484 4,958Other current liabilities 5,832 5,405Total other accrued liabilities $ 41,208 $ 34,106
16157000
12225000
5401000
4957000
8334000
6561000
5484000
4958000
5832000
5405000
41208000
34106000
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 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 the Company’s rent adjusted leverage ratio. At September 30, 2021, the base interest rate was 3.75% and the LIBOR-based interest rate was 1.59%. The Company had no borrowings outstanding on its revolving line of credit as of September 30, 2021. In addition, the Company has standby letters of credit outstanding related to its workers’ compensation and medical insurance policies. Standby letters of credit totaled $2.4 million as of both September 30, 2021 and December 31, 2020. There was $97.6 million available for borrowing on the revolving line of credit as of September 30, 2021, 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, 2021.
100000000.0
2023-09-18
0.0150
0.0225
0.0050
0.0100
0.0050
0.0125
0.0375
0.0159
0
2400000
2400000
97600000
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. Leasehold improvements are amortized using the straight-line method over the shorter of the original lease term, the renewal term if the lease renewal is reasonably certain or the useful life of the improvement. Following the onset of COVID-19 in 2020, the Company worked with its landlords to defer rent payments for many of its retail locations throughout the second quarter of 2020. As of December 31, 2020, the deferred rent balance was $2.1 million. During the nine months ended September 30, 2021, the Company repaid $1.9 million of the deferred rent balance to its landlords. As of September 30, 2021, the deferred rent balance was $0.2 million. The deferred rent balance is recorded as a liability within the current portion of lease liability balance. Leases (in thousands)Classification September 30, 2021 December 31, 2020Assets Operating lease assetsRight of use asset $ 125,258 $ 132,374Total leased assets $ 125,258 $ 132,374 Liabilities Current OperatingCurrent portion of lease liability $ 27,315 $ 27,223Noncurrent OperatingLong-term lease liability, net 114,261 122,678Total lease liabilities $ 141,576 $ 149,901 Three Months Ended Lease cost (in thousands)Classification September 30, 2021 September 30, 2020Operating lease costSG&A expenses $ 8,521 $ 8,285Financing lease cost Amortization of leased assetsSG&A expenses - 12Interest on lease liabilitiesInterest expense - 13Variable lease cost(1)SG&A expenses 3,740 3,494Short term lease costSG&A expenses 125 145Net lease cost $ 12,386 $ 11,949 Nine Months Ended Lease cost (in thousands)Classification September 30, 2021 September 30, 2020Operating lease costSG&A expenses $ 25,532 $ 24,758Financing lease cost Amortization of leased assetsSG&A expenses - 37Interest on lease liabilitiesInterest expense - 43Variable lease cost(1)SG&A expenses 10,748 10,399Short term lease costSG&A expenses 375 531Net lease cost $ 36,655 $ 35,768 (1) Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for the Company’s leased facilities. Nine Months Ended Other Information (in thousands) September 30, 2021 September 30, 2020Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ (27,675) $ (26,808)Operating cash flows from financing leases $ - $ 43Financing cash flows from financing leases $ - $ (162)Lease right-of-use assets obtained or modified in exchange for lease obligations $ - $ 14,010
P15Y
2100000
1900000
200000
Leases (in thousands)Classification September 30, 2021 December 31, 2020Assets Operating lease assetsRight of use asset $ 125,258 $ 132,374Total leased assets $ 125,258 $ 132,374 Liabilities Current OperatingCurrent portion of lease liability $ 27,315 $ 27,223Noncurrent OperatingLong-term lease liability, net 114,261 122,678Total lease liabilities $ 141,576 $ 149,901
125258000
132374000
125258000
132374000
27315000
27223000
114261000
122678000
141576000
149901000
Three Months Ended Lease cost (in thousands)Classification September 30, 2021 September 30, 2020Operating lease costSG&A expenses $ 8,521 $ 8,285Financing lease cost Amortization of leased assetsSG&A expenses - 12Interest on lease liabilitiesInterest expense - 13Variable lease cost(1)SG&A expenses 3,740 3,494Short term lease costSG&A expenses 125 145Net lease cost $ 12,386 $ 11,949 Nine Months Ended Lease cost (in thousands)Classification September 30, 2021 September 30, 2020Operating lease costSG&A expenses $ 25,532 $ 24,758Financing lease cost Amortization of leased assetsSG&A expenses - 37Interest on lease liabilitiesInterest expense - 43Variable lease cost(1)SG&A expenses 10,748 10,399Short term lease costSG&A expenses 375 531Net lease cost $ 36,655 $ 35,768 (1) Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for the Company’s leased facilities.
8521000
8285000
12000
13000
3740000
3494000
125000
145000
12386000
11949000
25532000
24758000
37000
43000
10748000
10399000
375000
531000
36655000
35768000
Nine Months Ended Other Information (in thousands) September 30, 2021 September 30, 2020Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ (27,675) $ (26,808)Operating cash flows from financing leases $ - $ 43Financing cash flows from financing leases $ - $ (162)Lease right-of-use assets obtained or modified in exchange for lease obligations $ - $ 14,010
27675000
26808000
43000
162000
14010000
Note 9: Fair Value of Financial Instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, the Company uses a three-tier valuation hierarchy based upon observable and non-observable inputs: 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; andInputs that are derived principally from or corroborated by other observable market data. Level 3 – Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. The following table sets forth by level within the fair value hierarchy the Company’s financial assets that were accounted for at fair value on a recurring basis at September 30, 2021 and December 31, 2020 according to the valuation techniques the Company uses to determine their fair values. There have been no transfers of assets among the fair value hierarchies presented. Pricing Fair Value at Category September 30, 2021 December 31, 2020Assets (in thousands)Cash and cash equivalents Level 1 $ 44,264 $ 9,617Restricted cash Level 1 655 655 The following methods and assumptions were used to estimate the fair value of each class of financial instrument. There have been no changes in the valuation techniques used by the Company to value the Company’s financial instruments. Cash and cash equivalents: Consists of cash on hand and bank deposits. The value was measured using quoted market prices in active markets. The carrying amount approximates fair value. Restricted cash: Consists of cash and cash equivalents held in bank deposit accounts restricted as to withdrawal or that are under the terms of use for current operations. The value was measured using quoted market prices in active markets. The carrying amount approximates fair value. Fair value measurements also apply to certain non-financial assets and liabilities measured at fair value on a nonrecurring basis. Property, plant and equipment and right of use assets are measured at fair value when an impairment is recognized and the related assets are written down to fair value. During the three and nine months ended September 30, 2021, the Company recognized a $0.7 million charge in selling, general and administrative expenses to write-down property, plant and equipment and right of use assets to their estimated fair values. During the nine months ended September 30, 2020, the Company recognized a $2.2 million charge in selling, general and administrative expenses to write-down property, plant, and equipment and right of use assets to their estimated fair values. The Company measured the fair value of these assets based on projected cash flows, an estimated risk-adjusted rate of return, and market rental rates for comparable properties. Projected cash flows are considered Level 3 inputs. Market rental rates for comparable properties are considered Level 2 inputs. No impairment charges were recorded during the three months ended September 30, 2020. During the nine months ended September 30, 2021, the Company recorded a $1.1 million adjustment to reflect an increase in the fair value to restore leased property to its original condition at the end of the lease. The change in the estimated value of the Company’s asset retirement obligation resulted in a $1.1 million increase in property, plant and equipment, a $0.1 million increase in other current liabilities, and a $1.0 million increase in other long-term liabilities. The Company measured the fair value of its asset retirement obligation based on the estimated amounts and timing of settlements, an estimated risk adjusted rate of return, and expected inflation rates, which are considered Level 2 inputs.
0
Pricing Fair Value at Category September 30, 2021 December 31, 2020Assets (in thousands)Cash and cash equivalents Level 1 $ 44,264 $ 9,617Restricted cash Level 1 655 655
44264000
9617000
655000
655000
700000
700000
2200000
0
1100000
1100000
100000
1000000.0
Note 10: Equity Incentive Plans At the Annual Meeting of Stockholders held on July 20, 2021 (the “Annual Meeting”), the Company’s stockholders approved the 2021 Omnibus Equity Compensation Plan (the “2021 Plan”). The 2021 Plan replaced 2012 Omnibus Award Plan (the “Prior Plan”). No new awards will be granted under the Prior Plan after the date of the Annual Meeting. However, the Company granted equity awards under the Prior Plan to the Company’s non-employee directors on the date of the Annual Meeting, and all awards granted under the Prior Plan that were outstanding on the date of stockholder approval of the 2021 Plan will remain outstanding in accordance with their terms. The maximum number of shares that may be delivered with respect to awards under the 2021 Plan is 3,500,000 shares, subject to adjustment in certain circumstances. Shares tendered or withheld to pay the exercise price of a stock option or to cover tax withholding will not be added back to the number of shares available under the 2021 Plan. To the extent that any award under the 2021 Plan, or any award granted under the Prior Plan prior to stockholder approval of the 2021 Plan, is forfeited, canceled, surrendered or otherwise terminated without the issuance of shares or an award is settled only in cash, the shares subject to such awards granted but not delivered will be added to the number of shares available for awards under the 2021 Plan. Stock options: The Company measures and recognizes compensation expense for all stock based awards at fair value. The financial statements for the three and nine months ended September 30, 2021 and 2020 include compensation expense for the portion of outstanding awards that vested during those periods. The Company recognizes stock based compensation expenses on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Total stock based compensation expense related to stock options was $0.1 million for both the three months ended September 30, 2021 and 2020. Total stock based compensation expense related to stock options was $0.3 million for both the nine months ended September 30, 2021 and 2020. Stock based compensation expense pertaining to stock options is included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations. As of September 30, 2021, the Company had outstanding stock options to purchase 992,695 shares of common stock at a weighted average exercise price of $10.91. Restricted stock: The Company awards restricted common shares to selected employees and to non-employee directors. Recipients are not required to provide any consideration upon vesting of the award. Restricted stock awards are subject to certain restrictions on transfer, and all or part of the shares awarded may be subject to forfeiture upon the occurrence of certain events, including employment termination. Certain awards are also subject to forfeiture if the Company fails to attain certain performance targets. The restricted stock is valued at its grant date fair value and expensed over the requisite service period or the vesting term of the awards. The Company adjusts the cumulative expense recognized on awards with performance conditions based on the probability of achieving the performance condition. Total stock based compensation expense related to restricted stock was $0.5 million for both the three months ended September 30, 2021 and 2020. Total stock based compensation expense related to restricted stock was $1.6 million and $1.3 million for the nine months ended September 30, 2021 and 2020, respectively. Stock based compensation expense pertaining to restricted stock awards is included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations. As of September 30, 2021, the Company had 1,355,707 outstanding restricted common shares.
3500000
100000
100000
300000
300000
992695
10.91
500000
500000
1600000
1300000
1355707
Note 11: 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 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 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 constitutes 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’s contributions of $3.2 million, net of syndication fees, were included in cash, restricted cash, other accrued liabilities and other long-term liabilities in the consolidated balance sheet. The Company incurred $1.3 million of syndication fees in connection with this transaction, which were classified as other current assets and other non-current assets in the consolidated balance sheet. The Company is recognizing the benefit of this net $1.9 million contribution over the seven-year compliance period as it is being earned through the on-going compliance with the conditions of the NMTC program. As of September 30, 2021, the balance of the contribution liability for this arrangement was $1.0 million, of which $0.5 million was classified as other accrued liabilities on the Consolidated Balance Sheet and $0.5 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 September 30, 2021, the remaining balance in the Investment Fund available for reimbursement to the Company was $0.7 million.
9200000
6700000
0.0137
3200000
P7Y
3200000
1300000
1900000
1000000.0
500000
500000
700000
Note 12: Related Party Transactions On July 9, 2018, Fumitake Nishi, a former Company employee and the brother-in-law of Robert A. Rucker, the Company’s former Interim Chief Executive Officer and President, former member of the Company’s Board of Directors, and former holder of more than 5% of the Company’s common stock as of September 30, 2021, informed the Company he had reacquired a majority of the equity of one of its key vendors, Nanyang Helin Stone Co. Ltd (“Nanyang”). Mr. Nishi also has an ownership interest in Tilestyling Co. Ltd (“Tile Style”), a vendor from which the Company started acquiring product in 2020. Nanyang and Tile Style supply the Company with natural stone products, including hand-crafted mosaics, listellos and other accessories. The Company paid $7.6 million to Nanyang in connection with purchases made during the year ended December 31, 2020. During the three and nine months ended September 30, 2021, the Company purchased $2.9 million and $6.2 million of products from Nanyang, respectively. As of September 30, 2021, there were no accounts payable due to Nanyang. The Company paid $0.7 million to Tile Style in connection with purchases made during the year ended December 31, 2020. During the three and nine months ended September 30, 2021, the Company purchased $1.0 million and $2.1 million of products from Tile Style, respectively. As of September 30, 2021, the accounts payable due to Tile Style was $0.1 million. 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 these relationships and determined that it would be in the Company’s best interests to continue purchasing products from Nanyang and to begin purchasing products from Tile Style. The Company believes Nanyang and Tile Style each provide 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 will continue to review future purchases from Nanyang and Tile Style and compare the pricing for products purchased from each of Nanyang and Tile Style to the pricing of same or similar products purchased from unrelated vendors.
0.05
7600000
2900000
6200000
0
700000
1000000.0
2100000
100000
Note 13: Subsequent Event On November 4, 2021, the Company announced that the Board of Directors had declared a $0.65 special dividend to stockholders of record as of the close of business on November 19, 2021. The dividend will be paid on December 3, 2021.
2021-11-04
0.65
2021-11-19
2021-12-03