UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

 

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(Mark One)

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

  

For the quarterly period ended March 31, 2015

 

OR

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

  

For the transition period from – to -

 

Commission file number: 001-35629 

 

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TILE SHOP HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

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Delaware		45-5538095
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

 

 

14000 Carlson Parkway
Plymouth, Minnesota		55441
(Address of principal executive offices)		(Zip Code)

 

(763) 852-2988

 

(Registrant’s telephone number, including area code)

  

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes    ☐ No

 

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

 

Large  accelerated  filer	☒		Accelerated  filer	☐
Non-accelerated filer	☐	(Do not check if a smaller reporting company)	Smaller  reporting  company	☐

 

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

 

As of April 27, 2015, there were 51,315,047 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

 

TILE SHOP HOLDINGS, INC.

Table of Contents

   

		Page
PART I. FINANCIAL INFORATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014	1
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (unaudited)	2
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three months ended March 31, 2015 (unaudited) and year ended December 31, 2014	3
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.	Controls and Procedures	14
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	16
Item 1A.	Risk Factors	16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	16
Item 4.	Mine Safety Disclosures	16
Item 5.	Other Information	16
Item 6.	Exhibits	17
Signatures		18
Exhibit Index		19

 

  

PART I. FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

  

Tile Shop Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

 

  

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

  

Tile Shop Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(dollars in thousands, except per share data)

(unaudited)

 

  

See accompanying Notes to Condensed Consolidated Financial Statements.

 

  

Tile Shop Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(dollars in thousands, except share data)

(unaudited)

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

Tile Shop Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 (dollars in thousands)

(unaudited)

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

 

 

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

 

  

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014 and our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q .

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, unexpected delays or expenses related to opening new stores and maintaining or renovating existing stores, changes to economic conditions and customer preferences, disruptions in our supply chain, or inventory management, competitive factors, increases to interest rates or other impacts on our ability to obtain or maintain financing, unanticipated expenses related to operating as a public company including but not limited to litigation-related expenses, an inability to maintain effective internal control over financial reporting, or disclosure controls and procedures, and those factors disclosed in the section captioned “Risk Factors” in our Annual Report for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

Overview and Recent Trends

 

We are a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the United States. We offer a wide selection of products, attractive prices, and exceptional customer service in an extensive showroom setting. As of March 31, 2015, we operated 109 stores in 31 states, with an average size of 22,100 square feet. We also sell our products on our website.

 

We purchase our tile products and accessories directly from suppliers and manufacture our own setting and maintenance materials, such as thinset, grout, and sealers. We believe that our long-term supplier relationships, together with our design, manufacturing and distribution capabilities, enable us to offer a broad assortment of high-quality products to our customers, who are primarily homeowners and professionals, at competitive prices. We have invested significant resources to develop our proprietary brands and product sources, and believe that we are a leading retailer of natural stone tiles, accessories, and related materials in the United States.

 

We believe that the highly-fragmented United States retail tile market provides us with a significant opportunity to expand our store base. We opened 2 new stores in the first quarter of 2015, and opened 19 new stores in the United States in 2014. We plan to open an additional 6 to 8 stores in 2015. We believe that there will continue to be additional expansion opportunities in the United States and Canada. We expect store base growth will drive productivity and operational efficiencies. Our growth plans also require us to maintain significant inventory on-hand in order to fulfill orders at these new locations.

 

 

For the three months ended March 31, 2015 and 2014, we reported net sales of $73.0 million and $64.4 million, respectively, and income from operations of $7.2 million and $7.0 million, respectively. The increase in sales and income from operations was primarily due to an additional 16 new retail locations opened during the twelve months ended March 31, 2015, and a comparative store sales increase of 4.5% for the three months ended March 31, 2015.

 

Net cash provided by operating activities was $26.1 million and $15.2 million for the three months ended March 31, 2015 and 2014, respectively, which was used to fund capital expenditures for opening new stores and daily operations, and in 2015, debt repayments. We expect to continue to fund our capital expenditures and daily operations from our operating cash flows. As of March 31, 2015, we had cash of $9.0 million and working capital of $44.5 million.

 

Key Components of our Consolidated Statements of Income

 

Net Sales Net sales represents total charges to customers, net of returns, and includes freight charged to customers. We recognize sales at the time that the customer takes possession of the merchandise or final delivery of the product has occurred. We recognize service revenue, which consists primarily of freight charges for home delivery, when the service has been rendered. We are required to charge and collect sales and other taxes on sales to our customers and remit these taxes back to government authorities. Sales and other taxes are recorded in the consolidated balance sheets, but excluded from the consolidated statements of operations.

 

The table below sets forth information about our same store sales growth for the three month period ended March 31, 2015 and March 31, 2014. Our increase in same store sales growth is primarily attributable to increases in number of orders, as well as average order size. During the three months ended March 31, 2014, the decrease in comparable sales was attributable to several factors including unusually harsh winter weather conditions experienced throughout much of the country, and a challenging macroeconomic environment during which existing home sales decreased, which resulted in a decrease in traffic in our stores. In addition, we experienced higher turnover of store managers and sales associates which also negatively impacted sales. Finally, many of our stores opened were in new markets and we did not have a consistent and disciplined grand opening marketing plan to drive brand awareness around the time of the grand opening. Same store sale amounts include total charges to customers less any actual returns, and the change in the returns provision related to comparable stores. In general, we consider a store comparable on the first day of the 13th full month of operation.

  

		Three Months Ended March 31,
		2015				2014
Same store sales growth			4.5	%			(2.3%	)

 

 

 

Between April 1, 2014 and March 31, 2015, we opened 16 new retail locations. Incremental net sales of $5.7 million sales occurred in the first quarter of 2015 that were from stores not included in the comparable store base. Comparable store sales for the first quarter of 2015 increased $2.9 million, compared to the first quarter of 2014.

 

Cost of Sales Cost of sales consists primarily of material costs, freight, duties, and storage and delivery of product to the customers, as well as certain costs associated with distribution and manufacturing of setting and maintenance materials.

 

Gross Profit Gross profit is net sales less cost of sales. Gross margin is the percentage determined by dividing gross profit by net sales.

 

Selling, general, and administrative expenses Payroll costs and occupancy expenses have historically been our most significant selling, general, and administrative expenses. Payroll costs exclude certain costs associated with distribution and manufacturing labor, as those costs are included in cost of sales. For the three months ended March 31, 2015 and 2014, our selling, general, and administrative expenses as a percentage of net sales was 60.0% and 59.0%, respectively. Our payroll costs have increased as a percentage of net sales primarily due to store base growth and investments in support infrastructure. Our occupancy costs have increased as a percentage of net sales due to opening 19 new stores in 2014 and 2 new stores in the three months ended March 31, 2015. In addition, advertising costs increased due to abnormally low cost investment during the three month period ended March 31, 2014, as the Company chose to reduce its advertising in response to lower demand caused by the harsh winter weather conditions experienced throughout much of the country.

 

Pre-opening costs Our pre-opening costs are those typically associated with the openings of a new store and generally include rent expense, payroll costs, occupancy costs and promotional costs. Pre-opening costs are expensed as incurred and recorded in selling, general and administrative expenses.

 

Income taxes We are subject to income tax in the United States as well as other tax jurisdictions in which we conduct business. Our effective tax rate for the three months ended March 31, 2015 was 43.0%.

 

Non-GAAP Measures

  

We calculate Adjusted EBITDA by taking net income calculated in accordance with GAAP, and adjusting interest expense, income taxes, depreciation and amortization, stock based compensation and other special charges including investigation and litigation costs. Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales. Free cash flows is calculated by taking net cash provided by operating activities and adding net cash used in investing activities. Non-GAAP net income excludes the special charges including investigation and litigation costs, and is net of tax.

 

We believe that these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation, and for budgeting and planning purposes. These measures are used in financial reports prepared for management and our board of directors. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with other specialty retailers, many of which present similar non-GAAP financial measures to investors.

 

The reconciliation of adjusted EBITDA to net income for the three months ended March 31, 2015 and 2014 is as follows:

  

		(in thousands)
		Three months ended March 31,
		2015				2014
Net income		$	3,659			$	3,709
Interest expense			803				711
Income taxes			2,762				2,472
Depreciation			5,649				4,411
Special charges			514				1,128
Stock-based compensation			1,305				1,397
Adjusted EBITDA		$	14,692			$	13,828

 

The reconciliation of free cash flows to net cash provided by operating activities and used in investing activities for the three months ended March 31, 2015 and 2014 is as follows:

  

		(in thousands)
		Three months ended March 31,
		2015				2014
Net cash provided by operating activities		$	26,126			$	15,207
Net cash used in investing activities			(4,575	)			(11,452	)
Free Cash Flows		$	21,551			$	3,755

 

  

The reconciliation of Non-GAAP net income to income before income taxes for the three months ended March 31, 2015 and 2014 is as follows:

  

		(in thousands)
		Three months ended March 31,
		2015				2014
Reported income before income taxes		$	6,421			$	6,181
Special charges			514				1,128
Non-GAAP net income before taxes			6,935				7,309
Provision for income taxes			(2,984	)			(2,924	)
Non-GAAP net income		$	3,951			$	4,385

 

Our management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded in our consolidated financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which expenses and income are excluded or included in determining this non-GAAP financial measure. In order to compensate for these limitations, management presents non-GAAP financial measures in connection with GAAP results. We urge investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures and not to rely on any single financial measure to evaluate our business.

 

Results of Operations

 

Comparison of the Three Months Ended March 31, 2015 to the Three Months Ended March 31, 2014

  

		(in thousands)
		2015				% of sales				2014				% of sales
Net sales		$	72,963							$	64,379
Cost of sales			21,992				30.1	%			19,446				30.2	%
Gross profit			50,971				69.9	%			44,933				69.8	%
Selling, general and administrative expenses			43,776				60.0	%			37,972				59.0	%
Income from operations			7,195				9.9	%			6,961				10.8	%
Interest expense			803				1.1	%			711				1.1	%
Other income (expense)			29				0.0	%			(69	)			(0.1	%)
Income before income taxes			6,421				8.8	%			6,181				9.6	%
Provision for income taxes			(2,762	)			(3.8	%)			(2,472	)			(3.8	%)
Net income		$	3,659				5.0	%		$	3,709				5.8	%

  

Net sales Net sales for the first quarter of 2015 increased $8.6 million, or 13.3%, over the first quarter of 2014 as net sales in non-comparable stores increased $5.7 million and net sales in comparable stores increased $2.9 million. Net sales increased primarily due to the expansion of our store base by 16 locations, or 17.2%, compared to March 31, 2014.

  

Gross profit Gross profit for the first quarter of 2015 increased $6.0 million, or 13.4%, compared to the first quarter of 2014, primarily due to the increase in net sales. Gross margin increased from 69.8% for the first quarter of 2014 to 69.9% for the first quarter of 2015.

 

Selling, general, and administrative expenses Selling, general, and administrative expenses for the first quarter of 2015 increased $5.8 million, or 15.3%, compared to the first quarter of 2014. Selling, general, and administrative expenses as a percentage of net sales increased to 60.0% for first quarter of 2015 compared to 59.0% for the first quarter of 2014. The increase in selling, general, and administrative expenses was primarily due to increased salaries and payroll costs of $2.7 million, increased rent and occupancy costs of $1.7 million, and increased depreciation and amortization of $1.2 million, as a result of opening 16 new stores during the period from April 1, 2014 through March 31, 2015. In addition, advertising expense increased $1.1 million during the period due to lower advertising spend during the quarter ended March 31, 2014, as the Company chose to reduce advertising in response to lower demand caused by the harsh winter weather conditions experienced throughout the country.

 

Selling, general, and administrative expenses include costs of $0.5 million and $1.1 million for the first quarter of 2015 and 2014, respectively, which relate to legal matters, including investigation and litigation expenses.

 

Pre-opening costs Our pre-opening costs are those typically associated with the openings of a new store and generally include rent expense, payroll costs and promotional costs. We expense pre-opening costs as incurred and include these costs in selling, general and administrative expenses. During the first quarter of 2015 and 2014, we incurred pre-opening costs of $0.1 million and $0.6 million, respectively.

 

Income from operations and operating margin As a result of the above, income from operations for the first quarter of 2015 decreased by $0.2 million, or 3.4%, compared to the first quarter of 2014. Operating income margin for the first quarter of 2015 decreased to 9.9%, compared to 10.8% for the first quarter of 2014. The decrease is due to the increases noted above in selling, general and administrative expenses.

 

Interest expense Interest expense for the first quarter of 2015 increased $0.1 million, compared to the first quarter of 2014. The increase is due to an increase in our interest rates.

 

Income before income taxes We recorded net income before taxes of $6.4 million for the first quarter of 2015 compared to net income before taxes of $6.2 million for the first quarter of 2014.

 

Provision for income taxes Income tax provision increased $0.3 million for the first quarter of 2015 compared to the first quarter of 2014 due to a higher tax rate in the first quarter of 2015.

 

 

  

Liquidity and Capital Resources

  

Our principal liquidity requirements have been for working capital and capital expenditures. Our principal sources of liquidity are $9.0 million of cash and cash equivalents at March 31, 2015, our cash flow from operations, and borrowings available under our credit facility. We expect to use this liquidity for opening new stores, purchasing additional merchandise inventory, maintaining our existing stores, reducing outstanding debt, and general corporate purposes.

 

On October 3, 2012, the Company and its operating subsidiary, The Tile Shop, LLC, entered into a credit facility with Bank of America, N.A., which was amended on April 30, 2013, July 8, 2013, March 26, 2014 and September 29, 2014 (as amended, the “Credit Agreement”). The most recent amendment on September 29, 2014 modified the Consolidated Total Rent Adjusted Ratio schedule for future periods commencing September 30, 2014. The Credit Agreement provides the Company with a $120 million senior secured credit facility, comprised of a five-year $25 million term loan and a $95 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 1.75% to 2.25%, 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 Bank of America “prime rate,” and (c) the Eurodollar rate plus 1.00%, in each case plus 0.75% to 1.25% depending on The Tile Shop’s leverage ratio. At March 31, 2015 and December 31, 2014 the base interest rate was 4.50%. At March 31, 2015 and December 31, 2014 the LIBOR-based interest rate was 2.521% and 2.506%, respectively. As of March 31, 2015 and December 31, 2014, the Company had outstanding borrowings related to the revolving line of credit of $56.5 million and $74.0 million, respectively. The term loan requires quarterly principal payments of $875,000. As of March 31, 2015 and December 31, 2014, the Company had outstanding borrowings related to the term loan of $16.3 million and $17.1 million, respectively. 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 terms other than 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. In addition, except with respect to pro rata payments made by The Tile Shop or other subsidiaries to the Company or any other equity owner of such entity, the Credit Agreement prohibits the payment of cash dividends. The Company was in compliance with the covenants as of March 31, 2015.

 

We believe that our cash flow from operations, together with our existing cash and cash equivalents, and borrowings available under our credit facility will be sufficient to fund our operations and anticipated capital expenditures over at least the next 12 months.

 

Capital expenditures paid in the three months ended March 31, 2015 were $4.6 million. Approximately $3.8 million of this was for new store build-out and remodels of existing stores, $0.2 million was for improvements at of our distribution and manufacturing facilities, and the remainder was for general corporate purposes.

 

Our future capital requirements will vary based on the number of additional stores, distribution centers, and manufacturing facilities that we open and the number of stores that we choose to renovate. Our decisions regarding opening, relocating, or renovating stores, and whether to engage in strategic acquisitions, will be based in part on macroeconomic factors and the general state of the U.S. economy, as well as the local economies in the markets in which our stores are located. We intend to open 6 to 8 stores at an expected aggregate cost of $7.5 million to $11.2 million in the remainder of 2015.

 

Cash flows

  

The following table summarizes our cash flow data for the three months ended March 31, 2015 and 2014.

   

		(in thousands)
		Three months ended March 31,
		2015				2014
Net cash provided by operating activities		$	26,126			$	15,207
Net cash used in investing activities			(4,575	)			(11,452	)
Net cash provided by financing activities			(18,351	)			(1,229	)

  

Operating activities

  

Cash from operations during the three months ended March 31, 2015 was $26.1 million, compared to $15.2 million during the three months ended March 31, 2014. The increase is attributable to improvements in working capital.

 

Investing activities

  

Net cash used in investing activities totaled $4.6 million for the three months ended March 31, 2015, compared to $11.5 million for the three months ended March 31, 2014. Net cash used in investing activities in each period was primarily for capital purchases of store fixtures, equipment, building improvements and leasehold improvements for stores opened or remodeled, new distribution and manufacturing facilities, and general corporate assets. The decrease in cash used in investing activities is due to the decrease in the number of stores opening in 2015 versus 2014. In the first quarter of 2015, 2 new retail locations opened, compared to 5 new retail locations that opened in the first quarter of 2014.

   

 

 

Financing activities

  

Net cash used in financing activities was $18.4 million for the three months ended March 31, 2015, compared to $1.2 million for the three months ended March 31, 2014. Cash used in financing activities during the three months ended March 31, 2015 was primarily for payments of long-term debt and capital lease obligations of $23.4 million, partially offset by net proceeds from our revolving credit facility of $5.0 million. At March 31, 2015, the Company was in compliance with its debt covenants. The Company intends to pay the principal payments using cash from operations.

 

Cash and cash equivalents totaled $9.0 million at March 31, 2015, versus $5.8 million at December 31, 2014. The Company has working capital of $44.5 million at March 31, 2015, compared to working capital of $56.4 million at December 31, 2014.

 

Off-balance sheet arrangements

  

As of March 31, 2015 and December 31, 2014, we did not have any “off-balance sheet arrangements” (as such term is defined in Item 303 of Regulation S-K) that could have a current or future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Contractual arrangements

  

As of March 31, 2015, there were no significant changes to our contractual obligations.

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued a final standard on revenue from contracts with customers. The new standard sets forth a single comprehensive model for recognizing and reporting revenue. The new standard is effective for the Company in its fiscal year 2017, and permits the use of either a retrospective or a cumulative effect transition method. The Company is currently assessing the impact of implementing the new guidance on its consolidated financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risks in the ordinary course of our business. These risks include primarily inflation, interest rate risk, and credit concentration risk.

 

Inflation

 

Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general, and administrative expenses as a percentage of revenues if the selling prices of our products do not increase with these increased costs.

 

Interest Rate Risk

 

We are exposed to interest rate risk through the investment of our cash and cash equivalents and in connection with borrowings under our credit facility. Borrowings under our revolving credit facility bear interest at either a base rate or a LIBOR-based rate, at our option. The LIBOR-based rate ranges from LIBOR plus 1.75% to 2.25%, depending on the Company’s leverage ratio. The base rate will be equal to the greatest of: (a) the Federal funds rate plus 0.50%, (b) the Bank of America “prime rate,” and (c) the Eurodollar rate plus 1.00%, in each case plus 0.75% to 1.25% depending on The Tile Shop’s leverage ratio. The base rate was 4.50% at March 31, 2015. Based upon balances and interest rates as of March 31, 2015, holding other variables constant, a one percentage point increase in interest rates for the next 12-month period would decrease pre-tax earnings and cash flow by approximately $0.7 million. Conversely, a one percentage point decrease in interest rates for the next 12-month period would result in an increase to pre-tax earnings and cash flow of approximately $0.7 million.

 

We currently do not engage in any interest rate hedging activity. However, we may do so in the future to mitigate market risk rate. We do not, and do not intend to, engage in the practice of trading derivative securities for profit.

 

Credit Concentration Risk

 

Financial instruments, which may subject us to concentration of credit risk, consist principally of cash deposits. We maintain cash balances at financial institutions with strong credit ratings. However, the amounts invested with financial institutions are generally in excess of FDIC insurance limits.

  

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that information relating to the Company is accumulated and communicated to management, including our principal officers as appropriate to allow timely decisions regarding required disclosure. The Chief Executive Officer and Chief Financial Officer concluded that, due to the material weakness in our internal control over financial reporting described below, the Company’s disclosure controls and procedures were not effective as of March 31, 2015.

 

 

  

Changes in Internal Control over Financial Reporting

 

No changes to our internal control over financial reporting occurring during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

 

Material Weakness Previously Identified

 

We previously identified and disclosed in our Annual Report on Form 10-K for the period ended December 31, 2014 a material weakness involving the selection and deployment of general control activities over technology, the completeness and accuracy of data used in the performance of control activities, and control activities designed to mitigate identified risks including compliance with established accounting policies. This material weakness still exists, and a result, our management concluded that the Company's internal control over financial reporting was not effective as of March 31, 2015. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

Remediation Efforts

 

We developed certain remediation steps to address the previously disclosed material weaknesses discussed above and to improve our internal control over financial reporting. The Company and the Board take the control and integrity of the Company’s financial statements seriously and believe that the remediation steps described below are essential to maintaining a strong internal control environment. The following remediation steps are among the measures that are being implemented by the Company:

 

●

Design a process to review users who have access to key financial systems.

●

Enhance existing change management policies and implement processes to capture documentation evidencing the execution of these policies.

●

Establish a control to compare the economic life of an asset to the remaining lease term at the time a new asset is placed in service.

●

Refine process documentation to more clearly define how processes and controls ensure compliance with key policies.

●

Formalize a policy to document the inputs and assumptions underlying key reports and analysis used in the preparation of accounting entries as well as management’s process to evaluate the completeness of key data elements.

 

We are committed to maintaining a strong internal control environment, and believe that these remediation actions will represent significant improvements in our controls. However, the identified material weakness in internal control over financial reporting will not be considered remediated until controls have been designed and/or controls are in operation for a sufficient period of time for our management to conclude that the material weakness has been remediated. Additional remediation measures may be required, which may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting.

  

 

  

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company, two of its former executive officers, its directors, and certain companies affiliated with the directors, are defendants in a consolidated class action lawsuit 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 actions were filed in 2013, and then consolidated. The plaintiffs are four investors who seek to represent a class or classes consisting of (1) persons who purchased Tile Shop common stock in the market between August 22, 2012 and January 28, 2014 (the “alleged class period”), (2) persons who purchased Tile Shop common stock in the Company’s December 2012 secondary public offering; and (3) persons who purchased Tile Shop common stock in the Company’s June 2013 secondary public offering. Eight investment banking firms who were underwriters in the secondary public offerings are also named as defendants. In their consolidated amended complaint (the “complaint”) filed on May 23, 2014, the plaintiffs allege that defendants made false or misleading statements of material fact in press releases and SEC filings about the Company’s relationships with its vendors, financial performance, and prospects, and that defendants failed to disclose certain related party transactions. The complaint asserts claims under Sections 11 and 12(a)(2) of the Securities Act of 1933, and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In addition to attorney’s fees and costs, the plaintiffs seek to recover damages on behalf of all investors who purchased or otherwise acquired the Company’s stock in the secondary public offerings or in the market during the alleged class period. The defendants are defending the matter and have moved to dismiss the complaint. Those motions are pending before the Court.

 

The Company is also a Nominal Defendant in two matters brought derivatively on behalf of the Company by two shareholders of the Company. The first such action was filed on March 17, 2015 in the United States District Court for the District of Minnesota and is captioned Kinkeung Mok v. Rucker, et al. That action also names the Company’s former CEO, five of the Company’s outside directors, and a former employee of the Company as defendants. The Mok complaint alleges breaches of fiduciary duty by the Company’s board pertaining to the alleged sale of tiles containing high concentrations of lead as well as the Company’s alleged failure to disclose certain related party transactions. The complaint also alleges that a former employee of the Company was unjustly enriched as a result of certain related party transactions. The second derivative action was filed on April 7, 2015 in the Court of Chancery of the State of Delaware and is captioned City of Haverhill Retirement System v. Rucker, et al. That action also names the Company’s former CEO, the Company’s current CEO, and five of the Company’s outside directors as defendants. The Haverhill complaint alleges breach of fiduciary duty by the Company’s board pertaining to the Company’s alleged failure to disclose certain related party transactions as well as waste of corporate assets. Both complaints seek to recover from defendants those damages sustained by the Company as a result of defendants’ alleged breaches of fiduciary duty, disgorgement, and attorneys’ fees. The Haverhill action also seeks reforms to the Company’s corporate governance and internal procedures. The defendants have not yet responded to the complaints but intend to defend them.

 

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.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

  

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

 

Issuer Repurchases of Equity Securities

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not Applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

 

ITEM 6. EXHIBITS

 

Exhibits
	3.1(1)	Certificate of Incorporation of Tile Shop Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on July 2, 2012).
	3.2(2)	By-Laws of Tile Shop Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on July 2, 2012).
	10.1	Amendment to Terms of Employment, effective January 1, 2015, between Tile Shop Holdings, Inc. and Chris Homeister (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014).
	10.2	Amendment to Terms of Employment, effective January 1, 2015, between Tile Shop Holdings, Inc. and Robert A. Rucker (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014).
	31.1*	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
	31.2*	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
	32.1**	Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
	32.2**	Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
	101.INS	XBRL Instance Document.
	101.SCH	XBRL Taxonomy Extension Schema Document.
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
	*	Filed herewith.
	**	Furnished herewith.

 

 

  

SIGNATURES

 

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

  

	TILE SHOP HOLDINGS, INC.
Dated: May 1, 2015	By:	/s/ CHRIS R. HOMEISTER
		Chris R. Homeister
		Chief Executive Officer

 

Dated: May 1, 2015	By:	/s/ KIRK L. GEADELMANN
		Kirk L. Geadelmann
		Chief Financial Officer

 

 

  

TILE SHOP HOLDINGS, INC.

EXHIBIT INDEX

   

Exhibits
	3.1(1)	Certificate of Incorporation of Tile Shop Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on July 2, 2012).
	3.2(2)	By-Laws of Tile Shop Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on July 2, 2012).
	10.1	Amendment to Terms of Employment, effective January 1, 2015, between Tile Shop Holdings, Inc. and Chris Homeister (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014).
	10.2	Amendment to Terms of Employment, effective January 1, 2015, between Tile Shop Holdings, Inc. and Robert A. Rucker (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014).
	31.1*	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
	31.2*	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
	32.1**	Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
	32.2**	Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
	101.INS	XBRL Instance Document.
	101.SCH	XBRL Taxonomy Extension Schema Document.
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
	*	Filed herewith.
	**	Furnished herewith.