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.
The Company is a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States. Natural stone products include marble, travertine, granite, quartz, sandstone, slate, and onyx tiles. Man-made products include ceramic, porcelain, glass, cement, wood look, and metal tiles. The majority of the tile products are sold under the Company's proprietary Rush River and Fired Earth brand names. The Company purchases tile products, accessories
and tools directly from its network of suppliers. The Company manufactures its own setting and maintenance materials, such as thinset, grout and sealer under the Superior brand name. As of December 31, 2018, the Company operated
140
stores in
31
states and the District of Columbia, with an average size of approximately
20,200
square feet. The Company
also
has a sourcing
office
located in China.
Basis of Presentation
The consolidated financial statements of Holdings include the accounts of its wholly owned subsidiaries and variable interest entities, for which the Company is the primary beneficiary. See Note 12, “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’s estimates and judgments are based on historical experience and various other assumptions that it believes are reasonable under the circumstances. The amount of assets and liabilities reported on the Company's balance sheets and the amounts of income and expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition and related reserves for sales returns, useful lives of property, plant and equipment, determining impairment of property, plant and equipment, valuation of inventory, and income taxes. Actual results may differ from these estimates.
Cash and Cash Equivalents
The Company had cash and cash equivalents of
$5.6
million and
$6.6
million at December 31,
2018
and
2017
, respectively. The Company considers all highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents. The Company accepts a range of debit and credit cards, and these transactions are generally transmitted to a bank for reimbursement within 24 hours. The payments due from the banks for these debit and credit card transactions are generally received, or settled, within 24 to 48 hours of the transmission date. The Company considers all debit and credit card transactions that settle in less than seven days to be cash and cash equivalents. Amounts due from the banks for these transactions classified as cash and cash equivalents totaled $0.8 million and
$3.1
million at December 31,
2018
and
2017
, respectively.
Restricted Cash
Cash and cash equivalents that are restricted as to withdrawal or are under the terms of use for current operations are included in the restricted balance on the balance sheet.
Trade Receivables
Trade receivables are carried at original invoice amount less an estimate made for doubtful accounts. Management determines the allowance for doubtful accounts on a specific identification basis as well as by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. The allowance for doubtful accounts was
$0.1
million as of December 31,
2018
and
2017
. The Company does not accrue interest on accounts receivable.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Inventories
The Company’s inventory consists of manufactured items and purchased merchandise held for resale. Inventories are stated at the lower of cost (determined using the weighted-average cost method) or net realizable value. The Company capitalizes the cost of inbound freight, duties, and receiving and handling costs to bring purchased materials into its distribution network. The labor and overhead costs incurred in connection with the production process are included in the value of manufactured finished goods. The Company provides provisions for losses related to shrinkage and other amounts that are otherwise not expected to be fully recoverable. These provisions are calculated based on historical shrinkage, selling price, margin and current business trends. These estimates have calculations that require management to make assumptions based on the current rate of sales, age, salability and profitability of inventory, historical percentages that can be affected by changes in our merchandising mix, customer preferences, rates of sale through and changes in actual shrinkage trends.
The provision for losses related to shrinkage and other amounts was
$0.3
million and
$0.2
million as of December 31,
2018
and
2017
, 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,
2018
and
2017
, the Company has not
recognized any liabilities for uncertain tax positions
nor has the Company
accrued interest and penalties
related to uncertain tax positions.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration received in exchange for those goods or services. The Company recognizes service revenue, which consists primarily of freight charges for home delivery, when the service has been rendered. The Company is required to charge and collect sales and other taxes on sales to the Company's customers and remit these taxes back to government authorities. Total revenues do not include sales tax because the Company is a pass-through conduit for collecting and remitting sales tax. Sales are reduced by an allowance for anticipated sales returns that the Company estimates based on historical returns.
The Company generally requires customers to pay a deposit when purchasing inventory that is not regularly carried at the store location, or not currently in stock. These deposits are included in other accrued liabilities until the customer takes possession of the merchandise.
Sales Return Reserve
Customers may return purchased items for an exchange or refund.
The process to establish a sales return reserve contains uncertainties because it requires management to make assumptions and to apply judgment to estimate future returns and exchanges. The customer may receive a refund or exchange the original product for a replacement of equal or similar quality for a period of six months from the time of original purchase. Products received back under this policy are reconditioned pursuant to state laws and resold.
The Company records a reserve for estimated product returns, based on historical return trends together with current product sales performance.
Cost of Sales and Selling, General and Administrative Expenses
The primary costs classified in each major expense category are:
Cost of Sales
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Shipping and transportation 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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Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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·
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Physical inventory losses;
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·
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Costs incurred at distribution centers in connection with the receiving process; and
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·
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Labor and overhead costs incurred to manufacture inventory
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Selling, General & Administrative Expenses
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·
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All compensation costs for store, corporate and distribution employees;
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·
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Occupancy, utilities and maintenance costs of store and corporate facilities;
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·
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Shipping and transportation expenses to move inventory from the Company's distribution centers to the Company's stores;
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·
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Depreciation and amortization; and
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Stock Based Compensation
The Company recognizes expense for its stock based compensation based on the fair value of the awards on the grant date. The Company may issue incentive awards in the form of stock options, restricted stock awards and other equity awards to employees and non-employee directors. Compensation expense is recognized on a straight-line basis over the requisite service period, net of actual forfeitures. Certain awards are also subject to forfeiture if the Company fails to attain its Adjusted EBITDA targets. The Company adjusts the cumulative expense recognized on awards with performance conditions based on a probability of achieving the performance condition.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and bank deposits. By their nature, all such instruments involve risks including credit risks of non-performance by counterparties. A substantial portion of the Company's cash and cash equivalents and bank deposits are invested with banks with high investment grade credit ratings.
Segments
The Company’s operations consist primarily of retail sales of natural stone and man-made tiles, setting and maintenance materials, and related accessories in stores located in the United States. The Company’s chief operating decision maker only reviews the consolidated results of the Company and accordingly, the Company has concluded it has one reportable segment.
Advertising Costs
Advertising costs were
$8.3
million,
$9.5
million and
$6.9
million for the years ended December 31,
2018
,
2017
and
2016
, respectively, and are included in selling, general and administrative expenses in the consolidated statements of operations. The Company’s advertising consists primarily of digital media, direct marketing, events and traditional print media that is expensed at the time the media is distributed.
Pre-opening Costs
The Company’s pre-opening costs are those typically associated with the opening of a new store and generally include rent expense, compensation costs and promotional costs. The Company expenses pre-opening costs as incurred which are recorded in selling, general and administrative expenses. During the years ended December 31,
2018
,
2017
and
2016
, the Company reported pre-opening costs of
$0.1
million,
$1.7
million and
$0.5
million, respectively.
Property, Plant and Equipment
Property, plant and equipment and leasehold improvements are recorded at cost. Improvements are capitalized while repairs and maintenance costs are charged to selling, general and administrative expenses when incurred. Property, plant and equipment are depreciated or amortized using the straight-line method over each asset’s estimated useful life. Leasehold improvements and fixtures at leased locations are amortized using the straight-line method over the shorter of the lease term (including fixed rate renewal terms)
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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)
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Buildings and building improvements
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40
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Leasehold improvements
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8
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–
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26
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Furniture and fixtures
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2
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–
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7
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Machinery and equipment
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5
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–
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10
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Computer equipment and software
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3
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–
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7
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Vehicles
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5
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The Company evaluates potential impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired, and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. If impairment exists and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets, an impairment loss is recorded based on the difference between the carrying value and fair value of the assets. During the fiscal years ended December 31, 2018 and 2017, the Company recorded asset impairment charges of $0.7 million and $1.1 million, which were classified in selling, general and administrative expenses. No impairment charges were recorded during the year ended December 31, 2016.
Internal Use Software
The Company capitalizes software development costs incurred during the application development stage related to new software or major enhancements to the functionality of existing software that is developed solely to meet the Company’s internal operational needs and when there are no plans to market the software externally. Costs capitalized include external direct costs of materials and services and internal compensation costs. Any costs during the preliminary project stage or related to training or maintenance are expensed as incurred. Capitalization ceases when the software project is substantially complete and ready for its intended use. The capitalization and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility, and estimated economic life. As of December 31,
2018
and
2017
,
$3.2
million and
$0.2
million was included in computer equipment and software, respectively. As of December 31, 2018,
$6.6
million was also included in construction in progress primarily relating to the Company’s new enterprise resource planning system. The internal use software costs are amortized over estimated useful lives of
three
to
seven
years. There was
$0.3
million,
$0.2
million and
$0.5
million of amortization expense related to capitalized software during the years ended December 31,
2018
,
2017
and
2016
, respectively.
Leases
The Company leases its store locations and corporate headquarters. We also lease our distribution center in Dayton, New Jersey. 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 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 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,
2018
and
2017
, an accrual of
$0.6
million and
$0.3
million related to estimated employee health claims was included in other current liabilities, respectively. As of December 31,
2018
and
2017
, an accrual of
$1.6
million and
$1.3
million related to estimated workers’ compensation claims was included in other current liabilities, respectively.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company has standby letters of credit outstanding related to the Company's workers’ compensation and employee health insurance policies. As of December 31,
2018
and
2017
, the standby letters of credit totaled
$1.1
million.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“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 receive in exchange for those goods or services. In 2016, the FASB issued several amendments to the standard. The Company adopted this standard as of January 1, 2018 using the modified re
trospective transition method. See Note 2, “Revenues,” for further details.
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 in the statement of cash flows. The Company adopted the new standard as of March 31, 2018 using the retrospective transition method. The Company’s restricted cash balance was $0.8 million as of
December 31
, 2018. Upon adopting the new standard, the Company no longer presents the release of restricted cash as a financing cash inflow. Instead, restricted cash and long-term restricted cash balances are included in the beginning and ending cash, cash equivalents and restricted cash balances in the Consolidated Statement of Cash Flows.
In connection with the adoption of this standard, $6.0 million received from restricted cash accounts during the fiscal year ended December 31, 2017 that was previously presented as a financing cash inflow was reclassified to cash, cash equivalents and restricted cash balances in the Consolidated Statement of Cash Flows. Additionally, the Company’s
$6.7
million contribution to the NMTC fund, the $1.9 million received from restricted cash accounts, and the $1.3 million of closing costs incurred in connection with this transaction during the fiscal year ended December 31, 2016 that were previously presented financing cash flows were reclassified to cash, cash equivalents and restricted cash balances. Contributions made by U
.
S
.
Bank Community, LLC to new market tax credit fund totaling $3.2 million during the fiscal year ended December 31, 2016 that were previously
not considered financing cash inflows as they related to restricted cash
are now classified as financing cash inflows. See Note 12 for further discussion surrounding New Market Tax Credits.
Accounting Pronouncements Not Yet Adopted
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 accounting standards update also requires expanded disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The Company will adopt the new standard effective January 1, 2019 using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption.
The standard provides a number of optional practical expedients in transition. The Company will elect the package of three practical expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carryforward the historical lease classification. The Company will also elect to apply the hindsight practical expedient. The Company will not separate nonlease components from lease components by class of underlying assets where appropriate and the Company will not apply the recognition requirements of the standard to short-term leases, as allowed by the standard.
Upon adopting the new standard, the Company expects the most significant impact to the financial statements will be the recognition of right of use assets of approximately
$142
million to
$147
milli
on and lease liabilities of
$165
million
to
$170
million as of January 1, 2019. The Company will also adjust
the
useful life of certain leasehold improvements in the event the application of the hindsight practical expedient results in a change in the expected lease term. The Company expects that the change in the useful life assigned to certain leasehold improvements will result in a
$14
million
to
$17
million reduction in fixed assets. The adoption of the new standard is not expected to have a material impact on net income or cash flows
. The Company is in the process of finalizing its discount rate analysis
.
In June 2016, the FASB issued a final standard on accounting for credit losses. The new standard is effective for the Company in fiscal 2020 and requires a change in credit loss calculations using the expected loss method. The Company is evaluating the effect of the new standard on its consolidated financial statements and related disclosures.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note
2
: Revenues
On January 1, 2018, the Company adopted Accounting Standards Update No. 2014-09 (Topic 606), “Revenue from Contracts with Customers,” using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605. The adoption of Topic 606 had a cumulative impact adjustment to opening retained earnings of
$0.1
million as of January 1, 2018 and did not have an impact on revenues recognized for the
year ended
December 31, 2018
.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration received in exchange for those goods or services. Sales taxes are excluded from revenue.
The following table presents revenues disaggregated by product category:
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Years Ended December 31,
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2018
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2017
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Man-made tiles
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46
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%
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43
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%
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Natural stone tiles
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28
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33
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Setting and maintenance materials
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14
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11
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Accessories
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10
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11
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Delivery service
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2
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2
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100
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%
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100
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%
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The Company generates revenues by selling tile products, setting and maintenance materials, accessories, and delivery services to its customers through its store locations. The timing of revenue recognition coincides with the transfer of control of goods and services ordered by the customer, which falls into one of three categories described below:
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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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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.
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·
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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.
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The Company determines the transaction price of its contracts based on the pricing established at the time a customer places an order. The transaction price does not include sales tax as the Company is a pass-through conduit for collecting and remitting sales tax. Any discounts applied to an order are allocated proportionately to the base price of the goods and services ordered. Deposits made by customers are recorded in other accrued liabilities. Deferred revenues associated with customer deposits are recognized at the time the Company transfers control of the items ordered or renders the delivery service. In the event an order is partially fulfilled as of the end of a reporting period, revenue will be recognized based on the transaction price allocated to the goods delivered and services rendered. The customer deposit balance was
$
7.4
million
and
$8.1
million
as of
December
3
1
, 2018
and
2017
, respectively
. Revenues recognized during the
year ended December 31,
2018 included in the customer deposit balance as of the b
eginning of the period were
$7.9
million.
The Company extends financing to qualified professional customers who apply for credit. The accounts receivable balance was $3.
1
million and $2.4 million as of
December
31, 2018 and
2017, respectively. Customers who qualify for an account receive 30-day payment terms. The Company expects that the customer will pay for the goods and services ordered within one year from the date the order is placed. Accordingly, the Company qualifies for the practical expedient outlined in ASC 606-10-32-18 and does not adjust the promised amount of consideration for the effects of the financing component.
Customers may return purchased items for an exchange or refund. The Company records a reserve for estimated product returns based on the historical returns trends and the current product sales performance. Historically, the sales returns reserve was presented
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
net of cost of sales in other current liabilities. Upon adoption of Topic 606, the Company presents the sales returns reserve as an other current liability and the estimated value of the inventory that will be returned as an other current asset in the Consolidated Balance Sheet. The components of the sales returns reserve reflected in the Consolidated Balance Sheet as of
December 31, 2018 and
2017 are as follows:
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(in thousands)
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December 31,
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December 31,
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2018
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2017
(1)
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Other current liabilities
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$
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5,154
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$
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3,139
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Other current assets
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1,498
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-
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Sales returns reserve, net
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$
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3,656
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$
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3,139
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(1)
As of December 31, 2017, the sales returns reserve of $3.1 million was presented net of the expected value of inventory to be returned of $0.9 million.
Note
3
: Property Plant and Equipment:
Property, plant and equipment consisted of the following at December 31:
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2018
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2017
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(in thousands)
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Land
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$
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904
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$
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904
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Building and building improvements
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25,608
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25,417
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Leasehold improvements
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88,454
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84,677
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Furniture and fixtures
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140,612
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129,876
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Machinery and equipment
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29,424
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28,561
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Computer equipment and software
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33,947
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29,851
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Vehicles
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4,125
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3,463
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Construction in progress
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11,089
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6,124
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Total property, plant and equipment
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334,163
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308,873
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Less accumulated depreciation
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(175,807)
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(157,468)
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Total property, plant and equipment, net
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$
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158,356
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$
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151,405
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Depreciation expense on property and equipment, including capital leases, was
$28.4
million,
$26.2
million and
$23.0
million for the years ended December 31,
2018
,
2017
and
2016
, respectively. Property, plant and equipment is measured at fair value when an impairment is recognized and the related assets are written down to fair value. During the year
s
ended December 31,
2018 and 2017,
the Company recorded asset impairment charges of
$0.7
million and
$1.1 million
, respectively
.
No
impairment charges were recorded during the year ended December 31,
2016
.
Note
4
: Accrued Liabilities
Accrued liabilities consisted of the following at December 31:
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2018
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2017
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(in thousands)
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Customer deposits
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$
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7,383
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$
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8,064
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Sales return reserve
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5,154
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3,139
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Accrued wages and salaries
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3,689
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2,853
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Payroll and sales taxes
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2,929
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2,491
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Other current liabilities
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5,329
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5,866
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Total accrued liabilities
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$
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24,484
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$
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22,413
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Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5: Long-term Debt
Long-term debt, net of debt issuance costs, consisted of the following at December 31:
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2018
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2017
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Unamortized
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Unamortized
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Debt Issuance
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Debt Issuance
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Principal
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Costs
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Principal
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Costs
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(in thousands)
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Term note payable (interest at
3.06%
at December 31, 2017)
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$
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-
|
|
$
|
-
|
|
$
|
11,346
|
|
$
|
(36)
|
Commercial bank credit facility
|
|
|
53,000
|
|
|
-
|
|
|
15,000
|
|
|
-
|
Variable interest rate bonds (
1.69%
at December 31, 2017)
|
|
|
-
|
|
|
-
|
|
|
705
|
|
|
-
|
Total debt obligations
|
|
|
53,000
|
|
|
-
|
|
|
27,051
|
|
|
(36)
|
Less: current portion
|
|
|
-
|
|
|
-
|
|
|
8,855
|
|
|
(22)
|
Debt obligations, net of current portion
|
|
$
|
53,000
|
|
$
|
-
|
|
$
|
18,196
|
|
$
|
(14)
|
Approximate annual
aggregate maturities of debts
are as follows: (in thousands):
|
|
|
|
|
|
|
|
Fiscal year
|
|
|
|
2019
|
|
$
|
-
|
2020
|
|
|
-
|
2021
|
|
|
-
|
2022
|
|
|
-
|
2023
|
|
|
53,000
|
Thereafter
|
|
|
-
|
Total future maturities payments
|
|
$
|
53,000
|
Less: debt issuance costs
|
|
|
-
|
Total future maturities payments, net of debt issuance costs
|
|
$
|
53,000
|
On September 18, 2018, Holdings and its operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Bank of America, N.A., Fifth Third Bank and Citizens Bank (the “Credit Agreement”). The Credit Agreement provides the Company with a senior credit facility consisting of a
$100.0
million revolving line of credit through
September 18, 2023
. Borrowings pursuant to the Credit Agreement initially bear interest at a rate of adjusted LIBOR plus
1.75%
and may bear interest in a range between adjusted LIBOR plus
1.50%
to adjusted LIBOR plus
2.25%
, depending on The Tile Shop’s consolidated total rent adjusted leverage ratio. At
December
3
1
, 2018 the base interest rate was
6.25%
and the LIBOR-based interest rate was
4.52%
.
The Credit Agreement is secured by virtually all of the assets of the Company, including but not limited to, inventory, receivables, equipment and real property. The Credit Agreement contains customary events of default, conditions to borrowings, and restrictive covenants, including restrictions on the Company’s ability to dispose of assets, make acquisitions, incur additional debt, incur liens, or make investments. The Credit Agreement also includes financial and other covenants, including covenants to maintain certain fixed charge coverage ratios and consolidated total rent adjusted leverage ratios. The Company was in compliance with the covenants as of
December
3
1
, 2018.
The Credit Agreement supersedes and replaces in its entirety the Company’s prior senior secured credit facility with Fifth Third Bank dated June 2, 2015, as amended on April 5, 2018, July 17, 2017, February 10, 2017 and December 9, 2016. The Company drew on the revolving line of credit pursuant to the Credit Agreement to refinance the existing term loan, revolving line of credit and interest outstanding under the Company’s prior credit facility, as well as pay
$0.4
million in debt issuance costs in connection with the Credit Agreement. Debt issuance costs are classified as other c
urrent assets and other assets o
n the
c
onsolidated
b
alance
s
heet and amortized on a straight line basis over the life of the Credit Agreement. The Company recorded a
$0.1
million charge in interest expense to write-off certain unamortized deferred financing fees associated
with
its prior
credit facility as of the date of the payoff.
Borrowings outstanding consisted of
$53.0
million on the revolving line of credit as of
December 31
, 2018. In addition, the Company has standby letters of credit outstanding related to its workers compensation and medical insurance policies. As of
December
3
1
, 2018 and 2017, the standby letters of credit totaled
$1.1
million. There was
$45.9
million available for borrowing on the revolving line of credit as of
December 31
, 2018, which may be used to support the Company’s growth and for working capital purposes.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Capital Leases:
The Company has
one
store lease that is accounted for as a capital lease. This lease expires in 2022. Assets acquired under capital leases are included in property, plant and equipment.
As of December 31, 2018, minimum lease payments under the Company's capital lease obligation were as follows (in thousands):
|
|
|
|
|
|
|
|
Fiscal year
|
|
|
|
2019
|
|
$
|
215
|
2020
|
|
|
216
|
2021
|
|
|
215
|
2022
|
|
|
90
|
2023
|
|
|
-
|
Thereafter
|
|
|
-
|
Less: amounts representing interest
|
|
|
(160)
|
Present value of future minimum lease payments
|
|
|
576
|
Less: current portion
|
|
|
140
|
Capital lease obligations, net of current portion
|
|
$
|
436
|
Note
6
: 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,
2018
,
2017
and
2016
, rent expense was
$35.4
million,
$33.8
million, and
$29.7
million, respectively.
Annual minimum rentals under non-cancelable operating leases are as follows, for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
Fiscal year
|
|
|
|
2019
|
|
$
|
35,247
|
2020
|
|
|
35,647
|
2021
|
|
|
35,868
|
2022
|
|
|
36,182
|
2023
|
|
|
35,843
|
Thereafter
|
|
|
384,180
|
Total future maturities payments
|
|
$
|
562,967
|
Legal proceedings:
The Company was a nominal defendant in several actions brought derivatively on behalf of the Company by
three
shareholders. The plaintiffs alleged that the defendant-directors and/or officers 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, and by permitting the Company’s primary product to contain illegal amounts of lead. The complaints also alleged claims for insider trading and/or unjust enrichment. The Company moved to dismiss the actions, or in the alternative, to stay the actions. Before the motions were decided, the parties entered into settlement
discussions. The parties entered into a Stipulation of Settlement dated April 11, 2018 to resolve all claims in the derivative actions. The settlement also resolved a demand letter dated May 19, 2016 that the Company’s Board of Directors had received from a shareholder about the same matters that were the subjects of the derivative actions. By Order and Final Judgment entered on August 23, 2018, the Delaware Court of Chancery approved the settlement of the derivative actions and dismissed them with prejudice. Under the terms of settlement, the Board of Directors adopted, and the Company implemented, certain changes to its policies and practices that address related
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
person transactions, insider trading, compliance, and ethics. The Company also paid plaintiffs and their counsel
$1.3
million for attorneys’ fees, expenses, and incentive awards that the Court awarded to them.
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
7
: 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
l
evel within the fair value hierarchy the Company’s financial assets that were accounted for at fair value on a recurring basis at December 31,
2018
and
2017
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, 2018
|
|
December 31, 2017
|
Assets
|
|
|
|
(in thousands)
|
Cash and cash equivalents
|
|
Level 1
|
|
$
|
5,557
|
|
$
|
6,621
|
Restricted cash
|
|
Level 1
|
|
|
825
|
|
|
855
|
The following methods and assumptions were used to estimate the fair value of each class of financial instrument. There have been no changes in the valuation techniques used by the Company to value the Company’s financial instruments.
|
·
|
|
Cash and cash equivalents:
Consists of cash on hand and bank deposits. The value was measured using quoted market prices in active markets. The carrying amount approximates fair value.
|
|
·
|
|
Restricted cash:
Consists of cash and cash equivalents held in bank deposit accounts restricted as to withdrawal or are under the terms of use for current operations. The value was measured using quoted market prices in active markets. The carrying amount approximates fair value.
|
Fair value measurements also apply to certain non-financial assets and liabilities measured at fair value on a nonrecurring basis. Property, plant and equipment is measured at fair value when an impairment is recognized and the related assets are written down to fair value. During the year
s
ended December 31,
2018 and
2017, the Company identified property, plant and equipment that would be disposed of prior to the end of their useful lives
,
which resulted in the recognition of a
$0.
7
million and
$1.1 million charge to write-down these assets to their estimated fair value
, respectively
. The Company measured the fair value of these assets based on projected cash flows and an estimated risk-adjusted rate of return. Projected cash flows are considered level 3 inputs. No impairment charges were recorded during the y
ear ended December 31, 2016
.
The carrying value of the Company’s borrowings under its credit agreement approximate fair value based upon level 2 inputs of the market interest rates available to the Company for debt obligations with similar risks and maturities.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note
8
: Related Party Transactions
On July 9, 2018, Fumitake Nishi,
a former Company employee and
the brother-in-law of
Robert
A.
Rucker, our former
Interim Chief Executive Officer and President, and a member of the Company’s Board,
informed the Company he had reacquired a majority of the equity of one of its key vendors, Nanyang Helin Stone Co. Ltd (“Nanyang”). Nanyang supplies the Company with natural stone products including hand-crafted mosaics, listellos and other accessories. During the
years
ended December 31,
2018, 2017 and
2016, the Company purchased
$12.0
million,
$12.8
million, and
$8.4
million of products from Nanyang, respectively.
As of December 31, 2018 and 2017, the
accounts
payable due to Nanyang was $1.2 million and $0.9 million, respectively.
Mr. Nishi’s employment with the Company was terminated on January 1, 2014 as a result of several violations of the Company’s code of business conduct and ethics policy. Certain of those violations involved his undisclosed ownership of Nanyang at that time.
Management and the Audit Committee have evaluated the relationship and determined that it would be in the Company’s best interests to continue purchasing products from Nanyang. The Company believes Nanyang provides an important combination of quality, product availability and pricing, and relying solely on other vendors to supply similar product to the Company would not be in the Company’s best interests. The Company and the
Audit
Committee has and will continue to review future purchases from Nanyang and compare the pricing for products purchased from Nanyang to the pricing of same or similar products purchased from unrelated vendors.
The Company employ
ed
Adam Rucker, son of Robert A. Rucker, our
former I
nterim Chief Executive Officer and President, and a member of our Board of Directors, as a Director of Information Technology
through December 12, 2018
. In fiscal year
s
2018
,
2017 and 2016,
the Company paid Adam Rucker a total of
$1
12
,000
,
$120,000
and
$140,000
, respectively.
Adam Rucker also received the standard benefits provided to other Company employees during fiscal years
2018
,
2017
and
2016
.
Note 9
: Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, after taking into consideration all dilutive potential common shares outstanding during the period.
Basic and diluted net income per share was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(in thousands, except share and per share data)
|
Net income
|
|
$
|
10,442
|
|
$
|
10,819
|
|
$
|
18,463
|
Weighted-average shares outstanding - basic
|
|
|
51,907,619
|
|
|
51,700,045
|
|
|
51,418,600
|
Dilutive common stock equivalents
|
|
|
181,541
|
|
|
227,832
|
|
|
461,513
|
Weighted-average shares outstanding - diluted
|
|
|
52,089,160
|
|
|
51,927,877
|
|
|
51,880,113
|
Basic net income per share
|
|
$
|
0.20
|
|
$
|
0.21
|
|
$
|
0.36
|
Diluted net income per share
|
|
$
|
0.20
|
|
$
|
0.21
|
|
$
|
0.36
|
Antidilutive Shares
|
|
|
1,508,616
|
|
|
445,490
|
|
|
373,255
|
Note 10
: Equity Incentive Plans
2012 Plan:
Un
der the 2012 Omnibus Award Plan
,
5,000,000
shares of the Company’s common stock are reserved for issuance pursuant to a variety of stock based compensation awards, including stock options, and restricted stock awards.
Stock Options:
During the years ended December 31,
2018
,
2017
and
2016
, the Company granted stock options to its employees that included service condition requirements. The options provide for certain acceleration of vesting and cancellation of options under different circumstances, such as a change in control, death, disability and termination of service. The Company recognizes compensation expense on a straight-line basis over the requisite service period, net of actual forfeitures.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in the option valuation models are outlined in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Risk-free interest rate
|
|
2.75%
|
–
|
3.08%
|
|
1.89%
|
–
|
2.12%
|
|
1.15%
|
–
|
1.52%
|
Expected life (in years)
|
|
5
|
–
|
6
|
|
5
|
–
|
6
|
|
5
|
–
|
7
|
Expected volatility
|
|
55%
|
–
|
57%
|
|
51%
|
–
|
55%
|
|
52%
|
–
|
53%
|
Dividend yield
|
|
2%
|
–
|
4%
|
|
1%
|
–
|
2%
|
|
0%
|
–
|
0%
|
The computation of the expected volatility assumptions used in the option valuation models was based on historical volatilities of the Company. The Company used the “simplified” method to calculate the expected term of options granted due to the lack of adequate historical data. The risk-free interest rate was based on the U.S. Treasury yield at the time of grant.
The expected dividend yield for
2018 and
2017 was determined using the historical dividend payout and a trailing twelve month closing stock price on the grant date. The expected dividend yield was zero prior to December 31, 2016 based on the fact that, at that time, the Company had not
previously
paid dividends.
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
$3.10
,
$5.88
, and
$7.37
during the years ended December 31,
2018
,
2017
and
2016
, respectively.
Stock based compensation related to options for the years ended December 31,
2018
,
2017
and
2016
was
$1.0
million,
$1.9
million, and
$3.2
million, respectively, and was included in selling, general and administrative expenses in the consolidated statements of operations. As of December 31,
2018
, the total future compensation cost related to non-vested options not yet recognized in the consolidated statement of operations was
$2.0
million and is expected to be recognized over a weighted-average period of
2.4
years.
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, 2016
|
|
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
|
Granted
|
|
305,150
|
|
$
|
13.49
|
|
$
|
5.88
|
|
|
|
|
|
Exercised
|
|
(313,372)
|
|
$
|
10.07
|
|
$
|
5.44
|
|
|
|
|
|
Cancelled/Forfeited
|
|
(619,755)
|
|
$
|
13.04
|
|
$
|
6.29
|
|
|
|
|
|
Balance, December 31, 2017
|
|
1,732,564
|
|
$
|
14.74
|
|
$
|
6.95
|
|
4.5
|
|
$
|
365
|
Granted
|
|
176,380
|
|
$
|
7.19
|
|
$
|
3.10
|
|
|
|
|
|
Exercised
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
Cancelled/Forfeited
|
|
(520,865)
|
|
$
|
18.59
|
|
$
|
8.69
|
|
|
|
|
|
Balance, December 31, 2018
|
|
1,388,079
|
|
$
|
12.34
|
|
$
|
5.80
|
|
4.9
|
|
$
|
-
|
Exercisable at December 31, 2018
|
|
862,663
|
|
$
|
13.26
|
|
$
|
6.39
|
|
3.7
|
|
|
|
Vested and expected to vest, December 31, 2018
|
|
1,388,079
|
|
$
|
12.34
|
|
$
|
5.80
|
|
4.9
|
|
$
|
-
|
The aggregate intrinsic value is the difference between the exercise price and the closing price of the Company’s stock on December 31.
No
stock options were exercised during
fiscal year
2018.
The intrinsic value of the stock options exercised during
fiscal year
2017
was
$4.4
million
.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Options outstanding as of December 31,
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Price
|
|
|
|
Weighted Average
|
|
|
|
|
Options
|
|
Exercise Price
|
|
Remaining Contractual
Life-Years
|
$5.00
|
to
|
$10.00
|
|
687,400
|
|
$
|
8.79
|
|
6.12
|
$10.01
|
to
|
$15.00
|
|
380,304
|
|
$
|
12.20
|
|
2.81
|
$15.01
|
to
|
$20.00
|
|
212,875
|
|
$
|
17.86
|
|
4.76
|
$20.01
|
to
|
$25.00
|
|
74,500
|
|
$
|
22.44
|
|
5.62
|
$25.01
|
to
|
$30.00
|
|
33,000
|
|
$
|
29.44
|
|
4.56
|
Restricted Stock:
The Company awards restricted common shares to selected employees and non-employee directors. Recipients are not required to provide any consideration
upon vesting of the award
. Restricted share awards are subject to certain restrictions on transfer, and all or part of the shares awarded may be subject to forfeiture upon the occurrence of certain events, including employment termination. Certain awards are also subject to forfeiture if the Company fails to attain its Adjusted EBITDA targets. The restricted common shares are valued at the grant date fair value and expensed over the requisite service period or the vesting term of the awards. The Company adjusts the cumulative expense recognized on awards with performance conditions based on the probability of achieving the performance condition.
The following table summarizes restricted stock activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Avg
Grant Date
Fair Value
|
Nonvested, January 1, 2016
|
|
79,036
|
|
$
|
17.67
|
Granted
|
|
73,384
|
|
$
|
17.60
|
Vested
|
|
(66,536)
|
|
$
|
15.55
|
Forfeited
|
|
-
|
|
$
|
-
|
Nonvested, December 31, 2016
|
|
85,884
|
|
$
|
19.25
|
Granted
|
|
324,184
|
|
$
|
13.55
|
Vested
|
|
(47,051)
|
|
$
|
19.93
|
Forfeited
|
|
(87,849)
|
|
$
|
17.71
|
Nonvested, December 31, 2017
|
|
275,168
|
|
$
|
13.03
|
Granted
|
|
682,646
|
|
$
|
6.61
|
Vested
|
|
(63,680)
|
|
$
|
15.88
|
Forfeited
|
|
(131,617)
|
|
$
|
8.70
|
Nonvested, December 31, 2018
|
|
762,517
|
|
$
|
7.80
|
The total expense associated with restricted stock for the years ended December 31,
2018
,
2017
, and
2016
was
$1.7
million,
$1.2
million, and
$1.1
million, respectively. As of December 31,
2018
, there was
$4.8
million of total unrecognized expense related to unvested restricted stock awards, which are expected to vest, and will be expensed over a weighted-average period of
3.
0
years. The fair value of restricted stock granted in fiscal year
s
2018
and 2017
was
$4.5
million
and $4.4 million, respectively
. The total fair value of restricted stoc
k that vested in fiscal years 2018 and 2017 was $1.2 million and $1.1 million, respectively
. Using the closing stock price of
$5.48
on December 31,
2018
, the number of restricted shares outstanding and expected to vest was
758,317
, with an intrinsic value of
$4.2
million.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11: Income Taxes
The components of the provision for income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
734
|
|
$
|
2,721
|
|
$
|
10,831
|
State
|
|
|
638
|
|
|
872
|
|
|
2,560
|
International
|
|
|
23
|
|
|
30
|
|
|
30
|
Total Current
|
|
|
1,395
|
|
|
3,623
|
|
|
13,421
|
Deferred
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,839
|
|
|
9,354
|
|
|
(363)
|
State
|
|
|
844
|
|
|
363
|
|
|
(182)
|
International
|
|
|
80
|
|
|
-
|
|
|
-
|
Total Deferred
|
|
|
3,763
|
|
|
9,717
|
|
|
(545)
|
Total Provision for Income Taxes
|
|
$
|
5,158
|
|
$
|
13,340
|
|
$
|
12,876
|
A majority of the Company's income is from domestic operations.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, including, but not limited to, a reduction of the corporate income tax rate to
21%
effective January 1, 2018 and a one-time mandatory transition tax on accumulated foreign earnings. The Company was required to recognize the effect of the tax law changes in the period of enactment, including determining the transition tax, re-measuring the Company’s U.S. deferred tax assets and liabilities and reassessing the net realizability of the Company’s deferred tax assets and liabilities. Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) allowed the Company to record provisional amounts during a measurement period not to extend beyond one year after the enactment date.
During 2018, the Company completed its evaluation of the income tax effects of the Tax Act. The Company recorded adjustments to its provisional estimates resulting in a
$0.2
million reduction income tax expense concurrent with the filing of its 2017 federal and state income tax returns. The accounting for the income tax effects of the Tax Act is complete as of December 31, 2018.
The following table reflects the effective income tax rate reconciliation for the years ended December 31,
2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Federal statutory rate
|
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Tax reform
|
|
(1.1)
|
|
|
18.9
|
|
|
-
|
|
State income taxes, net of the federal tax benefit
|
|
5.7
|
|
|
4.1
|
|
|
4.4
|
|
Stock based compensation
|
|
7.6
|
|
|
(2.0)
|
|
|
1.6
|
|
Other
|
|
(0.1)
|
|
|
(0.8)
|
|
|
0.1
|
|
Effective tax rate
|
|
33.1
|
%
|
|
55.2
|
%
|
|
41.1
|
%
|
The Company’s effective tax rate for 2018 was
33.1%
, compared to
55.2%
in 2017, a decrease of
22.1%
. The decrease in the effective tax rate is primarily attributable to the Tax Act
, which
reduced the U
.
S
.
federal statutory tax rate from 35% in 2017 to 21% in 2018. Income tax expense in the fourth quarter of 2017 also included a charge to reduce the value of the Company’s deferred tax assets in accordance with the Tax Act, which resulted in an
18.9%
increase in the Company’s effective tax rate. Income tax expense in 2018
includes stock
based compensation tax shortfall charges, which increased the Com
pany’s effective tax rate by
7.6%
.
The Company’s effective tax rate for 2017 was
55.2%
in 2017, compared to
41.1%
in 2016, an increase of
14.1%
. The increase in the effective tax rate was primarily attributable to charges recorded to reduce the value of the Company’s deferred tax assets in accordance with the Tax Act, which resulted in an
18.9%
increase in the Company’s effective tax rate.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Components of net deferred income taxes are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
(in thousands)
|
Deferred income tax assets:
|
|
|
|
|
|
|
Section 743 carryforward
|
|
$
|
14,730
|
|
$
|
16,508
|
Leasehold improvement reimbursements
|
|
|
3,719
|
|
|
3,642
|
Inventory
|
|
|
1,635
|
|
|
1,229
|
Deferred rent
|
|
|
5,960
|
|
|
5,456
|
Stock based compensation
|
|
|
1,239
|
|
|
2,016
|
Other
|
|
|
1,724
|
|
|
1,404
|
Total deferred income tax assets
|
|
$
|
29,007
|
|
$
|
30,255
|
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
Depreciation
|
|
|
19,821
|
|
|
17,403
|
Other
|
|
|
1,961
|
|
|
1,198
|
Total deferred income tax liabilities
|
|
|
21,782
|
|
|
18,601
|
Net deferred income tax assets
|
|
$
|
7,225
|
|
$
|
11,654
|
The Company
completed
its
analysis of the impacts of U.S. tax reform in the fourth quarter
of fiscal year
2018. Accordingly,
the Company
ha
s
recognized the tax consequences of all foreign unremitted earnings and management has no specific plans to indefinitely reinvest the unremitted earnings of
its
foreign subsidiary as of December 31, 2018
. As of December 31, 2018, the total undistributed earnings of the Company's non-U.S. subsidiary is approximately
$0.8
million. The C
ompany has
provided deferred taxes of
$0.1
million on withholding taxes, state taxes, and foreign currency gains and losses due on the repatriation of those earnings.
The Company records interest and penalties through income tax relating to uncertain tax positions. As of December 31,
2018
,
2017
and
2016
, the Company has not recognized any
liabilities for uncertain tax positions
nor has the Company
accrued interest and penalties
related to uncertain tax positions.
The Company's federal income tax returns for fiscal years 2015 through 2017 tax years are still subject to examination in the U.S. Various state and foreign jurisdiction tax years remain open to examination. The Company believes that any potential assessment would be immaterial to its financial statements.
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12: 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, Inc. (“Tile Shop Lending”) made a loan to, Twain Investment Fund 192 LLC (the “Investment Fund”) under a qualified New Markets Tax Credit (“NMTC”) program. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and is intended to induce capital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their federal income taxes for up to 39% of qualified investments in the equity of community development entities (“CDEs”). CDEs are privately managed investment institutions that are certified to make qualified low-income community investments.
In this transaction, Tile Shop Lending loaned
$6.7
million to the Investment Fund at an interest rate of
1.37%
per year and with a maturity date of
December 31, 2046
. The Investment Fund then contributed the loan to a CDE, which, in turn, loaned the funds on similar terms to Tile Shop of Oklahoma, LLC, an indirect, wholly-owned subsidiary of Holdings. The proceeds of the loans from the CDEs (including loans representing the capital contribution made by U.S. Bank, net of syndication fees) were used to partially fund the distribution center project.
In December 2016, U.S. Bank also contributed
$3.
2 million to the Investment Fund and, by virtue of such contribution, is entitled to substantially all of the tax benefits derived from the NMTC, while the Company effectively received net loan proceeds equal to U.S. Bank’s contributions to the Investment Fund. This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase U.S. Bank’s interest. The Company believes that U.S. Bank will exercise the put option in December 2023 at the end of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify U.S. Bank for any loss or recapture of NMTCs related to the financing until such time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement.
The Company has determined that the financing arrangement with the Investment Fund and CDEs contains a variable interest entity (“VIE”). The ongoing activities of the Investment Fund – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the Investment Fund. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to the structure; U.S. Bank’s lack of a material interest in the 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 Fund, as a VIE, in accordance with the accounting standards for consolidation. In 2016, U.S. Bank’s contributions of $3.2 million, net of syndications fees, were included in cash, restricted cash, other accrued liabilities and other long-term liabilities in the consolidated balance sheet. The Company
incurred $1.3 million
of syndication fees in connection with this transaction, which were classified as other current assets and other non-current assets in the consolidated balance sheet. The Company is recognizing the benefit of this net
$1.9
million contribution over the
seven
-year compliance period as it is being earned through the on-going compliance with the conditions of the NMTC program. As of December 31,
2018
, the balance of the contribution liability was
$2.3
million, of which
$0.5
million was classified as other accrued liabilities on the consolidated balance sheet and
$1.8
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. During the fiscal year ended December 31, 2017, the Company received reimbursements totaling
$6.0
million from the investment fund. As of December 31,
2018
, the balance in the Investment Fund available for reimbursement to the Company was
$0.8
million.
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 US. Bank, the “investors”) related to the
$19.1
million acquisition, rehabilitation, and construction of the Company’s distribution center and manufacturing facilities in Durant, Oklahoma. In this transaction, Tile Shop Lending loaned
$13.5
million to the Tile Shop Investment Fund LLC. The investors contributed
$5.6
million to the Tile Shop Investment Fund LLC. The investors are entitled to the tax benefits derived from the NMTC by virtue of their contribution while the Company received the proceeds, net of syndication fees, to apply toward the construction project. This transaction includes a put/call provision whereby the Company may
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 Tile Shop Investment Fund LLC. The Company concluded that it is the primary beneficiary of the VIE and consolidated the Tile Shop Investment Fund LLC, as a VIE, in accordance with the accounting standards for consolidation. In 2013, the investors’ 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 31,
2018
, the balance of the contribution liability was
$2.3
million, of which
$0.5
million was classified as other accrued liabilities on the consolidated balance sheet and
$1.8
million was classified as other long-term liabilities on the consolidated balance sheet.
Note 13
: Retirement Savings Plan
The Company has a 401(k) profit sharing plan covering substantially all full-time employees. Employee contributions are limited to the maximum amount allowable by the Internal Revenue Code. The Company matched
$1.6
million,
$1.4
million, and
$0.5
million of employee contributions in
2018
,
2017
, and
2016
and made
no
discretionary contributions for any of the years presented.
Note 1
4
: Quarterly Financial Data (Unaudited)
Quarterly results of operations for the years ended December 31,
2018
and
2017
are summarized below (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
(in thousands)
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
91,134
|
|
$
|
92,914
|
|
$
|
89,259
|
|
$
|
83,947
|
Gross profit
|
|
|
64,038
|
|
|
65,312
|
|
|
63,011
|
|
|
58,978
|
Income from operations
|
|
|
6,111
|
|
|
7,442
|
|
|
3,880
|
|
|
705
|
Net income (loss)
|
|
|
4,011
|
|
|
4,958
|
|
|
2,553
|
|
|
(1,080)
|
Basic earnings (loss) per share
|
|
|
0.08
|
|
|
0.10
|
|
|
0.05
|
|
|
(0.02)
|
Diluted earnings (loss) per share
|
|
|
0.08
|
|
|
0.10
|
|
|
0.05
|
|
|
(0.02)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
92,135
|
|
$
|
89,464
|
|
$
|
84,421
|
|
$
|
78,580
|
Gross profit
|
|
|
64,745
|
|
|
62,348
|
|
|
56,662
|
|
|
52,467
|
Income (loss) from operations
|
|
|
13,533
|
|
|
11,600
|
|
|
4,377
|
|
|
(3,664)
|
Net income (loss)
|
|
|
8,009
|
|
|
7,723
|
|
|
2,438
|
|
|
(7,351)
|
Basic earnings (loss) per share
|
|
|
0.16
|
|
|
0.15
|
|
|
0.05
|
|
|
(0.14)
|
Diluted earnings (loss) per share
|
|
|
0.15
|
|
|
0.15
|
|
|
0.05
|
|
|
(0.14)
|
Table Of Contents
Tile Shop Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1
5
: Subsequent Event
On
February 19
,
2019
, the Company declared a
$0.05
dividend to stockholders of record as of the close of business on
March 4
, 201
9
. The dividend will be paid on
March 15
, 201
9
.