Tile Shop(TTSH) - 2020 Q4 - Annual Report

Part I Business Tile Shop Holdings, Inc. is a specialty retailer of natural and man-made tiles, operating 142 stores with a focus on productivity and customer experience - The company operates as a specialty retailer with 142 stores in 31 states and the District of Columbia, with an average store size of approximately 20,000 square feet[8] Financial Performance (2018-2020) | Year | Net Sales (in millions) | (Loss)/Income from Operations (in millions) | | :--- | :--- | :--- | | 2020 | $325.1 | $6.4 | | 2019 | $340.4 | $(1.4) | | 2018 | $357.3 | $18.1 | Net Sales by Product Category (2020 vs. 2019) | Product Category | 2020 (%) | 2019 (%) | | :--- | :--- | :--- | | Man-made tiles | 46 | 47 | | Natural stone tiles | 29 | 29 | | Setting and maintenance materials | 14 | 13 | | Accessories | 9 | 10 | | Delivery service | 2 | 1 | - The company's 2021 strategic plan focuses on improving in-store productivity, enhancing the online customer experience, and optimizing supply chain and assortment management[18][19][20] - As of December 31, 2020, the company had 1,149 employees, with 1,097 being full-time, and none are represented by a union[35] Risk Factors The company faces material risks from the COVID-19 pandemic, intense competition, foreign supplier reliance, and un-remediated internal control weaknesses - The COVID-19 pandemic has materially and adversely affected business operations, sales, and supply chains, with store traffic and sales decreasing by approximately 50% in early Q2 2020[48][50] - Two material weaknesses in internal control over financial reporting, related to the 2019 ERP system conversion and IT general controls, were not remediated as of year-end 2020[74][112] - The company faces significant competition from a fragmented market with low barriers to entry, including national home centers, specialty retailers, and online competitors[33][56] - The company's common stock was voluntarily delisted from Nasdaq in November 2019 and now trades on the OTC Pink Market, with a relisting application submitted in March 2021[113] - A significant portion of products are sourced from foreign suppliers, with the top ten accounting for 52% of tile purchases in 2020, exposing the company to various risks[30][86] Unresolved Staff Comments The company reports that there are no unresolved staff comments - Not applicable[124] Properties The company operates 142 leased stores across 31 states and owns four distribution and manufacturing facilities - The company operates 142 leased stores with an average size of approximately 20,000 square feet[125][126] - The company owns four distribution and manufacturing facilities and leases one additional distribution facility[126] Legal Proceedings The company is involved in various legal proceedings, including a significant derivative and class action lawsuit settled in 2020 for $12.0 million - A derivative and class action lawsuit filed in November 2019 was settled in October 2020, establishing a $12.0 million fund paid by the company's insurers[130] Mine Safety Disclosures The company reports no mine safety disclosures - None[131] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the OTC Pink Market after Nasdaq delisting, with dividends suspended and stock repurchases cancelled - The company's common stock was voluntarily delisted from Nasdaq in November 2019 and now trades on the OTC Pink Market under the symbol "TTSH"[133] - The quarterly cash dividend program was suspended and the stock repurchase program was cancelled in October 2019[117][136] Quarterly Stock Price (OTC Pink Market, 2020) | Period | High ($) | Low ($) | | :--- | :--- | :--- | | Q1 2020 | 2.08 | 0.10 | | Q2 2020 | 1.74 | 0.55 | | Q3 2020 | 2.89 | 1.22 | | Q4 2020 | 4.73 | 2.75 | Selected Financial Data This section presents a five-year summary of the company's financial data, including 2020 net sales of $325.1 million and net income of $6.0 million Selected Financial Data (2018-2020, in thousands) | Metric | 2020 ($) | 2019 ($) | 2018 ($) | | :--- | :--- | :--- | :--- | | Net sales | 325,057 | 340,351 | 357,254 | | Gross profit | 221,525 | 236,119 | 251,339 | | Income (loss) from operations | 6,376 | (1,357) | 18,138 | | Net income (loss) | 6,031 | (4,463) | 10,442 | | Total assets | 342,690 | 399,814 | 297,630 | | Total debt | 0 | 63,000 | 53,000 | | Net cash from operating activities | 65,596 | 38,563 | 18,170 | Reconciliation of Net Income (Loss) to Adjusted EBITDA (2018-2020, in thousands) | Line Item | 2020 ($) | 2019 ($) | 2018 ($) | | :--- | :--- | :--- | :--- | | Net income (loss) | 6,031 | (4,463) | 10,442 | | Interest expense | 1,874 | 3,792 | 2,690 | | (Benefit) provision for income taxes | (1,529) | (674) | 5,158 | | Depreciation & amortization | 31,336 | 33,546 | 28,396 | | Stock based compensation | 2,241 | 2,645 | 2,669 | | Adjusted EBITDA | 39,953 | 34,846 | 49,355 | - Comparable store sales declined by 5.6% in 2020, following a 4.6% decline in 2019[141] Management's Discussion and Analysis of Financial Condition and Results of Operations Overview and COVID-19 Impact The COVID-19 pandemic significantly impacted 2020 operations, leading to cost-saving measures, full debt repayment, and a Nasdaq relisting application - In response to the pandemic, the company reduced SG&A expenses by cutting workforce, reducing store hours, and curtailing advertising[160] - The company deferred rent payments, resulting in a $2.1 million deferred rent balance as of December 31, 2020, and deferred $2.7 million in employer social security taxes[161][162] - Cost-saving measures enabled the company to conserve cash and fully repay its outstanding debt in 2020[163] - On March 1, 2021, the Board authorized an application to relist the company's common stock on Nasdaq[166] Results of Operations For 2020, net sales decreased by 4.5% to $325.1 million, gross margin declined, and SG&A expenses decreased, leading to improved operating income Year-over-Year Performance Comparison (2020 vs. 2019) | Metric | 2020 (Millions) | 2019 (Millions) | Change (Millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $325.1 | $340.4 | $(15.3) | (4.5) | | Gross Profit | $221.5 | $236.1 | $(14.6) | (6.2) | | SG&A Expenses | $215.1 | $237.5 | $(22.3) | (9.4) | | Income (Loss) from Operations | $6.4 | $(1.4) | $7.7 | N/A | - The decrease in 2020 net sales was primarily due to a 5.6% decrease in comparable store sales, driven by weaker store traffic from COVID-19[172] - The gross margin rate declined from 69.4% in 2019 to 68.1% in 2020, primarily due to a higher mix of freight delivery services and increased inventory write-downs[173] - The effective tax rate was (34.0%) in 2020, compared to 13.1% in 2019, primarily due to the CARES Act allowing net operating loss carryback[177] Liquidity and Capital Resources The company's liquidity is supported by $9.6 million cash and a $100 million credit facility, with no outstanding debt and increased operating cash flow - As of December 31, 2020, the company had $9.6 million in cash and no outstanding borrowings on its revolving line of credit, with $97.6 million available[187][190] Cash Flow Summary (2018-2020, in thousands) | Cash Flow Activity | 2020 ($) | 2019 ($) | 2018 ($) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 65,596 | 38,563 | 18,170 | | Net cash used in investing activities | (1,968) | (26,390) | (34,143) | | Net cash (used in) provided by financing activities | (63,329) | (8,622) | 14,931 | - Capital expenditures were significantly curtailed to $2.0 million in 2020, with $12 million to $15 million projected for 2021[194][198] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant estimates for revenue recognition, inventory valuation, property impairment, and income taxes - Key estimates include the allowance for sales returns, which was $5.0 million as of December 31, 2020[202] - Inventory is valued at the lower of cost or net realizable value, with reserves for shrinkage and obsolescence totaling $0.6 million as of December 31, 2020[203] - Long-lived assets are evaluated for impairment, with a $2.2 million charge recorded in 2020 related to underperforming stores[205] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks including inflation, interest rate risk from its credit facility, credit concentration, and foreign currency exchange - The company is exposed to interest rate risk via its credit facility, which uses variable rates including LIBOR, with its planned phase-out noted as a risk[216] - Foreign currency risk is present due to inventory purchases in Chinese yuan, representing less than 15% of total inventory purchases in 2020[219] - The company does not currently engage in any interest rate or foreign currency exchange hedging activities[217][220] Financial Statements and Supplementary Data This section includes the company's consolidated financial statements and auditor's reports, with an unqualified opinion on financials but an adverse opinion on internal controls - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the year ended December 31, 2020[398] - The auditor issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2020, due to two identified material weaknesses[410][411] - The material weaknesses relate to ineffective design and implementation of controls for the 2019 ERP system conversion and ineffective IT general controls[411] Consolidated Balance Sheet Highlights (As of Dec 31, 2020) | Account | Amount (in thousands) | | :--- | :--- | | Total Current Assets | $104,654 | | Total Assets | $342,690 | | Total Current Liabilities | $76,804 | | Total Liabilities | $203,628 | | Total Stockholders' Equity | $139,062 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[222] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2020, due to two un-remediated material weaknesses in internal control - Management concluded that disclosure controls and procedures were not effective as of December 31, 2020[224] - Two material weaknesses related to the 2019 ERP system implementation were not remediated in 2020, leading to an ineffective internal control environment[227] - The weaknesses include ineffective design and implementation of controls for the ERP system conversion and ineffective IT general controls (ITGCs)[229] - Ernst & Young, LLP, issued an adverse report on the company's internal control over financial reporting as of December 31, 2020[228] Other Information The company reports no other information - None[232] Part III Directors, Executive Officers and Corporate Governance This section details the company's executive officers and Board of Directors, including committee compositions, independence, and the Code of Business Conduct - The Board of Directors is divided into three classes with staggered three-year terms[251] - The Board has three primary committees: Audit, Compensation, and Nominating and Corporate Governance, with all members determined independent under Nasdaq standards[261] - The Audit Committee, chaired by an audit committee financial expert, oversees financial reporting, internal controls, and the independent auditor[262][264] - The company has adopted a Code of Business Conduct and Ethics, available on its investor relations website[259] Executive Compensation The executive compensation program aligns pay with strategy, with 2020 temporary salary reductions and a modified cash incentive plan based on EBITDA - In response to COVID-19, executive officers took temporary salary reductions in April 2020, including a 20% CEO salary reduction, reinstated in July 2020[286][287][288] Summary Compensation Table for Fiscal 2020 (Named Executive Officers) | Name | Position | Salary ($) | Stock Awards ($) | Non-Equity Incentive Plan Comp ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Cabell Lolmaugh | CEO & President | 335,417 | 91,716 | 147,734 | 579,950 | | Nancy DiMattia | SVP & CFO | 239,583 | 22,929 | 105,524 | 374,775 | | Mark Davis | VP, Investor Relations & CAO | 176,593 | 11,465 | 61,555 | 254,028 | | Joseph Kinder | SVP, Supply Chain & Distribution | 208,917 | 45,858 | 73,613 | 333,611 | - The 2020 non-equity incentive plan was modified due to COVID-19, resulting in a $0.9 million bonus pool and an 84.4% payout of target for executives[298][299] - The CEO's annual total compensation to median employee compensation ratio was 11.77 to 1 for fiscal year 2020[339] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details beneficial ownership of common stock, with executive officers and directors owning approximately 31.2% of outstanding shares - As of March 9, 2021, executive officers and directors as a group beneficially owned approximately 31.2% of the company's outstanding common stock[363] Beneficial Ownership of 5% Stockholders | Name of Beneficial Owner | Percent of Ownership (%) | | :--- | :--- | | Peter J. Jacullo III, Director | 16.6 | | Peter H. Kamin, Chairman of the Board | 13.3 | | Robert A. Rucker | 9.8 | | B. Riley Financial, Inc. and affiliates | 8.5 | | Cannell Capital LLC | 6.1 | | Savitr Capital LLC | 5.4 | | Philotimo Fund, LP and affiliates | 5.0 | - As of December 31, 2020, 810,925 securities remained available for future issuance under the company's equity compensation plans[371] Certain Relationships and Related Transactions, and Director Independence The company discloses related party transactions with vendors Nanyang Helin Stone Co. Ltd and Tilestyling Co. Ltd, totaling $7.6 million in 2020 - The company has significant related party transactions with vendors Nanyang Helin Stone Co. Ltd and Tilestyling Co. Ltd, majority-owned by a former executive's brother-in-law[377] Payments to Related Party Vendor (Nanyang) | Year | Payments (in millions) | | :--- | :--- | | 2020 | $7.6 | | 2019 | $5.1 | - The Audit Committee reviewed and approved related party transactions, deeming them in the company's best interest due to quality, availability, and pricing[378] - The Board has determined that a majority of its directors are "independent" as defined by Nasdaq rules[375] Principal Accountant Fees and Services This section details fees paid to Ernst & Young LLP, totaling $637,800 in 2020, a decrease from 2019 primarily due to lower audit fees Accountant Fees (Ernst & Young LLP) | Fee Category | 2020 ($) | 2019 ($) | | :--- | :--- | :--- | | Audit Fees | 637,800 | 1,096,000 | | Audit-Related Fees | 0 | 0 | | Tax Fees | 0 | 0 | | All Other Fees | 0 | 61,000 | | Total | 637,800 | 1,157,000 | - All audit and non-audit services performed by the independent auditors were pre-approved by the Audit Committee[389] Part IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Form 10-K, including consolidated financial statements, schedules, and a comprehensive index of exhibits - This item lists the financial statements, schedules, and exhibits filed with the report, including the auditor's report and various material agreements[392][394] Form 10-K Summary The company indicates that a Form 10-K summary is not applicable - Not applicable[395]