# Tile Shop Holdings, Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [Tile Shop Holdings, Inc.](/companies/ttsh.md) (CIK 1552800)
- Form: 10-Q
- Filed: 2024-05-09
- Accepted by EDGAR: May 9, 2024, 12:31 ET
- Period: 2024-03-31
- Accession: 0001552800-24-000009
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1552800/000155280024000009/ttsh-20240331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1552800/000155280024000009/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $91.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-01-01 to 2024-03-31 | $31.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2024-01-01 to 2024-03-31 | $60.3m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2024-01-01 to 2024-03-31 | $58.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | $2.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $166.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $428.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | $1.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.04 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.04 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 43,717,347 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $18.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $2.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-03-31 | $24.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-03-31 | $126.7m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $325.9m | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $87.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-31 | $204.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-03-31 | $121.3m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 23,915 characters.

*The following discussion and analysis of Tile Shop Holdings, Inc.’s (“Holdings,” and together with its wholly owned subsidiaries, the “Company,” “we,” “us,” or “our”) financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 and our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.*

### Forward-Looking Statements

*This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “depend,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “seek,” “should,” “target,” “will,” “will likely result,” “would,” and similar expressions or variations, although some forward-looking statements are expressed differently. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q are based on current expectations and assumptions that are subject to risks and uncertainties, many of which are difficult to predict and are outside of our control, that may cause our actual results, performance, or achievements to differ materially from any expected future results, performance, or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, our anticipated new store openings, remodeling plans, and growth opportunities; our business strengths, marketing strategies, competitive advantages and role in our industry and markets; an overall decline in the health of the economy, the tile industry, consumer confidence and spending, and the housing market, including as a result of rising inflation or interest rates, instability in the global banking system, geopolitical instability or the possibility of an economic downturn or recession or other macroeconomic factors; the impact of ongoing supply chain disruptions and inflationary cost pressures, including increased materials, labor, energy, and transportation costs and decreased discretionary consumer spending; our ability to successfully implement and realize the anticipated benefits of our strategic plan; our ability to successfully anticipate consumer trends; any statements with respect to dividends or stock repurchases and timing, methods, and payment of same; the effectiveness of our marketing strategy; potential fluctuations in our comparable store sales; our expectations regarding our and our customers’ financing arrangements and our ability to obtain additional capital, including potential difficulties of obtaining financing due to market conditions resulting from geopolitical conditions and other economic factors; supply costs and expectations, including the continued availability of sufficient products from our suppliers, risks related to relying on foreign suppliers, and the potential impact of the Russia-Ukraine, Israel/Hamas and other geopolitical conflicts on, among other things, product availability and pricing and timing and cost of deliveries; our expectations with respect to ongoing compliance with the terms of the Credit Agreement (as defined below), including increasing interest rates; our ability to provide timely delivery to our customers; the effect of regulations on us and our industry, and our suppliers’ compliance with such regulations, including any environmental or climate change-related requirements; the impact of corporate citizenship and environmental, social and governance matters; labor shortages and our expectations regarding the effects of employee recruiting, training, mentoring, and retention on our ability to recruit and retain employees; tax-related risks; the potential impact of cybersecurity breaches or disruptions to our management information systems; our ability to successfully implement our information technology and other digital initiatives; our ability to effectively manage our online sales; costs and adequacy of insurance; the potential impact of natural disasters, which may worsen or increase due to the effects of climate change, and other catastrophic events; risks inherent in operating as a holding company; fluctuations in material and energy costs, including ongoing volatility of oil and gas prices; our ability to remediate the material weaknesses in our internal control over financial reporting; the potential outcome of any legal proceedings; risks related to ownership of our common stock; and those factors set forth in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 and in this Form 10-Q.*

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

*We intend to use our website, investors.tileshop.com, as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD of the Securities and Exchange Commission (“SEC”). Such disclosures will be* *included on our website under the heading News and Events. Accordingly, investors should monitor such portions of our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. Information contained on or accessible through our website is not a part of, and is not incorporated by reference into, this Quarterly Report on Form 10-Q or any other report or document we file with the SEC. Any reference to our website is intended to be an inactive textual reference only.*

### Overview and Recent Trends

We are a specialty retailer of natural stone, man-made and luxury vinyl tiles, setting and maintenance materials, and related accessories in the United States. We offer a wide selection of products, attractive prices, and exceptional customer service in an extensive showroom setting. As of March 31, 2024, we operated 142 stores in 31 states and the District of Columbia, with an average size of approximately 20,000 square feet.

We purchase our tile products and accessories directly from suppliers and manufacture our own setting and maintenance materials, such as thinset, grout, and sealers. We believe that our long-term supplier relationships, together with our design and 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, man-made and luxury vinyl tiles, setting and maintenance materials, and related accessories in the United States.

Our business continues to be impacted by a number of macroeconomic factors, including rising interest rates, and slowing existing home turnover. We believe this is contributing to a slowdown in demand for home improvement products. Our comparable store sales decreased by 10.2% during the three months ended March 31, 2024 due to lower levels of traffic in our stores.

Our first quarter in 2024 included an extra day when compared to the first quarter of 2023. Using average daily sales for the period, we estimate that the impact of the additional day in 2024 resulted in an increase in sales of approximately $1.0 million. At the same time, we believe the impact of the additional day in 2024 was offset by a change in the timing of Easter from April in 2023 to March in 2024.

Our gross margin rate improved by 160 basis points from the first quarter of 2023 to 65.8% for the three months ended March 31, 2024. The improvement in gross margin rate was primarily due to lower levels of international freight and decreases in product costs.

Selling, general and administrative expenses decreased $3.4 million, or 5.5%, from $61.4 million in the first quarter of 2023 to $58.0 million in the first quarter of 2024. The decrease was due to a $2.9 million decrease in variable costs, and a $1.0 million decrease in depreciation expense, which were partially offset by a $0.6 million increase in rent expense.

During the three months ended March 31, 2024, we generated $18.6 million of operating cash flow, which was used to fund $2.7 million of capital expenditures. Cash and cash equivalents increased by $15.4 million from $8.6 million on December 31, 2023 to $24.0 million on March 31, 2024. As of March 31, 2024, we had no borrowings outstanding on our line of credit.

### Key Components of our Consolidated Statements of Income

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

Comparable store sales growth is the percentage change in sales of comparable stores period-over-period. A store is considered comparable on the first day of the 13th full month of operation. When a store is relocated, it is excluded from the comparable store sales 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. Comparable store sales data reported by other companies may be prepared on a different basis and therefore may not be useful for purposes of comparing our results to those of other businesses. Company management believes the comparable store sales growth (decline) metric provides useful information to both management and investors to evaluate the Company’s performance, the effectiveness of its strategy and its competitive position.

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

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

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

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

### Results of Operations

### Comparison of the three months ended March 31, 2024 to the three months ended March 31, 2023

*($ in thousands)*

|  | 2024 | % of sales | 2023 | % of sales(1) |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $91,728 | 100.0% | $102,019 | 100.0% |
| Cost of sales | 31,409 | 34.2% | 36,481 | 35.8% |
| Gross profit | 60,319 | 65.8% | 65,538 | 64.2% |
| Selling, general and administrative expenses | 58,036 | 63.3% | 61,413 | 60.2% |
| Income from operations | 2,283 | 2.5% | 4,125 | 4.0% |
| Interest expense | (166) | (0.2)% | (798) | (0.8)% |
| Income before income taxes | 2,117 | 2.3% | 3,327 | 3.3% |
| Provision for income taxes | (428) | (0.5)% | (815) | (0.8)% |
| Net income | $1,689 | 1.8% | $2,512 | 2.5% |

(1) Amounts do not foot due to rounding.

***Net Sales*** Net sales for the first quarter of 2024 decreased $10.3 million, or 10.1%, compared with the first quarter of 2023. Sales decreased at comparable stores by 10.2% during the first quarter of 2024 compared to the first quarter of 2023, due to a decrease in traffic.

***Gross Profit*** Gross profit decreased $5.2 million, or 8.0%, in the first quarter of 2024 compared to the first quarter of 2023. The gross margin rate was 65.8% and 64.2% during the first quarter of 2024 and 2023, respectively. The improvement in gross margin rate was primarily due to lower levels of international freight and decreases in product costs.

***Selling, General, and Administrative Expenses*** Selling, general, and administrative expenses decreased $3.4 million, or 5.5%, from $61.4 million in the first quarter of 2023 to $58.0 million in the first quarter of 2024. The decrease was due to a $2.9 million decrease in variable costs, and a $1.0 million decrease in depreciation expense, which were partially offset by a $0.6 million increase in rent expense.

***Interest Expense*** Interest expense was $0.2 million and $0.8 million for the first quarter of 2024 and 2023, respectively. The decrease was due to a decrease in average borrowings outstanding on our line of credit.

***Provision for Income Taxes*** The provision for income taxes for the first quarter of 2024 and 2023 was $0.4 million and $0.8 million, respectively. The decrease in the provision for income tax was due to a decrease in pretax income. Our effective tax rate was 20.2% and 24.5% in the first quarter of 2024 and 2023, respectively. The decrease in the effective tax rate was largely due to an increase in the tax benefit associated with employee equity award vestings that occurred during the first quarter of 2024.

### Non-GAAP Measures

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

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

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

The reconciliation of Adjusted EBITDA to net income for the three months ended March 31, 2024 and 2023 is as follows:

*($ in thousands)*

|  | Three Months Ended March 31, 2024 | % of sales | 2023 | % of sales(1) |
| --- | ---: | ---: | ---: | ---: |
| Net income | $1,689 | 1.8% | $2,512 | 2.5% |
| Interest expense | 166 | 0.2% | 798 | 0.8% |
| Provision for income taxes | 428 | 0.5% | 815 | 0.8% |
| Depreciation and amortization | 4,742 | 5.2% | 5,783 | 5.7% |
| Stock based compensation | 392 | 0.4% | 405 | 0.4% |
| Adjusted EBITDA | $7,417 | 8.1% | $10,313 | 10.1% |

(1) Amounts do not foot due to rounding.

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

*($ in thousands)*

|  | March 31, 2024(1) | 2023(1) |
| --- | ---: | ---: |
| Income from Operations (trailing twelve months) | $14,316 | $21,998 |
| Total Assets | 322,685 | 346,695 |
| Less: Accounts payable | (24,560) | (28,002) |
| Less: Income tax payable | (652) | (850) |
| Less: Other accrued liabilities | (31,865) | (37,696) |
| Less: Lease liability | (134,303) | (130,385) |
| Less: Other long-term liabilities | (4,720) | (4,623) |
| Capital Employed | $126,585 | $145,139 |
| Pretax Return on Capital Employed | 11.3% | 15.2% |

(1) Income statement accounts represent the activity for the trailing twelve months ended as of each of the balance sheet dates. Balance sheet accounts represent the average account balance for the four quarters ended as of each of the balance sheet dates.

### Liquidity and Capital Resources

Our principal liquidity requirements have been for working capital and capital expenditures. Our principal sources of liquidity are $24.0 million of cash and cash equivalents at March 31, 2024, our cash flow from operations, and borrowings available under our Credit Agreement. We expect to use this liquidity for maintaining our existing stores, purchasing additional merchandise inventory, and general corporate purposes.

On September 30, 2022, Holdings and its operating subsidiary, The Tile Shop, and certain subsidiaries of each entered into a Credit Agreement with JPMorgan Chase Bank, N.A. and the lenders party thereto, including Fifth Third Bank (the “Credit Agreement”). The Credit Agreement provides us with a senior credit facility consisting of a $75.0 million revolving line of credit through September 30, 2027. Borrowings pursuant to the Credit Agreement initially bear interest at a rate per annum equal to: (i) Adjusted Term SOFR Rate (as defined in the Credit Agreement), plus a margin ranging from 1.25% to 1.75%; (ii) Adjusted Daily Simple SOFR (as defined in the Credit Agreement), plus a margin ranging from 1.25% to 1.75%; or (iii) the Alternate Base Rate (as defined in the Credit Agreement), plus a margin ranging from 0.25% to 0.75%. The margin is determined based on the Rent Adjusted Leverage Ratio (as defined in the Credit Agreement).

The Credit Agreement is secured by virtually all of our assets, including but not limited to, inventory, accounts receivable, equipment and general intangibles. The Credit Agreement contains customary events of default, conditions to borrowing and restrictive covenants, including restrictions on our ability to dispose of assets, engage in acquisitions or mergers, make distributions on or repurchases of capital stock, incur additional debt, incur liens or make investments. The Credit Agreement also includes financial and other covenants, including covenants to maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of no less than 1.20 to 1.00 and a Rent Adjusted Leverage Ratio (as defined in the Credit Agreement) of no greater than 3.50 to 1.00. We were in compliance with the covenants as of March 31, 2024.

We had no borrowings outstanding on our line of credit as of March 31, 2024. We have standby letters of credit outstanding related to our workers’ compensation and medical insurance policies. As of March 31, 2024, standby letters of credit totaled $1.4 million. As of March 31, 2024, there was $73.6 million available for borrowing on the revolving line of credit, which may be used for maintaining our existing stores, purchasing additional merchandise inventory, and general corporate purposes.

We believe that our cash flow from operations, together with our existing cash and cash equivalents and borrowings available under our Credit Agreement, will be sufficient to fund our operations and anticipated capital expenditures over at least the next twelve months and our long-term liquidity requirements.

### Capital Expenditures

Capital expenditures were $2.7 million and $3.4 million for the three months ended March 31, 2024 and 2023, respectively. Capital expenditures in 2024 were primarily due to investments in new stores, store remodels, merchandising, distribution and information technology assets.

### Cash flows

The following table summarizes our cash flow data for the three months ended March 31, 2024 and 2023.

*(in thousands)*

|  | Three Months Ended March 31, 2024 | 2023 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $18,589 | $25,822 |
| Net cash used in investing activities | (2,719) | (3,367) |
| Net cash used in financing activities | (455) | (20,827) |

### Operating activities

Net cash provided by operating activities during the three months ended March 31, 2024 was $18.6 million compared with $25.8 million during the three months ended March 31, 2023. The decrease was primarily attributable to the collection of an income tax refund in the three months ended March 31, 2023 that was not repeated again in 2024, combined with a decrease in net income.

### Investing activities

Net cash used in investing activities totaled $2.7 million for the three months ended March 31, 2024 compared with $3.4 million for the three months ended March 31, 2023. Cash used in investing activities during the three months ended March 31, 2024 was primarily due to investments in store remodels, merchandising, distribution and information technology assets.

### Financing activities

Net cash used in financing activities was $0.5 million for the three months ended March 31, 2024 compared with $20.8 million for the three months ended March 31, 2023. Cash outflows for financing activities during the three months ended March 31, 2023 were primarily related to payments made against our line of credit. We were able to fully repay our line of credit in 2023. Accordingly, cash outflows to repay balances due on our line of credit decreased between the three months ended March 31, 2023 and March 31, 2024, respectively.

Cash and cash equivalents totaled $24.0 million at March 31, 2024 compared with $8.6 million at December 31, 2023. Working capital was $39.0 million at March 31, 2024 compared with $35.8 million at December 31, 2023.

## Market risk

As filed, 195 characters.

There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

## Controls and procedures

As filed, 7,872 characters.

### 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 SEC, and that information relating to the Company is accumulated and communicated to management, including our principal officers, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2024 and have concluded that our disclosure controls and procedures were not effective as of March 31, 2024 due to the material weaknesses in our internal control over financial reporting as described below.

### Material Weakness in Internal Control over Financial Reporting

A material weakness is a significant deficiency, or combination of significant deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, the application of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that compliance with the policies or procedures may deteriorate.

As previously disclosed in our form 10-K for the year ended December 31, 2023, we identified the following two material weaknesses in our internal control over financial reporting:

The ineffective design of the Company’s information technology general controls (“ITGCs”), which stemmed from deficiencies in user access controls, which did not adequately restrict access to the Company’s financial reporting system, did not ensure appropriate segregation of duties, and did not prevent unauthorized individuals from having the ability to create, post and modify journal entries. The material weakness also resulted in the ineffectiveness of automated and manual business process controls throughout the Company’s financial reporting and business transaction cycles that are dependent upon the affected ITGCs.

The breakdown in the operating effectiveness of the Company’s controls designed to identify and ensure timely recognition of new and modified leases, as well as additional deficiencies in the design and operating effectiveness of the Company’s controls to review key inputs underlying certain lease accounting calculations.

These deficiencies resulted in an elevated risk that a material misstatement of our annual or interim financial statements would not be prevented or detected by other compensating controls. Notwithstanding the identified material weaknesses, we believe the consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations, and cash flows for the periods presented in conformity with GAAP.

### Planned Remediation of Material Weaknesses

Management has actively engaged in implementing remediation plans to address the material weaknesses outlined above. Steps taken by management in connection with management’s remediation efforts during the three months ended March 31, 2024 include:

Restricting access in our enterprise resource planning (“ERP”) system to process transactions that could trigger a manual journal entry initiated outside of the park and post process for users who are responsible for reviewing account reconciliations.

Implementing a new monitoring control to identify the population of transactions processed in our ERP system that generate accounting entries that do not go through the park and post process and assessing the compensating controls designed to reduce the risk of misstatement arising from these transactions to an appropriate level.

Adjusting access profiles in the Company’s ERP system to eliminate the ability for a user to modify and subsequently approve a manual journal entry.

Reviewing activity occurring during the quarter to identify and assess the appropriateness of manual journal entries that had been modified and approved by the same user.

Enhanced lease related controls to ensure all new leases and lease modifications are identified in a timely manner as well as to ensure leases and lease related accounts are accounted for appropriately.

We continue to implement the remediation steps with respect to the material weaknesses outlined above which include an ongoing effort to refine the control designed to identify access profiles in our ERP system that result in segregation of duties risks. Each identified material weakness in internal control over financial reporting will not be considered remediated until the applicable controls have been in operation for a sufficient period of time for our management to conclude that such material weakness has been remediated. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting. No assurance can be made that our remediation efforts will be completed in a timely manner or that the updated controls and procedures associated with such efforts will be deemed adequate after being subjected to testing.

### Changes in Internal Control over Financial Reporting

Other than the changes discussed above, there were no changes in internal control over financial reporting (as defined by Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, intends that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

## Risk factors

As filed, 150 characters.

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, 2023.

Filed May 9, 2024.
Source: SEC EDGAR, the filing index for accession 0001552800-24-000009. Last ingested by Listed: Oct 24, 2026, 15:13 ET. No prices; not investment advice.