10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________

FORM 10-Q

_____________________________

(Mark One)

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

For the quarterly period ended June 30, 2018

OR

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

For the transition period from – to –

Commission file number: 001-35629

_____________________________

TILE SHOP HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

_____________________________

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

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

(763) 852-2950

(Registrant’s telephone number, including area code)

_____________________________

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

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

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

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

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

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

As of July 30, 2018, there were 52,705,343  shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

TILE SHOP HOLDINGS, INC.

Table of Contents

		Page
PART I. FINANCIAL 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 (Deficit)	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	24
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	26
Signatures		27

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

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

	June 30,		December 31,
	2018		2017
	(unaudited)		(audited)
Assets
Current assets:
Cash and cash equivalents	$	9,907	$	6,621
Restricted cash		835		855
Receivables, net		3,217		2,381
Inventories		100,426		85,259
Income tax receivable		3,477		5,726
Other current assets, net		5,798		4,717
Total Current Assets		123,660		105,559
Property, plant and equipment, net		150,505		151,405
Deferred tax assets		10,636		11,654
Other assets		1,861		2,107
Total Assets	$	286,662	$	270,725
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	33,577	$	30,771
Current portion of long-term debt		6,958		8,833
Income tax payable		50		17
Other accrued liabilities		27,137		22,413
Total Current Liabilities		67,722		62,034
Long-term debt, net		22,498		18,182
Capital lease obligation, net		509		576
Deferred rent		42,938		41,290
Other long-term liabilities		4,205		4,769
Total Liabilities		137,872		126,851
Commitments and Contingencies (see Note 11)
Stockholders’ Equity:
Common stock, par value $0.0001; authorized: 100,000,000 shares; issued and outstanding: 52,508,090 and 52,156,850 shares, respectively		5		5
Preferred stock, par value $0.0001; authorized: 10,000,000 shares; issued and outstanding: 0 shares		-		-
Additional paid-in-capital		176,124		180,109
Accumulated deficit		(27,331)		(36,239)
Accumulated other comprehensive income (loss)		(8)		(1)
Total Stockholders' Equity		148,790		143,874
Total Liabilities and Stockholders' Equity	$	286,662	$	270,725

See accompanying Notes to Consolidated Financial Statements.

3

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Income

(dollars in thousands, except per share data)

(unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Net sales	$	92,914	$	89,464	$	184,048	$	181,599
Cost of sales		27,602		27,116		54,698		54,506
Gross profit		65,312		62,348		129,350		127,093
Selling, general and administrative expenses		57,870		50,748		115,797		101,960
Income from operations		7,442		11,600		13,553		25,133
Interest expense		(597)		(448)		(1,151)		(933)
Other income		37		62		72		98
Income before income taxes		6,882		11,214		12,474		24,298
Provision for income taxes		(1,924)		(3,491)		(3,505)		(8,566)
Net income	$	4,958	$	7,723	$	8,969	$	15,732
Income per common share:
Basic	$	0.10	$	0.15	$	0.17	$	0.31
Diluted	$	0.10	$	0.15	$	0.17	$	0.30
Weighted average shares outstanding:
Basic		51,887,094		51,633,150		51,884,402		51,578,691
Diluted		52,019,881		52,223,183		51,996,263		52,111,134
Dividends declared per share	$	0.05	$	0.05	$	0.05	$	0.05

See accompanying Notes to Consolidated Financial Statements.

4

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Net income	$	4,958	$	7,723	$	8,969	$	15,732
Currency translation adjustment		(37)		3		(7)		8
Other comprehensive income		(37)		3		(7)		8
Comprehensive income	$	4,921	$	7,726	$	8,962	$	15,740

See accompanying Notes to Consolidated Financial Statements.

5

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)

(dollars in thousands, except share data)

(unaudited)

	Common stock
	Shares	Amount		Additional paid-in capital		Treasury units		Retained earnings (deficit)		Accumulated other comprehensive income (loss)		Total
Balance at December 31, 2016	51,607,143	$	5	$	185,998	$	-	$	(47,058)	$	(46)	$	138,899
Issuance of restricted shares	324,184		-		-		-		-		-		-
Cancellation of restricted shares	(87,849)		-		-		-		-		-		-
Stock based compensation	-		-		3,156		-		-		-		3,156
Stock option exercises	313,372		-		1,639		-		-		-		1,639
Tax withholdings related to net share settlements of stock based compensation awards	-		-		(318)		-		-		-		(318)
Dividends paid	-		-		(10,366)		-		-		-		(10,366)
Foreign currency translation adjustments	-		-		-		-		-		45		45
Net income	-		-		-		-		10,819		-		10,819
Balance at December 31, 2017	52,156,850	$	5	$	180,109	$	-	$	(36,239)	$	(1)	$	143,874
Adoption of revenue recognition standard (see Note 1)	-		-		-		-		(60)		-		(60)
Issuance of restricted shares	395,282		-		-		-		-		-		-
Cancellation of restricted shares	(44,042)		-		-		-		-		-		-
Stock based compensation	-		-		1,215		-		-		-		1,215
Dividends paid	-		-		(5,200)		-		-		-		(5,200)
Foreign currency translation adjustments	-		-		-		-		-		(7)		(7)
Net income	-		-		-		-		8,969		-		8,969
Balance at June 30, 2018	52,508,090	$	5	$	176,124	$	-	$	(27,331)	$	(8)	$	148,790

See accompanying Notes to Consolidated Financial Statements.

6

Tile Shop Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 (dollars in thousands)

(unaudited)

	Six Months Ended
	June 30,
	2018		2017
Cash Flows From Operating Activities
Net income	$	8,969	$	15,732
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation & amortization		13,978		12,592
Amortization of debt issuance costs		338		349
Loss on disposals of property, plant and equipment		344		152
Deferred rent		1,877		1,552
Stock based compensation		1,215		1,770
Deferred income taxes		1,019		2,523
Changes in operating assets and liabilities:
Receivables		(836)		(610)
Inventories		(15,167)		7,009
Prepaid expenses and other assets		(1,217)		5,139
Accounts payable		2,016		(1,015)
Income tax receivable / payable		2,281		382
Accrued expenses and other liabilities		4,459		(10,747)
Net cash provided by operating activities		19,276		34,828
Cash Flows From Investing Activities
Purchases of property, plant and equipment		(13,149)		(20,000)
Proceeds from the sale of property, plant and equipment		15		-
Net cash used in investing activities		(13,134)		(20,000)
Cash Flows From Financing Activities
Payments of long-term debt and capital lease obligations		(32,638)		(34,646)
Advances on line of credit		35,000		25,000
Dividends paid		(5,200)		(5,168)
Proceeds from exercise of stock options		-		102
Employee taxes paid for shares withheld		(30)		(211)
Net cash used in financing activities		(2,868)		(14,923)
Effect of exchange rate changes on cash		(8)		8
Net change in cash		3,266		(87)
Cash, cash equivalents and restricted cash beginning of period		7,476		12,948
Cash, cash equivalents and restricted cash end of period	$	10,742	$	12,861
Cash and cash equivalents	$	9,907	$	12,006
Restricted cash		835		855
Long-term restricted cash		-		-
Cash, cash equivalents and restricted cash end of period	$	10,742	$	12,861
Supplemental disclosure of cash flow information
Purchases of property, plant and equipment included in accounts payable and accrued expenses	$	1,488	$	2,407
Cash paid for interest		1,124		936
Cash paid (received) for income taxes, net		186		5,817

See accompanying Notes to Consolidated Financial Statements.

7

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Note 1: Background

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

The Company is a specialty retailer of natural stone andman-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 June 30, 2018, the Company had 140 stores in 31 states and the District of Columbia, with an average size of approximately 20,200 square feet. The Company also sells products on its website. The Company has distribution centers located in Michigan, New Jersey, Oklahoma, Virginia and Wisconsin. The Company has a sourcing operation located in China.

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

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

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board(“FASB”) issued a final standard on revenue from contracts with customers. This new standard introduces a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In 2016, the FASB issued several amendments to the standard.  The Company adopted this standard as of January 1, 2018 using the modified retrospective transition method.  See Note 2 for further details.

In November 2016, the FASB issued new guidance on restricted cash on the statement of cash flows. The new guidance requires the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown in the statement of cash flows. The Company adopted the new standard as of March 31, 2018 using the retrospective transition method. The Company’s restricted cash balance was $0.8 million as of June 30, 2018. Upon adopting the new standard, the Company no longer presents the release of restricted cash as a financing cash inflow. Instead, restricted cash and long-term restricted cash balances are included in the beginning and ending cash, cash equivalents and restricted cash balances in the Consolidated Statement of Cash Flows.In connection with the adoption of this standard,$6.0 million received from restricted cash accounts during thesix months ended June 30, 2017 that was previously presented as a financing cash inflow was reclassified to the beginning cash, cash equivalents and restricted cash balances in the ConsolidatedStatement of Cash Flows.

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued a standard that primarily requires organizations that lease assets to recognize the rights and obligations created by those leases on the consolidated balance sheet.  The standard is effective in fiscal year 2019, with early adoption permitted. The Company expects the primary impact upon adoption will be the recognition, on a discounted basis, of minimum commitments under non-cancelable operating leases on the consolidated balance sheets resulting in the recording of right of use assets and lease obligations.  The Company’s minimum commitments under non-cancelable operating leases are disclosed in Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.  The Company has identified its lease management system and is in the process of identifying and evaluating the applicable leases.  The Company is currently assessing the effect the new standard will have on its consolidated financial statements.

8

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Note 2: Revenues

On January 1, 2018, the Company adopted Accounting Standards Update No. 2014-09 (Topic 606), “Revenue from Contracts with Customers,” using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605.  The adoption of Topic 606 had a cumulative impact adjustment to opening retained earnings of $0.1 million as of January 1, 2018 and did not have an impact on revenues recognized for the three and six months ended June 30, 2018.

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to our 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 six months ended
	June 30,				June 30,
	2018		2017		2018		2017
Man-made tiles	47	%	43	%	46	%	42	%
Natural stone tiles	28		33		28		34
Setting and maintenance materials	13		11		13		11
Accessories	10		11		11		11
Delivery service	2		2		2		2
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 and website.  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 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 or online 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 discounts applied to an order are allocated proportionately to the base price of the goods and services ordered.  Deposits made by customers are recorded in other accrued liabilities. Deferred revenues associated with customer deposits are recognized at the time the Company transfers control of the items ordered or renders the delivery service. In the event an order is partially fulfilled as of the end of a reporting period, revenue will be recognized based on the transaction price allocated to the goods delivered and services rendered. The customer deposit balance was $8.1 million as of each ofJune 30, 2018 and December 31, 2017. Revenues recognized during the six months ended June 30, 2018included in the customer deposit balance as of the beginning of the period were $7.7 million.

9

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

The Company extends financing to qualified professional customers who apply for credit.  The accounts receivable balance was $3.2 million and $2.4 million as of June 30, 2018 and December 31, 2017, respectively.  Customers who qualify for an account receive 30-day payment terms.  The Company expects that the customer will pay for the goods and services ordered within one year from the date the order is placed.  Accordingly, the Company qualifies for the practical expedient outlined in ASC 606-10-32-18 and does not adjust the promised amount of consideration for the effects of the financing component. 

Customers may return purchased items for an exchange or refund.  The Company records a reserve for estimated product returns based on the historical returns trends and the current product sales performance.  Historically, the sales returns reserve was presented net of cost of sales in other current liabilities.  Upon adoption of Topic 606, the Company presents the sales returns reserve as an other current liability and the estimated value of the inventory that will be returned as an other current asset in the Consolidated Balance Sheet.  The components of the sales returns reserve reflected in the Consolidated Balance Sheet as of June 30, 2018 and December 31, 2017are as follows:

	(in thousands)
	June 30,		December 31,
	2018		2017(1)
Other current liabilities	$	5,792	$	3,139
Other current assets		1,651		-
Sales returns reserve, net	$	4,141	$	3,139

(1) As of December 31, 2017, the sales returns reserve of $3.1 million was presented net of the expected value of inventory to be returned of $0.9 million.

Note 3: Inventories

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

	(in thousands)
	June 30,		December 31,
	2018		2017
Finished goods	$	83,521	$	65,843
Raw materials		2,288		1,660
Finished goods in transit		14,617		17,756
Total	$	100,426	$	85,259

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 million and $0.2 million as of June 30, 2018 and December 31, 2017, respectively. 

Note 4: Income taxes

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, including, but not limited to, a reduction of the corporate income tax rate to 21% effective January 1, 2018, and a one-time mandatory transition tax on accumulated foreign earnings, a tax on global intangible low taxed income (“GILTI”), and the repeal of the domestic manufacturing deduction for 2018. The Company recognized the effect of the tax law changes in the period of enactment, including determining the transition tax, re-measuring the Company’s U.S. deferred tax assets and liabilities and reassessing the net realizability of the Company’s deferred tax assets and liabilities. Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act,(“SAB 118”) allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation is expected throughout 2018, the Company considers the accounting of the transition tax, deferred tax re-measurements and other items to be provisional due to the forthcoming guidance and the Company’s ongoing analysis of final year-end data and tax positions. The Company expects to complete its analysis

10

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

within the measurement period in accordance with SAB 118. While the Company does not expect to incur a current tax on GILTI relative to 2018 operations, the Company has not yet elected an accounting policy related to GILTI.

The Company's effective tax rate on net income before income taxes for the three months ended June 30, 2018 and 2017 was 28.0% and 31.1%, respectively. The Company’s effective tax rate on net income before taxes for the six months ended June 30, 2018 and 2017 was 28.1% and 35.3%, respectively.The difference between the Company’s effective rate of 28.0% and the expected federal statutory rate of 21.0% for the three and six months ended June 30, 2018 is primarily due to state income taxes.

For the three months ended June 30, 2018 and 2017, the Company recorded a provision for income taxes of $1.9 million and $3.5 million, respectively. For the six months ended June 30, 2018 and 2017, the Company recorded a provision for income taxes of $3.5 million and $8.6 million, respectively. The decrease in the provision for income taxes for both the three and six months ended June 30, 2018 and 2017is due to lower pretax earnings as well as the decrease in the corporate tax rate.

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

Note 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)
		For the three months ended				For the six months ended
		June 30,				June 30,
		2018		2017		2018		2017
Net income		$	4,958	$	7,723	$	8,969	$	15,732
Weighted average shares outstanding - basic			51,887,094		51,633,150		51,884,402		51,578,691
Effect of dilutive securities attributable to stock based awards			132,787		590,033		111,861		532,443
Weighted average shares outstanding - diluted			52,019,881		52,223,183		51,996,263		52,111,134
Income per common share:
Basic		$	0.10	$	0.15	$	0.17	$	0.31
Dilutive		$	0.10	$	0.15	$	0.17	$	0.30
Anti-dilutive securities excluded from earnings per share calculation			2,298,350		209,570		2,107,629		254,511

Note 6: Other Accrued Liabilities

Other accrued liabilities consisted of the following:

	(in thousands)
	June 30,		December 31,
	2018		2017
Customer deposits	$	8,080	$	8,064
Accrued wages and salaries		3,795		2,853
Sales returns reserve		5,792		3,139
Payroll and sales taxes		3,233		2,491
Other current liabilities		6,237		5,866
Total other accrued liabilities	$	27,137	$	22,413

11

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Note 7: Long-term Debt

On June 2, 2015, Holdings and its operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Fifth Third Bank, Bank of America, N.A., and Huntington National Bank (as amended, the “Credit Agreement”). The Credit Agreement was most recently amended on April 5, 2018 to adjust the consolidated fixed charge coverage ratio covenant to a minimum of 1.35:1.00 and revise the consolidated total rent adjusted leverage ratio covenant to a maximum of 4.00:1.00.

The Credit Agreement provides the Company with a $125.0 million senior secured credit facility, comprised of a five-year $50.0 million term loan and a $75.0 million revolving line of credit. Borrowings outstanding consisted of $7.0 million on the term loan and $22.5 million on the revolving line of credit as of June 30, 2018. There was $52.5 million available for borrowing on the revolving line of credit as of June 30, 2018, which may be used to support the Company’s growth and for working capital purposes.

Borrowings pursuant to the Credit Agreement bear interest at either a base rate or a LIBOR-based rate, at the option of the Company. The LIBOR-based rate will range from LIBOR plus 1.50% to 2.00%, depending on The Tile Shop’s leverage ratio. The base rate is equal to the greatest of: (a) the Federal funds rate plus 0.50%, (b) the Fifth Third Bank “prime rate,” and (c) the Eurodollar rate plus 1.00%, in each case plus 0.50% to 1.00% depending on The Tile Shop’s leverage ratio. At June 30, 2018 the base interest rate was 5.75% and the LIBOR-based interest rate was3.84%.  

The term loan requires quarterly principal payments of $2.5 million for quarters ended September 30, 2018 through March 31, 2020.The Company can elect to prepay the term loan without incurring a penalty.

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, make investments, or enter into transactions with affiliates on other than terms that could be obtained in an arm’s length transaction. The Credit Agreement also includes financial and other covenants including covenants to maintain certain fixed charge coverage ratios and rent adjusted leverage ratios. The Company was in compliance with the covenants as of June 30, 2018.

The Company has standby letters of credit outstanding related to its workers compensation and medical insurance policies.  As of June 30, 2018 and 2017, the standby letters of credit totaled $1.1 million.

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

	June 30, 2018				December 31, 2017
			Unamortized				Unamortized
			Debt Issuance				Debt Issuance
	Principal		Costs		Principal		Costs
Term note payable - interest at 3.84% and 3.06% at June 30, 2018 and December 31, 2017, respectively	$	6,971	$	(15)	$	11,346	$	(36)
Commercial bank credit facility		22,500		-		15,000		-
Variable interest rate bonds (1.69% at December 31, 2017)		-		-		705		-
Total debt obligations		29,471		(15)		27,051		(36)
Less: current portion		6,971		(13)		8,855		(22)
Debt obligations, net of current portion	$	22,500	$	(2)	$	18,196	$	(14)

Note 8: 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.

12

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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 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.

The following table sets forth by Level within the fair value hierarchy the Company’s financial assets that were accounted for at fair value on a recurring basis at June 30, 2018 and December 31, 2017 according to the valuation techniques the Company uses to determine their fair values. There have been no transfers of assets among the fair value hierarchies presented.

	Pricing	Fair Value at
	Category	June 30, 2018		December 31, 2017
Assets	(in thousands)
Cash and cash equivalents	Level 1	$	9,907	$	6,621
Restricted cash	Level 1		835		855

The following methods and assumptions were used to estimate the fair value of each class of financial instrument.  There have been no changes in the valuation techniques used by the Company to value the Company’s financial instruments.

· 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.

Fair value measurements also apply to certain non-financial assets and liabilities measured at fair value on a nonrecurring basis.  Property, plant and equipment is measured at fair value when an impairment is recognized and the related assets are written down to fair value. The Company measured the fair value of these assets based on projected cash flows and an estimated risk-adjusted rate of return. Projected cash flows are considered level 3 inputs. During the three and six months ended June 30, 2018, the Company identified property, plant and equipment that would be disposed of prior to the end of their useful lives, which resulted in the recognition of a $0.3 million charge to write-down these assets to their estimated fair value. No impairment charges were recorded during the three and six months ended June 30, 2017.

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 9: 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 and six months ended June 30, 2018 and 2017 include compensation cost for the portion of outstanding awards that vested during those periods. The Company recognizes stock based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Total stock based compensation expense related to stock options was $0.2 million and $0.6 million for the three months ended June 30, 2018 and 2017, respectively. Total stock based compensation expense related to stock options was $0.5 millionand $1.2 million forthe six months ended June 30, 2018 and 2017, respectively. Stock based compensation expense pertaining to stock options is included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income.

13

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

As of June 30, 2018, the Company had outstanding stock options to purchase 1,672,804 shares of common stock at a weighted average exercise price of $14.44.

Restricted stock:

The Company awards restricted common shares to selected employees and to non-employee directors. Recipients are not required to provide any consideration other than continued service. 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 $0.4 million and $0.3 million for the three months ended June 30, 2018 and 2017, respectively. Total stock based compensation expense related to restricted stock was $0.7 million and $0.6 million for the six months ended June 30, 2018 and 2017, respectively. Stock based compensation expense pertaining to restricted stock is included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income.

As of June 30, 2018, the Company had 618,091 outstanding restricted common shares.

Note 10:New Market Tax Credit

2016 New Market 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 $6.7million 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 $3.1 million to the Investment Funds and, by virtue of such contribution, is entitled to substantially all of the tax benefits derived from the NMTCs, while the Company effectively received net loan proceeds equal to U.S. Bank’s contributions to the Investment Fund. This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase U.S. Bank’s interest. The Company believes that U.S. Bank will exercise the put option in December 2023 at the end of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify U.S. Bank for any loss or recapture of NMTCs related to the financing until such time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement.  

The Company has determined that the financing arrangement with the Investment Fund and CDEs contains a variable interest entity (“VIE”). The ongoing activities of the Investment Fund – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the Investment Fund. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to the structure; U.S. Bank’s lack of a material interest in the underling economics of the project; and the fact that the Company is obligated to absorb losses of the Investment Fund. The Company concluded that it is the primary beneficiary of the VIE and consolidated the Investment Fund, as a VIE, in accordance with the accounting standards for consolidation. In 2016, U.S. Bank’s contributions of $3.1 million, net of syndications 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

14

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

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 June 30, 2018, the balance of the contribution liability was $2.5 million, of which $0.4 million is classified as other accrued liabilities on the Consolidated Balance Sheet and $2.1 million is classified as other long-term liabilities on the Consolidated Balance Sheet.

The Company is able to request reimbursement for certain expenditures made in connection with the expansion of the distribution center in Durant, Oklahoma from the Investment Fund.  Expenditures that qualify for reimbursement include building costs, equipment purchases, and other expenditures tied to the expansion of the facility. During the fiscal year ended December 31, 2017, the Company received reimbursements totaling $6.0 million from the Investment Fund. As of June 30, 2018, the balance in the Investment Fund available for reimbursement to the Company was $0.8 million.

2013 New Market 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 a $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 maybe obligated or entitled to repurchase the investors’ interest. The Company believes that the investors will exercise the put option in September 2020 at the end of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify the investors for any loss or recapture of NMTCs related to the financing until such time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement. 

The Company determined that this financing arrangement contains a VIE.  The ongoing activities of the Tile Shop Investment Fund LLC – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the Tile Shop Investment Fund LLC. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to the structure; the investors lack of a material interest in the underling economics of the project; and the fact that the Company is obligated to absorb losses of the Investment Fund. 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 June 30, 2018, the balance of the contribution liability was $1.4 million, of which $0.7 million is classified as other accrued liabilities on the Consolidated Balance Sheet and $0.7 million is classified as other long-term liabilities on the Consolidated Balance Sheet.

Note 11: Commitments and Contingencies

The Company is a nominal defendant in three actions brought derivatively on behalf of the Company by three shareholders in 2015.  The plaintiffs allege that the defendant-directors and/or officers breached their fiduciary duties by failing to adopt adequate internal controls for the Company, by approving false and misleading statements issued by the Company, by causing the Company to violate generally accepted accounting principles and SEC regulations, and by permitting the Company’s primary product to contain illegal amounts of lead. The complaints also allege claims for insider trading and/or unjust enrichment. The Company moved to dismiss the actions, or in the alternative, to stay the actions.  Before the motions were decided, the parties entered into settlement discussions.  As of April 11, 2018, the parties entered into a Stipulation of Settlement to resolve all claims in the three actions, which is subject to the approval of the Delaware Court of Chancery.  Under the terms of settlement, the Board of Directors will adopt, and the Company will implement, certain changes to its policies and practices that address related person transactions, insider trading, compliance, and ethics.  The Stipulation of Settlement also provides that the Company will be liable to pay to plaintiffs and their counsel such amount of attorneys’ fees, expenses, and incentive awards as the Court might award to them. The plaintiffs have formally requested that the Court award them attorneys’ fees and expenses in the amount of $1.7 million and an incentive award of $5,000 for each of

15

Tile Shop Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

the two plaintiffs. The Company intends to oppose the requested amount of attorneys’ fees and expenses as being excessive. The Court is scheduled to hold a hearing on final approval of the settlement on August 23, 2018.

By letter dated May 19, 2016, a shareholder of the Company demanded that the Board of Directors investigate alleged breaches of fiduciary duty related to the same matters described above and take action against certain present and former officers and directors of the Company. The Board of Directors has appointed a committee of two independent directors to investigate and evaluate the matters raised in the demand letter, and to recommend to the Company’s Board of Directors what actions, if any, should be taken by the Company with respect to the matters raised in the demand letter. The settlement of the three derivative actions described in the preceding paragraph, if approved by the Delaware Court of Chancery, will resolve this shareholder demand.

Based on the terms of the Settlement and range of potential award of attorneys’ fees and expenses, the Company does not believe the amount of losses resulting from the derivative actions and demands will have a material impact on its financial statements.

The Company is also, from time to time, subject to claims and disputes arising in the normal course of business.  In the opinion of management, while the outcome of such claims and disputes cannot be predicted with certainty, the Company’s ultimate liability in connection with these matters is not expected to have a material adverse effect on the results of operations, financial position, or cash flows.

Note 12: Related Party Transactions

On July 9, 2018 Fumitake Nishi, the brother-in-law of our interim CEO Robert Rucker and a former Company employee, informed us he had reacquired a majority of the equity of one of our key vendors, Nanyang Helin Stone Co. Ltd (“Nanyang”).  Nanyang supplies us with natural stone products including hand-crafted mosaics, listellos and other accessories. During 2016, 2017 and the first six months of 2018, we purchased approximately $8.4 million, $12.8 million and $5.7 million, respectively, of products from Nanyang.  Mr. Nishi’s employment in our Company was terminated on January 1, 2014 as a result of several violations of our code of business conduct and ethics policy.  Certain of those violations involved his undisclosed ownership of Nanyang at that time. 

Management and the Audit Committee have evaluated the relationship and determined that it would be in the Company’s best interests to continue purchasing products from Nanyang.  The Company believes Nanyang provides an important combination of quality, product availability and pricing, and relying solely on other vendors to supply similar product to the Company would not be in the Company’s best interests.  The Company and the Committee will review future purchases from Nanyang and compare the pricing for products purchased from Nanyang to the pricing of same or similar products purchased from unrelated vendors.

Note 13: Subsequent Events

On July 19, 2018, the Company declared a $0.05 dividend to stockholders of record as of the close of business on July 30, 2018. The dividend will be paid on August 10, 2018.

16

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017 and our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “depend,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “will likely result,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, unexpected delays or expenses related to maintaining or renovating existing stores, changes to our promotional strategy changes to economic or market conditions and customer preferences, disruptions in our supply chain, or inventory management, changes to our product assortment, competitive factors, increases to interest rates or other impacts on our ability to obtain or maintain financing, unanticipated expenses related to operating as a public company including but not limited to litigation-related expenses, and those factors disclosed in the section captioned “Risk Factors” in our Annual Report for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview and Recent Trends

We are a specialty retailer of naturalstone andman-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 June 30, 2018, we operated 140 stores in 31 states and the District of Columbia, with an average size of 20,200 square feet. We also sell our products on our website.

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

We believe that the highly-fragmented United States retail tile market provides us with a significant opportunity to expand our store base. We opened 2 new stores in the first six months of 2018, and opened 15 new stores during 2017. Between July 1, 2017 and June 30, 2018, we opened 10 new store locations. We do not plan to open any additional stores in 2018. We believe that there will continue to be additional expansion opportunities in the United States and Canada. We expect store base growth will drive productivity and operational efficiencies. Our growth plans also require us to maintain significant inventory on-hand in order to fulfill transactions at these new locations.

For the three months ended June 30, 2018 and 2017, we reported net sales of $92.9 million and $89.5 million, respectively. The increase in sales for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 was primarily due to net sales of $5.0 million from stores not included in the comparable store base, partially offset by a decline in comparable stores sales of 1.8%, or $1.6 million.  For the six months ended June 30, 2018 and 2017, we reported net sales of $184.0 million and $181.6 million, respectively. The increase in sales for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was primarily due to net sales of $10.4 million from stores not included in the comparable store base, partially offset by a decline in comparable store sales of 4.4%, or $7.9 million.

The decrease in sales at comparable stores for the three and six months ended June 30, 2018 was primarily the result of weaker store traffic due in part to our shift in promotional strategy.

17

The table below sets forth information about our comparable store sales (decline) and growth for the three and six months ended June 30, 2018 and 2017.  

	For the three months ended				For the six months ended
	June 30,				June 30,
	2018		2017		2018		2017
Comparable store sales (decline) growth	(1.8)	%	0.5	%	(4.4)	%	2.7	%

For the three months ended June 30, 2018 and 2017, we reported gross profit of $65.3 million and $62.3 million, respectively. The gross margin rate for the three months ended June 30, 2018 and 2017 was 70.3% and 69.7%, respectively.For the six months ended June 30, 2018 and 2017, we reported gross profit of $129.4 million and $127.1 million, respectively. The gross margin rate for the six months ended June 30, 2018 and 2017 was 70.3% and 70.0%, respectively.The improvement in gross profit dollars for the three and six months ended June 30, 2018 is attributable to an increase in sales combined with an increase in the gross margin rate.  The increase in the gross margin rate is primarily due to decreased promotional activity.

For the three months ended June 30, 2018 and 2017, we reported income from operations of $7.4 million and $11.6 million, respectively. For the six months ended June 30, 2018 and 2017, we reported income from operations of $13.6 million and $25.1 million, respectively.  The decrease in income from operations was primarily driven by investments made in store compensation, regional leadership, website design and customer relationship management capabilities combined with an increase in occupancy costsfrom new stores that have opened since July 1, 2017. 

Inventory increased by $12.1 million from $88.3 million on March 31, 2018 to $100.4 million on June 30, 2018.  The increase was attributable to new products added to our assortment during the quarter.

Long term debt increased $4.3 million from $25.2 million on March 31, 2018 to $29.5 million on June 30, 2018.  The increase was attributable to the expansion of our product assortment resulting in an increase in inventory and capital investments associated with store remodels and merchandising.

Net cash provided by operating activities was $19.3 million and $34.8 million for the six months ended June 30, 2018 and 2017, respectively, which was used to fund operations, inventory purchases, store remodel and merchandising investments, and dividends. We expect to continue to fund our capital expenditures and daily operations from our operating cash flows. As of June 30, 2018, we had cash of $9.9 million and working capital of $55.9 million compared with cash of $6.6 million and working capital of $43.5 million atDecember 31, 2017.

Key Components of our Consolidated Statements of Income

Net SalesNet sales represents total charges to customers, net of returns, and includes freight charged to customers. We recognize sales at the time that the customer takes control of the merchandise or final delivery of the product has occurred. We are required to charge and collect sales and other taxes on sales to our customers and remit these taxes back to government authorities. Total revenues do not include sales tax because we are a pass-through conduit for collecting and remitting sales tax. Sales are reduced by a reserve for anticipated sales returns that we estimate based on historical returns.

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

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

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

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

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

18

Non-GAAP Measure

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

We believe that this non-GAAP measure of financial results provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses this non-GAAP measure to compare our performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation, and for budgeting and planning purposes. This measure is used in monthly financial reports prepared for management and our Board of Directors. We believe that the use of this non-GAAP financial measure provides an additionaltool for investors to use in evaluating ongoing operating results and trends and in comparing our financial performance with other specialty retailers, many of which present  a similar non-GAAP financial measure to investors.

The reconciliation of Adjusted EBITDA to net income for the three and six months ended June 30, 2018 and 2017 is as follows:

	(in thousands)
	Three Months Ended
	June 30,
	2018		% of net sales(2)		2017		% of net sales(1)(2)
Net income	$	4,958	5.3	%	$	7,723	8.6	%
Interest expense		597	0.6	%		448	0.5	%
Income taxes		1,924	2.1	%		3,491	3.9	%
Depreciation & amortization		6,978	7.5	%		6,256	7.0	%
Stock based compensation		598	0.6	%		928	1.0	%
Adjusted EBITDA	$	15,055	16.2	%	$	18,846	21.1	%

	(in thousands)
	Six Months Ended
	June 30,
	2018		% of net sales			2017	% of net sales(1)
Net income	$	8,969	4.9	%	$	15,732	8.7	%
Interest expense		1,151	0.6	%		933	0.5	%
Income taxes		3,505	1.9	%		8,566	4.7	%
Depreciation & amortization		13,978	7.6	%		12,592	6.9	%
Stock based compensation		1,215	0.7	%		1,770	1.0	%
Adjusted EBITDA	$	28,818	15.7	%	$	39,593	21.8	%

⁽¹⁾ In prior periods, the Company also adjusted for special charges, including shareholder and other litigation costs. The Company has recast the Adjusted EBITDA presentation for the three and six months ended June 30, 2017 to conform to the current presentation.

⁽²⁾ Amounts may not foot due to rounding.

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

19

Results of Operations

Comparison of the three months ended June 30, 2018 to the three months ended June 30, 2017

	(in thousands)
	2018		% of sales		2017		% of sales
Net sales	$	92,914			$	89,464
Cost of sales		27,602	29.7	%		27,116	30.3	%
Gross profit		65,312	70.3	%		62,348	69.7	%
Selling, general and administrative expenses		57,870	62.3	%		50,748	56.7	%
Income from operations		7,442	8.0	%		11,600	13.0	%
Interest expense		(597)	(0.6)	%		(448)	(0.5)	%
Other income		37	0.0	%		62	0.1	%
Income before income taxes		6,882	7.4	%		11,214	12.5	%
Provision for income taxes		(1,924)	(2.1)	%		(3,491)	(3.9)	%
Net income	$	4,958	5.3	%	$	7,723	8.6	%

Net Sales Net sales for the second quarter of 2018 increased $3.4 million, or 3.9%, compared with the second quarter of 2017, primarily due to a $5.0 million increase in net sales from stores not included in the comparable store base, partially offset by a $1.6 million decrease in net sales generated by comparable stores. The decrease in sales at comparable stores for the three months ended June 30, 2018 was due to weaker store traffic due in part to our shift in promotional strategy.

Gross Profit Gross profit for the second quarter of 2018 increased $3.0 million, or 4.8%, compared with the second quarter of 2017 due to an increase in net sales and the gross margin rate. The gross margin rate was 70.3% and 69.7% for the second quarter of 2018 and 2017, respectively. The improvement in the gross margin rate was primarily due to decreased promotional activity.

Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the second quarter of 2018 increased $7.1 million, or 14.0%, compared with the second quarter of 2017. The $7.1 million increase in selling, general, and administrative expenses was driven primarily by costs associated with opening and operating 10 new stores during the period from July 1, 2017 through June 30, 2018, investments in store and warehouse staff compensation, and the addition of regional sales leader positions.  Included in the selling, general, and administrative expenses increase during the second quarter of 2018 was $2.0 million of planned strategic investments in store compensation, regional sales leadership, website design, and customer relationship management capabilities.

Pre-opening CostsDuring the three months ended June 30, 2018 and 2017, we incurred pre-opening costs of $0.0 million and $0.5 million, respectively.

Interest Expense Interest expense was $0.6 million and $0.4 million for the second quarter of 2018 and 2017, respectively. The increase was due to higher interest rates during the second quarter of 2018.  

Provision for Income Taxes Income tax provision decreased $1.6 million for the second quarter of 2018 compared with the second quarter of 2017 due to a decrease in income before income taxes, along with a decrease in our effective tax rate due to the Tax Act. Our effective tax rate for the three months ended June 30, 2018 and 2017 was 28.0% and 31.1%, respectively.

20

Comparison of the six months ended June 30, 2018 to the six months ended June 30, 2017

	(in thousands)
	2018		% of sales		2017		% of sales
Net sales	$	184,048			$	181,599
Cost of sales		54,698	29.7	%		54,506	30.0	%
Gross profit		129,350	70.3	%		127,093	70.0	%
Selling, general and administrative expenses		115,797	62.9	%		101,960	56.1	%
Income from operations		13,553	7.4	%		25,133	13.8	%
Interest expense		(1,151)	(0.6)	%		(933)	(0.5)	%
Other income (expense)		72	0.0	%		98	0.1	%
Income before income taxes		12,474	6.8	%		24,298	13.4	%
Provision for income taxes		(3,505)	(1.9)	%		(8,566)	(4.7)	%
Net income	$	8,969	4.9	%	$	15,732	8.7	%

Net Sales Net sales for the six months ended June 30, 2018 increased $2.4 million, or 1.3%, compared with the six months ended June 30, 2017, primarily due to a $7.9 million decrease in net sales generated by comparable stores. The decrease in sales at comparable stores for the six months ended June 30, 2018 was due to weaker store traffic due in part to our shift in promotional strategy.

Gross Profit Gross profit for the six months ended June 30, 2018 increased $2.3 million, or 1.8%, compared with the six months ended June 30, 2017 primarily due to an increase in net sales and an increase in the gross margin rate. The gross margin rate was 70.3% and 70.0% for the six months ended June 30, 2018 and 2017, respectively. The improvement in the gross margin rate was primarily due to decreased promotional activity.

Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the six months ended June 30, 2018 increased $13.8 million, or 13.6%, compared with the six months ended June 30, 2017. The $13.8 million increase in selling, general, and administrative expenses was driven primarily by costs associated with opening and operating 10 new stores during the period from July 1, 2017 through June 30, 2018,  investments in store and warehouse staff compensation, and the addition of regional sales leader positions. Included in the selling, general, and administrative expenses increase during the six months ended June 30, 2018 was approximately $4.0 million of planned strategic investments in store compensation, regional sales leadership, website design, and customer relationship management capabilities.

Pre-opening Costs During the six months ended June 30, 2018 and 2017, we incurred pre-opening costs of $0.1 million and $0.8 million, respectively.

Interest Expense Interest expense was $1.2 million and $0.9 million for the six months ended June 30, 2018 and 2017, respectively. The increase was due to higher interest rates and a higher debt balance during the six months ended June 30, 2018.

Provision for Income Taxes Income tax provision decreased $5.1 million for the six months ended June 30, 2018 compared with the six months ended June 30, 2017 due to a decrease in income before income taxes, along with a decrease in our effective tax rate due to the Tax Act. Our effective tax rate for the six months ended June 30, 2018 and 2017 was 28.1% and 35.3%, respectively.

Liquidity and Capital Resources

Our principal uses of liquidity have been investments in working capital and capital expenditures. Our principal sources of liquidity are $9.9 million of cash and cash equivalents at June 30, 2018, our cash flow from operations, and borrowings available under our credit facility. We expect to use this liquidity for opening new stores, purchasing additional merchandise inventory, maintaining our existing stores, reducing outstanding debt, paying dividends to our shareholders and general corporate purposes.

On June 2, 2015, we and our operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Fifth Third Bank, Bank of America, N.A., and Huntington National Bank (as amended, the “Credit Agreement”). The Credit Agreement was most recently amended on April 5, 2018 to adjust the consolidated fixed charge coverage ratio covenant to a minimum of 1.35:1.00 and revise the consolidated total rent adjusted leverage ratio covenant to a maximum of 4.00:1.00.

The Credit Agreement provides us with a $125.0 million senior secured credit facility, comprised of a five-year $50.0 million term loan and a $75.0 million revolving line of credit. Borrowings outstanding consisted of $7.0 million on the term loan and $22.5 million

21

on the revolving line of credit as of June 30, 2018. There was $52.5 million available for borrowing on the revolving line of credit as of June 30, 2018, which may be used to support our growth and for working capital purposes.

Borrowings pursuant to the Credit Agreement bear interest at either a base rate or a LIBOR-based rate, at our option. The LIBOR-based rate will range from LIBOR plus 1.50% to 2.00%, depending on our leverage ratio. The base rate is equal to the greatest of: (a) the Federal funds rate plus 0.50%, (b) the Fifth Third Bank “prime rate,” and (c) the Eurodollar rate plus 1.00%, in each case plus 0.50% to 1.00% depending on our leverage ratio. At June 30, 2018 the base interest rate was 5.75% and the LIBOR-based interest rate was 3.84%.  

The term loan requires quarterly principal payments of $2.5 million for the quarters ended September 30, 2018 through March 31, 2020. We can elect to prepay the term loan without incurring a penalty.

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, make investments, or enter into transactions with affiliates on other than terms that could be obtained in an arm’s length transaction. The Credit Agreement also includes financial and other covenants, including covenants to maintain certain fixed charge coverage ratios and rent adjusted leverage ratios. We were in compliance with the covenants as of June 30, 2018. We intend to make principal payments due in future periods using cash from operations.

We have standby letters of credit outstanding related to our workers compensation and medical insurance policies. As of June 30, 2018 and 2017, the standby letters of credit totaled $1.1 million.

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

Capital Expenditures

Capital expenditures were $13.1 million and $20.0 million for the six months ended June 30, 2018 and 2017, respectively. The decrease in capital expenditures is primarily due to the decelerated pace of new store openings. We opened2 and7 new stores during the six months ended June 30, 2018 and 2017, respectively. During the six months ended June 30, 2018, capital expenditures primarily consisted of remodels for existing store investments and information technology investments.

Cash flows

The following table summarizes our cash flow data for the six months ended June 30, 2018 and 2017.

	(in thousands)
	Six Months Ended
	June 30,
	2018		2017
Net cash provided by operating activities	$	19,276	$	34,828
Net cash used in investing activities		(13,134)		(20,000)
Net cash used in financing activities		(2,868)		(14,923)

Operating activities

Net cash provided by operating activities during the six months ended June 30, 2018 was $19.3 million compared with $34.8 million during the six months ended June 30, 2017. The decrease is attributable to a  decrease in net income, along with an increase in inventory.

Investing activities

Net cash used in investing activities totaled $13.1 million for the six months ended June 30, 2018 compared with $20.0 million for the six months ended June 30, 2017. Net cash used in investing activities in each period was primarily for capital purchases of store fixtures, equipment, building improvements and leasehold improvements for stores opened or remodeled, asset additions in our distribution and manufacturing facilities, information technology infrastructure, a new enterprise resource planning system, and general corporate information technology assets.

22

Financing activities

Net cash used in financing activities was $2.9 million for the six months ended June 30, 2018 compared with$14.9 million for thesix months ended June 30, 2017.  Net cash used in financing activities during the six months ended June 30, 2018included$32.6 million in payments of long-term debt and capital lease obligations and $5.2 million in dividends paid to stockholders, offset by advances on the line of credit of $35.0 million.

Cash and cash equivalents totaled $9.9 million at June 30, 2018 compared with $6.6 million at December 31, 2017. Working capital was $55.9 million at June 30, 2018 compared with $43.5 million at December 31, 2017.

Off-Balance Sheet Arrangements

As of June 30, 2018 and December 31, 2017, 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 June 30, 2018, there were no material changes to our contractual obligations outside the ordinary course of business.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued a final standard on revenue from contracts with customers. This new standard introduces a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In 2016, the FASB issued several amendments to the standard.  We adopted this standard as of January 1, 2018 using the modified retrospective transition method.  See Note 2 in Item 1, Notes to Consolidated Financial Statementsin this Form 10-Q for further details.

In November 2016, the FASB issued new guidance on restricted cash on the statement of cash flows. The new guidance requires the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown in the statement of cash flows. We adopted the new standard as of March 31, 2018 using the retrospective transition method. Our restricted cash balance was $0.8 million as of June 30, 2018. Upon adopting the new standard, we no longer present the release of restricted cash as a financing cash inflow. Instead, restricted cash and long-term restricted cash balances will be included in the beginning and ending cash, cash equivalents and restricted cash balances in the statement of cash flows.In connection with the adoption of this standard,  $6.0 million received from restricted cash accounts during six months ended June 30, 2017 that was previously presented as a financing cash inflow was reclassified to cash, cash equivalents and restricted cash in the statement of cash flows.

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued a standard that primarily requires organizations that lease assets to recognize the rights and obligations created by those leases on the consolidated balance sheet.  The standard is effective for fiscal year 2019, with early adoption permitted. We expect the primary impact on our consolidated balance sheets upon adoption will be the recognition, on a discounted basis, of our minimum commitments under non-cancelable operating leases resulting in the recording of right of use assets and lease obligations.  Our minimum commitments under non-cancelable operating leases are disclosed in Note 5 to theConsolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.  We have identified our lease managementsystem and are in the process of identifying and evaluating the applicable leases.  We are currently assessing the effect the new standard will have on our consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that information relating to the Company is accumulated and communicated to management, including our principal officers as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018 and have concluded that such disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control over Financial Reporting

No changes to our internal control over financial reporting occurred during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a nominal defendant in three actions brought derivatively on behalf of the Company by three shareholders in 2015.  The plaintiffs allege that the defendant-directors and/or officers breached their fiduciary duties by failing to adopt adequate internal controls for the Company, by approving false and misleading statements issued by the Company, by causing the Company to violate generally accepted accounting principles and SEC regulations, and by permitting the Company’s primary product to contain illegal amounts of lead. The complaints also allege claims for insider trading and/or unjust enrichment. The Company moved to dismiss the actions, or in the alternative, to stay the actions.  Before the motions were decided, the parties entered into settlement discussions.  As of April 11, 2018, the parties entered into a Stipulation of Settlement to resolve all claims in the three actions, which is subject to the approval of the Delaware Court of Chancery.  Under the terms of settlement, the Board of Directors will adopt, and the Company will implement, certain changes to its policies and practices that address related person transactions, insider trading, compliance, and ethics.  The Stipulation of Settlement also provides that the Company will be liable to pay to plaintiffs and their counsel such amount of attorneys’ fees, expenses, and incentive awards as the Court might award to them.  The plaintiffs have formally requested that the Court award them attorneys’ fees and expenses in the amount of $1.7 million and an incentive award of $5,000 for each of the two plaintiffs. The Company intends to oppose the requested amount of attorneys’ fees and expenses as being excessive. The Court is scheduled to hold a hearing on final approval of the settlement on August 23, 2018.

By letter dated May 19, 2016, a shareholder of the Company demanded that the Board of Directors investigate alleged breaches of fiduciary duty related to the same matters described above and take action against certain present and former officers and directors of the Company. The Board of Directors has appointed a committee of two independent directors to investigate and evaluate the matters raised in the demand letter, and to recommend to the Company’s Board of Directors what actions, if any, should be taken by the Company with respect to the matters raised in the demand letter. The settlement of the three derivative actions described in the preceding paragraph, if approved by the Delaware Court of Chancery, will resolve this shareholder demand.

Based on the terms of the Settlement and range of potential award of attorneys’ fees and expenses, the Company does not believe the amount of losses resulting from the derivative actions and demands will have a material impact on its financial statements.

The Company is also, from time to time, subject to claims and disputes arising in the normal course of business.  In the opinion of management, while the outcome of such claims and disputes cannot be predicted with certainty, the Company’s ultimate liability in connection with these matters is not expected to have a material adverse effect on the results of operations, financial position, or cash flows.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

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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
April 1, 2018 - April 30, 2018	9,358	(1)	$	0.60	(1)	-	-
May 1, 2018 - May 31, 2018	3,658	(2)		6.74	(2)	-	-
June 1, 2018 - June 30, 2018	-			-		-	-
	13,016		$	2.32		-	-

⁽¹⁾ A total of 931 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 Incentive Plan. The Company did not pay cash to repurchase these shares, nor were these repurchases part of a publicly announced plan or program. The remaining 8,427 shares were repurchased by the Company pursuant to the terms of the underlying restricted stock agreements, as allowed by the 2012 Omnibus Incentive 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⁾ These 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 Incentive Plan. The Company 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

On July 9, 2018 Fumitake Nishi, the brother-in-law of our interim CEO Robert Rucker and a former Company employee, informed us he had reacquired a majority of the equity of one of our key vendors, Nanyang Helin Stone Co. Ltd (“Nanyang”).  Nanyang supplies us with natural stone products including hand-crafted mosaics, listellos and other accessories. During 2016, 2017 and the first six months of 2018, we purchased approximately $8.4 million, $12.8 million and $5.7 million, respectively, of products from Nanyang.  Mr. Nishi’s employment in our Company was terminated on January 1, 2014 as a result of several violations of our code of business conduct and ethics policy.  Certain of those violations involved his undisclosed ownership of Nanyang at that time. 

Management and the Audit Committee have evaluated the relationship and determined that it would be in the Company’s best interests to continue purchasing products from Nanyang.  The Company believes Nanyang provides an important combination of quality, product availability and pricing, and relying solely on other vendors to supply similar product to the Company would not be in the Company’s best interests.  The Company and the Committee will review future purchases from Nanyang and compare the pricing for products purchased from Nanyang to the pricing of same or similar products purchased from unrelated vendors.

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ITEM 6. EXHIBITS

Exhibits
3.1	Certificate of Incorporation of Tile Shop Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (Reg. No. 333-182482) filed with the Securities and Exchange Commission on July 2, 2012).
3.2	By-Laws of Tile Shop Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-4 (Reg. No. 333-182482) filed with the Securities and Exchange Commission on July 2, 2012).
10.1	Fourth Amendment to Credit Agreement, dated April 5, 2018, among The Tile Shop, LLC, Tile Shop Holdings, Inc., Fifth Third Bank, and the other parties named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 6, 2018).
31.1*	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1**	Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
32.2**	Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
101.INS*	XBRL Instance Document.
101.SCH*	XBRL Taxonomy Extension Schema Document.
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document.

*    Filed herewith

**  Furnished herewith

26

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: August1, 2018	By:	/s/ ROBERT A. RUCKER
		Robert A. Rucker
		Chief Executive Officer

Dated: August1, 2018	By:	/s/ KIRK L. GEADELMANN
		Kirk L. Geadelmann
		Chief Financial Officer

27

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Robert A. Rucker, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tile Shop Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August1, 2018
	/s/ ROBERT A. RUCKER
	Robert A. Rucker
	Interim Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Kirk L. Geadelmann, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tile Shop Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August1, 2018
	/s/ KIRK L. GEADELMANN
	Kirk L. Geadelmann
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Tile Shop Holdings, Inc. (the “Company”) on Form 10-Q for the period ending June30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert A. Rucker,  Interim Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ ROBERT A. RUCKER

Robert A. Rucker

Chief Executive Officer

August1, 2018

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Tile Shop Holdings, Inc. (the “Company”) on Form 10-Q for the period ending June30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kirk L. Geadelmann, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ KIRK L. GEADELMANN

Kirk L. Geadelmann

Chief Financial Officer

August1, 2018

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2018	Jul. 30, 2018
Document And Entity Information
Entity Registrant Name	TILE SHOP HOLDINGS, INC.
Entity Central Index Key	0001552800
Entity Filer Category	Large Accelerated Filer
Document Type	10-Q
Document Fiscal Period Focus	Q2
Document Period End Date	Jun. 30, 2018
Document Fiscal Year Focus	2018
Current Fiscal Year End Date	--12-31
Trading Symbol	tts
Amendment Flag	false
Entity Common Stock, Shares Outstanding (in shares)		52,705,343

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 9,907	$ 6,621
Restricted cash	835	855
Receivables, net	3,217	2,381
Inventories	100,426	85,259
Income tax receivable	3,477	5,726
Other current assets, net	5,798	4,717
Total Current Assets	123,660	105,559
Property, plant and equipment, net	150,505	151,405
Deferred tax assets	10,636	11,654
Other assets	1,861	2,107
Total Assets	286,662	270,725
Current liabilities:
Accounts payable	33,577	30,771
Current portion of long-term debt	6,958	8,833
Income tax payable	50	17
Other accrued liabilities	27,137	22,413
Total Current Liabilities	67,722	62,034
Long-term debt, net	22,498	18,182
Capital lease obligation, net	509	576
Deferred rent	42,938	41,290
Other long-term liabilities	4,205	4,769
Total Liabilities	137,872	126,851
Commitments and Contingencies (see Note 11)
Stockholders’ Equity:
Common stock, par value $0.0001; authorized: 100,000,000 shares; issued and outstanding: 52,508,090 and 52,156,850 shares, respectively	5	5
Preferred stock, par value $0.0001; authorized: 10,000,000 shares; issued and outstanding: 0 shares
Additional paid-in-capital	176,124	180,109
Accumulated deficit	(27,331)	(36,239)
Accumulated other comprehensive income (loss)	(8)	(1)
Total Stockholders' Equity	148,790	143,874
Total Liabilities and Stockholders' Equity	$ 286,662	$ 270,725

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Consolidated Balance Sheets (Parenthetical) - $ / shares	Jun. 30, 2018	Dec. 31, 2017
Consolidated Balance Sheets [Abstract]
Common stock, par value (per share)	$ 0.0001	$ 0.0001
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	52,508,090	52,156,850
Common stock, shares outstanding	52,508,090	52,156,850
Preferred stock, par value (per share)	$ 0.0001	$ 0.0001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0

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Consolidated Statements of Income - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Consolidated Statements of Income [Abstract]
Net sales	$ 92,914	$ 89,464	$ 184,048	$ 181,599
Cost of sales	27,602	27,116	54,698	54,506
Gross profit	65,312	62,348	129,350	127,093
Selling, general and administrative expenses	57,870	50,748	115,797	101,960
Income from operations	7,442	11,600	13,553	25,133
Interest expense	(597)	(448)	(1,151)	(933)
Other income	37	62	72	98
Income before income taxes	6,882	11,214	12,474	24,298
Provision for income taxes	(1,924)	(3,491)	(3,505)	(8,566)
Net income	$ 4,958	$ 7,723	$ 8,969	$ 15,732
Income per common share:
Basic	$ 0.10	$ 0.15	$ 0.17	$ 0.31
Diluted	$ 0.10	$ 0.15	$ 0.17	$ 0.30
Weighted average shares outstanding:
Basic	51,887,094	51,633,150	51,884,402	51,578,691
Diluted	52,019,881	52,223,183	51,996,263	52,111,134
Dividends declared per share	$ 0.05	$ 0.05	$ 0.05	$ 0.05

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Consolidated Statements of Comprehensive Income [Abstract]
Net income	$ 4,958	$ 7,723	$ 8,969	$ 15,732
Currency translation adjustment	(37)	3	(7)	8
Other comprehensive income	(37)	3	(7)	8
Comprehensive income	$ 4,921	$ 7,726	$ 8,962	$ 15,740

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Consolidated Statements of Stockholders' Equity (Deficit) - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings (Deficit) [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Total
Balance at Dec. 31, 2016	$ 5	$ 185,998	$ (47,058)	$ (46)	$ 138,899
Balance (in shares) at Dec. 31, 2016	51,607,143
Issuance of restricted shares (in shares)	324,184
Cancellation of restricted shares (in shares)	(87,849)
Stock based compensation		3,156			3,156
Stock option exercises		1,639			1,639
Stock option exercises (in shares)	313,372
Tax withholdings related to net share settlements of stock-based compensation awards		(318)			(318)
Dividends paid		(10,366)			(10,366)
Foreign currency translation adjustments				45	45
Net income			10,819		10,819
Balance at Dec. 31, 2017	$ 5	180,109	(36,239)	(1)	$ 143,874
Balance (in shares) at Dec. 31, 2017	52,156,850				52,156,850
Adoption of revenue recognition standard (see Note 1)			(60)		$ (60)
Issuance of restricted shares (in shares)	395,282
Cancellation of restricted shares (in shares)	(44,042)
Stock based compensation		1,215			1,215
Dividends paid		(5,200)			(5,200)
Foreign currency translation adjustments				(7)	(7)
Net income			8,969		8,969
Balance at Jun. 30, 2018	$ 5	$ 176,124	$ (27,331)	$ (8)	$ 148,790
Balance (in shares) at Jun. 30, 2018	52,508,090				52,508,090

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017	Jun. 30, 2018	Dec. 31, 2017	Jun. 30, 2017
Cash Flows From Operating Activities
Net income	$ 4,958	$ 7,723	$ 8,969	$ 15,732	$ 10,819
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation & amortization			13,978	12,592
Amortization of debt issuance costs			338	349
Loss on disposals of property, plant and equipment			344	152
Deferred rent			1,877	1,552
Stock based compensation			1,215	1,770
Deferred income taxes			1,019	2,523
Changes in operating assets and liabilities:
Receivables			(836)	(610)
Inventories			(15,167)	7,009
Prepaid expenses and other assets			(1,217)	5,139
Accounts payable			2,016	(1,015)
Income tax receivable / payable			2,281	382
Accrued expenses and other liabilities			4,459	(10,747)
Net cash provided by operating activities			19,276	34,828
Cash Flows From Investing Activities
Purchases of property, plant and equipment			(13,149)	(20,000)
Proceeds from the sale of property, plant and equipment			15
Net cash used in investing activities			(13,134)	(20,000)
Cash Flows From Financing Activities
Payments of long-term debt and capital lease obligations			(32,638)	(34,646)
Advances on line of credit			35,000	25,000
Dividends paid			(5,200)	(5,168)
Proceeds from exercise of stock options				102
Employee taxes paid for shares withheld			(30)	(211)
Net cash used in financing activities			(2,868)	(14,923)
Effect of exchange rate changes on cash			(8)	8
Net change in cash			3,266	(87)
Cash, cash equivalents and restricted cash beginning of period			7,476	12,948	12,948
Cash, cash equivalents and restricted cash end of period	10,742	12,861	10,742	12,861	7,476
Cash and cash equivalents						$ 9,907	$ 6,621	$ 12,006
Restricted cash						835	855	855
Long-term restricted cash
Cash, cash equivalents and restricted cash end of period	$ 10,742	$ 12,861	7,476	12,948	$ 12,948	$ 10,742	$ 7,476	$ 12,861
Supplemental disclosure of cash flow information
Purchases of property, plant and equipment included in accounts payable and accrued expenses			1,488	2,407
Cash paid for interest			1,124	936
Cash paid (received) for income taxes, net			$ 186	$ 5,817

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Background

6 Months Ended

Jun. 30, 2018

Background [Abstract]

Background

Note 1: Background

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

The Company is a specialty retailer of natural stone andman-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 June 30, 2018, the Company had 140 stores in 31 states and the District of Columbia, with an average size of approximately 20,200 square feet. The Company also sells products on its website. The Company has distribution centers located in Michigan, New Jersey, Oklahoma, Virginia and Wisconsin. The Company has a sourcing operation located in China.

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

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

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board(“FASB”) issued a final standard on revenue from contracts with customers. This new standard introduces a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In 2016, the FASB issued several amendments to the standard.  The Company adopted this standard as of January 1, 2018 using the modified retrospective transition method.  See Note 2 for further details.

In November 2016, the FASB issued new guidance on restricted cash on the statement of cash flows. The new guidance requires the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown in the statement of cash flows. The Company adopted the new standard as of March 31, 2018 using the retrospective transition method. The Company’s restricted cash balance was $0.8 million as of June 30, 2018. Upon adopting the new standard, the Company no longer presents the release of restricted cash as a financing cash inflow. Instead, restricted cash and long-term restricted cash balances are included in the beginning and ending cash, cash equivalents and restricted cash balances in the Consolidated Statement of Cash Flows. In connection with the adoption of this standard, $6.0 million received from restricted cash accounts during the six months ended June 30, 2017 that was previously presented as a financing cash inflow was reclassified to the beginning cash, cash equivalents and restricted cash balances in the Consolidated Statement of Cash Flows.

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued a standard that primarily requires organizations that lease assets to recognize the rights and obligations created by those leases on the consolidated balance sheet.  The standard is effective in fiscal year 2019, with early adoption permitted. The Company expects the primary impact upon adoption will be the recognition, on a discounted basis, of minimum commitments under non-cancelable operating leases on the consolidated balance sheets resulting in the recording of right of use assets and lease obligations.  The Company’s minimum commitments under non-cancelable operating leases are disclosed in Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.  The Company has identified its lease management system and is in the process of identifying and evaluating the applicable leases.  The Company is currently assessing the effect the new standard will have on its consolidated financial statements.

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Revenues

6 Months Ended

Jun. 30, 2018

Revenues [Abstract]

Revenues

Note 2: Revenues

On January 1, 2018, the Company adopted Accounting Standards Update No. 2014-09 (Topic 606), “Revenue from Contracts with Customers,” using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605.  The adoption of Topic 606 had a cumulative impact adjustment to opening retained earnings of $0.1 million as of January 1, 2018 and did not have an impact on revenues recognized for the three and six months ended June 30, 2018.

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to our 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 six months ended
	June 30,				June 30,
	2018		2017		2018		2017
Man-made tiles	47	%	43	%	46	%	42	%
Natural stone tiles	28		33		28		34
Setting and maintenance materials	13		11		13		11
Accessories	10		11		11		11
Delivery service	2		2		2		2
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 and website.  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 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 or online 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 discounts applied to an order are allocated proportionately to the base price of the goods and services ordered.  Deposits made by customers are recorded in other accrued liabilities. Deferred revenues associated with customer deposits are recognized at the time the Company transfers control of the items ordered or renders the delivery service. In the event an order is partially fulfilled as of the end of a reporting period, revenue will be recognized based on the transaction price allocated to the goods delivered and services rendered. The customer deposit balance was $8.1 million as of each ofJune 30, 2018 and December 31, 2017. Revenues recognized during the six months ended June 30, 2018included in the customer deposit balance as of the beginning of the period were $7.7 million.

The Company extends financing to qualified professional customers who apply for credit.  The accounts receivable balance was $3.2 million and $2.4 million as of June 30, 2018 and December 31, 2017, respectively.  Customers who qualify for an account receive 30-day payment terms.  The Company expects that the customer will pay for the goods and services ordered within one year from the date the order is placed.  Accordingly, the Company qualifies for the practical expedient outlined in ASC 606-10-32-18 and does not adjust the promised amount of consideration for the effects of the financing component. 

Customers may return purchased items for an exchange or refund.  The Company records a reserve for estimated product returns based on the historical returns trends and the current product sales performance.  Historically, the sales returns reserve was presented net of cost of sales in other current liabilities.  Upon adoption of Topic 606, the Company presents the sales returns reserve as an other current liability and the estimated value of the inventory that will be returned as an other current asset in the Consolidated Balance Sheet.  The components of the sales returns reserve reflected in the Consolidated Balance Sheet as of June 30, 2018 and December 31, 2017are as follows:

	(in thousands)
	June 30,		December 31,
	2018		2017(1)
Other current liabilities	$	5,792	$	3,139
Other current assets		1,651		-
Sales returns reserve, net	$	4,141	$	3,139

(1)As of December 31, 2017, the sales returns reserve of $3.1 million was presented net of the expected value of inventory to be returned of $0.9 million.

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Inventories

6 Months Ended

Jun. 30, 2018

Inventories [Abstract]

Inventories

Note 3: Inventories

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

	(in thousands)
	June 30,		December 31,
	2018		2017
Finished goods	$	83,521	$	65,843
Raw materials		2,288		1,660
Finished goods in transit		14,617		17,756
Total	$	100,426	$	85,259

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 million and $0.2 million as of June 30, 2018 and December 31, 2017, respectively. 

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Income Taxes

6 Months Ended

Jun. 30, 2018

Income Taxes [Abstract]

Income Taxes

Note 4: Income taxes

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, including, but not limited to, a reduction of the corporate income tax rate to 21% effective January 1, 2018, and a one-time mandatory transition tax on accumulated foreign earnings, a tax on global intangible low taxed income (“GILTI”), and the repeal of the domestic manufacturing deduction for 2018. The Company recognized the effect of the tax law changes in the period of enactment, including determining the transition tax, re-measuring the Company’s U.S. deferred tax assets and liabilities and reassessing the net realizability of the Company’s deferred tax assets and liabilities. Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act,(“SAB 118”) allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation is expected throughout 2018, the Company considers the accounting of the transition tax, deferred tax re-measurements and other items to be provisional due to the forthcoming guidance and the Company’s ongoing analysis of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with SAB 118. While the Company does not expect to incur a current tax on GILTI relative to 2018 operations, the Company has not yet elected an accounting policy related to GILTI.

The Company's effective tax rate on net income before income taxes for the three months ended June 30, 2018 and 2017 was 28.0% and 31.1%, respectively. The Company’s effective tax rate on net income before taxes for the six months ended June 30, 2018 and 2017 was 28.1% and 35.3%, respectively.The difference between the Company’s effective rate of 28.0% and the expected federal statutory rate of 21.0% for the three and six months ended June 30, 2018 is primarily due to state income taxes.

For the three months ended June 30, 2018 and 2017, the Company recorded a provision for income taxes of $1.9 million and $3.5 million, respectively. For the six months ended June 30, 2018 and 2017, the Company recorded a provision for income taxes of $3.5 million and $8.6 million, respectively. The decrease in the provision for income taxes for both the three and six months ended June 30, 2018 and 2017is due to lower pretax earnings as well as the decrease in the corporate tax rate.

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

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Earnings Per Share

6 Months Ended

Jun. 30, 2018

Earnings Per Share [Abstract]

Earnings Per Share

Note 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)
		For the three months ended				For the six months ended
		June 30,				June 30,
		2018		2017		2018		2017
Net income		$	4,958	$	7,723	$	8,969	$	15,732
Weighted average shares outstanding - basic			51,887,094		51,633,150		51,884,402		51,578,691
Effect of dilutive securities attributable to stock based awards			132,787		590,033		111,861		532,443
Weighted average shares outstanding - diluted			52,019,881		52,223,183		51,996,263		52,111,134
Income per common share:
Basic		$	0.10	$	0.15	$	0.17	$	0.31
Dilutive		$	0.10	$	0.15	$	0.17	$	0.30
Anti-dilutive securities excluded from earnings per share calculation			2,298,350		209,570		2,107,629		254,511

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Other Accrued Liabilities

6 Months Ended

Jun. 30, 2018

Other Accrued Liabilities [Abstract]

Other Accrued Liabilities

Note 6: Other Accrued Liabilities

Other accrued liabilities consisted of the following:

	(in thousands)
	June 30,		December 31,
	2018		2017
Customer deposits	$	8,080	$	8,064
Accrued wages and salaries		3,795		2,853
Sales returns reserve		5,792		3,139
Payroll and sales taxes		3,233		2,491
Other current liabilities		6,237		5,866
Total other accrued liabilities	$	27,137	$	22,413

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Long-term Debt

6 Months Ended

Jun. 30, 2018

Long-term Debt [Abstract]

Long-term Debt

Note 7: Long-term Debt

On June 2, 2015, Holdings and its operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Fifth Third Bank, Bank of America, N.A., and Huntington National Bank (as amended, the “Credit Agreement”). The Credit Agreement was most recently amended on April 5, 2018 to adjust the consolidated fixed charge coverage ratio covenant to a minimum of 1.35:1.00 and revise the consolidated total rent adjusted leverage ratio covenant to a maximum of 4.00:1.00.

The Credit Agreement provides the Company with a $125.0 million senior secured credit facility, comprised of a five-year $50.0 million term loan and a $75.0 million revolving line of credit. Borrowings outstanding consisted of $7.0 million on the term loan and $22.5 million on the revolving line of credit as of June 30, 2018. There was $52.5 million available for borrowing on the revolving line of credit as of June 30, 2018, which may be used to support the Company’s growth and for working capital purposes.

Borrowings pursuant to the Credit Agreement bear interest at either a base rate or a LIBOR-based rate, at the option of the Company. The LIBOR-based rate will range from LIBOR plus 1.50% to 2.00%, depending on The Tile Shop’s leverage ratio. The base rate is equal to the greatest of: (a) the Federal funds rate plus 0.50%, (b) the Fifth Third Bank “prime rate,” and (c) the Eurodollar rate plus 1.00%, in each case plus 0.50% to 1.00% depending on The Tile Shop’s leverage ratio. At June 30, 2018 the base interest rate was 5.75% and the LIBOR-based interest rate was3.84%.  

The term loan requires quarterly principal payments of $2.5 million for quarters ended September 30, 2018 through March 31, 2020.The Company can elect to prepay the term loan without incurring a penalty.

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, make investments, or enter into transactions with affiliates on other than terms that could be obtained in an arm’s length transaction. The Credit Agreement also includes financial and other covenants including covenants to maintain certain fixed charge coverage ratios and rent adjusted leverage ratios. The Company was in compliance with the covenants as of June 30, 2018.

The Company has standby letters of credit outstanding related to its workers compensation and medical insurance policies.  As of June 30, 2018 and 2017, the standby letters of credit totaled $1.1 million.

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

	June 30, 2018				December 31, 2017
			Unamortized				Unamortized
			Debt Issuance				Debt Issuance
	Principal		Costs		Principal		Costs
Term note payable - interest at 3.84% and 3.06% at June 30, 2018 and December 31, 2017, respectively	$	6,971	$	(15)	$	11,346	$	(36)
Commercial bank credit facility		22,500		-		15,000		-
Variable interest rate bonds (1.69% at December 31, 2017)		-		-		705		-
Total debt obligations		29,471		(15)		27,051		(36)
Less: current portion		6,971		(13)		8,855		(22)
Debt obligations, net of current portion	$	22,500	$	(2)	$	18,196	$	(14)

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Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2018

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

Note 8: 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 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.

The following table sets forth by Level within the fair value hierarchy the Company’s financial assets that were accounted for at fair value on a recurring basis at June 30, 2018 and December 31, 2017 according to the valuation techniques the Company uses to determine their fair values. There have been no transfers of assets among the fair value hierarchies presented.

	Pricing	Fair Value at
	Category	June 30, 2018		December 31, 2017
Assets	(in thousands)
Cash and cash equivalents	Level 1	$	9,907	$	6,621
Restricted cash	Level 1		835		855

The following methods and assumptions were used to estimate the fair value of each class of financial instrument.  There have been no changes in the valuation techniques used by the Company to value the Company’s financial instruments.

· 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.

Fair value measurements also apply to certain non-financial assets and liabilities measured at fair value on a nonrecurring basis.  Property, plant and equipment is measured at fair value when an impairment is recognized and the related assets are written down to fair value. The Company measured the fair value of these assets based on projected cash flows and an estimated risk-adjusted rate of return. Projected cash flows are considered level 3 inputs. During the three and six months ended June 30, 2018, the Company identified property, plant and equipment that would be disposed of prior to the end of their useful lives, which resulted in the recognition of a $0.3 million charge to write-down these assets to their estimated fair value. No impairment charges were recorded during the three and six months ended June 30, 2017.

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.

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Equity Incentive Plans

6 Months Ended

Jun. 30, 2018

Equity Incentive Plans [Abstract]

Equity Incentive Plans

Note 9: 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 and six months ended June 30, 2018 and 2017 include compensation cost for the portion of outstanding awards that vested during those periods. The Company recognizes stock based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Total stock based compensation expense related to stock options was $0.2 million and $0.6 million for the three months ended June 30, 2018 and 2017, respectively. Total stock based compensation expense related to stock options was $0.5 million and $1.2 million for the six months ended June 30, 2018 and 2017, respectively. 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 June 30, 2018, the Company had outstanding stock options to purchase 1,672,804 shares of common stock at a weighted average exercise price of $14.44.

Restricted stock:

The Company awards restricted common shares to selected employees and to non-employee directors. Recipients are not required to provide any consideration other than continued service. 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 $0.4 million and $0.3 million for the three months ended June 30, 2018 and 2017, respectively. Total stock based compensation expense related to restricted stock was $0.7 million and $0.6 million for the six months ended June 30, 2018 and 2017, respectively. Stock based compensation expense pertaining to restricted stock is included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income.

As of June 30, 2018, the Company had 618,091 outstanding restricted common shares.

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New Market Tax Credit

6 Months Ended

Jun. 30, 2018

New Market Tax Credit [Abstract]

New Market Tax Credit

Note 10:New Market Tax Credit

2016 New Market 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 $6.7million 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 $3.1 million to the Investment Funds and, by virtue of such contribution, is entitled to substantially all of the tax benefits derived from the NMTCs, while the Company effectively received net loan proceeds equal to U.S. Bank’s contributions to the Investment Fund. This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase U.S. Bank’s interest. The Company believes that U.S. Bank will exercise the put option in December 2023 at the end of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify U.S. Bank for any loss or recapture of NMTCs related to the financing until such time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement.  

The Company has determined that the financing arrangement with the Investment Fund and CDEs contains a variable interest entity (“VIE”). The ongoing activities of the Investment Fund – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the Investment Fund. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to the structure; U.S. Bank’s lack of a material interest in the underling economics of the project; and the fact that the Company is obligated to absorb losses of the Investment Fund. The Company concluded that it is the primary beneficiary of the VIE and consolidated the Investment Fund, as a VIE, in accordance with the accounting standards for consolidation. In 2016, U.S. Bank’s contributions of $3.1 million, net of syndications 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 $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 June 30, 2018, the balance of the contribution liability was $2.5 million, of which $0.4 million is classified as other accrued liabilities on the Consolidated Balance Sheet and $2.1 million is classified as other long-term liabilities on the Consolidated Balance Sheet.

The Company is able to request reimbursement for certain expenditures made in connection with the expansion of the distribution center in Durant, Oklahoma from the Investment Fund.  Expenditures that qualify for reimbursement include building costs, equipment purchases, and other expenditures tied to the expansion of the facility. During the fiscal year ended December 31, 2017, the Company received reimbursements totaling $6.0 million from the Investment Fund. As of June 30, 2018, the balance in the Investment Fund available for reimbursement to the Company was $0.8 million.

2013 New Market 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 a $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 maybe obligated or entitled to repurchase the investors’ interest. The Company believes that the investors will exercise the put option in September 2020 at the end of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify the investors for any loss or recapture of NMTCs related to the financing until such time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement. 

The Company determined that this financing arrangement contains a VIE.  The ongoing activities of the Tile Shop Investment Fund LLC – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the Tile Shop Investment Fund LLC. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to the structure; the investors lack of a material interest in the underling economics of the project; and the fact that the Company is obligated to absorb losses of the Investment Fund. 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 June 30, 2018, the balance of the contribution liability was $1.4 million, of which $0.7 million is classified as other accrued liabilities on the Consolidated Balance Sheet and $0.7 million is classified as other long-term liabilities on the Consolidated Balance Sheet.

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2018

Commitments and Contingencies [Abstract]

Commitments and Contingencies

Note 11: Commitments and Contingencies

The Company is a nominal defendant in three actions brought derivatively on behalf of the Company by three shareholders in 2015.  The plaintiffs allege that the defendant-directors and/or officers breached their fiduciary duties by failing to adopt adequate internal controls for the Company, by approving false and misleading statements issued by the Company, by causing the Company to violate generally accepted accounting principles and SEC regulations, and by permitting the Company’s primary product to contain illegal amounts of lead. The complaints also allege claims for insider trading and/or unjust enrichment. The Company moved to dismiss the actions, or in the alternative, to stay the actions.  Before the motions were decided, the parties entered into settlement discussions.  As of April 11, 2018, the parties entered into a Stipulation of Settlement to resolve all claims in the three actions, which is subject to the approval of the Delaware Court of Chancery.  Under the terms of settlement, the Board of Directors will adopt, and the Company will implement, certain changes to its policies and practices that address related person transactions, insider trading, compliance, and ethics.  The Stipulation of Settlement also provides that the Company will be liable to pay to plaintiffs and their counsel such amount of attorneys’ fees, expenses, and incentive awards as the Court might award to them. The plaintiffs have formally requested that the Court award them attorneys’ fees and expenses in the amount of $1.7 million and an incentive award of $5,000 for each of the two plaintiffs. The Company intends to oppose the requested amount of attorneys’ fees and expenses as being excessive. The Court is scheduled to hold a hearing on final approval of the settlement on August 23, 2018.

By letter dated May 19, 2016, a shareholder of the Company demanded that the Board of Directors investigate alleged breaches of fiduciary duty related to the same matters described above and take action against certain present and former officers and directors of the Company. The Board of Directors has appointed a committee of two independent directors to investigate and evaluate the matters raised in the demand letter, and to recommend to the Company’s Board of Directors what actions, if any, should be taken by the Company with respect to the matters raised in the demand letter. The settlement of the three derivative actions described in the preceding paragraph, if approved by the Delaware Court of Chancery, will resolve this shareholder demand.

Based on the terms of the Settlement and range of potential award of attorneys’ fees and expenses, the Company does not believe the amount of losses resulting from the derivative actions and demands will have a material impact on its financial statements.

The Company is also, from time to time, subject to claims and disputes arising in the normal course of business.  In the opinion of management, while the outcome of such claims and disputes cannot be predicted with certainty, the Company’s ultimate liability in connection with these matters is not expected to have a material adverse effect on the results of operations, financial position, or cash flows.

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Related Party Transactions

6 Months Ended

Jun. 30, 2018

Related Party Transactions [Abstract]

Related Party Transactions

Note 12: Related Party Transactions

On July 9, 2018 Fumitake Nishi, the brother-in-law of our interim CEO Robert Rucker and a former Company employee, informed us he had reacquired a majority of the equity of one of our key vendors, Nanyang Helin Stone Co. Ltd (“Nanyang”).  Nanyang supplies us with natural stone products including hand-crafted mosaics, listellos and other accessories. During 2016, 2017 and the first six months of 2018, we purchased approximately $8.4 million, $12.8 million and $5.7 million, respectively, of products from Nanyang.  Mr. Nishi’s employment in our Company was terminated on January 1, 2014 as a result of several violations of our code of business conduct and ethics policy.  Certain of those violations involved his undisclosed ownership of Nanyang at that time. 

Management and the Audit Committee have evaluated the relationship and determined that it would be in the Company’s best interests to continue purchasing products from Nanyang.  The Company believes Nanyang provides an important combination of quality, product availability and pricing, and relying solely on other vendors to supply similar product to the Company would not be in the Company’s best interests.  The Company and the Committee will review future purchases from Nanyang and compare the pricing for products purchased from Nanyang to the pricing of same or similar products purchased from unrelated vendors.

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Subsequent Events

6 Months Ended

Jun. 30, 2018

Subsequent Events [Abstract]

Subsequent Events

Note 13: Subsequent Events

On July 19, 2018, the Company declared a $0.05 dividend to stockholders of record as of the close of business on July 30, 2018. The dividend will be paid on August 10, 2018.

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Revenues (Tables)

6 Months Ended

Jun. 30, 2018

Revenues [Abstract]

Schedule of Revenues Disaggregated by Product Category

	For the three months ended				For the six months ended
	June 30,				June 30,
	2018		2017		2018		2017
Man-made tiles	47	%	43	%	46	%	42	%
Natural stone tiles	28		33		28		34
Setting and maintenance materials	13		11		13		11
Accessories	10		11		11		11
Delivery service	2		2		2		2
Total	100	%	100	%	100	%	100	%

Schedule of Components of Returns Reserve

	(in thousands)
	June 30,		December 31,
	2018		2017(1)
Other current liabilities	$	5,792	$	3,139
Other current assets		1,651		-
Sales returns reserve, net	$	4,141	$	3,139

(1)As of December 31, 2017, the sales returns reserve of $3.1 million was presented net of the expected value of inventory to be returned of $0.9 million.

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Inventories (Tables)

6 Months Ended

Jun. 30, 2018

Inventories [Abstract]

Schedule of Inventories

	(in thousands)
	June 30,		December 31,
	2018		2017
Finished goods	$	83,521	$	65,843
Raw materials		2,288		1,660
Finished goods in transit		14,617		17,756
Total	$	100,426	$	85,259

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Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2018

Earnings Per Share [Abstract]

Schedule of Earnings Per Share

	(all amounts in thousands except share and per share data)
		For the three months ended				For the six months ended
		June 30,				June 30,
		2018		2017		2018		2017
Net income		$	4,958	$	7,723	$	8,969	$	15,732
Weighted average shares outstanding - basic			51,887,094		51,633,150		51,884,402		51,578,691
Effect of dilutive securities attributable to stock based awards			132,787		590,033		111,861		532,443
Weighted average shares outstanding - diluted			52,019,881		52,223,183		51,996,263		52,111,134
Income per common share:
Basic		$	0.10	$	0.15	$	0.17	$	0.31
Dilutive		$	0.10	$	0.15	$	0.17	$	0.30
Anti-dilutive securities excluded from earnings per share calculation			2,298,350		209,570		2,107,629		254,511

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Other Accrued Liabilities (Tables)

6 Months Ended

Jun. 30, 2018

Other Accrued Liabilities [Abstract]

Schedule of Other Accrued Liabilities

	(in thousands)
	June 30,		December 31,
	2018		2017
Customer deposits	$	8,080	$	8,064
Accrued wages and salaries		3,795		2,853
Sales returns reserve		5,792		3,139
Payroll and sales taxes		3,233		2,491
Other current liabilities		6,237		5,866
Total other accrued liabilities	$	27,137	$	22,413

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Long-term Debt (Tables)

6 Months Ended

Jun. 30, 2018

Long-term Debt [Abstract]

Schedule of Long-Term Debt

	June 30, 2018				December 31, 2017
			Unamortized				Unamortized
			Debt Issuance				Debt Issuance
	Principal		Costs		Principal		Costs
Term note payable - interest at 3.84% and 3.06% at June 30, 2018 and December 31, 2017, respectively	$	6,971	$	(15)	$	11,346	$	(36)
Commercial bank credit facility		22,500		-		15,000		-
Variable interest rate bonds (1.69% at December 31, 2017)		-		-		705		-
Total debt obligations		29,471		(15)		27,051		(36)
Less: current portion		6,971		(13)		8,855		(22)
Debt obligations, net of current portion	$	22,500	$	(2)	$	18,196	$	(14)

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Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2018

Fair Value of Financial Instruments [Abstract]

Summary of Fair Value of Financial Assets Measured on a Recurring Basis

	Pricing	Fair Value at
	Category	June 30, 2018		December 31, 2017
Assets	(in thousands)
Cash and cash equivalents	Level 1	$	9,907	$	6,621
Restricted cash	Level 1		835		855

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Background (Narrative) (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2017 USD ($)	Jun. 30, 2018 USD ($) ft² store state	Dec. 31, 2017 USD ($)
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Number of stores | store		140
Number of states in which entity operates | state		31
Area of stores | ft²		20,200
Restricted cash	$ 855	$ 835	$ 855
Previously Reported [Member]
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Proceeds from restricted cash, financing activities	$ 6,000

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Revenues (Narrative) (Details) - USD ($)	6 Months Ended
	Jun. 30, 2018	Dec. 31, 2017
Revenue from Contract with Customer Disclosure [Line Items]
Cumulative impact adjustment to retained earnings	$ (27,331,000)	$ (36,239,000)
Customer deposit balance	8,100,000
Customer deposit balance, revenues recognized	7,700,000
Accounts receivable	3,217,000	2,381,000
Difference between Revenue Guidance in Effect before and after Topic 606 [Member] | Accounting Standards Update 2014-09 [Member]
Revenue from Contract with Customer Disclosure [Line Items]
Cumulative impact adjustment to retained earnings	$ 0	$ 100,000

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Revenues (Schedule of Revenues Disaggregated by Product Category) (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Disaggregation of Revenue [Line Items]
Total revenue	100.00%	100.00%	100.00%	100.00%
Man-Made Tiles [Member]
Disaggregation of Revenue [Line Items]
Total revenue	47.00%	43.00%	46.00%	42.00%
Natural Stone Tiles [Member]
Disaggregation of Revenue [Line Items]
Total revenue	28.00%	33.00%	28.00%	34.00%
Setting And Maitenance Materials [Member]
Disaggregation of Revenue [Line Items]
Total revenue	13.00%	11.00%	13.00%	11.00%
Accessories [Member]
Disaggregation of Revenue [Line Items]
Total revenue	10.00%	11.00%	11.00%	11.00%
Delivery Service [Member]
Disaggregation of Revenue [Line Items]
Total revenue	2.00%	2.00%	2.00%	2.00%

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Revenues (Schedule of Components of Returns Reserve) (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017		Jun. 30, 2018
Revenues [Abstract]
Other current liabilities	$ 3,139	[1]	$ 5,792
Other current assets			1,651
Sales return reserve, net	3,139	[1]	$ 4,141
Inventory expected to be returned	$ 900

[1] As of December 31, 2017, the sales returns reserve of $3.1 million was presented net of the expected value of inventory to be returned of $0.9 million.

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Inventories (Schedule of Inventories) (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Inventories [Abstract]
Finished goods	$ 83,521	$ 65,843
Raw materials	2,288	1,660
Finished goods in transit	14,617	17,756
Total	100,426	85,259
Inventory, provision for shrinkage and other	$ 500	$ 200

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Income Taxes (Narrative) (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Income Taxes [Abstract]
Federal statutory rate			21.00%
Effective income tax rate	28.00%	31.10%	28.10%	35.30%
Provision for income taxes	$ 1,924,000	$ 3,491,000	$ 3,505,000	$ 8,566,000
Liability for uncertain tax positions	$ 0	$ 0	0	0
Income tax interest and penalties related to uncertain tax positions			$ 0	$ 0

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Earnings Per Share (Schedule of Earnings Per Share) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Earnings Per Share [Abstract]
Net income	$ 4,958	$ 7,723	$ 8,969	$ 15,732	$ 10,819
Weighted-average shares outstanding - basic	51,887,094	51,633,150	51,884,402	51,578,691
Effect of dilutive securities attributable to stock-based awards	132,787	590,033	111,861	532,443
Weighted-average shares outstanding - diluted	52,019,881	52,223,183	51,996,263	52,111,134
Income per common share: Basic	$ 0.10	$ 0.15	$ 0.17	$ 0.31
Income per common share: Dilutive	$ 0.10	$ 0.15	$ 0.17	$ 0.30
Anti-dilutive securities excluded from earnings per share calculation	2,298,350	209,570	2,107,629	254,511

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Other Accrued Liabilities (Schedule of Other Accrued Liabilities) (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Other Accrued Liabilities [Abstract]
Customer deposits	$ 8,080	$ 8,064
Accrued wages and salaries	3,795	2,853
Sales return reserve	5,792	3,139
Payroll and sales taxes	3,233	2,491
Other current liabilities	6,237	5,866
Total other accrued liabilities	$ 27,137	$ 22,413

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Long-term Debt (Narrative) (Details) - USD ($) $ in Millions		6 Months Ended
	Apr. 05, 2018	Jun. 30, 2018	Dec. 31, 2017	Jun. 30, 2017
Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Credit facility, available borrowing capacity		$ 52.5
Term Loan [Member]
Debt Instrument [Line Items]
Credit facility effective interest rate		3.84%	3.06%
Credit Agreement [Member]
Debt Instrument [Line Items]
Credit facility, maximum borrowing capacity		$ 125.0
Credit Agreement [Member] | London Interbank Offered Rate (LIBOR) [Member]
Debt Instrument [Line Items]
Credit facility effective interest rate		3.84%
Credit Agreement [Member] | Federal Funds Rate [Member]
Debt Instrument [Line Items]
Credit facility, spread on variable interest rate		0.50%
Credit Agreement [Member] | Eurodollar [Member]
Debt Instrument [Line Items]
Credit facility, spread on variable interest rate		1.00%
Credit Agreement [Member] | Base Rate [Member]
Debt Instrument [Line Items]
Credit facility effective interest rate		5.75%
Credit Agreement [Member] | Minimum [Member]
Debt Instrument [Line Items]
Debt instrument, fixed charge coverage ratio	135.00%
Credit facility, interest rate based on leverage ratio		0.50%
Credit Agreement [Member] | Minimum [Member] | London Interbank Offered Rate (LIBOR) [Member]
Debt Instrument [Line Items]
Credit facility, spread on variable interest rate		1.50%
Credit Agreement [Member] | Maximum [Member]
Debt Instrument [Line Items]
Debt instrument, rent adjusted leverage ratio	400.00%
Credit facility, interest rate based on leverage ratio		1.00%
Credit Agreement [Member] | Maximum [Member] | London Interbank Offered Rate (LIBOR) [Member]
Debt Instrument [Line Items]
Credit facility, spread on variable interest rate		2.00%
Credit Agreement [Member] | Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Credit facility, maximum borrowing capacity		$ 75.0
Line of credit outstanding		22.5
Credit Agreement [Member] | Term Loan [Member]
Debt Instrument [Line Items]
Credit facility, maximum borrowing capacity		$ 50.0
Credit facility term		5 years
Loan payable		$ 7.0
Credit Agreement [Member] | Letter of Credit [Member]
Debt Instrument [Line Items]
Line of credit outstanding		1.1		$ 1.1
September 30, 2018 to March 31, 2020 [Member] | Credit Agreement [Member] | Term Loan [Member]
Debt Instrument [Line Items]
Quarterly principal payments		$ 2.5

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Long-term Debt (Schedule of Long-Term Debt) (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Debt Instrument [Line Items]
Principal, Total debt obligations	$ 29,471	$ 27,051
Unamortized Debt Issuance Costs, Total debt obligations	(15)	(36)
Principal, Less: current portion	6,971	8,855
Unamortized Debt Issuance Costs, Less: current portion	(13)	(22)
Principal, Debt obligations, net of current poriton	22,500	18,196
Unamortized Debt Issuance Costs, Debt obligations, net of current portion	(2)	(14)
Term Loan [Member]
Debt Instrument [Line Items]
Principal, Total debt obligations	6,971	11,346
Unamortized Debt Issuance Costs, Total debt obligations	$ (15)	$ (36)
Effective interest rate	3.84%	3.06%
Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Principal, Total debt obligations	$ 22,500	$ 15,000
Variable Rate Debt [Member]
Debt Instrument [Line Items]
Principal, Total debt obligations		$ 705
Effective interest rate		1.69%

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Fair Value of Financial Instruments (Narrative) (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Fair Value of Financial Instruments [Abstract]
Asset impairment charges	$ 300,000	$ 0	$ 300,000	$ 0

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Fair Value of Financial Instruments (Summary of Fair Value of Financial Assets Measured on a Recurring Basis) (Details) - Level 1 [Member] - Fair Value, Measurements, Recurring [Member] - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	$ 9,907	$ 6,621
Restricted cash	$ 835	$ 855

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Equity Incentive Plans (Narrative) (Details) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 0.2	$ 0.6	$ 0.5	$ 1.2
Stock options outstanding	1,672,804		1,672,804
Stock options outstanding, weighted average exercise price	$ 14.44		$ 14.44
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 0.4	$ 0.3	$ 0.7	$ 0.6
Restricted stock outstanding	618,091		618,091

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New Market Tax Credit (Narrative) (Details) - USD ($) $ in Millions	1 Months Ended		6 Months Ended	12 Months Ended
	Dec. 31, 2016	Jul. 31, 2013	Jun. 30, 2018	Dec. 31, 2017
New Market Tax Credit Disclosure [Line Items]
Reimbursements received				$ 6.0
Restricted cash			$ 0.8
Chase and US Bank [Member]
New Market Tax Credit Disclosure [Line Items]
Contribution to affiliate		$ 5.6
Twain Investment Fund 192 [Member]
New Market Tax Credit Disclosure [Line Items]
Net proceeds from contribution	$ 1.9
Contribution liability compliance period			7 years
Contribution liability			$ 2.5
Contribution liability, current			0.4
Contribution liability, noncurrent			$ 2.1
Twain Investment Fund 192 [Member] | Tile Shop Holdings [Member]
New Market Tax Credit Disclosure [Line Items]
Syndicate costs	1.2
Twain Investment Fund 192 [Member] | Tile Shop Lending [Member]
New Market Tax Credit Disclosure [Line Items]
Loan amount	$ 6.7
Loan interest rate	1.37%
Loan maturity date			Dec. 31, 2046
Tile Shop Investment Fund [Member]
New Market Tax Credit Disclosure [Line Items]
Contribution to affiliate		4.4
Contribution liability compliance period			7 years
Contribution liability			$ 1.4
Contribution liability, current			0.7
Contribution liability, noncurrent			$ 0.7
Tile Shop Investment Fund [Member] | Tile Shop Holdings [Member]
New Market Tax Credit Disclosure [Line Items]
Syndicate costs		1.2
Tile Shop Investment Fund [Member] | Tile Shop Lending [Member]
New Market Tax Credit Disclosure [Line Items]
Loan amount		13.5
U.S. Bank Community [Member] | Twain Investment Fund 192 [Member]
New Market Tax Credit Disclosure [Line Items]
Contribution to affiliate	$ 3.1
U.S. Bank Community [Member] | Oklahoma [Member]
New Market Tax Credit Disclosure [Line Items]
Financing agreement project cost	$ 9.2
Chase and US Bank [Member] | Oklahoma [Member]
New Market Tax Credit Disclosure [Line Items]
Financing agreement project cost		$ 19.1

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Commitments and Contingencies (Narrative) (Details) $ in Millions	3 Months Ended	6 Months Ended	12 Months Ended
	Mar. 31, 2018 item	Jun. 30, 2018 USD ($) $ / plaintiff	Dec. 31, 2015 lawsuit plaintiff
Related Party Transactions Class Action [Member]
Loss Contingencies [Line Items]
Requested incentive per plaintiff | $ / plaintiff		5,000
Tile Shop Holdings, Inc. Stockholder Derivative Litigation [Member]
Loss Contingencies [Line Items]
Number of actions | lawsuit			3
Number of plaintiffs | plaintiff			3
Requested court award | $		$ 1.7
Number of committee members | item	2

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Related Party Transactions (Narrative) (Details) - USD ($) $ in Millions	6 Months Ended	12 Months Ended
	Jun. 30, 2018	Dec. 31, 2017	Dec. 31, 2016
Nanyang Helin Stone Company [Member]
Related Party Transaction [Line Items]
Payments to related party	$ 5.7	$ 12.8	$ 8.4

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Subsequent Events (Narrative) (Details) - Subsequent Event [Member]	Jul. 19, 2018 $ / shares
Subsequent Event [Line Items]
Dividends payable, date declared	Jul. 19, 2018
Dividends payable, amount per share	$ 0.05
Dividends payable, date of record	Jul. 30, 2018
Dividends payable, date to be paid	Aug. 10, 2018