TILE SHOP HOLDINGS, INC.

We depend on our management information systems to integrate the activities of our stores, to process orders, to manage inventory, to purchase merchandise and to sell and ship goods on a timely basis. We may experience operational problems with our information systems as a result of system failures, viruses, computer “hackers” or other causes. We may incur significant expenses in order to repair any such operational problems. Any significant disruption or slowdown of our systems could cause information, including data related to customer orders, to be lost or delayed, which could result in delays in the delivery of products to our stores and customers or lost sales. Accordingly, if our network is disrupted, we may experience delayed communications within our operations and between our customers and ourselves.

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 December  31, 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 the fiscal year ended December 31, 2017 that was previously presented as a financing cash inflow was reclassified to cash, cash equivalents and restricted cash balances in the Consolidated Statement of Cash Flows.  Additionally, our $6.7 million contribution to the NMTC fund, the $1.9 million received from restricted cash accounts, and the $1.3 million of closing costs incurred in connection with this transaction during the fiscal year ended December 31, 2016 that were previously presented financing cash flows were reclassified to cash, cash equivalents and restricted cash balances.  Contributions made by U.S. Bank Community, LLC to new market tax credit fund totaling $3.2 million during the fiscal year ended December 31, 2016 that were previously not considered financing cash inflows as they related to restricted cash are now classified as financing cash inflows.  See Note 12 for further discussion surrounding New Market Tax Credits.

Upon adopting the new standard, we expect the most significant impact to the financial statements will be the recognition of right of use assets of approximately $142 million to $147 million and lease liabilities of $165 million to $170 million as of January 1, 2019.  We will also adjust the useful life of certain leasehold improvements in the event the application of the hindsight practical expedient results in a change in the expected lease term.  We expect that the change in the useful life assigned to certain leasehold improvements will result in a $14 million to $17 million reduction in fixed assets.  The adoption of the new standard is not expected to have a material impact on net income or cash flows. We are in the process of finalizing our discount rate analysis.

In June 2016, the FASB issued a final standard on accounting for credit losses. The new standard is effective for us in fiscal 2020 and requires a change in credit loss calculations using the expected loss method. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures.

Pursuant to the offer letter agreement, Mr. Lolmaugh is entitled to receive severance benefits if his employment is terminated by us without cause at any time or if he resigns for good reason, subject to execution of a full release in our favor. In such an event, Mr. Lolmaugh is entitled to continued payment of his base salary for six months and an additional payment in an amount equal to six times our contribution amount for the monthly health insurance premium for him during the month immediately prior to termination. Upon a change of control, Mr. Lolmaugh is also entitled to full vesting acceleration with respect to any unvested equity awards if he is not offered employment by the successor entity, or if he is terminated without cause or constructively terminated prior to the first anniversary of the change of control.

Upon adopting the new standard, the Company expects the most significant impact to the financial statements will be the recognition of right of use assets of approximately $142 million to $147 million and lease liabilities of $165 million to $170 million as of January 1, 2019.  The Company will also adjust the useful life of certain leasehold improvements in the event the application of the hindsight practical expedient results in a change in the expected lease term.  The Company expects that the change in the useful life assigned to certain leasehold improvements will result in a $14 million to $17 million reduction in fixed assets.  The adoption of the new standard is not expected to have a material impact on net income or cash flows. The Company is in the process of finalizing its discount rate analysis.

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