Tile Shop Holdings
Annual Report 2013

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGECOMMISSIONWashington, D.C. 20549 FORM 10-K ☒☒Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2013or ☐☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from to Commission File Number: 001-35629 TILE SHOP HOLDINGS, INC.(Exact name of registrant as specified in its charter) Delaware45-5538095(State or other jurisdiction of(I.R.S. Employerincorporation or organization)Identification No.) 14000 Carlson Parkway, Plymouth, Minnesota 55441(Address of principal executive offices, including zip code) (763) 852-2901(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of theAct: Title of each className of each exchange on which registeredCommon Stock, $0.0001 par valueThe NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐☐ No ☒☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐☐ No ☒☒ Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ☒☒ No ☐☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data Filerequired 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 suchshorter period that the registrant was required to submit and post such files). Yes ☒☒ No ☐☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm -10K or any amendment to this Form 10K. ☐☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12-b2 of the Exchange Act. Large accelerated filer ☒☒ Accelerated filer ☐☐ Non-accelerated filer ☐☐ Smaller reporting company ☐☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐☐ No ☒☒ The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which thecommon equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recentlycompleted second fiscal quarter was approximately: $1,118,716,430 At February 21, 2014, the registrant had 51,230,600 shares of Common Stock outstanding. 1 TILE SHOP HOLDINGS, INC.FORM 10-KTABLE OF CONTENTS PART I ITEM 1.BUSINESS3 ITEM 1A.RISK FACTORS6 ITEM 1B.UNRESOLVED STAFF COMMENTS14 ITEM 2.PROPERTIES14 ITEM 3.LEGAL PROCEEDINGS15 ITEM 4.MINE SAFETY DISCLOSURES15 PART II ITEM 5.MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES16 ITEM 6.SELECTED FINANCIAL DATA18 ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS19 ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK27 ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA28 ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE28 ITEM 9A.CONTROLS AND PROCEDURES28 ITEM 9B.OTHER INFORMATION29 PART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE30 ITEM 11.EXECUTIVE COMPENSATION34 ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS43 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE45 ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES49 PART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES51 SIGNATURES76 POWER OF ATTORNEY77 2 PART I ITEM 1. BUSINESS Overview We are a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the United States. We offera wide selection of products, attractive prices, and exceptional customer service in an extensive showroom setting. We sell over 4,500 products fromaround the world, including ceramic, porcelain, glass, and stainless steel manufactured tiles and, marble, granite, quartz, sandstone, travertine, slate,and onyx natural tiles, primarily under our proprietary Rush River and Fired Earth brands. We purchase our tile products and accessories directly fromproducers. We manufacture our own setting and maintenance materials, such as thinset, grout, and sealers under our Superior brand name. As ofDecember 31, 2013, we operated 88 stores in 28 states, with an average size of 23,000 square feet. We also sell our products on our website. We believe that our long-term producer relationships, together with our design, manufacturing and distribution capabilities, enable us to offer a broadassortment of high-quality products to our customers, who are primarily homeowners, at competitive prices. We have invested significant resources todevelop our proprietary brands and product sources and believe that we are a leading retailer of stone tiles, accessories, and related materials in the UnitedStates. In 2013, we reported net sales and income from operations of $229.6 million and $33.1 million, respectively. We opened 20 new stores in 2013 and intendto open 20 stores in 2014. As of fiscal year end 2013, 2012 and 2011, we had total assets of $242.8 million, $176.1 million and $119.0 million,respectively. Organizational History Tile Shop Holdings, Inc. (“Holdings”, and together with its wholly owned subsidiaries, the “Company”) was incorporated in Delaware in June 2012. OnAugust 21, 2012, Holdings consummated the transactions contemplated pursuant to that certain Contribution and Merger Agreement dated as of June 27,2012, among Holdings, JWC Acquisition Corp., a publicly-held Delaware corporation (“JWCAC”), The Tile Shop, LLC, a privately-held Delawarelimited liability company (“The Tile Shop”), and certain other parties. Through a series of transactions, The Tile Shop was contributed to and became asubsidiary of Holdings and Holdings effected a business combination with and became a successor issuer to JWCAC. These transactions are referred toherein as the “Business Combination.” Competitive Strengths We believe that the following factors differentiate us from our competitors and position us to continue to grow our specialty tile business. Inspiring Customer Experience Our showrooms bring our products to life. Each showroom features up to 70 different mockups, or vignettes, ofbathrooms, kitchens, fireplaces, foyers, and other settings that showcase our broad array of products. Each store also features over 1,400 hand- crafteddisplay boards showing tile that we offer for sale. Our stores are spacious, well-lit, and organized by product type to make our customers’ shoppingexperience easy. Broad Product Assortment at Attractive Prices We offer over 4,500 manufactured and natural tile products, setting and maintenance materials, andaccessories. We are able to maintain every-day low prices by purchasing tile and accessories directly from producers and manufacturing our own settingand maintenance materials. Customer Service and Satisfaction Our sales personnel are highly-trained and knowledgeable about the technical and design aspects of our products. Weoffer weekly do-it-yourself classes in all of our showrooms. In addition, we provide one-on-one installation training as required to meet customer needs. Weoffer a liberal return policy, with no restocking fees. Worldwide Sourcing Capabilities We have long-standing relationships with producers of our tiles throughout the world and work with them to designproducts exclusively for us. We believe that these direct relationships differentiate us from our competitors, who generally purchase commodity productsthrough distributors. We are often the largest or exclusive customer for many of our producers. Proprietary Branding We sell the majority of our products under our proprietary brand names, which help us to differentiate our products from those ofour competitors. We offer products across a range of price points and quality levels that allow us to target discrete market segments and to appeal to diversegroups of customers. Centralized Distribution System We service our retail locations from four distribution centers. Our distribution centers can cost-effectively service storeswithin a 700-mile radius, providing us with the ability to open new locations in markets where we believe that we have a competitive advantage or seeattractive demographics. 3 Growth Strategy We intend to increase our net sales and profitability through a combination of new store openings, store re-models and same store sales growth. In the fiveyears ended December 31, 2013, we grew through a combination of opening 47 new retail locations and increases in same store sales. We expect to continueto gain market share. Specific elements of our strategy for continued growth include the following: Open New Stores We believe that the highly-fragmented U.S. retail tile market provides us with a significant opportunity to expand our store base. During2013, we opened 20 new stores. We intend to open 20 new stores in 2014, in new markets and our existing markets, northeast, southeast, midwest, andmid-Atlantic regions of the United States. We believe that there will continue to be additional expansion opportunities in the United States. We expect ourstore base growth to increase operational efficiencies. Increase Sales and Profitability of Existing Stores We believe that our ongoing investment in new products, store re-models and training program for oursales associates, together with our associate incentive compensation structure, will result in continued same store sales growth. Sales Model We appeal to customers who desire high-quality products at an attractive value. We principally sell our products directly to homeowners. We also sellproducts to contractors, who are primarily small businesses that have been hired by homeowners to complete tile projects. We believe that due to theaverage cost and relative infrequency of a tile purchase, many of our customers conduct extensive research using multiple channels before making apurchase decision. Our sales strategy emphasizes customer service by providing comprehensive and convenient education tools on our website and in ourstores for our customers to learn about our products and the tile installation process. Our website contains a broad range of information regarding our tileproducts, setting and maintenance materials, and accessories. Customers can order samples, view catalogs, or purchase products from either our stores orwebsite. Customers can choose to have their purchases delivered or picked up at one of our stores. We strive to make our customers’ transactions easy andefficient. Our stores are designed to emphasize our products in a visually appealing showroom format. Our typical store is approximately 23,000 square feet, withapproximately 19,000 square feet devoted to the showroom and the balance being warehouse space, which is used primarily to hold customer orderswaiting to be picked up or delivered. Our stores are typically accessible from major roadways and have significant visibility to passing traffic. We canadapt to a range of existing buildings, whether free-standing or in shopping centers. Unlike many of our competitors, we devote a substantial portion of our retail store space to showrooms, including samples of our over 4,500 products andup to 70 different vignettes of bathrooms, kitchens, fireplaces, foyers, outdoor living, and other settings that showcase our products. Our showrooms aredesigned to provide our customers with a better understanding of how to integrate various types of tile in order to create an attractive presentation in theirhomes. Each store is also equipped with a consumer training center designed to teach customers how to properly install tile. A typical store staff consists of a manager and 6 to 15 sales and warehouse associates. Our store managers are responsible for store operations and foroverseeing our customers’ shopping experience. Our store associates have flexibility to meet or beat competitor pricing. We offer financing to customers through a branded credit card provided by a third-party consumer finance company. These credit cards, which can onlybe used in our stores and on our website, provide customers with a 10% discount on all purchases. In 2013, approximately 6.3% of our sales were madeusing our branded credit card. Marketing We utilize a variety of methods to market to our customer base and attract new customers to our retail locations and website. We establish and maintain ourmarket presence through strong execution of our in-store branding and execution, best-in-class and unique product assortment, personalized customerservice, and attractive and competitive pricing. In addition, we are very active in social media and employ a dynamic, data-driven marketing approachthat focuses on the most qualified customers that are actively researching our products. We also partner extensively with local and national designers aswell as sponsoring nationally recognized home improvement shows. Our advertising expenditures largely fall into the above mentioned categories. Our website is designed to educate consumers and to generate in-store and online sales. Visitors to our website can purchase our products directly as wellas search a comprehensive knowledge base on tile, including frequently asked questions, installation guides, detailed product information, catalogs, andhow-to videos that explain the installation process. Our website and social media efforts have also been devoted to building brand awareness, connectingwith potential customers, and building relationships with satisfied customers. 4 Products We offer a complete assortment of tile products, generally sourced directly from producers, including ceramic, porcelain, glass, and stainless steelmanufactured tiles, marble, granite, quartz, sandstone, travertine, slate, and onyx natural tiles. We also offer a broad range of setting and maintenancematerials, such as thinset, grout and sealers, and accessories, including installation tools, shower and bath caddies, drains, and similar products. We sellmost of our products under our proprietary brand names. In total, we offer over 4,500 different tile, setting and maintenance materials, and accessoryproducts. In 2013, our net sales were 52% from stone products, 32% from ceramic products, and 16% from setting and maintenance products. Theseamounts compare to 53% from stone products, 30% from ceramic products, and 17% from setting and maintenance products in 2012. Manufacturers We have long-standing relationships with manufacturers of our tiles throughout the world and work with them to design products exclusively for us. Webelieve that these direct relationships differentiate us from our competitors, who generally purchase commodity products through distributors. We are oftenthe largest or exclusive customer for many of our suppliers, which we believe enables us to obtain better prices in some circumstances. We currently purchase tile products from approximately 130 different producers. Our top 10 tile suppliers accounted for approximately 52% of our tilepurchases in 2013. We believe that alternative and competitive suppliers are available for most of our products. In 2013, approximately 60% of ourpurchased product was sourced from Asia, 33% from Europe, 4% from North America and 3% from South America. Our foreign purchases are negotiatedand paid for in U.S. dollars. Distribution and Order Fulfillment We take possession of our products in the country of origin and arrange for transportation to our distribution centers located in Wisconsin, Michigan,Virginia and Oklahoma. We maintain a large inventory of products in order to fulfill customer orders and minimize delays in delivery. We manufactureour setting and maintenance materials at our Wisconsin, Michigan, Virginia and Oklahoma locations. We fulfill customer orders primarily by shipping our products to our stores where customers can either pick them up or arrange for home delivery. Ordersplaced on our website are shipped directly to customers’ homes from our distribution centers. We continue to evaluate logistics alternatives to best serviceour retail store base and our customers. We believe that our existing distribution facilities will continue to play an integral role in our growth strategy, andwe expect to establish one or more additional distribution centers in the next five years to support geographic expansion of our retail store base. Competition The retail tile market is highly-fragmented. We compete directly with large national home centers that offer a wide range of home improvement products inaddition to tile, such as Home Depot and Lowe’s; regional and local specialty retailers of tile, such as Tile America, World of Tile, Arizona Tile, CenturyTile, and Floor and Décor; factory-direct stores, such as Dal-Tile and Florida Tile; and a large number of privately-owned, single-site stores. We alsocompete indirectly with companies that sell other types of floor coverings, including wood floors, carpet, and vinyl sheet. The barriers to entry into theretail tile industry are relatively low and new or existing tile retailers could enter our markets and increase the competition that we face. Many of ourcompetitors enjoy competitive advantages over us, such as greater name recognition, longer operating histories, more varied product offerings, and greaterfinancial, technical, and other resources. We believe that the key competitive factors in the retail tile industry include: •product assortment; •product presentation; •customer service; •store location; •immediacy of inventory; and •price. We believe that we compete favorably with respect to each of these factors by providing a highly diverse selection of products to our customers, at anattractive value, in appealing and convenient retail store locations, with exceptional customer service and on-site instructional opportunities. Further, whilesome larger factory-direct competitors manufacture their own products, most of our competitors purchase their tile from domestic manufacturers ordistributors when they receive an order from a customer. As a result, we believe that it takes these retailers longer than us to deliver products to customersand that their prices tend to be higher than our prices. We also believe that we offer a broader range of products and stronger in-store customer support thanthese competitors.  5 Employees As of December 31, 2013, we had 1,214 employees, 1,200 of whom were full-time and none of whom were represented by a union. Of these employees,834 work in our stores, 72 work in corporate, store support, infrastructure or similar functions, and 308 work in distribution and manufacturingfacilities. We believe that we have good relations with our employees. Property and Trademarks We have registered and unregistered trademarks for all of our brands, including 15 registered marks and 2 pending trademark applications marks in theUnited States. We regard our intellectual property as having significant value and our brands are an important factor in the marketing of our products.Accordingly, we have taken, and continue to take, appropriate steps to protect our intellectual property. Government Regulation We are subject to extensive and varied federal, state and local government regulation in the jurisdictions in which we operate, including laws andregulations relating to our relationships with our employees, public health and safety, zoning, and fire codes. We operate each of our stores, offices, anddistribution and manufacturing facilities in accordance with standards and procedures designed to comply with applicable laws, codes, and regulations.Our operations and properties are also subject to federal, state and local laws and regulations relating to the use, storage, handling, generation,transportation, treatment, emission, release, discharge and disposal of hazardous materials, substances and wastes and relating to the investigation andcleanup of contaminated properties, including off-site disposal locations. We do not incur significant costs complying with environmental laws andregulations. However, we could be subject to material costs, liabilities, or claims relating to environmental compliance in the future, especially in the eventof changes in existing laws and regulations or in their interpretation. Products that we import into the United States are subject to laws and regulations imposed in conjunction with such importation, including those issuedand/or enforced by U.S. Customs and Border Protection. We work closely with our suppliers to ensure compliance with the applicable laws andregulations in these areas. Financial Information about Geographic Areas All of our revenues are generated within the United States and all of our long-lived assets are located within the United States as well. Available Information We are subject to the reporting requirements of the Securities Exchange Act of 1934 and its rules and regulations (the “1934 Act”). The 1934 Act requiresus to file periodic reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Copies of these reports, proxystatements and other information can be read and copied at the SEC Public Reference Room, 100 F Street, N.E., Washington D.C. 20549. Information onthe operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web site that contains reports,proxy statements, and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically byaccessing the SEC’s Web site at http://www.sec.gov. We maintain a Web site at www.tileshop.com, the contents of which are not part of or incorporated by reference into this Annual Report on Form 10-K. Wemake our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports available onour Web site, free of charge, as soon as reasonably practicable after such reports have been filed with or furnished to the SEC. Our Code of BusinessConduct and Ethics, as well as any waivers from and amendments to the Code of Business Conduct and Ethics, are also posted on our Web site. ITEM 1A. RISK FACTORS The following are significant factors known to us that could adversely affect our business, financial condition, or operating results, as well as adverselyaffect the value of an investment in our common stock. These risks could cause our actual results to differ materially from our historical experience andfrom results predicted by forward-looking statements. All forward-looking statements made by us are qualified by the risks described below. There maybe additional risks that are not presently material or known. You should carefully consider each of the following risks and all other information set forthin this Annual Report on Form 10-K. 6 Our business is dependent on general economic conditions in our markets. Our revenues depend, in part, on discretionary spending by our customers. Pressure on discretionary income brought on by economic downturns andslow recoveries, including housing market declines, rising energy prices, and weak labor markets, may cause consumers to reduce the amount that theyspend on discretionary items. If recovery from the current economic downturn continues to be slow or prolonged, our growth, prospects, results ofoperations, cash flows, and financial condition could be adversely impacted. General economic conditions and discretionary spending are beyond ourcontrol and are affected by, among other things: •consumer confidence in the economy; •unemployment trends; •consumer debt levels; •consumer credit availability; •data security and privacy concerns; •the housing market; •gasoline and fuel prices; •interest rates and inflation; •price deflation, including due to low-cost imports; •slower rates of growth in real disposable personal income; •natural disasters and unpredictable weather; •national security concerns; •tax rates and tax policy; and •other matters that influence consumer confidence and spending. Increasing volatility in financial markets may cause some of the above factors to change with an even greater degree of frequency and magnitude than inthe past. Our ability to grow and remain profitable may be limited by direct or indirect competition in the retail tile industry, which is highly competitive. The retail tile industry in the United States is highly competitive. Participants in the tile industry compete primarily based on product variety, customerservice, store location, and price. There can be no assurance that we will be able to continue to compete favorably with our competitors in these areas. Ourstore competitors include large national home centers (such as Home Depot and Lowe’s), regional and local specialty retailers of tile (such as Tile America,World of Tile, Century Tile, and Floor and Décor), factory direct stores (such as Dal-Tile and Florida Tile) and privately-owned, single-site stores. Wealso compete indirectly with companies that sell other types of floor coverings, including wood floors, carpet, and vinyl sheet. In the past, we have facedperiods of heightened competition that materially affected our results of operations. Certain of our competitors have greater name recognition, longeroperating histories, more varied product offerings, and substantially greater financial and other resources than us. Accordingly, we may face periods ofintense competition in the future that could have a material adverse effect on our planned growth and future results of operations. Moreover, the barriers toentry into the retail tile industry are relatively low. New or existing retailers could enter our markets and increase the competition that we face. In addition,manufacturers and vendors of tile and related products, including those whose products we currently sell, could enter the U.S. retail tile market and startdirectly competing with us. Competition in existing and new markets may also prevent or delay our ability to gain relative market share. Any of thedevelopments described above could have a material adverse effect on our planned growth and future results of operations. If we fail to successfully manage the challenges that our planned growth poses or encounter unexpected difficulties during our expansion,our revenues and profitability could be materially adversely affected. One of our long term objectives is to increase revenues and profitability through market share leadership. Our ability to achieve market share leadership,however, is contingent upon our ability to open new stores and achieve operating results in new stores at the same level as our similarly situated currentstores. There can be no assurance that we will be able to open stores in new markets at the rate required to achieve market leadership in such markets,identify and obtain favorable store sites, arrange favorable leases for stores, or obtain governmental and other third- party consents, permits, and licensesneeded to open or operate stores in a timely manner, train and hire a sufficient number of qualified managers for new stores, attract a strong customer baseand brand familiarity in new markets, or successfully compete with established retail tile stores in the new markets that we enter. Failure to open newstores in an effective and cost-efficient manner could place us at a competitive disadvantage as compared to retailers who are more adept than us atmanaging these challenges, which, in turn, could negatively affect our overall operating results. 7 Our same store sales fluctuate due to a variety of economic, operating, industry and environmental factors and may not be a fair indicator ofour overall performance. Our same store sales have experienced fluctuations, which can be expected to continue. Numerous factors affect our same store sales results, includingamong others, the timing of new and relocated store openings, the relative proportion of new and relocated stores to mature stores, cannibalization resultingfrom the opening of new stores in existing markets, changes in advertising and other operating costs, the timing and level of markdowns, changes in ourproduct mix, weather conditions, retail trends, the retail sales environment, economic conditions, inflation, the impact of competition, and our ability toexecute our business strategy efficiently. As a result, same store sales or operating results may fluctuate, and may cause the price of our securities tofluctuate significantly. Therefore, we believe that period-to-period comparisons of our same store sales may not be a reliable indicator of our future overalloperating performance. We intend to open additional stores in both our existing markets and new markets, which poses both the possibility of diminishing sales byexisting stores in our existing markets and the risk of a slow ramp-up period for stores in new markets. Our expansion strategy includes plans to open 20 additional stores in existing markets and new markets in 2014. Because our stores typically drawcustomers from their local areas, additional stores may draw customers away from nearby existing stores and may cause same store sales performance atthose existing stores to decline, which may adversely affect our overall operating results. Additionally, stores in new markets typically have a ramp-upperiod before sales become steady enough for such stores to be profitable. Our ability to open additional stores will be dependent on our ability to promoteand/or recruit enough qualified field managers, store managers, assistant store managers, and sales associates. The time and effort required to train andsupervise a large number of new managers and associates and integrate them into our culture may divert resources from our existing stores. If we areunable to profitably open additional stores in both new and existing markets and limit the adverse impact of those new stores on existing stores, it mayreduce our same store sales and overall operating results during the implementation of our expansion strategy. Our expansion strategy will be dependent upon, and limited by, the availability of adequate capital. Our expansion strategy will require additional capital for, among other purposes, opening new stores, distribution centers, and manufacturing facilities aswell as entering new markets. Such capital expenditures will include researching real estate and consumer markets, lease, inventory, property andequipment costs, integration of new stores and markets into company-wide systems and programs, and other costs associated with new stores and marketentry expenses and growth. If cash generated internally is insufficient to fund capital requirements, we will require additional debt or equity financing.Adequate financing may not be available or, if available, may not be available on terms satisfactory to us. In addition, our credit facility may limit theamount of capital expenditures that we may make annually, depending on our leverage ratio. If we fail to obtain sufficient additional capital in the future orwe are unable to make capital expenditures under our credit facility, we could be forced to curtail our expansion strategies by reducing or delaying capitalexpenditures relating to new stores and new market entry. As a result, there can be no assurance that we will be able to fund our current plans for theopening of new stores or entry into new markets. We depend on a number of suppliers, and any failure by any of them to supply us with products may impair our inventory and adversely affectour ability to meet customer demands, which could result in a decrease in revenues and/or gross margin. Our current suppliers may not continue to sell products to us on acceptable terms or at all, and we may not be able to establish relationships with newsuppliers to ensure delivery of products in a timely manner or on terms acceptable to us. We do not have long-term contractual supply agreements with oursuppliers which obligate them to supply us with products at specified quantities or prices. We may not be able to acquire desired merchandise in sufficientquantities on terms acceptable to us in the future. We are also dependent on suppliers for assuring the quality of merchandise supplied to us. Our inabilityto acquire suitable merchandise in the future or the loss of one or more of our suppliers and our failure to replace them may harm our relationship with ourcustomers and our ability to attract new customers, resulting in a decrease in net sales. We source the approximately 4,500 products that we stock and sell from over 130 domestic and international vendors. We source a large number of thoseproducts from foreign manufacturers, including approximately 52% of our products from a group of 10 suppliers located in Asia and Europe. Wegenerally take title to these products overseas and are responsible for arranging shipment to our distribution centers. Financial instability among keyvendors, political instability, trade restrictions, tariffs, currency exchange rates, and transport capacity and costs are beyond our control and couldnegatively impact our business if they seriously disrupt the movement of products through our supply chain or increased the costs of our products. If our suppliers do not use ethical business practices or comply with applicable laws and regulations, our reputation could be harmed due tonegative publicity and we could be subject to legal risk. We do not control the operations of our suppliers. Accordingly, we cannot guarantee that our suppliers will comply with applicable environmental andlabor laws and regulations or operate in a legal, ethical, and responsible manner. Violation of environmental, labor or other laws by our suppliers or theirfailure to operate in a legal, ethical, or responsible manner, could reduce demand for our products if, as a result of such violation or failure, we attractnegative publicity. Further, such conduct could expose us to legal risks as a result of the purchase of products from non-compliant suppliers. If customers are unable to obtain third-party financing at satisfactory rates, sales of our products could be materially adversely affected. Our business, financial condition, and results of operations have been, and may continue to be affected, by various economic factors. Deterioration in thecurrent economic environment could lead to reduced consumer and business spending, including by our customers. It may also cause customers to shifttheir spending to products that we either do not sell or that generate lower profitably for us. Further, reduced access to credit may adversely affect theability of consumers to purchase our products. This potential reduction in access to credit may adversely impact our ability to offer customers credit cardfinancing through third party credit providers on terms similar to those offered currently, or at all. In addition, economic conditions, including decreasesin access to credit, may result in financial difficulties leading to restructuring, bankruptcies, liquidations and other unfavorable events for our customers,which may adversely impact our industry, business, and results of operations. 8 Any failure by us to successfully anticipate consumer trends may lead to loss of consumer acceptance of our products, resulting in reducedrevenues. Our success depends on our ability to anticipate and respond to changing trends and consumer demands in a timely manner. If we fail to identify andrespond to emerging trends, consumer acceptance of our merchandise and our image with current or potential customers may be harmed, which couldreduce our revenues. Additionally, if we misjudge market trends, we may significantly overstock unpopular products and be forced to reduce the salesprice of such products, which would have a negative impact on our gross profit and cash flow. Conversely, shortages of products that prove popularcould also reduce our revenues. We depend on a few key employees, and if we lose the services of certain of our executive officers, we may not be able to run our businesseffectively. Our future success depends in part on our ability to attract and retain key executive, merchandising, marketing, and sales personnel. Our executiveofficers include Robert Rucker, president and chief executive officer; Chris Homeister, chief operating officer; Timothy Clayton, chief financial officer;Carl Randazzo, senior vice president — retail; and Joseph Kinder, senior vice president — operations. We have employment and non-competearrangements with each of Messrs. Rucker, Homeister, Clayton, Randazzo, and Kinder. If any of these executive officers ceases to be employed by us, wewould have to hire additional qualified personnel. Our ability to successfully hire other experienced and qualified executive officers cannot be assured, andmay be difficult because we face competition for these professionals from our competitors, our suppliers and other companies operating in our industry.As a result, the loss or unavailability of any of our executive officers could have a material adverse effect on us. We have entered into a $120 million credit facility. The burden of this additional debt could adversely affect us, make us more vulnerable toadverse economic or industry conditions, and prevent us from fulfilling our debt obligations or from funding our expansion strategy. In connection with the Business Combination, we issued promissory notes in an aggregate principal amount of approximately $70 million, which we fullyrepaid as of December 31, 2013. We have entered into a credit facility with Bank of America, N.A., as administrative agent and The Huntington NationalBank, as syndication agent, for $120 million, including a term loan of $25 million and a revolving credit facility of $95 million, which we have used,in part, to repay the promissory notes issued in connection with the Business Combination. The terms of our credit facility and the burden of theindebtedness incurred thereunder could have serious consequences for us, such as: •limiting our ability to obtain additional financing to fund our working capital, capital expenditures, debt service requirements, expansionstrategy, or other needs; •placing us at a competitive disadvantage compared to competitors with less debt; •increasing our vulnerability to, and reducing our flexibility in planning for, adverse changes in economic, industry, and competitiveconditions; and •increasing our vulnerability to increases in interest rates if borrowings under the credit facility are subject to variable interest rates. Our credit facility also contains negative covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to,among other things: •incur indebtedness; •create liens; •engage in mergers or consolidations; •sell assets (including pursuant to sale and leaseback transactions); •pay dividends and distributions or repurchase our capital stock; •make investments, acquisitions, loans, or advances; •make capital expenditures; 9 •repay, prepay, or redeem certain indebtedness; •engage in certain transactions with affiliates; •enter into agreements limiting subsidiary distributions; •enter into agreements limiting the ability to create liens; •amend our organizational document in a way that has a material effect on the lenders or administrative agent under our credit facility; and •change our lines of business. A breach of any of these covenants could result in an event of default under our credit facility. Upon the occurrence of an event of default, the lender couldelect to declare all amounts outstanding under such facility to be immediately due and payable and terminate all commitments to extend further credit, orseek amendments to our debt agreements that would provide for terms more favorable to such lender and that we may have to accept under thecircumstances. If we were unable to repay those amounts, the lender under our credit facility could proceed against the collateral granted to them to securethat indebtedness. If we fail to hire, train, and retain qualified store managers, sales associates, and other employees, our enhanced customer service could becompromised and we could lose sales to our competitors. A key element of our competitive strategy is to provide product expertise to our customers through our extensively trained, commissioned sales associates.If we are unable to attract and retain qualified personnel and managers as needed in the future, including qualified sales personnel, our level of customerservice may decline, which may decrease our revenues and profitability. If we are unable to renew or replace current store leases or if we are unable to enter into leases for additional stores on favorable terms, or ifone or more of our current leases is terminated prior to expiration of its stated term and we cannot find suitable alternate locations, ourgrowth and profitability could be negatively impacted. We currently lease all of our store locations. Many of our current leases provide us with the unilateral option to renew for several additional rental periods atspecific rental rates. Our ability to re-negotiate favorable terms on an expiring lease or to negotiate favorable terms for a suitable alternate location, and ourability to negotiate favorable lease terms for additional store locations, could depend on conditions in the real estate market, competition for desirableproperties, our relationships with current and prospective landlords, or on other factors that are not within our control. Any or all of these factors andconditions could negatively impact our growth and profitability. Compliance with laws or changes in existing or new laws and regulations or regulatory enforcement priorities could adversely affect ourbusiness. We must comply with various laws and regulations at the local, regional, state, federal, and international levels. These laws and regulations changefrequently and such changes can impose significant costs and other burdens of compliance on our business and vendors. Any changes in regulations, theimposition of additional regulations, or the enactment of any new legislation that affect employment/labor, trade, product safety, transportation/logistics,energy costs, health care, tax, or environmental issues, or compliance with the Foreign Corrupt Practices Act, could have an adverse impact on ourfinancial condition and results of operations. Changes in enforcement priorities by governmental agencies charged with enforcing existing laws andregulations can increase our cost of doing business. We may also be subject to audits by various taxing authorities. Changes in tax laws in any of the multiple jurisdictions in which we operate, or adverseoutcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could result in an unfavorable change in our effectivetax rate, which could have an adverse effect on our business and results of operations. As our stores are generally concentrated in the midwestern, mid-Atlantic and northeast regions of the United States, we are subject to regionalrisks. We have a high concentration of stores in the midwestern, mid-Atlantic and northeast regions. If these markets individually or collectively suffer aneconomic downturn or other significant adverse event, there could be an adverse impact on same store sales, revenues, and profitability, and the ability toimplement our planned expansion program. Any natural disaster, extended adverse weather or other serious disruption in these markets due to fire,tornado, hurricane, or any other calamity could damage inventory and could result in decreased revenues. Our results may be adversely affected by fluctuations in material and energy costs. Our results may be affected by the prices of the materials used in the manufacture of tile, setting and maintenance materials, and related accessories thatwe sell. These prices may fluctuate based on a number of factors beyond our control, including: oil prices, changes in supply and demand, generaleconomic conditions, labor costs, competition, import duties, tariffs, currency exchange rates, and government regulation. In addition, energy costs havefluctuated dramatically in the past and may fluctuate in the future. These fluctuations may result in an increase in our transportation costs for distributionfrom the manufacturer to our distribution center and from our regional distribution centers to our retail stores, utility costs for our distribution andmanufacturing centers and retail stores, and overall costs to purchase products from our vendors. 10 We may not be able to adjust the prices of our products, especially in the short-term, to recover these cost increases in materials and energy. A continualrise in material and energy costs could adversely affect consumer spending and demand for our products and increase our operating costs, both of whichcould have a material adverse effect on our financial condition and results of operations. Our success is highly dependent on our ability to provide timely delivery to our customers, and any disruption in our delivery capabilities orour related planning and control processes may adversely affect our operating results. Our success is due in part to our ability to deliver products quickly to our customers, which relies on successful planning and distribution infrastructure,including ordering, transportation and receipt processing, and the ability of suppliers to meet distribution requirements. Our ability to maintain thissuccess depends on the continued identification and implementation of improvements to our planning processes, distribution infrastructure, and supplychain. We also need to ensure that our distribution infrastructure and supply chain keep pace with our anticipated growth and increased number of stores.The cost of these enhanced processes could be significant and any failure to maintain, grow, or improve them could adversely affect our operating results.Our business could also be adversely affected if there are delays in product shipments due to freight difficulties, strikes, or other difficulties at oursuppliers’ principal transport providers, or otherwise. Damage, destruction, or disruption of our distribution and manufacturing centers could significantly impact our operations and impede ourability to produce and distribute our products. We rely on four regional distribution centers to supply products to all of our retail stores. In addition, we rely on our manufacturing centers, located at ourdistribution centers, to manufacture our setting and maintenance materials. If any of these facilities, or the inventory stored in these facilities, weredamaged or destroyed by fire or other causes, our distribution or manufacturing processes would be disrupted, which could cause significant delays indelivery. This could negatively impact our ability to stock our stores and deliver products to our customers, and cause our revenues and operating resultsto deteriorate. Our ability to control labor costs is limited, which may negatively affect our business. Our ability to control labor costs is subject to numerous external factors, including prevailing wage rates, the impact of legislation or regulations governinghealthcare benefits or labor relations, such as the Employee Free Choice Act, and health and other insurance costs. If our labor and/or benefit costsincrease, we may not be able to hire or maintain qualified personnel to the extent necessary to execute our competitive strategy, which could adversely affectour results of operations. Our business exposes us to personal injury and product liability claims, which could result in adverse publicity and harm to our brands andour results of operations. We are from time to time subject to claims due to the injury of an individual in our stores or on our property. In addition, we may be subject to productliability claims for the products that we sell. Our purchase orders generally do not require the manufacturer to indemnify us against any product liabilityclaims arising from products purchased by us. Any personal injury or product liability claim made against us, whether or not it has merit, could be time-consuming and costly to defend, resulting in adverse publicity or damage to our reputation, and have an adverse effect on our results of operations. Inaddition, any negative publicity involving our vendors, employees, and other parties who are not within our control could negatively impact us. Our business operations could be disrupted if our information technology systems fail to perform adequately or we are unable to protect theintegrity and security of our customers’ information. We depend upon our information technology systems in the conduct of all aspects of our operations. If our information technology systems fail to performas anticipated, we could experience difficulties in virtually any area of our operations, including but not limited to replenishing inventories or deliveringproducts to store locations in response to consumer demands. It is also possible that our competitors could develop better online platforms than us, whichcould negatively impact our internet sales. Any of these or other systems-related problems could, in turn, adversely affect our revenues and profitability. In addition, in the ordinary course of our business, we collect and store certain personal information from individuals, such as our customers andsuppliers, and we process customer payment card and check information. We are continually evaluating our systems associated with the collection,security, and handling of personal information and intend to make any required changes or enhancements in our systems and policies in response to thisassessment. Our failure to properly comply with relevant laws, a breach of our network security and systems, or other events that cause the loss or publicdisclosure of, or access by third parties to, our customers’ personal information could have serious negative consequences for our business, includingpossible fines, penalties and damages, an unwillingness of customers to provide us with their credit card or payment information, harm to our reputationand brand, loss of our ability to accept and process customer credit card orders, and time-consuming and expensive litigation. 11 Computer hackers may attempt to penetrate our computer systems and, if successful, misappropriate personal information, payment card or checkinformation, or confidential business information. In addition, an employee, contractor, or other third party with whom we do business may attempt tocircumvent our security measures in order to obtain such information. The techniques used to obtain unauthorized access or sabotage systems changefrequently and may originate from less regulated or remote areas around the world. As a result, we may be unable to proactively address these techniquesor to implement adequate preventative measures. Many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatorydisclosures regarding a security breach often lead to widespread negative publicity, which may cause our customers to lose confidence in the effectivenessof our data security measures. Any security breach, whether successful or not, would harm our reputation and could cause the loss of customers. Concentration of ownership may have the effect of delaying or preventing a change in control. Our directors, executive officers, and holders of more than 5% of our common stock, together with their affiliates, beneficially hold approximately 45% ofour outstanding shares of common stock. As a result, these stockholders, if acting together, have the ability to influence the outcome of corporate actionsrequiring stockholder approval. This concentration of ownership may have the effect of delaying or preventing a change in control and might adverselyaffect the market price of our securities. Future sales of our common stock may cause the market price of our securities to drop significantly, even if our business is doing well. In connection with the Business Combination and the underwritten public offerings of our common stock by certain of our stockholders in December2012 and June 2013, our officers, directors and certain stockholders, who, immediately following the Business Combination, collectively held anaggregate of 34,305,233 shares of our common stock, agreed to refrain from selling such shares for periods of time that have now passed. As a result, ourdirectors, officers and the selling stockholders in the December 2012 and June 2013 underwritten public offerings may sell their shares at any time,subject to compliance with applicable securities laws. The presence of these additional securities trading in the public market may have an adverse effecton the market price of our common stock. In addition, the former direct and indirect holders of equity interests in The Tile Shop and the JWCAC founders hold registration rights, subject to certainlimitations, with respect to our common stock that they received in the Business Combination pursuant to a registration rights agreement. The holders of amajority in interest of our common stock held by the former direct and indirect holders of equity interests in The Tile Shop will be entitled to require us,on up to four occasions, to register under the Securities Act of 1933, as amended, or the Securities Act, the shares of common stock that they received inthe Business Combination. The holders of a majority in interest of our common stock held by the JWCAC founders will be entitled to require us, on up totwo occasions, to register under the Securities Act the shares of common stock that they received in the Business Combination, and any shares that maybe issued pursuant to the exercise of certain warrants held by them. As of the date of this report, we have effected two registrations pursuant to suchagreements. The presence of these additional securities trading in the public market may have an adverse effect on the market price of our common stock. Although our common stock is currently listed on The NASDAQ Global Market, there can be no assurance that we will be able to comply withthe continued listing standards. The NASDAQ Global Market may delist our common stock from trading on its exchange for failure to meet the continued listing standards. If ourcommon stock were delisted from The NASDAQ Global Market, we and our stockholders could face significant material adverse consequencesincluding: •a limited availability of market quotations for our common stock; •a determination that our common stock is a “penny stock” would require brokers trading in our common stock to adhere to more stringentrules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; •a limited amount of analyst coverage; and •a decreased ability to issue additional securities or obtain additional financing in the future. The market price of our securities may decline and/or be volatile. Fluctuations in the price of our securities could contribute to the loss of all or part of your investment. Prior to the Business Combination, there had notbeen a public market for our securities or The Tile Shop’s securities, and trading in JWCAC’s securities had not been active. An active, liquid, andorderly market for our securities may not be sustained and the trading price of our securities could be volatile and subject to wide fluctuations in responseto various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in oursecurities and our securities may trade at prices significantly below the price that you paid for them. In such circumstances, the trading price of oursecurities may not recover and may experience a further decline. 12 Factors affecting the trading price of our securities may include: •actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar tous; •changes in the market’s expectations about our operating results; •the effects of seasonality on our business cycle; •success of competitive retailers; •our operating results failing to meet the expectation of securities analysts or investors in a particular period; •research reports published regarding our business; •changes in financial estimates and recommendations by securities analysts concerning us, the housing market, the retail specialty tilemarket, or the retail market in general; •operating and stock price performance of other companies that investors deem comparable to us; •our ability to market new and enhanced products on a timely basis; •changes in laws and regulations affecting our business; •commencement of, or involvement in, litigation involving us; •changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; •the volume of shares of our common stock available for public sale; •any major change in our board of directors or management; •sales of substantial amounts of common stock by our directors, executive officers, or significant stockholders or the perception that suchsales could occur; and •general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations, and acts of waror terrorism. Broad market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The NASDAQGlobal Market and the stock market in general have experienced price and volume fluctuations that have often been unrelated or disproportionate to theoperating performance of the particular companies affected. The trading prices and valuations of these securities, and of our securities, may not bepredictable. A loss of investor confidence in the market for retail securities or the securities of other companies that investors perceive to be similar to uscould depress the price of our securities regardless of our business, prospects, financial conditions, or results of operations. A decline in the market priceof our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future. If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if theychange their recommendations regarding our common stock adversely, the price and trading volume of our common stock could decline. The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, ourbusiness, our market, or our competitors. If any of the analysts who cover us change their recommendation regarding our common stock adversely, orprovide more favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who covers uswere to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause ourcommon stock price or trading volume to decline. We are a holding company with no business operations of our own and depend on cash flow from The Tile Shop to meet our obligations. We are a holding company with no business operations of our own or material assets other than the equity of our subsidiaries. All of our operations areconducted by our subsidiary, The Tile Shop. As a holding company, we will require dividends and other payments from our subsidiaries to meet cashrequirements. The terms of any future credit facility may restrict our subsidiaries from paying dividends and otherwise transferring cash or other assets tous, although our current facility does not restrict this action. If there is an insolvency, liquidation, or other reorganization of any of our subsidiaries, ourstockholders likely will have no right to proceed against their assets. Creditors of those subsidiaries will be entitled to payment in full from the sale or otherdisposal of the assets of those subsidiaries before us, as an equity holder, would be entitled to receive any distribution from that sale or disposal. If TheTile Shop is unable to pay dividends or make other payments to us when needed, we will be unable to satisfy our obligations. 13 Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair atakeover attempt. Our certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in ourmanagement without the consent of our board of directors. These provisions include: •a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of amajority of our board of directors; •no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; •the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or theresignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; •the ability of our board of directors to determine to issue shares of preferred stock and to determine the price and other terms of thoseshares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership ofa hostile acquirer; •a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of ourstockholders; •the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executiveofficer, or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action,including the removal of directors; •limiting the liability of, and providing indemnification to, our directors and officers; •controlling the procedures for the conduct and scheduling of stockholder meetings; •providing the board of directors with the express power to postpone previously scheduled annual meetings of stockholders and to cancelpreviously scheduled special meetings of stockholders; •providing that directors may be removed prior to the expiration of their terms by stockholders only for cause; and •advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to proposematters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation ofproxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us. These provisions, alone or together, could delay hostile takeovers and changes in control of us or changes in our management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, whichprevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approvalof the holders of substantially all of our outstanding common stock. Any provision of our certificate of incorporation or bylaws or Delaware law that hasthe effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our commonstock, and could also affect the price that some investors are willing to pay for our common stock. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES As of December 31, 2013, we operated 88 stores located in 28 states with an average square footage of approximately 23,000 square feet. We lease all of our stores. Our 15,000 square foot headquarters in Plymouth, Minnesota is attached to our flagship retail store. We own four regionalfacilities used for distribution of purchased product and manufacturing of maintenance and setting materials, located in Spring Valley, Wisconsin;Ottawa Lake, Michigan; Ridgeway, Virginia; and Durant, Oklahoma, which consist of 51,000, 271,000, 134,000, and 150,000 square feet, respectively. We believe that our material property holdings are suitable for our current operations and purposes. In order to continue executing our growth strategy, weintend to open 20 new retail locations in 2014. 14 ITEM 3. LEGAL PROCEEDINGS From time to time, we have been and may become involved in legal proceedings arising in the ordinary course of our business. Although the results oflitigation and claims cannot be predicted with certainty, we are not presently involved in any legal proceeding which we expect to have a material adverseeffect on our business, operating results, or financial condition. Regardless of the outcome, litigation can have an adverse impact on us because of defenseand settlement costs, diversion of management resources, and other factors. ITEM 4. MINE SAFETY DISCLOSURES None. 15 Part II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES Our common stock has been traded on The NASDAQ Global Market under the symbol “TTS” since the consummation of the Business Combination onAugust 21, 2012. Prior to this time, there was no public market for our common stock. Our Public Warrants (as defined in Item 13. “CertainRelationships and Related Transactions-Warrant Agreement,”) were previously on the Over- the-Counter Bulletin Board under the symbol “TTSAW.” Thefollowing table shows the high and low sale prices per share of our common stock and Public Warrants as reported on The NASDAQ Global Market andthe Over-the-Counter Bulletin Board for the periods indicated: Common Stock Public Warrants Quarter High Low High Low Fiscal 2012Third (beginning August 21, 2012) $16.99 $11.75 $3.60 $1.05 Fourth $17.56 $12.00 $6.85 $3.05 Fiscal 2013First $22.39 $16.41 $5.21 $10.48 Second $30.33 $19.69 $9.57 $9.82 Third $30.88 $24.72 $- $- Fourth $29.90 $10.05 $- $- (1)Following the second quarter of fiscal 2013, no warrants remain outstanding. As of February 21, 2014, we had approximately 33 holders of record of our common stock. All our Public Warrants were either exercised or redeemedduring the year ended December 31, 2013. This figure does not include the number of persons whose securities are held in nominee or “street” nameaccounts through brokers. As of February 21, 2014, we had outstanding a total of 51,230,600 shares of common stock and no warrants. Dividends We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our common stock in the foreseeable future. While ourboard of directors may consider whether or not to institute a dividend policy, it is our present intention to retain any earnings for use in our businessoperations. In addition, our credit facility restricts our ability to pay dividends. Securities Authorized for Issuance Under Equity Compensation Plans For information on our equity compensation plans, refer to Item 12, “Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters.” Recent Sales of Unregistered Securities None. Issuer Purchases of Equity Securities None. 16(1) Stock Performance Graph The graph and table below present the Company’s cumulative total stockholder returns relative to the performance of the S&P SmallCap 600 and the DowJones U.S. Furnishings Index for the period commencing August 22, 2012, the date of the Business Combination, and ending December 31, 2013, the lasttrading day of fiscal 2013. The comparison assumes $100 invested at the close of trading on August 22, 2012 in (i) the Company’s common stock, (ii)the stocks comprising the S&P SmallCap 600, and (iii) the stocks comprising the Dow Jones U.S. Furnishings Index. All values assume that alldividends were reinvested on the date paid. The points on the graph represent fiscal quarter-end amounts based on the last trading day in each fiscalquarter. The stock price performance included in the line graph below is not necessarily indicative of future stock price performance. August 22,2012 December 31,2012 March 31,2013 June 30,2013 September30,2013 December 31,2013 Tile Shop Holdings, Inc. $100.00 $129.46 $161.62 $222.77 $226.85 $139.00 S&P Small Cap 600 $100.00 $104.18 $116.44 $120.57 $133.11 $145.76 Dow Jones U.S.Furnishings Index $100.00 $114.95 $148.24 $141.74 $150.66 $167.14 Source: Market Watch 17 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical financial information derived from (i) our audited financial statements included elsewhere in this report asof December 31, 2013 and for the year ended December 31, 2013, (ii) The Tile Shop’s audited financial statements included elsewhere in this report as ofDecember 31, 2012 and for the years ended December 31, 2012 and 2011 and (iii) The Tile Shop’s audited financial statements not included in this reportas of December 31, 2011 and 2010 and for the years ended December 31, 2010 and 2009. The following selected financial data should be read inconjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financialstatements and the related notes appearing elsewhere in this report. As of December 31, or for the year ended December 31, 2013 2012 2011 2010 2009 (in thousands, except per share) Statement of Income Data Net sales $229,564 $182,650 $152,717 $135,340 $116,247 Cost of sales 68,755 49,626 40,321 36,124 31,706 Gross profit 160,809 133,024 112,396 99,216 84,541 Selling, general and administrative expenses 127,731 94,716 78,368 68,105 60,051 Deferred compensation expense - 3,897 1,415 450 120 Income from operations 33,078 34,411 32,613 30,661 24,370 Interest expense 2,581 1,252 443 467 545 Change in fair value of warrants 54,219 82,063 - - - Other income (expense) 4 15 (77) 124 73 (Loss) income before income taxes (23,718) (48,889) 32,093 30,318 23,898 (Provision for) benefit from income taxes (11,942) 2,002 (733) (609) (675)Net (loss) income $(35,660) $(46,887) $31,360 $29,709 $23,223 Earnings per share (0.72) $(1.31) $0.97 $0.92 $0.72 Weighted average shares outstanding 49,600 35,838 32,261 32,330 32,330 Balance Sheet Data Cash and cash equivalents $1,761 $2,987 $6,283 $14,117 $17,850 Inventories 67,756 46,890 43,744 35,358 26,342 Total assets 242,769 176,074 119,005 108,890 95,632 Warrant liability - 95,645 - - - Total debt and capital lease obligations, including currentmaturities 96,396 74,824 4,853 5,582 4,574 Total stockholders' equity 79,863 (44,763) 75,147 69,437 62,000 Working capital 51,719 35,934 34,852 34,895 31,851 Cash Flow Data Net cash provided by operating activities $21,211 $47,222 $34,722 $32,461 $34,729 Net cash used in investing activities (52,955) (29,064) (18,561) (14,376) (8,267)Net cash used in financing activities 30,518 (21,454) (23,995) (21,818) (12,243)Other Selected Financial Data (unaudited) Adjusted EBITDA $54,294 $50,634 $42,602 $38,472 $31,576 Adjusted EBITDA margin 23.7% 27.7% 27.9% 28.4% 27.2% Gross margin 70.0% 72.8% 73.6% 73.3% 72.7% Operating income margin 14.4% 18.8% 21.4% 22.7% 21.0% Same stores sales growth 12.4% 7.1% 6.4% 11.4% (4.6%)Stores open - end of period 88 68 53 48 41 (1)Historical amounts do not include pro forma adjustments for income taxes as a result of our change in tax status, which was effective on August21, 2012 upon consummation of the Business Combination. (2)We calculate Adjusted EBITDA by taking net income calculated in accordance with accounting principles generally accepted in the UnitedStates, or GAAP, and adjusting interest expense, income taxes, depreciation and amortization, non-cash change in fair value of warrants, non-recurring items including equity related transaction costs, other items (including special investigation costs), deferred compensation expense,and stock based compensation expense. Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales. We believe that thesenon-GAAP measures of financial results provide useful information to management and investors regarding certain financial and businesstrends relating to our financial condition and results of operations. Our management uses these non-GAAP measures to compare ourperformance to that of prior periods for trend analyses, for purposes of determining management incentive compensation, and for budgetingand planning purposes. These measures are used in financial reports prepared for management and our board of directors. We believe that theuse of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trendsand in comparing our financial measures with other specialty retailers, many of which present similar non-GAAP financial measures toinvestors.(1)(1)(2)(2)(3)(4)(5) 18 (3)Gross margin is gross profit divided by net sales. (4)Operating income margin is income from operations divided by net sales. (5)Same store sales growth is the percentage change in sales of comparable stores period over period. A store is considered comparable on the firstday of the 13th month of operation. Same store sales growth amounts include total charges to customers less any actual returns. We do notinclude estimated return provisions or sale allowances in the same store sales calculation, as return reserves are calculated on a consolidatedlevel. Same store sales data reported by other companies may be prepared on a different basis and therefore may not be useful for purposes ofcomparing our results to those of other businesses. Reconciliation of Non-GAAP Adjusted EBITDA to GAAP Net Income (loss) Years Ended December 31, 2013 2012 2011 2010 2009 (in thousands) Net (loss) income $(35,660) $(46,887) $31,360 $29,709 $23,223 Interest expense 2,581 1,252 443 467 545 Income taxes 11,942 (2,002) 733 609 675 Change in fair value of warrants 54,219 82,063 - - - Depreciation and amortization 14,316 10,530 8,651 7,237 7,013 Deferred compensation expense - 3,897 1,415 450 120 Non-recurring transaction related costs 2,216 400 - - - Stock-based compensation 4,680 1,381 - - - Adjusted EBITDA $54,294 $50,634 $42,602 $38,472 $31,576 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 limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to berecorded in our consolidated financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgments bymanagement about which expenses and income are excluded or included in determining these non-GAAP financial measures. In order to compensate forthese limitations, management presents non-GAAP financial measures in connection with GAAP results. We urge investors to review the reconciliation ofour non-GAAP financial measures to the comparable GAAP financial measures and not to rely on any single financial measure to evaluate our business. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis together with “Selected Historical Consolidated Financial Data” and our consolidatedfinancial statements and related notes included elsewhere in the Annual Report on Form 10-K. Among other things, those historical consolidatedfinancial statements include more detailed information regarding the basis of presentation for the financial data than are included in the followingdiscussion. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the “safe harbor” provisions of thePrivate Securities Litigation Reform Act of 1995. In some cases you can identify these statements by forward-looking words such as “may,”“might,” “will,” “will likely result,” “should,” “anticipates,” “expects,” “intends,” “plans,” “seeks,” “estimates,” “potential,” “continue,”“believes” and similar expressions, although some forward-looking statements are expressed differently. The forward-looking statements in thisForm 10-K relate to, among others things, statements relating to our anticipated new store openings; our business strengths and competitiveadvantages; expenses as a result of becoming a public company; legal proceedings; our intended future process for determining and assessingcompensation; our expectations for the future use of equity incentive plans; our expectations regarding financing arrangements; our retail salesand market share expectations; depreciation and amortization expense; supply costs and expectations; costs and adequacy of insurance; ourexpectations with respect to ongoing compliance with the terms of our credit facility; the effect of regulations on us and our industry and ourcompliance with such regulations; and our anticipated revenues, expenses, and capital requirements. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may causeour actual results, performance, or achievements to differ materially from any expected future results, performance, or achievements expressed orimplied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These risks and uncertainties include, but are not limited to: •the level of demand for our products; •our ability to grow and remain profitable in the highly competitive retail tile industry; •our ability to access additional capital; •our ability to attract and retain qualified personnel; •changes in general economic, business and industry conditions; •our ability to introduce new products that satisfy market demand; and •legal, regulatory, and tax developments, including additional requirements imposed by changes in domestic and foreign laws andregulations. 19 There is no assurance that our expectations will be realized. If one or more of these risks or uncertainties materialize, or if our underlyingassumptions prove incorrect, actual results may vary materially from those expected, estimated, or projected. Such risks and uncertainties alsoinclude those set forth under “Risk Factors” in Item 1A of this Form 10-K. Our forward-looking statements speak only as of the time that they aremade and do not necessarily reflect our outlook at any other point in time. Except as required by law or regulation, we undertake no obligation toupdate publicly any forward-looking statements, whether as a result of new information, future events, or for any other reason. Overview We are a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the United States. We offera wide selection of products, attractive prices, and exceptional customer service in an extensive showroom setting. As of December 31, 2013, operated 88stores in 28 states, with an average size of 23,000 square feet. We also sell our products on our website. We purchase our tile products and accessories directly from producers and manufacture our own setting and maintenance materials, such as thinset,grout, and sealers. We believe that our long-term producer relationships, together with our design, manufacturing and distribution capabilities, enable us tooffer a broad assortment of high-quality products to our customers, who are primarily homeowners, at competitive prices. We have invested significantresources to develop our proprietary brands and product sources and believe that we are a leading retailer of stone tiles, accessories, and related materials inthe United States. We believe that the highly-fragmented U.S. retail tile market provides us with a significant opportunity to expand our store base. We opened 20 new storesin the U.S. in 2013, and plan to open 20 stores in 2014. We believe that there will continue to be additional expansion opportunities in the United Statesand Canada. We expect store base growth will drive productivity and operational efficiencies. In 2013, we reported net sales and income from operations of $229.6 million and $33.1 million, respectively. From December 31, 2009 to December 31,2013, our net sales and income from operations increased at compounded annual growth rates of 18.5% and 7.9%, respectively. During that period, weopened 47 new retail locations and focused on cost control and implementing selected price increases in order to maintain our gross profit and income fromoperations. We plan to continue to focus on store growth. Net cash flows provided by operating activities were $21.2 million and $47.2 million for 2013 and 2012, respectively, which were used to fund capitalexpenditures for opening new stores and daily operations. We expect to continue to fund our capital expenditures and daily operations from our operatingcash flows and with borrowings pursuant to our credit facility. As of December 31, 2013, we had cash of $1.8 million and working capital of $51.7million. We plan to continue to invest in strong customer service by leveraging our highly-trained staff from our existing store base to train new store staff. We alsocontinue to invest in our marketing and brand management, website improvements, and growing use of social media. We also plan to maintain ourmarketing and brand management by periodically remodeling our in-store displays and developing content about our store and products for smart phonesand tablets. In 2013, approximately 50% of our net sales were from repeat customers. As a result of the Business Combination, during 2013 we incurred incremental general and administrative expenses of approximately $2.5 million that areattributable to operating as a publicly traded company, and supporting our more rapid growth strategy. These incremental public company expensesinclude annual and quarterly reporting; Sarbanes-Oxley compliance expenses; expenses associated with listing on The NASDAQ Global Market; chieffinancial officer, chief operating officer and additional staff compensation; legal fees; independent auditor fees; investor relations expenses; registrar andtransfer agent fees; director and officer liability insurance costs; and director compensation. In addition, we incurred approximately $4.7 million of non-cash, stock-based compensation expense in 2013. We also incurred a non-cash charge related to the change in the fair value of the warrant liability of $54.2 million in 2013, based on the fluctuation in thetrading price of the stock purchase warrants. Key Components of our Consolidated Statements of Income Net Sales Net sales represents total charges to customers and includes freight charged to customers. We recognize sales at the time that the customer takespossession of the merchandise. We recognize service revenue, which consists primarily of freight charges for home delivery, when the service has beenrendered. We are required to charge and collect sales and other taxes on sales to our customers and remit these taxes back to government authorities. Salesand other taxes are recorded in the consolidated balance sheets but excluded from the consolidated statements of income. The increase in net sales in recentyears has been a result of store base growth, increases in same store sales, expansion of product lines, and a gradually improving national economy. The table below sets forth information about our same store sales growth from fiscal 2011 to fiscal 2013. Our increase in same store sales growth isprimarily attributable to increases in number of orders, as well as average order size. The increase in net sales has also been a result of growing our storebase in recent years. Same store sale amounts include total charges to customers less any actual returns. We do not include estimated return provisions orsales allowances in the same store sales calculation, as return reserves are calculated at the consolidated level. In general, we consider a store comparable onthe first day of the 13th month of operation.  Years Ended December 31, 2013 2012 2011 Same store sales growth 12.4% 7.1% 6.4% 20 We opened twenty, fifteen and five new stores in 2013, 2012 and 2011, respectively. Net sales at new stores are generally lowest in the first few monthsafter a location is opened and generally increase over time. We expect a store’s net sales to increase faster during its first three years of operation than in itslater years. Store locations opened in existing markets tend to have higher net sales in the first year of operation than store locations opened in new markets,as a portion of such net sales come from more mature stores in those markets. Cost of Sales Cost of sales consists primarily of material costs, freight, duties, and storage and delivery of product to customers from stores, as well ascosts associated with manufacturing of maintenance materials. Gross Profit Gross profit is net sales less cost of sales. Gross margin is the percentage determined by dividing gross profit by net sales. In 2013, 2012and 2011, our gross margin was 70.0%, 72.8%, and 73.6%, respectively. We have been able to maintain relatively stable gross margins as a result ofproduct cost control and retail price adjustments, in the past. However, increases in freight and distribution costs, along with increased discounts andpromotional activity adversely impacted our gross margins by approximately 200 basis points in 2013. Selling, General and Administrative Expenses Payroll costs and occupancy expenses have historically been our most significant selling, general, andadministrative expenses. Payroll costs exclude costs associated with manufacturing labor costs, as those costs are included in cost of sales. In 2013, 2012,and 2011, our selling, general, and administrative expense as a percentage of net sales was 55.6%, 51.9% and 51.3%, respectively. Our payroll costshave increased as a percentage of net sales over the last three years primarily due to increased store base growth and investments in support infrastructure.Advertising costs have increased as a percentage of net sales due new marketing efforts. Our selling, general and administrative expenses have increased aswe add administrative and sales personnel, continue making investments in our corporate infrastructure to support our growth, and incur expensesattributable to operating as a publicly traded company. These costs include those associated with SEC reporting, Sarbanes-Oxley compliance, and listingon The NASDAQ Global Market, as well as increased financial personnel, professional fees, insurance costs and director compensation. In addition,since becoming a public company, we have utilized stock options and restricted stock as a significant element of our long term incentive plan for executiveand non-executive employees. These costs were new in 2012 and grew significantly in 2013 to $4.7 million from $1.4 million in the prior year. They willcontinue to grow in 2014, but at a slower rate. Pre-opening costs Our pre-opening costs are those typically associated with the openings of a new store and generally include rent expense, payroll costs,occupancy costs and promotional costs. Pre-opening costs are expensed as incurred and recorded in selling, general and administrative expenses. Income Taxes As of August 21, 2012, we are subject to income tax in the United States as well as other tax jurisdictions in which we conduct business.Our effective tax rates in fiscal 2013 are not necessarily indicative of the effective tax rate that may be expected for fiscal year 2014 or future periods. Adjusted EBITDA We calculate Adjusted EBITDA by taking net income calculated in accordance with accounting principles generally accepted in the United States, orGAAP, and adjusting interest expense, income taxes, depreciation and amortization, non-cash change in fair value of warrants, non-recurring itemsincluding equity related transaction costs, other items (including special investigation costs), deferred compensation expense, and stock basedcompensation expense. Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales. We believe that these non-GAAP measures offinancial results provide useful information to management and investors regarding certain financial and business trends relating to our financial conditionand results of operations. Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses, forpurposes of determining management incentive compensation, and for budgeting and planning purposes. These measures are used in financial reportsprepared for management and our board of directors. We believe that the use of these non-GAAP financial measures provides an additional tool forinvestors to use in evaluating ongoing operating results and trends and in comparing our financial measures with other specialty retailers, many of whichpresent 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 limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to berecorded in our consolidated financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgments bymanagement about which expenses and income are excluded or included in determining these non-GAAP financial measures. In order to compensate forthese limitations, management presents non-GAAP financial measures in connection with GAAP results. We urge investors to review the reconciliation ofour non-GAAP financial measures to the comparable GAAP financial measures and not to rely on any single financial measure to evaluate our business. 21 Years Ended December 31, 2013 2012 2011 2010 2009 (in thousands) Net (loss) income $(35,660) $(46,887) $31,360 $29,709 $23,223 Interest expense 2,581 1,252 443 467 545 Income taxes 11,942 (2,002) 733 609 675 Change in fair value of warrants 54,219 82,063 - - - Depreciation and amortization 14,316 10,530 8,651 7,237 7,013 Deferred compensation expense - 3,897 1,415 450 120 Non-recurring transaction related costs 2,216 400 - - - Stock-based compensation 4,680 1,381 - - - Adjusted EBITDA $54,294 $50,634 $42,602 $38,472 $31,576 Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012 Years Ended December 31, 2013 % of sales 2012 % of sales (in thousands) Net sales $229,564 $182,650 Cost of sales 68,755 30.0% 49,626 27.2% Gross profit 160,809 70.0% 133,024 72.8% Selling, general and administrative expenses 127,731 55.6% 94,716 51.9% Deferred compensation expense - 0.0% 3,897 2.1% Income from operations 33,078 14.4% 34,411 18.8% Interest expense 2,581 1.1% 1,252 0.7% Change in fair value of warrants 54,219 23.6% 82,063 44.9% Other income (expense) 4 0.0% 15 0.0% Loss before income taxes (23,718) (10.3%) (48,889) (26.8%)(Provision) benefit for income taxes (11,942) (5.2%) 2,002 1.1% Net income (loss) $(35,660) (15.5%) $(46,887) (25.7%) Net Sales Net sales from fiscal year 2012 to fiscal year 2013, our net sales increased by $46.9 million, or 25.7%, to $229.6 million. This increase isprimarily due to net sales of $24.4 million from 20 new stores, a full year of the 15 stores opened in 2012, and strong same store sales growth. Gross Profit Gross profit increased $27.8 million, or 20.9%, from fiscal year 2012 to fiscal year 2013 primarily due to the increase in net sales. Grossmargin decreased from 72.8% in 2012 to 70.0% in 2013, or (3.8%). The decrease in margin can be attributed to slight increases in product acquisition,freight and distribution costs during the year ended December 31, 2013. In addition, we have used selective product related promotions and shippingdiscounts to generate or secure sales. All of these actions are specifically designed to drive traffic and enhance customer satisfaction. In view of our overallstrong gross margins, we believe that an aggressive approach to capturing market share, while impacting gross margins slightly in the short term, servesto enhance our long-term prospects. Selling, General and Administrative Expenses Selling, general, and administrative expenses increased by $33.0 million, or 34.9%, in fiscal year 2013compared to fiscal year 2012. As a percentage of net sales, selling, general, and administrative expenses increased from 51.9% in 2012 to 55.6%, or by7.1%. The increase in selling, general, and administrative expenses was primarily due to increased payroll, rent and occupancy costs, as well asdepreciation and amortization due to opening 20 new stores during the year ended December 31, 2013 as well as a full year of costs associated to 15 storesthat we opened during the year ended December 31, 2012. Payroll costs increased by $11.0 million, driven by growing store base and new employeeadditions on store and corporate levels, as well as increased employee compensation costs, including increased stock-based compensation expense of $3.3million. Rent, depreciation and amortization increased by $3.8 million from fiscal year 2012 to fiscal year 2013. Professional fees associated with being apublic company and fulfilling certain resale registration obligations increased approximately $2.4 million in 2013 as compared to 2012. Pre-opening Costs Our pre-opening costs are those typically associated with the openings of a new store and generally include rent expense, payroll costsand promotional costs. We expense pre-opening costs as incurred and include these costs in selling, general and administrative expenses. During the yearsended December 31, 2013 and 2012, we reported pre-opening costs of $2.4 million and $1.1 million, respectively. 22 Deferred Compensation Expense We had no deferred compensation expense in 2013 compared to $3.9 million in 2012. The decrease in deferredcompensation expense was due to the termination of The Tile Shop’s historical equity incentive deferred compensation plan, or the Deferred CompensationPlan, and the related cash payment to each former participant in our Deferred Compensation Plan in August 2013, as well as accelerated vesting of certainmembership interests in The Tile Shop in connection with the consummation of the Business Combination during 2012. We will not recognize anyadditional expense related to the foregoing Business Combination matters in 2014. Income From Operations and Operating Margin As a result of the above, income from operations decreased by $1.3 million, or (3.9%), from fiscalyear 2012 to fiscal year 2013. Operating income margin decreased from 18.8% to 14.4%, or by (23.4%). Interest Expense Interest expense increased $1.3 million, or 106.2%, for the year ended December 31, 2013 compared to the year ended December 31,2012. The increase is due to an increase in debt outstanding from borrowings under our credit facility, which was outstanding for the full year. Change in Fair Value of Warrants The decrease in change in fair value of warrant liability of $27.8 million relates to a non-cash charge for the changein the fair value of the outstanding warrants during the year ended December 31, 2013. The warrants were assumed by the Company in connection withthe Business Combination on August 21, 2012. As of December 31, 2013, the warrants were fully exercised or redeemed, and no further expense will berecorded for these warrants in future periods. Income Tax (Provision) Benefit Income tax provision increased by $14.0 million to $11.9 million for the year ended December 31, 2013 compared to abenefit of $2.0 million for the year ended December 31, 2012 due to higher taxable income. The Company was not a taxable entity until August 21, 2012. Net (Loss) Income Primarily as a result of the change in the fair value of the warrant liability described above, we recorded a net loss of $35.7 millionfor the year ended December 31, 2013 compared to a net loss of $46.9 million in the previous year. Excluding the change in fair value of warrants, whichwas $54.2 million for the year ended December 31, 2013 and $82.1 million for the year ended December 31, 2012, net income was $18.6 million and$35.2 million for the years ended December 31, 2013 and 2012, respectively, which represents a decrease of $16.6 million, or 47% as compared to theprevious year. This decrease is primarily the result of becoming a taxable entity late in 2102. We believe this non-GAAP measure is useful because itexcludes a significant item that is considered to be non- operational and of a non-cash nature, and which will change from period to period due to theimpact of market fluctuations. The non-GAAP measure thereby facilitates our evaluation of current operating performance and comparisons to pastoperating performance. Comparison of the Year Ended December 31, 2012 and the Year Ended December 31, 2011 Years Ended December 31, 2012 % of sales 2011 % of sales (in thousands) Net sales $182,650 $152,717 Cost of sales 49,626 27.2% 40,321 26.4% Gross profit 133,024 72.8% 112,396 73.6% Selling, general and administrative expenses 94,716 51.9% 78,368 51.3% Deferred compensation expense 3,897 2.1% 1,415 0.9% Income from operations 34,411 18.8% 32,613 21.4% Interest expense 1,252 0.7% 443 0.3% Change in fair value of warrants 82,063 44.9% - 0.0% Other income (expense) 15 0.0% (77) (0.1%)(Loss) income before income taxes (48,889) (26.8%) 32,093 21.0% Benefit (provision) for income taxes 2,002 1.1% (733) (0.5%)Net (loss) income $(46,887) (25.7%) $31,360 20.5% Net Sales From fiscal year 2011 to fiscal year 2012, our net sales increased by $29.9 million, or 19.6%, to $182.7 million. This increase is primarilydue to net sales of $11.5 million from 15 new stores and strong same store sales growth. Gross Profit Gross profit increased $20.6 million, or 18.4% from fiscal year 2011 to fiscal year 2012 primarily due to the increase in net sales. Grossmargin decreased from 73.6% in 2011 to 72.8% in 2012, or 0.1%. The change was primarily driven by slightly higher product related costs andtransportation expenses. 23 Selling, General, and Administrative Expenses Selling, general, and administrative expenses increased by $16.3 million, or 20.9%, in fiscal year2012 compared to fiscal year 2011. As a percentage of net sales, selling, general, and administrative expenses increased from 51.3% in 2011 to 51.9%, orby 1.2%. The increase in selling, general, and administrative expenses was primarily due to increased payroll, rent and occupancy costs, as well asdepreciation and amortization. Payroll costs increased by $9.2 million, driven by growing store base and new employee additions on store and corporatelevels, as well as increased employee compensation costs, including stock-based compensation expense of $1.4 million. Rent expense increased from by$2.6 million from fiscal year 2011 to fiscal year 2012. Depreciation and amortization increased by $1.9 million from fiscal year 2011 to fiscal year 2012.Higher compliance, regulatory, and personnel costs associated with being a public company also had an impact on selling, general, and administrativeexpense. Pre-opening Costs Our pre-opening costs are those typically associated with the openings of a new store and generally include rent expense, payroll costsand promotional costs. Pre-opening costs are expensed as incurred and recorded in selling, general and administrative expenses. During the years endedDecember 31, 2012 and 2011, we reported pre-opening costs of approximately $1.1 million and $0.4 million, respectively. Deferred Compensation Expense Deferred compensation expense increased $2.5 million, or 175.4% in fiscal year 2012 compared to fiscal year 2011.The increase in deferred compensation expense was primarily due to the termination of The Tile Shop’s historical equity incentive deferred compensationplan, or the Deferred Compensation Plan, and the related agreement to make a lump-sum cash payment to each former participant in our DeferredCompensation Plan, as well as accelerated vesting of certain membership interests in The Tile Shop in connection with the consummation of the BusinessCombination. We will not recognize any additional expense related to the foregoing. Income From Operations and Operating Margin As a result of the above, income from operations increased by $1.8 million, or 5.5%, fromfiscalyear 2011 to fiscal year 2012. Operating income margin decreased from 21.4% to 18.8%, or by 12.1%. Excluding the non-recurring deferred compensationcosts in each period, income from operations would have been $38.3 million for the year ended December 31, 2012 and $34.0 million for the year endedDecember 31, 2011. Interest Expense Interest expense increased $0.8 million, or 183%, for the year ended December 31, 2012 compared to the year ended December 31,2011. The increase is primarily due to interest incurred on the promissory notes issued in connection with the Business Combination, which have beenrepaid in full, and our new credit facility. Change in Fair Value of Warrants The increase in change in fair value of warrant liability of $82.1 million, relates to a non-cash charge for the changein the fair value of the outstanding warrants for the year ended December 31, 2012. The warrants were assumed by the Company in connection with theBusiness Combination on August 21. Subsequent to December 31, 2012, all warrants were fully exercised or redeemed. Income Tax Benefit (Provision) Income tax benefit increased $2.7 million for the year ended December 31, 2012 compared to a provision of $.7 millionfor the year ended December 31, 2011 as a result of becoming a taxable entity due to the Business Combination, and because of these developments, werecognized $5.9 million of net deferred tax assets, which was offset by a tax expense of $3.9 million for the period from August 21, 2012 throughDecember 31, 2012. Net (Loss) Income Primarily as a result of the change in the fair value of the warrant liability described above, we recorded a net loss of $46.9 millionfor the year ended December 31, 2012 compared to $31.4 million of net income in the previous year. Excluding the change in fair value of warrants, whichwas $82.1 million for the year ended December 31, 2012, net income would have been $35.2 million, which represented an increase of $3.8 million, or12.2% as compared to the previous year. We believe this non-GAAP measure is useful because it excludes a significant item that is considered to benonoperational and of a non-cash nature, and which will change from period to period due to the impact of market fluctuations. The non-GAAP measurethereby facilitates our evaluation of current operating performance and comparisons to past operating performance. Liquidity and Capital Resources Our principal liquidity requirements have been for working capital and capital expenditures. Our principal sources of liquidity are $2.6 million of cashand cash equivalents at December 31, 2013, our cash flow from operations, and borrowings available under our credit facility. We expect to use thisliquidity for general corporate purposes, including opening new stores, purchasing additional merchandise inventory and maintaining our existing stores. On October 3, 2012, the Company and its operating subsidiary, The Tile Shop, LLC, entered into a credit facility with Bank of America, N.A. (the“Credit Agreement”). The Credit Agreement, as amended, provides the Company with a $120 million senior secured credit facility, comprised of a five-year $25 million term loan and a $95 million revolving line of credit. The Amended Credit Agreement is secured by virtually all of the assets of theCompany, including but not limited to, inventory, receivables, equipment and real property. Borrowings pursuant to the Credit Agreement bear interest ateither a base rate or a LIBOR-based rate, at the option of the Company. The LIBOR-based rate will range from LIBOR plus 1.75% to 2.25%, dependingon 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 Bank of America “prime rate,”and (c) the Eurodollar rate plus 1.00%, in each case plus 0.75% to 1.25% depending on The Tile Shop’s leverage ratio. At December 31, 2013 and 2012,the base interest rate was 4.25%. At December 31, 2013 and 2012 the LIBOR-based interest rate was 2.408% and 2.615%, respectively. As of December31, 2013 and 2012, the Company had outstanding borrowings related to the revolving line of credit of $73.5 million and $47.6 million, respectively. Theterm loan requires quarterly principal payments of $0.9 million. The Credit Agreement contains customary events of default, conditions to borrowings,and restrictive covenants, including restrictions on the Company’s and The Tile Shop’s ability to dispose of assets, make acquisitions, incur additionaldebt, incur liens, make investments, or enter into transactions with affiliates on other than on 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 adjustedleverage ratios. In addition, except with respect to pro rata payments made by The Tile Shop or other subsidiaries to the Company or any other equityowner of such entity, the Credit Agreement prohibits the payment of cash dividends. The Company was in compliance with the covenants during the yearended December 31, 2013, based on an amendment dated April 30, 2013 which excluded the impact of the repurchase of warrants and the repurchase ofcapital stock, up to the amount of cash proceeds received from warrant exercises, from the calculation of certain financial covenants and an amendmentdated July 8, 2013 which excluded the liabilities related to the New Market Tax Credit transaction (see Note 13 to Part II, Item 8) from our leverage ratio. 24 We have used borrowings during the year ended December 31, 2013 pursuant to the credit agreement for general corporate purchases, working capital,building of new stores and distribution centers and manufacturing facilities, and improvements to existing stores, corporate headquarters and distributioncenters. Additional borrowings pursuant to the credit facility may be used to support our growth and for working capital purposes. We believe that our cash flow from operations, together with our existing cash and cash equivalents, and borrowings available under our credit facility willbe sufficient to fund our operations and anticipated capital expenditures over at least the next 12 months. In 2013, we made capital expenditures of approximately $52.9 million. The expenditures included cash paid for new stores, with an aggregate cost ofapproximately $31.1 million. Approximately $4.6 million was spent to renovate our existing in-store displays and $4.8 million to expand our distributioncenters, $8.2 million to complete a new distribution and manufacturing facility and $3.7 million to expand corporate headquarters and expand our existinginformation technology infrastructure. The remainder of capital expenditures related to general corporate matters. Our future capital requirements will vary based on the number of additional stores, distribution centers, and manufacturing facilities that we open and thenumber of stores that we choose to renovate. Our decisions regarding opening, relocating, or renovating stores, and whether to engage in strategicacquisitions, will be based in part on macroeconomic factors and the general state of the U.S. economy, as well as the local economies in the markets inwhich our stores are located. As of now, we intend to open 20 stores at an expected aggregate cost of approximately $28 million in 2014. Cash Flows The following table summarizes our cash flow data for the years ended December 31, 2013, 2012, and 2011. Years Ended December 31, 2013 2012 2011 (in thousands) Net cash provided by operating activities $21,211 $47,222 $34,722 Net cash used in investing activities (52,955) (29,064) (18,561)Net cash provided by (used in) financing activities 30,518 (21,454) (23,995) Operating Activities Cash flows from operating activities were significantly influenced by net income, depreciation and amortization of property, plant and equipment,amortization of deferred rent, changes in warrant liability, deferred compensation payments and changes in working capital. In 2013 net cash provided by operating activities was $21.2 million. The increase in cash provided by operating activities was primarily due to our netincome from operations, decreased accounts payable and other liability payments, and a decrease in our prepaid expenses. These items were partiallyoffset by a $6.2 payment on deferred compensation , $7 million of estimated tax payments, and a $20.9 million in inventory purchases. The increase ininventory purchases related to the opening of a new distribution center during 2013, the opening of 20 new stores during 2013, and the anticipation ofopening 20 new stores in 2014. Also, the increased inventory balances are in anticipation of the expected increase in our net sales in 2014. In 2012, cash provided by operating activities was $47.2 million, driven primarily by our net loss of $46.9 million, which was reduced by non- cashcharges of $98.3 million, including $82.1 million of change in fair value of warrants, $10.5 million of depreciation and amortization, $1.4 million ofstock-based compensation, $3.0 million of deferred rent, and $3.9 million of deferred compensation costs, offset by a non-cash income tax benefit of $2.6million. In addition, these cash inflows were decreased by an increase in working capital of $4.2 million, which included a $0.3 million increase in tradereceivables, a $0.3 million increase in inventories, a $4.6 million increase in prepaid expenses, prepaid inventory and other current assets, a $1.1 millionincrease in accounts payable, and a $3.4 million decrease in accrued expenses and other liabilities, and a $2.5 million increase in income tax receivable. In 2011, cash provided by operating activities was $34.7 million, driven primarily by our net income of $31.4 million, which was reduced by non- cashcharges of $12.8 million, including $8.7 million of depreciation and amortization, $2.5 million of deferred rent, $1.4 million of deferred compensationexpense, and a $0.2 million loss on disposal of property, plant, and equipment. These cash inflows were offset by an increase in working capital of $9.4million, which included a $0.2 million decrease in trade receivables, an $8.4 million increase in inventories, a $0.4 million increase in prepaid expensesand other current assets, a $1.8 million decrease in accounts payable, and a $1.0 million increase in accrued expenses and other liabilities. Investing Activities Net cash used in investing activities was $53.0 million, $29.1 million and $18.6 million in 2013, 2012, and 2011, respectively. Net cash used ininvesting activities in each period included capital purchases of store fixtures, equipment, building improvements and leasehold improvements for storesopened or remodeled, new distribution and manufacturing facilities, and corporate headquarters expansion, internally developed software and routinecapital purchases of computer hardware and software. 25 Financing Activities Net cash provided by (used in) financing activities was $30.5 million, ($21.5) million and ($24.0) million in 2013, 2012, and 2011, respectively. Cashprovided by financing in 2013 was primarily from the proceeds of exercises of warrants, net advances on our credit facility, and cash provided by theNMTC transaction (Note 13). Cash used by financing was primarily for repurchase of common stock and warrants and principal payments on long-termdebt. Net cash used in financing activities in 2012 and 2011 included capital purchases of store fixtures, equipment and leasehold improvements forstores opened or remodeled, and routine capital purchases of computer hardware and software. Off-balance Sheet Arrangements As of December 31, 2013 and December 31, 2012, we did not have any “off-balance sheet arrangements” (as such term is defined in Item 303 ofRegulation S-K) that could have a current or future effect on our financial condition, changes in financial condition, net sales or expenses, results ofoperations, liquidity, capital expenditures or capital resources. Contractual Arrangements The following table summarizes certain of our contractual obligations at December 31, 2013 and the effect such obligations are expected to have on ourliquidity and cash flows in future periods: Payment Due by Period Total Less than 1Year 1-3 Years 4-5 Years 5+ Years Long-term debt including principal and interest $106,719 $5,884 $11,777 $88,443 $615 Operating lease obligations 398,392 20,669 42,303 43,355 292,065 Capital lease obligations 2,270 472 635 426 737 Total contractual obligations $507,381 $27,025 $54,715 $132,224 $293,417 (1)Includes total interest of $11.5 million, comprised of $2.3 million of interest for the period of less than 1 year, $4.6 million of interest for the period of1 – 3 years, $4.6 million of interest for the period of 4 – 5 years, and $0 million of interest for the period of 5+ years.(2)Includes the base or current renewal period for our operating leases, which contain varying renewal provisions.(3)Includes total interest of $0.8 million, comprised of $0.2 million of interest for the period of less than 1 year, $0.3 million of interest for the period of 1– 3 years, $0.2 million of interest for the period of 4 – 5 years, and $0.2 million of interest for the period of 5+ years. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requires us to makeestimates, assumptions, and judgments that affect the reported amount of assets, liabilities, revenues, costs and expenses, and related disclosures. Webase our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances, but all suchestimates and assumptions are inherently uncertain and unpredictable. We evaluate our estimates and assumptions on an ongoing basis. Actual resultsmay differ from those estimates and assumptions, and it is possible that other professionals, applying their own judgment to the same facts andcircumstances, could develop and support alternative estimates and assumptions that would result in material changes to our operating results andfinancial condition. Our most critical accounting policies are summarized below. For further information on our critical and other significant accountingpolicies, see the notes to the consolidated financial statements appearing elsewhere in this 10-K. Recognition of Revenue We recognize sales at the time that the customer takes possession of the merchandise. We recognize service revenue, which consists primarily of freightcharges for home delivery, when the service has been rendered. We are required to charge and collect sales and other taxes on sales to our customers andremit these taxes back to government authorities. Sales and other taxes are recorded net in the consolidated balance sheets but excluded from theconsolidated statements of income. Net sales are reduced by an allowance for anticipated sales returns that we estimate based on historical sales trends andexperience. Any reasonably likely changes that may occur in the assumptions underlying our allowance estimates would not be expected to have a materialimpact on our financial condition or operating performance. Our revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment toestimate future sales returns and exchanges and the associated costs. The customer may receive a refund or exchange the original product for a replacementof equal or similar quality for an indefinite period of time after the original purchase. Products received back under this policy are reconditioned pursuantto state laws and resold. 26 (1)(2)(3) Stock-based Compensation We have granted equity-linked incentives to certain of our employees. We account for equity-linked incentives in accordance with ASC 718 “StockCompensation”. ASC 718 addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchangefor equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. We have granted cash-settled and equity-settled awards. Prior to the consummation of the Business Combination, the cash-settled awards were classifiedas liabilities as required under ASC 718. At each reporting date, the liability was measured at intrinsic value with resulting changes recognized in ourconsolidated statements of income. As of the consummation of Business Combination, we have only equity-settled awards. We measure compensation cost for equity-settled awards at fairvalue on the date of grant and recognize compensation cost in our consolidated statements of income over the service or performance period through whichthe award is expected to vest. We determine compensation cost by using option pricing models. Property, Plant, and Equipment Property, plant and equipment is carried at cost less accumulated depreciation, which is amortized over the useful life of the assets. Leaseholdimprovements are amortized over the shorter of their estimated useful lives or lease period (including expected renewal periods). Property, plant, andequipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Ourinvestment in store leasehold improvements, including fixtures and equipment, is the most significant component of property, plant, and equipment. When evaluating property, plant, and equipment for potential impairment, if certain impairment indicators exist, we first compare the carrying value of theasset’s undiscounted estimated future cash flows. If the estimated future cash flows are less than the carrying value of the asset, we calculate animpairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which is based on estimatedfuture discounted cash flows. We recognize impairment if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. Based upon theimpairment review, there were no impairment losses reported in the financial statements. We have not made any material changes in the policy that we use to assess impairment losses. We have not incurred any material impairment losses in the past and do not believe that a reasonable likelihood exists that there will be a material change inthe estimates or assumptions used to calculate property, plant, and equipment asset impairment losses. However, if actual results are not consistent withour estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material. Income taxes As a result of the Business Combination, beginning August 21, 2012, our results of operations are taxed as a C Corporation. Prior to the BusinessCombination, The Tile Shop’s operations were taxed as a limited liability company, whereby The Tile Shop elected to be taxed as a partnership and theincome or loss was required to be reported by each respective member on their separate income tax returns. Therefore, no provision for federal income taxeshas been provided in the accompanying consolidated financial statements for periods prior to August 21, 2012. The provision recorded prior to August21, 2012, represents income taxes primarily payable by the LLC, due to minimum fees in several states and income tax in the state of Michigan. Since August 21, 2012, we have recognized deferred tax liabilities and assets for the expected future tax consequences of events that have been included inthe financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement basis andtax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We estimate the degree towhich tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such taxassets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax asset will not be realized infuture periods. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced. New Accounting Pronouncements There have been no new accounting pronouncements that we would expect to have a significant impact on our results of operations, financial condition orliquidity. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks in the ordinary course of our business. These risks include primarily inflation, interest rate risk, and credit concentrationrisk. Inflation Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our operating results. Although we do not believethat inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverseeffect on our ability to maintain current levels of gross margin and selling, general, and administrative expenses as a percentage of revenues if the sellingprices of our products do not increase with these increased costs. 27 Interest Rate Risk We are exposed to interest rate risk through the investment of our cash and cash equivalents and in connection with borrowings under our $120 millioncredit facility. Borrowings under our revolving credit facility bear interest at either a base rate or a LIBOR-based rate, at our option. The LIBOR-based rateranges from LIBOR plus 1.75% to 2.25%, depending on The Tile Shop’s leverage ratio. The base rate will be equal to the greatest of: (a) the Federal fundsrate plus 0.50%, (b) the Bank of America “prime rate,” and (c) the Eurodollar rate plus 1.00%, in each case plus 0.75% to 1.25% depending on The TileShop’s leverage ratio. The base rate was 4.25% at December 31, 2013. Based upon balances and interest rates as of December 31, 2013, holding othervariables constant, a one percentage point increase in interest rates for the next 12-month period would decrease pre-tax earnings and cash flow byapproximately $1.0 million. Conversely, a one percentage point decrease in interest rates for the next 12-month period would result in an increase to pre-taxearnings and cash flow of approximately $1.0 million. We invest in short-term investments with maturities of three months or less. Changes in interestrates affect the interest income that we earn in connection with these investments, and therefore impact our cash flows and results of operations. We currently do not engage in any significant interest rate hedging activity. However, we may do so in the future to mitigate market risk rate. We do not,and do not intend to, engage in the practice of trading derivative securities for profit. Credit Concentration Risk Financial instruments, which may subject us to concentration of credit risk, consist principally of cash deposits. We maintain cash balances at financialinstitutions with strong credit ratings. However, the amounts invested with financial institutions are generally in excess of FDIC insurance limits. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and the reports of the independent registered public accounting firms, listed under Item 15“Exhibits, Financial Statement Schedules”, are included as a separate section of this Annual Report on Form 10-K beginning on page 34 and areincorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controlsand procedures as of December 31, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company inthe reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designedto ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated andcommunicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisionsregarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures. Based on the evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the material weaknessesidentified by our auditors in connection with their audit of our consolidated financial statements for the year ended December 31, 2012 were effectivelyremediated as of December 31, 2013 and that our disclosure controls and procedures were effective as of December 31, 2013. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f)promulgated under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief ExecutiveOfficer and Chief Financial Officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with accounting principles generallyaccepted in the United States of America (“GAAP”). Internal control over financial reporting includes policies and procedures that: (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of an issuer’s assets; (ii) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that anissuer’s receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (iii) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of an issuer’s assets that could have a material effect onthe consolidated financial statements. An internal control material weakness is a significant deficiency, or combination of significant deficiencies, ininternal control over financial reporting, such that there is a reasonable possibilities that a material misstatement of the annual or interim financialstatements will not be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not preventor 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. 28 As disclosed in our Form 10Q/A for the quarterly period ended September 30, 2012, in connection with the preparation of our consolidated financialstatements for the year ended December 31, 2012, management identified that previously issued financial statements for the three and nine months endedSeptember 30, 2012, contained a misstatement relating to the Company’s accounting for its outstanding common stock purchase warrants. As a result ofthis restatement, a material weakness was identified in our internal controls related to the Company’s identification and analysis of the complex accountingand financial reporting attributes associated with certain non-routine transactions such as our common stock purchase warrant agreements, including notutilizing qualified external experts to supplement internal resources. We implemented additional procedures to remediate this material weakness, including(1) developing common processes for identifying non-routine events and transactions that may require the involvement of subject matter experts, (2)developing a common methodology for assessing the accounting, disclosure and reporting implications surrounding non-routine transactions, (3)increasing our critical analysis of the guidance and recommendations provided by subject matter experts and (4) developing an appropriate concludingframework that enables management to consider all relevant input in arriving at a conclusion. As required by Rule 13a-15(c) promulgated under the Exchange Act, our management, with the participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2013. Management’s assessment wasbased on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework(1992 Framework) (“COSO”). Based on Management’s assessment, management believes that, as of December 31, 2013, the material weaknessidentified above was remediated as of December 31, 2013 and our internal control over financial reporting is effective based on those criteria. Ernst & Young, LLP, our independent registered public accounting firm, has issued a report on our internal control over financial reporting as ofDecember 31, 2013. See “Item 8. Consolidated Financial Statements and Supplementary Data”. Changes in Internal Control over Financial Reporting Except as discussed below, there was no change in our internal control over financial reporting that occurred during the fourth quarter of our fiscal yearthat has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Remediation of the 2012 Material Weakness We implemented additional procedures to remediate the 2012 material weakness described above. Those additional procedures included (1) developing acommon process for identifying non-routine events and transactions that may require the involvement of subject matter experts, (2) developing a commonmethodology for assessing the accounting, disclosure and reporting implications surrounding non-routine transactions, (3) increasing our critical analysisof the guidance and recommendations provided by subject matter experts and (4) developing an appropriate concluding framework that enablesmanagement to consider all relevant input in arriving at a conclusion. Management believes the efforts effectively remediated the material weakness as ofDecember 31, 2013. 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 internalcontrol over financial reporting are designed to provide reasonable assurance of achieving their objectives. However, our management does not expect thatour disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of acontrol system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of theinherent 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 occurbecause of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or morepeople or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about thelikelihood 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. ITEM 9B. OTHER INFORMATION None. 29 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE DIRECTORS AND EXECUTIVE OFFICERS Executive Officers The following table provides information about our executive officers, including their ages, as of the date of this Form 10-K. Name Age PositionRobert A. Rucker 61 Chief Executive Officer and President; DirectorChris Homeister 45 Chief Operating OfficerTimothy C. Clayton 59 Chief Financial Officer; Senior Vice PresidentJoseph Kinder 48 Senior Vice President – OperationsCarl Randazzo 49 Senior Vice President – RetailLeigh M. Behrman 60 Vice President – Human Resources and Compliance Robert A. Rucker has been our Chief Executive Officer and president, and a member of our Board since June 2012. Previously, Mr. Rucker served as TheTile Shop’s Chief Executive Officer and president, and as a member of its board of managers. Mr. Rucker holds a B.E.S. in Psychology and Historyfrom the University of Minnesota. We believe that Mr. Rucker is qualified to serve on our Board based on his historic knowledge of The Tile Shop as itsfounder and his strategic vision for our Company. Chris Homeister has been our Chief Operating Officer since October 2013. From May 2012 through September 2013, Mr. Homeister was chief executiveofficer and founder of Homeister Ventures LLC, a provider of consulting services for private equity, venture capital, retail, and consumer electronicsfirms. Prior thereto, from June 2009 through April 2012, Mr. Homeister served as senior vice president and general manager of Best Buy Co., Inc.’sEntertainment Business Group, where he was responsible for all elements and the management of the business unit. From April 2005 to May 2009, heheld various roles at Best Buy, including senior vice president of Digital Merchandising and Strategic Planning; vice president of Merchandising, MobileElectronics and Computing; and senior director of Business Team Finance. Prior to Best Buy, Mr. Homeister held management positions at Gateway, Inc.and Amoco Oil Company. Mr. Homeister earned an M.B.A. from the University of Notre Dame and a B.B.A. in finance from the University of Iowa. Timothy C. Clayton has been our Chief Financial Officer and Senior Vice President since August 2012. From June 2012 to August 2012 Mr. Claytonserved as a financial consultant to The Tile Shop. From June 2010 through August 2012 Mr. Clayton served as the chief financial officer of Sajan, Inc., apublicly-traded provider of language translation services and software. Prior to June 2010, Mr. Clayton has been the principal of Emerging Capital, LLC,a management consulting firm he founded in 2000, and, in such capacity, has served as the chief financial officer of ADESA, Inc., an automotiveservices company, and of numerous other public and private companies. From November 1997 to June 2000, Mr. Clayton was the executive vicepresident, chief financial officer and treasurer of Building One Services Corporation, a publicly-traded facilities services company, of which he was also aco-founder. From August 1976 until November 1997, Mr. Clayton served in various capacities at Price Waterhouse, LLP, an independent publicaccounting firm, including serving as an audit and business advisory services partner from July 1988 to November 1997. From January 2005 untilMarch 2013, Mr. Clayton served as a director and chairman of the audit committee of Agribank, FSB, a wholesale bank serving the rural agriculturalmarket. Mr. Clayton holds a B.A. in accounting from Michigan State University and is a certified public accountant. Joseph Kinder has been our Senior Vice President — Operations since June 2012. Previously, Mr. Kinder served as The Tile Shop’s supply chainmanager from August 1995 until June 2012, as an assistant store manager for The Tile Shop from March 1994 to August 1995, and as a sales personat The Tile Shop from March 1993 to March 1994. Mr. Kinder holds a B.A. in Business from the College of Saint Thomas. Carl Randazzo has been our Senior Vice President — Retail since June 2012. Previously, Mr. Randazzo served as The Tile Shop’s national sales managerfrom October 2006 until June 2012, as a regional sales manager for The Tile Shop from June 2004 to October 2006, as a store manager for The Tile Shopfrom April 1994 to June 2004, and as a sales person at The Tile Shop from October 1992 to April 1994. Mr. Randazzo holds a B.S. in Economics fromArizona State University. Leigh M. Behrman has been our Vice President — Human Resources and Compliance since June 2012. Previously, Mr. Behrman served as The TileShop’s human resources manager from October 2007 until June 2012, as The Tile Shop’s facility manager from June 1999 to October 2007, and as TheTile Shop’s corporate controller from January 1988 to June 1999. NON-MANAGEMENT DIRECTORS The following table provides information about our non-management directors, including their ages, as of the date of this Form 10-K. Name Age PositionClass I Directors: Peter J. Jacullo III 59 Director(1)(2)Adam L. Suttin 46 DirectorClass II Directors: Peter H. Kamin 51 DirectorTodd Krasnow 56 DirectorClass III Directors: Robert A. Rucker 61 Chief Executive Officer and President; DirectorWilliam E. Watts 61 Director; Chairman of the Board(1) Member of the Audit Committee.(2) Member of the Compensation Committee.(3) Member of the Nominating and Corporate Governance Committee. 30(1)(1)(3)(2)(3)(2) Peter J. Jacullo III has served as a member of our Board since August 2012. Previously, Mr. Jacullo served as a member of The Tile Shop’s board ofmanagers from December 2007 to August 2012. Since July 1987, Mr. Jacullo has been a self-employed investor and consultant, and he currently serveson the board of directors of various privately-held companies. Previously, Mr. Jacullo was a vice president and director of the Boston Consulting Groupfrom May 1984 to July 1987, where he was also employed in various other capacities from May 1978 to May 1984. He is currently a director of ANZTerminals Pty Limited, an Australian-based independent operator of bulk liquid and gas storage facilities with facilities located in Australia and NewZealand, and of Magnatech International Inc., a provider of equipment for the hydraulic hose industry. Mr. Jacullo holds an M.B.A. from the Universityof Chicago and a B.A. in Economics from Johns Hopkins University. We believe that Mr. Jacullo is qualified to serve on our Board in light of thecontinuity that he provides on our Board and his experience as a professional investor. Adam L. Suttin has served as a member of our Board since August 2012. Previously, Mr. Suttin served as president of JWC Acquisition Corp. Mr. Suttinco-founded J.W. Childs Associates, L.P., a private equity investment firm, in 1995 and is a partner of that firm. From 1989 to 1995, Mr. Suttin was aninvestment professional at Thomas H. Lee Company. He is currently a member of the board of directors of Brookstone, Inc., Sunny Delight BeveragesCo., Esselte Ltd., Mattress Firm Holdings, Inc., and The NutraSweet Company. Mr. Suttin holds a B.S. in Economics from the Wharton School of theUniversity of Pennsylvania and a B.A.S. in Engineering from the Moore School of Engineering of the University of Pennsylvania. We believe that Mr.Suttin is qualified to serve on our Board in light of his experience as a co-founder of J.W. Childs and his experience as a director of various companies. Peter H. Kamin has served as a member of our Board since August 2012. Previously, Mr. Kamin served as a member of The Tile Shop’s board ofmanagers from January 2012 to August 2012. Mr. Kamin has served as managing partner of 3K Limited Partnership, an investment fund, since January2012. Previously, Mr. Kamin was the founding partner of ValueAct Capital, an investment fund, from January 2000 to January 2012. Since June 2012,Mr. Kamin has been a director and member of the audit committee of Ambassadors Group, Inc., a publicly-traded educational travel company; since May2012, Mr. Kamin has been a director and member of the governance committee of MAM Software Group, Inc., a publicly-traded provider of businessautomation and ecommerce solutions for the automotive aftermarket; and since April 2012, Mr. Kamin has been a director and member of the auditcommittee of Rand Worldwide, Inc., a provider of technology solutions and professional services to engineering and design companies. Mr. Kaminpreviously served on the board of directors and as a member of the audit committee of Adesa, Inc., a publicly-traded provider of vehicle auction andremarketing services, from April 2007 to December 2011; on the board of directors and as a member of the audit and compensation committees of Seitel,Inc., a publicly-traded provider of onshore seismic data to the oil and gas industry, from February 2007 to December 2011; and on the board of directorsand as a member of the governance committee of Exterran Holdings, Inc., a provider of natural gas compression products and services, from January2007 to September 2008. Mr. Kamin holds an M.B.A. from the Harvard University Graduate School of Business and a B.A. in Economics from TuftsUniversity. We believe that Mr. Kamin is qualified to serve on our Board due to his significant experience as a director of publicly-traded companies andhis substantial experience as an investor. Todd Krasnow has served as a member of our Board since August 2012. Previously, Mr. Krasnow served as a member of The Tile Shop’s board ofmanagers from January 2012 to August 2012. Mr. Krasnow has served as the president of Cobbs Capital, Inc., a private consulting company, sinceJanuary 2005, and as marketing domain expert with Highland Consumer Fund, a venture capital firm, since June 2007. Previously, Mr. Krasnow was thechairman of Zoots, Inc., a dry cleaning company, from June 2003 to January 2008, and chief executive officer of Zoots, Inc. from February 1998 to June2003. He served as the executive vice president of sales and marketing of Staples, Inc. from May 1993 to January 1998 and in other sales and marketingpositions for Staples, Inc. from March 1986 to May 1993. Since September 2005, Mr. Krasnow has served as a director of Carbonite, Inc., a publicly-traded provider of online backup solutions for consumers and small and medium sized businesses; since December 2005, Mr. Krasnow has served aschairman of Carbonite’s compensation committee; and since September 2009, he has served as a member of Carbonite’s audit committee. Mr. Krasnow isalso a director of OnForce, Inc., an online marketplace that enables enterprises to hire information technology service professionals; and a member of theadvisory boards of C&S Wholesale Grocers, Inc. and of Kids II, a manufacturer of baby and toddler products. Mr. Krasnow previously served as adirector of Piedmont, Ltd., a Japanese storage company, which conducts business as Quraz which was sold in September 2013, and of Global CustomerCommerce, Inc., an internet retailer of blinds and wall coverings which was sold in January 2014. Mr. Krasnow holds an M.B.A. from the HarvardUniversity Graduate School of Business and an A.B. in Chemistry from Cornell University. We believe that Mr. Krasnow is qualified to serve on ourBoard due to his operating and management experience and his expertise in sales and marketing. William E. Watts has served as a member of our Board since August 2012. Previously, Mr. Watts served as vice president of JWC Acquisition Corp. Mr.Watts has been a partner of J. W. Childs Associates, L.P., a private equity investment firm, since June 2001. From 1991 to 2001, he was president andchief executive officer of General Nutrition Companies. Prior to being named president and chief executive officer, Mr. Watts held the positions of presidentand chief operating officer of General Nutrition, president and chief operating officer of General Nutrition Center, and senior vice president of retailing andvice president of retail operations of General Nutrition Center. Mr. Watts currently serves as non-executive chairman of the board of directors of MattressFirm Holdings, Inc. and as non-executive chairman of the board of directors of JA Apparel Corp. (Joseph Abboud), and director of Brookstone, Inc. Mr.Watts holds a B.A. in Social Science from the State University of New York at Buffalo. We believe that Mr. Watts is qualified to serve on our Board inlight of his experience as a director of various companies and his experience as chief executive officer of a company with a well-known brand. In accordance with our certificate of incorporation, our Board is divided into three classes with staggered three-year terms. At each annual meeting ofstockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annualmeeting following election. Except as otherwise provided by law and subject to the rights of any class or series of preferred stock, vacancies on our boardof directors (including a vacancy created by an increase in the size of the board of directors) may be filled only by the affirmative vote of a majority of theremaining directors. A director elected by the board of directors to fill a vacancy (other than a vacancy created by an increase in the size of the board ofdirectors) serves for the unexpired term of such director’s predecessor in office and until such director’s successor is elected and qualified. A directorappointed to fill a position resulting from an increase in the size of the board of directors serves until the next annual meeting of stockholders at which theclass of directors to which such director is assigned by the board of directors is to be elected by stockholders and until such director’s successor is electedand qualified. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, asnearly as possible, each class will consist of one-third of the directors. 31 Our directors are divided among the three classes as follows: •The Class I directors are Messrs. Jacullo and Suttin, with terms expiring at the annual meeting of stockholders to be held in 2016; •The Class II directors are Messrs. Kamin and Krasnow, with terms expiring at the annual meeting of stockholders to be held in 2014; and •The Class III directors are Messrs. Rucker and Watts, with terms expiring at the annual meeting of stockholders to be held in 2015. Our Board met ten times between January 1, 2013 and December 31, 2013. Each director attended at least 75% of the meetings of the Board and of anycommittee of the Board on which such director served that was held between January 1, 2013 and December 31, 2013. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS In October 2011, Mr. Joseph Kinder, our senior vice president – operations, was involved in a domestic dispute (misdemeanor charge stayed) and a verbalaltercation with police officers (pled guilty to a gross misdemeanor). SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and persons who own more than ten percent of a registeredclass of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and otherequity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Companywith copies of all Section 16(a) forms they file. To the Company’s knowledge, based on a review of the copies of such reports furnished to the Company, the officers, directors and greater than tenpercent stockholders complied with all Section 16(a) filing requirements during the fiscal year ended December 31, 2013, except that one sale transactionby Nabron International, Inc. was not reported on a timely-filed Form 4, but such transaction was subsequently reported on a timely-filed Form 5. CODE OF BUSINESS CONDUCT AND ETHICS The Company has adopted a Code of Business Conduct and Ethics that applies to all officers, directors and employees. We intend to maintain the higheststandards of ethical business practices and compliance with all laws and regulations applicable to our business. The Code of Business Conduct andEthics is available on the “Investor Relations” section of our website, at http://investors.tileshop.com, under the “Governance” heading. We intend tosatisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Ethics andBusiness Conduct by posting such information on our website at the web address and location specified above. COMMITTEES OF THE BOARD OF DIRECTORS Our Board of Directors has established the following committees: an audit committee, a compensation committee, and a nominating and corporategovernance committee. The composition and responsibilities of each committee are described below. Members serve on these committees until theirresignation or until otherwise determined by our Board. Audit Committee Our Audit Committee oversees our corporate accounting and financial reporting process, the audit of our financial statements, and our internal controlprocesses. Among other matters, the Audit Committee evaluates our independent auditors’ qualifications, independence, and performance; determines theengagement, retention, and compensation of the independent auditors; reviews and approves the scope of the annual audit and the audit fee; discusses withmanagement and the independent auditors the results of the annual audit and the review of our quarterly financial statements, including the disclosures inour annual and quarterly reports to be filed with the SEC; approves the retention of the independent auditors to perform any proposed permissible non-audit services; reviews our risk assessment and risk management processes; establishes procedures for receiving, retaining, and investigating complaintsreceived by us regarding accounting, internal accounting controls, or audit matters; monitors the rotation of partners of the independent auditors on ourengagement team as required by law; reviews our critical accounting policies and estimates; and oversees any internal audit function. Additionally, theAudit Committee reviews and approves related person transactions and reviews and evaluates, on an annual basis, the Audit Committee charter and thecommittee’s performance. Our independent registered public accounting firm and management each periodically meet privately with our Audit Committee. The current members of our Audit Committee are Messrs. Jacullo, Kamin, and Suttin, with Mr. Kamin serving as the chair of the committee. Allmembers of our Audit Committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and Nasdaq. OurBoard has determined that Mr. Kamin is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisitefinancial sophistication as defined under the applicable rules and regulations of Nasdaq. A description of Mr. Kamin’s experience is set forth above under“Non-Management Directors.” Messrs. Jacullo, Kamin, and Suttin are independent directors as defined under the applicable rules and regulations of theSEC, Nasdaq and Public Company Accounting Oversight Board. The Audit Committee operates under a written charter that satisfies the applicablestandards of the SEC and Nasdaq, and which is available at our website, www.tileshop.com, in the “Info – Legal/Investors– Investor Relations” section,under “Governance – Governance Documents.” The Audit Committee met thirteen times between December 31, 2012 and December 31, 2013. Compensation Committee Our Compensation Committee reviews and recommends policies relating to compensation and benefits of our executive officers and employees. TheCompensation Committee annually reviews and approves corporate goals and objectives relevant to compensation of our chief executive officer and otherexecutive officers, evaluates the performance of these officers in light of those goals and objectives, and sets the compensation of these officers based onsuch evaluations. The Compensation Committee also reviews and makes recommendations to the Board with respect to director compensation andadministers the issuance of stock options and other awards under our equity compensation plans. The Compensation Committee reviews and prepares thenecessary compensation disclosures required by the SEC. Additionally, the Compensation Committee reviews and evaluates, on an annual basis, theCompensation Committee charter and the Committee’s performance. 32 The current members of our Compensation Committee are Messrs. Jacullo, Krasnow, and Watts, with Mr. Krasnow serving as the chair of theCommittee. All of the members of our Compensation Committee are independent under the applicable rules and regulations of the SEC, Nasdaq, andSection 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). The Compensation Committee operates under a written charter thatsatisfies the applicable standards of the SEC and Nasdaq, and which is available at our website, www.tileshop.com, in the “Info – Legal/Investors–Investor Relations” section, under “Governance – Governance Documents.” The Compensation Committee met four times between January 1, 2013 andDecember 31, 2013. Nominating and Corporate Governance Committee Our Nominating and Corporate Governance Committee is responsible for making recommendations regarding corporate governance; identification,evaluation and nomination of candidates for directorships; and the structure and composition of our Board and committees thereof. In addition, theNominating and Corporate Governance Committee oversees our corporate governance guidelines, approves our committee charters, oversee compliancewith our code of business conduct and ethics, contributes to succession planning, reviews actual and potential conflicts of interest of our directors andofficers other than related person transactions reviewed by the Audit Committee, and oversees the Board of Director self-evaluation process. Additionally,the Nominating and Corporate Governance Committee reviews and evaluates, on an annual basis, the Nominating and Corporate Governance Committeecharter and the Committee’s performance. The current members of our Nominating and Corporate Governance Committee are Messrs. Kamin and Krasnow, with Mr. Krasnow serving as the chairof the Committee. All of the members of our Nominating and Corporate Governance Committee are independent under the applicable rules and regulationsof Nasdaq. The Nominating and Corporate Governance Committee operates under a written charter, which is available at our website, www.tileshop.com,in the “Info – Legal/Investors– Investor Relations” section, under “Governance – Governance Documents.” The Nominating and Corporate GovernanceCommittee met one time between January 1, 2013 and December 31, 2013. DIRECTOR RECOMMENDATION AND NOMINATION PROCESS The Nominating and Corporate Governance Committee considers the following criteria, among other criteria that it deems appropriate, in recommendingcandidates for service on the Board: •Personal and professional integrity; •Experience in corporate management, such as service as an officer of a publicly held company and a general understanding of marketing,finance and other elements relevant to the success of a publicly held company; •Experience in the Company’s industry; •Experience as a member of the board of directors of another publicly held company; •Academic expertise in the area of the Company’s operations; •Practical and mature business judgment, including the ability to make independent analytical inquires; and •The manner in which a candidate’s appointment to the Board would impact the overall composition of the Board with regard to diversity ofviewpoint, professional experience, education, skill, race, gender and national origin. In assessing director candidates, the Nominating and Corporate Governance Committee considers diversity, age, skills, and such other factors as it deemsappropriate given the current needs of the Board of Directors and the Company, to maintain a balance of knowledge, experience and capability. TheNominating and Corporate Governance Committee does not have a formal diversity policy and does not follow any ratio or formula with respect todiversity in order to determine the appropriate composition of the Board. In the case of incumbent directors whose terms of office are set to expire, theNominating and Corporate Governance Committee reviews these directors’ overall service to the Company during their terms, including the number ofmeetings attended, level of participation, quality of performance, and any other relationships and transactions that might impair the directors’independence. In the case of new director candidates, the Nominating and Corporate Governance Committee also determines whether the nominee isindependent for Nasdaq purposes, which determination is based upon applicable Nasdaq listing standards, applicable SEC rules and regulations and theadvice of counsel, if necessary. The Nominating and Corporate Governance Committee conducts any appropriate and necessary inquiries into thebackgrounds and qualifications of possible candidates after considering the function and needs of the Board of Directors. The Nominating and CorporateGovernance Committee meets to discuss and consider the candidates’ qualifications and then selects a nominee by majority vote. The Nominating and Corporate Governance Committee will consider director candidates recommended by stockholders. The Nominating and CorporateGovernance Committee does not intend to alter the manner in which it evaluates candidates, including the minimum criteria set forth above, based onwhether or not the candidate was recommended by a stockholder. To nominate a director for the fiscal 2015 Annual Meeting, stockholders must submitsuch nomination in writing to our Secretary at 14000 Carlson Parkway, Plymouth, Minnesota 55441 not later than the close of business on April 23,2015, nor earlier than the close of business on March 24, 2015. You are advised to review the Company’s Bylaws for requirements relating to directornominees. 33 STOCKHOLDER PROPOSALS FOR 2015 ANNUAL MEETING In order to be considered for inclusion in this year’s proxy statement, stockholder proposals must be submitted in writing to the Company no laterFebruary 12, 2014. The Company suggests that proposals for the 2014 Annual Meeting of Stockholders be submitted by certified mail, return receiptrequested. The proposal must be in accordance with the provision of Rule 14a-8 promulgated by the Securities and Exchange Commission under theSecurities Exchange Act of 1934, as amended. Stockholders who intend to present a proposal or director nomination at the 2015 Annual Meeting of Stockholders without including such proposal ornomination in the Company’s proxy statement must, pursuant to the Company’s Bylaws, deliver to the Company notice of such proposal no earlier thanMarch 24, 2015 and no later than April 23, 2015. The Company reserves the right to reject, rule out of order, or take appropriate action with respect toany proposal that does not comply with these and other applicable requirements. ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION Compensation Discussion and Analysis This section discusses our policies and decisions with respect to the compensation of our executive officers and employees who are named in the “2013Summary Compensation Table” and the most important factors relevant to an analysis of these policies and decisions. We expect that our executivecompensation philosophy as a publicly traded company will differ from our historical compensation philosophy as a result on our CompensationCommittee’s continued review and evaluation of our compensation philosophy and structure. The “named executive officers,” to whom this discussionapplies are: •Robert A. Rucker, chief executive officer; •Chris Homeister, chief operating officer; •Timothy Clayton, chief financial officer; •Joseph Kinder, senior vice president – operations; and •Carl Randazzo, senior vice president – retail. All of our named executive officers served as executive officers during the entire 2013 fiscal year, with the exception of Chris Homeister, who joined theCompany in October 2013. Overview We recognize that our ability to excel depends on the integrity, knowledge, imagination, skill, diversity, and teamwork of our employees. To this end, westrive to create an environment of mutual respect, encouragement, and teamwork that rewards commitment and performance and that is responsive to theneeds of our employees. The principles and objectives of our compensation and benefits programs for our employees generally, and for our namedexecutive officers specifically, are to: •align compensation incentives with our corporate strategies, business, and financial objectives and the long-term interests of our stockholders; •motivate, reward and retain executives whose knowledge, skills, and performance ensure our continued success; and •ensure that total compensation is fair, reasonable, and competitive. Prior to completion of the Business Combination in August 2012, the compensation for our named executive officers has consisted of (i) base salary, (ii)performance bonus, (iii) phantom equity units, (iii) perquisites and health and welfare benefits, and (v) 401(k) plan retirement savings opportunities.Effective immediately prior to the consummation of the Business Combination, we terminated our Deferred Compensation Plan, pursuant to which wepreviously granted phantom equity units. We made a lump-sum cash payment to each former holder of phantom equity units, including certain of ournamed executive officers, on August 20, 2013, in full satisfaction of all phantom equity units previously held by such individuals. Effective upon consummation of the Business Combination, we adopted an equity award plan, and made grants to certain of our named executive officersthereunder. For a further description of the plan, see “Executive Compensation — Compensation Discussion and Analysis — Executive CompensationProgram Components — 2012 Omnibus Award Plan” beginning on page 26 of this Form 10-K. Each of the primary elements of our executive compensation program are discussed in more detail below. While we have identified particular compensationobjectives that each element of executive compensation serves, our compensation programs are designed to be flexible and complementary and tocollectively serve all of the executive compensation objectives described above. Accordingly, whether or not specifically mentioned below, we believe thateach individual element, to some extent, serves each of our objectives. Further, while each of our executive officers has not been, and may not be,compensated with all individual compensation elements, we believe that the compensation provided to each individual executive officer is, and will be,consistent with the overall compensation philosophy and objectives set forth above. 34 Compensation Determination Process We review executive compensation annually, including evaluating our philosophy and compensation programs as circumstances require. As part of thisreview process, we expect to apply the values and the objectives outlined above, together with consideration for the levels of compensation that we would bewilling to pay to ensure that our compensation remains competitive and that it is meeting our retention objectives in light of the cost to us if we wererequired to replace a key employee. In addition, we consider the results of non-binding advisory votes on executive compensation, commonly referred to as“say-on-pay” votes. At our 2013 annual meeting of stockholders, we held a say-on-pay vote on the compensation of our named executive officers asdescribed in the proxy statement for that meeting. Stockholders approved the compensation of the named executive officers by a favorable vote ofapproximately 99% of votes cast, including abstentions. We are mindful of the opinions of our stockholders and considered these results when deciding toretain our general compensation philosophy and core objectives for the upcoming fiscal year. Historically, The Tile Shop’s board of managers did not review anonymous private company compensation surveys in setting the compensation of ournamed executive officers. In the future, we anticipate that our Compensation Committee will determine executive compensation, at least in part, by referenceto the compensation information for the executives of a peer group of comparable companies, although no such peer group has yet been determined.Additionally, our Compensation Committee may consider engaging a compensation consultant in future years to provide market data on a peer group ofcompanies in our industry. We believe that such information, together with other information obtained by the members of our Compensation Committeewould help ensure that our compensation program remains competitive. We anticipate that our Compensation Committee may make adjustments inexecutive compensation levels in the future as a result of this more formal market comparison process. The compensation levels of our named executive officers reflect, to a significant degree, the varying roles and responsibilities of such executives. As aresult of the assessment by our Board of Robert Rucker’s roles and responsibilities, there is and has been a significant compensation differential betweenhis compensation levels and those of our other named executive officers. Executive Compensation Program Components Base Salary. Base salaries of our named executive officers are initially established through arm’s-length negotiation at the time an executive is hired,taking into account such executive’s qualifications, experience, and prior salary. Base salaries of our named executive officers are approved and reviewedperiodically by our Chief Executive Officer, and in the case of our Chief Executive Officer’s base salary, by our Board, and adjustments to base salariesare based on the scope of an executive’s responsibilities, individual contribution, prior experience, and sustained performance. Decisions regarding salaryincreases may take into account the executive officer’s current salary, equity or equity-linked interests, and the amounts paid to an executive officer’s peerswithin our Company. In making decisions regarding salary increases, we may also draw upon the experience of members of our Board of Directors withother companies. Base salaries are also reviewed in the case of promotions or other significant changes in responsibility. No formulaic base salaryincreases are provided to our named executive officers. This strategy is consistent with our intent of offering base salaries that are cost-effective whileremaining competitive. In anticipation of the consummation of the Business Combination in August 2012, we entered into offer letter agreements with each of Messrs. Rucker,Clayton, Kinder and Randazzo, which provide for annual base salaries of $303,991, $200,000, $200,000, and $200,000, respectively. Pursuant to theterms of his offer letter, Mr. Rucker’s base salary increased to $500,000 effective January 1, 2013. We entered into an offer letter agreement in connectionwith hiring Mr. Homeister in October 2013, which provides for an annual base salary of $300,000. For a further description of these offer letteragreements, see “Executive Compensation — Offer Letter Agreements” beginning on page 40 of this 10-K. The actual base salaries earned by all of our named executive officers in 2013, 2012 and 2011 are set forth in the “Summary Compensation Table.” InFebruary 2014, the Compensation Committee approved increases to the base salaries of Messrs. Clayton, Kinder and Randazzo, to $208,000 each, on anannualized basis. 2012 Omnibus Award Plan. In June 2012, our Board and stockholders adopted an equity award plan, which became effective upon the consummationof the Business Combination. The principal purpose of the equity award plan is to attract, retain, and motivate selected employees, consultants, anddirectors. As initially adopted, the equity award plan provided for stock-based compensation awards. In February 2013, the Compensation Committee andthe Board amended the equity award plan to authorize grants of performance-based awards. At the same time, the plan was renamed the 2012 OmnibusAward Plan (the “Omnibus Plan”). The Compensation Committee of our Board administers the Omnibus Plan, subject to the right of our Board to assumeauthority for administration or delegate such authority to another committee of the Board. Awards under the Omnibus Plan may be granted to individualswho are then our officers, employees, directors, or consultants or are the officers, employees, directors, or consultants of our subsidiaries. Under the Omnibus Plan, 2,500,000 shares of our common stock were initially reserved for issuance pursuant to a variety of stock-based compensationawards, including stock options and restricted stock awards. As initially adopted, the number of shares initially reserved for issuance or transferpursuant to awards under the Omnibus Plan would increase on the first day of each calendar year beginning in 2013 and ending in 2022, in an amountequal to the least of (A) 2,500,000 shares, (B) six percent (6%) of the shares of common stock outstanding (on an as-converted basis) on the last day ofthe immediately preceding calendar year, and (C) such smaller number of shares of common stock as determined by our Board. In February 2013, theCompensation Committee and the Board acknowledged that 2,500,000 shares of common stock were added to the Omnibus Plan reserve effective January1, 2013 in accordance with the automatic share increase provision, and amended the Omnibus Plan to eliminate the automatic share increase forsubsequent years.  35 In the event of a change of control, as such term is defined in the Omnibus Plan, the administrator may, in its sole discretion, accelerate vesting of awardsissued under the Omnibus Plan such that 100% of any such award may become vested and exercisable. Additionally, the administrator has completediscretion to structure one or more awards under the Omnibus Plan to provide that such awards will become vested and exercisable on an accelerated basis.The administrator may also make appropriate adjustments to awards under the Omnibus Plan and is authorized to provide for the acceleration,termination, assumption, substitution, or conversion of such awards in the event of a change of control or certain other unusual or nonrecurring events ortransactions. The types of awards we intend to grant under the Omnibus Plan are as follows: Cash Performance Awards. Historically, annual cash bonuses have been awarded to our named executive officers when The Tile Shop’s board ofmanagers or our Chief Executive Officer determined that such bonuses were merited in light of corporate performance. During 2011 and 2012, Mr. Rucker was awarded an annual cash bonus in an amount sufficient to provide him with total actual after-tax bonuscompensation equal to 3% of our net income, inclusive of the bonus compensation and associated tax adjustment payable to him, for the correspondingperiod. Our other named executive officers were historically awarded annual cash bonuses in an amount determined by our Chief Executive Officer andapproved by our Board or The Tile Shop’s board of managers, as applicable, reflecting (i) our annual operating performance, (ii) our year-over-yearoperating growth, (iii) attainment of individual and corporate goals, and (iv) other discretionary factors deemed relevant. In February 2013, the Board and the Compensation Committee of the Board adopted specific performance targets and payout levels for each executiveofficer for fiscal year 2013. Mr. Rucker is eligible to earn target cash incentive compensation equal to 100% of his base salary and each of Messrs.Clayton, Kinder, and Randazzo is eligible to earn target cash incentive compensation equal to 50% of their base salary, based on our Adjusted EBITDAfor the year. The target incentive compensation is payable if we achieve the Adjusted EBITDA target set forth in our budget. Each of Messrs. Rucker,Clayton, Kinder, and Randazzo is entitled to receive a partial incentive payment if we achieve at least 85% of our budgeted Adjusted EBITDA, and anincentive of up to double the target incentive amount if we achieve 115% of our budgeted Adjusted EBITDA and attain targeted sales goals. Similarly,pursuant to his Offer Letter Agreement, Mr. Homeister is eligible to earn target cash incentive compensation equal to 50% of his base salary based on ourearnings for the applicable year, which may be measured in the discretion of the Compensation Committee based on one or more of Earnings Per Share,Net Income or Adjusted EBITDA. Mr. Homeister is entitled to receive a partial incentive payment if we achieve at least 85% of our budgeted earnings, andan incentive of up to double the target incentive amount if we achieve 115% of our budgeted earnings. For the 2013 fiscal year, Mr. Homeister’s cashincentive arrangement was pro-rated for the partial year during which he was employed with the Company. The Compensation Committee reviews andcertifies performance following the end of each fiscal year and may also consider discretionary factors when making awards. Accordingly, in 2014 theCompensation Committee approved incentive awards in the amount of $30,000 to each of Messrs. Homeister, Clayton, Kinder and Randazzo, partiallybased on the forgoing performance measures and partially based on discretion. The actual cash bonuses earned by all of our named executive officers in 2013, 2012 and 2011 are set forth in the “2013 Summary Compensation Table.” In February 2014, the Compensation Committee determined to continue the same cash incentive award structure and performance measures as used in2013, adjusted to reflect performance targets that correspond to the fiscal 2014 budget. Equity and Equity-Linked Incentives. Historically, in order to align the interests of our named executive officers with those of our stockholders, wegranted certain of our employees and each of our named executive officers, other than Mr. Rucker, phantom equity units pursuant our DeferredCompensation Plan that were payable in cash based on the appreciation in the value of The Tile Shop’s Common Units. Due to Mr. Rucker’s significantbeneficial equity interest in The Tile Shop, The Tile Shop’s board of managers determined that it was not necessary or appropriate to grant Mr. Ruckerany such phantom equity units. The phantom equity units granted to The Tile Shop’s other executives were fully-vested upon grant and payable to theholders thereof upon the earlier of (i) the tenth or fifteenth anniversary of the date of grant, as applicable, or (ii) immediately prior to a change of control ofThe Tile Shop. Upon the occurrence of either such event, the holder of each unit of phantom equity is entitled to receive, in respect of each such unit, apayment in cash equal to the change in the fair market value of The Tile Shop’s Common Units between the date of grant and (a) the last day of the fiscalyear immediately preceding the tenth or fifteenth anniversary of the date of grant, as applicable, or (b) the date of the change of control, as applicable. At alltimes from January 1, 2009 until the termination of our Deferred Compensation Plan in connection with the consummation of the Business Combination,Messrs. Kinder and Randazzo each held 300,000 phantom equity units of The Tile Shop. Effective immediately prior to the consummation of theBusiness Combination, we terminated our Deferred Compensation Plan. We made a lump-sum cash payment to each former holder of phantom equityunits, including a $2,060,000 payment to each of Messrs. Kinder and Randazzo, on August 20, 2013, in full satisfaction of all phantom equity unitspreviously held by such individuals. Going forward, we intend to continue to use equity incentive awards pursuant to our Omnibus Plan to link the interests of our named executive officerswith those of our stockholders. The Omnibus Plan provides that the administrator may grant or issue stock options and restricted stock or anycombination thereof. Stock options may be either nonqualified stock options or incentive stock options. We expect vesting of these equity incentive awardsto be dependent in whole or in part on continued employment, in order to encourage the retention of our named executive officers through the vesting periodof the awards. In some cases, vesting may also be partially based on the annual appreciation of our common stock. In determining the size of inducementand ongoing equity awards to our named executive officers, our Compensation Committee considers a number of internal factors, such as the relative jobscope, the value of outstanding equity awards, individual performance history, prior contributions to us, and the size of prior awards, as well as externalfactors such as the levels of unvested equity awards held by our executive officers in relation to their peers at comparable companies. The CompensationCommittee also intends to consider the foregoing factors for future awards. In 2013, we granted 50,000 units of restricted common stock and 200,000 incentive stock options to Chris Homeister pursuant to the Omnibus Plan, bothof which are subject to time-based vesting over a four-year period. The equity grants made to our named executive officers in 2013 are set forth in the“Grants of Plan Based Awards in Fiscal Year 2013” table and are discussed in the “Equity Grants” section of this item. 36 To date in 2014, we have granted options or issued an aggregate of 105,000 shares of the Company’s common stock to named executive officers under theOmnibus Plan. See the subsection below entitled “Equity Grants”. We do not have any securities ownership requirements for our named executive officers. Retirement Savings. All of our full-time employees, including our named executive officers, are eligible to participate in The Tile Shop 401(k) RetirementPlan. Employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit, which was $17,500 in 2013 (or $23,000for employees over 50), and to have the amount of this reduction contributed to the 401(k) plan. In 2013, 2012 and 2011, we made a matchingcontribution of $0.25 for every $1.00 that each applicable employee contributed to the 401(k) plan, up to a maximum of 5% of such employee’s salary.Each year, this matching contribution vests as to 20% of the aggregate matching contributions for such employee, such that all previous and futurematching contributions will be vested after the employee has been employed by us for a period of five years. Perquisites. From time-to-time, we have provided certain of our named executive officers with perquisites that we believe are reasonable. We do not viewperquisites as a significant element of our comprehensive compensation structure, but do believe they can be useful in attracting, motivating, and retainingexecutive talent. We believe that these additional benefits may assist our executive officers in performing their duties and provide time efficiencies for ourexecutive officers in appropriate circumstances, and may consider providing additional perquisites in the future. There are no material perquisites to ournamed executive officers that are contractual obligations pursuant to written agreement. All future practices regarding perquisites will be approved andsubject to periodic review by our Compensation Committee. Tax Considerations. Our Board considers the potential effects of Section 162(m) of the Code on the compensation paid to our executive officers. Section162(m) disallows a tax deduction for any publicly-held corporation for individual compensation exceeding $1.0 million in any taxable year for the ChiefExecutive Officer and each of the next three most highly compensated executive officers (other than the Chief Financial Officer, if any), unless thecompensation is “performance based” or based on another available exemption. Prior to being a publicly-held corporation, The Tile Shop’s board ofmanagers did not take the deductibility limit imposed by Section 162(m) into consideration in setting compensation. The restricted stock granted to Mr.Rucker in August 2012 was not “performance based,” and the restricted stock granted to Mr. Homeister in October, 2013 was not “performance based.”We expect that our Compensation Committee will, where reasonably practicable, seek to qualify the variable compensation paid to our executive officersfor an exemption from the deductibility limitations of Section 162(m), including by awarding stock options that satisfy the “qualified performance-basedcompensation” exception by virtue of being approved by a qualifying compensation committee of two or more outside directors, being issued pursuant toan underlying plan that sets the maximum number of shares that can be granted to any person within a specified period and compensating recipients basedsolely on an increase in the stock price after the grant date (i.e., the exercise price or base price is greater than or equal to the fair market value of the stocksubject to the award on the grant date). In approving the amount and form of compensation for our executive officers in the future, our CompensationCommittee will consider all elements of the cost to us of providing such compensation, including the potential impact of Section 162(m). However, ourCompensation Committee may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when itbelieves that such payments are appropriate to attract and retain executive talent. Taxation of “Parachute” Payments and Deferred Compensation. In 2011 and 2012, we provided Mr. Rucker, with a “gross-up” or reimbursementpayment in the amount of $844,225 and $782,444, respectively,for tax liability relating to the cash incentives he earned in those years. We have notprovided any named executive officer with any “gross-ups” relating to tax liability that he or she might owe as a result of the application of Sections 280G,4999 or 409A of the Code, and we have not agreed, nor are otherwise obligated, to provide any executive officer with any “gross-up” or otherreimbursement in the future. Sections 280G and 4999 of the Code provide that executive officers and directors who hold significant equity interests andcertain other service providers may be subject to an excise tax if they receive payments or benefits in connection with a change of control that exceedscertain prescribed limits, and that we, or a successor, may forfeit a deduction on the amounts subject to this additional tax. Section 409A of the Code alsoimposes additional significant taxes on the individual in the event that an executive officer, director, or other service provider received “deferredcompensation” that does not meet the requirements of Section 409A of the Code. Compensation Committee Report The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based upon this review anddiscussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in ourproxy statement and in this Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Compensation Committee of the Board of Directors: Todd Krasnow, ChairmanPeter J. Jacullo IIIWilliam E. Watts 37 Summary Compensation Table The following table provides information regarding the compensation earned during the fiscal years ended December 31, 2011 through December 31, 2013by each of the Named Executive Officers for each year in which each was a Named Executive Officer: Name and PrincipalPosition FiscalYear Salary($) Bonus($) StockAwards($) OptionAwards($) Non-EquityIncentive PlanCompensation($) All OtherCompensation($) Total($) Robert A. Rucker 2013 500,000 — — — — — 500,000 Chief Executive Officer 2012 303,991 — 2,762,500 — 1,936,983 847,075 5,850,549 2011 262,302 — — — 1,032,971 788,144 2,083,417 Chris Homeister 2013 75,000 — 1,447,000 2,740,180 30,000 — 4,292,180 Chief OperatingOfficer — — — — — — — — Timothy Clayton 2013 200,000 — — — 30,000 — 230,000 Chief Financial Officer 2012 66,667 39,690 — 1,102,993 — — 1,209,350 Joseph Kinder 2013 200,000 — — — 30,000 — 230,000 Senior Vice President –Operations 2012 192,970 112,660 — 1,654,383 — — 1,960,013 2011 162,000 91,345 — — — — 253,345 Carl Randazzo 2013 200,000 — — — 30,000 — 230,000 Senior Vice President –Retail 2012 178,375 118,834 — 1,654,383 — — 1,951,592 2011 162,000 135,227 — — — — 297,227 (1)The value of stock awards and options in this table represent the fair value of such awards granted or modified during the fiscal year, as computedin accordance with FASB ASC 718. The assumptions used to determine the valuation of the awards are discussed in Note 11 to our consolidatedfinancial statements, included herein. (2)The amount under “All Other Compensation” for Mr. Rucker for fiscal 2011 includes $782,444 in tax “gross-ups” related to Mr. Rucker’s non-equity incentive plan compensation and $5,700 in insurance premium payments made on behalf of Mr. Rucker. The amount under “All OtherCompensation” for Mr. Rucker for fiscal 2012 includes $844,225 in tax “gross-ups” related to Mr. Rucker’s non-equity incentive plan compensationand $2,850 in insurance premium payments made on behalf of Mr. Rucker. (3)Mr. Homeister was not a named executive officer in fiscal 2011 or fiscal 2012. (4)Includes pro rata compensation received by Mr. Homeister for services as Chief Operating Officer from October 1, 2013 through December 31, 2013. (5)Mr. Clayton was not a named executive officer in fiscal 2011. (6)Includes compensation received by Mr. Clayton for services as Chief Financial Officer since August 21, 2012. 38(1)(1)(2)(3)(4)(6) Grants of Plan-Based Awards for Fiscal 2013 The following table sets forth certain information regarding grants of plan-based awards during the fiscal year ended December 31, 2013: Name Grant Date Estimatedfuturepayouts underequityincentive planawardsTarget(#) All otherstockawards:Number ofshares ofstock or units(#) All otheroptionawards:Number ofsecuritiesunderlyingoptions(#) Exercise orbase price ofoptionawards($/Sh) Grant datefair value ofstock andoptionawards($) Chris Homeister 10/1/2013 — 50,000 — — 1,447,000 10/1/2013 — — 200,000 28.94 2,740,180 (1)Represents options to acquire shares of common stock. These options will vest and become exercisable in four equal annual installments beginningon October 1, 2014 based on continued service. Offer Letter Agreements In June 2012, as the result of arm’s length negotiations, we entered into an offer letter agreement with Mr. Rucker setting forth the terms and conditions ofhis employment effective upon consummation of the Business Combination. The offer letter agreement provided for an annual base salary of $303,991for the remainder of the 2012 fiscal year and provides for an annual base salary of $500,000 for the 2013 fiscal year. In future years, Mr. Rucker’s basesalary will be subject to increases and modifications as determined by our Board and its Compensation Committee. Pursuant to the offer letter agreement,Mr. Rucker is entitled to receive severance benefits if his employment is terminated by us without cause at any time or if he resigns with good reason,subject to execution of a full release in our favor. In such an event, Mr. Rucker is entitled to continued payment of his base salary for twelve months andan additional payment in an amount equal to twelve times our contribution amount for the monthly health insurance premium for him during the monthimmediately prior to termination. Upon a change of control, Mr. Rucker is also entitled to full vesting acceleration with respect to any unvested equityawards if he is not offered employment by the successor entity, or if he is terminated without cause or constructively terminated prior to the firstanniversary of the change of control. In June 2012, as the result of arm’s length negotiations, we entered into offer letter agreements with each of Messrs. Kinder and Randazzo, setting forth theterms and conditions of each such individual’s respective employment effective upon consummation of the Business Combination. The offer letteragreements provide for annual base salaries $200,000, respectively, for Messrs. Kinder and Randazzo, subject to increases and modifications asdetermined by our Board and its Compensation Committee. Pursuant to the offer letter agreements, each of Messrs. Kinder and Randazzo is entitled toreceive 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 fullrelease in our favor. In such an event, each of Messrs. Kinder and Randazzo is entitled to continued payment of his base salary for six months and anadditional payment in an amount equal to six times our contribution amount for the monthly health insurance premium for him during the monthimmediately prior to termination. Upon a change of control, each of Messrs. Kinder and Randazzo is also entitled to full vesting acceleration with respectto any unvested equity awards if he is not offered employment by the successor entity, or if he is terminated without cause or is constructively terminatedprior to the first anniversary of the change of control. In July 2012, as the result of arm’s length negotiations, we entered into an offer letter agreement with Mr. Clayton setting forth the terms and conditions ofhis employment, effective upon consummation of the Business Combination. The offer letter agreement provides for an annual base salary of $200,000,subject to increases and modifications as determined by our Board and its Compensation Committee. Mr. Clayton’s current base salary is $200,000.Pursuant to the offer letter agreement, Mr. Clayton is entitled to receive severance benefits if his employment is terminated by us without cause at any timeor if he resigns for good reason, subject to execution of a full release in our favor. In such an event, Mr. Clayton is entitled to continued payment of hisbase salary for six months and an additional payment in an amount equal to six times our contribution amount for the monthly health insurance premiumfor him during the month immediately prior to termination. Upon a change of control, Mr. Clayton is also entitled to full vesting acceleration with respectto any unvested equity awards if he is not offered employment by the successor entity, or if he is terminated without cause or constructively terminatedprior to the first anniversary of the change of control. In October 2013, as the result of arm’s length negotiations, we entered into an offer letter agreement with Mr. Homeister setting forth the terms andconditions of his employment, effective as of October 1, 2013. The offer letter agreement provides for an annual base salary of $300,000, in addition tocash bonus compensation by achieving target performance determined by our Compensation Committee. Pursuant to the offer letter agreement, Mr.Homeister 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, subjectto execution of a full release in our favor. In such an event, Mr. Homeister is entitled to continued payment of his base salary for six months and anadditional payment in an amount equal to six times our contribution amount for the monthly health insurance premium for him during the monthimmediately prior to termination. Upon a change of control, Mr. Homeister is also entitled to full vesting acceleration with respect to any unvested equityawards if he is not offered employment by the successor entity, or if he is terminated without cause or constructively terminated prior to the firstanniversary of the change of control. (1) 39 In connection with their offer letter agreements, each of Messrs. Rucker, Clayton, Kinder, Randazzo, and Homeister agreed not to compete, directly orindirectly, with us or solicit any of our employees or business contacts during the term of his employment and for a period of two years, one year, oneyear, one year, and one year thereafter, respectively. Notwithstanding the foregoing, we may, at our election, extend the term of the non-compete and non-solicit obligations to which Messrs. Clayton, Kinder, and Randazzo are subject to be for a period of two years following termination of employment;provided, that we provide the applicable individual with continued payment of his base salary for twelve months (in lieu of six months) and an additionalpayment in an amount equal to twelve times (in lieu of six times) our contribution amount for the monthly health insurance premium for him during themonth immediately prior to termination. Equity Grants In August 2012, upon the consummation of the Business Combination, Messrs. Kinder, Randazzo, and Clayton received initial grants of options topurchase 330,000, 330,000, and 220,000 shares of our common stock, respectively, at an exercise price per share of $10.00. Two-thirds of the total numberof shares subject to each such stock option grant are subject to vesting in equal annual installments over four years from the date of grant, based onlyupon the applicable executive officer’s continued service to us, and one-third of the total number of shares subject to each such stock option grant aresubject to vesting in equal annual installments over four years from the date of grant, based both on the appreciation in the price of our common stock andcontinued service to us. The portion of stock option grants tied to appreciation in the price of our common stock will vest on each anniversary of the dateof grant if the trading price of our common stock has increased by at least 20% over the applicable one-year period. The increase will be measured byreference to the average closing price on the Nasdaq Stock Market of our common stock over the 30 trading days immediately preceding the date of grant oranniversary date thereof, as applicable. We believe that these vesting schedules will appropriately encourage long-term employment with us while allowingour executives to realize compensation in line with the value that they create for our stockholders. In August 2012, upon the consummation of the Business Combination, we also granted to Mr. Rucker an award of 250,000 restricted shares of ourcommon stock. The risk of forfeiture for such shares will lapse as to one-third of the total number of shares of common stock on each of December 31,2013, 2014, and 2015, subject to Mr. Rucker’s continued service as an employee, officer, or director of our Company. In October 2013, in connection with his Offer Letter Agreement, we granted Mr. Homeister 50,000 shares of restricted stock pursuant to the Omnibus Plan.These shares are subject to restrictions on transfer and a purchase option in favor of the Company in the event that Mr. Homeister is no longer an employeeof the Company. These restrictions on transfer and the purchase option will be eliminated as to 25% of the shares on each of October 1, 2014, 2015, 2016and 2017. In addition, Mr. Homeister was granted incentive stock options to purchase 200,000 shares of the Company’s common stock pursuant to theOmnibus Plan. The stock options will be exercisable at 100% of the fair market value of the Company’s common stock on the date of grant, will vest inequal installments over a four year period beginning on the first anniversary date of the date of grant and expire 10 years from the date of the grant. Following completion of the 2013 fiscal year, in February 2014, we granted Timothy C. Clayton incentive stock options in the amount of 55,000 shares ofthe Company’s common stock pursuant to the Omnibus Plan. The stock options will be exercisable at 100% of the fair market value of the Company’scommon stock on the date of grant, will vest in three equal annual installments beginning on the first anniversary date of the date of grant and expire 7years from the date of the grant. Also in February 2014, Chris Homeister received incentive stock options in the amount of 50,000 shares of theCompany’s common stock pursuant to the Omnibus Plan. The stock options will be exercisable at 100% of the fair market value of the Company’scommon stock on the date of grant, will vest in five equal annual installments beginning on the first anniversary date of the date of grant and expire 7years from the date of the grant. We have provided for the acceleration of vesting of equity awards granted to each of Messrs. Rucker, Clayton, Kinder, Randazzo, and Homeister in theevent of a change of control of our Company. In the event of a change of control, if the individual is terminated without cause or is otherwise constructivelyterminated prior to the first anniversary of the change of control, the vesting of any unvested awards will be accelerated in full immediately prior to suchtermination. We believe that these acceleration opportunities will further align the interests of our executives with those of our stockholders by providing ourexecutives an opportunity to benefit alongside our stockholders in a corporate transaction. 40 Outstanding Equity Awards at Fiscal Year-end for Fiscal 2013 The following table sets forth certain information regarding outstanding equity awards held by the Named Executive Officers as of December 31, 2013: Option Awards Stock Awards Name Grant Date Number ofSecuritiesUnderlyingUnexercisedOptionsExercisable(#) Number ofSecuritiesUnderlyingOptionsUnexercisable(#) EquityIncentivePlanAwards:Number ofSecuritiesUnderlyingUnexercisedUnearnedOptions(#) OptionExercisePrice($) OptionExpirationDate Number ofShares orUnits ofStock ThatHave NotVested(#) MarketValue ofShares orUnits ofStock ThatHave NotVested($) Robert A. Rucker 8/21/12 — — — — — 166,666 3,011,655 Chris Homeister 10/1/13 — 200,000 — 28.94 10/1/23 50,000 903,500 Timothy Clayton 8/21/12 55,000 110,000 55,000 10.00 8/21/22 — — Joseph Kinder 8/21/12 82,500 165,000 82,500 10.00 8/21/22 — — Carl Randazzo 8/21/12 82,500 165,000 82,500 10.00 8/21/22 — — (1)These shares of restricted stock will become unrestricted as 83,333 shares of common stock on each of December 31, 2014, and 2015. (2)These options become exercisable in four equal annual installments beginning on October 1, 2014. (3)These shares of restricted stock will become unrestricted in equal annual installments beginning on October 1, 2014. (4)These options became exercisable in four equal annual installments beginning on August 21, 2013. (5)These options became exercisable in four equal annual installments beginning on August 21, 2013 provided that the Company meets or exceeds certainannual stock price increase targets. Option Exercises and Stock Vested for Fiscal 2013 None of the named executive officers exercised options during the fiscal year ended December 31, 2013. Mr. Rucker had 83,334 shares of restrictedcommon stock vest in the fiscal year ended December 31, 2013. Pension Benefits The Company did not sponsor any defined benefit pension or other actuarial plan for its named executive officers during the year ended December 31,2013. Nonqualified Deferred Compensation As discussed above in the section “— 2012 Omnibus Award Plan — Equity and Equity-Linked Incentives,” prior to the Business Combination, TheTile Shop maintained a Deferred Compensation Plan for its executive officers, with the exception of Mr. Rucker. At all times from January 1, 2009 untilthe termination of our Deferred Compensation Plan in connection with the consummation of the Business Combination, Messrs. Kinder and Randazzoeach held 300,000 phantom equity units of The Tile Shop. Effective immediately prior to the consummation of the Business Combination, we terminatedour Deferred Compensation Plan. We made a lump-sum cash payment to each former holder of phantom equity units, including Messrs. Kinder andRandazzo in the amount of $2,060,000 each, on August 20, 2013, in full satisfaction of all phantom equity units previously held by such individuals. 41(1)(2)(3)(4)(5)(4)(5)(4)(5) The following table sets forth certain information regarding nonqualified deferred compensation paid to and earned by the named executive officers as ofDecember 31, 2013: Name ExecutiveContributions inLast FY($) RegistrantContributions inLast FY($) AggregateEarnings in LastFY($) AggregateWithdrawals/Distributions($) AggregateBalance at LastFYE($) Robert A. Rucker — — — — — Chris Homeister — — — — Timothy Clayton — — — — — Joseph Kinder — — — 2,060,000 — Carl Randazzo — — — 2,060,000 — (1) Represents the amounts paid in lump sum to the identified participants on August 20, 2013, which amounts were based on change in value of thephantom equity units from January 1, 2012 through the effective date of the Business Combination, at which time the Deferred Compensation Plan wasterminated. Potential Payments Upon Termination or Change in Control As discussed above in connection with each named executive officer’s offer letter agreement, each named executive officer may be eligible to receiveseverance benefits in the event that his employment is terminated by the Company without cause or by the named executive officer for good reason.Additionally, each named executive officer is entitled to full vesting of any outstanding equity awards in the event of a change of control, if the individualis terminated without cause or is otherwise constructively terminated prior to the first anniversary of the change of control. The amounts payable to each of the named executive officers, assuming that each individual's employment had terminated on December 31, 2013, undereach scenario, are as follows: Termination Name In Connection with aChange in Control ($) By Company Not for Cause($) By NEO for Good Reason($) Robert A. Rucker 2,347,686 506,027 506,027 Chris Homeister 4,340,193 153,013 153,013 Timothy Clayton 959,913 103,013 103,013 Joseph Kinder 1,388,363 103,013 103,013 Carl Randazzo 1,388,363 103,013 103,013 (1)Represents lapse of the risks of forfeiture on all outstanding shares of restricted stock, in the case of Mr. Rucker, and full vesting of all outstandingoptions to purchase common stock, in the case of the other named executive officers. (2)Represents payments of one year of base salary and company-contributed health-insurance costs, in the case of Mr. Rucker, and six months of basesalary and company-contributed health insurance costs, in the case of the other named executive officers, with the exception of Mr. Randazzo whodoes not participate in company-sponsored health insurance. DIRECTOR COMPENSATION Each of our non-employee directors receives an annual fee of $100,000 and the chairperson of our Board receives an additional annual fee of $150,000,which annual period runs based on the anniversary date of the Business Combination. In fiscal year 2013, Mr. Kamin elected to received compensation inthe form of one-half in cash, payable quarterly, and one-half in the form of restricted common stock granted pursuant to the Omnibus Plan upon theanniversary of consummation of the Business Combination. Messrs. Krasnow and Watts elected to receive compensation fully in the form of restrictedcommon stock granted pursuant to the Omnibus Plan upon the anniversary of consummation of the Business Combination. The number of shares of ourrestricted common stock granted were equal to the quotient obtained by dividing (i) the amount of the annual fee payable to such non-employee director inthe form of restricted stock, as set forth above, by (ii) the average closing price on Nasdaq of our common stock over 30 trading days immediatelypreceding the date of grant. In 2013, Messrs. Kamin, Krasnow, and Watts received 1,779, 3,557, and 8,894 shares of restricted stock, respectively. Therisks of forfeiture for the restricted stock grants will lapse in full on second anniversary date of the Business Combination, contingent upon the applicablenon-employee director’s continued service on our Board. If any restricted stock remains for which the risks of forfeiture have not lapsed at the time of anon-employee director’s termination of service on the Board, the Company has the option to purchase such shares of restricted stock at a price set forth inthe agreements governing such restricted stock. 42(1)(1)(2)(2) Each of Messrs. Jacullo and Suttin agreed to forego all compensation for their service as directors of our Company during the 2013 fiscal year. Messrs.Jacullo and Suttin will receive pro-rated director compensation in accordance with the above-described terms from January 1, 2014 through August 21,2014 and intend to participate in the above-described director compensation program thereafter. Director Compensation Table for Fiscal 2013 The following table summarizes the compensation paid to each non-employee director in the fiscal year ended December 31, 2013: Name Fees Earned or Paidin Cash ($) Stock Awards ($) Total ($) Peter H. Kamin 25,000 46,094 71,094 Todd Krasnow — 92,162 92,162 Peter J. Jacullo III — — — Adam L. Suttin — — — William E. Watts — 230,444 230,444 (1)The value of stock awards in this table represent the fair value of such awards granted during the fiscal year, as computed in accordance withFASB ASC 718. The assumptions used to determine the valuation of the awards are discussed in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and in Note 11 to Part II, Item 8.(2)The aggregate number of shares of restricted stock held by each of the directors listed in the table above as of December 31, 2013 was as follows: Mr.Kamin 11,779 shares, Mr. Krasnow 13,557 shares, and Mr. Watts 33,894 shares. These shares of restricted stock were granted to the directors onAugust 21, 2012 and upon the one-year anniversary date of the consummation of the Business Combination and the risks of forfeiture will lapse infull on August 21, 2014. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee consists of Messrs. Jacullo, Krasnow, and Watts. None of the individuals who currently serve as a member of ourCompensation Committee has ever been an executive officer or employee of ours. In connection with the Business Combination, each of Messrs. Jacullo,Krasnow and Watts received compensation from and entered into agreements with the Company as described in “Certain Relationships and RelatedTransactions.” None of our executive officers currently serves, nor in the past year has served, as a member of the Board or Compensation Committee (orother Board committee performing equivalent functions) of any entity that has one or more executive officers serving on our Board or CompensationCommittee. During the fiscal year completed December 31, 2013, none of The Tile Shop’s executive officers or employees, other than Mr. Rucker,participated in the deliberations of The Tile Shop’s board of managers concerning executive officer compensation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of February 21, 2014, information regarding beneficial ownership of our common stock by: •each person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock;each of our named executive officers; •each of our directors; and •all of our executive officers and directors as a group. Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she,or it possesses sole or shared voting or investment power of that security, including options and warrants that are currently exercisable or exercisablewithin 60 days. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons named in the table belowhave sole voting and investment power with respect to all shares of common stock shown that they beneficially own, subject to community property lawswhere applicable. The information does not necessarily indicate beneficial ownership for any other purpose. Common stock subject to options and warrants currently exercisable or exercisable within 60 days of February 21, 2014 are deemed to be outstanding forcomputing the percentage ownership of the person holding these options and/or warrants and the percentage ownership of any group in which the holder isa member but are not deemed outstanding for computing the percentage of any other person. We have based our calculation of the percentage of beneficial ownership based on 51,230,600 shares of our common stock outstanding on February 21,2014. Unless otherwise noted below, the address for each of the stockholders in the table below is c/o Tile Shop Holdings, Inc., 14000 Carlson Parkway,Plymouth, Minnesota, 55441. (1)(2) 43 Name of Beneficial Owner Number ofSharesBeneficially Owned Percent 5% Stockholders: Nabron International, Inc. 10,560,616 20.6%The Tile Shop, Inc. 6,274,250 12.3 JWTS, Inc. 4,441,731 8.7 Tremblant Capital Group 4,203,817 8.2 T. Rowe Price Associates, Inc. 4,131,911 8.1 Executive Officers and Directors: Robert A. Rucker 6,524,250 12.7 Timothy C. Clayton 55,000 * Joseph Kinder 82,500 * Carl Randazzo 82,500 * Chris Homeister 50,000 * Peter J. Jacullo III 4,445,563 8.7 Peter H. Kamin 487,300 1.0 Todd Krasnow 156,786 * Adam L. Suttin 437,178 * William E. Watts 279,814 * All Executive Officers and Directors as a Group (11 persons) 12,629,391 24.7% * Represents beneficial ownership of less than one percent (1%) of the outstanding common stock. (1) Based upon a Schedule 13D/A filed with the SEC on June 18, 2013 by Nabron International, Inc., a Bahamas company (“Nabron”), Raymond LongSing Tang (“Tang”), Lars Soren Sorensen (“Sorensen”), and Louise Mary Garbarino (“Garbarino”). Tang, Sorensen, and Garbarino are directors ofNabron and may be deemed to have shared voting and investment power over the securities held by Nabron. The business address of Nabron is 2ndFloor, Le Prince de Galles, 3-5 Avenue des Citronniers, MC98000 Monaco. (2) Based upon a Schedule 13D/A filed with the SEC on June 13, 2013 by The Tile Shop, Inc., a Minnesota corporation (“TS, Inc.”) and Robert A.Rucker (“Rucker”). Rucker is the sole director of TS, Inc. and may be deemed to have sole voting and investment power over the securities held by TS,Inc. (3) Based upon a Schedule 13D/A filed with the SEC on June 13, 2013 by JWTS, Inc., a Delaware corporation (“JWTS”) and Peter J. Jacullo III(“Jacullo”). Jacullo is the sole director of JWTS and may be deemed to have sole voting and investment power over the securities held by JWTS. Thebusiness address of JWTS is c/o Peter J. Jacullo III 61 High Ridge Avenue, Ridgefield, Connecticut 06877. (4) Based upon a schedule 13G filed with the SEC on February 14, 2014 by Tremblant Capital Group (“Tremblant”). The business address of Tremblantis 767 Fifth Ave, New York, New York, 10153. (5) Based upon Schedule 13G filed with the SEC on February 13, 2014 by T. Rowe Price Associates (“T. Rowe Price”). The business address of T. RowePrice is 100 E. Pratt Street, Baltimore, Maryland 21202. (6) Includes 166,667 shares of restricted common stock held by Mr. Rucker that are subject to a repurchase option held by the Company. (7) Represents options to purchase 55,000 shares of common stock that are currently exercisable or will become exercisable within 60 days of February21, 2014. (8) Represents options to purchase 82,500 shares of common stock that are currently exercisable or will become exercisable within 60 days of February21, 2014. (9) Represents options to purchase 82,500 shares of common stock that are currently exercisable or will become exercisable within 60 days of February21, 2014. (10) Includes 3,832 shares of restricted common stock held by Peter J. Jacullo III and 551 shares of common stock held by Mr. Jacullo’s son. Mr. Jacullodisclaims beneficial ownership of the shares of common stock held by his son, except to the extent of his pecuniary interest therein. (11) Includes 195,059 shares of common stock held by the Peter H. Kamin Revocable Trust dated February 2003 (“2003 Trust”), 137,035 shares ofcommon stock held by the Peter H. Kamin Childrens Trust dated March 1997 (“1997 Trust”), 35,361 shares of common stock held by the Peter H.Kamin GST Trust (“GST”), 108,023 shares of common stock held by 3K Limited Partnership (“3K” and, together with Kamin, 2003 Trust, 1997(1)(2)(3)(4) (5)(2)(6)(7)(8)(9)(3) (10)(11)(12)(13)Trust, GST, and 3K, the “Kamin Entities”), and 100 shares of common stock held by Kamin’s son. Kamin is the sole trustee of the 2003 Trust, the soletrustee of the 1997 Trust, a trustee of GST, and sole general partner of 3K and may be deemed to have sole voting and investment power over thesecurities held by these entities. Kamin disclaims beneficial ownership of the shares of common stock held by his son, except to the extent of hispecuniary interest therein. (12) Includes 100 shares of common stock held by Todd Krasnow’s spouse and 100 shares of common stock held by Todd Krasnow’s son. Mr.Krasnow disclaims beneficial ownership of the shares of common stock held by his spouse and his son, except to the extent of his pecuniary interesttherein. (13) Includes 3,832 shares of restricted common stock held by Adam Suttin and 33,689 shares of common stock held by the Adam L. Suttin IrrevocableFamily Trust. Mr. Suttin’s spouse is the trustee of the trust and Mr. Suttin disclaims beneficial ownership of the shares of common stock held by thetrust, except to the extent of his pecuniary interest therein. 44 EQUITY COMPENSATION PLAN INFORMATION The following table presents our equity compensation plan information as of December 31, 2013: Number ofsecurities to beissued uponexercise ofoutstandingoptions, warrants,and rights Weighted-averageexercise price ofoutstandingoptions, warrantsand rights ($) Number ofsecuritiesremainingavailable forfuture issuanceunder equitycompensationplans Equity compensation plans approved by stockholders 2,274,917 14.02 2,365,853 Equity compensation plans not approved by stockholders - - - TOTAL 2,274,917 14.02 2,365,853 (1)Represents shares of common stock to be issued upon exercise of currently outstanding options to purchase common stock, granted pursuant to ourOmnibus Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE INDEPENDENCE OF THE BOARD OF DIRECTORS As required under the rules and regulations of the Nasdaq Stock Market, independent directors must comprise a majority of a listed company’s board ofdirectors. Based upon information requested from and provided by each director concerning his background, employment, and affiliations, includingfamily relationships, we have determined that Messrs. Jacullo, Kamin, Krasnow, Suttin, and Watts, representing five of our six directors, do not have arelationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directorswill be “independent” as that term is defined under the applicable rules and regulations of the Securities and Exchange Commission, or the SEC, and thelisting requirements and rules of Nasdaq. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We describe below transactions and series of similar transactions, occurring since the beginning of our 2012 fiscal year (as well as certain transactionsoccurring during The Tile Shop’s 2011 fiscal year), to which we were a participant or will be a participant, in which: •the amounts involved exceeded or will exceed $120,000; and •any of our directors, executive officers, holders of more than 5% of our common stock or any member of their immediate family, as defined inItem 404 of Item S-K of the 1934 Act and interpreted by the SEC in related guidance (collectively, the “Related Persons”) had or will have adirect or indirect material interest. Compensation arrangements with our named executive officers and directors are described elsewhere in this Annual Report on Form 10-K. There are nofamily relationships among any of our directors or executive officers. BUSINESS COMBINATION In August 2012, we consummated the Business Combination pursuant to the terms of that certain Contribution and Merger Agreement (the “MergerAgreement”), dated as of June 27, 2012, by and among JWC Acquisition Corp., an entity for which Adam Suttin and Mr. William Watts served aspresident and vice president, respectively, (“JWCAC”), on the one hand, and The Tile Shop, the members of The Tile Shop, including Todd Krasnow,various entities controlled by Peter Kamin, The Tile Shop, Inc. (controlled by Robert Rucker) and JWTS, Inc. (controlled by John Jacullo), (the“Members”), Nabron International Inc., a Bahamas corporation, a holder of greater than 5% of our outstanding common stock (“Nabron” and, togetherwith the Members other than ILTS, LLC, the “Sellers”), the Company, Tile Shop Merger Sub, Inc., a Delaware corporation and wholly owned subsidiaryof the Company, and Peter Jacullo, in his capacity as Sellers’ Representative, on the other hand. Pursuant to the Merger Agreement, (i) the Sellerscontributed, directly or indirectly, all of the membership interests in The Tile Shop to the Company in exchange for an aggregate of approximately$75,000,000 in cash, promissory notes in an aggregate principal amount of approximately $70,000,000 (the “Promissory Notes”), and 32,000,000 sharesof common stock of the Company and (ii) each share of common stock of JWCAC was exchanged for one share of the Company’s common stock. Inconnection with the Business Combination, we acquired all of the outstanding equity securities of The Tile Shop and JWCAC. Prior to the consummationof the Business Combination, JWCAC redeemed 5,500,000 shares of its outstanding common stock from its stockholders who purchased shares inJWCAC’s initial public offering. 45(1) The consideration received, directly or indirectly, by each of the Related Persons in connection with the Business Combination is set forth below: Related Person CashConsideration Promissory Notes Shares ofCommon Stock Nabron International, Inc. $37,732,065 $37,479,696 17,445,432 The Tile Shop, Inc. (entity controlled by Mr. Rucker) $23,792,481 $18,887,729 8,313,792 JWTS, Inc. (entity controlled by Mr. Jacullo) $11,843,840 $11,764,632 5,476,003 Peter H. Kamin Revocable Trust dated February 2003 (entity controlled by Mr.Kamin) $584,101 $580,194 270,059 Peter H. Kamin Childrens Trust dated March 2007 (entity controlled by Mr.Kamin) $350,460 $348,116 162,035 3K Limited Partnership (entity controlled by Mr. Kamin) $233,639 $232,077 108,023 Peter H. Kamin GST Trust (entity controlled by Mr. Kamin) $65,239 $73,984 35,361 Todd Krasnow $298,878 $306,060 143,384 The Promissory Notes had a three year term, subject to pre-payment at any time without penalty, and bore interest at a rate of 4% per annum, payablequarterly. The largest aggregate outstanding principal amount under these Promissory Notes since the beginning of 2011 was $69,771,111, as of theconsummation of the Business Combination. On October 3, 2012, we paid the entire outstanding principal balance of the Promissory Notes together withall accrued interest thereon, in an aggregate amount of $70,099,895, which consisted of $69,771,111 of principal and $328,784 of accrued interestthereon, in full satisfaction of our obligations pursuant to the Promissory Notes. In connection with the consummation of the Business Combination, JWC Acquisition LLC (the “Sponsor”), an affiliate of JWCAC, distributed 208,734shares of common stock to Mr. Suttin, 39,284 shares of common stock to an trust affiliated with Mr. Suttin, and 151,123 shares of common stock toMr. Watts. Nabron Loan In August 2012, prior to the consummation of the Business Combination, we issued a $5,500,000 variable term promissory note to Nabron, which boreinterest at a rate of 4% per annum and was subject to pre-payment at any time without penalty. The largest aggregate outstanding principal amount underthis promissory note since the beginning of 2012 was $5,500,000, as of the date of issuance. On September 28, 2012, we paid the entire outstandingprincipal balance of this promissory note together with all accrued interest thereon, in an aggregate amount of $5,520,777, which consisted of$5,500,000 of principal and $20,777 of accrued interest thereon, in full satisfaction of our obligations pursuant to this promissory note. Private Placement In August 2012, in connection with the consummation of the Business Combination, we issued and sold an aggregate of 1,500,000 shares of our commonstock to a total of nine accredited investors at a purchase price of $10.00 per share, generating total gross proceeds of $15.0 million (the “PrivatePlacement”), including 1,080,000 shares of common stock issued to John W. Childs, a former holder of greater than 5% of our outstanding commonstock, 110,000 shares of common stock issued to Mr. Suttin, and 100,000 shares of common stock issued to Mr. Watts. Registration RightsIn connection with the Business Combination, the Sellers, the members of the Sponsor, including, but not limited to, Adam Suttin, William Watts andJohn W. Childs (the “Sponsor” and the “Sponsor Members”) and the Company entered into a registration rights agreement under which the Sellers and theSponsor Members hold registration rights with respect to their shares of our common stock. The holders of a majority in interest of our common stockheld by the Sellers are entitled to require us, on up to four occasions, to register under the Securities Act the shares of common stock that they received inthe Business Combination. The holders of a majority in interest of our common stock held by the Sponsor Members are entitled to require us, on up totwo occasions, to register under the Securities Act the shares of common stock that they received in the Business Combination, any shares issued to theSponsor Members pursuant to the exercise of the warrant held by them where such shares of common stock are not otherwise registered under theSecurities Act, and the shares issued in connection with the Private Placement. The securities that may be registered pursuant to the registration rightsagreement are referred to as registrable securities. Demand registration may be made pursuant to the registration rights agreement so long as the estimatedmarket value of the shares of common stock to be registered is at least $10,000,000. The majority in interest of each of the Sellers and the SponsorMembers may elect to exercise these registration rights at any time. In addition, these stockholders will have certain “piggyback” registration rights on otherregistration statements that we may file. We will bear the expenses incurred in connection with the filing of any such registration statements. On May 24, 2013, we filed a Registration Statement on Form S-1 for an underwritten secondary offering, referred to herein as the May 2013 publicoffering. The parties to the registration rights agreement waived the application of the registration rights agreement to the May 2013 public offering andconsented to the filing of the registration statement therefor. 46 Lock-Up Agreements At the time of the Business Combination, the Sellers and the Sponsor Members entered into lock-up agreements pursuant to which they agreed not to sellany of their shares of our common stock issued in connection with or prior to the Business Combination for certain periods. In addition, we, our officersand directors, and the selling stockholders in our December 2012 public offering signed additional lock-up agreements under which we and they agreednot to dispose of or hedge any shares or any securities convertible into or exchangeable for our common stock for certain periods. On March 12, 2013, theearly release provisions of these lock-up agreements were triggered. As a result, the Sellers, the Sponsor Members, our directors, officers and the sellingstockholders in our December 2012 public offering may sell their shares at any time, subject to compliance with applicable securities laws and anyapplicable restrictions in connection with our May 2013 public offering. In connection with our May 2013 public offering, we, our officers and directors, and the selling stockholders agreed that we and they would not, withoutthe prior written consent of Citigroup Global Markets Inc. and Robert W. Baird & Co. Incorporated, dispose of or hedge any shares or any securitiesconvertible into or exchangeable for our common stock, with the exception of the Post-offering Nabron Stock Purchase. For us, Nabron, Noble ResourcesLimited, Peter J. Jacullo III, JWTS, Inc., and TS, Inc. the period was 150 days from May 24, 2013, and for the remaining officers, directors and sellingstockholders the period was 60 days from May 24, 2013. Citigroup Global Markets Inc. and Robert W. Baird & Co. Incorporated in their sole discretioncould release any of the securities subject to the lock-up agreements at any time without notice. Notwithstanding the foregoing, if (i) during the last 17 daysof the applicable restricted period, we issued an earnings release or material news or a material event relating to our company occurred; or (ii) prior to theexpiration of the applicable restricted period, we announced that we would release earnings results during the 16-day period beginning on the last day of theapplicable restricted period, the restrictions described above would continue to apply until the expiration of the 18-day period beginning on the issuance ofthe earnings release or the occurrence of the material news or material event. Warrant Agreements In connection with the Business Combination, the Sellers and an affiliate of the Sponsor entered into an agreement pursuant to which the Sellers or theirassignees purchased from such affiliate an aggregate of 4,466,885 warrants, for an aggregate purchase price of $3,419,327. These warrants were amongthose sold in connection with JWCAC’s initial public offering (collectively, the “Public Warrants”) and were acquired by the affiliate following JWCAC’sinitial public offering for an aggregate purchase price of $3,419,327. These Public Warrants were all exercised in March and April 2013. In connection with the Business Combination, we entered into an agreement with the Sponsor and the Sponsor Members under which (i) the SponsorMembers waived their rights and the rights of their permitted transferees to exercise warrants to purchase an aggregate of 5,333,333 shares of commonstock, which were issued in a private placement, (the “Sponsor Warrants”) for cash and agreed that such Sponsor Warrants may only be exercised on acashless basis. These Sponsor Warrants were all exercised in March and April 2013. In connection with the Business Combination, we entered into a letter agreement with The Tile Shop, Inc., a Minnesota corporation (“TS, Inc.”) and anentity controlled by Mr. Rucker, pursuant to which TS, Inc. and its affiliates agreed (i) to exercise Public Warrants only on a cashless exercise basis and(ii) that the maximum number of shares of our common stock issuable upon exercise of Public Warrants is the lesser of (A) 434,968 shares of commonstock or (B) the number of shares of common stock that may be issued without Mr. Rucker’s beneficial ownership of shares of our common stockexceeding 20 percent. These warrants were all exercised prior to December 31, 2013. PRE-BUSINESS COMBINATION RELATED PERSON TRANSACTIONS In June 2011, TS, Inc., a holder of 5% of the membership interests of The Tile Shop prior to the Business Combination and an entity controlled by Mr.Rucker, sold (i) an aggregate of 1,710,000 Common Units of The Tile Shop to ILTS, LLC, a Delaware limited liability company (“ILTS”), a holder of5% of the membership interests in The Tile Shop prior to the Business Combination and an entity of which Mr. Jacullo was a manager and (ii) anaggregate of 290,000 Common Units of The Tile Shop to three trusts that are now stockholders of JWTS, Inc., a Delaware corporation (“JWTS”), aholder of 5% of the membership interests in The Tile Shop and an entity controlled by Mr. Jacullo, in each case for $4.4434 per unit. The Common Unitspurchased by the three trusts were contributed to JWTS and were contributed to the Company in connection with the Business Combination in exchangefor the cash, Promissory Notes and shares described above, under the subheading “Business Combination.” Immediately prior to the consummation ofthe Business Combination, TS Inc. sold an additional 1,710,000 and 290,000 Common Units of The Tile Shop to ILTS and JWTS, respectively, for$4.7583 per unit. In connection with these transactions, The Tile Shop released a security interest in the Common Units that were the subject of thesesales. In January 2012, TS, Inc., ILTS and JWTS sold (i) an aggregate of 129,333 Common Units of The Tile Shop to Mr. Krasnow, (ii) an aggregate of646,667 Common Units of The Tile Shop to the Peter H. Kamin Revocable Trust dated February 2003, the Peter H. Kamin Childrens Trust datedMarch 2007, and 3K Limited Partnership, entities of which Mr. Kamin is trustee or general partner, as applicable, (iii) an aggregate of 25,867 CommonUnits of The Tile Shop to Family Office Investors LLC, an entity in which Mark Riser, a member of the board of managers of The Tile Shop prior to theconsummation of the Business Combination, is the sole member, and (iv) an aggregate of 19,400 Common Units of The Tile Shop to a third party, ineach case for $7.732 per unit. In connection with these transactions, The Tile Shop made certain representations and warranties. On each of December 31, 2011 and June 21, 2012, The Tile Shop made a $300,000 payment to TS, Inc. in connection with the final redemption of anaggregate of 3,000,000 special cash distribution units of The Tile Shop issued to TS, Inc., which were fully redeemed by The Tile Shop and no longeroutstanding as of June 21, 2012. In lieu of paying such amounts to TS, Inc. in cash, The Tile Shop reduced the outstanding amount under a promissorynote, dated December 30, 2002, made by TS, Inc. and payable to The Tile Shop. The original principal amount of this promissory note was $13,241,800with simple interest accruing at a rate of five percent per annum on any unpaid balance. The largest aggregate outstanding principal amount under thispromissory note since the beginning of 2011 was $1,468,291.75, as of January 1, 2011. On June 21, 2012, TS, Inc. made a final payment to The TileShop of $919,444.22 in full satisfaction of all obligations pursuant to this promissory note. Taken together, the aggregate payment of $1,519,444.22made by TS, Inc. pursuant to this promissory note since the beginning of 2011 fiscal year consisted of a payment of $1,468,291.75 of principal and$51,152.47 of accrued interest. 47 FISCAL YEAR 2013 STOCK TRANSACTIONS In March 2013, we purchased 357,464 outstanding warrants from Adam Suttin and 324,969 outstanding warrants from William Watts at a purchaseprice of $8.41 per warrant. Since Messrs. Suttin and Watts are members of our Board, the independent directors considered and approved the transactionson terms which reflected a purchase price based on the public market price of the warrants. In March 2013, Mr. Suttin exercised 357,464 warrants on a cashless basis, pursuant to which 230,301 shares were withheld to satisfy the exercise priceand 127,166 shares were issued. In March 2013 Mr. Watts exercised 324,969 warrants on a cashless basis, pursuant to which 209,364 shares werewithheld to satisfy the exercise price and 115,605 shares were issued. The terms of exercise were as provided in the warrant agreements, which wereconsistent with terms in warrants held by non-directors of the Company. On May 24, 2013, we entered into a Stock Purchase Agreement with Nabron, whereby we agreed to repurchase a number of shares of our common stockhaving an aggregate value of $46.0 million at a price per share equal to the public offering price for our May 2013 public offering less the underwritersdiscount for our May 2013 public offering. We refer to this agreement to repurchase as the “Post-offering Nabron Stock Purchase.” The closing of the Post-offering Nabron Stock Purchase was conditioned upon the completion of the May 2013 public offering. The closing of the May 2013 public offering wasnot conditioned upon the completion of the Post-offering Nabron Stock Purchase. We funded the purchase price for the Post-offering Nabron StockPurchase with the proceeds from the warrant exercise as described above. ADDITIONAL RELATIONSHIPS During the 2011, 2012 and 2013 fiscal years, The Tile Shop and the Company utilized the services of Beijing Pingxiu (“BP”), a licensed Chinese exporttrading company that was acquired in late 2011 by Fumitake Nishi, who is a former Company employee and the brother-in-law of Robert Rucker, ourCEO. Prior to Mr. Nishi's acquisition of BP, the entity was jointly owned by Zhang Jian, who is related through marriage to Mr. Rucker’s wife, andZhang Jian’s son, who is Mr. Rucker’s nephew. The role of a licensed Chinese export trading company is to coordinate the export process on behalf ofChinese vendors, which includes processing export paperwork, managing registration of exports with the Chinese government, invoicing and receivingpayments from the purchaser, and processing payments to sellers. The total amount of payments processed by and through BP during the years endedDecember 31, 2011, 2012 and 2013 was $6.3 million, $12.5 million and $16.9 million, respectively. BP primarily processed export transactions on anagency basis on behalf of Company vendors. During the 2011, 2012 and 2013 fiscal years, the aggregate value of transactions processed by BP on anagency basis was $6.2 million, $9.5 million and $9.5 million, respectively. For a portion of transactions, BP processed the transaction by acquiring titleto the product and reselling the product to the Company. The aggregate value of transactions processed by BP on a reseller basis was $0.1 million, $3.0million and $7.4 million, respectively, during the 2011, 2012 and 2013 fiscal years. As of December 1, 2013, we discontinued our business relationshipwith BP. During the 2011, 2012 and 2013 fiscal years, The Tile Shop and the Company purchased a portion of stone accessory products from a Chinese entity,Nanyang Helin Stone Co. Ltd. (“Nanyang”), which is majority-owned by Mr. Nishi. Total amounts paid by The Tile Shop and the Company toNanyang during the years ended December 31, 2011, 2012 and 2013 were $1.7 million, $2.1 million and $2.8, respectively. We have determined that theprices paid for products purchased from Nanyang were consistent with what we paid other unrelated vendors for the same or similar products. During the 2011, 2012 and 2013 fiscal years, Mr. Nishi was employed by us as a purchasing supervisor. For his services, Mr. Nishi was paid aggregateW-2 wages of $95,000 in each of 2011 and 2012 and $107,500 in 2013, and in each year received the standard benefits provided to other non-executiveCompany employees. Consistent with the compensation provided to other non-executive Company employees, on August 21, 2012, Mr. Nishi received anoption to purchase 35,000 options of Company common stock with an exercise price equal to the fair market value of the common stock on the date ofgrant. As of January 1, 2014, Mr. Nishi is no longer employed by the Company and has forfeited all options, none of which were exercised. The Audit Committee conducted an investigation with regard to Mr. Nishi’s activities which included a review of our past transactions with BP anduncovered Mr. Nishi’s interest in Nanyang, resulting in its review of our past transactions with Nanyang as well. The Audit Committee investigationfound no evidence that the Company had underpaid or overpaid vendors on account of the BP relationship. The Audit Committee investigation alsoreviewed the cost of products the Company purchased from Nanyang and concluded that the cost of such products was consistent with the prices theCompany paid other vendors for the same or similar SKUs. Mr. Nishi’s undisclosed activities with regard to BP and Nanyang violated Company policiesand therefore the Company has terminated its business relationship with BP and Mr. Nishi’s employment has been terminated. Subject to the conditionthat Mr. Nishi’s ownership interest be transferred to a party or parties unrelated to the Company and that Mr. Nishi be removed and barred from holdingany officer or director position of Nanyang, the Company has approved ongoing business with Nanyang for the 2014 fiscal year. We are also aware that Mr. Nishi is a director of, and through BP a 10% owner of, Best Cheer Construction Materials (Shanghai) Co. Ltd, a Chinesecompany which was formed in September 2013 (“Best Cheer Construction”). Neither the Tile Shop nor the Company has purchased any product fromBest Cheer Construction. The Company does purchase product from Best Cheer Stone Group LTD (“Best Cheer Stone”), which we understand is a 10%owner of Best Cheer Construction (we also understand an entity known as Best Cheer Development Limited, which may be related to Best Cheer Stone,owns approximately 50% of Best Cheer Construction). The Tile Shop and the Company purchased approximately $0, $0.4 million and $1.1 million ofproduct from Best Cheer Stone during the 2011, 2012 and 2013 fiscal years, respectively. From time to time, the Company may employ related persons and other family members of its officers and directors. Consistent with the policy describedbelow, all such employment arrangements involving amounts exceeding $50,000 are reviewed by our Audit Committee. 48 POLICIES AND PROCEDURES FOR RELATED PERSON TRANSACTIONS Effective upon consummation of the Business Combination, our board of directors adopted a written related person transaction policy that sets forth thepolicies and procedures for the review and approval or ratification of related person transactions. This policy is administered by our audit committee andwill covers any transaction, arrangement, or relationship, or any series of similar transactions, arrangements, or relationships, in which we were or are tobe a participant, the amount involved exceeds $50,000 and a related person had or will have a direct or indirect material interest. While the policy coversrelated person transactions in which the amount involved exceeds $50,000, the policy states that related person transactions in which the amount involvedexceeds $120,000 are required to be disclosed in applicable filings as required by the Securities Act, Exchange Act, and related rules. Our board ofdirectors determined to set the threshold for approval of related person transactions in the policy at an amount lower than that which is required to bedisclosed under the Securities Act, Exchange Act, and related rules because we believe that it is appropriate for our audit committee to review transactionsor potential transactions in which the amount involved exceeds $50,000, as opposed to $120,000. Pursuant to this policy, our audit committee will (i)review the relevant facts and circumstances of each related person transaction, including if the transaction is on terms comparable to those that could beobtained in arm’s-length dealings with an unrelated third party and the extent of the related party’s interest in the transaction, and (ii) take into account theconflicts of interest and corporate opportunity provisions of our code of business conduct and ethics. Each director, director nominee and executive officerof will present to our audit committee each proposed related person transaction to which such director, director nominee or executive officer is a party,including all relevant facts and circumstances relating thereto, and will update the audit committee as to any material changes to any related persontransaction. All related person transactions may only be consummated if our audit committee has approved or ratified such transaction in accordance withthe guidelines set forth in the policy. Related party transactions do not include: (i) the payment of compensation by the company to an executive officer ordirector of the company ; (ii) indebtedness due from a related person for transactions in the ordinary course of business; (iii) a transaction in which theinterest of the related person arises solely from ownership of a class of securities of the Company where all holders of that class of securities receive thesame benefit, on a pro-rata basis, from the transaction; or (iv) a transaction in which the rates or charges involved are determined by competitive bids.Additionally, certain types of transactions have been pre-approved by our audit committee under the policy as not involving a material interest. These pre-approved transactions include transactions in the ordinary course of business where the related party’s interest arises only: (a) from his or her position as adirector of another entity that is party to the transaction, (b) from an equity interest of less than 5% in another entity that is party to the transaction, or (c)from a limited partnership interest of less than 5%, subject to certain limitations. No director will be permitted to participate in the approval of a relatedperson transaction for which he or she is a related party. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES PRINCIPAL ACCOUNTING FEES AND SERVICES The following table presents fees for professional services rendered by Ernst & Young, LLP our principal accountants for the fiscal year 2013 and Deloitte& Touche, LLP our principal account for the fiscal year 2012: 2013 2012 Audit Fees $300,000 $266,000 Audit-Related Fees 34,600 753,000 Tax Fees 5,132 14,500 All Other Fees — — $339,732 $1,033,500 (1)Audit Fees were principally for services rendered for the audit and/or review of our consolidated financial statements. (2)Audit-Related Fees includes fees for services rendered in connection with the filing of registration statements with the SEC, and the issuance ofaccountant consents and comfort letters. (3)Tax Fees consist of fees billed in the indicated year for professional services with respect to tax compliance, tax advice and tax planning. (4)All Other Fees consist of fees billed in the indicated year for other permissible work that is not included within the above category descriptions. 49(1)(2)(3)(4) PRE-APPROVAL POLICIES AND PROCEDURES Pursuant to its written charter, the Audit Committee is required to pre-approve the audit and non-audit services performed by our independent auditors.Notwithstanding the foregoing, separate Audit Committee pre-approval shall not be required (a) if the engagement for services is entered into pursuant topre-approval policies and procedures established by the Audit Committee regarding the Company’s engagement of the independent auditor (the “Pre-Approval Policy”) as to matters within the scope of the Pre-Approval Policy or (b) for de minimus non-audit services that are approved in accordance withapplicable SEC rules. The Audit Committee has determined that the rendering of the services other than audit services by its principal accountant iscompatible with maintaining the principal accountant’s independence. 50 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of report 1. Financial Statements. The following consolidated financial statements of the Company and its subsidiaries are filed as part of this Annual Report on Form 10-K: Page # (i)Reports of Independent Registered Public Accounting Firms 34(ii)Consolidated Balance Sheets for the years ended December 31, 2013 and 2012 36(iii)Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011 37(iv)Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011 38(v)Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 39(vi) Notes to Consolidated Financial Statements 40 2.Exhibits. See “Exhibit Index” immediately following the signature page of this Form 10-K 51 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and ShareholdersTile Shop Holdings, Inc. and SubsidiariesPlymouth, Minnesota We have audited the accompanying consolidated balance sheet of Tile Shop Holdings, Inc. and subsidiaries as of December 31, 2013, and the relatedconsolidated statements of income, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2013. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tile Shop Holdings,Inc. and subsidiaries at December 31, 2013 and the consolidated results of its operations and its cash flows for the year ended December 31, 2013, inconformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Tile Shop Holdings, Inc.’sinternal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 28, 2014 expressed anunqualified opinion thereon. /s/ Ernst & Young LLPMinneapolis, MinnesotaFebruary 28, 2014 52 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders ofTile Shop Holdings, Inc. and SubsidiariesPlymouth, Minnesota We have audited the accompanying consolidated balance sheet of Tile Shop Holdings, Inc. and Subsidiaries (formerly known as The Tile Shop, LLC andSubsidiary) (the "Company") as of December 31, 2012, and the related consolidated statements of income, stockholders' equity (deficit), and cash flowsfor each of the two years in the period ended December 31, 2012. These financial statements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Companyis not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration ofinternal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide areasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31,2012, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2012, in conformity with accountingprinciples generally accepted in the United States of America. /s/ Deloitte & Touche LLPChicago, IllinoisMarch 18, 2013 (February 28, 2014 as to the effects of the related party transactions disclosed in Note 9) 53 The Board of Directors and Shareholders ofTile Shop Holdings, Inc. and SubsidiariesPlymouth, Minnesota We have audited Tile Shop Holdings, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2013, based oncriteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992framework) (the COSO criteria). Tile Shop Holdings, Inc. and subsidiaries’ management is responsible for maintaining effective internal control overfinancial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management'sAnnual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financialreporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other proceduresas we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the companyare being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financialstatements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. In our opinion, Tile Shop Holdings, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2013, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheet of Tile Shop Holdings, Inc. and subsidiaries as of December 31, 2013, and the related consolidated statements of income, stockholders’ equity(deficit), and cash flows for the year ended December 31, 2013 of Tile Shop Holdings, Inc. and subsidiaries and our report dated February 28, 2014expressed an unqualified opinion thereon. /s/ Ernst & Young LLPMinneapolis, MinnesotaFebruary 28, 2014 54 Tile Shop Holdings, Inc. and SubsidiariesConsolidated Balance Sheets(In thousands, except share and per share data) December 31, 2013 December 31, 2012 ASSETS Current assets: Cash and cash equivalents $1,761 $2,987 Restricted cash 985 - Trade receivables, net 1,198 1,009 Inventories 67,756 46,890 Prepaid inventory 4,311 6,051 Income tax receivable 9,528 2,529 Deferred tax assets - current 3,588 9,364 Other current assets, net 2,577 2,983 Total Current Assets 91,704 71,813 Property, plant and equipment, net 125,317 82,080 Deferred tax assets 23,291 20,865 Other assets, net 2,457 1,316 TOTAL ASSETS $242,769 $176,074 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $22,867 $14,968 Current portion of long-term debt 3,590 3,860 Other accrued liabilities 13,528 10,880 Deferred compensation - 6,171 Total Current Liabilities 39,985 35,879 Long-term debt, net 91,646 69,310 Capital lease obligation, net 1,161 1,420 Deferred rent 25,560 18,583 Warrant liability - 95,645 Other long-term liabilities 4,554 - TOTAL LIABILITIES 162,906 220,837 Stockholders’ equity: Common stock, par value $0.0001; authorized: 100,000,000 shares; issued: 51,229,720 and 43,177,822shares outstanding 5 4 Preferred stock, par value $0.0001; authorized: 10,000,000 shares; issued: 0 shares - - Additional paid-in-capital 169,719 9,434 Accumulated deficit (89,861) (54,201)Total stockholders’ equity 79,863 (44,763)TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $242,769 $176,074 The accompanying notes are an integral part of these consolidated financial statements 55 Tile Shop Holdings, Inc. and SubsidiariesConsolidated Statements of IncomeFor the years ended December 31, 2013, 2012 and 2011(In thousands, except share and per share data) 2013 2012 2011 Net sales $229,564 $182,650 $152,717 Cost of sales 68,755 49,626 40,321 Gross profit 160,809 133,024 112,396 Selling, general and administrative expenses 127,731 94,716 78,368 Deferred compensation expense - 3,897 1,415 Income from operations 33,078 34,411 32,613 Interest expense 2,581 1,252 443 Change in fair value of warrants 54,219 82,063 0 Other income (expense) 4 15 (77)(Loss) income before income taxes (23,718) (48,889) 32,093 (Provision for) benefit from income taxes (11,942) 2,002 (733)Net (loss) income $(35,660) $(46,887) $31,360 (Loss) income per common share: Basic and diluted $(0.72) $(1.31) $0.97 Weighted average shares outstanding: Basic and diluted 49,600,396 35,837,609 32,261,168 Pro forma computation related to conversion to C Corporation for income taxpurposes (unaudited) Historical loss before income taxes $- $(48,889) $32,093 Pro forma provision for income taxes - (13,270) (12,837)Pro forma net (loss) income $- $(62,159) $19,256 The accompanying notes are an integral part of these consolidated financial statements 56 Tile Shop Holdings, Inc. and SubsidiariesConsolidated Statements of Stockholders’ Equity (Deficit)(In thousands, except share data) Common stock Shares Amount Additionalpaid-in- capital Treasury units Retained earnings(deficit) Total Balance at January 1, 2011 32,329,897 $3 $8,259 $(261) $61,436 $69,437 Redemption of common units of TileShop LLC (329,897) - (84) - (1,400) (1,484)Distributions to members of Tile ShopLLC - - - - (24,166) (24,166)Net income - - - - 31,360 31,360 Balance at December 31, 2011 32,000,000 3 8,175 (261) 67,230 75,147 Merger of JWC Acquisition Corp 10,534,884 1 (13,909) - - (13,908)Issuance of promissory note - - (17,282) - (52,489) (69,771)Distributions to members of Tile ShopLLC - - - - (22,055) (22,055)Cancellation of treasury units - - (261) 261 - - Issuance of restricted shares 295,000 - - - - - Exercise of warrants 347,938 - 5,569 - - 5,569 Stock based compensation - - 1,953 - - 1,953 Expenses for business combination - - (2,490) - - (2,490)Deferred income taxes - - 27,679 - - 27,679 Net loss - - - - (46,887) (46,887)Balance at December 31, 2012 43,177,822 4 9,434 - (54,201) (44,763)Exercise of warrants 7,166,381 1 82,413 - - 82,414 Repurchase of warrants - - (30,108) - - (30,108)Non-cash exercise of warrants 2,790,061 - (1) - - (1)Reclass warrant liability to equity - - 149,865 - - 149,865 Common stock repurchase (1,986,290) - (46,000) - - (46,000)Issuance of restricted shares 64,230 - - - - - Stock based compensation - - 4,680 - - 4,680 Stock option exercises 17,516 - 100 - - 100 Adjustment to merger consideration (1,102) - - (1,102)Deferred income taxes 438 - - 438 Net loss - - - - (35,660) (35,660)Balance at December 31, 2013 51,229,720 $5 $169,719 $- $(89,861) $79,863 The accompanying notes are an integral part of these consolidated financial statements 57 Tile Shop Holdings, Inc. and SubsidiariesConsolidated Statements Cash FlowsFor the years ended December 31, 2013, 2012 and 2011(In thousands) 2013 2012 2011 Cash Flows From Operating Activities Net income (loss) $(35,660) $(46,887) $31,360 Adjustments to reconcile net income (loss) to net cash provided by operatingactivities: Amortization of debt issuance costs 148 19 - Depreciation and amortization 14,316 10,530 8,651 Loss on disposals of property, plant and equipment 101 23 260 Change in fair value of warrants 54,219 82,063 - Deferred rent 6,977 2,999 2,468 Stock based compensation 4,680 1,381 - Deferred compensation expense - 3,897 1,415 Deferred income taxes 3,788 (2,550) - Changes in operating assets and liabilities: Trade receivables (189) (270) 208 Inventories (20,866) (280) (8,386)Prepaid expenses and other current assets 2,173 (4,693) (386)Accrued interest 60 349 Accounts payable 2,013 1,121 (1,890)Income tax receivable/ payable (6,999) (2,529) - Payment of deferred compensation (6,171) - - Accrued expenses and other liabilities 2,621 2,049 1,022 Net cash provided by operating activities 21,211 47,222 34,722 Cash Flows From Investing Activities Change in value of life insurance policy (86) (11) - Purchases of property, plant and equipment (52,869) (29,053) (18,561)Net cash used in investing activities (52,955) (29,064) (18,561) Cash Flows From Financing Activities Release of restricted cash 2,471 - - Payments on promissory notes - (69,771) - Payments of long-term debt and capital lease obligations (3,714) (2,628) (729)Distributions to members of Tile Shop LLC - (26,306) (21,744)Repurchase of warrants (30,108) Repurchase of common shares (46,000) - (1,485)Proceeds from exercise of warrants 82,413 4,001 - Proceeds from exercise of stock options 100 - - Cash received in merger with JWC Acquisition Corp - 62,904 - Proceeds from issuance of common shares to JWC Acquisition Corp'sshareholders - 15,000 - Payment to members of Tile Shop LLC for contribution - (75,000) - Expenses for business combination - (2,463) - Net advances on line of credit 25,566 72,600 - Payment towards special cash distribution units - (300) (300)Receipt on note from member - 1,205 263 Debt issuance costs (300) (594) - Security deposits 90 (102) - Net cash provided by (used in) financing activities 30,518 (21,454) (23,995) Net change in cash (1,226) (3,296) (7,834) Cash and cash equivalents beginning of period 2,987 6,283 14,117 Cash and cash equivalents end of period $1,761 $2,987 $6,283 The accompanying notes are an integral part of these consolidated financial statements  58 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 1: Organization and Nature of Business The Tile Shop, LLC (“The Tile Shop”) was formed on December 30, 2002, as a Delaware limited liability company and began operations on January 1,2003. Tile Shop Holdings, Inc. (“Holdings,” and together with its wholly owned subsidiaries, the “Company”) is incorporated under the laws of the stateof Delaware. The Company was formed for the purpose of consummating the transactions contemplated by the Contribution and Merger Agreement (the“Contribution and Merger Agreement”), dated June 27, 2012, by and among JWC Acquisition Corp., a Delaware corporation (“JWCAC”), The TileShop, the member of The Tile Shop other than ILTS, LLC, a Delaware limited liability company (“ILTS”), Nabron International, Inc., a Bahamascorporation (“Nabron”), Tile Shop Merger Sub, Inc., a Delaware corporation (“Merger Sub”), and Peter J. Jacullo III, as representative (“BusinessCombination”), which was completed on August 21, 2012 and is fully discussed in Note 2 below. JWCAC was incorporated under the laws of the stateof Delaware in 2010 for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar businesscombination involving JWCAC and one or more businesses. The Company is engaged in the sale of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the UnitedStates. We offer a wide selection of products, attractive prices, and exceptional customer service in an extensive showroom setting. We sell over 4,500products from around the world, including ceramic, porcelain, glass, and stainless steel manufactured tiles and, marble, granite, quartz, sandstone,travertine, slate, and onyx natural tiles. The Company also fabricates or manufactures certain products in Michigan, Virginia, Oklahoma and Wisconsin.The Company’s primary market is retail sales to consumers; however, the Company does have sales to contractors. As of December 31, 2013, theCompany had 88 stores and an on-line retail operation. The retail stores are located in Minnesota, Wisconsin, Kansas, Illinois, Michigan, Ohio, Indiana,Maryland, Missouri, Kentucky, New York, Virginia, Iowa, North Carolina, New Jersey, Tennessee, Nebraska, Delaware, Georgia, Pennsylvania,Florida, Massachusetts, Rhode Island, South Carolina, Texas, Colorado, Connecticut and Oklahoma. The Company also has distribution centers locatedin Wisconsin, Michigan, Virginia and Oklahoma. The consolidated financial statements of the company include the accounts of its wholly owned subsidiaries, and variable interest entities. See Note 13,“New Market Tax Credit Entities” (NMTC) for the discussion of financing arrangements involving certain entities that are variable interest entities that areincluded in our consolidated financial statements. All significant intercompany transactions have been eliminated in consolidation. Note 2: Business Combination and the Basis of Presentation On August 21, 2012, Holdings completed a business combination pursuant to the terms of the Contribution and Merger Agreement dated June 27, 2012(the “Contribution and Merger Agreement”), whereby the former members of The Tile Shop, LLC (“The Tile Shop”) directly or indirectly, contributed allof their membership interests in The Tile Shop to Holdings (the “Contribution”), in exchange for (i) a cash payment of $75 million, (ii) 32,000,000 sharesof the common stock of Holding’s valued at $320 million, and (iii) promissory notes issued by Holdings in the aggregate principal amount of $69.8million. As a result of the Contribution, all ownership interests in The Tile Shop were contributed to Holdings. Concurrent with the Contribution, (i) alloutstanding shares of JWC Acquisition Corp., a Delaware corporation (“JWCAC”) common stock were exchanged for one share of Holding’s commonstock and (ii) each outstanding JWCAC warrant, which was exercisable for one share of JWCAC common stock, became exercisable for one share ofHolding’s common stock. This transaction is referred to as the “Business Combination”. Immediately following the Business Combination, the formermembers of The Tile Shop held 75.2% of the 42,534,884 issued and outstanding shares of Holding’s common stock. The Tile Shop was considered the acquirer for accounting purposes because it obtained effective control of JWCAC. The Tile Shop did not have a changein control since The Tile Shop’s operations comprise the ongoing operations of the combined entity, its senior management became the senior managementof the combined entity, and its former owners own a majority voting interest in the combined entity and are able to elect a majority of the combined entity’sboard of directors. Accordingly, the Business Combination does not constitute the acquisition of a business for purposes of Financial AccountingStandards Board’s Accounting Standard Codification 805, “Business Combinations,” or ASC 805. As a result, the assets and liabilities of The TileShop and JWCAC are carried at historical cost and the Company has not recorded any step-up in basis or any intangible assets or goodwill as a result ofthe Business Combination. All direct costs of the Business Combination were offset to additional paid-in capital. The historical financial statementspresented herein are that of The Tile Shop. The recapitalization of the number of shares of common stock attributable to The Tile Shop members were reflected retroactive to January 1, 2010.Accordingly, the number of shares of common stock presented as outstanding as of January 1, 2010 totaled 32,329,897 consisting of 32,000,000 sharesof common stock issued to The Tile Shop members as consideration for the Contribution, and 329,897 of common units held by the former owners ofThe Tile Shop, LLC which were fully redeemed in 2011. This number of shares was also used to calculate the Company’s earnings per share for allperiods prior to the Business Combination. 59 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements The cash flows related to the business combination, as reported in the Consolidated Statement of Cash Flows is summarized as follows (in thousands): Amount Cash in trust at JWCAC $124,950 Add: proceeds from issue of shares 15,000 Less: redemption of JWCAC public shares (54,960)Less: cash paid to The Tile Shop members (75,000)Less: payment of deferred offering cost by JWCAC (4,588)Less: payment of transaction expenses (4,644)Remaining cash received by the Company in the merger $758 The number of shares of common stock of the Company issued and outstanding immediately following the consummation of the Business Combinationis summarized as follows: Number of Shares JWCAC public shares outstanding prior to the Business Combination 12,500,000 JWCAC founder shares 2,034,884 Total JWCAC shares outstanding prior to the Business Combination 14,534,884 Less: redemption of JWCAC public shares (5,500,000)Total JWCAC shares outstanding immediately prior to the effective date of the Business Combination 9,034,884 Common shares issued as consideration to members of The Tile Shop 32,000,000 Common shares issued to sponsor of JWCAC 1,500,000 Total common shares outstanding at closing, August 21, 2012 42,534,884 Because the former Tile Shop members retained a significant ownership interest in the Company following the Business Combination, a portion of the$69.8 million of notes payable issued to the former members of The Tile Shop as part of the Business Combination was treated as a leverageddividend and accordingly $52.5 million was been reflected as a distribution of retained earnings in the accompanying financial statements. Theremainder of the notes payable was deducted from additional paid in capital. Pro Forma Information: The pro forma computation related to the conversion to a C Corporation for income tax purposes assumes that such conversion occurred as of January 1,2011. These amounts are not necessarily indicative of the consolidated results of income for future years or actual results that would have been realizedhad the change in tax status occurred as of the beginning of each such year. Note 3: Summary of Selected Significant Accounting Polices Basis of preparation: The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with United States generallyaccepted accounting principles (“US GAAP”) to reflect the financial position, results of operations and cash flows of the Company. These financialstatements have been prepared on a going concern basis, which assumes the realization of assets and satisfaction of liabilities in the normal course ofbusiness. The Company reviewed subsequent events through the issue date for inclusion in these consolidated financial statements. Use of estimates: The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amountsreported in the consolidated financial statements. The Company bases its estimates and judgments on historical experience and on various otherassumptions that it believes are reasonable under the circumstances. The amount of assets and liabilities reported on the Company's balance sheets and theamounts of income and expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limitedto, the accounting for revenue recognition and related reserves for sales returns, useful lives of property, plant and equipment, determining impairment onlong-lived assets, valuation of inventory, determining compensation expense on stock based compensation plans and accruals for incentive compensation.Actual results may differ from these estimates. Reclassification: Certain amounts in the prior year’s audited consolidated financial statements have been reclassified for comparative purposes to conform to the currentyear’s presentation. The reclassification for 2012 was to present the long-term portion of debt issuance costs as a long-term asset, and condense items incurrent assets, and current liabilities on the balance sheet.current assets, and current liabilities on the balance sheet. 60 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Cash and cash equivalents: The Company considers all highly liquid investments with initial maturities of three months or less to be cash equivalents. Trade receivables: Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables. Management determines the allowance for doubtfulaccounts on a specific identification basis as well as by using historical experience applied to an aging of accounts. Trade receivables are written off whendeemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. As of December 31, 2013 and 2012, the allowancefor doubtful accounts was not significant. The Company does not accrue interest on accounts receivable. Inventories: Inventories are stated at the lower of cost (determined on the first-in, first-out method) or market. Inventories consist primarily of merchandise held for sale.Inventories were comprised of the following at December 31 (in thousands): 2013 2012 Finished goods $62,690 $39,353 Raw materials 1,370 858 Finished goods in transit 3,696 6,679 Total $67,756 $46,890 Income taxes: As a result of the Business Combination, beginning August 21, 2012, the Company’s results of operations are taxed as a C Corporation. Prior to theBusiness Combination, The Tile Shop’s operations were taxed as a limited liability company, whereby The Tile Shop elected to be taxed as a partnershipand the income or loss was required to be reported by each respective member on their separate income tax returns. Therefore, no provision for federalincome taxes has been provided in the accompanying consolidated financial statements for periods prior to August 21, 2012. The provision recorded priorto August 21, 2012, represents income taxes primarily payable by The Tile Shop, due to minimum fees in several states and income tax in the state ofMichigan. Subsequent to August 21, 2012, the Company has recognized deferred tax liabilities and assets for the expected future tax consequences of events that havebeen included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financialstatement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. TheCompany estimates the degree to which tax assets and credit carry forwards will result in a benefit based on expected profitability by tax jurisdiction. Avaluation allowance for such tax assets and loss carry forwards is provided when it is determined to be more likely than not that the benefit of suchdeferred tax asset will not be realized in future periods. If it becomes more likely than not that a tax asset will be used, the related valuation allowance onsuch assets would be reduced. Revenue recognition: Sales are recognized upon pick up or delivery of products which is when transfer of title to a customer occurs, the sales price is fixed or determinable, andcollection is reasonably assured. The Company is required to charge and collect sales and other taxes on sales to its customers and remit the taxes back tothe government authorities. Sales and other taxes are recorded in the consolidated balance sheets but excluded from the consolidated statements of income. The Company accrues a liability for sales returns in the period that the related sales are recognized. The customer may receive a refund or exchange theoriginal product for a replacement of equal or similar quality for an indefinite period of time after the original purchase. Revenues are recognized net ofexpected returns, which we estimate using historical return rates and lag patterns as a percentage of sales. 61 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Cost of sales: Cost of sales includes the total cost of our products sold, including, operating and transportation costs to move our products from our vendors to theCompany’s distribution centers, inventory reserves and adjustments, and shipping charges associated with sales to our customers. Stock based compensation: The Company has given equity linked incentives to certain employees. The Company accounts for equity linked incentives in accordance with ASC 718“Stock Compensation”. ASC 718 addresses the accounting for share-based payment transactions in which an enterprise receives employee services inexchange for equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled bythe issuance of such equity instruments. Prior to the Business Combination, the Company has issued cash settled and equity settled awards. Until consummation of the Business Combination,the cash settled awards were classified as liabilities as required under ASC 718. At each reporting date the liability was measured at intrinsic value withresulting changes recognized in the consolidated statements of income. Since consummation of the Business Combination, the Company has only equity settled awards. The Company measures and recognizes compensationexpense for all stock-based payments on the grant date at fair value, net of estimated forfeitures. The Company recognizes stock-based compensation costsover the requisite service period of the award. The financial statements for the years ended December 31, 2013, 2012, and 2011 recognize compensationcost for the portion of outstanding awards which have vested during the applicable year. Restricted stock: The Company awards restricted common shares to selected employees, and non-employee directors. Recipients are not required to provide anyconsideration other than continued service. Company share awards are subject to certain restrictions on transfer, and all or part of the shares awarded maybe subject to forfeiture upon the occurrence of certain events, including employment termination. The restricted stock is valued at its grant date fair valueand expensed over the requisite service period or the vesting term of the award. Concentration of risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and bankdeposits. By their nature, all such instruments involve risks including credit risks of non-performance by counterparties. A substantial portion of theCompany's cash and cash equivalents and bank deposits are invested with banks with high investment grade credit ratings. Segments: The Company’s operations consist primarily of retail sales of manufactured and natural stone tiles, setting and maintenance materials, and relatedaccessories in stores located in the United States and through its website. The Company’s chief operating decision maker only reviews the consolidatedresults of the Company and accordingly the Company has concluded it has one reportable segment. Advertising costs: Advertising costs are charged to expense as incurred. Advertising costs were $6.2 million; $2.9 million and $2.1 million, for the years ended December31, 2013, 2012 and 2011, respectively, and are included in selling, general and administrative expenses in the consolidated statements of income.Magazine advertisements, internet advertisements, media broadcasts and billboard advertising made up the majority of our advertising costs in all threeyears. Pre-opening costs: Our pre-opening costs are those typically associated with the openings of a new store and generally include rent expense, payroll costs and promotionalcosts. We expense pre-opening costs as incurred which are recorded in selling, general and administrative expenses. During the years ended December 31,2013, 2012 and 2011, we reported pre-opening costs of $2.4 million, $1.0 million and $0.9 million, respectively. 62 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Property and equipment: Property, equipment and leasehold improvements are recorded at cost. Improvements are capitalized while repairs and maintenance costs are charged tooperations when incurred. Property and equipment is depreciated or amortized using the straight-line method over estimated useful lives ranging from threeto seven years. Assets purchased under a capital lease are amortized using the straight-line method over the shorter of the lease (including renewal terms)term or the estimated useful life of the asset. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or theestimated useful life of the asset. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and anygain or loss thereon is included in the results of operations. Asset life (in years) Buildings and building improvements 40 Leasehold improvements 8 - 26 Furniture and fixtures 3 - 7 Machinery and equipment 5 - 7 Computer equipment 5 - 7 Purchased, and internally developed computer software 3 - 5 Vehicles 3 - 5 Internal use software: The Company capitalizes software development costs incurred during the application development stage related to new software or major enhancements tothe functionality of existing software that is developed solely to meet the Company’s internal operational needs and when no substantive plans exist or arebeing developed to market the software externally. Costs capitalized include external direct costs of materials and services and internal payroll and payroll-related costs. Any costs during the preliminary project stage or related to training or maintenance is expensed as incurred. Capitalization ceases when thesoftware project is substantially complete and ready for its intended use. The capitalization and ongoing assessment of recoverability of development costsrequires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economicfeasibility, and estimated economic life. As of December 31, 2013 and 2012, $0.6 million and $0 was included in construction in progress. When thesoftware is ready for the intended use, these costs will be amortized over their estimated useful lives of three years. There was no amortization expenserelated to capitalized software during the years ended December 31, 2013, 2012 and 2011, respectively. Debt issuance costs: The Company capitalized approximately $1.3 million and $0.6 million of debt issuance costs during the years ended December 31, 2013 and 2012,respectively. The Company amortizes the debt issuance costs using the effective interest method over the life of the related debt instrument and includesthese costs with other assets on the consolidated balance sheets. Amortization of debt issuance costs of approximately $0.1 million for the year endedDecember 31, 2013 and $0 million for the years ended December 31, 2012 and 2011, respectively, is included in interest expense in the consolidatedstatements of income. The remaining balance of deferred costs was approximately $1.8 million at December 31, 2013. Accrued warrant liability: Warrants were accounted for as derivative instruments in accordance with the Accounting Standards Codification (“ASC”) Subtopic 815-40, Contractsin Entity’s Own Equity. As such, changes in the fair value of the warrants were recorded in the statements of income as “Change in fair value of warrantliability.” As of December 31, 2013, the Company had no outstanding warrants. Leases: The Company classifies all leases at the inception date as either a capital lease or an operating lease. Leases of assets under which there is transfer ofsubstantially the entire risk and rewards incidental to ownership as per ASC 840 “Leases” are classified as capital leases. All other leases are classifiedas operating leases. Assets under capital leases are capitalized and lease payments are allocated to the lease obligation and interest on the obligation amount. Rent expense on operating leases is charged to expense in accordance with the terms of the agreement. For leases that contain fixed escalation of theminimum rent, rent expense is recognized on a straight-line basis through the end of the lease term. The start of the lease term is the earlier of the leasecommencement date or the date the Company takes possession of the asset. The difference between the straight-line rent amounts and amounts payableunder the leases is recorded as deferred rent. 63 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial StatementsSelf insurance: The Company is self-insured for certain employee health benefit claims. The Company estimates a liability for aggregate losses below stop-loss coveragelimits based on estimates of the ultimate costs to be incurred to settle known claims and claims not reported as of the balance sheet date. The estimatedliability is not discounted and is based on a number of assumptions and factors including historical trends, and economic conditions. This liability couldbe affected if future occurrences and claims differ from these assumptions and historical trends. As of December 31, 2013 and 2012, an accrual ofapproximately $0.1 and $0.2 million related to estimated claims was included in other current liabilities, respectively. Note 4: Property Plant and Equipment: Property and equipment consisted of the following at December 31 (in thousands): 2013 2012 Land $703 $703 Building and building improvements 18,685 13,246 Leasehold improvements 56,239 40,513 Furniture and fixtures 83,925 64,979 Machinery and equipment 21,360 13,258 Computer equipment 7,849 6,044 Purchased computer software 2,775 2,663 Vehicles 2,518 2,154 Construction in progress 8,480 2,434 Total property, plant and equipment 202,534 145,994 Less accumulated depreciation and amortization (75,288) (62,103)Less accumulated depreciation and amortization of capital leases (1,929) (1,811)Total property, plant and equipment, net $125,317 $82,080 Depreciation and amortization expense on property and equipment, including capital leases, was approximately $14.3 million, $10.5 million and $8.7million for the years ended December 31, 2013, 2012 and 2011, respectively. Note 5: Accrued Liabilities Accrued liabilities consisted of the following at December 31 (in thousands): 2013 2012 Customer deposits $5,301 $4,080 Accrued wages and salaries 2,905 2,912 Taxes - other 1,783 1,490 Interest payable 409 349 Sales return reserve 2,850 1,815 Current portion of capital lease obligation 280 234 Total accrued liabilities $13,528 $10,880 64 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 6: Long-term debt Long-term debt consisted of the following at December 31 (in thousands): 2013 2012 Variable interest rate (0.37% at both December 31, 2013 and 2012) bonds, which mature April1, 2023, collateralized by buildings and equipment $ 1,085 $ 1,445 Term note payable - quarterly installments of $0.875 million, interest at 2.4084% and2.6154% at December 31, 2013 and 2012, through October 2017 20,625 24,125 Commercial bank credit facility 73,526 47,600 95,236 73,170 Less: current portion 3,590 3,860 Debt obligations, net of current portion $91,646 $69,310 Approximate annual aggregate maturities of debts are as follows: (thousands): Fiscal year 2014 $3,590 2015 3,595 2016 3,595 2017 83,751 2018 105 Thereafter 600 Total future maturities payments $95,236 On October 3, 2012, the Company and its operating subsidiary, The Tile Shop, LLC, entered into a credit facility with Bank of America, N.A. (the“Credit Agreement”). The Credit Agreement, as amended, provides the Company with a $120 million senior secured credit facility, comprised of a five-year $25 million term loan and a $95 million revolving line of credit. The Amended Credit Agreement is secured by virtually all of the assets of theCompany, including but not limited to, inventory, receivables, equipment and real property. Borrowings pursuant to the Credit Agreement bear interest ateither a base rate or a LIBOR-based rate, at the option of the Company. The LIBOR-based rate will range from LIBOR plus 1.75% to 2.25%, dependingon 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 Bank of America “prime rate,”and (c) the Eurodollar rate plus 1.00%, in each case plus 0.75% to 1.25% depending on The Tile Shop’s leverage ratio. At December 31, 2013 and 2012,the base interest rate was 4.25%. At December 31, 2013 and 2012 the LIBOR-based interest rate was 2.408% and 2.615%, respectively. As of December31, 2013 and 2012, the Company had outstanding borrowings related to the revolving line of credit of $73.5 million and $47.6 million, respectively. Theterm loan requires quarterly principal payments of $0.875 million. The Credit Agreement contains customary events of default, conditions to borrowings,and restrictive covenants, including restrictions on the Company’s and The Tile Shop’s ability to dispose of assets, make acquisitions, incur additionaldebt, incur liens, make investments, or enter into transactions with affiliates on other than on 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 adjustedleverage ratios. In addition, except with respect to pro rata payments made by The Tile Shop or other subsidiaries to the Company or any other equityowner of such entity, the Credit Agreement prohibits the payment of cash dividends. The Company was in compliance with the covenants during the yearended December 31, 2013, based on an amendment dated April 30, 2013 which excluded the impact of the repurchase of warrants and the repurchase ofcapital stock, up to the amount of cash proceeds received from warrant exercises, from the calculation of certain financial covenants and an amendmentdated July 8, 2013 which excluded the liabilities related to the New Market Tax Credit transaction (Note 13) in our leverage ratio. 65 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Capital Leases: The Company has several leases for store facilities that are accounted for as capital leases. These leases expire at various dates through 2022. Assetsacquired under capital leases are included in property, plant and equipment. As of December 31, 2013, minimum lease payments under the Company's capital lease obligation were as follows (thousands): Fiscal year 2014 $472 2015 418 2016 217 2017 211 2018 216 Thereafter 737 Less: amounts representing interest (830)Present value of future minimum lease payments 1,441 Less: current portion 280 Capital lease obligations, net of current portion $1,161 Note 7: Commitments and Contingencies Operating leases: The Company leases buildings and office space under various operating lease agreements. In addition to rent, most leases require payment of real estatetaxes, insurance, and common area maintenance. The leases generally have an initial lease term of 10 to 15 years and contain renewal options andescalation clauses. For leases that contain fixed escalation of the minimum rent, or rent holidays, rent expense is recognized on a straight-line basis throughthe end of the lease term including renewals. The difference between the straight-line rent amounts and amounts payable under the leases is recorded asdeferred rent. For the years ended December 31, 2013, 2012 and 2011, rent expense was approximately $19.5 million, $14.0 million, and $11.4 million,respectively. Annual minimum rentals under non-cancelable operating leases are as follows, for the years ended December 31 (in thousands): Fiscal year 2014 $20,669 2015 21,150 2016 21,152 2017 21,466 2018 21,889 Thereafter 292,065 Total future maturities payments $398,391 Legal proceedings: As a retail company, we are subject to various claims relating to workers compensation, disclosure inaccuracies and employee matters. Some litigationagainst us could take the form of class action complaints or derivative actions by stockholders. The Company establishes accruals for potential exposure,as appropriate, for claims against the Company when losses become probable and reasonably estimable. Where the Company is able to reasonablyestimate a range of potential losses, the Company records the amount within that range that constitutes the Company’s best estimate. The Company alsodiscloses the nature and range of loss for claims against the Company when losses are reasonably possible and material. In the opinion of management, theoutcome of litigation currently pending will not materially impact the Company’s results of operations, financial condition, or liquidity. 66 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 8: Fair Value of Financial Instruments: These consolidated financial statements include the following financial instruments: cash and cash equivalents, trade receivables, accounts payable,accrued expenses, capital leases, notes payable, debt and warrant liability. At December 31, 2013 and December 31, 2012, the carrying amount of theCompany’s cash and cash equivalents, trade receivables, accounts payable and accrued expenses approximated their fair values due to their short-termmaturities. The carrying value of the Company’s borrowings and capital lease obligation approximates fair value based upon the market interest ratesavailable to the Company for debt and capital lease obligations with similar risk and maturities. 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 forthe asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, the Company uses a three-tiervaluation 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, eitherdirectly 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 significantmanagement judgment. These values are generally determined using pricing models for which the assumptions utilize management’sestimates of market participant assumptions. Our common stock warrants were listed for trading on the OTC market. As of December 31, 2013 and December 31, 2012, we had $0 and $95.6million, respectively, in an accrued liability classified as a Level 1 security, related to warrants to purchase common stock. Warrant expense related to thechange in fair value of warrants was $54.2 million and $82.1 million for years ended December 31, 2013 and 2012, respectively. Note 9: Related Party Transactions In January 2012, TS, Inc., ILTS and JWTS sold (i) an aggregate of 129,333 Common Units of The Tile Shop to Mr. Krasnow, (ii) an aggregate of646,667 Common Units of The Tile Shop to the Peter H. Kamin Revocable Trust dated February 2003, the Peter H. Kamin Childrens Trust datedMarch 2007, and 3K Limited Partnership, entities of which Mr. Kamin is trustee or general partner, as applicable, (iii) an aggregate of 25,867 CommonUnits of The Tile Shop to Family Office Investors LLC, an entity in which Mark Riser, a member of the board of managers of The Tile Shop prior to theconsummation of the Business Combination, is the sole member, and (iv) an aggregate of 19,400 Common Units of The Tile Shop to Warren Garden, ineach case for $7.732 per unit. In connection with these transactions, The Tile Shop made certain representations and warranties. During the years ended 2012 and 2011 The Tile Shop made payments of $300,000 to TS, Inc. in connection with the final redemption of an aggregate of3,000,000 special cash distribution units of The Tile Shop issued to TS, Inc., which were fully-redeemed by The Tile Shop during 2012. In lieu of payingsuch amounts to TS, Inc. in cash, The Tile Shop reduced the outstanding amount under a promissory note, dated December 30, 2002, made by TS, Inc.and payable to The Tile Shop. Total principal payments made in cash related to this promissory note were approximately $1,205,000 and $263,000 forthe years ended December 31, 2012 and 2011, respectively. Between November 2013 and January 2014, the Company learned about certain related party transactions that existed during 2011 and 2012 that had notbeen previously disclosed. These relationships are described in the paragraphs that follow. During the years ended December 31, 2013, 2012 and 2011, the Tile Shop made payments of $16.9 million, $12.5 million and $6.3 million,respectively to Beijing Pingxiu (“BP”), a Chinese entity that primarily processed export transactions on behalf of the Company's vendors. In Novemeber2011, a former employee and brother-in-law of the Company's CEO became the owner of BP. The payments made to BP for the period of November 1,2011 through December 31, 2011 were $1.7 million. The Company had approximately $0 and $1.0 million in accounts payable due to BP at December31, 2013 and 2012, respectively. During the years ended December 31, 2013, 2012 and 2011, the Tile Shop made payments of $2.8 million, $2.1 million and $1.7 million, respectively,to Nanyang Helin Stone Co. Ltd. (“Nanyang”), a company partially owned by a former Company employee and brother-in-law of the Company’s CEO.The Company has notified Nanyang that it will continue business with Nanyang only if the former employee’s ownership is transferred to an unrelatedparty and the former employee is not an officer or director of Nanyang. The Company had approximately $0.5 million and $0.2 million in accountspayable due to Nanyang at December 31, 2013 and 2012, respectively. 67 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 10: Earnings Per Share Basic earnings per share is calculated by dividing net (loss) income by the weighted-average number of shares outstanding during the period. Dilutedearnings (loss) per share is calculated by dividing net (loss) income by the weighted- average number of common shares outstanding, after giving effect toall dilutive potential common shares outstanding during the period. Common stock issued to The Tile Shop members in exchange for their ownershipinterests in The Tile Shop are retroactively reflected from January 1, 2010 as the number of shares outstanding in all periods prior to August 21, 2012 forthe purpose of the earnings (loss) per share calculation. The additional shares issued as part of the business combination have been reflected asoutstanding shares from August 21, 2012. For the years ended December 31, 2013, 2012 and 2011, diluted net loss per share is identical to basic net lossper share as potentially dilutive securities have been excluded from the calculation of diluted net loss per common share because the inclusion of suchsecurities would be anti-dilutive. Basic and diluted net income (loss) per share was calculated as follows (in thousands, except per share data): 2013 2012 2011 Net (loss) income $(35,660) $(46,887) $31,360 Weighted-average shares outstanding - basic and diluted 49,600,396 35,837,609 32,261,168 Basic and diluted net (loss) income per share $(0.72) $(1.31) $0.97 Note 11: Equity Incentive Plans 2006 Plan: In 2006, The Tile Shop created an equity incentive deferred compensation plan for certain key employees. The plan provisions called for grantingparticipation units to key employees to allow them to participate in the increased value of The Tile Shop. Under the plan, the units granted were payable incash on the 10th or 15th anniversary of the award, except in the event of death or a change of control in The Tile Shop, in which case settlement wouldoccur on date of death of employee or date of change or control. On the settlement date, the participants would be paid cash equal to the difference betweenFair Market Value as determined in accordance with the plan (“FMV”) of The Tile Shop’s common units as of the valuation date immediately precedingthe exercise date less the initial FMV multiplied by the number of units. In June 2006, 600,000 units were granted, which were exercisable on the 10th anniversary of the award. The initial FMV of the units was $1.203 per unit.The second grant of 200,000 units occurred on May 25, 2007 at an initial FMV of $2.1245 per unit which were exercisable on the 15th anniversary of theaward. The final grant under the plan was on made January 1, 2009 for 200,000 units, which were exercisable on the 15th anniversary of the award. Theinitial FMV for these units was $3.1725 per unit. All the units vested immediately. These awards were accounted for under ASC 718 and classified asliabilities. The Company measured the liability at intrinsic value at each reporting period. Fluctuations in the intrinsic value of the liability award wererecorded as increases or decreases in compensation expense immediately as the awards were fully vested at the grant date. The intrinsic value wascalculated based on the difference between FMV of the Company’s common unit, based on an analysis of enterprise value at each valuation date, and theinitial FMV determined in accordance with the plan. Effective immediately prior to the consummation of the Business Combination, The Tile Shop terminated the 2006 Plan and agreed to make a lump- sumcash payment to each holder of the equity units one day following the first anniversary of the effective date of the Business Combination. The Companyrecognized compensation expense of $3.9 million and $1.4 million for the years ended December 31, 2012 and 2011, respectively, related to this plan.During the year ended December 31, 2013, the Company paid the entire balance of the deferred compensation liability. January 2012 Plan: On January 1, 2012, The Tile Shop granted and issued 233,500 Series 2012 Participating Capital Appreciation Common Units (“Restricted StockUnits”) to two members of its board of managers. The Restricted Stock Units were a new series of common units designated by the board of managers.These awards vested equally over a four year period on the anniversary of issuance, except on occurrence of a significant event in which they will vestimmediately. The Restricted Stock Units were subject to a recapture amount of $300 million as of the issue date, reduced from time to time by the aggregateamount of distributions (not including tax distributions) made, from and after the issue date, by The Tile Shop to the common holders with respect totheir common units. No distributions were to be paid to the Series 2012 holders with respect to their Series 2012 units until the date that the commonholders collectively have received distributions (not including tax distributions) of $300 million. These awards were accounted for under ASC 718 and were classified as liabilities and measured at intrinsic value. Pursuant to the plan, effectiveimmediately prior to the consummation of the Business Combination, the Restricted Stock Units fully vested. As a result, the Company recorded a $0.5million charge during the year ended December 31, 2012 to the income statement to record the deferred compensation expense resulting from the acceleratedvesting of the Restricted Stock Units. The Company recognized compensation cost of $0 and $0.6 million for the years ended December 31, 2013 and2012 related to these units. As a part of the Business Combination transaction the Restricted Stock Units were exchanged for common shares of theCompany. 68 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements 2012 Plan: Under the 2012 Omnibus Award Plan (the “2012 Plan”), 2,500,000 shares of the Company’s common stock were initially reserved for issuance pursuantto a variety of stock-based compensation awards, including stock options, and restricted stock awards. The number of shares initially reserved forissuance or transfer pursuant to awards under the 2012 Plan was to be increased on the first day of each calendar year beginning in 2013 and ending in2022, in an amount equal to the lesser of (A) 2,500,000 shares, (B) six percent (6%) of the shares of common stock outstanding (on an as-convertedbasis) on the last day of the immediately preceding calendar year, and (C) such smaller number of shares of stock as determined by the Company’s boardof directors. During 2013, (i) 2,500,000 shares of common stock were added to the 2012 Plan reserve effective January 1, 2013 in accordance with theautomatic share increase provision of the 2012 Plan, (ii) the 2012 Plan was amended to eliminate the automatic share increase for subsequent years, and(iii) the 2012 Plan was amended to authorize grants of performance-based awards, which may be paid in cash or equity. The 2102 Plan was approved bythe Company’s stockholders in July 2013. Stock Options: During the year ended December 31, 2013, the Company granted stock options to its employees that included service condition requirements. During the year ended December 31, 2012, the Company granted stock options to its employees that included both service condition requirements andmarket conditions. The options issued provide for the options to be vested in two different tranches: (1)two-thirds of the total grant vests 25% on each anniversary of the grant date for four years provided the employee has provided continued service; and (2)one-third of the total grant vests 25% on each anniversary of the grant date based both on the appreciation in the price of the Company’s common stockby 20% annually and continued service to the Company. The options provide for certain acceleration of vesting and cancellation of options under different circumstances, such as a change in control, death,disability and termination of service. For the portion of the options that vest only based upon a service condition, the Company recognizes compensationexpense net of estimated forfeitures on a straight-line basis over the requisite service period. For the portion of the options that contain both a market andservice condition, the Company recognizes compensation expense, net of estimated forfeitures, using graded vesting over the requisite service period. The fair value of each option grant containing only a service condition was estimated on the date of grant using the Black-Scholes option pricing. Theassumptions used in the option valuation models are outlined in the following table: 2013 2012Risk-free interest rate .81%to 1.6% .60 -.62 Expected life (years) 7 5.5- 7 Expected volatility 45%- 46% 38%- 46% The fair value of each option grant containing market and service conditions was estimated on the date of grant using a Monte Carlo Simulation analysisvaluation model and assumes that price target thresholds will be achieved. If such price target thresholds are not met, compensation cost is not reversed.The inputs for expected volatility, expected dividends, and risk-free rate used in estimating those options’ fair value are the same as those noted in the tablerelated to options issued with service conditions only, except the expected life for the options granted that contain market conditions is derived from thepricing model. The computation of the expected volatility assumptions used in the option valuation models was based on historical volatilities and implied volatilities ofthe Company and peer companies. The Company utilized the volatilities of peer companies due to its lack of extensive history. For the options containingonly a service condition, the Company used the “simplified” method for an expected life as prescribed in SEC Staff Accounting Bulletin (“SAB”) No.110, for companies that do not have adequate historical data. The risk-free interest rate was based on the U.S. Treasury yield at the time of grant. Theexpected dividend yield was zero based on the fact the company has not paid dividends, nor does it intend to pay dividends in the future. Stock based compensation related to options for the years ended December 31, 2013, 2012 and 2011 was $3.3 million ($0.07 per share basic), $1.3million ($0.02 per share basic), and $0, respectively, and was included in selling, general and administrative expenses in the consolidated statements ofincome. As of December 31, 2013, the total future compensation cost related to non-vested options not yet recognized in the consolidated statement ofincome was $11.0 million, of which $0.9 million is attributable to vesting upon price target thresholds being met and $10.1 million is attributable to time-based vesting. That cost is expected to be recognized over a weighted-average period of 2.9 years. This is an estimate based on options currentlyoutstanding and therefore this projected expense could be more in the future. Using the closing stock price of $18.07, on December 31, 2013, the numberof non-vested shares outstanding was 1,868,918 with an intrinsic value of $9.8 million. 69 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements The following table summarizes stock option activity: Options Weighted AvgExercise price Weighted AvgGrant DateFair Value Weighted AvgRemainingContractualTerm (Years) Outstanding at beginning of period 1,751,000 $10.10 $5.19 9.7 Granted 709,500 $23.54 $11.12 Exercised (22,999) $10.00 $5.00 Cancelled/Forfeited (162,584) $13.96 $6.87 Outstanding at end of period 2,274,917 $14.02 $6.92 8.9 Options exercisable at end of period 405,999 $10.11 $5.13 8.7 Vested during the year 430,248 $10.10 $5.12 Non vested at December 31, 2012 1,751,000 $10.10 $5.19 Non vested at December 31, 2013 1,868,918 $14.86 $7.32 Using the Black-Scholes option pricing model, management has determined that the service conditions only options issued in 2012 have a weighted-average grant date fair value of $5.56. Using the Monte Carlo Simulation analysis valuation model for the portion of the options that have a market and aservice condition, management has determined the weighted-average grant date fair value to be $4.46. Aggregate fair value of options vested during the years ended December 31, 2013 and 2012 were $2.0 million and $0 million, respectively. Intrinsic valueas of December 31, 2013 is based on the fair value price of $18.07, which was the closing price of the stock on December 31, 2013. Based on the $18.07fair value of the stock, the aggregate intrinsic value of options outstanding at December 31, 2013, and exercisable, and exercised during the year endedDecember 31, 2013 is $13.1 million and $3.2 million, and $0.3 million, respectively. There were no options vested or exercised during the year endedDecember 31, 2012. Options outstanding as of December 31, 2013 are as follows: Range of Exercise Price Weighted Average Options Exercise Price RemainingContractual Life-Years $10.00to $15.00 1,602,917 $10.00 8.64 $15.01to $20.00 233,000 $17.57 9.11 $20.01to $25.00 166,000 $23.03 9.60 $25.01to $30.00 273,000 $29.07 9.70 Restricted Stock: On October 1, 2013, the Company granted an executive officer an award of 50,000 shares of restricted common stock of the Company, which vests andbecomes unrestricted as to one-quarter of the total number of shares of common stock on each of October 1, 2014, 2015, 2016, and 2017, subject tocontinued service as an employee, officer, or director of the Company. Compensation expense is recognized on a straight-line basis over the requisiteservice period. The grant-date fair value of these awards, as determined by the fair market value on date of grant, was $28.94 per share. On August 21, 2012, the Company granted an executive officer an award of 250,000 shares of restricted common stock of the Company, which vests andbecomes unrestricted as to one-third of the total number of shares of common stock on each of December 31, 2013, 2014, and 2015, subject to continuedservice as an employee, officer, or director of the Company. Compensation expense is recognized on a straight-line basis over the requisite service period.The grant-date fair value of these awards, as determined by the fair market value on date of grant, was $11 per share. Furthermore, on August 21, 2013 and 2012, the Company granted 14,230 and 45,000, respectively, shares of restricted common stock to its directorswhich vest at the end of one year from date of grant subject to continued service as directors of the Company. The grant-date fair value of these awards, asdetermined by the fair market value on date of grant, was $25.91 and $11 per share, respectively. Compensation expense is recognized on a straight-linebasis over the requisite service period. 70 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements The total expense associated with restricted stock for the years ended December 31, 2013 and 2012 was $1.4 million and $0.5 million, respectively. As ofDecember 31, 2013, there was $3.3 million of total unrecognized expense related to unvested restricted stock awards, which are expected to vest, and arebeing amortized through 2017. The fair value of restricted stock granted in the 2013 fiscal year was $1.2 million. The total fair value of restricted stockthat vested during the years ended December 31, 2013 was $2.3 million. Using the closing stock price of $18.07, on December 31, 2013, the number ofrestricted shares outstanding and expected to vest was 230,896, with an intrinsic value of $4.2 million. Warrants: In connection with the Merger, each outstanding JWCAC warrant that was formerly exercisable for one share of JWCAC common stock becameexercisable for one share of the Company’s common stock. Total warrants outstanding as of the merger date was 17,833,333 warrants at an exercise priceof $11.50 per share, and an expiration date of August 21, 2017. The warrants were listed for trading on the OTC market. The terms of the warrants include a provision (the “Price Reduction Provision”) that requires theCompany to reduce the exercise price by a stated formula if (i) the Company completes a transaction involving a reclassification or reorganization of theoutstanding shares of its common stock, a merger or consolidation in which it is not the surviving company, or a sale of its assets and (ii) at least 30% ofthe consideration payable to common stockholders as a result of that transaction is not common stock listed on a national securities exchange or the OTCBulletin Board. The Company evaluated the warrants under Accounting Standards Codification (“ASC”) Subtopic 815-40, Contracts in Entity’s Own Equity. ASCSection 815-40-15 addresses equity versus liability treatment and classification of equity-linked financial instruments, including common stock purchasewarrants, and states that a warrant may be classified as a component of equity only if, among other things, the warrant is indexed only to the issuer’scommon stock. Under ASC Section 815-40-15, a warrant is not indexed to the issuer’s common stock if the terms of the warrant require an adjustment tothe exercise price upon a specified event and that event is not an input to the fair value of the warrant. Based on its evaluation, the Company concludedthat the warrants are not indexed to the Company’s common stock in the manner contemplated by ASC Section 815-40-15 because the transactions thatwill trigger the Price Reduction Provision are not inputs to the fair value of the warrants. Accordingly, the existence of the Price Reduction Provision in thewarrants required us to classify the warrants as a derivative liability. As of December 31, 2013, the Company had no outstanding warrants. During the year ended December 31, 2013, 1) 7,166,381 warrants were exercisedfor cash proceeds of $82.4 million and 2) 6,731,938 warrants were exercised on a cashless basis in exchange for of 2,790,061 shares. In March 2013, we completed the purchase of 3,580,004 outstanding warrants in private transactions. The aggregate purchase price to acquire thewarrants was approximately $30.1 million. These purchases were funded with the cash proceeds received from the exercise of publicly held warrants. In April 2013, we directed our transfer agent to notify the holders of any remaining outstanding warrants of the call for early exercise. These warrantholders had until May 12, 2013 to exercise their outstanding warrants on a cashless basis. Thereafter, any warrants that remained unexercised wereautomatically redeemed by the Company at a redemption price of $0.01 per warrant in cash. On May 15, 2013, we automatically redeemed 7,071warrants. 71 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 12: Income Taxes As a result of the Business Combination, beginning August 21, 2012, the Company’s results of operations are taxed as a C Corporation. Prior to theBusiness Combination, The Tile Shop’s operations were taxed as a limited liability company, whereby The Tile Shop elected to be taxed as a partnershipand the income or loss was required to be reported by each respective member on their separate income tax returns. Therefore, no provision for federalincome taxes was provided in the accompanying consolidated financial statements for periods prior to August 21, 2012. The provision recorded prior toAugust 21, 2012, represents income taxes primarily payable by the LLC, due to minimum fees in several states and income tax in the state of Michigan.The following amounts represent the determination of the deferred tax assets and liabilities recognized in the Business Combination. The change in statusto a taxable entity and the transactions consummated as part of the Business Combination resulted in the recognition of deferred tax assets and liabilitiesbased on the expected tax consequences of temporary differences between the book and tax basis of The Tile Shop’s assets and liabilities at the date of theBusiness Combination including the following: (i) historical outside basis difference at December 31, 2011, (ii) outside basis differences occurring in2012 prior to the Business Combination, and (iii) the tax basis increase of The Tile Shop membership interests directly held by TS Holdings related to theBusiness Combination. At December 31, 2013, outside basis differences originating prior to the Business Combination related primarily to temporarybasis differences in inventory, fixed assets, accruals, and Section 743, totaled approximately $6.4 million, which have been tax-effected at a 40%combined federal and state rate. This deferred tax assets of $.6 million and $5.9 million were recognized and included in the tax benefit for the yearsended December 31, 2013 and 2012. In addition, deferred tax assets of $0.4 million and $27.7 million, during the periods ending December 31, 2013 andDecember 31, 2012, were recognized in connection with the Business Combination transactions (related to item (iii) above), which enables the Company torealize future tax deductions for the step-up in basis of the Tile Shop member ownership interests that have been contributed to the Company. These basisdifferences were credited directly to additional paid in capital as of the closing of the Business Combination. We have adopted ASC 740-10 relating to “Accounting for uncertainty in income taxes”. As a result of the implementation of ASC 740-10, no adjustment foruncertain tax positions was required. As of December 31, 2013 and 2012, we have not recognized any liabilities for uncertain tax positions nor have weaccrued interest and penalties related to uncertain tax positions. It is our policy to record interest and penalties through income tax expense. Components of net deferred income taxes are as follows at December 31 (thousands): 2013 2012 Deferred income tax assets: Section 743 carryforward $35,300 $37,657 Deferred compensation accrual - 2,416 Leasehold improvement reimbursements 4,435 3,264 Inventory 1,102 2,126 Deferred rent 2,290 - Stock based compensation 248 - Other 985 1,178 Total deferred income tax assets $44,360 $46,641 Deferred income tax liabilities Stock based compensation - 824 Depreciation 17,481 15,588 Total deferred income tax liabilities 17,481 16,412 Net deferred income tax assets $26,879 $30,229 Components of (provision for) benefit from income taxes is as follows (thousands): 2013 (Provision for) benefit from income taxes Federal State Total Current $(5,634) $(2,520) $(8,154)Deferred (4,007) 218 (3,788) $(9,640) $(2,301) $(11,942) 72 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements 2012 Benefit from (provision for) income taxes Federal State Total Current (149) (570) (719)Deferred 2,381 340 2,721 Total $2,232 $(230) $2,002 The following table reflects the effective income tax rate reconciliation for the years ended December 31, 2013, 2012 and 2011 (thousands): 2013 2012 2011 Income (loss) from continuing operations before income taxes: $(23,718) $(48,889) $32,093 Income tax benefit (provision) at federal statutory rate (35%), (34%) and (34%) 8,301 16,622 (10,912) Income from entity not subject to tax - 8,561 10,912 State tax, net of federal tax benefit (1,529) 3,450 - Change in warrant liability (18,976) (31,734) - Minimum state fees before business combination 98 (534) (733)Section 743 step up 561 5,900 - Stock based compensation (573) (182) - Domestic production activities deduction 57 - - Change in deferred rate (94) - - Other, net 214 (81) - $(11,942) $(2,002) $(733) The Tile Shop, LLC tax returns for periods 2010 through the Business Combination on August 21, 2012, are subject to examination by the IRS however,these tax liabilities are the responsibility of the former Tile Shop members. The Company’s federal and state tax returns for the period ended December 31,2012 remains subject to examination 73 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 13: New Market Tax Credit In July 2013 we entered into a financing transaction with Chase Community Equity or “Chase,”, and U.S. Bank Community, LLC or “U.S. Bank”,collectively the “investors” related to a $19.1 million acquisition, rehabilitation and construction of our new distribution and manufacturing center inDurant, Oklahoma. The investors made a capital contribution to, and Tile Shop Lending made a loan to Chase New Market Tax Credit, The Tile Shop ofOklahoma Investment Fund, LLC, and The Tile Shop Investment Fund LLC, or the “Investment Funds,” under a qualified New Markets Tax Credit, or“NMTC,” program. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000, or the “Act,” and is intended to inducecapital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their Federal income taxes for up to 39% ofqualified investments in the equity of community development entities, or “CDEs.” CDEs are privately managed investment institutions that are certifiedto make qualified low-income community investments, or “QLICIs.” In July 2013 Tile Shop Lending loaned $13.5 million to the Investment Funds at an interest rate of 1.35% per year and with a maturity of September 30,2043. The Investment Funds then contributed the loan to certain CDEs, which, in turn, loaned the funds on similar terms to Tile Shop of Oklahoma,LLC, our indirect, wholly-owned subsidiary. The proceeds of the loans from the CDEs (including loans representing the capital contribution made by theinvestors, net of syndication fees) were used to partially fund the new manufacturing and distribution center project. In July 2013, the investors also contributed $5.6 million to the Investment Funds and, by virtue of such contribution, are entitled to substantially all ofthe tax benefits derived from the NMTCs, while we effectively received net loan proceeds equal to investor’s contributions to the Investment Fund. Thistransaction includes a put/call provision whereby we may be obligated or entitled to repurchase the investors’ interest. We believe that the investors willexercise 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 to100% recapture for a period of seven years as provided in the Internal Revenue Code. We are required to be in compliance with various regulations andcontractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not beingrealized and, therefore, could require us to indemnify the investors for any loss or recapture of NMTCs related to the financing until such time as ourobligation to deliver tax benefits is relieved. We do not anticipate any credit recaptures will be required in connection with this arrangement. We have determined that the financing arrangement with the Investment Funds and CDEs contains a variable interest entity, or “VIE.” The ongoingactivities of the Investment Funds – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are notexpected to significantly affect economic performance throughout the life of the Investment Funds. Management considered the contractual arrangementsthat obligate us to deliver tax benefits and provide various other guarantees to the structure; Chase’s and U.S. Bank Community LLC’s lack of a materialinterest in the underling economics of the project; and the fact that we are obligated to absorb losses of the Investment Fund. We concluded that we are theprimary beneficiary of the VIE and consolidated the Investment Funds, as a VIE, in accordance with the accounting standards for consolidation. Chase’sand U.S. Bank Community LLC’s contributions of $4.4 million, net of syndication fees, are included in cash, restricted cash, and other long-termliabilities in the accompanying consolidated balance sheet. The benefit of this net $4.4 million contribution will be recognized as a decrease in depreciationexpense as we amortize the contribution liability over the seven-year compliance period as it is being earned through our on-going compliance with theconditions of the NMTC program. Direct costs of $1.0 million incurred in structuring the financing arrangement are deferred and will be recognized asexpense over the term of the loans. Incremental costs to maintain the structure during the compliance period are recognized as incurred. The restricted cashis expected to be released in during 2014. Note 14: Retirement Savings Plan The Company has a 401(k) profit sharing plan covering substantially all full-time employees. Employee contributions are limited to the maximum amountallowable by the Internal Revenue Code. The Company matched approximately $0.4 million, $0.3 million, and $0 million of employee contributions in2013, 2012, and 2011 and made no discretionary contributions for any of the years presented. Note 15: Supplemental Cash Flows Information (thousands) 2013 2012 2011 Cash paid for interest $2,521 $349 $443 Cash paid for income taxes $15,006 $195 $527 Non cash items: Issuance of promissory note as a part of merger transaction $- $69,771 $- Increase in accrued expenses and APIC through merger transactions $- $1,662 $- Increase in APIC for merger consideration $1,102 $2,490 $- Warrants recorded as a liability as part of merger transaction $- $15,150 $- Reclassification of warrant liability to equity $149,865 $1,568 $- Increase in fixed assets through accounts payable $4,783 $1,516 $100 Cashless exercises of warrants $- $- $- Cashless exercises of stock options $- $- $- Increase in long-term liabilities and restricted cash, net of debt issuance costs $3,465 $- $-  74 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 15: - Quarterly Financial Data (Unaudited) Quarterly results of operations for the years ended December 31 are summarized below (in thousands, except per share amounts): FirstQuarter SecondQuarter Third Quarter FourthQuarter 2013 Net sales $56,835 $58,123 $56,800 $57,806 Gross profit 40,373 40,866 39,814 39,756 Income from operations 12,019 10,476 7,607 2,976 Net income (loss) (44,717) 3,584 4,050 1,423 Basic and diluted earnings (loss) per share (1.00) 0.07 0.08 0.82 2012 Net sales $45,861 $46,314 $44,288 $46,187 Gross profit 33,688 33,659 32,092 33,585 Income from operations 10,464 10,903 5,569 7,475 Net income (loss) 10,133 10,657 (31,865) (34,412)Basic and diluted earnings (loss) per share 0.32 0.33 (0.87) (1.01) (1) Includes non-recurring, non-cash change in fair value of warrants. 75(1)(1)(1) SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized. TILE SHOP HOLDINGS, INC. Date: February 28, 2014 /s/ ROBERT A. RUCKER Robert A. Rucker Chief Executive Officer 76 POWER OF ATTORNEY Each person whose signature appears below constitutes ROBERT A. RUCKER and TIMOTHY C. CLAYTON, or either of them, as his orher true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place andstead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, andother documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power andauthority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents andpurposes as he or she might or could do in person, hereby ratifying and confirming all said attorney-in-fact and agent, or her substitute or substitutes,may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf ofthe Registrant and in the capacities and on the date indicated. Signature Date /s/ ROBERT A. RUCKER February 28, 2014 Robert A. Rucker Chief Executive Officer, Director (Principal Executive Officer) /s/ TIMOTHY C. CLAYTON February 28, 2014 Timothy C. Clayton Chief Financial Officer (Principal Financial and Accounting Officer) /s/ WILLIAM E. WATTS February 28, 2014 William E. Watts Director and Chairman of the Board of Directors /s/ PETER J. JACULLO February 28, 2014 Peter J. Jacullo, Director /s/ PETER H. KAMIN February 28, 2014 Peter H. Kamin, Director /s/ TODD KRASNOW February 28, 2014 Todd Krasnow, Director /s/ADAM L. SUTTIN February 28, 2014 Adam L. Suttin, Director 77 TILE SHOP HOLDINGS, INC. EXHIBIT INDEX Exhibit No. Description 2.1Contribution and Merger Agreement, dated June 27, 2012, by and among JWC Acquisition Corp., The Tile Shop, LLC, members ofThe Tile Shop, LLC, Nabron International, Inc. Tile Shop Merger Sub, Inc. and Sellers’ representative – incorporated by reference toexhibit 2.1 to the Current Report on Form 8-K filed by JWCAC on June 27, 2012. 3.1Certificate of Incorporation of Tile Shop Holdings, Inc. – incorporated by reference to Exhibit 3.1 to the Registrant’s Form S-4dated July 2, 2012. 3.2Bylaws of Tile Shop Holdings, Inc. – incorporated by reference to Exhibit 3.2 to the Registrant’s Form S-4 dated July 2, 2012. 4.1Specimen Common Stock Certificate – incorporated by reference to Exhibit 4.1 of Amendment No. 1 to the Registrant’s Form S-4dated July 23, 2012. 10.1Registration Rights Agreement, dated June 27, 2012, by and among JWC Acquisition Corp., Tile Shop Holdings, Inc., certainmembers of JWC Acquisition, LLC, Nabron International, Inc., The Tile Shop, Inc., JWTS, Inc. and certain other members ofThe Tile Shop, LLC – incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by JWC Acquisition Corp.on June 27, 2012. 10.2* Offer Letter Agreement, dated June 24, 2012, by and between Tile Shop Holdings, Inc. and Robert A. Rucker – incorporated byreference to Exhibit 10.6 to the Registrant’s Form S-4 dated July 2, 2012. 10.3* Offer Letter Agreement, dated June 24, 2012, by and between Tile Shop Holdings, Inc. and Joseph Kinder – incorporated by referenceto Exhibit 10.7 to the Registrant’s Form S-4 dated July 2, 2012. 10.4* Offer Letter Agreement, dated June 24, 2012, by and between Tile Shop Holdings, Inc. and Carl Randazzo – incorporated by referenceto Exhibit 10.8 to the Registrant’s Form S-4 dated July 2, 2012. 10.5* Offer Letter Agreement, dated June 24, 2012, by and between Tile Shop Holdings, Inc. and Leigh H. Behrman – incorporated byreference to Exhibit 10.9 to the Registrant’s Form S-4 dated July 2, 2012. 10.6*Tile Shop Holdings, Inc. 2012 Omnibus Award Plan (f/k/a 2012 Equity Award Plan) – incorporated by reference to Exhibit 10.1 to theRegistrant’s Current Report on Form 8-K filed July 26, 2013. 10.7*Amended And Restated Amendment No. 1 to The Tile Shop Holdings, Inc. 2012 Omnibus Award Plan (f/k/a 2012 Equity Award Plan)– incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed July 26, 2013. 10.8Form of Indemnification Agreement by and between Tile Shop Holdings, Inc. and each of its directors and executive officers –incorporated by reference to Exhibit 10.11 of Amendment No. 1 to the Registrant’s Form S-4 dated July 23, 2012. 10.9*Offer Letter Agreement, dated July 28, 2012, by and between Tile Shop Holdings, Inc. and Timothy C. Clayton – incorporated byreference to Exhibit 10.14 of Amendment No. 2 to the Registrant’s Form S-4 dated July 31, 2012. 10.10Credit Agreement, dated as of October 3, 2012, by and among the Company, The Tile Shop, certain subsidiaries of The Tile Shop,each lender from time to time party thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer –incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K dated October 3, 2012. 10.11Security Agreement, dated as of October 3, 2012, by and among the Company, The Tile Shop, ILTS, LLC, JWC Acquisition Corp.,The Tile Shop of Michigan, LLC, and Bank of America, N.A., as Administrative Agent – incorporated by reference to Exhibit 10.2 tothe Registrant’s Form 8-K dated October 3, 2012. 10.12Guaranty Agreement, dated as of October 3, 2012, by and among the Company, The Tile Shop, ILTS, LLC, JWC Acquisition Corp.,The Tile Shop of Michigan, LLC, and Bank of America, N.A., as Administrative Agent – incorporated by reference to Exhibit 10.3 tothe Registrant’s Form 8-K dated October 3, 2012. 10.13Amendment No. 1 to Credit Agreement, dated as of April 30, 2013, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC,certain subsidiaries of The Tile Shop, LLC and Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer– incorporated by reference to Exhibit 10.1to the registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2013. 10.14Stock Purchase Agreement by and between Tile Shop Holdings, Inc. and Nabron International, Inc., dated May 24, 2013 –incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 30, 2013. 10.15*Tile Shop Holdings, Inc. Incentive Stock Option Agreement – incorporated by reference to Exhibit 10.3 to the Registrant’s CurrentReport on Form 8-K filed July 26, 2013. 10.16*Tile Shop Holdings, Inc. Nonstatutory Stock Option Agreement – incorporated by reference to Exhibit 10.4 to the Registrant’s CurrentReport on Form 8-K filed July 26, 2013. 10.17*Tile Shop Holdings, Inc. Stock Restriction Agreement – incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report onForm 8-K filed July 26, 2013. 10.18Amendment No. 2 to Credit Agreement, dated as of July 8, 2013, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC,certain subsidiaries of The Tile Shop, LLC and Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer– incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013. 78 10.19*Employment Agreement, between Tile Shop Holdings, Inc. and Chris Homeister, effective October 1, 2013 – incorporated by referenceto Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated October 1, 2013. 21.1Subsidiaries of Tile Shop Holdings, Inc. – filed herewith. 23.1Consent of Ernst & Young LLP, independent registered public accounting firm – filed herewith. 23.2Consent of Deloitte & Touche LLP, independent registered public accounting firm – filed herewith. 24.1Power of Attorney (included on the “Signatures” page of this Form 10-K). 31.1Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – filed herewith. 31.2Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – filed herewith. 32.1**Certification by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith. 32.2**Certification by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith. 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. *Management compensatory plan or arrangement. **These certificates are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference in anyfiling we make under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. +In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and notfiled or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections. EXHIBIT 21.1 TILE SHOP HOLDINGS, INC. Subsidiaries of the Company (all of which are 100% owned, either directly or indirectly) The Tile Shop, LLC, a Delaware limited liability company ILTS, LLC, a Delaware limited liability company JWC Acquisition Corp., a Delaware corporation The Tile Shop of Michigan, LLC, a Michigan limited liability company The Tile Shop of Oklahoma, LLC, a Delaware limited liability company Tile Shop Lending, Inc., a Delaware corporation Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-183455 and 333-190088) pertaining to the 2012 OmnibusAward Plan of Tile Shop Holdings, Inc. and Subsidiaries of our report dated February 28, 2014, with respect to the consolidated financial statements ofTile Shop Holdings, Inc., and the effectiveness of internal control over financial reporting of Tile Shop Holdings, Inc. included in this Annual Report(Form 10-K) for the year ended December 31, 2013. /s/ Ernst & Young LLPMinneapolis, MinnesotaFebruary 28, 2014  EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-183455 and 333-190088 on Form S-8 of our report dated March 18, 2013(February 28, 2014 as to the effects of the related party transactions disclosed in Note 9) relating to the consolidated financial statements of Tile ShopHoldings, Inc. and Subsidiaries as of December 31, 2012 and for the two years in the period ended December 31, 2012 appearing in this Annual Report onForm 10-K of Tile Shop Holdings, Inc. /s/ DELOITTE & TOUCHE LLP Chicago, IllinoisFebruary 28, 2014  EXHIBIT 31.1 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Robert A. Rucker, certify that: 1.I have reviewed this annual report on Form 10-K 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 makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects 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 inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and15d-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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous 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 designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial 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 aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, 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 arereasonably 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’sinternal control over financial reporting. Date: February 28, 2014 /s/ ROBERT A. RUCKER Robert A. Rucker, Chief Executive Officer  EXHIBIT 31.2 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Timothy C. Clayton, certify that: 1.I have reviewed this annual report on Form 10-K 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 makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects 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 inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous 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 designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial 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 aboutthe effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on suchevaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, 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 arereasonably 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’sinternal control over financial reporting. Date: February 28, 2014 /s/ TIMOTHY C. CLAYTON Timothy C. Clayton, Chief Financial Officer  Exhibit 32.1 Certification Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to 18 U.S.C. §1350 (as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002), I, Robert A. Rucker, the ChiefExecutive Officer of Tile Shop Holdings, Inc. (the “Company”), hereby certify that the Annual Report on Form 10-K of the Company for the yearended December 31, 2013 (“the Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 andthat information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Companyand furnished to the SEC or its staff upon request. Date: February 28, 2014 /s/ ROBERT A. RUCKER Robert A. Rucker, Chief Executive Officer  Exhibit 32.2 Certification Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to 18 U.S.C. §1350 (as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002), I, Timothy C. Clayton, the ChiefFinancial Officer of Tile Shop Holdings, Inc. (the “Company”), hereby certify that the Annual Report on Form 10-K of the Company for the yearended December 31, 2013 (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 andthat information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Companyand furnished to the SEC or its staff upon request. Date: February 28, 2014 /s/ TIMOTHY C. CLAYTON Timothy C. Clayton, Chief Financial Officer 

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