Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
No
te 1: Summary of Significant Accounting Policies
Nature of Business
Tile Shop Holdings, Inc. (“Holdings”, and together with its wholly owned subsidiaries, the “Company”) was incorporated in Delaware in June 2012. On August 21, 2012, Holdings consummated the transactions contemplated pursuant to that certain Contribution and Merger Agreement dated as of June 27, 2012, among Holdings, JWC Acquisition Corp., a publicly-held Delaware corporation (“JWCAC”), The Tile Shop, LLC, a privately-held Delaware limited liability company (“The Tile Shop”), and certain other parties. Through a series of transactions, The Tile Shop was contributed to and became a subsidiary of Holdings and Holdings effected a business combination with and became a successor issuer to JWCAC. These transactions are referred to herein as the “Business Combination.”
The Company
is a specialty retailer
of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in retail locations
in the
United States. The Company’s assortment includes over
4,000
products from around the world that consist of natural stone, ceramic, porcelain, glass,
cement,
wood
look
,
and metal tiles.
Natural stone products include
marble, granite, quartz, sandstone, travertine, slate, and onyx tiles. The majority of the tile products are sold under the Company's proprietary Rush River and Fired Earth brand
names
. The Company purchases tile products, accessories and tools directly from its network of vendors. The Company manufactures its own setting and maintenance materials, such as thinset, grout, and sealers under the Superior brand name. As of December 31,
2016
, the Company operated
123
stores in
31
states
and the District of Columbia
, with an average size of approximately
21,100
square feet. The Company also sells products on its website.
Basis of Presentation
The consolidated financial statements of Holdings include the accounts of its wholly owned subsidiaries
, and variable interest ent
ities, for which the Company
is the primary beneficiary
. See Note 11, “New Market Tax Credit,” for the discussion of financing arrangements involving certain entities that are variable interest entities that are included in these consolidated financial statements. All significant intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles in
the United States (
“
GAAP
”
) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amount of assets and liabilities reported on the Company's balance sheets and the amounts of income and expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to,
the accounting for revenue recognition and related reserves for sales returns, useful lives of property, plant and equipment, determining impairment on long-lived assets, valuation of inventory, compensation expense on stock based compensation plans and income taxes. Actual results may differ from these estimates.
Reclassification
Certain amounts in the prior year’s audited financial statements have been reclassified for comparative purposes to conform with the current year’s presentation. Specifically, debt issuance costs presented in the prior year Consolidated Balance Sheet have been reclassified to conform to current year presentation. Refer to the “New Accounting Pronouncements” section of this footnote for additional discussion.
Cash and Cash Equivalents
The Company had cash and cash equivalents of
$6.1
million and
$10.3
million at December 31,
2016
, and
2015
, respectively. The Company considers all highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents. The Company accepts a range of debit and credit cards, and these transactions are generally transmitted to a bank for reimbursement within 24 hours. The payments due from the banks for these debit and credit card transactions are generally received, or settle
d
, within 24 to 48 hours of the transmission date. The Company considers all debit and credit card transactions that settle in less than seven days to be cash and cash equivalents. Amounts due from the banks for these transactions classified as cash and cash equivalents totaled
$3.0
million and
$1.8
million at December 31,
2016
and December 31,
2015
, respectively.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Restricted Cash
Cash and cash equivalents that are restricted as to withdrawal or are under the terms
of use for current operations
are included in the restricted balance on the balance sheet.
Cash and cash equivalents that are restricted as to withdrawal and designated for expenditure in the construction of noncurrent assets are included in long-term restricted cash on the balance sheet.
Trade Receivables
Trade receivables are carried at original invoice amount less an estimate made for doubtful accounts. Management determines the allowance for doubtful accounts on a specific identification basis as well as by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. The allowance for doubtful accounts was
$70,000
and
$113,500
as of December 31,
2016
and
2015
, respectively. The Company does not accrue interest on accounts receivable.
Inventories
Inventories are stated at the lower of cost (determined using the weighted average cost method) or market. Inventories consist primarily of merchandise held for sale. Inventories were comprised of the following at December 31,
2016
and
2015
:
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2016
|
|
2015
|
|
|
(in thousands)
|
Finished goods
|
|
$
|
61,949
|
|
$
|
59,503
|
Raw materials
|
|
|
2,312
|
|
|
2,681
|
Finished goods in transit
|
|
|
10,034
|
|
|
7,694
|
Total
|
|
$
|
74,295
|
|
$
|
69,878
|
The Company provides provisions for losses related to shrinkage and other amounts that are not otherwise 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
$163,000
and
$337,000
as of December 31,
2016
and
2015
, respectively.
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carry forwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carry forwards is provided when it is determined to be more likely than not that the benefit of such deferred tax asset will not be realized in future periods. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.
The Company records interest and penalties relating to uncertain tax positions in income tax expense. As of December 31,
2016
and
2015
, the Company has not recognized any liabilities for uncertain tax positions nor has the Company accrued interest and penalties related to uncertain tax positions.
Revenue Recognition
The Company recognizes sales at the time that the customer takes possession of the merchandise or when final delivery of the product has occurred. The Company recognizes service revenue, which consists primarily of freight charges for home delivery, when the service has been rendered. The Company is required to charge and collect sales and other taxes on sales to the Company's customers and remit these taxes back to government authorities. Total revenues do not include sales tax because the Company is a pass-through conduit for collecting and remitting sales tax. Sales are reduced by an allowance for anticipated sales returns that the Company estimates based on historical returns. The process to establish a sales return reserve contains uncertainties because it requires management to make assumptions and to apply judgment to estimate future returns and exchanges. The customer may receive a refund or exchange the original product for a replacement of equal or similar quality for a period of six months from the time of original purchase. Products received back under this policy are reconditioned pursuant to state laws and resold.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company generally requires customers to pay a deposit when purchasing inventory that is not regularly carried at the store location, or not currently in stock. These deposits are included in other accrued liabilities until the customer takes possession of the merchandise.
Sales Return Reserve
Customers may return purchased items for an exchange or refund. The Company records a reserve for estimated product returns, net of cost of sales based on historical return trends together with current product sales performance. A summary of activity in the Company's sales returns rese
rve
follows
:
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2016
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|
2015
|
|
2014
|
|
|
(in thousands)
|
Balance at beginning of year
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$
|
2,781
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|
$
|
3,292
|
|
$
|
2,850
|
Additions for sales returns
|
|
|
31,334
|
|
|
26,522
|
|
|
28,517
|
Deductions from reserve
|
|
|
(31,035)
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|
|
(27,033)
|
|
|
(28,075)
|
Balance at end of year
|
|
$
|
3,080
|
|
$
|
2,781
|
|
$
|
3,292
|
Cost of Sales and Selling, General and Administrative Expenses
The following table illustrates the primary costs classified in each major expense category:
Cost of Sales
|
·
|
|
Cost of product
s
sold;
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|
·
|
|
Freight expenses to bring products into the Company's distribution centers;
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·
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|
Custom and duty expenses;
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·
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|
Customer shipping and handling expenses;
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|
·
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|
Physical inventory losses;
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|
·
|
|
Costs incurred at distribution centers in connection with the receiving process;
|
|
·
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|
Labor and overhead costs incurred to manufacture inventory
|
Selling, General
& Administrative Expenses
|
·
|
|
All other payroll and benefit costs for retail, corporate and distribution employees;
|
|
·
|
|
Occupancy, utilities and maintenance costs of retail and corporate facilities;
|
|
·
|
|
Freight expenses to move inventory from the Company's distribution centers to the Company's stores;
|
|
·
|
|
Depreciation and amortization;
|
Our largest supp
lier
accounted for approximately
12%
of our total purchases in 2016.
Stock Based Compensation
The Company r
ecognizes expense for its stock
based compensation based on the fair value of the awards that are granted. Compensation expense is recognized
on a straight-line basis over the requisite service period, net of actual forfeitures
. The Company may issue incentive awards in the form of stock options, restricted stock awards and other equity awards to employees and non-employee directors. Compensation cost is recognized ratably over the requisite serv
ice period of the related stock
based compensation award.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and bank deposits. By their nature, all such instruments involve risks including credit risks of non-performance by counterparties. A substantial portion of the Company's cash and cash equivalents and bank deposits are invested with banks with high investment grade credit ratings.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Segments
The Company’s operations consist primarily of retail sales of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in stores located in the United States and through its website. The Company’s chief operating decision maker only reviews the consolidated results of the Company and accordingly, the Company has concluded it has one reportable segment.
Advertising Costs
Advertising costs were
$6.9
million,
$6.5
million and
$5.7
million, for the years ended December 31,
2016
,
2015
and
2014
, respectively, and are included in selling, general and administrative expenses in the consolidated statements of operations. The Company’s advertising consists primarily of digital media, direct marketing, event
s
and traditional print media that is expensed at the time the media is distributed.
Pre-opening
C
osts
The Company’s pre-opening costs are those typically associated with the opening of a new store and generally include rent expense, payroll costs and promotional costs. The Company expenses pre-opening costs as incurred which are recorded in selling, general and administrative expenses. During the years ended December 31,
2016
,
2015
and
2014
, the Company reported pre-opening costs of
$0.9
million,
$0.5
million and
$1.5
million, respectively.
Property, Plant and Equipment
Property, plant equipment and leasehold improvements are recorded at cost. Improvements are capitalized while repairs and maintenance costs are charged to selling, general and administrative expenses when incurred. Property, plant and equipment are depreciated or amortized using the straight-line method over each asset’s estimated useful life. Leasehold improvements and fixtures at leased locations are amortized using the straight-line method over the shorter of the lease term (including renewal terms) or the estimated useful life of the asset. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and any gain or loss thereon is included in other income and expense.
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Asset life (in years)
|
Buildings and building improvements
|
|
|
40
|
|
Leasehold improvements
|
|
8
|
–
|
26
|
Furniture and fixtures
|
|
2
|
–
|
7
|
Machinery and equipment
|
|
5
|
–
|
10
|
Computer equipment and software
|
|
3
|
–
|
7
|
Vehicles
|
|
|
5
|
|
Internal Use Software
The Company capitalizes software development costs incurred during the application development stage related to new software or major enhancements to the functionality of existing software that is developed solely to meet the Company’s internal operational needs and when there are no plans to market the software externally. Costs capitalized include external direct costs of materials and services and internal payroll and payroll-related costs. Any costs during the preliminary project stage or related to training or maintenance are expensed as incurred. Capitalization ceases when the software project is substantially complete and ready for its intended use. The capitalization and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility, and estimated economic life. As of December 31,
2016
and
2015
,
$0.4
million
and
$0.9
million
was included in computer equipment and software
, respectively
. The majority of the costs capitalized relate to amounts invoiced by external consultants. The costs are amortized over estimated useful lives of
three
to
five
years. There was
$0.5
million,
$0.5
million and
$0.3
million
depreciation expense related to capitalized software during the years ended December 31,
2016
,
2015
and
2014
, respectively.
Leases
The Company leases its store and corporate headquarters locations. Assets held under capital leases are included in property, plant and equipment and amortization is included in depreciation expense. Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the date the Company takes possession of the property. Tenant improvement allowances are amounts received from a lessor for improvements to leased properties and are amortized against rent expense over the life of the respective leases. At lease inception, the Company determines the lease term by assuming the exercise of those renewal options that are
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
reasonably assured. The exercise of lease renewal options is at the Company’s sole discretion. The lease term is used to determine whether a lease is capital or operating and is used to calculate straight-line rent expense. Additionally, the depreciable life of leased assets and leasehold improvements is limited by the expected lease term. Rent expense is included in
selling, general and administrative
expenses. Certain leases require the Company to pay real estate taxes, insurance, maintenance and other operating expenses associated with the leased premises. These expenses are also classified in
selling, general and administrative
expenses.
Self-Insurance
The Company is self-insured for certain employee health benefit and workers compensation claims. The Company estimates a liability for aggregate losses below stop-loss coverage limits based on estimates of the ultimate costs to be incurred to settle known claims and claims not reported as of the balance sheet date. The estimated liability is not discounted and is based on a number of assumptions and factors including historical trends, and economic conditions. As of December 31,
2016
and
2015
, an accrual of
$0.7
million and
$0.5
million related to estimated employee health benefit claims was included in other current liabilities, respectively. As of December 31,
2016
and
2015
, an accrual of
$1.2
million and
$0.6
million related to estimated workers compensation claims was included in other current liabilities, respectively.
The Company has a standby letter of credit outstanding related to the Company's worker's compensation insurance policy. As of December 31,
2016
and
2015
, the standby letter of credit totaled
$1.1
million and
$0.9
million, respectively.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In August 2014, the
Financial Accounting Standards Board (“FASB”)
issued a standard requiring an entity’s management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern within one year after the date of the financial statements. The guidance also sets forth a series of disclosures that are required in the event the entity’s management concludes that there is substantial doubt about the entity’s ability to continue as a going concern. The adoption of this new standard did n
ot have a material effect on the Company’s
financial statements.
In February 2015, the
FASB
issued a new accounting standard that modif
ies
current consolidation guidance. The standard makes changes to both the variable interest entity model and the voting interest entity model, including modifying the evaluation of whether limited partnerships or similar legal entities are variable interest entities or voting interest entities and amending the guidance for assessing how relationships of related parties affect the consolidation analysis of variable interest entities. The standard was effective
for the Company
as of the beginning of fiscal 2016. The adoption of this new standard did not have a material effect on
the Company’s
financial statements.
In April 2015, the FASB issued a standard that requires debt issuance costs related to a recognized debt liability be presented in the Consolidated Balance Sheet as a direct deduction from the carrying amount of that debt liability.
The Company
adopted the provisions of this
statement in the first quarter of 2016 and prior periods have been retrospectively adjusted. The adoption of this standard resulted in a
$0.1
million reduction of other current assets, net, a
$0.3
million reduction of other assets, a
$0.3
million reduction of the current portion of long
-
term debt, and a
$0.1
million reduction of long
-
term debt in the Consolidated Balance Sheet for the period ended December 31, 2015.
In March 2016, the FASB issued a standard that amends and simplifies the accounting for stock compensation. The guidance addresses various stock compensation aspects including accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes, among other things. In order to simplify the accounting for stock
based
compensation, the Company made a change in accounting policy to account for forfeitures when they occur, and as a result, we recognized a
$0.
5
million cumulative-effect reduction to retained earnings under the modified retrospective approach. During the third quarter of 2016, the
Company
recognized an adjustment to reduce
additional paid-in capital
and
share
based compensation
by $0.1 million to account for current year forfeiture activity. We elected prospective transition for the requirement to classify excess tax benefits as an operating activity in the Consolidated Statement of Cash Flows. The adoption did not have a material impact on the amounts reported in the Consolidated Statement of Cash Flows for
the
year ended December 31, 2016
. Additionally,
the Company
will prospectively recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the Consolidated Statement of Operations as a discrete item in the period in which awards vest. The adoption did not have a material impact on the amounts reported in the Consolidated Statement of Operations for the
year ended December 31, 2016
.
The Company
applied the modified retrospective method to recognize the cumulative effect of previously unrecognized excess tax benefits in opening retained earnings. The adoption did not have a material impact on the amounts reported in the Consolidated Balance Sheet for the year ended December 31, 2015.
The Company
also retrospectively applied the requirement to present employee taxes paid
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
when an employer withholds shares for tax-withholding purposes as a financing activity in the Consolidated Statement of Cash Flows. The adoption did not have a material impact on the amounts reported in the Consolidated Statement of Cash Flows for the
years
ended
December
31
, 2016 and 2015.
Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued a final standard on revenue from contracts with customers. This new standard introduces a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receiv
e in exchange for those goods or
ser
vices. In 2016, the FASB issued
several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer, the application of identifying performance obligations, and the recognition of expected breakage amounts either proportionally in earnings as redemptions occur or whe
n redemption is remote. T
he Company continues to assess the impacts of this standard,
including evaluating if
its current polices to account for samples, gift cards, and sales returns will change under the new standard. As the Company finalizes its assessment, the Company will take steps to define its accounting policies under the new standard, establish new processes and controls when warranted, and ensure these processes are designed to capture the information necessary to conform to the transitional disclosure requirements. The standard is effective for the Company in fiscal 2018 and provides for either full retrospective adoption or modified retrospective adoption by which the cumulative effect of the change is recognized in retained earnings at the date of initial application. The Company has elected to adopt this standard using the modified retrospective approach.
In July 2015, the FASB issued a standard which simplifies the subsequent measurement of inventory. Currently, an entity is required to measure inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The changes require that inventory be measured at the lower of cost and net realizable value, thereby eliminating the use of the other two market methodologies. Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. These changes become effective for
the Company
in fiscal 2017.
The Company is
currently assessing the effect the new standard will have on
its
consolidated financial statements.
In February 2016, the FASB issued a standard that primarily requires organizations that lease assets to recognize the rights and obligations created by those leases on the Consolidated Balance Sheet. The standard is effective in 2019, with early adoption permitted.
The Company is
currently assessing the effect the new standard will have on
its
consolidated financial statements.
In August 2016, the FASB issued an accounting standards update with new guidance on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in the standards update provide guidance on eight specific cash flow issues. The standards update is effective retrospectively for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted.
The Company is
currently assessing the
effect the new standard will have on
its
consolidated financial statements.
In
November
2016, the FASB issued new guidance on restricted cash on the statement of cash flows. The new guidance requires the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown on the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The guidance should be applied retrospectively after adoption.
Restricted cash and long-term restricted cash balances were
$3.0
million and $3.9 million, respectively, as of December 31, 2016. Upon adopting the new standard, the Company anticipates that the fluctuations in the restricted cash and long-term restricted cash balances will impact its statement of cash flows.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2: Property Plant and Equipment:
Property, plant and equipment consisted of the followi
ng at December 31
:
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2016
|
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2015
|
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(in thousands)
|
Land
|
|
$
|
904
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|
$
|
904
|
Building and building improvements
|
|
|
21,916
|
|
|
21,515
|
Leasehold improvements
|
|
|
77,404
|
|
|
72,154
|
Furniture and fixtures
|
|
|
119,589
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|
|
112,376
|
Machinery and equipment
|
|
|
26,433
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|
|
24,457
|
Computer equipment and software
|
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|
24,002
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15,286
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Vehicles
|
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3,136
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|
2,859
|
Construction in progress
|
|
|
3,543
|
|
|
2,199
|
Total property, plant and equipment
|
|
|
276,927
|
|
|
251,750
|
Less accumulated depreciation
|
|
|
(135,890)
|
|
|
(116,635)
|
Total property, plant and equipment, net
|
|
$
|
141,037
|
|
$
|
135,115
|
Depreciation expense on property and equipment, including capital leases, was
$23.0
million,
$22.2
million and
$19.9
million for the years ended December 31,
2016
,
2015
and
2014
, respectively.
No
asset impairment charges were recorded for the years ended December 31,
2016
,
2015
, and
2014
, respectively.
Note 3: Accrued Liabilities
Accrued liabilities consisted
of the following at December 31
:
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2016
|
|
2015
|
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|
(in thousands)
|
Shareholder litigation accrual
|
|
$
|
9,500
|
|
$
|
-
|
Customer deposits
|
|
|
7,742
|
|
|
6,026
|
Accrued wages and salaries
|
|
|
4,962
|
|
|
4,336
|
Sales return reserve
|
|
|
3,080
|
|
|
2,781
|
Payroll & sales taxes
|
|
|
2,691
|
|
|
3,043
|
Other current liabilities
|
|
|
5,486
|
|
|
3,141
|
Total accrued liabilities
|
|
$
|
33,461
|
|
$
|
19,327
|
Note 4: Long-term Debt
Long-term d
ebt
, net of debt issuance costs,
consisted of the follow
ing at December 31
:
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2016
|
|
2015
|
|
|
|
|
Unamortized
|
|
|
|
Unamortized
|
|
|
|
|
Debt Issuance
|
|
|
|
Debt Issuance
|
|
|
Principal
|
|
Costs
|
|
Principal
|
|
Costs
|
|
|
(in thousands)
|
Term note payable - interest at 2.27% and 2.18% at December 31, 2016 and 2015
|
|
$
|
17,721
|
|
$
|
(114)
|
|
$
|
47,450
|
|
$
|
(428)
|
Commercial bank credit facility
|
|
|
10,000
|
|
|
-
|
|
|
8,000
|
|
|
-
|
Variable interest rate bonds (0.89% and 0.35% at December 31, 2016 and 2015), which mature April 1, 2023, collateralized by buildings and equipment
|
|
|
805
|
|
|
-
|
|
|
900
|
|
|
-
|
Total debt obligations
|
|
|
28,526
|
|
|
(114)
|
|
|
56,350
|
|
|
(428)
|
Less: current portion
|
|
|
6,350
|
|
|
(64)
|
|
|
5,095
|
|
|
(351)
|
Debt obligations, net of current portion
|
|
$
|
22,176
|
|
$
|
(50)
|
|
$
|
51,255
|
|
$
|
(77)
|
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Approximate annual aggregate maturities of debts
, net of debt issuance costs,
are as follows: (in thousands):
|
|
|
|
|
|
|
|
Fiscal year
|
|
|
|
2017
|
|
$
|
6,350
|
2018
|
|
|
8,855
|
2019
|
|
|
2,831
|
2020
|
|
|
10,115
|
2021
|
|
|
120
|
Thereafter
|
|
|
255
|
Total future maturities payments
|
|
$
|
28,526
|
Less: debt issuance costs
|
|
|
114
|
Total future maturities payments, net of debt issuance costs
|
|
$
|
28,412
|
On June 2, 2015, the Company and its operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Fifth Third Bank, Bank of America, N.A., and Huntington National Bank (
as amended,
the “Credit Agreement”).
On
December
9
, 2016, the Credit Agreement was amended to permit an additional New Markets Tax Credit Financing arrangement and on February
10
, 2017, the Credit Agreement was amended to permit
the Company
to make certain dividend payments.
The Credit Agreement provides the Company with a
$125.0
million senior secured credit facility, comprised of a
five
-year
$50.0
million term loan and a
$75.0
million revolving line of credit. 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. Borrowings pursuant to the Credit Agreement bear interest at either a base rate or a LIBOR-based rate, at the option of the Company. The LIBOR-based rate will range from LIBOR plus
1.50%
to
2.00%
, depending on The Tile Shop’s leverage ratio. The base rate is equal to the greatest of: (a) the Federal funds rate plus
0.50%
, (b) the Fifth Third Bank “prime rate,” and (c) the Eurodollar rate plus
1.00%
, in each case plus
0.50%
to
1.00%
depending on The Tile Shop’s leverage ratio. At December 31,
2016
the base interest rate was
4.25%
and the LIBOR-based interest rate was
2.27%
. Borrowings outstanding consisted of
$10.0
million on the revolving line of credit and
$17.7
million on the term loan as of December 31,
2016
.
There was
$65.0
million available for borrowing on the revolving line of credit as of December 31,
2016
.
Additional borrowings pursuant to the Credit Agreement may be used to support the Company’s growth and for working capital purposes. The Company incurred
$1.0
million of debt issuance costs in connection with the Credit Agreement. These costs were capitalized as other current and other noncurrent assets, and will be amortized over the
five
-year life of the Credit Agreement. The term loan requires quarterly principal payments as follows (in thousands):
|
|
|
|
|
|
|
|
Period
|
|
|
|
March 31, 2017 to June 30, 2017
|
|
$
|
1,250
|
September 30, 2017 to June 30, 2018
|
|
|
1,875
|
September 30, 2018 to March 31, 2020
|
|
|
2,500
|
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, make investments, or enter into transactions with affiliates on other than terms that could be obtained in an arm’s length transaction. The Credit Agreement also includes financial and other covenants including covenants to maintain certain fixed charge coverage ratios and rent adjusted leverage ratios. The Company was in compliance with the covenants as of December 31,
2016
.
The Credit Agreement superseded and replaced in its entirety the Company’s senior secured credit facility with Bank of America, N.A. dated October 3, 2012, as amended on April 30, 2013, July 8, 2013, March 26, 2014 and September 29, 2014. The Company used the
$50.0
million term loan and
$23.0
million drawn on the line of credit pursuant to the Credit Agreement to refinance all of the existing indebtedness outstanding under the Company’s prior credit facility in the amount of approximately
$73.0
million, which consisted of
$72.8
million in unpaid principal and approximately
$0.2
million in accrued and unpaid interest and fees. The Company also recorded a
$0.2
million charge in interest expense to write-off of the unamortized deferred financing fees associated with the October 3, 2012 credit facility as of the date of the termination.
As of December 31,
2016
and
2015
, the Company had accrued
$0.0
million and
$0.1
million of interest expense, respectively. Accrued interest is included in other current liabilities.
Capital Leases:
The Company has
one
lease for store facilities that
is
accounted for as
a
capital lease. Th
is
lease expire
s
in
2022. Assets acquired under capital leases are included in property, plant and equipment.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31,
2016
, minimum lease payments under the Company's capital lease obligation were as follows (in thousands):
|
|
|
|
|
|
|
|
Fiscal year
|
|
|
|
2017
|
|
$
|
211
|
2018
|
|
|
215
|
2019
|
|
|
216
|
2020
|
|
|
216
|
2021
|
|
|
215
|
Thereafter
|
|
|
90
|
Less: amounts representing interest
|
|
|
(366)
|
Present value of future minimum lease payments
|
|
|
797
|
Less: current portion
|
|
|
100
|
Capital lease obligations, net of current portion
|
|
$
|
697
|
Note 5: Commitments and Contingencies
Operating leases:
The Company leases buildings and office space under various operating lease agreements. In addition to rent, most leases require payments of real estate taxes, insurance, and common area maintenance. The leases generally have an initial lease term of ten to fifteen years and contain renewal options and escalation clauses. For leases that contain fixed escalation of the minimum rent or rent holidays, rent expense is recognized on a straight-line basis through the end of the lease term including assumed renewals. The difference between the straight-line rent amounts and amounts payable under the leases is recorded as deferred rent. For the years ended December 31,
2016
,
2015
and
2014
, rent expense was
$29.7
million,
$27.2
million, and
$25.2
million, respectively.
Annual minimum rentals under non-cancelable operating leases are as follows, for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
Fiscal year
|
|
|
|
2017
|
|
$
|
29,722
|
2018
|
|
|
30,358
|
2019
|
|
|
30,958
|
2020
|
|
|
30,833
|
2021
|
|
|
30,630
|
Thereafter
|
|
|
368,716
|
Total future maturities payments
|
|
$
|
521,217
|
Legal proceedings:
The Company,
two
of its former executive officers,
three
of its outside directors
,
two
of its former directors
, and certain companies affiliated with the directors, are defendants in a consolidated class action brought under the federal securities laws and now pending in the United States District Court for the District of Minnesota under the caption Beaver County Employees’ Retirement Fund, et al. v. Tile Shop Holdings, Inc., et al. Several related actions were filed in 2013 and subsequently consolidated. The plaintiffs are
three
investors who represent classes consisting of (1) all purchasers of Tile Shop common stock between August 22, 2012 and January 28, 2014 (the “class period”), seeking to pursue remedies under the Securities Exchange Act of 1934; and (2) all purchasers of Tile Shop common stock pursuant and/or traceable to the Company’s December 2012 registration statement, seeking to pursue remedies under the Securities Act of 1933.
Six
firms who were underwriters in the December 2012 secondary public offering are also named as defendants. The plaintiffs allege that during the class period, defendants failed to disclose certain related party transactions in the Company’s SEC filings and press releases. The plaintiffs assert claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In addition to attorneys’ fees and costs, the plaintiffs seek to recover damages on behalf of class members.
Subsequent to December 31, 2016, t
he parties have entered into a Stipulation of Settlement
(“
S
tipulation”
)
dated January 13, 2017 to settle all claims. Pursuant to the Stipulation,
$9.5
million will be paid on behalf of all defendants. The Company has agreed to pay
$5.0
million of that amount and the insurance company providing coverage for the initial tier of the Company’s directors and officer’s policy has agreed to pay
$4.5
million of the settlement. The Company and the insurance provider subsequently transferred money to an escrow account that had been
established to hold the
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
settlement fund. The settlement is subject to court approval. The
c
ourt has scheduled a hearing on whether to grant final approval of the settlement for May 3, 2017.
The net charge of
$5.0
million was recorded in selling, general and administrative
expenses
in the Consolidated Statement of
Operations during the year ended
December 31, 2016. The Company recorded a
$9.5
million other current liability and a
$4.5
million other current asset in the Consolidated Balance Sheet as of December 31, 2016
to reflect the Company’s obligation to the class and the corresponding receivable from the insurance company
.
The Company will pursue recovery of this amount as well as other legal fees incurred in connection with this case from its insurance providers who cover losses under the directors and offers policy exceeding the initial tier of coverage.
The Company also is a Defendant in
three
actions brought derivatively on behalf of the Company by
three
shareholders in the Court of Chancery for the State of Delaware (“Delaware Chancery Court”).
Two
of the actions were filed in 2015 and then consolidated (the “Consolidated Actions”). On July 31, 2015, the plaintiff-shareholders in the Consolidated Actions filed a consolidated complaint. The consolidated complaint names as defendants
four
current
members of the Company’s
Board of Directors
,
two
of its former Directors,
and
a
former employee of the Company. The third action (the “Third Action”) was filed on or about September 28, 2016 against
seven
members of the Company’s
Board of Directors
,
a
former officer, and
a
former employee. All of the complaints track many of the same factual allegations as have been made in the above-described federal securities class action. They allege that the defendant-directors and/or officer breached their fiduciary duties by failing to adopt adequate internal controls for the Company, by approving false and misleading statements issued by the Company, by causing the Company to violate generally accepted accounting principles and SEC regulations, by engaging in or approving alleged insider trading, and by permitting the Company’s primary product to contain illegal amounts of lead. The complaints also allege claims for insider trading and/or unjust enrichment. The complaints seek damages, disgorgement, an award of attorneys’ fees and other expenses, and an order compelling changes to the Company’s corporate governance and internal procedures. In 2015, the defendants moved to dismiss the Consolidated Actions, or in the alternative, to stay the Consolidated Actions pending resolution of the Beaver County Employees’ Retirement Fund action described above. Subsequently, upon agreement of the parties, the Court entered an Order staying the Consolidated Actions. Recently the Company moved to dismiss the newly-filed Third Action, or in the alternative, to stay the Third Action until resolution of the Beaver County Employees’ Retirement Fund action described above, or until the Company’s
Board of Directors
takes action on the demand described below. That motion has not yet been decided.
By letter dated May 19, 2016, a shareholder of the Company, through his attorney and prior to filing the Third Action, demanded that the
Board of Directors
investigate alleged breaches of fiduciary duty related to the same matters described above, and take action against certain present and former officers and directors of the Company. The
Board of Directors
has appointed a committee of two independent directors to investigate and evaluate the matters raised in the demand letter, and to recommend to the Company’s
Board of Directors
what actions, if any should be taken by the Company with respect to the matters raised in the demand letter.
Given the uncertainty of litigation and the preliminary stage of these cases, the Company cannot reasonably estimate the possible loss or range of loss that may result from these actions. The Company maintains directors and officers liability insurance policies that may reduce the Company’s exposure, if any. In the event the Company incurs a loss, the Company will pursue recoveries to the maximum extent available under these policies.
The Company is also, from time to time, subject to claims and disputes arising in the normal course of business. In the opinion of management, while the outcome of such claims and disputes cannot be predicted with certainty, the Company’s ultimate liability in connection with these matters is not expected to have a material adverse effect on the results of operations, financial position, or cash flows.
Note 6: 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;
|
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
·
|
|
Inputs other than quoted prices that are observable for the asset or liability; and
|
|
·
|
|
Inputs that are derived principally from or corroborated by other observable market data.
|
Level 3 – Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment.
The following table sets forth by Level within the fair value hierarchy
the Company’s
financial assets that were accounted for at fair value on a recurring basis at December 31, 2016 and December 31, 2015 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
|
|
December 31, 2016
|
|
December 31, 2015
|
Assets
|
|
(in thousands)
|
Cash and cash equivalents
|
|
Level 1
|
|
$
|
6,067
|
|
$
|
10,330
|
Restricted cash
|
|
Level 1
|
|
|
3,000
|
|
|
219
|
Long-term restricted cash
|
|
Level 1
|
|
|
3,881
|
|
|
-
|
The following methods and assumptions were used to estimate the fair value of each class of financial instrument. There have been no changes in the valuation techniques used by
the Company
to value
the Company’s
financial instruments.
|
·
|
|
Cash and cash equivalents:
Consists of cash on hand and bank deposits. The value was measured using quoted market prices in active markets. The carrying amount approximates fair value.
|
|
·
|
|
Restricted cash:
Consists of cash and cash equivalents held in bank deposit accounts restricted as to withdrawal or are under the terms of use for current operations. The value was measured using quoted market prices in active markets. The carrying amount approximates fair value.
|
|
·
|
|
Long term restricted cash:
Consists of cash and cash equivalents held in bank deposit accounts restricted as to withdrawal and designated for expenditure in the construction of noncurrent assets. The value was measured using quoted market prices in active markets. The carrying amount approximates fair value.
|
Fair value measurements also apply to certain non-financial assets and liabilities measured at fair value on a nonrecurring basis. Property, plant and equipment is measured at fair value when an impairment is recognized and the related assets are written down to fair value. The Company did not recognize any significant impairment losses during 2016 or 2015. The carrying value of the Company’s borrowings under its credit agreement approximate fair value based upon the market interest rates available to the Company for debt obligations with similar risks and maturities.
Note 7: Related Party Transactions
The Company employ
s
Adam Rucker, son of Robert A. Rucker, a member of our
Board of Directors
, as a Director of Information Technology. In fiscal
2016
, the Company paid Adam
Rucker a total of
$1
40
,
000
, consisting of base salary and cash bonus.
In fiscal 2015, the Company
paid
Adam
Rucker a total of
$127,
000
, consisting of base salary
and cash bonus.
Also in
2015,
the Company
granted
stock options to Adam Rucker that had a
combined grant date fair value
of
$44,000
.
In fiscal 2014,
the Company
paid Adam Rucker
$10
4
,
000
consisting of base salary and
cash bonus
. Adam
Rucker also received the standard benefits provided to other Company employees during
2016,
2015
and 2014
.
Note 8: Earnings Per Share
Basic earnings per share is cal
culated by dividing net income
by the weighted-average number of shares outstanding during the period. Diluted earnings per share is cal
culated by dividing net income
by the weighted-average number of common shares outstanding, after taking into consideration all dilutive potential common shares outstanding during the period.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Basic and diluted net income
per
share was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands, except share and per share data)
|
Net income
|
|
$
|
18,463
|
|
$
|
15,696
|
|
$
|
10,547
|
Weighted-average shares outstanding - basic
|
|
|
51,418,600
|
|
|
51,161,059
|
|
|
51,015,354
|
Dilutive common stock equivalents
|
|
|
461,513
|
|
|
143,923
|
|
|
14,436
|
Weighted-average shares outstanding - diluted
|
|
|
51,880,113
|
|
|
51,304,982
|
|
|
51,029,790
|
Basic net income per share
|
|
$
|
0.36
|
|
$
|
0.31
|
|
$
|
0.21
|
Diluted net income per share
|
|
$
|
0.36
|
|
$
|
0.31
|
|
$
|
0.21
|
Antidilutive Shares
|
|
|
373,255
|
|
|
568,014
|
|
|
1,042,579
|
Note 9: Equity Incentive Plans
2012 Plan:
Under the 2012 Omnibus Award Plan (the “2012 Plan”),
2,500,000
shares of the Company’s common stock were initially reserved for issuance
pursuant to a variety of stock
based compensation awards, including stock options, and restricted stock awards. The number of shares initially reserved for issuance or transfer pursuant to awards under the 2012 Plan was to be increased on the first day of each calendar year beginning in 2013 and ending in 2022, in an amount equal to the lesser of (A)
2,500,000
shares, (B)
six
percent (6%) of the shares of common stock outstanding (on an as-converted basis) on the last day of the immediately preceding calendar year, and (C) such smaller number of shares of stock as determined by the Company’s
Board of Directors
. During 2013, (i) 2,500,000 shares of common stock were added to the 2012 Plan reserve effective January 1, 2013 in accordance with the automatic share increase provision of the 2012 Plan, (ii) the 2012 Plan was amended to eliminate the automatic share increase for subsequent years, and (iii) the 2012 Plan was amended to authorize grants of performance-based awards, which may be paid in cash or equity. The amendments to the 2012 Plan were approved by the Company’s stockholders in July 2013.
Stock Options:
During the years ended December 31,
2016
,
2015
and
2014
, the Company granted stock options to its employees that included service condition requirements. The options provide for certain acceleration of vesting and cancellation of options under different circumstances, such as a change in control, death, disability and termination of service. The Company recogniz
es compensation expense
on a straight-line basis over the requisite service period
, net of actual forfeitures
. For the portion of the options that contain both a market and service condition, the Company recognizes compensation expense, net of
actual
forfeitures, using graded vesting over the requisite service period.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in the option valuation models are outlined in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rate
|
|
1.15%
|
–
|
1.52%
|
|
0.90%
|
–
|
1.07%
|
|
0.78%
|
–
|
1.05%
|
Expected life (in years)
|
|
5
|
–
|
7
|
|
|
5
|
|
|
|
5
|
|
Expected volatility
|
|
52%
|
–
|
53%
|
|
52%
|
–
|
53%
|
|
|
52%
|
|
The computation of the expected volatility assumptions used in the option valuation models was based on historical volatilities of the Company. The Company used the “simplified” method for an expected life as prescribed in SEC Staff Accounting Bulletin (“SAB”) No. 110, for companies that do not have adequate historical data. The risk-free interest rate was based on the U.S. Treasury yield at the time of grant.
The expected dividend yield was
zero
for all stock options granted prior to December 31, 2016 based on the fact that
, at that time,
the Company had not paid dividend
s
or a plan
to pay dividend
s
in the future.
To the extent that actual outcomes differ from the Company's assumptions, the Company is not required to true up grant-date fair value-based expense to final intrinsic values. The weighted average fair value of stock options granted was
$7.37
,
$5.00
, and
$5.13
during the years ended December 31,
2016
,
2015
and
2014
, respectively.
Stock based compensation related to options for the years ended December 31,
2016
,
2015
and
2014
was
$3.2
million,
$3.6
million, and
$2.8
million, respectively, and was included in selling, general and administrative expenses in the consolidated statements of operations. As of December 31,
2016
, the total future compensation cost related to non-vested options not yet recognized in the consolidated statement of operations was
$5.3
million and is expected to be recognized over a weighted-average period of
3.3
years.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table summarizes stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Avg Grant
Date
Fair Value
|
|
Weighted Avg
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Balance, January 1, 2014
|
|
2,274,917
|
|
$
|
14.02
|
|
$
|
6.92
|
|
8.9
|
|
$
|
13,051
|
Granted
|
|
768,750
|
|
$
|
11.47
|
|
$
|
5.13
|
|
|
|
|
|
Exercised
|
|
(15,917)
|
|
$
|
10.00
|
|
$
|
5.19
|
|
|
|
|
|
Cancelled/Forfeited
|
|
(556,750)
|
|
$
|
13.93
|
|
$
|
6.60
|
|
|
|
|
|
Balance, December 31, 2014
|
|
2,471,000
|
|
$
|
13.27
|
|
$
|
6.45
|
|
7.6
|
|
$
|
38
|
Granted
|
|
482,671
|
|
$
|
10.91
|
|
$
|
5.00
|
|
|
|
|
|
Exercised
|
|
(69,932)
|
|
$
|
10.00
|
|
$
|
5.17
|
|
|
|
|
|
Cancelled/Forfeited
|
|
(258,794)
|
|
$
|
11.81
|
|
$
|
5.61
|
|
|
|
|
|
Balance, December 31, 2015
|
|
2,624,945
|
|
$
|
13.07
|
|
$
|
6.30
|
|
6.5
|
|
$
|
12,757
|
Granted
|
|
443,500
|
|
$
|
15.43
|
|
$
|
7.37
|
|
|
|
|
|
Exercised
|
|
(95,786)
|
|
$
|
10.47
|
|
$
|
5.40
|
|
|
|
|
|
Cancelled/Forfeited
|
|
(612,118)
|
|
$
|
12.33
|
|
$
|
5.68
|
|
|
|
|
|
Balance, December 31, 2016
|
|
2,360,541
|
|
$
|
13.84
|
|
$
|
6.71
|
|
5.7
|
|
$
|
15,971
|
Exercisable at December 31, 2016
|
|
1,358,430
|
|
$
|
13.60
|
|
$
|
6.79
|
|
5.7
|
|
|
|
Vested and expected to vest, December 31, 2016
|
|
2,660,291
|
|
$
|
13.40
|
|
$
|
6.46
|
|
5.7
|
|
$
|
18,834
|
The aggregate intrinsic value is the difference between the exercise price and the closing price of the Company’s stock on December 31. The intrinsic value of the stock options exercised during
2016
and
2015
was
$0.9
million and
$0.4
million, respectively.
Options outstanding as of December 31,
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Price
|
|
|
|
Weighted Average
|
|
|
|
|
Options
|
|
Exercise Price
|
|
Remaining Contractual
Life-Years
|
$5.00
|
to
|
$10.00
|
|
1,090,007
|
|
$
|
9.66
|
|
5.47
|
$10.01
|
to
|
$15.00
|
|
648,034
|
|
$
|
12.42
|
|
4.97
|
$15.01
|
to
|
$20.00
|
|
320,500
|
|
$
|
17.76
|
|
7.27
|
$20.01
|
to
|
$25.00
|
|
64,000
|
|
$
|
23.14
|
|
6.73
|
$25.01
|
to
|
$30.00
|
|
238,000
|
|
$
|
29.02
|
|
6.72
|
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Restricted Stock:
The following table summarizes restricted stock activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Avg
Grant Date
Fair Value
|
Nonvested, December 31, 2013
|
|
230,896
|
|
$
|
15.84
|
Granted
|
|
76,066
|
|
$
|
11.93
|
Vested
|
|
(117,727)
|
|
$
|
15.19
|
Forfeited
|
|
-
|
|
$
|
-
|
Nonvested, December 31, 2014
|
|
189,235
|
|
$
|
14.67
|
Granted
|
|
54,036
|
|
$
|
12.45
|
Vested
|
|
(164,235)
|
|
$
|
12.50
|
Forfeited
|
|
-
|
|
$
|
-
|
Nonvested, December 31, 2015
|
|
79,036
|
|
$
|
17.67
|
Granted
|
|
73,384
|
|
$
|
17.60
|
Vested
|
|
(66,536)
|
|
$
|
15.55
|
Forfeited
|
|
-
|
|
$
|
-
|
Nonvested, December 31, 2016
|
|
85,884
|
|
$
|
19.25
|
The total expense associated with restricted stock for the years ended December 31,
2016
,
2015
, and
2014
was
$1.1
million,
$1.9
million, and
$1.8
million, respectively. As of December 31,
2016
, there was
$1.2
million of total unrecognized expense related to unvested restricted stock awards, which are expected to vest, and will be expensed through 20
21
. The fair value of restricted stock granted in fiscal year
2016
was
$1.3
million. The total fair value of restricted stock that vested during the year ended December 31,
2015
was
$0.9
million. Using the closing stock price of
$19.55
on December 31,
2016
, the number of restricted shares outstanding and expected to vest was
85,884
, with an intrinsic value of
$1.7
million.
Note 10: Income Taxes
The Tile Shop, LLC tax returns for periods 2010 through the Business Combination on August 21, 2012 are subject to examination by the IRS
;
however, these tax liabilities are the responsibility of the former The Tile Shop members. The Company’s federal and state tax returns for the periods ended December 31, 2013, December 31, 2014
, and December 31, 2015
remain subject to examination.
The
Company records interest and penalties through income tax relating to uncertain tax positions. As of December 31,
2016
,
2015
and
2014
, the Company has not recognized any liabilities for uncertain tax positions nor has the Company accrued interest and penalties related to uncertain tax positions.
The components of the provision for income taxes
(benefit) consist of the following
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10,831
|
|
$
|
3,691
|
|
$
|
4,851
|
State
|
|
|
2,560
|
|
|
1,886
|
|
|
1,351
|
International
|
|
|
30
|
|
|
-
|
|
|
-
|
Total Current
|
|
|
13,421
|
|
|
5,577
|
|
|
6,202
|
Deferred
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(363)
|
|
|
5,252
|
|
|
1,076
|
State
|
|
|
(182)
|
|
|
247
|
|
|
104
|
Total Deferred
|
|
|
(545)
|
|
|
5,499
|
|
|
1,180
|
Total Provision for Income Taxes
|
|
$
|
12,876
|
|
$
|
11,076
|
|
$
|
7,382
|
A majority of all
of the Company's income is from domestic operations.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table reflects the effective income tax rate reconciliation for the years ended December 31,
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Federal statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of the federal tax benefit
|
|
4.4
|
|
|
4.4
|
|
|
5.0
|
|
Stock based compensation
|
|
1.6
|
|
|
1.4
|
|
|
1.5
|
|
Other
|
|
0.1
|
|
|
0.6
|
|
|
(0.3)
|
|
Effective tax rate
|
|
41.1
|
%
|
|
41.4
|
%
|
|
41.2
|
%
|
Components of net deferred income taxes are as foll
ows at December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Deferred income tax assets:
|
|
|
|
|
|
|
Section 743 carryforward
|
|
$
|
27,251
|
|
$
|
29,843
|
Leasehold improvement reimbursements
|
|
|
5,299
|
|
|
5,592
|
Inventory
|
|
|
1,707
|
|
|
1,606
|
Deferred rent
|
|
|
6,794
|
|
|
5,549
|
Stock based compensation
|
|
|
3,112
|
|
|
2,488
|
Other
|
|
|
3,064
|
|
|
1,023
|
Total deferred income tax assets
|
|
$
|
47,227
|
|
$
|
46,101
|
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
Depreciation
|
|
|
25,836
|
|
|
25,255
|
Total deferred income tax liabilities
|
|
|
25,836
|
|
|
25,255
|
Net deferred income tax assets
|
|
$
|
21,391
|
|
$
|
20,846
|
The Company has not recorded U.S. deferred income taxes on approximately $0.5 million of its non-U.S. subsidiaries' undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. If these earnings were repatriated to the United States, the Company would be required to accrue and pay U.S. federal income taxes and foreign withholding taxes, as adjusted for foreign tax credits.
Note 11: New Market Tax Credit
2016 New Market Tax Credit
In December 2016, the Company entered into a financing transaction with U.S. Bank Community, LLC (“U.S. Bank”) related to a
$9.2
million expansion of the Company’s facility in Durant, Oklahoma. U.S. Bank made a capital contribution to, and 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 December 2016, Tile Shop Lending loaned
$6.7
million to the Investment Funds at an interest rate of
1.37%
per year and with a maturity 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 the investors, net of syndication fees) were used to partially fund the distribution center project.
In December
2016
, the investors also contributed
$3.1
million to the Investment Funds and, by virtue of such contribution, are entitled to substantially all of the tax benefits derived from the NMTCs, while the Company effectively received net loan proceeds equal to the investors’ contributions to the Investment Fund. This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase the investors’ interest. The Company believes that the investors will exercise the put option in 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
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify the investors for any loss or recapture of NMTCs related to the financing until such time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement.
The Company has determined that the financing arrangement with the Investment Funds and CDEs contains a variable interest entity (“VIE”). The ongoing activities of the Investment Funds – 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 Funds. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to the structure; U.S. Bank’s lack of a material interest in the underling economics of the project; and the fact that the Company is obligated to absorb losses of the Investment Fund. The Company concluded that it is the primary beneficiary of the VIE and consolidated the Investment Funds, as a VIE, in accordance with the accounting standards for consolidation. U.S. Bank’s contributions of $3.1 million, are included in cash, restricted cash,
long-term restricted cash,
other accrued liabilities, and other long-term liabilities in the Consolidated Balance Sheet.
The benefit of this contribution will be recognized as a decrease in depreciation expense as the Company amortizes the contribution liability over the seven-year compliance period as it is being earned through the ongoing compliance with the conditions of the NMTC program.
The Company incurred
$1.2
million of
closing costs
in connection with this transaction which are classified as other current assets and other non-current assets in the Consolidated Balance Sheet.
The direct costs incurred in connection with this arrangement will be amortized over the seven year compliance period of the NMTC program
.
After closing on this transaction, the Company is able to request reimbursement
for
certain expenditures made in connection with the expansion of the d
istribution center in Durant, Oklahoma
from the Investment Fund. Expenditures that qualify for reimbursement include building costs, equipment purchases, and other expenditures tied to the expansion of the facility. As of December 31, 2016, the balance available in the Investment Fund available for reimbursement to the Company was
$6.9
million. The Company classified $3.0 million of the Investment Fund balance to be used toward the purchase of current assets as restricted cash and $3.9 million of the Investment Fund balance to be used toward the purchase of long-term assets as long-term restricted cash in the Consolidated Balance Sheet at December 31, 2016.
2013 New Market Tax Credit
In July 2013
,
the Company entered into a financing transaction with U.S.
Bank and Chase Community Equity (“Chase”, and collectively with Chase, the “investors”) related to a
$19.1
million
acquisition, rehabilitation, and construction of the Company’s distribution center and manufacturing facilities in Durant
,
Oklahoma. In this transaction, Tile Shop Lending loaned
$13.5
million to the Tile Shop Investment Fund LLC. The investors contributed
$5.6
million to the Tile Shop Investment Fund LLC. The investors are entitled to the tax benefits derived from the NMTC by virtue of their contribution while the Company received the proceeds, net of syndication fees, to apply toward the construction project. This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase the investors’ interest. The Company believes that the investors will exercise the put option in September 2020 at the end of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify the investors for any loss or recapture of NMTCs related to the financing until such time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement.
The Company determined that this financing arrangement contains a VIE. The ongoing activities of the Tile Shop Investment Fund LLC – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the Tile Shop Investment Fund LLC. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to the structure; the investors lack of a material interest in the underling economics of the project; and the fact that the Company is obligated to absorb losses of the Investment Fund. The Company concluded that it is the primary beneficiary of the VIE and consolidated the Tile Shop Investment Fund LLC, as a VIE, in accordance with the accounting standards for consolidation. In 2013, the investor’s contributions, of $5.6 million, net of syndication fees were included in cash, restricted cash
, other accrued liabilities
and other long-term liabilities in the Consolidated Balance Sheet. The Company incurred
$1.2
million of syndication fees in connection with this transaction which were classified as other current assets and other non-current assets in the Consolidated Balance Sheet. The Company is recognizing the benefit of this net
$4.4
million contribution over the
seven
-year compliance period as it is being earned through the on-going compliance with the conditions of the NMTC program.
As of
December
3
1
, 2016, the balance of the contribution liability was
$2.4
million
, of which
$0.7
million is classified as other accrued liabilities on the Consolidated Balance Sheet and
$1.7
million
is classified as other long-term liabilities on the Consolidated Balance Sheet.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12: Retirement Savings Plan
The Company has a 401(k) profit sharing plan covering substantially all full-time employees. Employee contributions are limited to the maximum amount allowable by the Internal Revenue Code. The Company matched
$0.5
million,
$0.4
million, and
$0.5
million of employee contributions in
2016
,
2015
, and
2014
and made
no
discretionary contributions for any of the years presented.
Note 13: Quarterly Financial Data (Unaudited)
Quarterly results of operations for the years ended December 31,
2016
and
2015
are summarized below (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
(in thousands)
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
84,714
|
|
$
|
84,270
|
|
$
|
78,559
|
|
$
|
76,614
|
Gross profit
|
|
|
59,705
|
|
|
58,699
|
|
|
55,159
|
|
|
53,333
|
Income from operations
|
|
|
11,756
|
|
|
11,709
|
|
|
7,798
|
|
|
1,650
|
Net income
|
|
|
6,758
|
|
|
6,849
|
|
|
4,583
|
|
|
273
|
Basic earnings per share
|
|
|
0.13
|
|
|
0.13
|
|
|
0.09
|
|
|
0.01
|
Diluted earnings per share
|
|
|
0.13
|
|
|
0.13
|
|
|
0.09
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
72,963
|
|
$
|
75,706
|
|
$
|
72,404
|
|
$
|
71,914
|
Gross profit
|
|
|
50,971
|
|
|
51,293
|
|
|
50,713
|
|
|
50,633
|
Income from operations
|
|
|
7,195
|
|
|
8,438
|
|
|
6,666
|
|
|
6,927
|
Net income
|
|
|
3,659
|
|
|
4,490
|
|
|
3,761
|
|
|
3,786
|
Basic earnings per share
|
|
|
0.07
|
|
|
0.09
|
|
|
0.07
|
|
|
0.08
|
Diluted earnings per share
|
|
|
0.07
|
|
|
0.09
|
|
|
0.07
|
|
|
0.08
|
The decrease in income from operations in the fourth quarter of 2016
, compared to the fourth quarter of 2015,
is due to a
$
5.5
million of the increase in special charges related to litigation
discussed in footnote 5
.
Note 1
4
:
Subsequent Event
On
February 14, 2017
, the Company
declared
a
$0.05
dividend to
stockholders
of record as of the close of business on
March 14, 2017
. The dividend will be paid on
March 24, 2017
.