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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

_____________________________

FORM 10-Q

_____________________________

(Mark One)

x

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

For the quarterly period ended June 30, 2022

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 or organization)

(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

TTSH

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. x 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). x 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

x

Non-accelerated filer

¨

Smaller reporting company

x

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    x No

As of August 1, 2022, there were 52,257,157 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

3

Consolidated Balance Sheets

3

Consolidated Statements of Operations

4

Consolidated Statements of Comprehensive Income

5

Consolidated Statements of Stockholders’ Equity

6

Consolidated Statements of Cash Flows

8

Notes to Consolidated Financial Statements

9

Item 2.

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

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

22

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

22

Item 1A.

Risk Factors

22

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3.

Defaults Upon Senior Securities

23

Item 4.

Mine Safety Disclosures

23

Item 5.

Other Information

23

Item 6.

Exhibits

25

Signatures

26

 

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 per share data)

June 30,

December 31,

2022

2021

(unaudited)

(audited)

Assets

Current assets:

Cash and cash equivalents

$

10,506

$

9,358

Restricted cash

655

655

Receivables, net

4,184

3,202

Inventories

110,039

97,175

Income tax receivable

8,548

6,923

Other current assets, net

8,090

9,769

Total Current Assets

142,022

127,082

Property, plant and equipment, net

76,621

82,285

Right of use asset

116,961

123,101

Deferred tax assets

6,435

6,953

Other assets

3,232

1,337

Total Assets

$

345,271

$

340,758

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

30,132

$

30,884

Income tax payable

282

390

Current portion of lease liability

28,126

28,190

Other accrued liabilities

41,236

38,249

Total Current Liabilities

99,776

97,713

Long-term debt

5,000

5,000

Long-term lease liability, net

102,656

110,261

Other long-term liabilities

4,851

5,560

Total Liabilities

212,283

218,534

Stockholders’ Equity:

Common stock, par value $0.0001; authorized: 100,000,000 shares; issued and outstanding: 52,270,922 and 51,963,377 shares, respectively

5

5

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

-

-

Additional paid-in capital

127,298

126,920

Retained earnings (accumulated deficit)

5,714

(4,713)

Accumulated other comprehensive (loss) income

(29)

12

Total Stockholders' Equity

132,988

122,224

Total Liabilities and Stockholders' Equity

$

345,271

$

340,758

See accompanying Notes to Consolidated Financial Statements.

3


Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

(dollars in thousands, except per share data)

(unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

2022

2021

2022

2021

Net sales

$

107,604

$

96,193

$

210,075

$

188,277

Cost of sales

36,586

29,768

72,212

57,666

Gross profit

71,018

66,425

137,863

130,611

Selling, general and administrative expenses

61,240

58,811

123,349

116,089

Income from operations

9,778

7,614

14,514

14,522

Interest expense

(201)

(145)

(467)

(313)

Income before income taxes

9,577

7,469

14,047

14,209

Provision for income taxes

(2,663)

(1,975)

(3,620)

(3,418)

Net income

$

6,914

$

5,494

$

10,427

$

10,791

Income per common share:

Basic

$

0.14

$

0.11

$

0.21

$

0.22

Diluted

$

0.13

$

0.11

$

0.20

$

0.21

Weighted average shares outstanding:

Basic

50,890,063

50,259,945

50,802,423

50,183,310

Diluted

51,253,543

51,333,949

51,214,607

51,183,259

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

Six Months Ended

June 30,

June 30,

2022

2021

2022

2021

Net income

$

6,914

$

5,494

$

10,427

$

10,791

Currency translation adjustment

(43)

4

(41)

12

Other comprehensive (loss) income

(43)

4

(41)

12

Comprehensive income

$

6,871

$

5,498

$

10,386

$

10,803

See accompanying Notes to Consolidated Financial Statements.


5


Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(dollars in thousands)

(unaudited)

Common stock

Shares

Amount

Additional
paid-in
capital

Accumulated
deficit

Accumulated
other
comprehensive
income (loss)

Total

Balance at March 31, 2021

51,932,704

$

5

$

158,545

$

(14,190)

$

(4)

$

144,356

Cancellation of restricted shares

(5,345)

-

-

-

-

-

Stock based compensation

-

-

706

-

-

706

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

(14,670)

-

(102)

-

-

(102)

Foreign currency translation adjustments

-

-

-

-

4

4

Net income

-

-

-

5,494

-

5,494

Balance at June 30, 2021

51,912,689

$

5

$

159,149

$

(8,696)

$

-

$

150,458

Balance at March 31, 2022

52,112,567

$

5

$

126,805

$

(1,200)

$

14

$

125,624

Issuance of restricted shares

172,429

-

-

-

-

-

Cancellation of restricted shares

(2,918)

-

-

-

-

-

Stock based compensation

-

-

562

-

-

562

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

(11,156)

-

(69)

-

-

(69)

Foreign currency translation adjustments

-

-

-

-

(43)

(43)

Net income

-

-

-

6,914

-

6,914

Balance at June 30, 2022

52,270,922

$

5

$

127,298

$

5,714

$

(29)

$

132,988

See accompanying Notes to Consolidated Financial Statements


6


Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(dollars in thousands)

(unaudited)

 

Common stock

Shares

Amount

Additional
paid-in
capital

Accumulated
deficit

Accumulated
other
comprehensive
income (loss)

Total

Balance at December 31, 2020

51,701,080

$

5

$

158,556

$

(19,487)

$

(12)

$

139,062

Issuance of restricted shares

322,024

-

-

-

-

-

Cancellation of restricted shares

(7,055)

-

-

-

-

-

Stock based compensation

-

-

1,299

-

-

1,299

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

(103,360)

-

(706)

-

-

(706)

Foreign currency translation adjustments

-

-

-

-

12

12

Net income

-

-

-

10,791

-

10,791

Balance at June 30, 2021

51,912,689

$

5

$

159,149

$

(8,696)

$

-

$

150,458

Balance at December 31, 2021

51,963,377

$

5

$

126,920

$

(4,713)

$

12

$

122,224

Issuance of restricted shares

592,396

-

-

-

-

-

Cancellation of restricted shares

(180,746)

-

-

-

-

-

Stock based compensation

-

-

1,054

-

-

1,054

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

(104,105)

-

(676)

-

-

(676)

Foreign currency translation adjustments

-

-

-

-

(41)

(41)

Net income

-

-

-

10,427

-

10,427

Balance at June 30, 2022

52,270,922

$

5

$

127,298

$

5,714

$

(29)

$

132,988

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)

Six Months Ended

June 30,

2022

2021

Cash Flows From Operating Activities

Net income

$

10,427

$

10,791

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

Depreciation and amortization

12,854

14,259

Amortization of debt issuance costs

157

151

Loss on disposals of property, plant and equipment

-

14

Non-cash lease expense

13,016

12,393

Stock based compensation

1,054

1,299

Deferred income taxes

518

(174)

Changes in operating assets and liabilities:

Receivables

(982)

(297)

Inventories

(12,864)

5,363

Other current assets, net

(378)

1,870

Accounts payable

(806)

1,010

Income tax receivable / payable

(1,733)

(760)

Accrued expenses and other liabilities

(12,040)

(3,934)

Net cash provided by operating activities

9,223

41,985

Cash Flows From Investing Activities

Purchases of property, plant and equipment

(7,361)

(6,157)

Net cash used in investing activities

(7,361)

(6,157)

Cash Flows From Financing Activities

Payments of long-term debt and financing lease obligations

(10,000)

-

Advances on line of credit

10,000

-

Employee taxes paid for shares withheld

(676)

(706)

Net cash used in financing activities

(676)

(706)

Effect of exchange rate changes on cash

(38)

11

Net change in cash, cash equivalents and restricted cash

1,148

35,133

Cash, cash equivalents and restricted cash beginning of period

10,013

10,272

Cash, cash equivalents and restricted cash end of period

$

11,161

$

45,405

Cash and cash equivalents

$

10,506

$

44,750

Restricted cash

655

655

Cash, cash equivalents and restricted cash end of period

$

11,161

$

45,405

Supplemental disclosure of cash flow information

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

$

90

$

391

Cash paid for interest

538

361

Cash paid for income taxes, net

4,836

4,352

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 June 30, 2022, 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 six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022.

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, 2021. 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.

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 six months ended

June 30,

June 30,

2022

2021

2022

2021

Man-made tiles

50

%

48

%

50

%

47

%

Natural stone tiles

26

28

25

29

Setting and maintenance materials

15

14

16

14

Accessories

7

7

7

8

Delivery service

2

3

2

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.

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Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

 

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 $15.1 million and $13.8 million as of June 30, 2022 and December 31, 2021, respectively. Revenues recognized during the six months ended June 30, 2022 that were included in the customer deposit balance as of the beginning of the period were $13.2 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 $4.2 million and $3.2 million at June 30, 2022 and December 31, 2021, 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 Sheets as of June 30, 2022 and December 31, 2021 were as follows:

(in thousands)

June 30,

December 31,

2022

2021

Other accrued liabilities

$

6,353

$

5,202

Other current assets

2,100

1,658

Sales returns reserve, net

$

4,253

$

3,544

 

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 June 30, 2022 and December 31, 2021:

(in thousands)

June 30,

December 31,

2022

2021

Finished goods

$

108,536

$

95,869

Raw materials

1,503

1,306

Total

$

110,039

$

97,175

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 and $0.5 million as of June 30, 2022 and December 31, 2021, respectively. 

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Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Note 4: Income Taxes

The Company's effective tax rate on net income before taxes for the three months ended June 30, 2022 and 2021 was 27.8% and 26.4%, respectively. The Company’s effective tax rate for the six months ended June 30, 2022 and 2021 was 25.8% and 24.1%, respectively. For the three months ended June 30, 2022 and 2021, the Company recorded a provision for income taxes of $2.7 million and $2.0 million, respectively. The increase in the provision for income taxes was due to higher pretax earnings in the quarter. For the six months ended June 30, 2022 and 2021, the Company recorded a provision for income taxes of $3.6 million and $3.4 million, respectively. The increase in the provision for income taxes was due to a decrease in the tax benefits recognized with respect to restricted stock vestings.

The Company records interest and penalties relating to uncertain tax positions in income tax expense. As of both June 30, 2022 and 2021, the Company had not recognized any liabilities for uncertain tax positions, nor had interest and penalties related to uncertain tax positions been accrued.

 

Note 5: Earnings Per Share

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

Basic and diluted earnings per share were calculated as follows:

(dollars in thousands, except per share data)

For the three months ended

For the six months ended

June 30,

June 30,

2022

2021

2022

2021

Net income

$

6,914

$

5,494

$

10,427

$

10,791

Weighted average shares outstanding - basic

50,890,063

50,259,945

50,802,423

50,183,310

Effect of dilutive securities attributable to stock based awards

363,480

1,074,004

412,184

999,949

Weighted average shares outstanding - diluted

51,253,543

51,333,949

51,214,607

51,183,259

Income per common share:

Basic

$

0.14

$

0.11

$

0.21

$

0.22

Diluted

$

0.13

$

0.11

$

0.20

$

0.21

Anti-dilutive securities excluded from earnings per share calculation

1,525,521

945,695

1,078,597

976,607

 

Note 6: Other Accrued Liabilities

Other accrued liabilities consisted of the following:

(in thousands)

June 30,

December 31,

2022

2021

Customer deposits

$

15,084

$

13,792

Sales returns reserve

6,353

5,202

Accrued wages and salaries

7,417

8,833

Payroll and sales taxes

4,256

3,796

Other current liabilities

8,126

6,626

Total other accrued liabilities

$

41,236

$

38,249

 

11


Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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, which was amended November 16, 2021 (as amended, 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 June 30, 2022, the base interest rate was 5.50% and the LIBOR-based interest rate was 3.54%. The Company had $5.0 million of borrowings outstanding on its revolving line of credit as of June 30, 2022. 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 June 30, 2022 and December 31, 2021. There was $92.6 million available for borrowing on the revolving line of credit as of June 30, 2022, 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 June 30, 2022.

 

Note 8: Leases

The Company leases its retail stores, certain distribution space, and office space. Leases generally have an initial 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.

Leases (in thousands)

Classification

June 30, 2022

December 31, 2021

Assets

Operating lease assets

Right of use asset

$

116,961

$

123,101

Total leased assets

$

116,961

$

123,101

Liabilities

Current

Operating

Current portion of lease liability

$

28,126

$

28,190

Noncurrent

Operating

Long-term lease liability, net

102,656

110,261

Total lease liabilities

$

130,782

$

138,451

Three Months Ended

Lease cost (in thousands)

Classification

June 30, 2022

June 30, 2021

Operating lease cost

SG&A expenses

$

8,611

$

8,533

Variable lease cost(1)

SG&A expenses

3,557

3,300

Short term lease cost

SG&A expenses

110

127

Net lease cost

$

12,278

$

11,960

Six Months Ended

Lease cost (in thousands)

Classification

June 30, 2022

June 30, 2021

Operating lease cost

SG&A expenses

$

17,282

$

17,011

Variable lease cost(1)

SG&A expenses

6,960

7,008

Short term lease cost

SG&A expenses

242

250

Net lease cost

$

24,484

$

24,269

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Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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

Six Months Ended

Other Information (in thousands)

June 30, 2022

June 30, 2021

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

$

18,754

$

18,283

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

$

6,876

$

-

 

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; 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 June 30, 2022 and December 31, 2021 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

June 30, 2022

December 31, 2021

Assets

(in thousands)

Cash and cash equivalents

Level 1

$

10,506

$

9,358

Restricted 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. The Company did not record any impairment losses during the three and six months ended June 30, 2022 and 2021.

 

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Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Note 10: Equity Incentive Plans

On July 20, 2021, the Company’s stockholders approved the 2021 Omnibus Equity Compensation Plan (the “2021 Plan”). The 2021 Plan replaced the 2012 Omnibus Award Plan (the “Prior Plan”). Awards granted under the Prior Plan that were outstanding on the date of stockholder approval remained 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 six months ended June 30, 2022 and 2021 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 less than $0.1 million for the three months ended June 30, 2022 and $0.1 million for the three months ended June 30 2021. Total stock based compensation expense related to stock options was $0.1 million and $0.2 million for the six months ended June 30, 2022 and 2021, respectively. 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 June 30, 2022, the Company had outstanding stock options to purchase 858,445 shares of common stock at a weighted average exercise price of $11.05 per share.

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 and $0.6 million for the three months ended June 30, 2022 and 2021, respectively. Total stock based compensation expense related to restricted stock was $1.0 million and $1.1 million for the six months ended June 30, 2022 and 2021, 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 June 30, 2022, the Company had 1,313,114 outstanding restricted common shares.

 

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

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Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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 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 June 30, 2022, the balance of the contribution liability for this arrangement was $0.7 million, of which $0.5 million was classified as other accrued liabilities on the Consolidated Balance Sheet and $0.2 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 June 30, 2022, the remaining balance in the Investment Fund available for reimbursement to the Company was $0.7 million.

 

Note 12: Related Party Transactions

On July 9, 2018, Fumitake Nishi informed the Company he had acquired an ownership interest in one of the Company’s key vendors, Nanyang Helin Stone Co. Ltd (“Nanyang”).  Mr. Nishi is 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.  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.

During the three months ended June 30, 2022 and 2021, the Company purchased $2.4 million and $1.4 million of products from Nanyang, respectively. During the six months ended June 30, 2022 and 2021, the Company purchased $5.7 million and $3.3 million of products from Nanyang, respectively. As of both June 30, 2022 and 2021 there were no accounts payable due to Nanyang. During the three months ended June 30, 2022 and 2021, the Company purchased $0.4 million and $0.5 million of products from Tile Style, respectively. During the six months ended June 30, 2022 and 2021, the Company purchased $1.6 million and $1.0 million of products from Tile Style, respectively. As of both June 30, 2022 and 2021 there were no accounts payable due to Tile Style. 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.

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Table of Contents

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

 

The following discussion and analysis of Tile Shop Holdings, Inc.’s (“Holdings,” and together with its wholly owned subsidiaries, the “Company,” “we,” “us,” or “our”) financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 and our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” 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,” “predict,” “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 Quarterly Report on Form 10-Q 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, our anticipated new store openings, remodeling plans, and growth opportunities; our business strengths, marketing strategies, competitive advantages and role in our industry and markets; an overall decline in the health of the economy, the tile industry, consumer confidence and spending, and the housing market, including as a result of rising inflation or interest rates or the COVID-19 pandemic; our expectations regarding the potential impacts on our business of the COVID-19 pandemic, including its effect on general economic conditions and credit markets, the supply chain and product availability, labor, and on customer traffic to our stores, as well as the potential duration of the COVID-19 pandemic and adequacy of measures we have taken to attempt to mitigate the impact of the COVID-19 pandemic on our business; the impact of ongoing supply chain disruptions and inflationary cost pressures, including increased materials, labor, and transportation costs and decreased discretionary consumer spending; our ability to successfully implement our strategic plan and the anticipated benefits of our strategic plan; our ability to successfully anticipate consumer trends; any statements with respect to dividends and timing, methods, and payment of same; the effectiveness of our marketing strategy; potential fluctuations in our comparable store sales; our expectations regarding our and our customers’ financing arrangements and our ability to obtain additional capital, including potential difficulties of obtaining refinancing due to market conditions resulting from the COVID-19 pandemic; supply costs and expectations, including the continued availability of sufficient products from our suppliers, risks related to relying on foreign suppliers, and the potential impact of the COVID-19 pandemic and the Russia-Ukraine conflict on, among other things, product availability and pricing and timing and cost of deliveries; our expectations with respect to ongoing compliance with the terms of the Credit Agreement (as defined below), including the potential impact of the phase out of LIBOR and increasing interest rates; our ability to provide timely delivery to our customers; the effect of regulations on us and our industry, and our suppliers’ compliance with such regulations, including any environmental or climate change-related requirements; the impact of corporate citizenship and environmental, social and governance matters; labor shortages and our expectations regarding the effects of employee recruiting, training, mentoring, and retention on our ability to recruit and retain employees; tax-related risks; the potential impact of cybersecurity breaches or disruptions to our management information systems; our ability to successfully implement our information technology initiatives; our ability to effectively manage our online sales; costs and adequacy of insurance; the potential impact of natural disasters, which may worsen or increase due to the effects of climate change, and other catastrophic events; risks inherent in operating as a holding company; fluctuations in material and energy costs, including recent increases in, and ongoing volatility of, gas prices; the potential outcome of any legal proceedings; risks related to ownership of our common stock; and those factors set forth in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and in this Form 10-Q.

There is no assurance that our expectations will be realized. If one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated, or projected. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Furthermore, such forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. 

We intend to use our website, investors.tileshop.com, as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD of the Securities and Exchange Commission (“SEC”). Such disclosures will be included on our website under the heading News and Events. Accordingly, investors should monitor such portions of our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. Information contained on or accessible through our website is not a part of, and is not incorporated by reference into, this Quarterly Report on Form 10-Q or any other report or document we file with the SEC. Any reference to our website is intended to be an inactive textual reference only.

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Table of Contents

Overview and Recent Trends

We are a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States. We offer a wide selection of products, attractive prices, and exceptional customer service in an extensive showroom setting. As of June 30, 2022, we operated 143 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, manufacturing and distribution capabilities, enable us to offer a broad assortment of high-quality products to our customers, who are primarily homeowners and professionals, at competitive prices. We have invested significant resources to develop our proprietary brands and product sources, and we believe that we are a leading retailer of natural stone and man-made tiles, accessories, and related materials in the United States.

Our business continues to be impacted by a number of macro-economic factors, including the trailing impact of the COVID-19 pandemic. Global supply chains and product availability remain highly challenged and the ongoing Russia-Ukraine conflict has only exacerbated an already difficult operating environment. These factors, combined with higher fuel costs and a highly competitive labor market, have created an inflationary environment and cost pressures.

In regard to consumer demand, since the onset of the COVID-19 pandemic, our business has experienced an increase in demand and sales. It remains unclear, however, if these demand trends will remain intact or if they will revert back to more historical levels over time, particularly as inflation begins to impact discretionary spending. In recent weeks, we have observed a deceleration in our comparable store sales growth.

June 2022 Quarter Financial Overview

For the three months ended June 30, 2022 and 2021, we reported net sales of $107.6 million and $96.2 million, respectively. Sales increased at comparable stores by 12.0% during the second quarter of 2022 compared to the second quarter of 2021, primarily due to an increase in average ticket driven by higher prices.

The table below sets forth information about our comparable store sales growth for the three and six months ended June 30, 2022 and 2021.

For the three months ended

For the six months ended

June 30,

June 30,

2022

2021

2022

2021

Comparable store sales growth (decline)

12.0

%

41.6

%

11.6

%

16.0

%

We continued to experience challenges in our supply chain during the second quarter of 2022. Specifically, we are still seeing an increase in the cost of the products we source from around the world due to vendor price increases in response to inflationary cost pressure. While ocean container rates have started to fall from peak levels, average freight rates remain elevated. We continue to monitor the impact of inflation on the costs of materials, labor, and other costs required to manage our business in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. There can be no assurance, however, that our operating results will not be affected by inflation in the future.

Selling, general and administrative expenses increased by $2.4 million from $58.8 million to $61.2 million during the three months ended June 30, 2021 and 2022, respectively. The increase was primarily due to a $4.0 million increase in pay and benefits expenses excluding bonus expenses due to an increase in staffing levels, sales commissions and benefits costs. Additionally, store occupancy costs increased by $1.0 million due to inflationary cost pressures that resulted in higher common area maintenance, store repair and utility expenses, a $0.7 million increase in marketing expenses and a $0.4 million increase in travel expenses. These expense increases were partially offset by a $3.1 million decrease in bonus expense during the quarter due to a reduction in accruals for annual incentives and lower levels of sales bonuses and a $0.7 million decrease in depreciation expense.

Net cash provided by operating activities was $9.2 million and $42.0 million for the six months ended June 30, 2022 and 2021, respectively. The decrease in cash provided by operating activities was primarily due to an increase in inventory in 2022 and other changes in working capital. 

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

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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 store 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. Comparable 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 growth (decline) 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, customs and duties fees, and storage and delivery of product to the customers, as well as physical inventory losses and costs associated with manufacturing of setting and maintenance materials.

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 costs, shipping and transportation expenses to move inventory from our distribution centers to our stores, and depreciation and amortization.

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

Results of Operations

Comparison of the three months ended June 30, 2022 to the three months ended June 30, 2021

(in thousands)

2022

% of sales

2021

% of sales(1)

Net sales

$

107,604

100.0

%

$

96,193

100.0

%

Cost of sales

36,586

34.0

%

29,768

30.9

%

Gross profit

71,018

66.0

%

66,425

69.1

%

Selling, general and administrative expenses

61,240

56.9

%

58,811

61.1

%

Income from operations

9,778

9.1

%

7,614

7.9

%

Interest expense

(201)

(0.2)

%

(145)

(0.2)

%

Income before income taxes

9,577

8.9

%

7,469

7.8

%

Provision for income taxes

(2,663)

(2.5)

%

(1,975)

(2.1)

%

Net income

$

6,914

6.4

%

$

5,494

5.7

%

(1) Amounts do not foot due to rounding.

Net Sales Net sales for the second quarter of 2022 increased $11.4 million, or 11.9%, compared with the second quarter of 2021. Sales increased at comparable stores by 12.0% during the second quarter of 2022 compared to the second quarter of 2021, primarily due to an increase in average ticket driven by higher prices.

Gross Profit Gross profit for the second quarter of 2022 increased $4.6 million, or 6.9%, compared with the second quarter of 2021, primarily due to the increase in sales. The gross margin rate was 66.0% and 69.1% during the second quarter of 2022 and 2021, respectively. The decrease in the gross margin rate was primarily due to an increase in the cost of our products driven by vendor cost increases and higher international freight rates, which were partially offset by an increase in our selling prices.

Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the second quarter of 2022 increased $2.4 million, or 4.1%, compared with the second quarter of 2021. The increase was primarily due to a $4.0 million increase in pay and benefits expenses excluding bonus expenses due to an increase in staffing levels, sales commissions and benefits costs. Additionally, store occupancy costs increased by $1.0 million due to inflationary cost pressures that resulted in higher common area maintenance, store repair and utility expenses, a $0.7 million increase in marketing expenses and a $0.4 million increase in travel expenses. These expense increases were partially offset by a $3.1 million decrease in bonus expense during the quarter due to a reduction in accruals for annual incentives and lower levels of sales bonuses and a $0.7 million decrease in depreciation expense.

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Interest Expense Interest expense was $0.2 million and $0.1 million for the second quarter of 2022 and 2021, respectively. The increase was due to an increase in outstanding debt during the second quarter of 2022 as compared to the second quarter of 2021.

Provision for Income Taxes The provision for income taxes for the second quarter of 2022 increased $0.7 million compared with the second quarter of 2021. The increase in the provision for income tax was largely due to the increase in income before taxes. Our effective tax rate for the three months ended June 30, 2022 and 2021 was 27.8% and 26.4%, respectively.

Comparison of the six months ended June 30, 2022 to the six months ended June 30, 2021

(in thousands)

2022

% of sales

2021

% of sales

Net sales

$

210,075

100.0

%

$

188,277

100.0

%

Cost of sales

72,212

34.4

%

57,666

30.6

%

Gross profit

137,863

65.6

%

130,611

69.4

%

Selling, general and administrative expenses

123,349

58.7

%

116,089

61.7

%

Income from operations

14,514

6.9

%

14,522

7.7

%

Interest expense

(467)

(0.2)

%

(313)

(0.2)

%

Income before income taxes

14,047

6.7

%

14,209

7.5

%

Provision for income taxes

(3,620)

(1.7)

%

(3,418)

(1.8)

%

Net income

$

10,427

5.0

%

$

10,791

5.7

%

Net Sales Net sales for the six months ended June 30, 2022 increased $21.8 million, or 11.6%, compared with the six months ended June 30, 2021. Sales increased at comparable stores by 11.6% during the six months ended June 30, 2022 when compared to the six months ended June 30, 2021, primarily due to an increase in average ticket driven by higher prices.

Gross Profit Gross profit for the six months ended June 30, 2022 increased $7.3 million, or 5.6%, compared with the six months ended June 30, 2021. The gross margin rate was 65.6% and 69.4% for the six months ended June 30, 2022 and 2021, respectively. The decrease in the gross margin rate was primarily due to an increase in the cost of our products driven by vendor cost increases and higher international freight rates, which were partially offset by an increase in our selling prices.

Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the six months ended June 30, 2022 increased $7.3 million, or 6.3%, compared with the six months ended June 30, 2021. The increase in selling, general, and administrative expenses was primarily due to a $4.8 million increase in pay and benefits, a $1.4 million increase in marketing, a $1.1 million increase in occupancy costs, a $0.8 million increase in software and IT expenses and a $0.7 million increase in travel for store support. The increase in pay and benefits included a $7.6 million increase in wages and benefits resulting from an increase in staffing levels, sales commissions and benefits costs. This increase was partially offset by a $2.8 million decrease in bonus expenses due to a reduction in accruals for annual incentives and a decrease in sales bonuses. Additionally, depreciation expense decreased by $1.4 million during the six months ended June 30, 2022 when compared to the six months ended June 30, 2021.

Interest Expense Interest expense was $0.5 million and $0.3 million for the six months ended June 30, 2022 and 2021, respectively. The increase was due to the increase in outstanding debt during the six months ended June 30, 2022.

Provision for Income Taxes Provision for income taxes increased $0.2 million for the six months ended June 30, 2022 compared with the six months ended June 30, 2021 due to a decrease in the tax benefits recognized with respect to restricted stock vestings. Our effective tax rate for the six months ended June 30, 2022 and 2021 was 25.8% and 24.1%, respectively.

Non-GAAP Measures

We calculate Adjusted EBITDA by taking net income calculated in accordance with accounting principles generally accepted in the United States (“GAAP”), and adjusting for interest expense, income taxes, depreciation and amortization, and stock based compensation expense. Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales. We 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, lease liability and other long-term liabilities. Other companies may calculate both Adjusted EBITDA and pretax return on capital employed differently, limiting the usefulness of these measures for comparative purposes.

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

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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.

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.

The reconciliation of Adjusted EBITDA to net income for the three and six months ended June 30, 2022 and 2021 is as follows:

(in thousands)

Three Months Ended

June 30,

2022

% of sales

2021

% of sales

Net income

$

6,914

6.4

%

$

5,494

5.7

%

Interest expense

201

0.2

%

145

0.2

%

Provision for income taxes

2,663

2.5

%

1,975

2.1

%

Depreciation and amortization

6,415

6.0

%

7,065

7.3

%

Stock based compensation

562

0.5

%

706

0.7

%

Adjusted EBITDA

$

16,755

15.6

%

$

15,385

16.0

%

(in thousands)

Six Months Ended

June 30,

2022

% of sales

2021

% of sales

Net income

$

10,427

5.0

%

$

10,791

5.7

%

Interest expense

467

0.2

%

313

0.2

%

Provision for income taxes

3,620

1.7

%

3,418

1.8

%

Depreciation and amortization

12,854

6.1

%

14,259

7.6

%

Stock based compensation

1,054

0.5

%

1,299

0.7

%

Adjusted EBITDA

$

28,422

13.5

%

$

30,080

16.0

%

The calculation of pretax return on capital employed is as follows:

(in thousands)

June 30,

2022(1)

2021(1)

Income from Operations (trailing twelve months)

$

20,602

$

20,099

Total Assets

347,424

354,776

Less: Accounts payable

(27,257)

(15,946)

Less: Income tax payable

(447)

(125)

Less: Other accrued liabilities

(41,806)

(42,338)

Less: Lease liability

(135,705)

(147,622)

Less: Other long-term liabilities

(4,980)

(4,244)

Capital Employed

$

137,229

$

144,501

Pretax Return on Capital Employed

15.0

%

13.9

%

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

 

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Liquidity and Capital Resources

Our principal liquidity requirements have been for working capital and capital expenditures. Our principal sources of liquidity are $10.5 million of cash and cash equivalents at June 30, 2022, our cash flow from operations, and borrowings available under our Credit Agreement. We expect to use this liquidity for purchasing additional merchandise inventory, maintaining our existing stores, and general corporate purposes.

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, which was amended November 16, 2021 (as amended, 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 June 30, 2022, the base interest rate was 5.50% and the LIBOR-based interest rate was 3.54%. We had $5.0 million outstanding on our revolving line of credit as of June 30, 2022. In addition, we have standby letters of credit outstanding related to our workers’ compensation and medical insurance policies. Standby letters of credit totaled $2.4 million as of both June 30, 2022 and December 31, 2021. There was $92.6 million available for borrowing on the revolving line of credit as of June 30, 2022, 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 June 30, 2022.

We believe that our cash flow from operations, together with our existing cash and cash equivalents and borrowings available under our Credit Agreement, will be sufficient to fund our operations and anticipated capital expenditures over at least the next twelve months and our long-term liquidity requirements.

Capital Expenditures

Capital expenditures were $7.4 million and $6.2 million for the six months ended June 30, 2022 and 2021, respectively. Capital expenditures in 2022 were primarily due to investments in store remodels, merchandising, distribution and information technology assets.

Cash flows

The following table summarizes our cash flow data for the six months ended June 30, 2022 and 2021.

   

(in thousands)

Six Months Ended

June 30,

2022

2021

Net cash provided by operating activities

$

9,223

$

41,985

Net cash used in investing activities

(7,361)

(6,157)

Net cash used in financing activities

(676)

(706)

Operating activities

Net cash provided by operating activities during the six months ended June 30, 2022 was $9.2 million compared with $42.0 million during the six months ended June 30, 2021. The decrease was primarily attributable to an increase in inventory purchases in 2022 and other working capital changes.

Investing activities

Net cash used in investing activities totaled $7.4 million for the six months ended June 30, 2022 compared with $6.2 million for the six months ended June 30, 2021. Cash used in investing activities during the six months ended June 30, 2022 was primarily due to investments in store remodels, merchandising, distribution and information technology assets.

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Financing activities

Net cash used in financing activities was $0.7 million for both the six months ended June 30, 2022 and 2021 and was primarily due to tax payments made in exchange for shares withheld from restricted share vestings.

Cash and cash equivalents totaled $10.5 million at June 30, 2022 compared with $9.4 million at December 31, 2021. Working capital was $42.2 million at June 30, 2022 compared with $29.4 million at December 31, 2021.

 

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. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 

 

ITEM 4. 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the 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 evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022 and concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control Over Financial Reporting

There were no changes in internal control over financial reporting (as defined by Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

ITEM 1. 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. In the opinion of management, while the outcome of such claims and disputes cannot be predicted with certainty, our ultimate liability in connection with these matters is not expected to have a material adverse effect on our results of operations, financial position or cash flows, and the amounts accrued for any individual matter are not material. However, legal proceedings are inherently uncertain. 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.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, other than with respect to the risk factor discussed below.

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Numerous economic factors, including inflation, our exposure to the U.S. housing industry, and the potential for a decrease in consumer spending, could adversely affect us.

Economic conditions, including inflation and weakness in the U.S. housing industry, could decrease consumer discretionary spending and adversely affect our financial performance. Consumer prices have experienced their largest percentage increases since 1981, and interest rates have begun to increase. We believe that our tile sales are affected by the strength of the U.S. housing industry. Downturns in the U.S. housing industry could have a material adverse effect on our financial results, business, and prospects. Similarly, a substantial portion of the products we offer are products that consumers may view as discretionary items rather than necessities. As a result, our results of operations are sensitive to changes in macroeconomic conditions that affect consumer spending, including discretionary spending. Difficult macroeconomic conditions also affect our customers' ability to obtain consumer credit. Other factors, including consumer confidence, employment levels, interest rates, tax rates, consumer debt levels, and fuel and energy costs could reduce consumer spending or change consumer purchasing habits. Accordingly, slowdowns in the U.S. or global economy, or an uncertain economic outlook, could materially adversely affect consumer spending habits and could have a material adverse effect on our financial results, business, and prospects.

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

Period

Total Number of Shares Purchased

Average Price Paid per Share

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

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

April 1, 2022 - April 30, 2022

7,008

(1)

$

6.32

-

-

May 1, 2022 - May 31, 2022

4,148

(2)

6.01

-

-

June 1, 2022 - June 30, 2022

2,918

(3)

0.00

-

-

   

14,074

$

4.92

-

-

(1)We withheld a total of 7,008 shares to satisfy tax withholding obligations due upon the vesting of restricted stock grants, as allowed by the 2012 Omnibus Award Plan. We did not pay cash to repurchase these shares, nor were these repurchases part of a publicly announced plan or program.

(2)We withheld a total of 4,148 shares to satisfy tax withholding obligations due upon the vesting of restricted stock grants, as allowed by the 2012 Omnibus Award Plan. We did not pay cash to repurchase these shares, nor were these repurchases part of a publicly announced plan or program.

 

(3)We cancelled 2,918 shares that were forfeited when the vesting conditions were not met, in accordance with the terms of the 2012 Omnibus Award Plan and related award agreements. We did not pay cash to repurchase these shares, nor were these repurchases part of a publicly announced plan or program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

The following table sets forth, as of August 1, 2022, information regarding beneficial ownership of our common stock by each person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock.

Beneficial ownership is determined according to the rules of the SEC, and generally means that a person has beneficial ownership of a security if he, she, or it possesses sole or shared voting or investment power of that security. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown that they beneficially own, subject to community property laws where applicable. The information does not necessarily indicate beneficial ownership for any other purpose.

We have based our calculation of the percentage of beneficial ownership on 52,257,157 shares of our common stock outstanding on August 1, 2022.

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Table of Contents

Unless otherwise noted below, the address for each of the shareholders in the table below is c/o Tile Shop Holdings, Inc., 14000 Carlson Parkway, Plymouth, Minnesota 55441.

Name of Beneficial Owner

Number of Shares Beneficially Owned

Percent

5% Stockholders:

Peter J. Jacullo III, Director(1)

8,392,568

16.1

%

Peter H. Kamin, Chairman of the Board(2)

6,918,096

13.2

%

David L. Kanen and affiliates(3)

3,484,620

6.7

%

Cannell Capital LLC(4)

3,147,164

6.0

%

Savitr Capital LLC(5)

2,770,535

5.3

%

(1)Based on a Schedule 13D/A filed with the SEC on January 4, 2022 by JWTS, Inc. (“JWTS”), Peter J. Jacullo III, and the Katherine D. Jacullo Children’s 1993 Irrevocable Trust (the “Jacullo Trust”) and a Form 4 filed by Mr. Jacullo with the SEC on June 16, 2022. JWTS directly holds 3,191,180 shares of common stock and has sole voting and dispositive power with respect to such shares. Mr. Jacullo is the President and sole member of the board of directors of JWTS, holds sole voting and dispositive power over the securities held by JWTS, and may be deemed to beneficially own the securities held by JWTS. The Jacullo Trust directly holds 4,706,489 shares of common stock and has sole voting and dispositive power with respect to such shares. Mr. Jacullo is a co-trustee of the Jacullo Trust, holds shared voting and dispositive power over the securities held by the Jacullo Trust, and may be deemed to beneficially own the securities held by the Jacullo Trust. Mr. Jacullo disclaims beneficial ownership of the shares of common stock held by the Jacullo Trust, except to the extent of his pecuniary interest therein. Mr. Jacullo directly holds 494,899 shares of common stock over which he has sole voting and dispositive power, including 21,689 shares of unvested restricted common stock.

(2)Based on a Schedule 13D/A filed with the SEC on January 14, 2020 by Peter H. Kamin and a Form 4 filed by Mr. Kamin with the SEC on June 16, 2022. Includes (i) 1,695,320 shares of common stock held by the Peter H. Kamin Revocable Trust dated February 2003, of which Peter H. Kamin is the trustee; (ii) 1,033,733 shares of common stock held by the Peter H. Kamin Childrens Trust dated March 1997, of which Mr. Kamin is the trustee; (iii) 117,453 shares of common stock held by the Peter H. Kamin Family Foundation, of which Mr. Kamin is the trustee; (iv) 328,711 shares of common stock held by the Peter H. Kamin GST Trust, of which Mr. Kamin is the trustee; (v) 333,495 shares of common stock held by 3K Limited Partnership, of which Mr. Kamin is the general partner; and (vi) 3,409,384 shares of common stock directly held by Mr. Kamin, including 41,209 shares of unvested restricted common stock. Mr. Kamin has sole voting and dispositive power over all such shares.

 

(3)Based on a Schedule 13D filed with the SEC on July 22, 2022 by Philotimo Fund, LP (“Philotimo”), Kanen Wealth Management, LLC (“KWM”), David L. Kanen and Philotimo Focused Growth and Income Fund (“PFGIF”), reporting holdings as of July 21, 2022. KWM is the general partner of Philotimo and investment manager of PFGIF. Mr. Kanen is the managing member of KWM. By virtue of these relationships, KWM may be deemed to beneficially own the shares of common stock owned by Philotimo and PFGIF, and Mr. Kanen may be deemed to beneficially own the shares of common stock owned by each of Philotimo, PFGIF, and KWM. Philotimo reported beneficial ownership of, and shared voting and dispositive power over, 1,624,524 shares. KWM reported beneficial ownership of, and shared voting and dispositive power over, 3,295,446 shares. Mr. Kanen reported beneficial ownership of 3,484,620 shares, including 189,174 shares over which he has sole voting and dispositive power and 3,295,446 shares over which he has shared voting and dispositive power. PFGIF reported beneficial ownership of, and shared voting and dispositive power over, 222,795 shares. The business address of the reporting persons is 5850 Coral Ridge Drive, Suite 309, Coral Springs, Florida 33076.

(4)Based on a Schedule 13D filed with the SEC on February 3, 2021 by Cannell Capital LLC and J. Carlo Cannell. Cannell Capital LLC acts as the investment adviser to Tonga Partners, L.P., Tristan Partners, L.P. and Tristan Offshore Fund, Ltd. (the “Funds”) and as investment advisor to various separately-managed accounts (collectively with the Funds, the “Investment Vehicles”). Mr. Cannell is the sole managing member of Cannell Capital LLC and investment adviser to the Investment Vehicles. As such, Cannell Capital LLC and Mr. Cannell may be deemed to beneficially own the 3,147,164 shares of common stock held directly by the Investment Vehicles and have sole voting and dispositive power over such shares. The business address of the reporting persons is 245 Meriwether Circle, Alta, Wyoming 83414.

(5)Based on a Schedule 13G filed with the SEC on January 28, 2020 by Savitr Capital LLC (“Savitr”), Savitr holds shared voting and dispositive power over 2,770,535 shares of common stock. The business address of Savitr is 600 Montgomery Street, 47th Floor, San Francisco, California 94111.


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Table of Contents

ITEM 6. EXHIBITS

 

Exhibit No.

Description

3.1

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

3.2

Certificate of Amendment to the Certificate of Incorporation of Tile Shop Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 21, 2021).

3.3

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

31.1*

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

31.2*

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

32.1**

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

32.2**

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

101*

The following financial statements from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

* Filed herewith

** Furnished herewith

 

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Table of Contents

SIGNATURES

 

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

 

 

TILE SHOP HOLDINGS, INC.

 

 

 

 

 

Dated: August 4, 2022

By:

/s/ CABELL H. LOLMAUGH

 

 

 

Cabell H. Lolmaugh

 

 

 

Chief Executive Officer

 

Dated: August 4, 2022

By:

/s/ KARLA LUNAN

 

 

 

Karla Lunan

 

 

 

Chief Financial Officer

 

 

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