UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________

FORM 10-Q

_____________________________

(Mark One)


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

For the quarterly period ended ~~September 30, 2018~~March 31, 2019


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

For the transition period from – to –

Commission file number: 001-35629

_____________________________

TILE SHOP HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

_____________________________


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


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

(763) 852-2950

(Registrant’s telephone number, including area code)

_____________________________

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

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


Large accelerated filer	☒☐	Accelerated filer	☐☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.0001 par value	TTS	The Nasdaq Stock Market LLC

As of ~~October 22, 2018,~~May 2, 2019, there were ~~52,759,558~~52,951,217 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

Table of Contents

TILE SHOP HOLDINGS, INC.

Table of Contents


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	23
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Stockholders’ Equity (Deficit)	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2523
Item 4.	Controls and Procedures	2524
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	2524
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	27
Signatures		28

Table of Contents

PART I. FINANCIAL INFORMATION

IT EM 1. FINANCIAL STATEMENTS

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

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



	September 30,		December 31,		March 31,		December 31,
	2018		2017		2019		2018
	(unaudited)		(audited)		(unaudited)		(audited)
Assets
Current assets:
Cash and cash equivalents	$	10,105	$	6,621	$	7,936	$	5,557
Restricted cash		835		855		825		825
Receivables, net		3,723		2,381		5,942		3,084
Inventories		106,310		85,259		110,804		110,095
Income tax receivable		3,362		5,726		3,086		3,548
Other current assets, net		6,921		4,717		7,904		7,181
Total Current Assets		131,256		105,559		136,497		130,290
Property, plant and equipment, net		153,453		151,405		143,785		158,356
Right of use asset						141,791		-
Deferred tax assets		10,239		11,654		7,249		7,225
Other assets		1,952		2,107		1,606		1,759
Total Assets	$	296,900	$	270,725	$	430,928	$	297,630

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	25,725	$	30,771	$	31,811	$	25,853
Current portion of long-term debt		-		8,833
Income tax payable		172		17		64		179
Current portion of lease liability						25,236		-
Other accrued liabilities		27,790		22,413		28,727		24,484
Total Current Liabilities		53,687		62,034		85,838		50,516
Long-term debt, net		46,000		18,182
Capital lease obligation, net		473		576
Long-term debt						50,000		53,000
Long-term lease liability, net						138,550		-
Financing lease obligation, net						398		436
Deferred rent		43,419		41,290		-		43,579
Other long-term liabilities		3,931		4,769		3,857		3,752
Total Liabilities		147,510		126,851		278,643		151,283

Commitments and Contingencies (see Note 11)

Stockholders’ Equity:
Common stock, par value $0.0001; authorized: 100,000,000 shares; issued and outstanding: 52,678,584 and 52,156,850 shares, respectively		5		5
Common stock, par value $0.0001; authorized: 100,000,000 shares; issued and outstanding: 52,901,733 and 52,707,879 shares, respectively						5		5
Preferred stock, par value $0.0001; authorized: 10,000,000 shares; issued and outstanding: 0 shares		-		-		-		-
Additional paid-in-capital		174,207		180,109		170,306		172,255
Accumulated deficit		(24,777)		(36,239)		(17,997)		(25,857)
Accumulated other comprehensive income (loss)		(45)		(1)		(29)		(56)
Total Stockholders' Equity		149,390		143,874		152,285		146,347
Total Liabilities and Stockholders' Equity	$	296,900	$	270,725	$	430,928	$	297,630



	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2018		2017		2018		2017		2019		2018
Net sales	$	89,259	$	84,421	$	273,307	$	266,020	$	86,908	$	91,134
Cost of sales		26,248		27,759		80,946		82,265		25,066		27,096
Gross profit		63,011		56,662		192,361		183,755		61,842		64,038
Selling, general and administrative expenses		59,131		52,285		174,928		154,245		58,948		57,927
Income from operations		3,880		4,377		17,433		29,510		2,894		6,111
Interest expense		(715)		(505)		(1,866)		(1,438)		(978)		(554)
Other income		40		34		112		132		15		35
Income before income taxes		3,205		3,906		15,679		28,204		1,931		5,592
Provision for income taxes		(652)		(1,468)		(4,157)		(10,034)		(611)		(1,581)
Net income	$	2,553	$	2,438	$	11,522	$	18,170	$	1,320	$	4,011

Income per common share:
Basic	$	0.05	$	0.05	$	0.22	$	0.35	$	0.03	$	0.08
Diluted	$	0.05	$	0.05	$	0.22	$	0.35	$	0.03	$	0.08

Weighted average shares outstanding:
Basic		51,920,830		51,757,248		51,896,678		51,638,864		51,961,780		51,881,681
Diluted		52,303,777		52,053,655		52,056,136		52,011,208		52,037,996		51,899,210

Dividends declared per share	$	0.05	$	0.05	$	0.15	$	0.15	$	0.05	$	0.05



	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2018		2017		2018		2017		2019		2018
Net income	$	2,553	$	2,438	$	11,522	$	18,170	$	1,320	$	4,011
Currency translation adjustment		(37)		22		(44)		30		27		30
Other comprehensive (loss) income		(37)		22		(44)		30
Other comprehensive income										27		30
Comprehensive income	$	2,516	$	2,460	$	11,478	$	18,200	$	1,347	$	4,041



	Common stock													Common stock
	Shares	Amount		Additional paid-in capital		Treasury units		Retained earnings (deficit)		Accumulated other comprehensive income (loss)		Total		Shares	Amount		Additional paid-in capital		Retained earnings (deficit)		Accumulated other comprehensive income (loss)		Total
Balance at December 31, 2016	51,607,143	$	5	$	185,998	$	-	$	(47,058)	$	(46)	$	138,899
Balance at December 31, 2017														52,156,850	$	5	$	180,109	$	(36,239)	$	(1)	$	143,874
Adoption of revenue recognition standard														-		-		-		(60)		-		(60)
Balance at January 1, 2018														52,156,850	$	5	$	180,109	$	(36,299)	$	(1)	$	143,814
Issuance of restricted shares	324,184		-		-		-		-		-		-	281,945		-		-		-		-		-
Cancellation of restricted shares	(87,849)		-		-		-		-		-		-	(9,638)		-		-		-		-		-
Stock based compensation	-		-		3,156		-		-		-		3,156	-		-		617		-		-		617
Stock option exercises	313,372		-		1,639		-		-		-		1,639
Tax withholdings related to net share settlements of stock based compensation awards	-		-		(318)		-		-		-		(318)
Dividends paid	-		-		(10,366)		-		-		-		(10,366)	-		-		(2,600)		-		-		(2,600)
Foreign currency translation adjustments	-		-		-		-		-		45		45	-		-		-		-		30		30
Net income	-		-		-		-		10,819		-		10,819	-		-		-		4,011		-		4,011
Balance at December 31, 2017	52,156,850	$	5	$	180,109	$	-	$	(36,239)	$	(1)	$	143,874
Adoption of revenue recognition standard (see Note 1)	-		-		-		-		(60)		-		(60)
Balance at March 31, 2018														52,429,157	$	5	$	178,126	$	(32,288)	$	29	$	145,872

Balance at December 31, 2018														52,707,879	$	5	$	172,255	$	(25,857)	$	(56)	$	146,347
Adoption of lease standard (see Note 1)														-		-		-		6,540		-		6,540
Balance at January 1, 2019														52,707,879	$	5	$	172,255	$	(19,317)	$	(56)	$	152,887
Issuance of restricted shares	595,125		-		-		-		-		-		-	281,173		-		-		-		-		-
Cancellation of restricted shares	(73,391)		-		-		-		-		-		-	(87,319)		-		-		-		-		-
Stock based compensation	-		-		1,950		-		-		-		1,950	-		-		739		-		-		739
Tax withholdings related to net share settlements of stock based compensation awards	-		-		(52)		-		-		-		(52)	-		-		(82)		-		-		(82)
Dividends paid	-		-		(7,800)		-		-		-		(7,800)	-		-		(2,606)		-		-		(2,606)
Foreign currency translation adjustments	-		-		-		-		-		(44)		(44)	-		-		-		-		27		27
Net income	-		-		-		-		11,522		-		11,522	-		-		-		1,320		-		1,320
Balance at September 30, 2018	52,678,584	$	5	$	174,207	$	-	$	(24,777)	$	(45)	$	149,390
Balance at March 31, 2019														52,901,733	$	5	$	170,306	$	(17,997)	$	(29)	$	152,285



	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2018		2017		2019		2018
Cash Flows From Operating Activities
Net income	$	11,522	$	18,170	$	1,320	$	4,011
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation & amortization		21,180		19,395		7,964		7,000
Amortization of debt issuance costs		607		526		149		167
Loss on disposals of property, plant and equipment		76		205		82		71
Impairment charges on property, plant and equipment		319		-
Deferred rent		2,345		2,911
Stock based compensation		1,950		2,759		739		617
Deferred income taxes		1,415		3,472		64		426
Changes in operating assets and liabilities:
Receivables		(1,342)		(249)		(2,858)		(504)
Inventories		(21,051)		3,369		(709)		(3,058)
Prepaid expenses and other assets		(2,374)		4,163		(806)		(1,771)
Accounts payable		(6,550)		5,421		8,429		(6,085)
Income tax receivable / payable		2,520		(1,163)		457		1,135
Accrued expenses and other liabilities		5,104		(9,624)		4,848		7,849
Net cash provided by operating activities		15,721		49,355		19,679		9,858
Cash Flows From Investing Activities
Purchases of property, plant and equipment		(22,893)		(28,031)		(12,198)		(4,846)
Proceeds from the sale of property, plant and equipment		13		-
Proceeds from insurance						610		-
Net cash used in investing activities		(22,880)		(28,031)		(11,588)		(4,846)
Cash Flows From Financing Activities
Payments of long-term debt and capital lease obligations		(95,235)		(44,672)
Payments of long-term debt and financing lease obligations						(18,054)		(16,904)
Advances on line of credit		114,095		30,000		15,000		15,000
Dividends paid		(7,800)		(7,764)		(2,606)		(2,600)
Proceeds from exercise of stock options		-		1,635
Employee taxes paid for shares withheld		(52)		(217)		(82)		-
Debt issuance costs		(374)		-
Net cash provided by (used in) financing activities		10,634		(21,018)
Net cash used in financing activities						(5,742)		(4,504)
Effect of exchange rate changes on cash		(11)		30		30		3
Net change in cash		3,464		336		2,379		511
Cash, cash equivalents and restricted cash beginning of period		7,476		12,948		6,382		7,476
Cash, cash equivalents and restricted cash end of period	$	10,940	$	13,284	$	8,761	$	7,987

Cash and cash equivalents	$	10,105	$	12,429	$	7,936	$	7,152
Restricted cash		835		855		825		835
Cash, cash equivalents and restricted cash end of period	$	10,940	$	13,284	$	8,761	$	7,987

Supplemental disclosure of cash flow information
Purchases of property, plant and equipment included in accounts payable and accrued expenses	$	2,229	$	4,935	$	1,478	$	1,895
Cash paid for interest		1,846		1,453		934		558
Cash paid (received) for income taxes, net		240		7,575		-		1

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Note 1: Background

Tile Shop Holdings, Inc. (“Holdings,” and together with its wholly owned subsidiaries, the “Company”) was incorporated in Delaware in June 2012.

The Company is a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States. The Company manufactures its own setting and maintenance materials, such as thinset, grout, and sealers. The Company’s primary market is retail sales to consumers, contractors, designers and home builders. As of ~~September 30, 2018,~~March 31, 2019, the Company had 140 stores in 31 states and the District of Columbia, with an average size of approximately 20,200 square feet. The Company has distribution centers located in Michigan, New Jersey, Oklahoma, Virginia and Wisconsin. The Company has a sourcing operation located in China.

The accompanying Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for comprehensive financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature, including the elimination of all intercompany transactions. Operating results for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2018.~~2019.

These statements should be read in conjunction with the Consolidated Financial Statements and footnotes included in ~~the Company’s~~our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017.~~2018. The accounting policies used in preparing these Consolidated Financial Statements are the same as those described in Note 1 to the Consolidated Financial Statements in such Form 10-K.

Recently Adopted Accounting Pronouncements

In ~~May 2014,~~February 2016, 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 retrospective transition method. See Note 2 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 September 30, 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 nine months ended September 30, 2017 that was previously presented as a financing cash inflow was reclassified to the beginning cash, cash equivalents and restricted cash balances in the Consolidated Statement of Cash Flows.

~~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~~consolidated balance sheet. This standard also requires expanded disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The Company adopted this standard is effective ~~in fiscal year~~January 1, 2019 ~~with early adoption permitted.~~ using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption.

The Company ~~continues to evaluate~~determines if an arrangement is a lease at inception. Operating leases are included in right of use assets and lease liabilities on the ~~impact~~consolidated balance sheets. The right of ~~this standard on its financial statements~~use assets and ~~disclosures, internal controls and accounting policies. This evaluation process includes reviewing all forms~~lease liabilities are recognized as the present value of ~~leases, performing a completeness assessment~~the future minimum lease payments over the lease ~~population.~~term at commencement date. As most of the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The ~~Company~~right of use asset is ~~currently planning on electing the package of practical expedients not to reassess prior conclusions related to contracts containing leases,~~also adjusted for any lease ~~classification~~payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease typically at the Company’s own discretion. The Company regularly evaluates the renewal options and ~~is evaluating~~when they are reasonably certain of exercise, the ~~other~~Company includes the renewal period in its lease term.

This standard provides a number of optional practical expedients ~~available~~in transition. The Company elected the package of three practical expedients permitted under the ~~guidance.~~transition guidance within this standard, which among other things, allows the Company to carryforward the historical lease classification. The Company ~~is implementing a third-party supported~~did not separate non-lease components from lease ~~accounting information system to account for its lease population in accordance with this new standard~~components by class of underlying assets and ~~establishing internal controls over~~ the ~~new system. The~~ Company ~~believes~~did not apply the ~~adoption~~recognition requirements of the standard ~~will have a material impact on~~to short-term leases, as allowed by the standard.

The Company also elected to apply the hindsight practical expedient. Its election of the hindsight practical expedient resulted in the shortening of lease terms for certain existing leases and the useful lives of corresponding leasehold improvements. In its ~~Consolidated Balance Sheet as virtually all leases will~~application of the hindsight practical expedient, the Company considered recent investments in leased properties and its overall real estate strategy, which resulted in the determination that most renewal options would not be ~~recognized as~~reasonably certain in determining the expected lease term.

Upon adopting this standard, the Company established a right of use asset of $147.2 million and lease ~~obligation.~~

liabilities of $169.9 million, reduced deferred rent by $44.6 million, and recorded a cumulative effect adjustment to retained earnings of $22.0 million. This retained earnings impact was due to the election of the hindsight practical expedient which resulted in a decrease in the cumulative difference between the straight-line rent expense and rental payments that had been made between the inception of each lease and January 1, 2019. The change in the useful life assigned to certain leasehold improvements resulted in a $15.3 million reduction in

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

~~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 adjustedfixed assets and ~~continue to be reported in accordance with the Company’s historic accounting under Topic 605.~~retained earnings. The adoption of ~~Topic 606 had a cumulative impact adjustment to opening retained earnings of $0.1 million as of January 1, 2018 and~~this standard did not have ana material impact on ~~revenues recognized~~net income or cash flows during the three months ended March 31, 2019. See Note 8 for further details.

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued a final standard on accounting for credit losses. The standard is effective for the ~~three~~Company in fiscal 2020 and ~~nine months ended September 30, 2018.~~requires a change in credit loss calculations using the expected loss method. The Company is evaluating the effect of this standard on its consolidated financial statements and related disclosures.

~~Revenue Recognition~~In August 2018, the FASB issued a final standard which provides guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The standard requires customers of cloud computing services to recognize an intangible asset for the software license and, to the extent that payments attributable to the software license are made over time, a liability is also recognized. The standard also allows customers of cloud computing services to capitalize certain implementation costs. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The standard will become effective for the Company at the beginning of its 2020 fiscal year, although early adoption is permitted for all entities. The Company is evaluating the effect of the standard on its consolidated financial statements.

Note 2: Revenues

Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration received in exchange for those goods or services. Sales taxes are excluded from revenues.

The following table presents revenues disaggregated by product category:



	For the three months ended				For the nine months ended				For the three months ended
	September 30,				September 30,				March 31,
	2018		2017		2018		2017		2019		2018
Man-made tiles	47	%	43	%	46	%	43	%	46	%	45	%
Natural stone tiles	28		33		28		33		29		29
Setting and maintenance materials	13		11		13		11		13		13
Accessories	10		11		11		11		11		11
Delivery service	2		2		2		2		1		2
Total	100	%	100	%	100	%	100	%	100	%	100	%

The Company generates revenues by selling tile products, setting and maintenance materials, accessories, and delivery services to its customers through its store ~~locations and website.~~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:

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 ~~$8.1~~$9.8 million and $7.4 million as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018, respectively. Revenues ~~recognized during the nine months ended September 30, 2018 included in the customer deposit balance as of the beginning of the period were $7.8 million.~~

~~The Company extends financing to~~recognized during the three-month period ended March 31, 2019 that were included in the customer deposit balance as of the beginning of the period were $6.6 million.

Accounts receivable include amounts due from qualified professional customers who apply for credit. ~~The accounts receivable balance was $3.7 million and $2.4 million as of September 30, 2018 and December 31, 2017, respectively.~~ Customers who qualify for an account receive 30-day payment terms. The accounts receivable balance was $5.9 million and $3.1 million at March 31, 2019 and December 31, 2018, respectively. The Company expects that the customer will pay for the goods and services ordered within one year from the date the order is placed. Accordingly, the Company 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 net of cost of sales in other current liabilities. ~~Upon adoption of Topic 606, the~~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 ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 are as follows:

~~(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.~~

Inventories are stated at the lower of cost (determined on the weighted-average cost method) or net realizable value. Inventories consist primarily of merchandise held for sale. Inventories were comprised of the following as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017:~~



	(in thousands)				(in thousands)
	September 30,		December 31,		March 31,		December 31,
	2018		2017		2019		2018
Finished goods	$	94,528	$	65,843	$	102,501	$	98,776
Raw materials		2,144		1,660		2,647		2,114
Finished goods in transit		9,638		17,756		5,656		9,205
Total	$	106,310	$	85,259	$	110,804	$	110,095

The Company provides provisions for losses related to shrinkage and other amounts that are otherwise not expected to be fully recoverable. These provisions are calculated based on historical shrinkage, selling price, margin and current business trends. The provision for losses related to shrinkage and other amounts was ~~$0.5~~$0.9 million and ~~$0.2~~$0.3 million as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

~~On December 22, 2017,~~The Company's effective tax rate on net income before income taxes for the ~~Tax Cuts~~three months ended March 31, 2019 and ~~Jobs Act~~2018 was 31.6% and 28.3%, respectively. The difference between the Company’s effective rate of ~~2017 (the “Tax Act”) was enacted into law~~31.6% and the ~~new legislation contains several key~~expected federal statutory rate of 21.0% for the three months ended March 31, 2019 is primarily due to state income taxes and stock based compensation tax ~~provisions that affected~~shortfall charges. For the ~~Company, including, but not limited to, a reduction of the corporate income tax rate to 21% effective January 1, 2018,~~three months ended March 31, 2019 and a one-time mandatory transition tax on accumulated foreign earnings, a tax on global intangible low taxed income (“GILTI”), and the repeal of the domestic manufacturing deduction for 2018. The Company recognized 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”) allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. During the third quarter of~~ 2018, the Company recorded ~~an adjustment~~a provision for income taxes of $0.6 million and $1.6 million, respectively. The decrease in the provision for income taxes is due to ~~its provisional estimates resulting in a $0.2 million reduction~~lower pretax earnings.

The Company records interest and penalties relating to uncertain tax positions in income tax ~~expense concurrent with the filing~~expense. As of ~~its 2017 federal income tax return. Since the Tax Act was passed late in the fourth quarter of 2017,~~March 31, 2019 and ~~ongoing guidance and accounting interpretation is expected throughout~~ 2018, the Company ~~considers the accounting of the state deferred~~has not recognized any liabilities for uncertain tax ~~re-measurements~~positions, nor have interest and ~~other items~~penalties related to ~~be provisional due to the forthcoming guidance and the Company’s ongoing analysis~~uncertain tax positions been accrued.

of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with SAB 118. While the Company does not expect to incur a current tax on GILTI relative to 2018 operations, the Company has not yet elected an accounting policy related to GILTI.

The Company's effective tax rate on net income before income taxes for the three months ended September 30, 2018 and 2017 was 20.3% and 37.6%, respectively. The difference between the Company’s effective tax rate for the three months ended September 30, 2018 of 20.3% and the expected federal statutory rate of 21.0% is primarily due to favorable adjustments from the filing of the 2017 federal income tax return, partially offset by state income taxes. The Company’s effective tax rate on net income before taxes for the nine months ended September 30, 2018 and 2017 was 26.5% and 35.6%, respectively. The difference between the Company’s effective rate for the nine months ended September 30, 2018 of 26.5% and the expected federal statutory rate of 21.0% for the three and nine months ended September 30, 2018 is primarily due to state income taxes.

For the three months ended September 30, 2018 and 2017, the Company recorded a provision for income taxes of $0.7 million and $1.5 million, respectively. For the nine months ended September 30, 2018 and 2017, the Company recorded a provision for income taxes of $4.2 million and $10.0 million, respectively. The decrease in the provision for income taxes for both the three and nine months ended September 30, 2018 is due to lower pretax earnings as well as the decrease in the corporate tax rate.

The Company records interest and penalties relating to uncertain tax positions in income tax expense. As of September 30, 2018 and 2017, the Company has not recognized any liabilities for uncertain tax positions, nor have interest and penalties related to uncertain tax positions been accrued.

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



	(all amounts in thousands except share and per share data)									(all amounts in thousands except share and per share data)
		For the three months ended				For the nine months ended					For the three months ended
		September 30,				September 30,					March 31,
		2018		2017		2018		2017			2019		2018
Net income		$	2,553	$	2,438	$	11,522	$	18,170		$	1,320	$	4,011
Weighted average shares outstanding - basic			51,920,830		51,757,248		51,896,678		51,638,864			51,961,780		51,881,681
Effect of dilutive securities attributable to stock based awards			382,947		296,407		159,458		372,344			76,216		17,529
Weighted average shares outstanding - diluted			52,303,777		52,053,655		52,056,136		52,011,208			52,037,996		51,899,210
Income per common share:
Basic		$	0.05	$	0.05	$	0.22	$	0.35		$	0.03	$	0.08
Dilutive		$	0.05	$	0.05	$	0.22	$	0.35		$	0.03	$	0.08
Anti-dilutive securities excluded from earnings per share calculation			1,730,948		511,122		2,116,198		298,721			1,639,659		1,971,066

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 ~~September 30, 2018~~March 31, 2019 the base interest rate was ~~6.00%~~6.50% and the LIBOR-based interest rate was ~~4.01%~~4.49%. Borrowings outstanding consisted of $50.0 million on the revolving line of credit as of March 31, 2019. In addition, the Company has standby letters of credit outstanding related to its workers compensation and medical insurance policies. As of March 31, 2019 and 2018, the standby letters of credit totaled $1.2 million and $1.1 million, respectively. There was $48.8 million available for borrowing on the revolving line of credit as of March 31, 2019, which may be used to support the Company’s growth and for working capital purposes.

The Credit Agreement is secured by virtually all of the assets of the Company, including but not limited to, inventory, receivables, equipment and real property. The Credit Agreement contains customary events of default, conditions to borrowings, and restrictive covenants, including restrictions on the Company’s ability to dispose of assets, make acquisitions, incur additional debt, incur liens, or make investments. The Credit Agreement also includes financial and other covenants, including covenants to maintain certain fixed charge coverage ratios and consolidated total rent adjusted leverage ratios. The Company was in compliance with the covenants as of ~~September 30, 2018.~~March 31, 2019.

The ~~Credit Agreement supersedes~~Company leases its retail stores, certain distribution space, and ~~replaces~~office space. Leases generally have a term of ten to fifteen years, and contain renewal options. Assets acquired under operating leases are included 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 lineright of credit pursuant to the Credit Agreement to refinance all of 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 current assets and otheruse assets in the accompanying Consolidated Balance ~~Sheet and amortized on a straight line basis over the~~Sheet. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants. The depreciable life of assets and leasehold improvements is limited by the Credit Agreement. The Company recorded a $0.1 million charge in interest expense to write-off of certain unamortized deferred financing fees associated with the June 2, 2015 credit facility as of the date of the payoff.expected lease term.

~~Borrowings outstanding consisted~~(1) Variable lease costs consist primarily of ~~$46.0 million on the revolving line of credit as of September 30, 2018. In addition, the Company has standby letters of credit outstanding related to its workers compensation~~taxes, insurance, and ~~medical insurance policies. As of September 30, 2018 and 2017, the standby letters of credit totaled $1.1 million. There was $52.9 million available~~common area or other maintenance costs for ~~borrowing on the revolving line of credit as of September 30, 2018, which may be used to support the Company’s growth and for working capital purposes.~~our leased facilities.

~~Long-term debt consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):~~

September 30, 2018

December 31, 2017

Unamortized

Unamortized

Debt Issuance

Debt Issuance

Principal

Costs

Principal

Costs
Term note payable - interest at 3.06% at December 31, 2017

$
-

$
-

$
11,346

$
(36)
Commercial bank credit facility

46,000

-

15,000

-
Variable interest rate bonds (interest at 1.69% at December 31, 2017)

-

-

705

-
Total debt obligations

46,000

-

27,051

(36)
Less: current portion

-

-

8,855

(22)
Debt obligations, net of current portion

$
46,000

$
-

$
18,196

$
(14)



Maturity of Lease Liabilities (in thousands)	Operating Leases		Financing Leases		Total
2019	$	26,177	$	162	$	26,339
2020		34,252		216		34,468
2021		32,677		215		32,892
2022		29,741		90		29,831
2023		24,691		-		24,691
Thereafter		52,125		-		52,125
Total lease payments		199,663		683		200,346
Less: interest		(35,877)		(140)		(36,017)
Present value of lease liabilities	$	163,786	$	543	$	164,329

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:

Level 3 – Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment.

The following table sets forth by Level within the fair value hierarchy the Company’s financial assets that were accounted for at fair value on a recurring basis at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 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

Pricing

Fair Value at

Category

March 31, 2019

December 31, 2018

Assets

(in thousands)

Cash and cash equivalents

Level 1

10,105

6,621

Level 1

7,936

5,557

Restricted cash

Level 1

835

855

Level 1

825

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.

Fair value measurements also apply to certain non-financial assets and liabilities measured at fair value on a nonrecurring basis. Property, plant and equipment isand right of use assets are measured at fair value when an impairment is recognized and the related

assets are written down to fair value. The Company ~~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.~~

During the nine months ended September 30, 2018, 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 $0.3 million charge to write-down these assets to their estimated fair value. Nodid not recognize any significant impairment ~~charges were recorded~~losses during the three months ended ~~September 30,~~March 31, 2019 and 2018. ~~No impairment charges were recorded during the three and nine months ended September 30, 2017.~~

The carrying value of the Company’s borrowings under its ~~credit agreement~~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.

The Company measures and recognizes compensation expense for all stock based awards at fair value. The financial statements for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ include compensation cost for the portion of outstanding awards that

vested during those periods. The Company recognizes stock based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Total stock based compensation expense related to stock options was $0.3 million ~~and $0.6 million~~ for both the three months ended ~~September 30, 2018~~March 31, 2019 and ~~2017, respectively. Total stock based compensation expense related to stock options was $0.7 million and $1.7 million for the nine months ended September 30, 2018 and 2017, respectively.~~2018. Stock based compensation expense pertaining to stock options is included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income.

As of ~~September 30, 2018,~~March 31, 2019, the Company had outstanding stock options to purchase ~~1,716,299~~1,632,585 shares of common stock at a weighted average exercise price of ~~$14.27.~~$11.17.

The Company awards restricted common shares to selected employees and to non-employee directors. Recipients are not required to provide any consideration ~~other than continued service.~~upon vesting of the award. Restricted stock awards are subject to certain restrictions on transfer, and all or part of the shares awarded may be subject to forfeiture upon the occurrence of certain events, including employment termination. Certain awards are also subject to forfeiture if the Company fails to attain certain performance targets. The restricted stock is valued at its grant date fair value and expensed over the requisite service period or the vesting term of the awards. The Company adjusts the cumulative expense recognized on awards with performance conditions based on the probability of achieving the performance condition. Total stock based compensation expense related to restricted stock was ~~$0.5~~$0.4 million and ~~$0.4~~$0.3 million for the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively. Total stock based compensation expense related to restricted stock was $1.2 million and $1.1 million for the nine months ended September 30, 2018 and 2017,~~ respectively. Stock based compensation expense pertaining to restricted stock awards is included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income.

As of ~~September 30, 2018,~~March 31, 2019, the Company had ~~753,113~~916,434 outstanding restricted common shares.

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~~In this transaction, which was conducted under a ~~capital contribution to, and~~qualified New Markets Tax Credit (“NMTC”) program, Tile Shop Lending, Inc. (“Tile Shop Lending”) ~~made a loan~~loaned $6.7 million 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,~~community development entity (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 ~~$3.1~~$3.2 million to the Investment ~~Funds~~Fund and, by virtue of such contribution, is entitled to substantially all of the tax benefits derived from the ~~NMTCs,~~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 ~~$3.1~~$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.~~consolidated balance sheet. The Company incurred ~~$1.2~~$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.~~consolidated balance sheet. The Company is recognizing the benefit of this net $1.9 million contribution over the seven-year compliance period as it is being earned through the on-going compliance with the conditions of the NMTC program. As of ~~September 30, 2018,~~March 31, 2019, the balance of the contribution liability was ~~$2.4~~$2.2 million, of which $0.5 million iswas classified as other accrued liabilities on the Consolidated Balance Sheet and ~~$1.9~~$1.7 million iswas 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 ~~September 30, 2018,~~March 31, 2019, the balance in the Investment Fund available for reimbursement to the Company was $0.8 million.

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 athe $19.1 million acquisition, rehabilitation, and construction of the Company’s distribution center and manufacturing facilities in Durant, Oklahoma. In this transaction, Tile Shop Lending loaned $13.5 million to the Tile Shop Investment Fund LLC. The investors contributed $5.6 million to the Tile Shop Investment Fund LLC. The investors are entitled to the tax benefits derived from the NMTC by virtue of their contribution while the Company received the proceeds, net of syndication fees, to apply toward the construction project. This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase the investors’ interest. The Company believes that the investors will exercise the put option in September 2020 at the end of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify the investors for any loss or recapture of NMTCs related to the financing until such time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement.

The Company determined that this financing arrangement contains a VIE. The ongoing activities of the Tile Shop Investment Fund LLC – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the Tile Shop Investment Fund LLC. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to the structure; the investors lack of a material interest in the underling economics of the project; and the fact that the Company is obligated to absorb losses of ~~the~~The Tile Shop Investment ~~Fund.~~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.~~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.~~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 ~~September 30, 2018,~~March 31, 2019, the balance of the contribution liability was ~~$1.2~~$0.9 million, of which ~~$0.6~~$0.7 million iswas classified as other accrued liabilities on the Consolidated Balance Sheet and ~~$0.6~~$0.2 million iswas classified as other long-term liabilities on the Consolidated Balance Sheet.

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 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 recognized $1.0 million of legal expense during the third quarter of 2018 concurrent with the Court’s decision regarding the plaintiffs attorneys’ fees.

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.

On July 9, 2018, Fumitake Nishi, the brother-in-law of the Company’s ~~interim CEO~~Director Robert Rucker and a former Company employee, 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 twelve months ended December 31, ~~2016 and 2017,~~2018, the Company purchased ~~$8.4 million and $12.8~~$12.0 million of products from ~~Nanyang, respectively.~~Nanyang. During the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the Company purchased ~~$9.6~~$1.2 million of products from Nanyang. 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 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.

On ~~October 18, 2018,~~April 30, 2019, the Company declared a $0.05 dividend to stockholders of record as of the close of business on ~~October 29, 2018.~~May 6, 2019. The dividend will be paid on ~~November 9, 2018.~~May 17, 2019.

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, ~~2017~~2018 and our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” 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~~the “safe harbor” provisions of the Private Securities Litigation Reform 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~~1995. In some cases, you can identify these statements ~~are often identified~~ by ~~the use of~~ words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “depend,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “will likely result,” “would,” and similar expressions or variations, ~~intended~~although some forward-looking statements are expressed differently. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q relate to, ~~identify~~among other things, our anticipated new store openings, remodeling plans, and growth opportunities; our business strengths, marketing strategies, competitive advantages and role in our industry and markets; our expectations regarding financing arrangements; our expectations with respect to dividend payments; our expectations with respect to ongoing compliance with the terms of our credit facility; and our expectations with respect to remediation of our identified material weaknesses.

These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from any expected future results, performance, or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the level of demand for our products and our ability to introduce new products that satisfy market demand; our ability to grow and remain profitable in the highly competitive retail tile industry, our ability to access additional capital; our ability to attract and retain qualified personnel; unexpected delays or expenses related to opening new stores and maintaining or renovating existing stores; changes to economic or market conditions and customer preferences; disruptions in our supply chain or inventory management; unanticipated issues with respect to remediation of our identified material weaknesses; and those factors set forth in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 and the additional Risk Factors set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q.

There is no assurance that our expectations will be realized. If one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated, or projected. These statements are based on the beliefs and assumptions of our management based on information currently available to management. 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 maintaining or renovating existing stores, changes to our promotional strategy changes to economic or market conditions and customer preferences, disruptions in our supply chain, or inventory management, changes to our product assortment, 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 and those factors disclosed in the section captioned “Risk Factors” in our Annual Report for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission. Furthermore, such forward-looking statements speak only as of the date of this ~~report.~~Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview and Recent Trends

We are a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States. We offer a wide selection of products, attractive prices, and exceptional customer service in an extensive showroom setting. As of ~~September 30, 2018,~~March 31, 2019, we operated 140 stores in 31 states and the District of Columbia, with an average size of approximately 20,200 square feet.

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

We believe that the highly-fragmented United States retail tile market provides us with a significant opportunity to expand our store base. We opened 2one new ~~stores~~store and closed one store at the end of its lease in the first ~~nine~~three months of ~~2018,~~2019, and opened 15two new stores during ~~2017.~~2018. Between ~~October~~April 1, ~~2017~~2018 and ~~September 30, 2018,~~March 31, 2019, we opened 6one new store ~~locations.~~and closed one store. We ~~do not~~ plan to open ~~any~~an additional five stores in ~~2018.~~2019, of which one is a relocation. 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 transactions at these new locations.

For the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ we reported net sales of ~~$89.3~~$86.9 million and ~~$84.4~~$91.1 million, respectively. The ~~increase~~decrease in sales for the three months ended ~~September 30, 2018~~March 31, 2019 compared to the three months ended ~~September 30, 2017~~March 31, 2018 was primarily due to net sales of $3.0 million from stores not included in the comparable store base, and an increase in comparable stores sales of 2.1%, or $1.8 million. For the nine months ended September 30, 2018 and 2017, we reported net sales of $273.3 million and $266.0 million, respectively. The increase in sales for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily due to net sales of $13.4 million from stores not included in the comparable store base, partially offset by a decline in comparable store sales of 2.3%, or $6.1 million.

The increase in sales at comparable stores for the three months ended September 30, 2018 is attributable to a higher average ticket due to decreased promotional activity and an increase in the average selling price of products added to our assortment over the last twelve

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~~months.~~to a decline in comparable stores sales of 4.2%, or $3.8 million. In addition, we had one less store in the comparable base during the three months ended March 31, 2019, which resulted in a $0.4 million decrease in net sales. The decrease in sales at comparable stores for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 was ~~primarily the result of~~due to weaker store traffic ~~due~~and customer experience issues following the implementation of a new enterprise resource planning system and the launch of our new website. Poor weather in ~~part~~the Midwest and Northeast as well as a $0.8 million reduction in advertising spend also contributed to ~~our shift~~the decrease in ~~promotional strategy.~~traffic during the three months ended March 31, 2019.

The table below sets forth information about our comparable store sales ~~growth and (decline)~~decline for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.

For the three months ended

For the nine months ended

September 30,

September 30,

2018

2017

2018

2017
Comparable store sales growth (decline)

2.1
%

1.1
%

(2.3)
%

2.2
%

For the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ we reported gross profit of ~~$63.0~~$61.8 million and ~~$56.7~~$64.0 million, respectively. The gross margin rate was 71.2% and 70.3% for the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017 was 70.6% and 67.1%, respectively. For the nine months ended September 30, 2018 and 2017, we reported gross profit of $192.4 million and $183.8 million,~~ respectively. The increase in gross margin rate ~~for~~was primarily driven by higher pricing on new products added to our assortment over the nine months ended September 30, 2018 and 2017 was 70.4% and 69.1%, respectively. The improvement in gross profit for the three and nine months ended September 30, 2018 and 2017 is attributable to an increase in both net sales and gross margin rate. The increase in the gross margin rate is primarily due to decreased promotional activity.last twelve months.

For the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ we reported income from operations of ~~$3.9~~$2.9 million and ~~$4.4 million, respectively. For the nine months ended September 30, 2018 and 2017, we reported income from operations of $17.4 million and $29.5~~$6.1 million, respectively. The decrease in income from operations was primarily driven by ~~an increase~~a decrease in ~~occupancy costs from new stores~~net sales and ~~strategic investments made in store compensation, regional leadership, website design~~increased selling, general and ~~customer relationship management capabilities.~~

Inventory increased by $5.9 million from $100.4 million on June 30, 2018 to $106.3 million on September 30, 2018. The increase was attributable to new products added to our assortment during the quarter.

Long term debt increased $16.5 million from $29.5 million on June 30, 2018 to $46.0 million on September 30, 2018. The increase was attributable to the expansion of our product assortment resulting in an increase in inventory and capital investments associated with store remodels and merchandising.administrative expenses.

Net cash provided by operating activities was ~~$15.7~~$19.7 million and ~~$49.4~~$9.9 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, and 2017, respectively. The decrease in operating cash flow is due to investments made to expand our product assortment during 2018. Cash flows generated by operating activities and borrowings against our line of credit wererespectively, which was used to fund operations, ~~inventory purchases,~~new store ~~remodel~~construction activities, store remodels, merchandising and ~~merchandising investments,~~information technology investment, dividends and ~~dividends.~~debt repayments. We expect to continue to fund our capital expenditures and daily operations from our operating cash flows in future periods. As of September 30, 2018, we had cash of $10.1 million and working capital of $77.6 million compared with cash of $6.6 million and working capital of $43.5 million at December 31, 2017.flows.

On April 29, 2019, our Board of Directors authorized a share repurchase program (the “Program”), pursuant to which we may, from time to time, purchase shares of our common stock for an aggregate repurchase price not to exceed $15,000,000. The Program began on May 2, 2019 and will continue indefinitely until the full repurchase amount has been utilized or our Board of Directors terminates the Program.

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 control of the merchandise or final delivery of the product has occurred. We are required to charge and collect sales and other taxes on sales to our customers and remit these taxes back to government authorities. Total revenues do not include sales tax because we are a pass-through conduit for collecting and remitting sales tax. Sales are reduced by a reserve for anticipated sales returns that we estimate based on historical returns.

Comparable store sales growth is a percentage change in sales of comparable stores period-over-period. A store is considered comparable on the first day of the 13th full month of operation. When a store is relocated, it is excluded from the comparable stores sales growth calculation. Comparable store sales growth amounts include total charges to customers less any actual returns. We include the change in allowance for anticipated sales returns applicable to comparable stores in the comparable store sales calculation.

Cost of Sales– Cost of sales consists primarily of material costs, freight, customs and duties fees, and storage and delivery of product to the customers, as well as physical inventory losses and costs associated with manufacturing of setting and maintenance materials.

Selling, General, and Administrative Expenses – Selling, general, and administrative expenses consists primarily of compensation costs, occupancy, utilities, maintenance costs, advertising costs, shipping and transportation expenses to move inventory from our distribution centers to our stores, depreciation and amortization.

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Pre-opening Costs – Our pre-opening costs are those typically associated with the opening of a new store and generally include rent expense, compensation costs and promotional costs. We expense pre-opening costs as incurred and include these costs in selling, general, and administrative expenses.

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

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Non-GAAP Measure

We calculate Adjusted EBITDA by taking net income calculated in accordance with accounting principles generally accepted in the United States (“GAAP”), and adjusting for interest expense, income taxes, depreciation and amortization, and stock based compensation expense. Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales.

We believe that this non-GAAP ~~measure of~~ financial ~~results~~measure provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses this non-GAAP financial measure 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. This non-GAAP financial measure is used in monthly financial reports prepared for management and our Board of Directors. We believe that the use of this non-GAAP financial measure provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial performance with other specialty retailers, many of which present a similar non-GAAP financial measure to investors.

The reconciliation of Adjusted EBITDA to net income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ is as follows:



	(in thousands)								(in thousands)
	Three Months Ended									Three Months Ended
	September 30,									March 31,
	2018		% of net sales		2017		% of net sales(1)			2019		% of sales(1)		2018		% of sales
Net income	$	2,553	2.9	%	$	2,438	2.9	%		$	1,320	1.5	%	$	4,011	4.4	%
Interest expense		715	0.8	%		505	0.6	%			978	1.1	%		554	0.6	%
Income taxes		652	0.7	%		1,468	1.7	%			611	0.7	%		1,581	1.7	%
Depreciation & amortization		7,202	8.1	%		6,803	8.1	%			7,964	9.2	%		7,000	7.7	%
Stock based compensation		735	0.8	%		989	1.2	%			739	0.8	%		617	0.7	%
Adjusted EBITDA	$	11,857	13.3	%	$	12,203	14.5	%		$	11,612	13.4	%	$	13,763	15.1	%

We calculate pretax return on capital employed by taking income from operations divided by capital employed. Capital employed equals total assets less accounts payable, income taxes payable, other accrued liabilities, lease liability, deferred rent and other long-term liabilities. We believe this non-GAAP financial measure is useful in assessing the effectiveness of our capital allocation over time. Other companies may calculate ~~Pretax Return~~pretax return on ~~Capital Employed~~capital employed differently, which limits the usefulness of the measure for comparative purposes.

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

(2) Represents the average lease liability and deferred rent account balances for the four quarters ended as of each of the balance sheet dates.

Our management does not consider these non-GAAP financial 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 ~~excludes~~exclude significant expenses and income that are required by GAAP to be recognized in our consolidated financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which expenses and income are excluded or included in determining these non-GAAP financial measures. In order to compensate for these limitations, management presents its 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.

Comparison of the three months ended ~~September 30, 2018~~March 31, 2019 to the three months ended ~~September 30, 2017~~March 31, 2018



	(in thousands)								(in thousands)
	2018		% of sales(1)		2017		% of sales		2019		% of sales(1)		2018		% of sales
Net sales	$	89,259			$	84,421	��		$	86,908			$	91,134
Cost of sales		26,248	29.4	%		27,759	32.9	%		25,066	28.8	%		27,096	29.7	%
Gross profit		63,011	70.6	%		56,662	67.1	%		61,842	71.2	%		64,038	70.3	%
Selling, general and administrative expenses		59,131	66.2	%		52,285	61.9	%		58,948	67.8	%		57,927	63.6	%
Income from operations		3,880	4.3	%		4,377	5.2	%		2,894	3.3	%		6,111	6.7	%
Interest expense		(715)	(0.8)	%		(505)	(0.6)	%		(978)	(1.1)	%		(554)	(0.6)	%
Other income		40	0.0	%		34	0.0	%		15	0.0	%		35	0.0	%
Income before income taxes		3,205	3.6	%		3,906	4.6	%		1,931	2.2	%		5,592	6.1	%
Provision for income taxes		(652)	(0.7)	%		(1,468)	(1.7)	%		(611)	(0.7)	%		(1,581)	(1.7)	%
Net income	$	2,553	2.9	%	$	2,438	2.9	%	$	1,320	1.5	%	$	4,011	4.4	%

Net Sales Net sales for the ~~third~~first quarter of ~~2018 increased $4.8~~2019 decreased $4.2 million, or ~~5.7%~~4.6%, compared with the ~~third~~first quarter of ~~2017,~~2018, primarily due to a $3.0 million increase in net sales from stores not included in the comparable store base and an increase of $1.8 million in net sales generated by comparable stores. Comparable store sales growth was 2.1% for the third quarter of 2018 versus 1.1% for the third quarter of 2017. The increase in sales at comparable stores for the three months ended September 30, 2018 is attributable to a higher average ticket due to decreased promotional activity and an increase in the average selling price of products added to our assortment over the last twelve months.

~~Gross Profit~~ Gross profit for the third quarter of 2018 increased $6.3 million, or 11.2%, compared with the third quarter of 2017 due to an increase in net sales and the gross margin rate. The gross margin rate was 70.6% and 67.1% for the third quarter of 2018 and 2017, respectively. The improvement in the gross margin rate was primarily due to decreased promotional activity.

~~Selling, General, and Administrative Expenses~~ Selling, general, and administrative expenses for the third quarter of 2018 increased $6.8 million, or 13.1%, compared with the third quarter of 2017. The $6.8 million increase in selling, general, and administrative expenses was driven primarily by costs associated with opening and operating 6 new stores during the period from October 1, 2017 through September 30, 2018, investments in store and warehouse staff compensation, and the addition of regional sales leader and pro market manager positions. Included in the selling, general, and administrative expenses increase during the third quarter of 2018 was $1.9 million of planned strategic investments in store compensation, regional sales leadership, website design, and customer relationship management capabilities. Additionally, we incurred approximately $1.0 million of incremental legal expense during the third quarter of 2018 to resolve our derivative securities litigation.

~~Pre-opening Costs~~ ~~During the three months ended September 30, 2017, we incurred pre-opening costs of $0.5 million. We incurred no pre-opening costs during the three months ended September 30, 2018.~~

~~Interest Expense~~ Interest expense was $0.7 million and $0.5 million for the third quarter of 2018 and 2017, respectively. The increase was primarily due to higher interest rates and a higher average debt balance during the third quarter of 2018.

~~Provision for Income Taxes~~ Income tax provision decreased $0.8 million for the third quarter of 2018 compared with the third quarter of 2017 due to a decrease in income before income taxes, along with a decrease in our effective tax rate due to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). Our effective tax rate for the three months ended September 30, 2018 and 2017 was 20.3% and 37.6%, respectively. The difference between the Company’s effective tax rate of 20.3% and the expected federal statutory rate of 21.0% is primarily due to favorable adjustments from the filing of the 2017 tax return.

~~Comparison of the nine months ended September 30, 2018 to the nine months ended September 30, 2017~~

~~Net Sales~~ Net sales for the nine months ended September 30, 2018 increased $7.3 million, or 2.7%, compared with the nine months ended September 30, 2017, primarily due to a $13.4 million increase in net sales from stores not included in the comparable store base, partially offset by a $6.1$3.8 million decrease in net sales generated by comparable stores. The decrease in sales at comparable stores for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 was ~~primarily the result of~~due to weaker store traffic ~~due~~and customer experience issues following the implementation of a new enterprise resource planning system and the launch of our new website. Poor weather in ~~part~~the Midwest and Northeast as well as a $0.8 million reduction in advertising spend also contributed to ~~our shift~~the decrease in ~~promotional strategy.~~traffic during the three months ended March 31, 2019. In addition, we had one less store in the comparable store base during the first quarter of 2019, which resulted in a $0.4 million decrease in net sales.

Gross Profit Gross profit for the ~~nine months ended September 30, 2018 increased $8.6~~first quarter of 2019 decreased $2.2 million, or ~~4.7%~~3.4%, compared with the ~~nine months ended September 30, 2017~~first quarter of 2018 primarily due to ~~an increase~~a decrease in net ~~sales and an increase in the gross margin rate.~~sales. The gross margin rate was ~~70.4%~~71.2% and ~~69.1%~~70.3% for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. The ~~improvement~~increase in ~~the~~ gross margin rate was primarily ~~due~~driven by higher pricing on new products added to ~~decreased promotional activity.~~our assortment over the last twelve months.

Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the ~~nine months ended September 30, 2018~~first quarter of 2019 increased ~~$20.7~~$1.0 million, or ~~13.4%~~1.8%, compared with the ~~nine months ended September 30, 2017. The $20.7~~first quarter of 2018. Depreciation expense increased $1.0 million ~~increase~~ in the first quarter of 2019 compared to the first quarter of 2018. First quarter selling, general and administrative expenses was driven primarily by costs associated with opening and operating new stores during the period from October 1, 2017 through September 30, 2018, investments in store and warehouse staff compensation, and the addition of regional sales leader and pro market manager positions. Included in the selling, general, and administrative expenses increase during the nine months ended September 30, 2018 wasalso included approximately ~~$6.1~~$2.5 million of ~~planned strategic investments~~expense related to the implementation of our new enterprise resource planning system. The increases in ~~store compensation, regional sales leadership, website design, and customer relationship management capabilities. Additionally, we incurred~~expenses were partially offset by lower variable expenses of approximately $1.0 million, ~~of incremental legal expense during the nine months ended September 30, 2018 to resolve our derivative securities litigation.~~a $0.8 million decrease in advertising expenses and a $0.6 million decrease in transportation expenses.

Pre-opening Costs During both the ~~nine months ended September 30,~~first quarter of 2019 and 2018, ~~and 2017,~~ we incurred pre-opening costs of $0.1 ~~million and $0.8 million, respectively.~~million.

Interest Expense Interest expense was ~~$1.9~~$1.0 million and ~~$1.4~~$0.6 million for the ~~nine months ended September 30,~~first quarter of 2019 and 2018, ~~and 2017,~~ respectively. The increase was due to higher average debt balances and higher interest rates ~~and a higher debt balance~~ during the ~~nine months ended September 30, 2018.~~first quarter of 2019.

Provision for Income Taxes Income tax provision decreased ~~$5.9~~$1.0 million for the ~~nine months ended September 30, 2018~~first quarter of 2019 compared with the ~~nine months ended September 30, 2017~~first quarter of 2018 due to a decrease in income before income ~~taxes, along with a decrease in our effective tax rate due to the Tax Act.~~taxes. Our effective tax rate for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018 was 31.6% and ~~2017 was 26.5% and 35.6%~~28.3%, respectively. The difference between the Company’s effective rate for the nine months ended September 30, 2018 of 26.5% and the expected federal statutory rate of 21.0% for the three and nine months ended September 30, 2018 is primarily due to state income taxes.

Our principal ~~uses of~~ liquidity requirements have been ~~investments in~~for working capital and capital expenditures. Our principal sources of liquidity are ~~$10.1~~$7.9 million of cash and cash equivalents at ~~September 30, 2018,~~March 31, 2019, 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, executing share repurchases, reducing outstanding debt, ~~paying dividends to our shareholders~~ and general corporate purposes. We intend to continue our regular quarterly dividend, which will enable us to return excess cash to stockholders. Future dividend payments are subject to the approval of the Board of Directors each quarter.

On September 18, 2018, we and our 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 us with a senior credit facility consisting of a $100 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 ~~September 30, 2018,~~March 31, 2019, the base interest rate was ~~6.00%~~6.50% and the LIBOR-based interest rate was ~~4.01%~~4.49%. Borrowings outstanding consisted of $50.0 million on the revolving line of credit as of March 31, 2019. We also have standby letters of credit outstanding related to our workers compensation and medical insurance policies. As of March 31, 2019 and 2018, the standby letters of credit totaled $1.2 million and $1.1 million, respectively. There was $48.8 million available for borrowing on the revolving line of credit as of March 31, 2019, which may be used to support our growth and for working capital purposes.

The Credit Agreement is secured by virtually all of ~~the~~our 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 our ability to dispose of assets, make acquisitions, incur additional debt, incur liens, or make investments. The Credit Agreement also includes financial and other covenants, including covenants to maintain certain fixed charge coverage ratios and consolidated total rent adjusted leverage ratios. We ~~are~~were in compliance with the covenants as of ~~September 30, 2018.~~

The Credit Agreement supersedes and replaces in its entirety our 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. In addition to increasing the line of credit from $75 million under the prior credit facility to $100 million under the Credit Agreement, the Credit Agreement also provides additional flexibility in our fixed charge coverage ratio covenant, which is now 1.25:1.00 (as compared to 1.35:1.00 under the prior credit facility), and in the calculation of the consolidated total rent adjusted leverage ratio, which now is based on six times the trailing four-quarter rent expense (as compared to eight times the trailing four-quarter rent expense under the prior credit facility).

We drew on the line of credit pursuant to the Credit Agreement to refinance all of the existing term loan, revolving line of credit and interest outstanding under our 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 current assets and other assets in the Consolidated Balance Sheet and amortized on a straight line basis over the life of the Credit Agreement. We recorded a $0.1 million charge in interest expense to write-off of certain unamortized deferred financing fees associated with the prior credit facility as of the date of the payoff. Borrowings outstanding consisted $46.0 million on the revolving line of credit as of September 30, 2018. We also have standby letters of credit outstanding related to our workers compensation and medical insurance policies. As of September 30, 2018 and 2017, the standby letters of credit totaled $1.1 million. There was $52.9 million available for borrowing on the revolving line of credit as of September 30, 2018, which may be used to support our growth and for working capital purposes.March 31, 2019.

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 12twelve months.

Capital expenditures were ~~$22.9~~$12.2 million and ~~$28.0~~$4.8 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. The ~~decrease~~increase in capital expenditures is primarily due to ~~the decelerated pace of new store openings~~increased investments in 2018. We opened 2 and 11 new stores during the nine months ended September 30, 2018 and 2017, respectively. During the nine months ended September 30, 2018, capital expenditures primarily consisted of 10 store remodels, merchandising, ~~and fixture investments at all 140 stores,~~ and information technology investments.

The following table summarizes our cash flow data for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.



	(in thousands)				(in thousands)
	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2018		2017		2019		2018
Net cash provided by operating activities	$	15,721	$	49,355	$	19,679	$	9,858
Net cash used in investing activities		(22,880)		(28,031)		(11,588)		(4,846)
Net cash provided by (used in) financing activities		10,634		(21,018)
Net cash used in financing activities						(5,742)		(4,504)

Net cash provided by operating activities during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 was ~~$15.7~~$19.7 million compared with ~~$49.4~~$9.9 million during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The ~~decrease~~increase is attributable to ~~a decrease in net income, along with an increase in inventory.~~improved working capital management.

Net cash used in investing activities totaled ~~$22.9~~$11.6 million for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 compared with ~~$28.0~~$4.8 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. 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, asset additions in our distribution and manufacturing facilities, information technology infrastructure, ~~a new enterprise resource planning system,~~ and general corporate information technology assets.

Net cash ~~provided by~~used in financing activities was ~~$10.6~~$5.7 million for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 compared with ~~net~~$4.5 million for the three months ended March 31, 2018. Net cash used in financing activities ~~of $21.0~~during the three months ended March 31, 2019 was primarily $18.1 million for the nine months ended September 30, 2017. Net cash provided by financing activities during the nine months ended September 30, 2018 included $114.1 million in advances on the Company’s line of credit which were partially offset by $95.2 million in payments of long-term debt and ~~capital~~financing lease obligations and ~~$7.8~~$2.6 million in dividends paid to ~~stockholders.~~stockholders, offset by advances on the revolving line of credit of $15.0 million.

Cash and cash equivalents totaled ~~$10.1~~$7.9 million at ~~September 30, 2018~~March 31, 2019 compared with ~~$6.6~~$5.6 million at December 31, ~~2017.~~2018. Working capital was ~~$77.6~~$50.7 million at ~~September 30, 2018~~March 31, 2019 compared with ~~$43.5~~$79.8 million at December 31, ~~2017.~~2018. The decrease in working capital during the first quarter of 2019 was due to the new accounting standard for leases, which added a current portion of lease liability to the Consolidated Balance Sheet.

As of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, 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.

As of ~~September 30, 2018,~~March 31, 2019, there were no material changes to our contractual obligations outside the ordinary course of business.

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board ~~(the “FASB”~~(“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. We adopted this standard as of January 1, 2018 using the modified retrospective transition method. See Note 2 in Item 1, Notes to Consolidated Financial Statements in this Form 10-Q 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. We adopted the new standard as of March 31, 2018 using the retrospective transition method. Our restricted cash balance was $0.8 million as of September 30, 2018. Upon adopting the new standard, we no longer present the release of restricted cash as a financing cash inflow. Instead, restricted cash and long-term restricted cash balances will be included in the beginning and ending cash, cash equivalents and restricted cash balances in the statement of cash flows. In connection with the adoption of this standard, $6.0 million received from restricted cash accounts during nine months ended September 30, 2017 that was previously presented as a financing cash inflow was reclassified to cash, cash equivalents and restricted cash in the statement of cash flows.

~~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~~consolidated balance sheet. This standard also requires expanded disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. We adopted this 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.

We determine if an arrangement is a lease at inception. Operating leases are included in right of use assets and lease liabilities on the consolidated balance sheets. The right of use assets and lease liabilities are recognized as the present value of the future minimum lease payments over the lease term at commencement date. As most of the leases do not provide an implicit rate, we use the incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The right of use asset is also adjusted for any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease typically at our own discretion. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in its lease term.

This standard provides a number of optional practical expedients in transition. We elected the package of three practical expedients permitted under the transition guidance within this standard, which among other things, allows us to carryforward the historical lease classification. We did not separate non-lease components from lease components by class of underlying assets and we did not apply the recognition requirements of the standard to short-term leases, as allowed by the standard.

We also elected to apply the hindsight practical expedient. Our election of the hindsight practical expedient resulted in the shortening of lease terms for certain existing leases and the useful lives of corresponding leasehold improvements. In our application of the hindsight practical expedient, we considered recent investments in leased properties and our overall real estate strategy, which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.

Upon adopting this standard, we established a right of use asset of $147.2 million and lease liabilities of $169.9 million, reduced deferred rent by $44.6 million, and recorded a cumulative effect adjustment to retained earnings of $22.0 million. This retained earnings impact was due to the election of the hindsight practical expedient which resulted in a decrease in the cumulative difference between the straight-line rent expense and rental payments that had been made between the inception of each lease and January 1, 2019. We also adjusted the useful life assigned to certain leasehold improvements, which resulted in a $15.3 million reduction in fixed assets and retained earnings. The adoption of this standard did not have a material impact on net income or cash flows during the three months ended March 31, 2019.

In June 2016, the FASB issued a final standard on accounting for credit losses. This standard is effective for us in fiscal ~~year 2019, with early adoption permitted.~~2020 and requires a change in credit loss calculations using the expected loss method. We ~~continue to evaluate~~are evaluating the ~~impact~~effect of this standard on our consolidated financial statements and ~~disclosures, internal controls~~related disclosures.

In August 2018, the FASB issued a final standard which provides guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The standard requires customers of cloud computing services to recognize an intangible asset for the software license and, ~~accounting policies. This evaluation process includes reviewing~~to the extent that payments attributable to the software license are made over time, a liability is also recognized. The standard also allows customers of cloud computing services to capitalize certain implementation costs. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The standard will become effective for us at the beginning of its 2020 fiscal year, although early adoption is permitted for all forms of leases, performing a completeness assessment over the lease population and analyzing the practical expedients in order to determine the best path of implementing changes to existing processes and controls.entities. We are ~~implementing a third-party supported lease accounting information system to account for our lease population in accordance with this new standard and establishing internal controls over~~evaluating the ~~new system. We believe the adoption~~effect of the standard ~~will have a material impact~~ on our ~~Consolidated Balance Sheet as virtually all leases will be recognized as a right of use asset and lease obligation.~~consolidated financial statements

There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017.~~2018.

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. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of ~~September 30, 2018~~March 31, 2019 and have concluded that ~~such~~our disclosure controls and procedures were not effective as of March 31, 2019 due to material weaknesses in our internal control over financial reporting as described below.

On January 1, 2019, we implemented a new enterprise resource planning (“ERP”) system on a company-wide basis. During the ~~end of~~quarter ended March 31, 2019, we identified two material weaknesses in internal control over financial reporting that arose from the ~~period covered by this Quarterly Report on Form 10-Q.~~new ERP system implementation. The two material weaknesses are:

Management has been actively engaged in developing remediation plans to address the control deficiencies outlined above. The remediation efforts include the following:

~~No changes~~On January 1, 2019, we implemented an ERP system on a company-wide basis. The implementation resulted in the two material weaknesses identified above. We believe we have developed an appropriate plan to remediate and have begun our ~~internal control over financial reporting occurred during~~remediation efforts related to the quarter ended September 30, 2018 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 weaknesses.

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 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 recognized $1.0 million of legal expense during the third quarter of 2018 concurrent with the Court’s decision regarding the plaintiffs attorneys’ fees.

~~The Company is also,~~We are, 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~~our ultimate liability in connection with these matters is not expected to have a material adverse effect on ~~the~~our results of operations, financial position, or cash flows.

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, ~~2017.~~2018 other than with respect to the risk factors discussed below.

Implementation of our new enterprise resource planning system has adversely impacted and could continue to negatively affect our business.

We rely extensively on our information technology (“IT”) systems to assist us in managing our business and summarizing our operational results. On January 1, 2019 we deployed a company-wide new enterprise resource planning (“ERP”) system. The new ERP system was implemented to position the Company for long-term growth, further enhance operating efficiencies and provide more effective management of our business operations, including sales order processing, inventory control, purchasing and supply chain management, and financial reporting. Implementing the new ERP system has been costly and has required, and may continue to require, the investment of significant personnel and financial resources. In addition to the risks inherent in the conversion to any new IT system, including the loss of information, disruption to our normal operations, and changes in accounting procedures, the implementation of our new ERP system has resulted in operational and reporting disruptions related to the conversion of existing customer orders, processing of new customer orders and maintaining an effective internal control environment.

Failure to properly or adequately address any issues with our new ERP system could result in increased costs and the diversion of management’s and employees’ attention and resources and could materially adversely affect our operating results, internal control over financial reporting and ability to manage our business effectively. While the ERP system is intended to further improve and enhance our information management systems, the ongoing implementation of this new ERP system exposes us to the risks of integrating that system with our existing systems and processes, including possible continued disruption of our financial reporting.

We have identified two material weaknesses in our internal control over financial reporting which, if not remediated, could result in material misstatements of our financial statements.

During the quarter ended March 31, 2019, we identified material weaknesses in internal control over financial reporting that pertain to our ERP system conversion that took place on January 1, 2019 involving (1) the ineffective design and implementation of effective controls with respect to the ERP system conversion, and (2) the ineffective design and implementation of IT general controls for information systems that are relevant to the preparation of financial statements. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Although we have developed and are implementing a plan to remediate these material weaknesses and believe, based on our evaluation to date, that these material weaknesses will be remediated in a timely fashion, we cannot ensure that this will occur within a specific timeframe. These material weaknesses will not be remediated until all necessary internal controls have been implemented, tested and determined to be operating effectively. In addition, we may need to take additional measures to address the material weaknesses or modify the planned remediation steps, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses will not result in a material misstatement of our financial statements. Moreover, we cannot ensure that we will not identify additional material weaknesses in our internal control over financial reporting in the future.

If we are unable to remediate the material weaknesses, our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods specified by the rules and forms of the Securities and Exchange Commission, could be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties and materially and adversely impact our business and financial condition.

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.


	(in thousands)
	March 31,		December 31,
	2019		2018
Other current liabilities	$	5,875	$	5,154
Other current assets		1,746		1,498
Sales returns reserve, net	$	4,129	$	3,656


	(in thousands)
	September 30,		December 31,
	2018		2017(1)
Other current liabilities	$	5,525	$	3,139
Other current assets		1,596		-
Sales returns reserve, net	$	3,929	$	3,139



	(in thousands)
	September 30,		December 31,
	2018		2017
Customer deposits	$	8,062	$	8,064
Sales returns reserve		5,525		3,139
Accrued wages and salaries		3,631		2,853
Payroll and sales taxes		3,650		2,491
Other current liabilities		6,922		5,866
Total other accrued liabilities	$	27,790	$	22,413



	(in thousands)
	March 31,		December 31,
	2019		2018
Customer deposits	$	9,783	$	7,383
Accrued wages and salaries		3,353		3,689
Sales returns reserve		5,875		5,154
Payroll and sales taxes		4,327		2,929
Other current liabilities		5,389		5,329
Total other accrued liabilities	$	28,727	$	24,484



Lease cost (in thousands)			March 31, 2019
Operating lease cost	SG&A expenses	$	8,013
Financing lease cost
Amortization of leased assets	Depreciation and amortization		12
Interest on lease liabilities	Interest expense		21
Variable lease cost(1)			3,225
Short term lease cost			264
Net lease cost		$	11,535



Leases (in thousands)	Classification		March 31, 2019
Assets
Operating lease assets	Right of use asset	$	141,791
Financing lease assets	Property, plant and equipment, net of accumulated depreciation		150
Total leased assets		$	141,941

Liabilities
Current
Operating	Current portion of lease liability	$	25,236
Financing	Other accrued liabilities		145
Noncurrent
Operating	Long-term lease liability, net		138,550
Financing	Other long-term liabilities		398
Total lease liabilities		$	164,329



	September 30, 2018				December 31, 2017
			Unamortized				Unamortized
			Debt Issuance				Debt Issuance
	Principal		Costs		Principal		Costs
Term note payable - interest at 3.06% at December 31, 2017	$	-	$	-	$	11,346	$	(36)
Commercial bank credit facility		46,000		-		15,000		-
Variable interest rate bonds (interest at 1.69% at December 31, 2017)		-		-		705		-
Total debt obligations		46,000		-		27,051		(36)
Less: current portion		-		-		8,855		(22)
Debt obligations, net of current portion	$	46,000	$	-	$	18,196	$	(14)



Other Information (in thousands)		March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	8,602
Operating cash flows from financing leases	$	21
Financing cash flows from financing leases	$	33



Lease Term and Discount Rate	March 31, 2019
Weighted-average remaining term (years)
Operating leases	6.4
Financing leases	3.2
Weighted-average discount rate
Operating leases	6.21	%
Financing leases	14.73	%



($ in thousands)	March 31,
	2019(1)			2018(1)
Income from Operations (trailing twelve months)	$	13,347		$	16,324

Total Assets		328,030			266,994
Less: Accounts payable		(29,242)			(22,020)
Less: Income tax payable		(116)			(150)
Less: Other accrued liabilities		(27,035)			(24,713)
Less: Lease liability(2)		(67,122)			(40,670)
Less: Other long-term liabilities		(3,937)			(4,895)
Capital Employed	$	200,578		$	174,546

Pretax Return on Capital Employed		6.7	%		9.4	%



	Total Number of Shares Purchased		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Program	Maximum Number of Shares that May Yet be Purchased Under Plans or Programs
July 1, 2018 - July 31, 2018	2,590	(1)	$	8.30	(1)	-	-
August 1, 2018 - August 31, 2018	7,207	(2)		0.00	(2)	-	-
September 1, 2018 - September 30, 2018	19,552	(2)		0.00	(2)	-	-
	29,349		$	0.73		-	-


Exhibits
3.1	Certificate of Incorporation of Tile Shop Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (Reg. No. 333-182482) filed with the Securities and Exchange Commission on July 2, 2012).
3.2	By-Laws of Tile Shop Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-4 (Reg. No. 333-182482) filed with the Securities and Exchange Commission on July 2, 2012).
~~10.1~~4.1	Credit Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, Tile Shop Lending, Inc., certain subsidiaries of The Tile Shop, LLC as borrowers, each lender from time to time party thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C issuerSpecimen Common Stock Certificate (incorporated by reference to Exhibit ~~10.1~~4.1 of Amendment No. 1 to the Company’s ~~Current Report~~Registration Statement on Form ~~8-K~~S-4 (Reg. No. 333-182482) filed with the Securities and Exchange Commission on ~~September 19, 2018).~~
~~10.2~~	Security Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, Tile Shop Lending, Inc., The Tile Shop of Michigan, LLC, and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 19, 2018).
~~10.3~~	Securities Pledge Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, Tile Shop Lending, Inc., The Tile Shop of Michigan, LLC, and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 19, 2018).
~~10.4~~	Guaranty Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, Tile Shop Lending, Inc., The Tile Shop of Michigan, LLC, and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 19, 2018)July 23, 2012).
31.1*	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of ~~2002~~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.


	TILE SHOP HOLDINGS, INC.

Dated: ~~October 26, 2018~~May 9, 2019	By:	/s/ ~~ROBERT A. RUCKER~~CABELL H. LOLMAUGH
		~~Robert A. Rucker~~Cabell H. Lolmaugh
		Chief Executive Officer


Dated: ~~October 26, 2018~~May 9, 2019	By:	/s/ KIRK L. GEADELMANN
		Kirk L. Geadelmann
		Chief Financial Officer

For the three months ended

Comparable store sales decline