Tile Shop(TTSH) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Net sales increased to $280.5 million and net income to $13.0 million for the nine months ended September 30, 2021, with total assets at $360.9 million Consolidated Balance Sheets Total assets increased to $360.9 million as of September 30, 2021, driven by higher cash and equity, while liabilities remained stable Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2021 (unaudited) | Dec 31, 2020 (audited) | Change | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash and cash equivalents | $44,264 | $9,617 | +$34,647 | | Inventories | $76,697 | $74,296 | +$2,401 | | Total Current Assets | $141,611 | $104,654 | +$36,957 | | Total Assets | $360,864 | $342,690 | +$18,174 | | Liabilities & Equity | | | | | Total Current Liabilities | $88,475 | $76,804 | +$11,671 | | Total Liabilities | $207,786 | $203,628 | +$4,158 | | Accumulated deficit | ($6,521) | ($19,487) | +$12,966 | | Total Stockholders' Equity | $153,078 | $139,062 | +$14,016 | Consolidated Statements of Operations Net sales increased to $92.2 million in Q3 2021 and $280.5 million for the nine months, with net income surging to $13.0 million Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $92,240 | $81,492 | $280,517 | $243,501 | | Gross profit | $62,949 | $55,304 | $193,560 | $165,673 | | Income from operations | $3,158 | $2,901 | $17,680 | $3,701 | | Net income | $2,175 | $1,914 | $12,966 | $4,656 | | Diluted EPS | $0.04 | $0.04 | $0.25 | $0.09 | Consolidated Statements of Comprehensive Income Comprehensive income for Q3 2021 was $2.2 million, increasing to $13.0 million for the nine-month period ended September 30, 2021 Comprehensive Income (in thousands) | Period | 2021 | 2020 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | | | | Net income | $2,175 | $1,914 | | Comprehensive income | $2,175 | $1,949 | | Nine Months Ended Sep 30 | | | | Net income | $12,966 | $4,656 | | Comprehensive income | $12,978 | $4,677 | Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $153.1 million by September 30, 2021, primarily due to $13.0 million in net income - The accumulated deficit decreased from ($19.5 million) at the end of 2020 to ($6.5 million) as of September 30, 2021, due to the $13.0 million in net income earned during the first nine months of 2021[21] Consolidated Statements of Cash Flows Net cash from operations was $44.4 million for the nine months ended September 30, 2021, with increased investing and decreased financing activities Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $44,390 | $57,347 | | Net cash used in investing activities | ($8,933) | ($1,315) | | Net cash used in financing activities | ($821) | ($56,278) | | Net change in cash | $34,647 | ($223) | Notes to Consolidated Financial Statements Notes detail the company's tile retail business, COVID-19 supply chain risks, revenue composition, and a declared special dividend - The company operates 143 stores in 31 states and considers the ongoing COVID-19 pandemic an uncertainty that could materially impact future financial results, particularly through supply chain disruptions and labor supply[28][31] Revenue Disaggregation by Product Category (Q3 2021 vs Q3 2020) | Product Category | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Man-made tiles | 49% | 46% | | Natural stone tiles | 27% | 29% | | Setting and maintenance materials | 14% | 14% | | Accessories | 7% | 9% | | Delivery service | 3% | 2% | - As of September 30, 2021, the company had no borrowings outstanding on its $100 million revolving line of credit and had $97.6 million available for borrowing[49] - On November 4, 2021, the Board of Directors declared a special dividend of $0.65 per share, payable on December 3, 2021[82] - The company continues to purchase significant amounts of product from Nanyang and Tile Style, vendors associated with a former employee and relative of a former executive, with purchases totaling $6.2 million from Nanyang and $2.1 million from Tile Style in the first nine months of 2021[80] Management's Discussion and Analysis of Financial Condition and Results of Operations Q3 sales increased 13.2% due to strong demand, improving gross margin, and rising SG&A expenses as operations normalized, while liquidity remains strong - The COVID-19 pandemic continues to impact the business through supply chain disruptions, including product shortages and cost inflation, leading the company to adjust pricing in response[91] - A special dividend of $0.65 per share was approved on November 2, 2021, and declared on November 4, 2021, to be paid on December 3, 2021[100] Comparable Store Sales Growth | Period | 2021 | 2020 | | :--- | :--- | :--- | | Three months ended Sep 30 | 12.8% | (6.5)% | | Nine months ended Sep 30 | 14.9% | (8.3)% | Results of Operations Net sales increased 13.2% in Q3 2021 due to comparable store sales, with gross margin improving and SG&A expenses rising from normalized operations - The increase in Q3 2021 SG&A expenses of $7.4 million was largely due to the resumption of normal business operations, including a $1.7 million increase in staffing costs, a $1.1 million increase in variable compensation, and a $0.7 million asset impairment charge[110] - The gross margin rate for Q3 2021 increased to 68.2% from 67.9% in Q3 2020, driven by better pricing and improved customer delivery collection rates, which offset higher product costs[109] - For the nine months ended Sep 30, 2021, interest expense decreased to $0.5 million from $1.6 million in the prior year period, due to lower outstanding debt[116] Non-GAAP Measures Adjusted EBITDA for Q3 2021 was $10.4 million, increasing to $40.5 million for the nine-month period, with pretax return on capital employed improving to 13.9% Adjusted EBITDA Reconciliation (in thousands) | Metric | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $2,175 | $1,914 | $12,966 | $4,656 | | Adjustments | $8,232 | $9,210 | $27,521 | $24,454 | | Adjusted EBITDA | $10,407 | $11,124 | $40,487 | $29,110 | - Pretax Return on Capital Employed for the trailing twelve months ending September 30, 2021 was 13.9%, a significant improvement from (0.4)% for the same period ending in 2020[123] Liquidity and Capital Resources The company maintains strong liquidity with $44.3 million in cash and $97.6 million available credit, supporting increased capital expenditures for growth - As of September 30, 2021, the company had $44.3 million in cash and cash equivalents and $97.6 million available for borrowing on its revolving line of credit[124][125] - Capital expenditures increased to $8.9 million for the nine months ended September 30, 2021, up from $1.3 million in the prior-year period, due to investments in one new store, one relocation, store remodels, and IT assets[128] - Working capital increased to $53.1 million at September 30, 2021, from $27.9 million at December 31, 2020, primarily due to the increase in cash and cash equivalents[134] Quantitative and Qualitative Disclosures About Market Risk The company reported no material changes in its primary market risk exposures or the management of those risks since its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 - There have been no material changes in the company's primary risk exposures or management of market risks from those disclosed in the 2020 Annual Report on Form 10-K[140] Controls and Procedures Disclosure controls and procedures were deemed ineffective as of September 30, 2021, due to ongoing material weaknesses from the 2019 ERP system implementation - Disclosure controls and procedures were deemed not effective as of September 30, 2021, due to two material weaknesses related to the 2019 ERP system implementation[141][142] - The material weaknesses involve ineffective design of controls over the ERP implementation (data conversion, integrity, training) and ineffective IT general controls (user access, segregation of duties, change management)[142] - The company is continuing to take steps to remediate the material weaknesses, but they will not be considered fully remediated until the new controls have operated effectively for a sufficient period[142] PART II. OTHER INFORMATION Legal Proceedings The company is involved in routine legal proceedings, but management anticipates no material adverse effect on financial results or position - The company is involved in routine legal proceedings but believes their outcomes will not materially impact its financial condition[144][145] Risk Factors A new risk factor highlights potential adverse impacts from federal COVID-19 vaccination or testing mandates on employee retention and hiring - A new risk factor has been identified concerning the OSHA regulation requiring COVID-19 vaccination or weekly testing for employees[147] - The company warns that this mandate could result in employee attrition and difficulty satisfying labor needs, which could adversely affect future revenues, costs, and profit margins[147] Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2021, the company acquired 27,943 shares through tax withholdings on vested restricted stock and repurchases under agreements - In Q3 2021, the company acquired 27,943 shares, including withholding 15,311 shares to satisfy tax obligations on vested restricted stock and repurchasing 12,632 shares at par value under restricted stock agreements[148][149] Other Information This section details beneficial ownership of common stock as of November 1, 2021, identifying five stockholders with over 5% ownership 5% Stockholders as of November 1, 2021 | Name of Beneficial Owner | Percent of Ownership | | :--- | :--- | | Peter J. Jacullo III, Director | 16.5% | | Peter H. Kamin, Chairman of the Board | 13.2% | | Cannell Capital LLC | 6.1% | | Savitr Capital LLC | 5.3% | | Philotimo Fund, LP and affiliates | 5.0% | Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, equity plans, and certifications Signatures The report is duly signed and authorized by Cabell H. Lolmaugh, Chief Executive Officer, and Nancy DiMattia, Chief Financial Officer, on November 4, 2021