UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________

FORM 10-Q

_____________________________

(Mark One)


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

For the quarterly period ended March 31, ~~2020~~2021


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

For the transition period from – to –

Commission file number: 001-35629

_____________________________

TILE SHOP HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

_____________________________


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


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

(763) 852-2950

(Registrant’s telephone number, including area code)

_____________________________

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

N/A

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

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

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


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

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

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

As of May ~~6, 2020,~~3, 2021, there were ~~51,412,666~~51,925,262 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

Table of Contents

TILE SHOP HOLDINGS, INC.

Table of Contents

‎

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)~~

March 31,

December 31,

2020

2019

(unaudited)

(audited)
Assets

Current assets:

Cash and cash equivalents

$
5,701

$
9,104
Restricted cash

815

815
Receivables, net

4,209

3,370
Inventories

86,295

97,620
Income tax receivable

9,298

3,090
Other current assets, net

8,049

8,180
Total Current Assets

114,367

122,179
Property, plant and equipment, net

121,069

130,461
Right of use asset

135,451

137,737
Deferred tax assets

2,741

7,196
Other assets

1,988

2,241
Total Assets

$
375,616

$
399,814

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$
15,403

$
18,181
Income tax payable

47

87
Current portion of lease liability

27,751

26,993
Other accrued liabilities

27,363

24,589
Total Current Liabilities

70,564

69,850
Long-term debt

37,500

63,000
Long-term lease liability, net

128,187

131,451
Financing lease obligation, net

230

274
Other long-term liabilities

4,263

4,340
Total Liabilities

240,744

268,915

Stockholders’ Equity:

Common stock, par value $0.0001; authorized: 100,000,000 shares; issued and outstanding: 51,396,986 and 50,806,674 shares, respectively

5

5
Preferred stock, par value $0.0001; authorized: 10,000,000 shares; issued and outstanding: 0 shares

-

-
Additional paid-in-capital

156,969

156,482
Accumulated deficit

(22,016)

(25,518)
Accumulated other comprehensive loss

(86)

(70)
Total Stockholders' Equity

134,872

130,899
Total Liabilities and Stockholders' Equity

$
375,616

$
399,814

~~See accompanying Notes to Consolidated Financial Statements.~~

~~Table of Contents~~

T~~ile Shop Holdings, Inc. and Subsidiaries~~

~~Consolidated Statements of Income~~

(dollars in thousands, except per share data)

~~(unaudited)~~



	March 31,		December 31,
	2021		2020
	(unaudited)		(audited)
Assets
Current assets:
Cash and cash equivalents	$	35,933	$	9,617
Restricted cash		655		655
Receivables, net		3,015		2,975
Inventories		70,972		74,296
Income tax receivable		6,631		8,116
Other current assets, net		7,921		8,995
Total Current Assets		125,127		104,654
Property, plant and equipment, net		94,769		99,035
Right of use asset		127,395		132,374
Deferred tax assets		5,454		5,341
Other assets		1,219		1,286
Total Assets	$	353,964	$	342,690

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	16,803	$	15,382
Income tax payable		167		93
Current portion of lease liability		29,440		27,223
Other accrued liabilities		43,268		34,106
Total Current Liabilities		89,678		76,804
Long-term debt		-		-
Long-term lease liability, net		116,357		122,678
Other long-term liabilities		3,573		4,146
Total Liabilities		209,608		203,628

Stockholders’ Equity:
Common stock, par value $0.0001; authorized: 100,000,000 shares; issued and outstanding: 51,932,704 and 51,701,080 shares, respectively		5		5
Preferred stock, par value $0.0001; authorized: 10,000,000 shares; issued and outstanding: 0 shares		-		-
Additional paid-in capital		158,545		158,556
Accumulated deficit		(14,190)		(19,487)
Accumulated other comprehensive loss		(4)		(12)
Total Stockholders' Equity		144,356		139,062
Total Liabilities and Stockholders' Equity	$	353,964	$	342,690

Three Months Ended

March 31,

2020

2019
Net sales

$
94,279

$
86,908
Cost of sales

29,324

25,066
Gross profit

64,955

61,842
Selling, general and administrative expenses

62,361

58,948
Income from operations

2,594

2,894
Interest expense

(848)

(978)
Other income

-

15
Income before income taxes

1,746

1,931
Benefit (provision) for income taxes

1,756

(611)
Net income

$
3,502

$
1,320

Income per common share:

Basic

$
0.07

$
0.03
Diluted

$
0.07

$
0.03

Weighted average shares outstanding:

Basic

49,842,072

51,961,780
Diluted

49,842,072

52,037,996

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

Tile

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of ~~Comprehensive~~ Income

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

(unaudited)

Three Months Ended

March 31,

2020

2019
Net income

$
3,502

$
1,320
Currency translation adjustment

(16)

27
Other comprehensive (loss) income

(16)

27
Comprehensive income

$
3,486

$
1,347



	Three Months Ended
	March 31,
	2021		2020
Net sales	$	92,084	$	94,279
Cost of sales		27,898		29,324
Gross profit		64,186		64,955
Selling, general and administrative expenses		57,278		62,361
Income from operations		6,908		2,594
Interest expense		(168)		(848)
Income before income taxes		6,740		1,746
(Provision) benefit for income taxes		(1,443)		1,756
Net income	$	5,297	$	3,502

Income per common share:
Basic	$	0.11	$	0.07
Diluted	$	0.10	$	0.07

Weighted average shares outstanding:
Basic		50,105,825		49,842,072
Diluted		51,056,798		49,842,072

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of ~~Stockholders’ Equity~~Comprehensive Income

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

(unaudited)

Common stock

Shares

Amount

Additional
paid-in
capital

Retained
earnings
(deficit)

Accumulated
other
comprehensive
income (loss)

Total
Balance at December 31, 2018

52,707,879

$
5

$
172,255

$
(25,857)

$
(56)

$
146,347
Adoption of lease standard

-

-

-

6,540

-

6,540
Balance at January 1, 2019

52,707,879

$
5

$
172,255

$
(19,317)

$
(56)

$
152,887
Issuance of restricted shares

281,173

-

-

-

-

-
Cancellation of restricted shares

(87,319)

-

-

-

-

-
Stock based compensation

-

-

739

-

-

739
Tax withholdings related to net share settlements of stock based compensation awards

-

-

(82)

-

-

(82)
Dividends paid ($0.05 per share)

-

-

(2,606)

-

-

(2,606)
Foreign currency translation adjustments

-

-

-

-

27

27
Net income

-

-

-

1,320

-

1,320
Balance at March 31, 2019

52,901,733

$
5

$
170,306

$
(17,997)

$
(29)

$
152,285

Balance at December 31, 2019

50,806,674

$
5

$
156,482

$
(25,518)

$
(70)

$
130,899
Issuance of restricted shares

669,609

-

-

-

-

-
Cancellation of restricted shares

(79,297)

-

-

-

-

-
Stock based compensation

-

-

566

-

-

566
Tax withholdings related to net share settlements of stock based compensation awards

-

-

(79)

-

-

(79)
Foreign currency translation adjustments

-

-

-

-

(16)

(16)
Net income

-

-

-

3,502

-

3,502
Balance at March 31, 2020

51,396,986

$
5

$
156,969

$
(22,016)

$
(86)

$
134,872



	Three Months Ended
	March 31,
	2021		2020
Net income	$	5,297	$	3,502
Currency translation adjustment		8		(16)
Other comprehensive income (loss)		8		(16)
Comprehensive income	$	5,305	$	3,486

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(dollars in thousands, except per share data)

(unaudited)



	Common stock
	Shares	Amount		Additional ‎paid-in ‎capital		Retained ‎earnings ‎(deficit)		Accumulated ‎other ‎comprehensive ‎income (loss)		Total
Balance at December 31, 2019	50,806,674	$	5	$	156,482	$	(25,518)	$	(70)	$	130,899
Issuance of restricted shares	669,609		-		-		-		-		-
Cancellation of restricted shares	(79,297)		-		-		-		-		-
Stock based compensation	-		-		566		-		-		566
Tax withholdings related to net share settlements of stock based compensation awards	-		-		(79)		-		-		(79)
Foreign currency translation adjustments	-		-		-		-		(16)		(16)
Net income	-		-		-		3,502		-		3,502
Balance at March 31, 2020	51,396,986	$	5	$	156,969	$	(22,016)	$	(86)	$	134,872

Balance at December 31, 2020	51,701,080	$	5	$	158,556	$	(19,487)	$	(12)	$	139,062
Issuance of restricted shares	322,024		-		-		-		-		-
Cancellation of restricted shares	(90,400)		-		-		-		-		-
Stock based compensation	-		-		592		-		-		592
Tax withholdings related to net share settlements of stock based compensation awards	-		-		(603)		-		-		(603)
Foreign currency translation adjustments	-		-		-		-		8		8
Net income	-		-		-		5,297		-		5,297
Balance at March 31, 2021	51,932,704	$	5	$	158,545	$	(14,190)	$	(4)	$	144,356

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)



	Three Months Ended				Three Months Ended
	March 31,				March 31,
	2020		2019		2021		2020
Cash Flows From Operating Activities
Net income	$	3,502	$	1,320	$	5,297	$	3,502
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,215		7,964		7,194		8,215
Amortization of debt issuance costs		149		149		76		149
Loss on disposals of property, plant and equipment		-		82
Impairment charges		2,155		-		-		2,155
Non-cash lease expense						6,155		5,868
Stock based compensation		566		739		592		566
Deferred income taxes		4,456		64		(113)		4,456
Changes in operating assets and liabilities:
Receivables		(839)		(2,858)		(40)		(839)
Inventories		11,325		(709)		3,324		11,325
Prepaid expenses and other assets		223		(806)
Other current assets, net						1,064		223
Accounts payable		(2,772)		8,429		1,580		(2,772)
Income tax receivable / payable		(6,249)		457		1,558		(6,249)
Accrued expenses and other liabilities		2,973		5,296		3,427		(3,707)
Other, net		(812)		(448)
Net cash provided by operating activities		22,892		19,679		30,114		22,892
Cash Flows From Investing Activities
Purchases of property, plant and equipment		(645)		(12,198)		(3,202)		(645)
Proceeds from insurance		-		610
Net cash used in investing activities		(645)		(11,588)		(3,202)		(645)
Cash Flows From Financing Activities
Payments of long-term debt and financing lease obligations		(79,160)		(18,054)		-		(79,160)
Advances on line of credit		53,600		15,000		-		53,600
Dividends paid		-		(2,606)
Employee taxes paid for shares withheld		(79)		(82)		(603)		(79)
Net cash used in financing activities		(25,639)		(5,742)		(603)		(25,639)
Effect of exchange rate changes on cash		(11)		30		7		(11)
Net change in cash, cash equivalents and restricted cash		(3,403)		2,379		26,316		(3,403)
Cash, cash equivalents and restricted cash beginning of period		9,919		6,382		10,272		9,919
Cash, cash equivalents and restricted cash end of period	$	6,516	$	8,761	$	36,588	$	6,516

Cash and cash equivalents	$	5,701	$	7,936	$	35,933	$	5,701
Restricted cash		815		825		655		815
Cash, cash equivalents and restricted cash end of period	$	6,516	$	8,761	$	36,588	$	6,516

Supplemental disclosure of cash flow information
Purchases of property, plant and equipment included in accounts payable and accrued expenses	$	15	$	1,478	$	161	$	15
Cash paid for interest		833		934		238		833
Cash paid for income taxes, net		22		-		-		22

See accompanying Notes to Consolidated Financial Statements.

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” ~~or “we”~~) 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 March 31, ~~2020,~~2021, the Company had ~~142~~143 stores in 31 states and the District of Columbia, with an average size of approximately 20,000 square feet. The Company has distribution centers located in Michigan, New Jersey, Oklahoma, Virginia and Wisconsin. The Company also has a sourcing ~~operation~~office located in China.

The accompanying Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for comprehensive financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature, including the elimination of all intercompany transactions. Operating results for the three months ended March 31, ~~2020~~2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2020.~~2021.

These statements should be read in conjunction with the Consolidated Financial Statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019.~~2020. The accounting policies used in preparing these Consolidated Financial Statements are the same as those described in Note 1 to the Consolidated Financial Statements in such Form 10-K.

~~Accounting Pronouncements Not Yet Adopted~~Reclassification

~~In June 2016,~~Certain amounts in the ~~Financial Accounting Standards Board (“FASB”) issued a final standard on accounting~~prior year financial statements have been reclassified for ~~credit losses. The new standard was initially effective~~comparative purposes to conform to the presentation for the quarter ended March 31, 2021. Specifically, the Company elected to change the way it presents cash flows from operating leases in its Statement of Cash Flows. In the three months ended March 31, 2020, the Company presented the net change in the right of use asset and ~~requires~~lease liabilities as other, net within the operating section of the Statement of Cash Flows. During the third quarter of 2020, the Company determined it would be more appropriate to disaggregate this activity. The amortization of the right of use assets is now presented as a non-cash lease expense within the operating section of the Statement of Cash Flows. Lease payments, net of the accretion of lease liabilities, are now presented as a change in ~~credit loss calculations using~~accrued expenses and other liabilities within the ~~expected loss method. In November 2019,~~operating section of the FASB issued Accounting Standards Update 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which, among other things, defers the effective dateStatement of Accounting Standards Update 2016-13, the standard on accounting for credit losses, for public filers that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted. Cash Flows.

The ~~Company is evaluating the effect~~impact of this ~~standard on its consolidated financial statements and related disclosures.~~

~~Note 2: Impact of the COVID-19 Pandemic~~

~~The COVID-19 pandemic has caused significant economic hardship across the United States and is having a material, adverse effect~~change on the ~~Company. Significant uncertainty exists concerning the magnitude,~~Statement of Cash Flows presented as of March 31, 2020 follows:


(in thousands)		Previously Reported		Adjustments		As Revised
Non-cash lease expense	$	-	$	5,868	$	5,868
Changes in operating assets and liabilities:
Accrued expenses and other liabilities		2,973		(6,680)		(3,707)
Other, net		(812)		812		-
Net cash provided by operating activities		22,892		-		22,892

The change in classification had no impact and duration of the COVID-19 pandemic. While the majority of the Company’s stores are still open to the public, the Company has taken steps to close stores and limit its hours of operation when stores are able to remain open. Since the beginning of the second quarter, the Company’s traffic and sales have decreased by approximately 50% when compared to the same period in 2019. Factors deriving from the COVID-19 response that have and are expected to continue to negatively impact the Company in the future include: limitations on the ability of the Company’s suppliers to manufacture and ship the products sold by the Company; limitations on the Company’s ~~employees’ ability to perform their work due to illness caused~~pretax earnings, earnings per share, net cash provided by operating activities or balance sheets in any period.

Impact of COVID-19 Pandemic

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. COVID-19 has negatively impacted public health and the global economy, disrupted global supply chains, and created volatility in financial markets. The continuing implications of COVID-19 on the Company remain uncertain and will depend on certain future developments, including the duration, scope and severity of the pandemic and the effects of new variants of COVID-19, some of which may be more virulent or ~~local, state, or federal orders requiring~~transmissible than the initial strain; its impact on the Company’s ~~stores to close or~~ employees, ~~to remain at home; limitation~~customers and suppliers; the range and timing of ~~carriers to deliver~~government mandated restrictions and other measures; and the ~~Company’s product to customers; limitations on the ability~~success of the ~~Company’s customers to conduct~~deployment and widespread adoption of approved COVID-19 vaccines and their ~~business and purchase the Company’s products and services; and limitations on the ability of the Company’s customers to pay in a timely manner. These events are expected to~~effectiveness. This uncertainty could have a material adverse effect on the Company’s results of operations, cash flows and liquidity at least until the COVID-19 pandemic moderates.The effectiveness of economic stabilization efforts, including U.S. government payments to affected citizens and industries, is uncertain. A recession resulting from the COVID-19 pandemic would prolong and exacerbate the negative impact on the ~~Company.~~ accounting estimates and

The Company reviews long lived assets used in operations for impairment losses when events and circumstances indicate the assets may be impaired. An impairment loss is recognized when estimated undiscounted future cash flows from the operations and/or disposition of the assets are less than the carrying amount. Measurement of an impairment loss is based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using discounted cash flows or independent opinions of value, as appropriate. Given the diminished projections of future cash flows due to the COVID-19 pandemic, the Company recorded a $2.2 million asset

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

~~impairment charge during~~assumptions utilized to prepare the ~~quarter ended March 31, 2020. See Note 11, “Fair Value of Financial Instruments,” for more information on asset impairment charges.~~

The Company has taken immediate steps to curtail operating expenses that include reducing the size of its workforce and temporarily suspending incentive compensation programs. Additionally, the Company is conserving cash by limiting inventory purchases, cutting anticipated spending on capital projects, and pursuing rent deferrals with its landlords. Although each of the remedial measures was taken to protect the business and preserve liquidity, each may also have the potential to haveCompany’s consolidated financial statements in future reporting periods, which could result in a material adverse impact on the Company’s ~~current business,~~ financial ~~condition and~~position, results of operations and ~~may create additional risks~~cash flows.

Recently Adopted Accounting Pronouncements

In the first quarter of fiscal 2021, the Company adopted new accounting requirements related to the measurement of credit losses on financial instruments, including trade receivables. The new standard and subsequent amendments replaced the incurred loss impairment model with a forward-looking expected credit loss model, which will generally result in earlier recognition of credit losses. The Company’s allowance for doubtful accounts represents its estimate of expected credit losses related to its trade receivables. To estimate the allowance for doubtful accounts, the Company leverages information on historical losses, current conditions, and reasonable and supportable forecasts of future conditions. Account balances are written off against the allowance when the Company deems the amount is uncollectible. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (FASB) issued guidance providing optional expedients and exceptions to account for the ~~Company. While the Company anticipates~~effects of reference rate reform to contracts, hedging relationships and other transactions that ~~the foregoing measures are temporary, it cannot predict the specific duration for which these precautionary measures will stay in effect, and there may~~reference LIBOR or another reference rate expected to be ~~a need to take additional measures~~discontinued. The optional guidance is effective as the information available continues to develop, including with respect to the Company’s employees, relationships with its third-party vendors, and its customers. It is also possible that the remedial measures taken will not be adequate to mitigate the impact of the ~~COVID-19 pandemic and the events described above, which could further adversely affect the Company’s business, results of operations, cash flow and liquidity.~~

The Company’s Credit Agreement with Bank of America, N.A, Fifth Third Bank, and Citizen’s Bank (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 outstanding consisted of $37.5 million on the revolving line of credit as of March 31, 2020. The Credit Agreement includes financial and other covenants, including covenants to maintain certain fixed charge ratios and consolidated total rent adjusted leverage ratios. The Company was in compliance with its covenants as of March 31, 2020.

~~As described above, due to the impact~~beginning of the ~~COVID-19 pandemic and~~reporting period when the closure of some of the Company’s stores, the Company’s financial performance has been negatively impacted and will continue to be negatively impacted until the pandemic eases. Prior to the outbreak of the pandemic, the Company believed that it would comply with the financial covenants under the Credit Agreement over the next twelve months; however, given current trends caused by the pandemic, itelection is unlikely that it will comply with certain covenants (such as the leverage ratio) in the second quarter of 2020 and possibly subsequent quarters. Under the terms of the Credit Agreement, the lenders could require repayment of the debt in advance of its maturity in the event of default.made through December 31, 2022. The Company is ~~actively working with~~currently evaluating the ~~lenders and evaluating a range of options. The Company expects to obtain an amendment or waiver from~~impact this guidance will have on its ~~lenders prior to a potential breach. Failure to obtain a waiver or amendment would have a material adverse effect on the Company’s liquidity,~~consolidated financial ~~condition and results of operations.~~statements.

Note 3:2: 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 three months ended
	March 31,				March 31,
	2020		2019		2021		2020
Man-made tiles	46	%	46	%	46	%	46	%
Natural stone tiles	29		29		29		29
Setting and maintenance materials	14		13		15		14
Accessories	10		11		8		10
Delivery service	1		1		2		1
Total	100	%	100	%	100	%	100	%

The Company generates revenues by selling tile products, setting and maintenance materials, accessories, and delivery services to its customers through its store ~~locations.~~locations and online. The timing of revenue recognition coincides with the transfer of control of goods and services ordered by the customer which falls into one of three categories described below:

Revenue recognized when an order is placed – If a customer places an order in a store and the contents ~~of their order are available, the Company recognizes revenue concurrent with the exchange of goods for consideration from the customer.~~

Revenue recognized when an order is picked up – If a customer places an order for items held in a centralized distribution center, the Company requests a deposit from the customer at the time they place the order. Subsequently when the contents of

~~Table~~ of ~~Contents~~their order are available, the Company recognizes revenue concurrent with the exchange of goods for consideration from the customer.

~~Tile Shop Holdings, Inc.~~

Revenue recognized when an order is picked up – If a customer places an order for items held in a centralized distribution center, the Company requests a deposit from the customer at the time they place the order. Subsequently when the contents of the customer’s order are delivered to the store, the customer returns to the store and ~~Subsidiaries~~picks up the items that were ordered. The Company recognizes revenue on this transaction when the customer picks up their order.

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~Revenue recognized when an order is delivered – If a customer places an order in a store and requests delivery of their order, the Company prepares the contents of their order, initiates the delivery service, and recognizes revenue once the contents of the customer’s order are delivered.

the customer’s order are delivered to the store, the customer returns to the store and picks up the items that were ordered. The Company recognizes revenue on this transaction when the customer picks up their order.

Revenue recognized when an order is delivered – If a customer places an order in a store and requests delivery of their order, the Company prepares the contents of their order, initiates the delivery service, and recognizes revenue once the contents of the customer’s order are delivered.

The Company determines the transaction price of its contracts based on the pricing established at the time a customer places an order. The transaction price does not include sales tax as the Company is a pass-through conduit for collecting and remitting sales tax. Any

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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. ~~Customer deposits are presented as an other accrued liability in the Consolidated Balance Sheet.~~ The customer deposit balance was ~~$7.2~~$17.8 million and ~~$7.7~~$12.2 million as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Revenues recognized during the three-month period ended March 31, ~~2020~~2021 that were included in the customer deposit balance as of the beginning of the period were ~~$7.0~~$10.4 million.

The Company extends financing to qualified professional customers who apply for credit. Customers who qualify for an account receive 30-day payment terms. The accounts receivable balance was ~~$4.2~~$3.0 million ~~and $3.4 million at~~on both March 31, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020. 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.~~ The Company presents the sales returns reserve as an other current ~~(accrued)~~accrued liability and the estimated value of the inventory that will be returned as an other current asset in the Consolidated Balance Sheet. The components of the sales returns reserve reflected in the Consolidated Balance Sheet as of March 31, ~~2020~~2021 and December 31, ~~2019 are~~2020 were as follows:


	(in thousands)				(in thousands)
	March 31,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
Other current (accrued) liabilities	$	6,067	$	5,434
Other current accrued liabilities					$	5,700	$	4,957
Other current assets		1,800		1,659		1,676		1,516
Sales returns reserve, net	$	4,267	$	3,775	$	4,024	$	3,441

Note 4:3: Inventories

Inventories are stated at the lower of cost (determined using the moving average cost method) or net realizable value. Inventories consist primarily of merchandise held for sale. Inventories were comprised of the following as of March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:



	(in thousands)				(in thousands)
	March 31,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
Finished goods	$	84,357	$	95,435	$	69,459	$	72,619
Raw materials		1,938		2,185		1,513		1,677
Total	$	86,295	$	97,620	$	70,972	$	74,296

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~~$0.7 million and ~~$0.2~~$0.6 million as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

~~Table of Contents~~

~~Tile Shop Holdings, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

Note 5:4: Income Taxes

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, includes significant income and payroll tax provisions. Additionally, the CARES Act modified the rules associated with net operating losses (“NOLs”) and made technical corrections to tax depreciation methods for qualified improvement property. Under the temporary provisions of CARES Act, NOL carryforwards and carrybacks may offset 100% of taxable income for taxable years beginning before 2021. In addition, NOLs arising in 2018, 2019 and 2020 taxable years may be carried back to each of the preceding five years to generate a refund.

The Company's effective tax rate on net income before ~~income~~ taxes for the three months ended March 31, 2021 and 2020 was 21.4% and (100.6)%, respectively. The Company’s effective tax rate during the three months ended March 31, 2020 ~~and 2019 was (100.6)% and~~ ~~31.6%, respectively. The difference between the Company’s effective rate of~~ ~~(100.6)% and the expected federal statutory rate of~~ ~~21.0% for the~~ ~~three months ended March 31, 2020 is primarily due to~~included adjustments resulting from the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the CARES ~~Act~~Act), which ~~gives~~gave the Company the ability to carry back federal ~~NOLs~~net operating losses to years with a federal statutory ~~tax~~ rate of 35%. ~~For~~The Company’s effective tax rate during the three months ended March 31, ~~2020 and 2019,~~2021 included a $0.3 million tax benefit associated with restricted stock award vestings that occurred during the ~~Company recorded a (benefit) provision for income taxes of~~ ~~$(1.8) million and~~ ~~$0.6 million, respectively. The decrease in the provision for income taxes is due to lower pretax earnings and the benefit generated from the NOL carryback tax rate differential.~~quarter.

The Company records interest and penalties relating to uncertain tax positions in income tax expense. As of March 31, ~~2020~~2021 and ~~2019,~~2020, the Company ~~has~~ ~~not~~had 0t recognized any liabilities for uncertain tax positions, ~~nor have~~0r had interest and penalties related to uncertain tax positions been accrued.

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Note 6:5: Earnings Per Share

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

Basic and diluted earnings per share were calculated as follows:



	(all amounts in thousands except share and per share data)					(dollars in thousands, except per share data)
		For the three months ended					For the three months ended
		March 31,					March 31,
		2020		2019			2021		2020
Net income		$	3,502	$	1,320		$	5,297	$	3,502
Weighted average shares outstanding - basic			49,842,072		51,961,780			50,105,825		49,842,072
Effect of dilutive securities attributable to stock based awards			-		76,216			950,973		-
Weighted average shares outstanding - diluted			49,842,072		52,037,996			51,056,798		49,842,072
Income per common share:
Basic		$	0.07	$	0.03		$	0.11	$	0.07
Diluted		$	0.07	$	0.03		$	0.10	$	0.07
Anti-dilutive securities excluded from earnings per share calculation			2,065,632		1,639,659			1,192,885		2,065,632

Note 7:6: Other Accrued Liabilities

Other accrued liabilities consisted of the following:



	(in thousands)				(in thousands)
	March 31,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
Customer deposits	$	7,201	$	7,727	$	17,763	$	12,225
Sales returns reserve		6,067		5,434		5,700		4,957
Accrued wages and salaries		4,833		4,064		6,767		6,561
Payroll and sales taxes		3,709		2,764		6,454		4,958
Other current liabilities		5,553		4,600		6,584		5,405
Total other accrued liabilities	$	27,363	$	24,589	$	43,268	$	34,106

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Note 8:7: Long-term Debt

plus 1.00%, in each case plus 0.50% to 1.25% depending on ~~our~~the Company’s rent adjusted leverage ratio. At March 31, ~~2020,~~2021 the base interest rate was ~~4.50%~~4.00% and the LIBOR-based interest rate was ~~3.98%~~1.86%. ~~Borrowings~~The Company had 0 borrowings outstanding ~~consisted of $37.5 million~~ on ~~the~~its revolving line of credit as of March 31, ~~2020.~~2021. In addition, the Company has standby letters of credit outstanding related to its ~~workers~~workers’ compensation and medical insurance policies. ~~As of March 31, 2020 and 2019, the standby~~Standby letters of credit totaled ~~$1.3~~$2.4 million as of both March 31, 2021 and ~~$1.2 million, respectively.~~December 31, 2020. There was ~~$61.2~~$97.6 million available for borrowing on the revolving line of credit as of March 31, ~~2020,~~2021, 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 March 31, ~~2020.~~ 2021.

Note 9:8: Leases

The Company leases its retail stores, certain distribution space, and office space. Leases generally have a term of ten to fifteen years, and contain renewal options. Assets acquired under operating leases are included in the Company’s right of use assets in the accompanying Consolidated Balance Sheet. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants. The depreciable life of assets and leasehold improvements is limited by the expected lease term.

Following the onset of COVID-19 in 2020, the Company worked with its landlords to defer rent payments for many of its retail locations throughout the second quarter of 2020. As of December 31, 2020, the deferred rent balance was $2.1 million. During the three months ended March 31, 2021, the Company repaid $1.0 million of the deferred rent balance to its landlords. As of March 31, 2021, the deferred rent balance was $1.1 million. The deferred rent balance is recorded as a liability within the current portion of lease liability balance.


Leases (in thousands)	Classification		March 31, 2020		December 31, 2019	Classification		March 31, 2021		December 31, 2020
Assets
Operating lease assets	Right of use asset	$	135,451	$	137,737	Right of use asset	$	127,395	$	132,374
Financing lease assets	Property, plant and equipment, net of accumulated depreciation		102		113
Total leased assets		$	135,553	$	137,850		$	127,395	$	132,374

Liabilities
Current
Operating	Current portion of lease liability	$	27,751	$	26,993	Current portion of lease liability	$	29,440	$	27,223
Financing	Other accrued liabilities		168		162
Noncurrent
Operating	Long-term lease liability, net		128,187		131,451	Long-term lease liability, net		116,357		122,678
Financing	Financing lease obligation, net		230		274
Total lease liabilities		$	156,336	$	158,880		$	145,797	$	149,901


							Three months ended
Lease cost (in thousands)	Classification		March 31, 2020		March 31, 2019	Classification		March 31, 2021		March 31, 2020
Operating lease cost	SG&A expenses	$	8,221	$	8,013	SG&A expenses	$	8,478	$	8,221
Financing lease cost
Amortization of leased assets	Depreciation and amortization		12		12	SG&A expenses		-		12
Interest on lease liabilities	Interest expense		16		21	Interest expense		-		16
Variable lease cost(1)	SG&A expenses		3,398		3,225	SG&A expenses		3,708		3,398
Short term lease cost	SG&A expenses		248		264	SG&A expenses		124		248
Net lease cost		$	11,895	$	11,535		$	12,310	$	11,895

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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


	Three months ended
Other Information (in thousands)		March 31, 2021		March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	8,482	$	9,067
Operating cash flows from financing leases	$	-	$	22
Financing cash flows from financing leases	$	-	$	60

~~Table of Contents~~

~~Tile Shop Holdings, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

Other Information (in thousands)

March 31, 2020

March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

$
9,067

$
8,602
Operating cash flows from financing leases

$
22

$
21
Financing cash flows from financing leases

$
60

$
33

~~Note 10: Commitments and Contingencies~~

The Company is, from time to time, party to lawsuits, threatened lawsuits, disputes and other claims arising in the normal course of business. The Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that the Company will incur a loss and the amount of the loss can be reasonably estimated, the Company records a liability in its consolidated financial statements. These legal accruals may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, the Company does not record an accrual, consistent with applicable accounting guidance. Based on information currently available to the Company, advice of counsel, and available insurance coverage, the Company believes that its established accruals are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on its consolidated financial condition. However, in light of the inherent uncertainty in legal proceedings, there can be no assurance that the ultimate resolution of a matter will not exceed established accruals. As a result, the outcome of a particular matter or a combination of matters may be material to the Company’s results of operations for a particular period, depending upon the size of the loss or the Company’s income for that particular period.

On November 5, 2019, a class action and derivative lawsuit was filed in the Court of Chancery of the State of Delaware against the Company and its directors by a purported stockholder of the Company, K-Bar Holdings LLC. On November 7, 2019, a similar complaint was filed by a purported stockholder of the Company, Wynnefield Capital, Inc., represented by the same plaintiffs’ law firm which filed the K-Bar Holdings lawsuit. On November 13, 2019, the two cases were consolidated. The complaints allege breaches of fiduciary duty in connection with, among other things, the Company’s decision to delist from Nasdaq and deregister its common stock under the Securities Exchange Act of 1934, as amended, and directors’ purchases of common stock. The complaints include derivative claims and seek injunctive relief to prevent the Company from deregistering its common stock, injunctive relief to prevent additional stock purchases, and unspecified damages. The Court entered a temporary restraining order (“TRO”) on November 8, 2019, which prohibits the Company from filing a Form 15 to complete the proposed deregistration and bars additional stock purchases by the defendant directors. The case is currently set for a trial beginning on July 13, 2020. The Company plans to continue to contest the litigation vigorously. The individual defendants in the case have asserted a right to indemnification from the Company, for which the Company has Director and Officer Liability Insurance policies that may provide coverage for certain defense costs and litigation expenses in addition to amounts the Court could award if plaintiffs were to prevail.

Note ~~11:~~9: Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, the Company uses a three-tier valuation hierarchy based upon observable and non-observable inputs:

Level 1 – Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2 – Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

~~Quoted prices for similar assets or liabilities in active markets;~~

~~Quoted prices for identical or similar assets or liabilities in non-active markets;~~

~~Inputs other than quoted prices that are observable for the asset or liability; and~~

~~Inputs that are derived principally from or corroborated by other observable market data.~~

Quoted prices for similar assets or liabilities in active markets;

Quoted prices for identical or similar assets or liabilities in non-active markets;

Inputs other than quoted prices that are observable for the asset or liability; and

Inputs that are derived principally from or corroborated by other observable market data.

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

~~Table of Contents~~

~~Tile Shop Holdings, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

The following table sets forth by ~~Level~~level within the fair value hierarchy the Company’s financial assets that were accounted for at fair value on a recurring basis at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 according to the valuation techniques the Company uses to determine their fair values. There have been no0 transfers of assets among the fair value hierarchies presented.

Pricing

Fair Value at

Pricing

Fair Value at

Category

March 31, 2021

December 31, 2020

Assets

(in thousands)

Cash and cash equivalents

Level 1

5,701

9,104

Level 1

35,933

9,617

Restricted cash

Level 1

815

Level 1

655

~~Cash and cash equivalents:~~ ~~Consists of cash on hand and bank deposits. The value was measured using quoted market prices in active markets. The carrying amount approximates fair value.~~

~~Restricted cash:~~ Consists of cash and cash equivalents held in bank deposit accounts restricted as to withdrawal or that are under the terms of use for current operations. The value was measured using quoted market prices in active markets. The carrying amount approximates fair value.

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

the three months ended March 31, 2020, the Company recognized a $2.2 million charge in selling, general and administrative expenses to write-down property, plant, and equipment and right of use assets to their estimated fair values. The Company measured the fair value of these assets based on projected cash flows, an estimated risk-adjusted rate of return, and market rental rates for comparable properties. Projected cash flows are considered ~~level~~Level 3 inputs. Market rental rates for comparable properties are considered ~~level~~Level 2 inputs. ~~No impairment charges were recorded during the three months ended March 31, 2019.~~

The carrying value of the Company’s borrowings under its Credit Agreement approximate fair value based upon Level 2 inputs of the market interest rates available to the Company for debt obligations with similar risks and maturities.

Note ~~12:~~10: Equity Incentive Plans

Stock options:

The Company measures and recognizes compensation expense for all stock based awards at fair value. The financial statements for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 include compensation expense for the portion of outstanding awards that vested during those periods. The Company recognizes stock based compensation expenses on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Total stock based compensation expense related to stock options was $0.1 million ~~and $0.3 million~~ for both the three months ended March 31, ~~2020~~2021 and ~~2019, respectively.~~March 31, 2020. 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 March 31, ~~2020,~~2021, the Company had outstanding stock options to purchase ~~1,161,697~~1,002,695 shares of common stock at a weighted average exercise price of ~~$11.11.~~$10.96.

Restricted stock:

The Company awards restricted common shares to selected employees and to non-employee directors. Recipients are not required to provide any consideration upon vesting of the award. Restricted stock awards are subject to certain restrictions on transfer, and all or part of the shares awarded may be subject to forfeiture upon the occurrence of certain events, including employment termination. Certain awards are also subject to forfeiture if the Company fails to attain certain performance targets. The restricted stock is valued at its grant date fair value and expensed over the requisite service period or the vesting term of the awards. The Company adjusts the cumulative expense recognized on awards with performance conditions based on the probability of achieving the performance condition. Total stock based compensation expense related to restricted stock was $0.5 million ~~and $0.4 million~~ for both the three months

~~Table of Contents~~

~~Tile Shop Holdings, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

ended March 31, ~~2020~~2021 and ~~2019, respectively.~~March 31, 2020. 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 March 31, ~~2020,~~2021, the Company had ~~1,463,169~~1,693,794 outstanding restricted common shares.

Note ~~13:~~11:New Markets Tax Credit

2016 New Markets Tax Credit

In December 2016, the Company entered into a financing transaction with U.S. Bank Community, LLC (“U.S. Bank”) related to a $9.2 million expansion of the Company’s facility in Durant, Oklahoma. U.S. Bank made a capital contribution to, and Tile Shop Lending, Inc. (“Tile Shop Lending”) made a loan to, Twain Investment Fund 192 LLC (the “Investment Fund”) under a qualified New Markets Tax Credit (“NMTC”) program. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and is intended to induce capital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their federal income taxes for up to 39% of qualified investments in the equity of community development entities (“CDEs”). CDEs are privately managed investment institutions that are certified to make qualified low-income community investments.

In this transaction, Tile Shop Lending loaned $6.7 million to the Investment Fund at an interest rate of 1.37% per year and with a maturity date of December 31, 2046. The Investment Fund then contributed the loan to a CDE, which, in turn, loaned the funds on similar terms to Tile Shop of Oklahoma, LLC, an indirect, wholly-owned subsidiary of Holdings. The proceeds of the loans from the CDEs (including loans representing the capital contribution made by U.S. Bank, net of syndication fees) were used to partially fund the distribution center project.

In December 2016, U.S. Bank ~~also~~ contributed $3.2 million to the Investment Fund and, by virtue of such contribution, is entitled to substantially all of the tax benefits derived from the NMTC, while the Company effectively received net loan proceeds equal to U.S. Bank’s contributions to the Investment Fund. This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase U.S. Bank’s interest. The Company believes that U.S. Bank will exercise the put option in December 2023

Table of Contents

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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~~constitutes a variable interest entity (“VIE”). The ongoing activities of the Investment Fund – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the Investment Fund. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to the structure; U.S. Bank’s lack of a material interest in the underlying economics of the project; and the fact that the Company is obligated to absorb losses of the Investment Fund. The Company concluded that it is the primary beneficiary of the VIE and consolidated the Investment Fund, as a VIE, in accordance with the accounting standards for consolidation. In 2016, U.S. Bank’s contributions of $3.2 million, net of syndication fees, were included in cash, restricted cash, other accrued liabilities and other long-term liabilities in the consolidated balance sheet. The Company incurred $1.3 million of syndication fees in connection with this transaction, which were classified as other current assets and other non-current assets in the consolidated balance sheet. The Company is recognizing the benefit of this net $1.9 million contribution over the seven-year compliance period as it is being earned through the on-going compliance with the conditions of the NMTC program. As of March 31, ~~2020,~~2021, the balance of the contribution liability for this arrangement was ~~$1.7~~$1.3 million, of which $0.5 million was classified as other accrued liabilities on the Consolidated Balance Sheet and ~~$1.2~~$0.8 million was classified as other long-term liabilities on the Consolidated Balance Sheet.

The Company is able to request reimbursement for certain expenditures made in connection with the expansion of the distribution center in Durant, Oklahoma from the Investment Fund. Expenditures that qualify for reimbursement include building costs,

~~Table of Contents~~

~~Tile Shop Holdings, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

equipment purchases, and other expenditures tied to the expansion of the facility. As of March 31, ~~2020,~~2021, the remaining balance in the Investment Fund available for reimbursement to the Company was ~~$0.8~~$0.7 million.

~~2013 New Markets Tax Credit~~

In July 2013, the Company entered into a financing transaction with U.S. Bank and Chase Community Equity (“Chase”, and collectively with US. Bank, the “investors”) related to the $19.1 million acquisition, rehabilitation, and construction of the Company’s distribution center and manufacturing facilities in Durant, Oklahoma. In this transaction, Tile Shop Lending loaned $13.5 million to the Tile Shop Investment Fund LLC. The investors contributed $5.6 million to the Tile Shop Investment Fund LLC. The investors are entitled to the tax benefits derived from the NMTC by virtue of their contribution while the Company received the proceeds, net of syndication fees, to apply toward the construction project. This transaction includes a put/call provision whereby the Company may 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 underlying economics of the project; and the fact that the Company is obligated to absorb losses of The Tile Shop Investment Fund LLC. The Company concluded that it is the primary beneficiary of the VIE and consolidated the Tile Shop Investment Fund LLC, as a VIE, in accordance with the accounting standards for consolidation. In 2013, the investors’ contributions, of $5.6 million, net of syndication fees, were included in cash, restricted cash, other accrued liabilities and other long-term liabilities in the consolidated balance sheet. The Company incurred $1.2 million of syndication fees in connection with this transaction which were classified as other current assets and other non-current assets in the consolidated balance sheet. The Company is recognizing the benefit of this net $4.4 million contribution over the seven-year compliance period as it is being earned through the on-going compliance with the conditions of the NMTC program. As of March 31, 2020, the balance of the contribution liability was $0.2 million, all of which was classified as other accrued liabilities on the Consolidated Balance Sheet.

Note ~~14:~~12: Related Party Transactions

On July 9, 2018, Fumitake Nishi, a former Company employee and the brother-in-law of Robert A. Rucker, ~~our~~the Company’s former Interim Chief Executive Officer and President, ~~and~~ former member of the Company’s Board ~~from which he resigned on February 12, 2020,~~of Directors, and holder of more than 5% of the Company’s common stock as of March 31, 2021, informed the Company he had reacquired a majority of the equity of one of its key vendors, Nanyang Helin Stone Co. Ltd (“Nanyang”). Mr. Nishi also has an ownership interest in Tilestyling Co. Ltd (“Tile Style”), a vendor from which the Company started acquiring product in 2020. Nanyang ~~supplies~~and Tile Style supply the Company with natural stone products, including hand-crafted mosaics, listellos and other accessories. ~~During~~The Company paid $7.6 million to Nanyang in connection with purchases made during the ~~twelve months~~year ended December 31, ~~2019, the Company purchased $5.1 million of products from Nanyang.~~2020. During the three months ended March 31, ~~2020,~~2021, the Company purchased ~~$2.0~~$1.9 million of products from Nanyang. As of March 31, 2021, the accounts payable due to Nanyang was $0.2 million. The Company paid $0.7 million to Tile Style in connection with purchases made during the year ended December 31, 2020. During the three months ended March 31, 2021, the Company purchased $0.5 million of products from Tile Style. As of March 31, 2021, the accounts payable due to Tile Style was $0.1 million. 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~~these relationships and determined that it would be in the Company’s best interests to continue purchasing products from ~~Nanyang.~~Nanyang and to begin purchasing products from Tile Style. The Company believes Nanyang ~~provides~~and Tile Style each provide an important combination of quality, product availability and pricing, and relying solely on other vendors to supply similar product to the Company would not be in the Company’s best interests. The Company and the Audit Committee ~~have and~~ will continue to review future purchases from Nanyang and Tile Style and compare the pricing for products purchased from each of Nanyang and Tile Style to the pricing of same or similar products purchased from unrelated vendors.

‎

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

The following discussion and analysis of ~~our~~Tile Shop Holdings, Inc.’s (“Holdings,” and together with its wholly owned subsidiaries, the “Company,” “we,” “us,” or “our”) financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 and our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “depend,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “will likely result,” “would,” and similar expressions or variations, although some forward-looking statements are expressed differently. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q relate to, 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, many of which have been, and may further be, exacerbated by the COVID-19 pandemic, include, but are not limited to, our anticipated new store openings, remodeling plans, and growth opportunities; our business strengths, marketing strategies, competitive advantages and role in our industry and markets; our expectations regarding the potential impacts on our business of the COVID-19 pandemic, including its effect on general economic conditions and credit markets and on customer traffic to our stores, as well as the potential duration of the COVID-19 pandemic and the length and adequacy of measures we have taken to attempt to mitigate the impact of the COVID-19 pandemic on our business; our ability to successfully implement our strategic plan and the anticipated benefits of our strategic plan; the effectiveness of our marketing strategy; potential fluctuations in our comparable store sales; our expectations regarding our and our customers’ financing arrangements and our ability to obtain additional capital, including potential difficulties of obtaining refinancing due to market conditions resulting from the COVID-19 pandemic; supply costs and expectations, including the continued availability of sufficient products from our suppliers and the potential impact of the COVID-19 ~~pandemic;~~pandemic on, among other things, product availability and timing of deliveries; our expectations with respect to ongoing compliance with the terms of the Credit Agreement (as defined below), including the possibility thatthe impact of the COVID-19 pandemic on our business may result in our inability to maintain such compliance, as well as the potential impact of the phase out of LIBOR; our ability to provide timely delivery to our customers; the effect of regulations on us and our industry, and our suppliers’ compliance with such regulations; our expectations regarding the effects of employee recruiting, training, mentoring, and retention; the potential impact of cybersecurity breaches or disruptions to our management information systems; our ability to successfully implement our information technology initiatives, including our enterprise resource planning (“ERP”) system; our ability to effectively manage our online sales; our ability to remediate material weaknesses in our internal control over financial reporting; ~~our proposed deregistration; the outcome of pending stockholder litigation;~~ costs and adequacy of insurance; the potential impact of natural disasters and other catastrophic events; risks inherent in operating as a holding company; fluctuations in material and energy costs; the potential outcome of any legal proceedings; risks related to ownership of our common stock; and those factors set forth in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2019 and the additional Risk Factors set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q.~~2020.

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

We intend to use our website, investors.tileshop.com, as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD of the Securities and Exchange Commission (“SEC”). Such disclosures will be included on our website under the heading News and Events. Accordingly, investors should monitor such portions of our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.

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 March 31, ~~2020,~~2021, we operated ~~142~~143 stores in 31 states and the District of Columbia, with an average size of approximately 20,000 square feet.

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

~~Table of Contents~~

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.

Impact of the COVID-19 Pandemic

The COVID-19 pandemic ~~has caused~~had a significant ~~economic hardship across~~impact on our operations during 2020. For instance, we experienced a sharp decline in traffic toward the end of the first quarter of 2020 following the onset of COVID-19 in the United ~~States~~States. In response, we took steps to reduce selling, general and ~~is having~~administrative (sometimes referred to as “SG&A”) expenses by eliminating a ~~material, adverse effect on~~portion of our ~~business. Significant uncertainty exists concerning~~workforce, reducing store hours, curtailing advertising spending, reducing the ~~magnitude, impact~~number of replenishment trucks sent from our distribution centers to our stores and ~~duration~~limiting other SG&A spending when possible. As state and local governments started lifting restrictions toward the end of the ~~COVID-19 pandemic. While~~second quarter of 2020, we saw an improvement in traffic and sales trends. Throughout the ~~majority~~remainder of 2020, we took a cautious approach to investing in activities that would increase our SG&A expenses, which included operating our stores ~~are still open~~at a reduced hours schedule compared to the ~~public,~~prior year. We also started experiencing elevated levels of product outages during second half of 2020 due to vendor production delays and other disruptions in our supply chain related to COVID-19.

During the first quarter of fiscal 2021, we continued to operate our stores at a reduced hours schedule. While we have taken steps to ~~close~~expand evening hours and test Sunday hours in select stores, we continue to take a cautious approach to investing in activities that would increase our SG&A expenses. We also continue to experience elevated levels of product outages, which are partially due to vendor production delays and ~~limit~~global shipping capacity constraints resulting, in part, from the impact of COVID-19. These factors, combined with strong demand, have resulted in an increase in our ~~hours of operation when stores are able to remain open. Since~~backlog. Customer deposits placed on orders that were not delivered by the ~~beginning~~end of the ~~second~~ quarter ~~our traffic and sales have decreased~~increased by ~~approximately 50% when compared~~$5.6 million from $12.2 million as of December 31, 2020 to ~~the same period in 2019. Factors deriving from the COVID-19 response that have and are expected to~~$17.8 million as of March 31, 2021. We continue to ~~negatively~~actively work with our vendors to secure delivery of backordered product.

While we are cautiously optimistic with the current business trend and the progress made distributing COVID-19 vaccinations in recent months, a resurgence of COVID-19 cases could have a negative impact ~~our business in the future include: limitations~~ on ~~the ability of our suppliers to manufacture and ship the products~~us. Specifically, we ~~sell;~~could be adversely impacted by limitations on our ~~employees’ ability~~employees to perform their work due to illness caused by the pandemic or local, state or federal orders requiring ~~our~~ stores to close or employees to remain at home; ~~limitation~~limitations of carriers to deliver our ~~product~~products to customers; product shortages; limitations on the ability of our customers to conduct their business and purchase our products and services; and limitations on the ability of our customers to pay us in a timely manner. These events are expected to have a material, adverse effect on the Company’s results of operations, cash flows and liquidity at least until the COVID-19 pandemic moderates. The effectiveness of economic stabilization efforts, including U.S. government payments to affected citizens and industries, is uncertain. A recession resulting from the COVID-19 pandemic would prolong and exacerbate the negative impact on us.

We review long lived assets used in operations for impairment losses when events and circumstances indicate the assets may be impaired. An impairment loss is recognized when estimated undiscounted future cash flows from the operations and/or disposition of the assets are less than the carrying amount. Measurement of an impairment loss is based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using discounted cash flows or independent opinions of value, as appropriate. Given the diminished projections of future cash flows due to the COVID-19 pandemic, we recorded a $2.2 million asset impairment charge during the quarter ended March 31, 2020.

We have taken immediate steps to curtail operating expenses that include reducing the size of our workforce and temporarily suspending incentive compensation programs. Additionally, we are conserving cash by limiting inventory purchases, cutting anticipated spending on capital projects, and pursuing rent deferrals with our landlords. Although each of the remedial measures was taken by us to protect the business and preserve liquidity, each may also have the potential to have a material adverse impact on our current business, financial condition and results of operations, and may create additional risks for the Company. While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and we may elect or need to take additional measures as the information available to us continues to develop, including with respect to our employees, relationships with our third-party vendors, and our customers. It is also possible that the remedial measures taken by us will not be adequate to mitigate the impact of the COVID-19 pandemic and the events described above, which we expect to further adversely affect the Company’s business, results of operations, cash flow and liquidity.

Our Credit Agreement with Bank of America, N.A, Fifth Third Bank, and Citizen’s Bank (the “Credit Agreement”) provides us with a senior credit facility consisting of a $100.0 million revolving line of credit through September 18, 2023. Borrowings outstanding consisted of $37.5 million on the revolving line of credit as of March 31, 2020. The Credit Agreement includes financial and other covenants, including covenants to maintain certain fixed charge ratios and consolidated total rent adjusted leverage ratios. We were in compliance with our covenants as of March 31, 2020.

As described above, due to the impact of the COVID-19 pandemic and the closure of some of our stores, our financial performance has been negatively impacted and will continue to be negatively impacted until the pandemic eases. Prior to the outbreak of the pandemic, we believed that we would comply with the financial covenants under the Credit Agreement over the next twelve months; however, given current trends caused by the pandemic, it is unlikely that we will comply with certain covenants (such as the leverage ratio) in the second quarter of 2020 and possibly subsequent quarters. Under the terms of the Credit Agreement, the lenders could require repayment of the debt in advance of its maturity in the event of default. We are actively working with the lenders and evaluating a range of options. We expect to obtain an amendment or waiver from our lenders prior to a potential breach. Failure to obtain a waiver or amendment would have a material adverse effect on our ~~liquidity, financial condition and~~ results of ~~operations.~~operations, cash flows and liquidity. In addition, even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of the economic impact of the pandemic.

Other Recent Developments

On March ~~2020~~1, 2021, the Company’s Board of Directors unanimously voted to authorize the Company to apply for listing of its common stock with The Nasdaq Stock Market LLC (“Nasdaq”). The Company’s common stock is currently quoted on the Pink tier of the OTC Markets under the symbol “TTSH”. The Company has submitted its listing application. The Company’s listing application is still pending. The Company cautions its stockholders and others considering trading its securities that there is no assurance that Nasdaq will approve the Company’s listing application.

March 2021 Quarter Financial Overview

For the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, we reported net sales of $92.1 million and $94.3 million, ~~and $86.9 million, respectively. The increase in sales for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily~~respectively, due to ~~an increase in comparable store sales of 6.7%, or $5.8 million. The increase~~a decrease in sales at comparable stores ~~for the three months ended March 31, 2020~~of 2.3%. The decrease in sales at comparable stores was primarily due to ~~stronger conversion and higher average ticket and partially offset by weaker~~a decrease in store traffic. ~~During the three months ended March 31, 2019, the Company experienced~~Our stores continued to operate at a ~~significant negative impact on conversion rates due to the implementation~~reduced number of ~~a new ERP system. Traffic levels decreased sharply in March 2020 following the outbreak of COVID-19. Sales generated by stores~~

~~Table of Contents~~

~~not included in the comparable store base increased $1.6 million~~hours during the ~~three months ended March 31, 2020~~first quarter of 2021 when compared to the ~~three months ended March 31, 2019.~~same period in 2020. Additionally, we continued to experience elevated levels of product outages, which had an adverse impact on sales during the first quarter of 2021.

The table below sets forth information about our comparable store sales (decline) growth ~~(decline)~~ for the three months ended March 31, ~~2020~~2021 and ~~2019.~~ 2020.

For the three months ended

March 31,

2020

2019
Comparable store sales growth (decline)

6.7
%

(4.2)
%

For the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, we reported gross profit of ~~$65.0~~$64.2 million and ~~$61.8~~$65.0 million, respectively. The gross margin rate was ~~68.9%~~69.7% and ~~71.2%~~68.9% for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. The ~~decrease~~increase in gross margin rate was primarily driven by better pricing and an ~~increase~~improvement in ~~cost~~customer delivery collection rates and partially offset by a higher mix of ~~products sold~~freight delivery services during the three months ended March 31, ~~2020~~2021 compared to the three months ended March 31, ~~2019.~~2020.

For the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, we reported income from operations of ~~$2.6~~$6.9 million and ~~$2.9~~$2.6 million, respectively. The ~~decrease~~increase in income from operations was primarily driven by a ~~$3.4~~$5.1 million ~~increase~~decrease in selling, general and administrative ~~(“SG&A”)~~ expenses, ~~that~~which was partially offset by the margin contribution from ~~higher~~lower sales levels. The ~~increase~~decrease in SG&A ~~expense~~expenses was ~~primarily~~partially due to a decrease in store hours during the first quarter of 2021 when compared to the first quarter of 2020, which contributed to a $1.5 million reduction in compensation and benefits expenses. In addition, during the three months ended March 31, 2020, the Company recorded $2.2 million of asset impairment charges and a $1.1 million ~~increase~~of legal costs incurred in connection with shareholder litigation in SG&A expenses. The Company did not record any asset impairment charges or incur any legal ~~expenses that was largely due to~~costs in connection with shareholder ~~litigation.~~litigation during the three months ended March 31, 2021.

Net cash provided by operating activities was ~~$22.9~~$30.1 million and ~~$19.7~~$22.9 million for the three months ended March 31, 2021 and 2020, ~~and 2019,~~ respectively. ~~The operating cash flows generated during the quarter were used primarily to sustain operations and reduce the Company’s debt balance by $25.5 million.~~

Key Components of our Consolidated Statements of Income

Net Sales – Net sales represents total charges to customers, net of returns, and includes freight charged to customers. We recognize sales at the time that the customer takes 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.

The comparable store sales operating metric is the percentage change in sales of comparable stores period-over-period. A store is considered comparable on the first day of the 13th full month of operation. When a store is relocated, it is excluded from the comparable store sales calculation. Comparable store sales includes total charges to customers less any actual returns. We include the change in allowance for anticipated sales returns applicable to comparable stores in the comparable store sales calculation. Comparable store sales data reported by other companies may be prepared on a different basis and therefore may not be useful for purposes of comparing our results to those of other businesses. Company management believes the comparable store sales operating metric provides useful information to both management and investors to evaluate the Company’s performance, the effectiveness of its strategy and its competitive position.

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

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

net sales.

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

~~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.

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

‎

Table of Contents

Results of Operations

Comparison of the three months ended March 31, ~~2020~~2021 to the three months ended March 31, ~~2019~~2020



	(in thousands)								(in thousands)
	2020		% of sales(1)		2019		% of sales		2021		% of sales⁽¹⁾		2020		% of sales⁽¹⁾
Net sales	$	94,279			$	86,908			$	92,084	100.0	%	$	94,279	100.0	%
Cost of sales		29,324	31.1	%		25,066	28.8	%		27,898	30.3	%		29,324	31.1	%
Gross profit		64,955	68.9	%		61,842	71.2	%		64,186	69.7	%		64,955	68.9	%
Selling, general and administrative expenses		62,361	66.1	%		58,948	67.8	%		57,278	62.2	%		62,361	66.1	%
Income from operations		2,594	2.8	%		2,894	3.3	%		6,908	7.5	%		2,594	2.8	%
Interest expense		(848)	(0.9)	%		(978)	(1.1)	%		(168)	(0.2)	%		(848)	(0.9)	%
Other income		-	-	%		15	0.0	%
Income before income taxes		1,746	1.9	%		1,931	2.2	%		6,740	7.3	%		1,746	1.9	%
Benefit (provision) for income taxes		1,756	1.9	%		(611)	(0.7)	%
(Provision) benefit for income taxes										(1,443)	(1.6)	%		1,756	1.9	%
Net income	$	3,502	3.7	%	$	1,320	1.5	%	$	5,297	5.8	%	$	3,502	3.7	%

⁽¹⁾ Amounts do not foot due to rounding.

Net Sales Net sales for the first quarter of ~~2020 increased $7.4~~2021 decreased $2.2 million, or ~~8.5%~~2.3%, compared with the first quarter of ~~2019,~~2020, primarily due to a ~~$5.8 million increase~~2.3% decrease in ~~net~~ sales generated by comparable stores. The ~~increase~~decrease in sales at comparable stores was primarily due to a decrease in store traffic. Our stores continued to operate at a reduced number of hours during the first quarter of 2021 when compared to the same period in 2020. Additionally, we continued to experience elevated levels of product outages, which had an adverse impact on sales during the first quarter of 2021.

Gross Profit Gross profit for the first quarter of 2021 decreased $0.8 million, or 1.2%, compared with the first quarter of 2020 primarily due to a decrease in sales. The gross margin rate was 69.7% and 68.9% for the three months ended March 31, 2021 and 2020, respectively. The increase in gross margin rate was ~~due to stronger conversion~~primarily driven by better pricing and an improvement in customer delivery collection rates and ~~higher average tickets which were~~ partially offset by ~~weaker store traffic. During the three months ended March 31, 2019, the Company experienced~~ a ~~significant negative impact on conversion rates due to the implementation~~higher mix of ~~a new ERP system. Traffic levels decreased sharply in March 2020 following the outbreak of COVID-19. Sales generated by stores not included in the comparable store base increased $1.6 million~~freight delivery services during the three months ended March 31, ~~2020~~2021 compared to the three months ended March 31, ~~2019.~~2020.

~~Gross Profit~~ Gross profit for the first quarter of 2020 increased $3.1 million, or 5.0%, compared with the first quarter of 2019 primarily due to an increase in net sales. The gross margin rate was 68.9% and 71.2% for the three months ended March 31, 2020 and 2019, respectively. The decrease in gross margin rate was primarily driven by an increase in cost of products sold during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the first quarter of ~~2020 increased $3.4~~2021 decreased $5.1 million, or ~~5.8%~~8.2%, compared with the first quarter of ~~2019.~~2020. The ~~increase~~decrease in SG&A ~~expense~~expenses was ~~primarily~~partially due to a decrease in store hours during the first quarter of 2021 when compared to the first quarter of 2020, which contributed to a $1.5 million reduction in compensation and benefits expenses. In addition, during the three months ended March 31, 2020, the Company recorded $2.2 million of asset impairment charges and a $1.1 million ~~increase~~of legal costs incurred in connection with shareholder litigation in SG&A expenses. The Company did not record any asset impairment charges or incur any legal ~~expenses that was largely due to~~costs in connection with shareholder ~~litigation.~~litigation during the three months ended March 31, 2021.

~~Pre-opening Costs~~ ~~During the first quarter of 2020 and 2019, we incurred pre-opening costs of $0.0 million and $0.1 million, respectively.~~

Interest Expense Interest expense was ~~$0.8~~$0.2 million and ~~$1.0~~$0.8 million for the first quarter of ~~2020~~2021 and ~~2019,~~2020, respectively. The decrease was due to ~~a lower interest rate~~the decrease in outstanding debt during the first quarter of 2021 as compared to the first quarter of 2020.

Provision for Income Taxes Provision for income taxes ~~decreased $2.4~~increased $3.2 million for the first quarter of ~~2020~~2021 compared with the first quarter of ~~2019.~~2020. Our effective tax rate for the three months ended March 31, 2021 and 2020 was 21.4% and ~~2019 was~~ (100.6)% ~~and 31.6%~~, respectively. The ~~decrease in the tax provision and the~~Company’s effective tax rate ~~is primarily due to~~during the three months ended March 31, 2020 included adjustments resulting from the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the CARES ~~Act~~Act), which ~~gives~~gave the Company the ability to carry back federal ~~NOLs~~net operating losses to years with a federal statutory ~~tax~~ rate of 35%. The Company’s effective tax rate during the three months ended March 31, 2021 included a $0.3 million tax benefit associated with restricted stock award vestings that occurred during the quarter.

Table of Contents

Non-GAAP Measures

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

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

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

The reconciliation of Adjusted EBITDA to net income for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 is as follows:



	(in thousands)									(in thousands)
		Three Months Ended									Three Months Ended
		March 31,									March 31,
		2020		% of sales(1)		2019		% of sales(1)			2021		% of sales		2020		% of sales⁽¹⁾
Net income		$	3,502	3.7	%	$	1,320	1.5	%		$	5,297	5.8	%	$	3,502	3.7	%
Interest expense			848	0.9	%		978	1.1	%			168	0.2	%		848	0.9	%
Income taxes			(1,756)	(1.9)	%		611	0.7	%
Provision (benefit) for income taxes												1,443	1.6	%		(1,756)	(1.9)	%
Depreciation and amortization			8,215	8.7	%		7,964	9.2	%			7,194	7.8	%		8,215	8.7	%
Stock based compensation			566	0.6	%		739	0.8	%			592	0.6	%		566	0.6	%
Adjusted EBITDA		$	11,375	12.1	%	$	11,612	13.4	%		$	14,694	16.0	%	$	11,375	12.1	%

⁽¹⁾ Amounts do not foot due to rounding.

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


							(in thousands)
($ in thousands)	March 31,
	2020(1)			2019(1)			March 31,
(Loss) income from Operations (trailing twelve months)	$	(1,657)		$	13,347
							2021⁽¹⁾			2020⁽¹⁾
Income (loss) from Operations (trailing twelve months)							$	10,691		$	(1,657)

Total Assets		401,279			328,030			358,686			401,279
Less: Accounts payable		(19,260)			(29,242)			(15,255)			(19,260)
Less: Income tax payable		(44)			(116)			(141)			(44)
Less: Other accrued liabilities		(25,805)			(27,035)			(42,341)			(25,805)
Less: Lease liability~~(2)~~		(160,115)			(67,122)			(150,892)			(160,115)
Less: Other long-term liabilities		(3,917)			(3,937)			(3,965)			(3,917)
Capital Employed	$	192,138		$	200,578		$	146,092		$	192,138

Pretax Return on Capital Employed		(0.9)	%		6.7	%		7.3	%		(0.9)	%

Table of Contents

⁽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.~~

Liquidity and Capital Resources

As a result of COVID-19, we have taken immediate steps to curtail operating expenses that include reducing the size of our workforce and temporarily suspending incentive compensation programs. Additionally, we are conserving cash by limiting inventory purchases, cutting anticipated spending on capital projects, and pursuing rent deferrals with our landlords. Although each of the remedial measures was taken by us to protect the business and preserve liquidity, each may also have the potential to have a material adverse impact on our current business, financial condition and results of operations, and may create additional risks for the Company. While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and we may elect or need to take additional measures as the information available to us continues to develop, including with respect to our employees, relationships with our third-party vendors, and our customers. It is also possible that the remedial measures taken by us will not be adequate to mitigate the impact of the COVID-19 pandemic and the events described above, which we expect to further adversely affect the Company’s business, results of operations, cash flow and liquidity.

Our principal liquidity requirements have been for working capital and capital expenditures. Our principal sources of liquidity are ~~$5.7~~$35.9 million of cash and cash equivalents at March 31, ~~2020,~~2021, our cash flow from operations, and borrowings available under our Credit Agreement. We expect to use this liquidity for purchasing additional merchandise inventory, maintaining our existing stores, and general corporate purposes.

On September 18, 2018, Holdings and its operating subsidiary, The Tile Shop, LLC, entered into ~~the~~a Credit Agreement with Bank of America, N.A., Fifth Third Bank and Citizens ~~Bank.~~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 LIBOR or base rate. The LIBOR-based rate ranges from LIBOR plus 1.50% to 2.25% depending on our rent adjusted leverage ratio. The base rate is equal to the greatest of (a) the Federal funds rate plus 0.50%, (b) the Bank of America “prime rate,” and (c) the Eurodollar rate plus 1.00%, in each case plus 0.50% to 1.25% depending on our rent adjusted leverage ratio. At March 31, ~~2020,~~2021, the base interest rate was ~~4.50%~~4.00% and the LIBOR-based interest rate was ~~3.98%~~1.86%. ~~Borrowings~~The Company had no borrowings outstanding ~~consisted of $37.5 million~~ on ~~the~~its revolving line of credit as of March 31, ~~2020. We also have~~2021. In addition, the Company has standby letters of credit outstanding related to ~~our~~its workers’ compensation and medical insurance policies. ~~As of March 31, 2020 and 2019, the standby~~Standby letters of credit totaled ~~$1.3~~$2.4 million as of both March 31, 2021 and ~~$1.2 million, respectively.~~December 31, 2020. There was ~~$61.2~~$97.6 million available for borrowing on the revolving line of credit as of March 31, ~~2020,~~2021, which may be used to support our growth and for working capital purposes.

The Credit Agreement is secured by virtually all of our assets, including but not limited to, inventory, receivables, equipment and real property. The Credit Agreement contains customary events of default, conditions to borrowings, and restrictive covenants, including restrictions on our ability to dispose of assets, make acquisitions, incur additional debt, incur liens, or make investments. The Credit Agreement also includes financial and other covenants, including covenants to maintain certain fixed charge coverage ratios and consolidated total rent adjusted leverage ratios. We were in compliance with the covenants as of March 31, ~~2020.~~2021.

~~As described above, due~~We believe that our cash flow from operations, together with our existing cash and cash equivalents and borrowings available under our Credit Agreement, will be sufficient to fund our operations and anticipated capital expenditures over at least the ~~impact of~~next twelve months. However, the worldwide economic disruptions caused by the COVID-19 pandemic ~~and the closure~~could materially affect our future access to our sources of some of our stores, our financial performance has been negatively impacted and will continue to be negatively impacted until the pandemic eases. Prior to the outbreak of the pandemic, we believed that we would comply with the financial covenants under the Credit Agreement over the next twelve months; however, given current trends caused by the pandemic, it is unlikely that we will comply with certain covenants (such as the leverage ratio) in the second quarter of 2020 and possibly subsequent quarters. Under the terms of the Credit Agreement, the lenders could require repayment of the debt in advance of its maturity inliquidity. In the event of ~~default. We are actively working with the lenders~~a sustained market deterioration and ~~evaluating a range of options. We expect~~declines in net sales, profit and operating cash flow, we may need additional liquidity, which would require us to ~~obtain an amendment or waiver from our lenders prior to a potential breach. Failure to obtain a waiver or amendment would have a material adverse effect on our liquidity, financial condition~~evaluate available alternatives and ~~results of operations.~~take appropriate actions.

Capital Expenditures

Capital expenditures were ~~$0.6~~$3.2 million and ~~$12.2~~$0.6 million for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. The ~~decrease~~increase in capital expenditures ~~was driven by our plan established at the beginning of the year to limit capital spending and focus on reducing debt~~ during the ~~three months ending March 31, 2020.~~first quarter of 2021 was due to investments in one new store, store remodels, merchandising and information technology assets.

~~Table of Contents~~

Cash flows

The following table summarizes our cash flow data for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.



	(in thousands)
	Three Months Ended
	March 31,
	2021		2020
Net cash provided by operating activities	$	30,114	$	22,892
Net cash used in investing activities		(3,202)		(645)
Net cash used in financing activities		(603)		(25,639)

(in thousands)

Three Months Ended

March 31,

2020

2019
Net cash provided by operating activities

$
22,892

$
19,679
Net cash used in investing activities

(645)

(11,588)
Net cash used in financing activities

(25,639)

(5,742)

Operating activities

Net cash provided by operating activities during the three months ended March 31, ~~2020~~2021 was ~~$22.9~~$30.1 million compared with ~~$19.7~~$22.9 million during the three months ended March 31, ~~2019.~~2020. The increase iswas attributable to an increase in net income and improved working capital ~~management.~~management during the three months ended March 31, 2021.

Table of Contents

Investing activities

Net cash used in investing activities totaled $3.2 million for the three months ended March 31, 2021 compared with $0.6 million for the three months ended March 31, ~~2020 compared with $11.6~~2020. The increase in cash used in investing activities was due to an increase in capital expenditures during the first quarter of 2021 to invest in one new store, store remodels, merchandising and information technology assets.

Financing activities

Net cash used in financing activities was $0.6 million for the three months ended March 31, ~~2019. Net cash used in investing activities in each period was primarily for store fixtures, equipment, building improvements, and general corporate information technology assets.~~

~~Financing activities~~

~~Net cash used in financing activities was~~2021 compared with $25.6 million for the three months ended March 31, ~~2020 compared with $5.7 million for the three months ended March 31, 2019. Net~~2020. The decrease in cash used in financing activities during the ~~three months ended March 31, 2020~~first quarter of 2021 was ~~applied toward reducing our long-term~~due to a decrease in debt ~~by $25.5 million during the three months ending March 31, 2020.~~payments.

Cash and cash equivalents totaled ~~$5.7~~$35.9 million at March 31, ~~2020~~2021 compared with ~~$9.1~~$9.6 million at December 31, ~~2019.~~2020. Working capital was ~~$43.8~~$35.4 million at March 31, ~~2020~~2021 compared with ~~$52.3~~$27.9 million at December 31, ~~2019.~~2020. The ~~decrease~~increase in working capital during the first quarter of ~~2019~~2021 was primarily due to ~~a decrease in inventory and~~an increase in cash and cash equivalents.

Off-Balance Sheet Arrangements

As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, we did not have any “off-balance sheet arrangements” (as such term is defined in Item 303 of Regulation S-K) that could have a current or future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Arrangements

As of March 31, ~~2020,~~2021, there were no material changes to our contractual obligations outside the ordinary course of business.

Recently Adopted Accounting Pronouncements

In the first quarter of fiscal 2021, we adopted new accounting requirements related to the measurement of credit losses on financial instruments, including trade receivables. The new standard and subsequent amendments replaced the incurred loss impairment model with a forward-looking expected credit loss model, which will generally result in earlier recognition of credit losses. Our allowance for doubtful accounts represents an estimate of expected credit losses related to our trade receivables. To estimate our allowance for doubtful accounts, we leverage information on historical losses, current conditions, and reasonable and supportable forecasts of future conditions. Account balances are written off against the allowance when we deem the amount is uncollectible. The adoption of this standard did not have a material impact on our consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In ~~June 2016,~~March 2020, the FASB issued a final standard on accounting for credit losses. The new standard was initially effective for us in 2020, and requires a change in credit loss calculations using the expected loss method. In November 2019, the FASB issuedFinancial Accounting Standards ~~Update 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives~~Board (FASB) issued guidance providing optional expedients and ~~Hedging (Topic 815),~~exceptions to account for the effects of reference rate reform to contracts, hedging relationships and ~~Leases (Topic 842): Effective Dates,” which, among~~ other ~~things, defers~~transactions that reference LIBOR or another reference rate expected to be discontinued. The optional guidance is effective as of the ~~effective date~~beginning of ~~Accounting Standards Update 2016-13,~~ the ~~standard on accounting for credit losses, for public filers that are considered smaller~~ reporting ~~companies as defined by~~period when the ~~SEC to fiscal years beginning after~~election is made through December ~~15, 2022, including interim periods within those years. Early adoption is permitted.~~31, 2022. We are currently evaluating the ~~effect of~~impact this ~~standard~~guidance will have on our consolidated financial ~~statements and related disclosures.~~statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~With the exception of the impacts of COVID-19, which are discussed elsewhere in this document, there~~There have been no material changes in our ~~reported~~primary risk exposures or management of market risks ~~or risk management policies since the filing of~~from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019, which was filed with the Securities and Exchange Commission on March 13,~~ 2020.

~~Table of Contents~~

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the ~~Securities and Exchange Commission (the “SEC”),~~SEC, and that information relating to the Company is accumulated and communicated to management, including our principal officers, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer ~~have~~ evaluated the effectiveness of our disclosure controls and procedures as of March 31, ~~2020~~2021 and ~~have~~ concluded that our disclosure controls and procedures were not effective as of March 31, ~~2020~~2021 due to material weaknesses in our internal control over financial reporting as described below.

Table of Contents

On January 1, 2019, we implemented an ERP system on a company-wide basis. As previously disclosed, during the year ended December 31, 2019, we identified two material weaknesses in internal control over financial reporting that arose from the new ERP system implementation. The two material weaknesses are:

The ineffective design and implementation of effective controls with respect to the ERP system conversion. Specifically, we did not exercise sufficient corporate governance and oversight, design effective controls over the ERP implementation to ensure appropriate data conversion and data integrity, or provide sufficient end-user training to our employees to ensure that our employees could effectively operate the system and carry out their responsibilities.

The ineffective design and implementation of IT general controls (ITGCs) for the ERP system that are relevant to the preparation of our financial statements. Specifically, we did not (i) maintain adequate control over user access to the ERP system to ensure appropriate segregation of duties and to restrict access to financial applications and data; and (ii) maintain adequate documentation practices surrounding management and control of IT changes affecting financial IT applications. Our business process controls (automated and manual) are dependent on the affected ITGCs and, therefore, are also deemed ineffective because they are adversely impacted by ineffective ITGCs.

The ineffective design and implementation of effective controls with respect to the ERP system conversion. Specifically, we did not exercise sufficient corporate governance and oversight, design effective controls over the ERP implementation to ensure appropriate data conversion and data integrity, or provide sufficient end-user training to our employees to ensure that our employees could effectively operate the system and carry out their responsibilities.

The ineffective design and implementation of IT general controls (“ITGCs”) for the ERP system that are relevant to the preparation of our financial statements. Specifically, we did not (i) maintain adequate control over user access to the ERP system to ensure appropriate segregation of duties and to restrict access to financial applications and data; and (ii) maintain adequate documentation practices surrounding management and control of IT changes affecting financial IT applications. Our business process controls (automated and manual) are dependent on the affected ITGCs and, therefore, are also deemed ineffective because they are adversely impacted by the ineffective ITGCs.

Planned Remediation of Material Weaknesses

We have adjusted, and intend to consider further adjustments to, our previously disclosed plans relating to addressing these material weaknesses. ~~As previously disclosed,~~We have taken steps to strengthen our change management procedures and performed a project to segregate responsibilities from users with access to our ERP system. We are currently building controls to mitigate the risk identified when we ~~voluntarily delisted~~were not able to systematically segregate responsibilities. The identified material weaknesses in internal control over financial reporting will not be considered remediated until controls have been designed and are in operation for a sufficient period of time for our ~~common stock from Nasdaq in November 2019 and intend~~management to ~~deregister our common stock under~~conclude that the ~~Exchange Act. Upon~~material weaknesses have been remediated. We will continue to assess the effectiveness of ~~the deregistration~~our remediation efforts in connection with ~~the SEC,~~ our ~~obligations~~evaluations of ~~associated with being an Exchange Act-registered company, including the requirement to file current and periodic reports, will terminate.~~internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

There were no changes in internal control over financial reporting (as defined by ~~Rules~~Rule 13a-15(f) ~~and 15d-15(f)~~ under the Exchange Act) during the quarter ended March 31, ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting.~~reporting, except as set forth above under “Planned Remediation of Material Weaknesses”.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are, from time to time, party to lawsuits, threatened lawsuits, disputes and other claims arising in the normal course of business. We assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in ~~the~~our consolidated financial statements. These legal accruals may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we do not record an accrual, consistent with applicable accounting guidance. ~~Based on information currently available~~In the opinion of management, while the outcome of such claims and disputes cannot be predicted with certainty, our ultimate liability in connection with these matters is not expected to ~~us, advice of counsel, and available insurance coverage, we believe that our established accruals are adequate and the liabilities arising from the legal proceedings will not~~ have a material adverse effect on our ~~consolidated~~results of operations, financial ~~condition.~~position or cash flows, and the amounts accrued for any individual matter are not material. However, ~~in light of the inherent uncertainty in~~ legal proceedings ~~there can be no assurance that the ultimate resolution of a matter will not exceed established accruals.~~are inherently uncertain. As a result, the outcome of a particular matter or a combination of matters may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.

On November 5, 2019, a class action and derivative lawsuit was filed in the Court of Chancery of the State of Delaware against us and our directors by a purported stockholder, K-Bar Holdings LLC. On November 7, 2019, a similar complaint was filed by a purported

~~Table of Contents~~

stockholder, Wynnefield Capital, Inc., represented by the same plaintiffs’ law firm which filed the K-Bar Holdings lawsuit. On November 13, 2019, the two cases were consolidated. The complaints allege breaches of fiduciary duty in connection with, among other things, our decision to delist from Nasdaq and deregister our common stock under the Securities Exchange Act of 1934, as amended, and directors’ purchases of common stock. The complaints include derivative claims and seek injunctive relief to prevent us from deregistering our common stock, injunctive relief to prevent additional stock purchases, and unspecified damages. The Court entered a temporary restraining order (“TRO”) on November 8, 2019, which prohibits us from filing a Form 15 to complete the proposed deregistration and bars additional stock purchases by the defendant directors. The case is currently set for a trial beginning on July 13, 2020. We plan to continue to contest the litigation vigorously. The individual defendants in the case have asserted a right to indemnification from us, for which we have Director and Officer Liability Insurance policies that may provide coverage for certain defense costs and litigation expenses in addition to amounts the Court could award if plaintiffs were to prevail.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 other than with respect to the risk factor discussed below. In addition, many of the risk factors disclosed in Item 1A of our Annual Report have been, and we anticipate will continue to be further, heightened or exacerbated by the impact of the COVID-19 pandemic. 2020.

The COVID-19 pandemic has negatively impacted, and we anticipate will continue to materially adversely affect, our business, financial condition, results of operations and cash flows, and our ability to maintain compliance with our current, or obtain new, lending facilities.

The novel strain of coronavirus, COVID-19, was first identified in China in late 2019. It has since spread globally and was declared a pandemic by the World Health Organization in March 2020. The COVID-19 pandemic has materially adversely affected our business, and we anticipate it will continue to negatively impact us at least throughout the duration of the pandemic. The full extent of the impact of the COVID-19 pandemic on our business and financial performance, including our ability to comply with the financial covenants under our Credit Agreement, remains uncertain. ~~A recession resulting from the COVID-19 pandemic would prolong and exacerbate the negative impact on us.~~

In response to COVID-19, governmental authorities have implemented numerous measures to try to contain the virus, such as travel bans and restrictions, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter in place orders and recommendation to practice social distancing. Although many governmental measures have had specific expiration dates, some of those measures have already been extended more than once, and there is considerable uncertainty regarding the duration of such measures and any potential future measures. Such measures have impacted, and may continue to affect, our workforce, operations, suppliers and customers. For instance, several of our stores have been required to limit their hours or close entirely, and our store traffic and sales have decreased by approximately 50% since the beginning of the second quarter of 2020 compared to the same period in 2019. We have taken steps to reduce the size of our workforce and we can provide no assurance that we will be able to rehire our workforce in the event our business experiences a subsequent recovery. Furthermore, while we have implemented work from home policies for a portion of our workforce, our store-based workforce comes into close contact with our customers as part of their day-to-day responsibilities, which increases the likelihood that they could contract COVID-19, which could potentially adversely affect our ability to adequately staff our stores and require us to incur additional costs to sanitize the impacted location. In addition, employees working remotely may not have the resources available to enable them to maintain the same level of productivity and efficiency, and increased reliance on remote access to our information systems increases our exposure to potential cybersecurity threats.

We have taken additional steps to curtail our operating expenses and conserve cash, including suspending incentive compensation programs and reducing executive compensation; limiting inventory purchases; cutting anticipated spending on capital projects; and pursuing rent deferrals with our landlords. While we anticipate that such measures will be temporary, we cannot predict how long we may need to keep such measures in effect. In addition, we may elect or need to take additional remedial measures as the information available to us continues to develop, including with respect to our workforce, relationships with our third-party vendors, and our customers. There is no certainty that the remedial measures we have implemented to date, or any additional remedial steps we may take in the future, will be sufficient to mitigate the risks posed by COVID-19. Further, such measures could potentially materially adversely affect our business, financial condition and results of operations and create additional risks for us.

In addition, our liquidity position is dependent upon our ability to borrow under our Credit Agreement. Prior to the outbreak of the pandemic, we believed that we would comply with the financial covenants under the Credit Agreement over the next twelve months; however, given the current trends caused by the pandemic, it is unlikely that we will comply with certain covenants (such as the leverage ratio) in the second quarter of 2020, And possibly subsequent quarters. Under the terms of the Credit Agreement, the lenders could require repayment of the debt in advance of maturity in the event of default. We are actively working with the lenders and evaluating a range of options. We expect to obtain an amendment or waiver from our lenders prior to a potential breach. Failure to obtain a waiver or amendment would have a material adverse effect on our liquidity, financial condition and results of operations.

2423

Table of Contents

The ultimate magnitude of COVID-19, including the full extent of the material negative impact on our financial and operational results, will depend on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time. The resumption of our normal business operations may be delayed or constrained by lingering effects of COVID-19 on our customers, suppliers and/or third-party service providers. Furthermore, the extent to which our mitigation efforts are successful, if at all, is not currently ascertainable. We cannot predict the full impact of the COVID-19 pandemic on our business and results of operations, but our business, financial condition, results of operations and cash flows have already been materially adversely impacted, and we anticipate they will continue to be materially adversely affected by the COVID-19 pandemic and its negative effects on global economic conditions.

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

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
January 1, 2020 - January 31, 2020

13,746
(1)
$
0.00

-

-
February 1, 2020 - February 29, 2020

41,313
(2)

1.91

-

-
March 1, 2020 - March 31, 2020

24,238
(1)

0.00

-

-

79,297

$
1.00

-

-

⁽¹⁾

These shares were repurchased by the Company pursuant to the terms of the underlying restricted stock agreements, as allowed by the 2012 Omnibus Award Plan. The Company paid $0.0001 per share, the par value, to repurchase these shares. These repurchases were not part of a publicly announced plan or program.

⁽²⁾

A total of 38,382 shares were withheld by the Company to satisfy tax withholding obligations due upon the vesting of restricted stock grants, as allowed by the 2012 Omnibus Award Plan. The Company did not pay cash to repurchase these shares, nor were these repurchases part of a publicly announced plan or program. An additional 2,931 shares were repurchased by the Company pursuant to the terms of the underlying restricted stock agreements, as allowed by the 2012 Omnibus Award Plan. The Company paid $0.0001 per share, the par value, to repurchase these shares. These repurchases were not part of a publicly announced plan or program.



Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Program	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
January 1, 2021 - January 31, 2021	1,710	⁽¹⁾	$	0.00	-	-
February 1, 2021 - February 28, 2021	34,472	⁽²⁾		6.50	-	-
March 1, 2021 - March 31, 2021	54,218	⁽²⁾		6.98	-	-
	90,400		$	6.66	-	-

⁽¹⁾We repurchased these shares pursuant to the terms of the underlying restricted stock agreements, as allowed by the 2012 Omnibus Award Plan. We paid $0.0001 per share, the par value, to repurchase these shares. These repurchases were not part of a publicly announced plan or program.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

~~None.~~The following table sets forth, as of May 3, 2021, information regarding beneficial ownership of our common stock by each person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock.

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

We have based our calculation of the percentage of beneficial ownership on 51,925,262 shares of our common stock outstanding on May 3, 2021.

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



Name of Beneficial Owner	Number of Shares Beneficially Owned	Percent
5% Stockholders:
Peter J. Jacullo III, Director⁽¹⁾	8,576,902	16.5	%
Peter H. Kamin, Chairman of the Board⁽²⁾	6,848,884	13.2	%
B. Riley Financial, Inc. and affiliates⁽³⁾	4,410,145	8.5	%
Cannell Capital LLC⁽⁴⁾	3,147,164	6.1	%
Savitr Capital LLC⁽⁵⁾	2,770,535	5.3	%
Philotimo Fund, LP and affiliates⁽⁶⁾	2,597,857	5.0	%

25(1)Based on a Schedule 13D/A filed with the SEC on January 16, 2020 by JWTS, Inc. (“JWTS”), Peter J. Jacullo III, and the Katherine D. Jacullo Children’s 1993 Irrevocable Trust (the “Jacullo Trust”) and a Form 4 filed by Mr. Jacullo with the SEC on July 22, 2020. JWTS directly holds 4,441,180 shares of common stock and has sole voting and dispositive power with respect to such shares. Mr. Jacullo is the President and sole member of the board of directors of JWTS, holds sole voting and dispositive power over the securities held by JWTS, and may be deemed to beneficially own the securities held by JWTS.

Table of Contents

The Jacullo Trust directly holds 3,676,989 shares of common stock and has sole voting and dispositive power with respect to such shares. Mr. Jacullo is a co-trustee of the Jacullo Trust, holds shared voting and dispositive power over the securities held by the Jacullo Trust, and may be deemed to beneficially own the securities held by the Jacullo Trust. Mr. Jacullo disclaims beneficial ownership of the shares of common stock held by the Jacullo Trust, except to the extent of his pecuniary interest therein. Mr. Jacullo directly holds 458,733 shares of common stock over which he has sole voting and dispositive power, including 71,900 shares of unvested restricted common stock.

(2)Based on a Schedule 13D/A filed with the SEC on January 14, 2020 by Peter H. Kamin and a Form 4 filed by Mr. Kamin with the SEC on July 22, 2020. Includes (i) 1,694,608 shares of common stock held by the Peter H. Kamin Revocable Trust dated February 2003, of which Peter H. Kamin is the trustee; (ii) 1,033,562 shares of common stock held by the Peter H. Kamin Childrens Trust dated March 1997, of which Mr. Kamin is the trustee; (iii) 97,453 shares of common stock held by the Peter H. Kamin Family Foundation, of which Mr. Kamin is the trustee; (iv) 328,711 shares of common stock held by the Peter H. Kamin GST Trust, of which Mr. Kamin is the trustee; (v) 333,307 shares of common stock held by 3K Limited Partnership, of which Mr. Kamin is the general partner; and (vi) 3,361,243 shares of common stock directly held by Mr. Kamin, including 107,849 shares of unvested restricted common stock. Mr. Kamin has sole voting and dispositive power over all such shares.

(3)Based on a Schedule 13D/A filed with the SEC on March 4, 2021 by B. Riley Financial, Inc. (“BRF”), B. Riley Capital Management, LLC (“BRCM”), BRC Partners Management GP, LLC (“BRPGP”), BRC Partners Opportunity Fund, LP (“BRPLP”), B. Riley Securities, Inc. (“BRS”) and Bryant R. Riley (collectively, the “B. Riley Parties”), and 272 Capital LP (“272 Capital”) and Wes Cummins (together with 272 Capital, the “272 Parties”).

As reported by the Schedule 13D/A, BRPLP directly holds 2,038,645 shares of common stock, and BRS directly holds 2,328,900 shares of common stock. BRPGP is a subsidiary of BRCM, a registered investment advisor, and is the general partner of BRPLP. BRF is the parent company of BRCM. As a result, BRPGP, BRCM and BRF may be deemed to indirectly beneficially own the shares of common stock held by BRPLP. BRF is the parent company of BRS. As a result, BRF may be deemed to indirectly beneficially own the shares of common stock held by BRS. Mr. Riley may beneficially own 42,600 shares of common stock held as sole trustee of the Robert Antin Children Irrevocable Trust. Mr. Riley disclaims beneficial ownership of the shares held by the Robert Antin Children Irrevocable Trust except to the extent of his pecuniary interest therein. BRF and Mr. Riley, the Co-Chief Executive Officer and Chairman of the Board of Directors of BRF, may be deemed to indirectly beneficially own the shares of common stock held directly by BRPLP or BRS. BRF and Mr. Riley disclaim beneficial ownership of the shares held by BRPLP and BRS except to the extent of its or his pecuniary interest therein. Each of BRPLP, BRPGP, BRCM, BRF and Mr. Riley may be deemed to have shared voting and dispositive power over the shares of common stock directly held by BRPLP. Each of BRS, BRF and Mr. Riley may be deemed to have shared voting and dispositive power over the shares of common stock directly held by BRS. Mr. Riley may be deemed to have sole voting and dispositive power over the shares of common stock held by the Robert Antin Children Irrevocable Trust.

As reported by the Schedule 13D/A, 272 Capital beneficially owned 941,244 shares of common stock by virtue of being the investment manager of the 272 Capital Master Fund Ltd (the “272 Master Fund”), which directly holds such shares. Mr. Cummins is the managing member of 272 Capital GP LLC, the general partner of 272 Capital, and the Chief Executive Officer of 272 Capital. Mr. Cummins may beneficially own the shares of common stock directly held by the 272 Master Fund by virtue of being the managing member of 272 Capital GP LLC. 272 Capital and Mr. Cummins may be deemed to have shared voting and dispositive power over the shares of common stock directly held by the 272 Master Fund.

The B. Riley Parties and the 272 Parties reported that, as of March 2, 2021, BRF and 272 Capital mutually agreed, in writing, to terminate their previous group agreement. By virtue of the termination of the group agreement, the B. Riley Parties and the 272 Parties are no longer deemed to have formed a “group” within the meaning of Section 13(d)(3) of the Exchange Act. Each of the B. Riley Parties expressly disclaims beneficial ownership of the shares of common stock beneficially owned by each of the 272 Parties, and each of the 272 Parties expressly disclaims beneficial ownership of the shares of common stock beneficially owned by each of the B. Riley Parties. The Schedule 13D/A acted as an “exit” filing for the 272 Parties. Accordingly, the shares held by the 272 Parties are not included in the aggregate shares held by the B. Riley Parties reported in this table.

The business address of the B. Riley Parties is 11100 Santa Monica Blvd., Suite 800, Los Angeles, California 90025. The business address of the 272 Capital Parties is 3811 Turtle Creek Blvd., Suite 2125, Dallas, Texas 75219.

(4)Based on a Schedule 13D filed with the SEC on February 3, 2021 by Cannell Capital LLC and J. Carlo Cannell. Cannell Capital LLC acts as the investment adviser to Tonga Partners, L.P., Tristan Partners, L.P. and Tristan Offshore Fund, Ltd. (the “Funds”) and as investment advisor to various separately-managed accounts (collectively with the Funds, the “Investment Vehicles”). Mr. Cannell is the sole managing member of Cannell Capital LLC and investment adviser to the Investment Vehicles. As such, Cannell Capital LLC and Mr. Cannell may be deemed to beneficially own the 3,147,164

Table of Contents

shares of common stock held directly by the Investment Vehicles and have sole voting and dispositive power over such shares. The business address of the reporting persons is 245 Meriwether Circle, Alta, Wyoming 83414.

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

(6)Based on a Schedule 13G filed with the SEC on February 4, 2021 by Philotimo Fund, LP (“Philotimo”), Kanen Wealth Management, LLC (“KWM”), and David L. Kanen, reporting holdings as of January 22, 2021. KWM is the general partner of Philotimo. Mr. Kanen is the managing member of KWM. By virtue of these relationships, KWM may be deemed to beneficially own the shares of common stock owned by Philotimo, and Mr. Kanen may be deemed to beneficially own the shares of common stock owned by each of Philotimo and KWM. Philotimo reported beneficial ownership of, and shared voting and dispositive power over, 1,524,524 shares. KWM reported beneficial ownership of, and shared voting and dispositive power over, 2,512,155 shares. Mr. Kanen reported beneficial ownership of 2,597,857 shares, including 85,702 shares over which he has sole voting and dispositive power and 2,512,155 shares over which he has shared voting and dispositive power. The business address of the reporting persons is 5850 Coral Ridge Drive, Suite 309, Coral Springs, Florida 33076.

‎

Table of Contents

ITEM 6. EXHIBITS


Exhibit No.	Description
3.1	Certificate of Incorporation of Tile Shop Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (Reg. No. 333-182482) filed with the Securities and Exchange Commission on July 2, 2012).
3.2	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*	~~Letter~~Tile Shop Holdings, Inc. Form of Performance-Based Stock Restriction Agreement ~~dated as of April 24, 2020, by and between the Company and Cabell H. Lolmaugh~~ (incorporated by reference to Exhibit ~~10.1~~10.20 to the Company’s ~~Current~~Annual Report on Form ~~8-K filed with~~10-K for the ~~Securities and Exchange Commission on April 27,~~year ended December 31, 2020).
10.231.1*	Letter Agreement, dated as of April 24, 2020, by and between the Company and Nancy DiMattia (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 April 27, 2020).
10.3*	Letter Agreement, dated as of April 24, 2020, by and between the Company and Mark B. Davis (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 April 27, 2020).
31.1**	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2**	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1***	Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
32.2***	Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
~~99.1~~101**	~~Director Standstill Commitment (incorporated by reference to Exhibit 99.1 to~~The following financial statements from the ~~Company’s Current~~Quarterly Report on Form ~~8-K filed with~~10-Q for the ~~Securities~~quarter ended March 31, 2021 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and ~~Exchange Commission on January 13, 2020).~~(vi) the Notes to Consolidated Financial Statements.
101.INS**104	Cover Page Interactive Data File (formatted as Inline 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.~~and contained in Exhibit 101).

* Management compensatory plan or arrangement.

** Filed herewith

*** Furnished herewith

‎

2627

Table of Contents

SIGNATURES

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


	TILE SHOP HOLDINGS, INC.

Dated: May ~~8, 2020~~7, 2021	By:	/s/ CABELL H. LOLMAUGH
		Cabell H. Lolmaugh
		Chief Executive Officer


Dated: May ~~8, 2020~~7, 2021	By:	/s/ NANCY DIMATTIA
		Nancy DiMattia
		Chief Financial Officer

2728


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Stockholders’ Equity	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 16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23 22
Item 4.	Controls and Procedures	24 22
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	24 23
Item 1A.	Risk Factors	25 23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26 24
Item 3.	Defaults Upon Senior Securities	26 24
Item 4.	Mine Safety Disclosures	26 24
Item 5.	Other Information	26 24
Item 6.	Exhibits	27
Signatures		28

For the three months ended

Comparable store sales (decline) growth