Tile Shop Holdings
Annual Report 2015

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2015or☐ 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 incorporation or organization)(I.R.S. Employer Identification No.) 14000 Carlson Parkway,Plymouth, Minnesota 55441(Address of principal executiveoffices, including zip code) (763) 852-2988(Registrant’s telephone number,including area code) Securities registered pursuant toSection 12(b) of the Act: Title of each className of each exchange on which registeredCommon Stock, $0.0001 par valueThe NASDAQ Stock Market LLC Securities registered pursuant toSection 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 thecommon 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: $534,784,518. For purposes of this calculation, the Company has included any shares held byNabron International Inc. as shares held by non-affiliates. At February 19, 2016, the registrant had 51,437,973 shares of Common Stock outstanding.   TILE SHOP HOLDINGS, INC. FORM 10-KTABLE OF CONTENTS PART I ITEM 1.BUSINESS1 ITEM 1A.RISK FACTORS6 ITEM 1B.UNRESOLVED STAFF COMMENTS14 ITEM 2.PROPERTIES14 ITEM 3.LEGAL PROCEEDINGS14 ITEM 4.MINE SAFETY DISCLOSURES15 PART II ITEM 5.MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES16 ITEM 6.SELECTED FINANCIAL DATA18 ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS19 ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK29 ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA29 ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE29 ITEM 9A.CONTROLS AND PROCEDURES30 ITEM 9B.OTHER INFORMATION31 PART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE32 ITEM 11.EXECUTIVE COMPENSATION38 ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS47 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE49 ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES50 PART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES52 SIGNATURES 76 POWER OF ATTORNEY 77  PART I ITEM 1. BUSINESS Overview The Tile Shop was founded in 1985. We offer a wide selection of manufactured and natural stone tiles, setting and maintenance materials, and relatedaccessories in retail locations across much of the United States. Our assortment includes over 4,000 products from around the world that consist of naturalstone, ceramic, porcelain, glass, and metal tiles. Natural stone products including marble, granite, quartz, sandstone, travertine, slate, and onyx tiles. Themajority of our tile products are sold under our proprietary Rush River and Fired Earth brands. We purchase our tile products, accessories and toolsdirectly from our network of vendors. We manufacture our own setting and maintenance materials, such as thinset, grout and sealers under our Superiorbrand name. As of December 31, 2015, we operated 114 stores in 31 states, with an average size of approximately 21,800 square feet. We also sell ourproducts on our website. We believe that our long-term vendor 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 and professionals, at competitive prices. We have investedsignificant resources to develop our proprietary brands and product sources and believe that we are a leading retailer of stone and ceramic tiles,accessories, and related materials in the United States. In 2015, we reported net sales and income from operations of $293.0 million and $29.2 million, respectively. Our 2014 and 2013 net sales were $257.2million and $229.6 million, respectively, and our 2014 and 2013 income from operations was $21.6 million and $33.1 million, respectively. We opened7 new stores in 2015 and intend to open 9 to 12 stores in 2016. As of fiscal year end 2015 and 2014, we had total assets of $245.4 million and $252.2million, respectively. Organizational History Tile Shop Holdings, Inc. (“Holdings”, and together with its wholly owned subsidiaries, the “Company”, or “we”) was incorporated in Delaware in June2012. On August 21, 2012, Holdings consummated the transactions contemplated pursuant to that certain Contribution and Merger Agreement dated asof June 27, 2012, among Holdings, JWC Acquisition Corp., a publicly-held Delaware corporation (“JWCAC”), The Tile Shop, LLC, a privately-heldDelaware limited liability company (“The Tile Shop”), and certain other parties. Through a series of transactions, The Tile Shop was contributed to andbecame a subsidiary of Holdings and Holdings effected a business combination with and became a successor issuer to JWCAC. These transactions arereferred to herein 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 In each store, our products are brought to life by showcasing a broad array of the items we offer in approximately 50different mockups, or vignettes, of bathrooms, kitchens, fireplaces, foyers, and other distinct spaces. Our stores are spacious, well-lit, and organized byproduct type to simplify our customers’ shopping experience. Broad Product Assortment at Attractive Prices We offer over 4,000 manufactured and natural tile products, setting and maintenance materials,accessories, and tools. We are able to maintain competitive prices by purchasing tile and accessories directly from producers and manufacturing our ownsetting and 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 stores. In addition, we provide one-on-one installation training as required to meet customer needs. Weaccept returns up to six months following the date of the sale, with no restocking fees. Worldwide Sourcing Capabilities We have long-standing relationships with our tile vendors throughout the world and work with them to designproducts exclusively for us. We believe that these direct relationships differentiate us from our competitors. 1 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 todiverse groups of customers. Centralized Distribution System We service our retail locations from four distribution centers. Our distribution centers, located in Michigan, Oklahoma,Virginia, and Wisconsin, are positioned to cost effectively service our existing stores. Strategic Plan Key elements of our strategy include: Develop Store Talent – During 2015, our initiatives to improve hiring and training practices resulted in significant reductions in sales associate turnoverand increases to average manager tenure. We plan to continue placing an emphasis on cultivating talent in our stores through recruiting, ongoingeducation and mentorship efforts. A key element of this strategy involves our Market Managers who are responsible for developing talent and drivingprofitability within a market. Market Managers are seasoned store managers who reinforce best practices to grow sales, expand product knowledge,enhance profitability and develop a team that is able to produce new leadership candidates. We plan to have Market Managers assigned to all stores in2016. Additionally, we have created a new Senior Assistant Store Manager position for our top performing Assistant Store Managers who complete allrequisite training programs and also distinguish themselves as high profile Store Manager candidates. We believe the ongoing emphasis placed on thecombination of recruiting, training and mentorship will continue to reduce turnover and produce the next generation of store leaders to support our long-term growth plans.Grow Professional Sales – During 2015, our initiatives focused on the professional customer resulted in a significant increase in professional customersales and mix relative to total company sales. The professional customer includes tile contractors, custom home builders and designers. Key elements ofthis strategy included joining national and local trade organizations, developing marketing strategies, hosting in-store events, enhancing our assortmentof tool products and refining our credit policies. We believe that our value propositions including a six month return policy, no restocking fees, storehours, tiered discounts, product availability, wide assortment, private label setting material, in house credit, free design support and job site delivery areun-paralleled in the marketplace. Our professional strategy enables our store associates to develop relationships with professionals in their trade area. Ourcorporate marketing team supports the stores by developing traffic and “leads” through trade organization memberships, direct marketing, co-hostingevents in our showrooms and other forms of digital marketing primarily, email marketing. We continuously expand our assortment and merchandisingsquare footage of installation materials and tools to meet the changing and growing needs of our professional customers. We have also implementedtraining programs and a standard operating process to assist new store sales associates to quickly and successfully develop revenues from professionalcustomers. Creating awareness and increasing the frequency of professional visits to our stores continue to be important elements of our revenue growthplans in 2016 and future periods. Increase Store Unit Growth – We believe we have exceptional opportunities to continue to add stores in existing markets and expand into new markets.We plan to increase our existing store base by 8 to 12 percent each year over the next several years. During 2016, we will focus on opening new stores inexisting markets where we will be able to leverage economies of scale in marketing, distribution, and store talent. Additionally, we plan to pursueopportunities to further enhance the return on our new store investments by selecting smaller retail spaces that provides us the opportunity to reduce theinitial investment to build a new store and the ongoing occupancy costs. Sales Model We principally sell our products directly to homeowners and professionals. With regard to individual customers, we believe that due to the average costand relative infrequency of a tile purchase, many of our individual customers conduct extensive research using multiple channels before making apurchase decision. Our sales strategy emphasizes customer service by providing comprehensive and convenient educational tools on our website and inour stores for our customers to learn about our products and the tile installation process. Our website contains a broad range of information regarding ourtile products, setting and maintenance materials, and accessories. Customers can order samples, view catalogs, or purchase products from either our storesor website. Customers can choose to have their purchases delivered or picked up at one of our stores. We believe this strategy also positions us well withprofessional customers who are influenced by the preferences of individual homeowners. Our stores are designed to emphasize our products in a visually appealing showroom format. Our average store is approximately 21,800 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. 2 Unlike many of our competitors, we devote a substantial portion of our retail store space to showrooms, including samples of our over 4,000 productsand approximately 50 different vignettes of bathrooms, kitchens, fireplaces, foyers, outdoor living, and other distinct spaces that showcase our products.Our showrooms are designed to provide our customers with a better understanding of how to integrate various types of tile in order to create an attractivepresentation in their homes. Most stores are also equipped with a training center designed to teach customers how to properly install tile. A typical store staff consists of a manager, an assistant manager, and five to fifteen staff, including both sales and warehouse associates. Our storemanagers are responsible for store operations and for overseeing our customers’ shopping experience. 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, give customers the opportunity to purchase tile from our stores at a discounted price. Marketing We utilize a variety of marketing strategies and programs to acquire and retain customers. Our customers include both consumers and trade professionals.Our advertising primarily consists of digital media, direct marketing including email and postal mail, in store events, mobile and traditional mediavehicles including newspaper circular/print ads, radio, television and video. We continually test and learn from new media and adjust our programs basedon performance. Our e-commerce site, tileshop.com supports desktop, tablet and mobile devices and is designed for consumers, trade professionals and industrystakeholders to learn about; our brand, our value propositions, our product assortment and installation techniques, and to look up our store locations.On social media, #TheTileShop provides current and prospective customers a high level of brand engagement to share their designs and finished projectsin our inspiration gallery. Tileshop.com also serves as a commerce platform for our customers who want to purchase products within or outside of ourphysical store footprint. Products can be delivered to a job site, home or store location. Products We offer a complete assortment of tile products, generally sourced directly from our vendors, including natural stone, ceramic, porcelain, glass, and metaltiles. Natural stone products include, marble, granite, quartz, sandstone, travertine, slate, and onyx tiles. Our wide assortment of trim pieces, mosaics,pencils, listellos and other unique products encourage our customers to make a fashion statement with their tile project. This also helps deliver a highlevel of customer satisfaction and drives repeat business. We also offer a broad range of setting and maintenance materials, such as thinset, grout, sealers,and accessories, including installation tools, shower and bath shelves, drains, and similar products. We sell most of our products under our proprietarybrand names, including Superior Adhesives & Chemicals, Superior Tools & Supplies, Rush River, and Fired Earth. In total, we offer over 4,000 differenttile, setting and maintenance materials and accessory products. In 2015, our net sales were 53% from natural stone products, 35% from ceramic andporcelain products, and 12% from setting, maintenance and related accessory products. These amounts compare to 52% from natural stone products, 34%from ceramic and porcelain products, and 14% from setting, maintenance and other related accessory products in 2014. Manufacturers We have long-standing relationships with our vendors throughout the world and work with them to design products exclusively for us. We believe thatthese direct relationships differentiate us from our competitors, who generally purchase products through distributors. We currently purchase tile products from approximately 165 different suppliers. Our top ten tile vendors accounted for 41% of our tile purchases in 2015.We believe that alternative and competitive suppliers are available for most of our products. In 2015, 68% of our purchased product was sourced fromAsia, 13% from Europe, 17% from North America and 2% from South America. Our foreign purchases are primarily negotiated and 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 Michigan, Oklahoma,Virginia and Wisconsin. We also manufacture our setting and maintenance materials at these locations. We maintain a large inventory of products inorder to quickly fulfill customer orders. 3 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 or a local store. We continue to evaluate logisticsalternatives to best service our retail store base and our customers. We believe that our existing distribution facilities will continue to play an integral rolein our growth strategy, and we expect to establish one or more additional distribution centers in the next five years to support geographic expansion ofour 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.In addition, we also compete with regional and local specialty retailers of tile, factory-direct stores, a large number of privately-owned, single-site stores,and on-line only competitors. We also compete indirectly with companies that sell other types of floor coverings, including wood floors, carpet, and vinylsheet. The barriers to entry into the retail tile industry are relatively low and new or existing tile retailers could enter our markets and increase thecompetition that we face. Many of our competitors enjoy competitive advantages over us, such as greater name recognition, longer operating histories,more varied product offerings, and greater financial, 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,while some larger factory-direct competitors manufacture their own products, many 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 supportthan these competitors. Employees As of December 31, 2015, we had 1,410 employees, 1,330 of whom were full-time and none of whom were represented by a union. Of these employees,1,077 work in our stores, 67 work in corporate, store support, infrastructure or similar functions, and 266 work in distribution and manufacturing facilities.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 18 registered trademarks. We regard our intellectual property as havingsignificant value and our brands are an important factor in the marketing of our products. Accordingly, we have taken, and continue to take, appropriatesteps 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. 4 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 theevent of 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 enforced by U.S. Customs and Border Protection. We work closely with our suppliers to ensure compliance with the applicable laws and regulationsin these areas. Financial Information about Geographic Areas Nearly all of our revenues are generated within the United States and nearly all of our long-lived assets are located within the United States as well. In2014, we opened a sourcing office based in China. 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.We make 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 availableon our 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. 5 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 may beadditional risks that are not presently material or known. You should carefully consider each of the following risks and all other information set forth inthis Annual Report on Form 10-K. Our business, financial condition and operating results are dependent on general economic conditions and discretionary spending by our customers,which in turn are affected by a variety of factors beyond our control. If such conditions deteriorate, our business, financial condition and operatingresults may be adversely affected. Our business, financial condition and operating results are affected by general economic conditions and discretionary spending by our customers. Suchgeneral economic conditions and discretionary spending are beyond our control and are affected by, among other things: •the housing market, including housing turnover and home values; •consumer confidence in the economy; •unemployment trends; •consumer debt levels; •consumer credit availability; •data security and privacy concerns; •energy prices; •interest rates and inflation; •slower rates of growth in real disposable personal income; •natural disasters and unpredictable weather; •tax rates and tax policy; and •other matters that influence consumer confidence and spending. If such conditions deteriorate, our business, financial condition and operating results may be adversely affected. In addition, increasing volatility infinancial and capital markets may cause some of the above factors to change with a greater degree of frequency and magnitude than in the 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.Our store competitors include large national home centers, regional and local specialty retailers of tile, factory direct stores, privately-owned, single-sitestores and online only competitors. We also compete indirectly with companies that sell other types of floor coverings, including wood floors, carpet,and vinyl sheet. In the past, we have faced periods of heightened competition that materially affected our results of operations. Certain of ourcompetitors have greater name recognition, longer operating histories, more varied product offerings, and substantially greater financial and otherresources than us. Accordingly, we may face periods of intense competition in the future that could have a material adverse effect on our plannedgrowth and future results of operations. Moreover, the barriers to entry into the retail tile industry are relatively low. New or existing retailers couldenter our markets and increase the competition that we face. In addition, manufacturers and vendors of tile and related products, including those whoseproducts we currently sell, could enter the United States retail tile market and start directly competing with us. Competition in existing and newmarkets may also prevent or delay our ability to gain relative market share. Any of the developments described above could have a material adverseeffect on our planned growth and future results of operations. 6 If we fail to successfully manage the challenges that our planned growth poses or encounter unexpected difficulties during our expansion, ourrevenues and profitability could be materially adversely affected. One of our long term objectives is to increase revenues and profitability through market share gains. Our ability to achieve market share growth, 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 current stores. Weanticipate opening 9 to 12 stores in fiscal year 2016. There can be no assurance that we will be able to open stores in new markets at the rate required toachieve market leadership in such markets, identify and obtain favorable store sites, arrange favorable leases for stores, or obtain governmental and otherthird-party consents, permits, and licenses needed to open or operate stores in a timely manner, train and hire a sufficient number of qualified managers fornew stores, attract a strong customer base and brand familiarity in new markets, or successfully compete with established retail tile stores in the newmarkets that we enter. Failure to open new stores in an effective and cost-efficient manner could place us at a competitive disadvantage as compared toretailers who are more adept than us at managing these challenges, which, in turn, could negatively affect our overall operating results. Our same store sales fluctuate due to a variety of economic, operating, industry and environmental factors and may not be a fair indicator of ouroverall 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, cannibalizationresulting from the opening of new stores in existing markets, changes in advertising and other operating costs, the timing and level of markdowns,changes in our product mix, weather conditions, retail trends, the retail sales environment, economic conditions, inflation, the impact of competition, andour ability to execute our business strategy efficiently. As a result, same store sales or operating results may fluctuate, and may cause the price of oursecurities to fluctuate significantly. Therefore, we believe that period-to-period comparisons of our same store sales may not be a reliable indicator of ourfuture overall operating performance. We intend to open additional stores in both our existing markets and new markets, which poses both the possibility of diminishing sales by existingstores 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 9 to 12 additional stores primarily in existing markets during 2016. 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 topromote and/or recruit enough qualified field managers, store managers, assistant store managers, and sales associates. The time and effort required totrain and supervise a large number of new managers and associates, and integrate them into our culture may divert resources from our existing stores. If weare unable to profitably open additional stores in both new and existing markets and limit the adverse impact of those new stores on existing stores, itmay reduce 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 futureor we are unable to make capital expenditures under our credit facility, we could be forced to curtail our expansion strategies by reducing or delayingcapital expenditures 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 forthe opening of new stores or entry into new markets. 7 If we fail to identify and maintain relationships with a sufficient number of suppliers, our ability to obtain products that meet our high qualitystandards at attractive prices could be adversely affected. We purchase flooring and other products directly from suppliers located around the world. However, we do not have long-term contractual supplyagreements with our suppliers that obligate them to supply us with products exclusively or at specified quantities or prices. As a result, our currentsuppliers may decide to sell products to our competitors and may not continue selling products to us. In order to retain the competitive advantage that webelieve results from these relationships, we need to continue to identify, develop and maintain relationships with qualified suppliers that can satisfy ourhigh standards for quality and our requirements for flooring and other products in a timely and efficient manner at attractive prices. The need to developnew relationships will be particularly important as we seek to expand our operations and enhance our product offerings in the future. The loss of one ormore of our existing suppliers or our inability to develop relationships with new suppliers could reduce our competitiveness, slow our plans for furtherexpansion and cause our net sales and operating results to be adversely affected. We source the over 4,000 products that we stock and sell from approximately 165 domestic and international vendors. We source a large number of thoseproducts from foreign manufacturers, including 41% of our products from a group of ten suppliers located in Asia, Europe and the United States. Wegenerally take title to these products sourced from foreign vendors overseas and are responsible for arranging shipment to our distribution centers.Financial instability among key vendors, political instability, trade restrictions, tariffs, currency exchange rates, and transport capacity and costs arebeyond our control and could negatively impact our business if they seriously disrupt the movement of products through our supply chain or increasedthe 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 to negativepublicity 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 thecurrent 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. Any failure by us to successfully anticipate consumer trends may lead to loss of consumer acceptance of our products, resulting in reduced revenues. 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 popular couldalso reduce our revenues. We depend on a few key employees, and if we lose the services of any our executive officers, we may not be able to run our business effectively. Our future success depends in part on our ability to attract and retain key executive, merchandising, marketing, and sales personnel. Our executiveofficers include Chris Homeister, Chief Executive Officer; Kirk Geadelmann, Chief Financial Officer; Carl Randazzo, Senior Vice President — Retail; andJoseph Kinder, Senior Vice President — Operations. We have employment and non-compete arrangements with each of Messrs. Homeister, Geadelmann,Kinder, and Randazzo. If any of these executive officers ceases to be employed by us, we would have to hire additional qualified personnel. Our ability tosuccessfully hire other experienced and qualified executive officers cannot be assured, and may be difficult because we face competition for theseprofessionals from our competitors, our suppliers and other companies operating in our industry. As a result, the loss or unavailability of any of ourexecutive officers could have a material adverse effect on us. 8 We have entered into a $125.0 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. We have entered into a credit facility with Fifth Third Bank., Bank of America, N.A., and The Huntington National Bank, for $125.0 million, including aterm loan of $50.0 million and a revolving credit facility of $75.0 million. The terms of our credit facility and the burden of the indebtedness incurredthereunder 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; •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 lendercould elect to declare all amounts outstanding under such facility to be immediately due and payable and terminate all commitments to extend furthercredit, or seek 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 tosecure that indebtedness. 9 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 salesassociates. If we are unable to attract and retain qualified personnel and managers as needed in the future, including qualified sales personnel, our levelof customer service 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 if one ormore of our current leases is terminated prior to expiration of its stated term and we cannot find suitable alternate locations, our growth andprofitability 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 periodsat specific rental rates. Our ability to re-negotiate favorable terms on an expiring lease or to negotiate favorable terms for a suitable alternate location, andour ability to negotiate favorable lease terms for additional store locations, could depend on conditions in the real estate market, competition fordesirable properties, our relationships with current and prospective landlords, or on other factors that are not within our control. Any or all of these factorsand conditions 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 our business. 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 midwest, mid-Atlantic, south and northeast regions of the United States, we are subject to regional risks. We have a high concentration of stores in the midwest, mid-Atlantic, south 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 havefluctuated 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. 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. 10 Our success is highly dependent on our ability to provide timely delivery to our customers, and any disruption in our delivery capabilities or ourrelated 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. Natural disasters, changes in climate and geo-political events could adversely affect our operating results. The threat or occurrence of one or more natural disasters or other extreme weather events, whether as a result of climate change or otherwise, the threat oroutbreak of terrorism, civil unrest or other hostilities or conflicts, could materially adversely affect our financial performance. These events may result indamage to, or destruction or closure of, our stores, distribution centers and other properties. Such events can also adversely affect our work force andprevent employees and customers from reaching our stores and other properties, can modify consumer purchasing patterns and decrease disposableincome, and can disrupt or disable portions of our supply chain and distribution network. 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 regulationsgoverning healthcare benefits or labor relations, such as the Affordable Care 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 adverselyaffect our results of operations. 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 customer information. We depend upon our information technology systems in the conduct of all aspects of our operations. If our information technology systems fail toperform as anticipated, we could experience difficulties in virtually any area of our operations, including but not limited to replenishing inventories ordelivering products to store locations in response to consumer demands. It is also possible that our competitors could develop better online platformsthan us, which could negatively impact our internet sales. Any of these or other systems-related problems could, in turn, adversely affect our revenues andprofitability. In connection with payment card sales and other transactions, including bank cards, debit cards, credit cards and other merchant cards, we process andtransmit confidential banking and payment card information. Additionally, as part of our normal business activities, we collect and store sensitivepersonal information related to our employees, customers, vendors and other parties. Despite our security measures, our information technology andinfrastructure may be vulnerable to criminal cyber-attacks or security incidents due to employee error, malfeasance or other vulnerabilities. Any suchincidents could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Third parties may havethe technology and know-how to breach the security of this information, and our security measures and those of our banks, merchant card processing andother technology vendors may not effectively prohibit others from obtaining improper access to this information. The techniques used by criminals toobtain unauthorized access to sensitive data change frequently and often are not recognized until launched against a target; accordingly, we may beunable to anticipate these techniques or 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 theeffectiveness of our data security measures. Any security breach, whether successful or not, would harm our reputation and could cause the loss ofcustomers. Our insurance coverage and self-insurance reserves may not cover future claims. We maintain various insurance policies for employee health and workers’ compensation. We are self-insured on certain health insurance plans and areresponsible for losses up to a certain limit for these respective plans. In 2014, we became self-insured with regard to workers’ compensation coverage, inwhich case we are responsible for losses up to certain retention limits on both a per-claim and aggregate basis. 11 For policies under which we are responsible for losses, we record a liability that represents our estimated cost of claims incurred and unpaid as of thebalance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends andeconomic conditions, and is closely monitored and adjusted when warranted by changing circumstances. Fluctuating healthcare costs, our significantgrowth rate and changes from our past experience with workers’ compensation claims could affect the accuracy of estimates based on historicalexperience. Should a greater amount of claims occur compared to what was estimated or medical costs increase beyond what was expected, our accruedliabilities might not be sufficient and we may be required to record additional expense. Unanticipated changes may produce materially different amountsof expense than that reported under these programs, which could adversely impact our operating results. We are involved in a number of legal proceedings and, while we cannot predict the outcomes of such proceedings and other contingencies withcertainty, some of these outcomes could adversely affect our business, financial condition and results of operations. We are, and may become involved in shareholder, consumer, employment, tort or other litigation. We cannot predict with certainty the outcomes of theselegal proceedings. The outcome of some of these legal proceeding could require us to take, or refrain from taking, actions which could negatively affectour operations or could require us to pay substantial amounts of money adversely affecting our financial condition and results of operations.Additionally, defending against lawsuits and proceedings may involve significant expense and diversion of management's attention and resources. The market price of our securities may decline and/or be volatile. Our common stock price may be volatile and all or part of any investment in our common stock may be lost. The market price of our common stock could fluctuate significantly. Those fluctuations could be based on various factors in addition to those otherwisedescribed in this report, including: ●our operating performance and the performance of our competitors; ●the public’s reaction to our filings with the SEC, our press releases and other public announcements; ●changes in recommendations or earnings estimates by research analysts who follow The Tile Shop or other companies in our industry; ●variations in general economic conditions; ●actions of our current stockholders, including sales of common stock by our directors and executive officers; ●the arrival or departure of key personnel; and ●other developments affecting us, our industry or our competitors. In addition, the stock market may experience significant price and volume fluctuations. These fluctuations may be unrelated to the operating performanceof particular companies but may cause declines in the market price of our common stock. The price of our common stock could fluctuate based uponfactors that have little or nothing to do with our company or its performance. 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 orother disposal of the assets of those subsidiaries before us, as an equity holder, would be entitled to receive any distribution from that sale or disposal. IfThe Tile Shop is unable to pay dividends or make other payments to us when needed, we will be unable to satisfy our obligations. 12 Concentration of ownership may have the effect of delaying or preventing a change in control. Our directors, executive officers, and certain holders of more than 5% of our common stock, including Nabron International Inc., together with theiraffiliates, beneficially hold approximately 40% of our outstanding shares of common stock. As a result, these stockholders, if acting together, have theability to influence the outcome of corporate actions requiring stockholder approval. This concentration of ownership may have the effect of delaying orpreventing a change in control and might adversely affect the market price of our securities. Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeoverattempt. 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 those shares,including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostileacquirer; •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 propose mattersto be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies toelect 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 ourcommon stock, and could also affect the price that some investors are willing to pay for our common stock. 13 ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES As of December 31, 2015, we operated 114 stores located in 31 states with an average square footage of approximately 21,800 square feet. The tablebelow sets forth the locations (alphabetically by state) of our 114 stores in operation as of December 31, 2015. StateStores StateStores StateStores StateStoresArkansas 1 Illinois 10 Missouri 4 Pennsylvania 5Arizona 2 Indiana 3 North Carolina 4 Rhode Island 1Colorado 3 Kansas 2 Nebraska 1 South Carolina 2Connecticut 2 Kentucky 3 New Jersey 5 Tennessee 3Delaware 1 Massachusetts 3 New Mexico 1 Texas 9Florida 4 Maryland 4 New York 7 Virginia 6Georgia 2 Michigan 6 Ohio 8 Wisconsin 3Iowa 1 Minnesota 6 Oklahoma 2 Total 114 We lease all of our stores. Our 15,000 square foot headquarters in Plymouth, Minnesota is attached to our retail store. We own four regional facilities usedfor distribution of purchased product and manufacturing of setting and maintenance 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. We intend to open 9 to 12 new retail locations in2016. ITEM 3. LEGAL PROCEEDINGS The Company, two of its former executive officers, five of its outside directors, and certain companies affiliated with the directors, are defendants in aconsolidated class action brought under the federal securities laws and now pending in the United States District Court for the District of Minnesota underthe caption Beaver County Employees’ Retirement Fund, et al. v. Tile Shop Holdings, Inc., et al. Several related actions were filed in 2013, and thenconsolidated. The plaintiffs are three investors who seek to represent a class or classes consisting of (1) all purchasers of Tile Shop common stock betweenAugust 22, 2012 and January 28, 2014 (the “alleged class period”), seeking to pursue remedies under the Securities Exchange Act of 1934; and (2) allpurchasers of Tile Shop common stock pursuant and/or traceable to the Company’s December 2012 registration statements, seeking to pursue remediesunder the Securities Act of 1933. Six firms who were underwriters in the December 2012 secondary public offering are also named as defendants. In theirconsolidated amended complaint (the “complaint”), the plaintiffs allege that during the alleged class period, certain defendants made false or misleadingstatements of material fact in press releases and SEC filings about the Company’s relationships with its vendors, its gross margins, and its supply chainand producer relationships, and that defendants failed to disclose certain related party transactions. The complaint asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In addition to attorney’s fees andcosts, the plaintiffs seek to recover damages on behalf of the members of the purported classes. The defendants are vigorously defending the matter. Thematter is now in discovery. The Company also is a Defendant in a consolidated action brought derivatively on behalf of the Company by two shareholders of the Company. Oneaction was first filed in the United States District Court for the District of Minnesota, and then voluntarily dismissed and re-filed in the Court of Chanceryfor the State of Delaware (“Delaware Chancery Court”). The second action was filed in Delaware Chancery Court. The two actions have since beenconsolidated by the Delaware Chancery Court under the caption In re Tile Shop Holdings, Inc. Stockholder Derivative Litigation. On July 31, 2015, theplaintiff-shareholders filed their Verified Consolidated Stockholder Derivative Complaint (“complaint”). The complaint names as defendants sixmembers of the Company’s Board of Directors, and a former employee of the Company. The complaint tracks many of the same factual allegations ashave been made in the above-described federal securities class action. It alleges that the defendant-directors breached their fiduciary duties by failing toadopt adequate internal controls for the Company, by approving false and misleading statements issued by the Company, by causing the Company toviolate generally accepted accounting principles and SEC regulations, by engaging in or approving alleged insider trading, and by permitting theCompany’s primary product to contain illegal amounts of lead. The complaint also alleges claims for insider trading and unjust enrichment. Thecomplaint seeks damages, disgorgement, an award of attorneys’ fees and other expenses, and an order compelling changes to the Company’s corporategovernance and internal procedures. On November 2, 2015, defendants filed a motion to dismiss the derivative action, or in the alternative, to stay itpending resolution of the Beaver County Employees’ Retirement Fund action described above. Subsequently, the parties entered into a stipulation, andthe Court entered an Order, staying the derivative action until resolution of the Beaver County Employees’ Retirement Fund action described above, oruntil a mutually agreeable resolution of the derivative action. 14 Given the uncertainty of litigation and the preliminary stage of these cases, the Company cannot reasonably estimate the possible loss or range of lossthat may result from these actions. The Company maintains directors and officers liability insurance policies that may reduce the Company’s exposure, ifany. In the event the Company incurs a loss, the Company will pursue recoveries to the maximum extent available under these policies. The Company is also, from time to time, subject to claims and disputes arising in the normal course of business. In the opinion of management, while theoutcome of such claims and disputes cannot be predicted with certainty, the Company’s ultimate liability in connection with these matters is notexpected to have a material adverse effect on the results of operations, financial position, or cash flows. ITEM 4. MINE SAFETY DISCLOSURES None. 15 Part II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES Our common stock is traded on The NASDAQ Stock Market under the symbol “TTS”. The following table shows the high and low sale prices per share ofour common stock as reported on The NASDAQ Stock Market for the periods indicated: Common Stock Quarter High Low Fiscal 2014 First $18.67 $12.40 Second $16.69 $11.75 Third $15.94 $9.06 Fourth $10.15 $6.94 Fiscal 2015 First $12.55 $6.95 Second $15.25 $11.51 Third $15.00 $11.32 Fourth $17.50 $11.67 As of February 19, 2016, we had approximately 29 holders of record of our common stock. This figure does not include the number of persons whosesecurities are held in nominee or “street” name accounts through brokers. As of February 19, 2016, we had outstanding a total of 51,437,973 shares of common stock and no warrants. The last reported sales price for our commonstock on February 19, 2016 was $13.26. Dividends We have never declared or paid, and do not anticipate declaring or paying, 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 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, 2015, the lasttrading day of fiscal 2015. The comparison assumes $100 invested at the close of trading on August 22, 2012 in (i) the Company’s common stock, (ii) thestocks comprising the S&P SmallCap 600, and (iii) the stocks comprising the Dow Jones U.S. Furnishings Index. All values assume that all dividendswere reinvested on the date paid. The points on the graph represent fiscal quarter-end amounts based on the last trading day in each fiscal quarter. Thestock price performance included in the line graph below is not necessarily indicative of future stock price performance. Tile Shop Holdings,Inc. S&P Small Cap 600 Dow Jones U.S.Furnishings Index August 22, 2012 $100.00 $100.00 $100.00 December 31, 2012 $129.46 $104.15 $114.95 March 31, 2013 $161.62 $116.13 $148.24 June 30, 2013 $222.77 $120.31 $141.74 September 30, 2013 $226.85 $132.82 $150.66 December 31, 2013 $139.00 $145.45 $167.14 March 31, 2014 $118.85 $146.67 $161.37 June 30, 2014 $117.62 $149.24 $169.03 September 30, 2014 $71.15 $138.77 $164.83 December 31, 2014 $68.31 $151.90 $188.82 March 31, 2015 $93.15 $157.39 $210.44 June 30, 2015 $109.15 $157.17 $219.24 September 30, 2015 $92.15 $142.09 $205.78 December 31, 2015 $126.15 $146.80 $207.54 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 reportas of December 31, 2015, and 2014 for the years ended December 31, 2015, 2014 and 2013 (ii) our audited financial statements not included elsewhere inthis report as of December 31, 2013 and 2012 and for the year ended December 31, 2012 (iii) The Tile Shop’s audited financial statements not included inthis report as of December 31, 2011 and for the years ended December 31, 2011. The following selected financial data should be read in conjunction withthe section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and therelated notes appearing elsewhere in this report. As of December 31, or for the year ended December 31, 2015 2014 2013 2012 2011 (in thousands, except per share) Statement of Income Data Net sales $292,987 $257,192 $229,564 $182,650 $152,717 Cost of sales 89,377 78,300 68,755 49,626 40,321 Gross profit 203,610 178,892 160,809 133,024 112,396 Selling, general and administrative expenses 174,384 157,316 127,731 94,716 78,368 Deferred compensation expense - - - 3,897 1,415 Income from operations 29,226 21,576 33,078 34,411 32,613 Interest expense 2,584 3,141 2,581 1,252 443 Change in fair value of warrants - - 54,219 82,063 - Other income (expense) 130 (506) 4 15 (77)Income (Loss) before income taxes 26,772 17,929 (23,718) (48,889) 32,093 Provision for (benefit) from income taxes 11,076 7,382 11,942 (2,002) 733 Net income (loss) $15,696 $10,547 $(35,660) $(46,887) $31,360 Earnings per share $0.31 $0.21 $(0.72) $(1.31) $0.97 Weighted average shares outstanding (diluted) 51,305 51,030 49,600 35,838 32,261 Balance Sheet Data Cash and cash equivalents $10,330 $5,759 $1,761 $2,987 $6,283 Inventories 69,878 68,857 67,756 46,890 43,744 Total assets 245,435 252,190 241,642 176,074 119,005 Warrant liability - - - 95,645 - Total debt and capital lease obligations,including current maturities 57,240 93,264 96,676 74,824 4,852 Total stockholders' equity 115,201 93,695 78,496 (46,130) 73,780 Working capital 47,245 52,468 51,719 35,934 34,853 Cash Flow Data Net cash provided by operating activities $60,264 $47,201 $21,211 $47,222 $34,722 Net cash used in investing activities (18,994) (40,552) (52,955) (29,064) (18,561)Net cash (used in) provided by financingactivities (36,688) (2,651) 30,518 (21,454) (23,995)Other Selected Financial Data (unaudited) Adjusted EBITDA $58,420 $47,460 $54,294 $50,634 $42,602 Adjusted EBITDA margin 19.9% 18.5% 23.7% 27.7% 27.9%Gross margin 69.5% 69.6% 70.0% 72.8% 73.6%Operating income margin 10.0% 8.4% 14.4% 18.8% 21.4%Same stores sales growth 7.4% (0.4%) 12.4% 7.1% 6.4%Stores open - end of period 114 107 88 68 53 (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 United States,or GAAP, and adjusting for interest expense, income taxes, depreciation and amortization, non-cash change in fair value of warrants, deferredcompensation expense, stock based compensation expense, and special charges including equity related transaction costs, litigation andinvestigation costs, and the write-off of debt issuance costs. Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales. Webelieve that these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial andbusiness trends 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 budgeting andplanning purposes. These measures are used in monthly 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 trends andin comparing our financial measures with other specialty retailers, many of which present similar non-GAAP financial measures to investors. 18(1)(1)(2)(2)(3)(4)(5) (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 13 full month of operation. Same store sales growth amounts include total charges to customers less any actual returns. Beginning in2015, we include estimated return provisions and sales allowances in the same store sales calculation. Prior to 2015, we did not include estimatedreturn provisions or sale allowances in the same store sales calculation, as return reserves were calculated on a consolidated level. Same store salesdata reported by other companies may be prepared on a different basis and therefore may not be useful for purposes of comparing our results tothose of other businesses. Reconciliation of Non-GAAP Adjusted EBITDA to GAAP Net (Loss) Income Years Ended December 31, 2015 2014 2013 2012 2011 (in thousands) Net income (loss) $15,696 $10,547 $(35,660) $(46,887) $31,360 Interest expense 2,584 3,141 2,581 1,252 443 Income taxes 11,076 7,382 11,942 (2,002) 733 Change in fair value of warrants - - 54,219 82,063 - Depreciation & amortization 22,236 19,925 14,316 10,530 8,651 Deferred compensation expense - - - 3,897 1,415 Special charges 1,283 1,848 2,216 400 - Stock based compensation 5,545 4,617 4,680 1,381 - Adjusted EBITDA $58,420 $47,460 $54,294 $50,634 $42,602 Our management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance withGAAP. The principal limitations of these non-GAAP financial measures are that they exclude significant expenses and income that are required by GAAPto be recognized 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 Financial Data” and our consolidated financial statements and relatednotes included elsewhere in the Annual Report on Form 10-K. Among other things, those historical consolidated financial statements include moredetailed information regarding the basis of presentation for the financial data than are included in the following discussion. This Annual Report onForm 10-K contains “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of1995. 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 someforward-looking statements are expressed differently. The forward-looking statements in this Form 10-K relate to, among others things, statementsrelating to our anticipated new store openings and growth opportunities; our business strengths and competitive advantages; the anticipated benefitsof our strategic plan; legal proceedings; our intended future process for determining and assessing compensation; our expectations for the future use ofequity incentive plans; our expectations regarding financing arrangements; our retail sales and market share expectations; depreciation andamortization expense; supply costs and expectations; costs and adequacy of insurance; our expectations with respect to ongoing compliance with theterms of our credit facility; the effect of regulations on us and our industry and our compliance with such regulations; our expectations regarding theeffects of employee recruiting, training and mentoring; and our anticipated revenues, expenses, and capital requirements. 19th These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause ouractual results, performance, or achievements to differ materially from any expected future results, performance, or achievements expressed or implied bysuch 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 and regulations,and results of litigation. There is no assurance that our expectations will be realized. If one or more of these risks or uncertainties materialize, or if our underlying assumptionsprove incorrect, actual results may vary materially from those expected, estimated, or projected. Such risks and uncertainties also include those set forthunder “Risk Factors” in Item 1A of this Form 10-K. Our forward-looking statements speak only as of the time that they are made and do not necessarilyreflect our outlook at any other point in time. Except as required by law or regulation, we undertake no obligation to update 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 and manufactured stone tiles, setting and maintenance materials, and related accessories in theUnited States. We offer a wide selection of products, attractive prices, and exceptional customer service in an extensive showroom setting. As ofDecember 31, 2015, we operated 114 stores in 31 states, with an average size of approximately 21,800 square feet. We also sell our products on ourwebsite. We purchase our tile products and accessories directly from suppliers and manufacture our own setting and maintenance materials, such as thinset, grout,and sealers. We believe that our long-term supplier relationships, together with our design, manufacturing and distribution capabilities, enable us to offera broad assortment of high-quality products to our customers, who are primarily homeowners and professionals, at competitive prices. We have investedsignificant resources to develop our proprietary brands and product sources, and believe that we are a leading retailer of natural and manufactured stonetiles, accessories, and related materials in the United States. We believe that the highly-fragmented United States retail tile market provides us with a significant opportunity to expand our store base. We opened 7new stores in the United States in 2015, and plan to open 9 to 12 stores in 2016. We believe that there will continue to be additional expansionopportunities in the United States and Canada. We expect store base growth will drive productivity and operational efficiencies. Our growth plans alsorequire us to maintain significant inventory on-hand in order to fulfill orders at these new locations. In 2015, we reported net sales and income from operations of $293.0 million and $29.2 million, respectively. From December 31, 2013 to December 31,2014, our net sales increased 12.0% and our income from operations decreased 34.8%. From December 31, 2014 to December 31, 2015, our net salesincreased 13.9% and our income from operations increased 35.5%. From December 31, 2013 to December 31, 2015, we opened 26 new retail locations. Net cash provided by operating activities was $60.3 million and $47.2 million for 2015 and 2014, respectively, which was used to fund capitalexpenditures for opening new stores and daily operations. We expect to continue to fund our capital expenditures and daily operations from ouroperating cash flows. As of December 31, 2015, we had cash of $10.3 million and working capital of $47.2 million. 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, as wellas employing our market manager program for all stores. We plan to continue to refine and implement a comprehensive strategy to grow our professionalcustomer business. Finally, we plan to increase our existing store base by 8 to 12 percent during 2016. Key Components of our Consolidated Statements of Operations Net Sales Net sales represents total charges to customers, net of returns, and includes freight charged to customers. We recognize sales at the time that thecustomer takes possession of the merchandise or final delivery of the product has occurred. We recognize service revenue, which consists primarily offreight charges for home delivery, when the service has been rendered. We are required to charge and collect sales and other taxes on sales to ourcustomers and remit these taxes back to government authorities. Total revenues do not include sales tax because we are a pass-through conduit forcollecting and remitting sales tax. The increase in net sales in recent years has been a result of store base growth, in 2013, 2014 and 2015, as well asincreases in comparable store sales in 2013 and 2015. 20 The table below sets forth information about our same store sales growth from 2013 to 2015. Our increase in same store sales growth is primarilyattributable to increases in number of orders, as well as increases in average order size. During 2014, the decrease in comparable sales was attributable toseveral factors including a challenging macroeconomic environment during which time existing home sales decreased, which resulted in a decrease intraffic in our stores. In addition, we experienced higher turnover of store managers and sales associates which also negatively impacted sales during theyear. Finally, many of our stores opened were in new markets and we did not have a consistent and disciplined grand opening marketing plan to drivebrand awareness around the time of the grand opening. The same store sales increase in 2015 was attributable to the growth in professional customer sales,an increase in marketing effectiveness, a reduction of sales associate turnover, an increase in average manager tenure, and investments made to helpimprove sales performance at stores opened in 2013 and 2014. Same store sales amounts include amounts charged to customers for orders delivered lessthe value of orders returned. In general, we consider a store comparable on the first day of the 13 full month of operation. For the year ended December 31, 2015 2014 2013 Same store sales growth (decline) 7.4% (0.4%) 12.4% We opened 7, 19, and 20 new stores in 2015, 2014 and 2013, respectively. Net sales at new stores are generally lowest in the first few months after alocation is opened and generally increase over time. We expect a store’s net sales to increase faster during its first four years of operation than in its lateryears. 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.This is due to increased brand awareness in existing markets and because a portion of such net sales comes from more mature stores in those markets. Cost of Sales Cost of sales consists primarily of material costs, freight, duties, and delivery of product to the customers, as well as costs associated withmanufacturing of setting and 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 2015, 2014 and2013, our gross margin was 69.5%, 69.6%, and 70.0%, respectively. We have been able to maintain relatively stable gross margins as a result of productcost control, moderating our price promotions and training and incenting our store sales associates to ensure the intelligent use of price discounts. 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 and certain handling and receiving costs, as those costs areincluded in cost of sales. In 2015, 2014, and 2013, our selling, general, and administrative expenses as a percentage of net sales was 59.5%, 61.2% and55.6%, respectively. Payroll costs increased slightly as a percentage of net sales in 2015 as a result of adding market managers and certain otherinvestments in store compensation to reduce turnover and improve sales growth, as well as increased benefit costs attributable to lower employeeturnover. However, improved sales performance and cost control during 2015 resulted in declines in occupancy cost and other selling, general andadministrative expenses as a percentage of net sales. Pre-opening costs Our pre-opening costs are those typically associated with the opening 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 We are subject to income tax in the United States as well as other tax jurisdictions in which we conduct business. Our effective tax rate forfiscal years 2015, 2014 and 2013 was 41.4%, 41.2% and (50.3%), respectively. The income tax rate of (50.3%) for fiscal year 2013 was due to the lossbefore income taxes of $23.7 million. The loss during fiscal year 2013 was a result of the change in the fair value of the warrant liability of $54.2 million. 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 for interest expense, income taxes, depreciation and amortization, non-cash change in fair value of warrants, deferred compensationexpense, stock based compensation expense, and special charges including equity related transaction costs, litigation and investigation costs, and thewrite-off of debt issuance costs. Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales. We believe that these non-GAAP measuresof financial results provide useful information to management and investors regarding certain financial and business trends relating to our financialcondition and results of operations. Our management uses these non-GAAP measures to compare our performance to that of prior periods for trendanalyses, for purposes of determining management incentive compensation, and for budgeting and planning purposes. These measures are used inmonthly financial reports prepared for management and our board of directors. We believe that the use of these non-GAAP financial measures provides anadditional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with other specialtyretailers, many of which present similar non-GAAP financial measures to investors. 21th Our management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance withGAAP. The principal limitations of these non-GAAP financial measures are that they exclude significant expenses and income that are required by GAAPto be recognized 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. Years Ended December 31, 2015 2014 2013 2012 2011 (in thousands) Net income (loss) $15,696 $10,547 $(35,660) $(46,887) $31,360 Interest expense 2,584 3,141 2,581 1,252 443 Income taxes 11,076 7,382 11,942 (2,002) 733 Change in fair value of warrants - - 54,219 82,063 - Depreciation & amortization 22,236 19,925 14,316 10,530 8,651 Deferred compensation expense - - - 3,897 1,415 Special charges 1,283 1,848 2,216 400 - Stock based compensation 5,545 4,617 4,680 1,381 - Adjusted EBITDA $58,420 $47,460 $54,294 $50,634 $42,602 Comparison of the Year Ended December 31, 2015 to the Year Ended December 31, 2014 (in thousands) 2015 % of sales 2014 % of sales Net sales $292,987 $257,192 Cost of sales 89,377 30.5% 78,300 30.4%Gross profit 203,610 69.5% 178,892 69.6%Selling, general and administrative expenses 174,384 59.5% 157,316 61.2%Income from operations 29,226 10.0% 21,576 8.4%Interest expense 2,584 0.9% 3,141 1.2%Other income (expense) 130 0.0% (506) (0.2%)Income before income taxes 26,772 9.1% 17,929 7.0%Provision for income taxes 11,076 3.8% 7,382 2.9%Net income $15,696 5.4% $10,547 4.1% Amounts do not foot due to rounding Net Sales Net sales for fiscal year 2015 increased by $35.8 million, or 13.9%, to $293.0 million, compared to fiscal year 2014 as net sales in comparablestores increased $18.9 million and net sales in non-comparable stores increased $16.9 million. Net sales increased primarily due to the 7.4% increase insales at comparable stores resulting from an increase in professional customer sales, an increase in marketing effectiveness, a decrease in sales associateturnover, and an increase in average store manager tenure. The increase in net sales generated by new stores relates to the expansion of our store base by 7locations in fiscal year 2015 and the inclusion of a full year of sales for the 19 stores that opened in 2014. Gross Profit Gross profit increased $24.7 million, or 13.8%, for fiscal year 2015 compared to fiscal year 2014 primarily due to the increase in netsales. The gross profit rate decreased to 69.5% for fiscal year 2015, from 69.6% for fiscal year 2014. The decrease in margin can be attributed to a series ofpricing tests performed to drive revenue growth during the second quarter of fiscal year 2015 which resulted in a temporary decline in gross margin rates. Selling, General and Administrative Expenses Selling, general, and administrative expenses increased $17.1 million, or 10.8%, in fiscal year 2015compared to fiscal year 2014. Selling, general, and administrative expenses as a percentage of net sales decreased to 59.5% in fiscal year 2015, comparedto 61.2% in fiscal year 2014. The increase in selling, general, and administrative expenses was primarily due to new store openings, which contributed a$10.0 million increase in payroll, $4.2 million increase in rent and occupancy costs, and a $2.3 million increase in depreciation. Selling, general, and administrative expenses include costs of $1.3 million and $1.8 million for fiscal years 2015 and 2014, respectively, which relate tolitigation and investigation costs. Pre-opening Costs Our pre-opening costs are those typically associated with the opening 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 fiscalyears 2015 and 2014, we recorded pre-opening costs of $0.5 million and $1.5 million, respectively. 22(1)(1) Income from Operations and Operating Margin As a result of the above, income from operations increased by $7.7 million, or 35.5%, for fiscal year2015 compared to fiscal year 2014. Operating margin increased to 10.0% for fiscal year 2015, compared to 8.4% for fiscal year 2014 due to improvedsales performance and cost control. Interest Expense Interest expense decreased $0.6 million, or 17.7%, for fiscal year 2015 compared to the fiscal year 2014. The decrease is due to thereduction of debt in 2015. Income before income taxes Income before income taxes was $26.8 million for fiscal year 2015, compared to $17.9 million for fiscal year 2014. Provision for income taxes Income tax provision increased $3.7 million for fiscal year 2015, compared to fiscal year 2014 due to higher taxableincome. Net Income Net income increased $5.1 million for fiscal year 2015, compared to fiscal year 2014, due to a comparable store sales increase of 7.4%. Comparison of the Year Ended December 31, 2014 to the Year Ended December 31, 2013 (in thousands) 2014 % of sales 2013 % of sales Net sales $257,192 $229,564 Cost of sales 78,300 30.4% 68,755 30.0%Gross profit 178,892 69.6% 160,809 70.0%Selling, general and administrative expenses 157,316 61.2% 127,731 55.6%Income from operations 21,576 8.4% 33,078 14.4%Interest expense 3,141 1.2% 2,581 1.1%Change in fair value of warrants - 0.0% 54,219 23.6%Other (expense) income (506) (0.2%) 4 0.0%Income (loss) before income taxes 17,929 7.0% (23,718) (10.3%)Provision for income taxes 7,382 2.9% 11,942 5.2%Net income (loss) $10,547 4.1% $(35,660) (15.5%) Net Sales Net sales for fiscal year 2014 increased by $27.6 million, or 12.0%, to $257.2 million, compared to fiscal year 2013 as net sales in non-comparable stores increased $28.4 million and net sales in comparable stores decreased $0.8 million. Net sales increased primarily due to the expansionof our store base by 19 locations in fiscal year 2014 and the inclusion of a full year of sales for the stores opened in 2013. Sales in 2014 were impacted byadverse changes in certain macroeconomic conditions, including a year-over-year decline in existing home sales and a decrease in the average tenure andlevel of experience of our store manager population. Gross Profit Gross profit increased $18.1 million, or 11.2%, for fiscal year 2014 compared to fiscal year 2013 primarily due to the increase in netsales. The gross profit rate decreased to 69.6% for fiscal year 2014, from 70.0% for fiscal year 2013. The decrease in margin can be attributed to slightincreases in product acquisition, freight and distribution costs during fiscal year 2014. Partially offsetting the increase in the costs of our products, wehave been more selective in our use of promotions to generate sales relative to last year. Selling, General and Administrative Expenses Selling, general, and administrative expenses increased $29.6 million, or 23.2%, in fiscal year 2014compared to fiscal year 2013. Selling, general, and administrative expenses as a percentage of net sales increased to 61.2% in fiscal year 2014, comparedto 55.6% in fiscal year 2013. The increase in selling, general, and administrative expenses was primarily due to new store openings, which contributed a$12.3 million increase in payroll, $9.6 million increase in rent and occupancy costs, and a $5.6 million increase in depreciation. Selling, general, and administrative expenses include costs of $1.8 million and $2.2 million for fiscal years 2014 and 2013, respectively, which relate tospecial investigation, shareholder litigation, and in 2013, equity related transactions. Pre-opening Costs Our pre-opening costs are those typically associated with the opening 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 fiscalyears 2014 and 2013, we reported pre-opening costs of $1.5 million and $2.4 million, respectively. 23 Income from Operations and Operating Margin As a result of the above, income from operations decreased by $11.5 million, or 34.8%, for fiscal year2014 compared to fiscal year 2013. Operating margin decreased to 8.4% for fiscal year 2014, compared to 14.4% for fiscal year 2013. Interest Expense Interest expense increased $0.6 million, or 21.7%, for fiscal year 2014 compared to fiscal year 2013. The increase is due to increasedinterest rates on borrowings in fiscal year 2014. Change in Fair Value of Warrants Fair value of the warrant liability decreased $54.2 million for fiscal year 2014, representing a non-cash charge for thechange in the fair value of the warrants that were outstanding during fiscal year 2013. As of December 31, 2013, the warrants were fully exercised orredeemed, and no further expense will be recorded for these warrants in future periods. Income (loss) before income taxes Income before income taxes was $17.9 million for fiscal year 2014, compared to a loss before income taxes of $23.7million for fiscal year 2013. The loss during fiscal year 2013 was as a result of the change in the fair value of the warrant liability of $54.2 million.Excluding the change in fair value of warrants, income before taxes was $30.5 million for fiscal year 2013. Provision for income taxes Income tax provision decreased $4.6 million for fiscal year 2014, compared to fiscal year 2013 due to lower taxableincome. Net Income (Loss) Net income increased $46.2 million for fiscal year 2014, compared to fiscal year 2013 primarily as a result of the change in the fairvalue of the warrant liability described above. Liquidity and Capital Resources Our principal liquidity requirements have been for working capital and capital expenditures. Our principal sources of liquidity are $10.3 million of cashand cash equivalents at December 31, 2015, 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 June 2, 2015, we, and our operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Fifth Third Bank, Bank of America, N.A.,and Huntington National Bank (the “Credit Agreement”). The Credit Agreement provides us with a $125.0 million senior secured credit facility,comprised of a five-year $50.0 million term loan and a $75.0 million revolving line of credit. The Credit Agreement is secured by virtually all of ourassets, 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 our option. The LIBOR-based rate will range from LIBOR plus 1.50% to 2.00%, depending on The TileShop’s leverage ratio. The base rate is equal to the greatest of: (a) the Federal funds rate plus 0.50%, (b) the Fifth Third Bank “prime rate,” and (c) theEurodollar rate plus 1.00%, in each case plus 0.50% to 1.00% depending on The Tile Shop’s leverage ratio. At December 31, 2015 the base interest ratewas 4.25% and the LIBOR-based interest rate was 2.18%. Borrowings outstanding consisted of $8.0 million on the revolving line of credit and $47.5million on the term loan as of December 31, 2015. The term loan requires quarterly principal payments as follows (in thousands): Period December 31, 2015 to June 30, 2017 $1,250 September 30, 2017 to June 30, 2018 1,875 September 30, 2018 to March 31, 2020 2,500 The Credit Agreement contains customary events of default, conditions to borrowings, and restrictive covenants, including restrictions on our ability todispose of assets, make acquisitions, incur additional debt, incur liens, make investments, or enter into transactions with affiliates on terms other thanthat could be obtained in an arm’s length transaction. The Credit Agreement also includes financial and other covenants including covenants tomaintain certain fixed charge coverage ratios and rent adjusted leverage ratios. In addition, except with respect to pro rata payments made by The TileShop or other subsidiaries to us or any other equity owner of such subsidiary, the Credit Agreement prohibits the payments of cash dividends. We werein compliance with the covenants as of December 31, 2015. The Credit Agreement superseded and replaced in its entirety our senior secured credit facility with Bank of America, N.A. dated October 3, 2012, asamended on April 30, 2013, July 8, 2013, March 26, 2014 and September 29, 2014. We used the $50.0 million term loan and $23.0 million drawn on theline of credit pursuant to the Credit Agreement to refinance all of the existing indebtedness outstanding under our prior credit facility in the amount ofapproximately $73.0 million, which consisted of $72.8 million in unpaid principal and approximately $0.2 million in accrued and unpaid interest andfees. We also recorded a $0.2 million charge in interest expense to write-off unamortized deferred financing fees associated with the October 3, 2012credit facility as of the date of the termination. 24 We have a standby letter of credit outstanding related to our workers compensation insurance policy. As of December 31, 2015 and 2014, the standbyletter of credit totaled $0.9 million and $0.4 million, respectively. We believe that our cash flow from operations, together with our existing cash and cash equivalents, and borrowings available under our credit facilitywill be sufficient to fund our operations and anticipated capital expenditures over at least the next 12 months. Capital Expenditures Capital expenditures in 2015 were $19.0 million. During the year, $15.6 million was for new store build-out and remodels of existing stores, $1.2 millionwas for investments in our distribution and manufacturing facilities, and the remainder was for general corporate purposes. Capital expenditures decreased in 2015 compared to 2014 primarily due to a decrease in the number of stores opened during the year. Capitalexpenditures decreased in 2014 compared to 2013 due to a decrease in funds invested in distribution and manufacturing facilities. In 2013, we completedand opened a fourth distribution center in Durant, Oklahoma, and expanded our headquarters. 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 United States economy, as well as the local economies in themarkets in which our stores are located. We intend to open 9 to 12 stores during 2016. Total capital expenditures are expected to be between $25 millionand $30 million in 2016. Cash Flows The following table summarizes our cash flow data for the years ended December 31, 2015, 2014, and 2013. Years Ended December 31, 2015 2014 2013 (in thousands) Net cash provided by operating activities $60,264 $47,201 $21,211 Net cash used in investing activities (18,994) (40,552) (52,955)Net cash (used in) provided by financing activities (36,688) (2,651) 30,518 Operating Activities Cash flows from operating activities provides us with a significant source of liquidity. Net cash provided by operating activities was $60.3 million, $47.2million, and $21.2 million in 2015, 2014, and 2013, respectively. Cash flows provided by operating activities in 2015 relate to current year earnings, plusnon-cash expenses, including depreciation, and a net improvement in working capital. The increase in operating cash flows over 2014 was primarilydriven by an increase in net income as well as improved management of working capital. Investing Activities Net cash used in investing activities was $19.0 million, $40.6 million and $53.0 million in 2015, 2014, and 2013, respectively. Net cash used ininvesting activities in each period was primarily for capital purchases of store fixtures, equipment, building improvements and leasehold improvementsfor stores opened or remodeled, new distribution and manufacturing facilities, and corporate headquarters expansion, internally developed software androutine capital purchases of computer hardware and software. 25 Financing Activities Net cash (used in) provided by financing activities was ($36.7) million, ($2.7) million and $30.5 million in 2015, 2014, and 2013, respectively. Cashused in financing activities during 2015 was primarily for payments of long-term debt and capital lease obligations of $124.0 million, partially offset bynet proceeds from long term debt of $88.0 million. Cash used in financing activities during 2014 was primarily for payments of long-term debt andcapital leases. Cash provided by financing activities in 2013 was primarily from the proceeds from exercises of warrants, net advances on our creditfacility, and cash provided by the new market tax credit transaction (See Note 11 to our consolidated financial statements included in this Form 10-K)offset by our repurchase of common stock and warrants and principal payments on long-term debt. Off-balance Sheet Arrangements As of December 31, 2015 and December 31, 2014, 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, 2015 and the effect such obligations are expected to have on ourliquidity and cash flows in future periods: Payment Due by Period Total Less than 1 Year 2-3 Years 4-5 Years 5+ Years Long-term debt including principal and interest $58,879 $6,268 $16,156 $36,072 $383 Operating lease obligations 493,945 26,597 54,818 56,426 356,104 Capital lease obligations 1,380 217 426 432 305 Total contractual obligations $554,204 $33,082 $71,400 $92,930 $356,792 (1)Includes total interest of $2.5 million, comprised of $1.2 million of interest for the period of less than 1 year, $0.9 million of interest for theperiod of 1 – 3 years, $0.4 million of interest for the period of 4 – 5 years, and $0.0 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 $0.5 million, comprised of $0.1 million of interest for the period of less than 1 year, $0.2 million of interest for the periodof 1 – 3 years, $0.2 million of interest for the period of 4 – 5 years, and $0.0 million of interest for the period of 5+ years. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with generally accepted accounting principles of the United States (GAAP). The preparation of ourfinancial statements and related disclosures requires us to make estimates, assumptions, and judgments that affect the reported amount of assets,liabilities, revenues, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that webelieve to be reasonable under the circumstances, but all such estimates and assumptions are inherently uncertain and unpredictable. We evaluate ourestimates and assumptions on an ongoing basis. Actual results may differ from those estimates and assumptions, and it is possible that other professionals,applying their own judgment to the same facts and circumstances, could develop and support alternative estimates and assumptions that would result inmaterial changes to our operating results and financial condition. Our most critical accounting policies are summarized below. For further information onour critical and other significant accounting policies, see the notes to the consolidated financial statements appearing elsewhere in this Form 10-K. Recognition of Revenue We recognize sales at the time the customer takes possession of the merchandise or when final delivery of the product has occurred. We recognize servicerevenue, which consists primarily of freight charges for home delivery, when the service has been rendered. We are required to charge and collect salesand other taxes on sales to our customers and remit these taxes back to government authorities. Total revenues do not include sales tax because we are apass-through conduit for collecting and remitting sales tax. Net sales are reduced by an allowance for anticipated sales returns that we estimate based onhistorical returns. Our process to establish a sales return reserve contains uncertainties because it requires management to make assumptions and to applyjudgment to estimate future sales returns and exchanges. The customer may receive a refund or exchange the original product for a replacement of equalor similar quality for a period of six months from the time of original purchase. Products received back under this policy are reconditioned pursuant tostate laws and resold. We believe our estimate for sales returns is an accurate reflection of future returns. Actual return trends have not varied significantlyfrom estimated amounts in prior periods. However, if the nature of sales returns changes significantly, our sales could be adversely impacted. 26(1)(2)(3) Inventory Valuation and Shrinkage Our inventory consists of manufactured items and purchased merchandise held for resale. Inventories are stated at the lower of cost (determined using theweighted-average cost method) or market. We capitalize the cost of inbound freight, duties and receiving and handling costs to bring purchased materialsinto our distribution network. The labor and overhead costs incurred in connection with the production process are included in the value of manufacturedfinished goods. We provide provisions for losses related to shrinkage and other amounts that are otherwise not expected to be fully recoverable. Theseprovisions are calculated based on historical shrinkage, selling price, margin and current business trends. These estimates have calculations that requiremanagement to make assumptions based on the current rate of sales, age, salability and profitability of inventory, historical percentages that can beaffected by changes in our merchandising mix, customer preferences, rates of sell through and changes in actual shrinkage trends. We do not believe thereis a reasonable likelihood that there will be a material change in the assumptions we use to calculate our inventory provisions. However, if actual resultsare not consistent with our estimates and assumptions, we may be exposed to losses that could be material. Stock-based Compensation We estimate the fair value of each option grant using the Black Scholes option pricing model. The valuation of stock options is a significant accountingestimate that requires us to use judgments and assumptions that are likely to have a material impact on our financial statements. We make predictiveassumptions regarding future stock price volatility, employee exercise behavior, dividend yield, and the forfeiture rate. The computation of the expectedvolatility assumptions used in the option valuation models was based on historical volatilities of the Company. The risk-free interest rate was based onthe U.S. Treasury yield at the time of grant. The expected dividend yield was zero based on the fact that we have not paid dividends, nor do we intend topay dividends in the future. To the extent that actual outcomes differ from our assumptions, we are not required to true up grant-date fair value-basedexpense to final intrinsic values. However historical data has a significant bearing on our forward-looking assumptions. Significant variances betweenactual and predicted experience could lead to prospective revisions in our assumptions, which could then significantly impact the year-over-yearcomparability of stock-based compensation expense. Property, Plant, and Equipment Property, plant and equipment are 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. Theevaluation is performed at the lowest level of identifiable cash flows independent of other assets. An impairment loss would be recognized whenestimated undiscounted future cash flows from the operations and/or disposition of the assets are less than the carrying amount. Measurement of animpairment loss would be based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using discounted cashflows or independent opinions of value, as appropriate. 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 changein the 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 determining future cash flows and asset fair values, we may be exposed to losses that could be material. Income taxes Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and liabilities usingenacted tax rates in effect for the year in which the differences are expected to reverse. We estimate the degree to which tax assets and loss carryforwardswill result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is providedwhen it is determined to be more likely than not that the benefit of such deferred tax asset will not be realized in future periods. If it becomes more likelythan not that a tax asset will be used, the related valuation allowance on such assets would be reduced. New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued a final standard on revenue from contracts with customers. The new standardsets forth a single comprehensive model for recognizing and reporting revenue. The new standard is effective for the Company in its fiscal year 2018,and permits the use of either a retrospective or a cumulative effect transition method. We are currently assessing the impact of implementing the newguidance on our consolidated financial statements. 27 In August 2014, the FASB issued a standard requiring an entity’s management to evaluate whether there is substantial doubt about an entity’s ability tocontinue as a going concern within one year after the date that the financial statements. The guidance also sets forth a series of disclosures that arerequired in the event the entity’s management concludes that there is substantial doubt about the entity’s ability to continue as a going concern. The newstandard becomes effective for us in fiscal 2016 and requires an ongoing evaluation at each interim and annual period thereafter. We have determined thatthe adoption of this new guidance will not have an impact on our consolidated financial statements. In February 2015, the FASB issued a new accounting standard that will modify current consolidation guidance. The standard makes changes to both thevariable interest entity model and the voting interest entity model, including modifying the evaluation of whether limited partnerships or similar legalentities are VIEs or voting interest entities and amending the guidance for assessing how relationships of related parties affect the consolidation analysisof VIEs. The standard is effective for us in fiscal 2016. We are currently assessing the impact of implementing the new guidance on our consolidatedfinancial statements. In April 2015, the FASB issued a standard that requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as adirect deduction from the carrying amount of that debt liability. The guidance is effective for us in fiscal year 2016, and requires retrospectiveapplication. We anticipate reclassifying $2.2 million of unamortized debt issuance costs from other asset accounts to be net against debt upon adoptingthis standard in the first quarter of 2016. In July 2015, the FASB issued a standard which simplifies the subsequent measurement of inventory. Currently, an entity is required to measure itsinventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value less an approximatelynormal profit margin. The changes require that inventory be measured at the lower of cost and net realizable value, thereby eliminating the use of theother two market methodologies. Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonablypredictable costs of completion, disposal, and transportation. Currently, we apply the net realizable value market option to measure inventories at thelower of cost or market. These changes become effective for us in fiscal 2017. We have determined that the adoption of these changes will not have amaterial impact on our consolidated financial statements. In November 2015, the FASB issued a standard which simplifies the presentation of deferred income taxes. The guidance provides presentationrequirements to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. The standard is effective for fiscalyears beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted for any interim and annualfinancial statements that have not yet been issued. We early adopted this standard effective December 31, 2015, retrospectively. Adoption resulted in a$4.2 million and $3.9 million decrease in current deferred tax assets and a $4.2 million and $3.9 million increase in long-term deferred tax assets in ourConsolidated Balance Sheets at December 31, 2015 and December 31, 2014, respectively. Adoption had no impact on our results of operations. 28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks in the ordinary course of our business. These risks primarily include 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 notbelieve 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 anadverse effect on our ability to maintain current levels of gross margin and selling, general, and administrative expenses as a percentage of revenues if theselling prices of our products do not increase with these increased costs. Interest Rate Risk We are exposed to interest rate risk through the investment of our cash and cash equivalents. Changes in interest rates affect the interest income that weearn in connection with these investments, and therefore impact our cash flows and results of operation. We are also exposed to interest rate risk, inconnection with borrowings under our credit facility. Borrowings under our revolving credit facility bear interest at either a base rate or a LIBOR-basedrate, at our option. The LIBOR-based rate ranges from LIBOR plus 1.50% to 2.00%, depending on The Tile Shop’s leverage ratio. The base rate is equal tothe greatest of: (a) the Federal funds rate plus 0.50%, (b) the Fifth Third Bank “prime rate,” and (c) the Eurodollar rate plus 1.00%, in each case plus 0.50%to 1.00% depending on The Tile Shop’s leverage ratio. The base rate was 4.25% at December 31, 2015. Based upon balances and interest rates as ofDecember 31, 2015, holding other variables constant, a one percentage point increase in interest rates for the next 12-month period would decrease pre-tax earnings and cash flow by approximately $0.6 million. Conversely, a one percentage point decrease in interest rates for the next 12-month periodwould result in an increase to pre-tax earnings and cash flow of approximately $0.6 million. We currently do not engage in any interest rate hedging activity. However, we may do so in the future to mitigate market risk rate. We do not, and do notintend 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. Exchange Rate Risk We are exposed to risks from foreign currency exchange rate fluctuations on the translation of our subsidiary based in China and on the purchase of goodsin Chinese yuan. Purchases made in Chinese yuan were less than 5% of our total inventory purchases in both 2015 and 2014. Our exposure to foreigncurrency rate fluctuations is not significant to our financial condition or results of operations. We currently do not engage in any exchange rate hedging activity and currently have no intention to do so in the foreseeable future. However, in thefuture, in an effort to mitigate losses associated with these risks, we may at times engage in transactions. 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 52 and areincorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 29 ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures(as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the period covered by thisreport and concluded that our disclosure controls and procedures were effective as of the period covered by this report. Our management, including ourChief Executive Officer and Chief Financial Officer, has concluded that the consolidated financial statements included in this Form 10-K present fairly, inall material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principlesgenerally accepted in the United States. 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 principlesgenerally accepted in the United States of America (“GAAP”). Internal control over financial reporting includes policies and procedures that: (i) pertain tothe maintenance 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 possibility 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 notprevent or detect misstatements. Also, the application of any evaluation of effectiveness to future periods is subject to the risk that controls may becomeinadequate because of changes in conditions, or that compliance with the policies or procedures may deteriorate. 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, 2015. Management’s assessment wasbased on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013Framework) (“COSO”). Based on management’s assessment, management has concluded that as of December 31, 2015, the previously-identified materialweakness (discussed in further detail below) had been remediated and the Company’s internal control over financial reporting was effective as ofDecember 31, 2015. Ernst & Young, LLP, our independent registered public accounting firm, has issued a report on our internal control over financial reporting as ofDecember 31, 2015. See “Item 8. Consolidated Financial Statements and Supplementary Data.” Changes in Internal Control over Financial Reporting During the quarter ended December 31, 2015, the Company completed its remediation efforts related to the company’s controls involving: ●The selection and deployment of general control activities over technology related to change management and user access controls. ●Controls that address the completeness and accuracy of data used in the performance of other control activities. ●The design and operation of control activities that mitigate identified risks, including compliance with established accounting policies. As a result of the completed remediation efforts noted below, there were improvements in internal control over financial reporting during the fourthquarter of 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.There were no other changes in internal control over financial reporting (as defined by Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that havematerially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 30 Remediation Actions In our Annual Report on Form 10-K for the year ended December 31, 2014, we identified a material weakness in our internal control over financialreporting with respect to the selection and deployment of general control activities over technology related to change management and user accesscontrols. We also identified deficiencies in controls that address the completeness and accuracy of data used in the performance of other control activities.In addition, we identified deficiencies related to the design and operation of control activities that mitigate identified risks, including compliance withestablished accounting policies. Specifically, we failed to establish control activities to ensure useful lives assigned to leasehold improvements and otherfixtures did not exceed the lease term at store and corporate headquarters locations. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. In response to this material weakness, management developed remediation plans to address the control deficiencies identified in 2014. The Companyimplemented the following remediation actions during 2015: ●Designed and executed a process to review users who have access to key financial systems. ●Enhanced existing change management policies and initiated a processes to capture documentation evidencing the execution of these policies. ●Established a control to compare the economic life of an asset to the remaining lease term at the time a new asset is placed in service. ●Refined process documentation to more clearly define how processes and controls ensure compliance with key policies. ●Formalized and implemented a policy to document the inputs and assumptions underlying key reports and analysis used in the preparation ofaccounting entries as well as management’s process to evaluate the completeness of key data elements. Management has determined that the remediation actions discussed above were appropriately designed and demonstrated effective operation for asufficient period of time to enable the company to conclude that the material weakness had been remediated as of December 31, 2015. 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 expectthat our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matterhow well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances offraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdownscan occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two ormore people 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. 31 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 PositionChris R. Homeister 47 Chief Executive Officer and President, DirectorKirk L. Geadelmann 47 Chief Financial OfficerJoseph Kinder 50 Senior Vice President – OperationsCarl Randazzo 51 Senior Vice President – Retail Chris R. Homeister has been our Chief Executive Officer and a Director since January 1, 2015. From October 2013 through December 2014, Mr.Homeister was our Chief Operating Officer. From May 2012 through September 2013, Mr. Homeister was Chief Executive Officer and founder ofHomeister Ventures LLC, a provider of consulting services for private equity, venture capital, retail, and consumer electronics firms. Prior thereto, fromJune 2009 through April 2012, Mr. Homeister served as Senior Vice President and General Manager of Best Buy Co., Inc.’s Entertainment BusinessGroup, where he was responsible for all elements and the management of the business unit. From April 2005 to May 2009, he held various roles at BestBuy, including Senior Vice President of Digital Merchandising and Strategic Planning; Vice President of Merchandising, Mobile Electronics andComputing. 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. We believe Mr. Homeister is qualified to serve as a directorbecause, as the Company’s Chief Executive Officer, he is familiar with the Company’s business and industry and is most capable of effectivelyidentifying strategic priorities and leading the execution of strategy. Additionally, his past experience in leading global sourcing, merchandising, andretail expansion will benefit the Company as it executes its strategic plan. Kirk L. Geadelmann has been our Chief Financial Officer and Senior Vice President since August 2014. Prior to joining the Company, Mr. Geadelmannworked at Best Buy from June 2000 to February 2014 in various management roles including Corporate and International Controller. During his tenure atBest Buy, Mr. Geadelmann was responsible for overseeing business planning, performance management, financial accounting and SEC reportingfunctions. Prior to Best Buy, he held roles with BMC Manufacturing, Arthur Andersen, Allianz Insurance and Coopers & Lybrand, where he earned hisCPA certification. Mr. Geadelmann earned a B.B.A. in Accounting and Risk Management from the University of Wisconsin-Madison. 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 person atThe 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 SalesManager from 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 TheTile Shop from 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. inEconomics from Arizona State University. As previously announced, effective March 1, 2016, Mr. Randazzo will become our Senior Vice President – Real Estate and Development and Lynda Stoutwill be joining the Company as our Senior Vice President – Retail. 32 Directors The following table provides information about our directors, including their ages, as of the date of this Form 10-K. Name Age PositionClass I Directors: Chris R. Homeister 47 Chief Executive Officer, DirectorPeter J. Jacullo III 61 DirectorAdam L. Suttin 48 DirectorClass II Directors: Peter H. Kamin 53 DirectorTodd Krasnow 58 DirectorClass III Directors: Christopher T. Cook 46 DirectorRobert A. Rucker 63 DirectorWilliam E. Watts 63 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. 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 serves onthe 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 ofMagnatech International Inc., a provider of equipment for the hydraulic hose industry. Mr. Jacullo holds an M.B.A. from the University of Chicago and aB.A. in Economics from Johns Hopkins University. We believe that Mr. Jacullo is qualified to serve on our Board in light of the continuity that heprovides 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 Kosta Browne Winery, LLC, Esselte Ltd., KeyImpact Sales & Systems, Inc., Shoe Sensation Inc., Mattress Firm Holdings, Inc., and the NutraSweet Company. Mr. Suttin holds a B.S. in Economics fromthe Wharton School of the University of Pennsylvania and a B.A.S. in Engineering from the Moore School of Engineering of the University ofPennsylvania. 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 Associates, L.P. andhis 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 of managersfrom January 2012 to August 2012. Mr. Kamin is the founder of 3K Limited Partnership, an investment fund, and has served as its Managing Partner sinceJanuary 2012. For the eleven years preceding the formation of 3K Limited Partnership, Mr. Kamin was a founding member and Managing Partner ofValueAct Capital. ValueAct Capital grew into a leading investment management organization during Mr. Kamin’s tenure. Prior to founding ValueActCapital in 2000, Mr. Kamin founded and managed Peak Investment L.P. Peak was a limited partnership, organized to make investments in a select numberof domestic public and private companies. Since May 2012, Mr. Kamin has been a director and member of the governance committee of MAM SoftwareGroup, Inc., a publicly-traded provider of business automation and ecommerce solutions for the automotive aftermarket. Mr. Kamin is also a director ofseveral privately held companies. Mr. Kamin previously served as a director of Ambassadors Group, Inc. from May 2012 to September 2015, of RandWorldwide, Inc. from April 2012 to June 2015, of Adesa, Inc. from April 2007 to December 2011, and of Seitel, Inc. from February 2007 to December2011, as well as previously serving as a director of several privately held companies. Mr. Kamin holds a B.A. in Economics from Tufts University and anM.B.A. from the Harvard University Graduate School of Business. Mr. Kamin is a trustee of Tufts University. We believe that Mr. Kamin is qualified toserve on our Board due to his significant experience as a director of publicly-traded companies and his substantial experience as an investor. 33(1)(2)(1)(1)(3)(2)(3)(3)(2) 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, since January2005, and as marketing domain expert with Highland Consumer Fund, a venture capital firm, since June 2007. Previously, Mr. Krasnow was the Chairmanof Zoots, Inc., a dry cleaning company, from June 2003 to January 2008, and Chief Executive Officer of Zoots, Inc. from February 1998 to June 2003. Heserved as the Executive Vice President of Sales and Marketing of Staples, Inc. from May 1993 to January 1998 and in other sales and marketing positionsfor Staples, Inc. from March 1986 to May 1993. Since September 2005, Mr. Krasnow has served as a director of Carbonite, Inc., a publicly-traded providerof online backup solutions for consumers and small and medium sized businesses; since December 2005, Mr. Krasnow has served as Chairman ofCarbonite’s compensation committee; and since September 2009, he has served as a member of Carbonite’s audit committee. Mr. Krasnow is a member ofthe advisory boards of C&S Wholesale Grocers, Inc. and of Kids II, a manufacturer of baby and toddler products. Since January 2016, Mr. Krasnow hasserved as a director of Bakkover Group, Ltd., a London, UK-based fresh prepared meals provider, and Ecentria Group, Inc., an Illinois-based internetretailer of outdoor, camping, optical and other gear. Mr. Krasnow previously served as a director of Piedmont, Ltd., a Japanese storage companyconducting business as Quraz, which was sold in September 2013; as a director of Global Customer Commerce, Inc., an internet retailer of blinds and wallcoverings, which was sold in January 2014; and as a director of OnForce, Inc., an online marketplace that enables enterprises to hire informationtechnology services professionals, which was sold in August 2014. Mr. Krasnow holds an M.B.A. from the Harvard University Graduate School ofBusiness and an A.B. in Chemistry from Cornell University. We believe that Mr. Krasnow is qualified to serve on our Board due to his operating andmanagement experience and his expertise in sales and marketing. Christopher T. Cook has served as a member of our Board since September 2014. Mr. Cook founded Sleep Experts, a Texas chain of mattress retail stores,and served as its Chief Executive Officer from 2004 until its acquisition by Mattress Firm in April 2014. Mr. Cook currently serves as a strategyconsultant to the Mattress Firm executive team. Mr. Cook was also on the founding team of SiteStuff, a venture-backed e-commerce company and servedas its Executive Vice President of Business Development until 2003. He currently serves on the board of the Entrepreneur’s Foundation of North Texasand is a member of the Young Presidents’ Organization. Mr. Cook has a B.B.A. in Finance from SMU Cox School of Business in Dallas, Texas. Webelieve that Mr. Cook is qualified to serve on our Board due to his in-depth involvement in founding and leading a company in the consumer retailindustry and his experience creating scalable sales culture and scalable systems. Robert A. Rucker has served as a member of our Board since June 2012 and was our Chief Executive Officer and President from June 2012 until December2014. Previously, Mr. Rucker served as The Tile Shop’s Chief Executive Officer and President and as a member of its board of managers. Mr. Ruckerholds a B.E.S. in Psychology and History from the University of Minnesota. We believe that Mr. Rucker is qualified to serve on our Board based on hishistorical knowledge of The Tile Shop as its founder and his strategic vision for the Company. William E. Watts has served as a member and Chairman of our Board since August 2012. Previously, Mr. Watts served as Vice President of JWCAcquisition 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, hewas President and Chief Executive Officer of General Nutrition Companies. Prior to being named President and Chief Executive Officer, Mr. Watts heldthe positions of president and chief operating officer of General Nutrition, President and Chief Operating Officer of General Nutrition Center, and SeniorVice President of Retailing and Vice President of Retail Operations of General Nutrition Center. Mr. Watts currently serves as Non-Executive Chairman ofthe board of directors of Mattress Firm Holdings, Inc., Non-Executive Chairman of the board of directors of Cycle Gear, Inc., and Non-ExecutiveChairman of the board of directors of Shoe Sensation, Inc. Mr. Watts holds a B.A. in Social Science from the State University of New York at Buffalo. Webelieve that Mr. Watts is qualified to serve on our Board in light of his experience as a director of various companies and his experience as chiefexecutive 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 Board(including a vacancy created by an increase in the size of the Board) may be filled only by the affirmative vote of a majority of the remaining directors. Adirector elected by the Board to fill a vacancy (other than a vacancy created by an increase in the size of the Board) serves for the unexpired term of suchdirector’s predecessor in office and until such director’s successor is elected and qualified. A director appointed to fill a position resulting from anincrease in the size of the Board serves until the next annual meeting of stockholders at which the class of directors to which such director is assigned bythe Board is to be elected by stockholders and until such director’s successor is elected and qualified. Any additional directorships resulting from anincrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of thedirectors. 34 Our directors are divided among the three classes as follows: •The Class I directors are Messrs. Homeister, 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 2017; and •The Class III directors are Messrs. Cook, Rucker and Watts, with terms expiring at the annual meeting of stockholders to be held in 2018. Our Board met four times between January 1, 2015 and December 31, 2015. Each director attended at least 75% of the meetings of the Board and of anycommittee of the Board on which such director served that were held between January 1, 2015 and December 31, 2015. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS In October 2011, Joseph Kinder, our Senior Vice President – Operations, was involved in a domestic dispute Mr. Kinder pled guilty to a charge ofcontributing to the need for child protection or services, which was deemed a misdemeanor. Peter Jacullo III, a director, previously served as a manager and secretary of BlueEarth Biofuels, LLC, which filed for bankruptcy in May 2014 and wassubsequently dissolved. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent of a registered class of theCompany’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equitysecurities of the Company. These executive officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us withcopies of all Section 16(a) forms they file. To our knowledge, based on a review of the copies of such reports furnished to us, the executive officers, directors and greater than ten percentstockholders complied with all Section 16(a) filing requirements during the fiscal year ended December 31, 2015, except that Nabron International, Inc., agreater than ten percent stockholder, filed a Form 4 on September 15, 2015 to report nine sales of Company equity securities that occurred from May 18,2015 through May 29, 2015. CODE OF BUSINESS CONDUCT AND ETHICS We have 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 and Ethicsis available on the “Investor Relations” section of our website, at http://investors.tileshop.com, under the “Governance Documents” heading. We intendto satisfy 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 has established the following committees: an Audit Committee, a Compensation Committee, and a Nominating and Corporate GovernanceCommittee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation oruntil otherwise determined by our Board. Audit Committee Our Audit Committee oversees our corporate accounting and financial reporting process, the audit of our financial statements, the audit of internalcontrols over financial reporting and other information included in documents containing the audited financial statements. Among other matters, theAudit Committee evaluates our independent auditors’ qualifications, independence – as required under Public Company Accounting Oversight Board(PCAOB) Auditing Standard No. 16, communications with Audit Committees (AS 16) and receives from the independent auditors written disclosuresregarding the auditors independence required by PCAOB Ethics and Independence Rule 3526, Communication with Audit Committees ConcerningIndependence, and has discussed with the independent auditors, the independent auditor’s independence. The Audit Committee also determines theengagement, retention, and compensation of the independent auditors; reviews and approves the scope of the annual audit and the audit fee; discusseswith management and the independent auditors the results of the annual audit and the review of our quarterly financial statements, including thedisclosures in our annual and quarterly reports to be filed with the SEC; assesses the performance of the independent auditors; approves the retention ofthe independent auditors to perform any proposed permissible non-audit services; reviews our risk assessment and risk management processes; establishesprocedures for receiving, retaining, and investigating complaints received by us regarding accounting, internal accounting controls, or audit matters;monitors the rotation of partners of the independent auditors on our engagement team as required by law; reviews our critical accounting policies andestimates; and oversees any internal audit function. Additionally, the Audit Committee reviews and approves related person transactions and reviews andevaluates, on an annual basis, the Audit Committee charter and performance. Our independent registered public accounting firm and management eachperiodically meet privately with our Audit Committee. 35 The Audit Committee has recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-Kfor the fiscal year December 31, 2015 for filing with the SEC. The current members of our Audit Committee are Messrs. Jacullo, Kamin, and Suttin, with Mr. Kamin serving as the chair of the Audit 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 aboveunder “Directors.” Messrs. Jacullo, Kamin, and Suttin are independent directors as defined under the applicable rules and regulations of the SEC,NASDAQ and Public Company Accounting Oversight Board. The Audit Committee operates under a written charter that satisfies the applicable standardsof the SEC and NASDAQ, and which is available on the “Investor Relations” section of our website, at http://investors.tileshop.com, under the“Governance Documents” heading. The Audit Committee met twelve times between January 1, 2015 and December 31, 2015. 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 andother executive officers, evaluates the performance of these officers in light of those goals and objectives, and sets the compensation of these officersbased on such evaluations. The Compensation Committee also reviews and makes recommendations to the Board with respect to director compensationand administers the issuance of stock options and other awards under our equity compensation plans. The Compensation Committee reviews and preparesthe necessary compensation disclosures required by the SEC. Additionally, the Compensation Committee reviews and evaluates, on an annual basis, theCompensation Committee charter and performance. The current members of our Compensation Committee are Messrs. Jacullo, Krasnow and Watts, with Mr. Krasnow serving as the chair of theCompensation Committee. All of the members of our Compensation Committee are independent under the applicable rules and regulations of the SEC,NASDAQ and Section 162(m) of the Internal Revenue Code of 1986, as amended. The Compensation Committee operates under a written charter thatsatisfies the applicable standards of the SEC and NASDAQ, and which is available on the “Investor Relations” section of our website, athttp://investors.tileshop.com, under the “Governance Documents” heading. The Compensation Committee met seven times between January 1, 2015 andDecember 31, 2015. 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, oversees 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 self-evaluation process. Additionally, theNominating and Corporate Governance Committee reviews and evaluates, on an annual basis, the Nominating and Corporate Governance Committeecharter and performance. The current members of our Nominating and Corporate Governance Committee are Messrs. Cook, Kamin and Krasnow, with Mr. Cook serving as the chairof the Nominating and Corporate Governance Committee. All of the members of our Nominating and Corporate Governance Committee are independentunder the applicable rules and regulations of NASDAQ. The Nominating and Corporate Governance Committee operates under a written charter, which isavailable on the “Investor Relations” section of our website, at http://investors.tileshop.com, under the “Governance Documents” heading. TheNominating and Corporate Governance Committee met three times between January 1, 2015 and December 31, 2015. 36 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, financeand 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 and the Company, to maintain a balance of knowledge, experience and capability. The Nominating andCorporate Governance Committee does not have a formal diversity policy and does not follow any ratio or formula with respect to diversity in order todetermine the appropriate composition of the Board. In the case of incumbent directors whose terms of office are set to expire, the Nominating andCorporate Governance Committee reviews these directors’ overall service to the Company during their terms, including the number of meetings attended,level of participation, quality of performance, and any other relationships and transactions that might impair the directors’ independence. In the case ofnew director candidates, the Nominating and Corporate Governance Committee also determines whether the nominee is independent for NASDAQpurposes, which determination is based upon applicable NASDAQ listing standards, applicable SEC rules and regulations and the advice of counsel, ifnecessary. The Nominating and Corporate Governance Committee conducts any appropriate and necessary inquiries into the backgrounds andqualifications of possible candidates after considering the function and needs of the Board. The Nominating and Corporate Governance Committee meetsto 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 2016 Annual Meeting, stockholders must submit such nomination in writing to our Secretary at 14000 Carlson Parkway,Plymouth, Minnesota 55441 no later than the close of business on April 15, 2016, nor earlier than the close of business on March 16, 2016. To nominatea director for the 2017 Annual Meeting, stockholders must submit such nomination in writing to our Secretary at 14000 Carlson Parkway, Plymouth,Minnesota 55441 no later than the close of business on April 13, 2017, nor earlier than the close of business on March 14, 2017. You are advised toreview the Company’s Bylaws for requirements relating to director nominees. STOCKHOLDER PROPOSALS FOR 2016 ANNUAL MEETING AND 2017 ANNUAL MEETING In order to have been considered for inclusion in this year’s proxy statement, stockholder proposals must have been submitted in writing to the Companyno later than January 21, 2016. In order to be considered for inclusion in next year’s proxy statement, stockholder proposals must be submitted in writingto the Company no later than January 28, 2017. The Company suggests that proposals for the 2017 Annual Meeting be submitted by certified mail, returnreceipt requested. The proposal must be in accordance with the provision of Rule 14a-8 promulgated by the Securities and Exchange Commission underthe Securities Exchange Act of 1934, as amended. Stockholders who intend to present a proposal or director nomination at the 2016 Annual Meeting without including such proposal or nomination in theCompany’s proxy statement must, pursuant to the Company’s Bylaws, deliver to the Company notice of such proposal no earlier than March 16, 2016and no later than April 15, 2016. Stockholders who intend to present a proposal or director nomination at the 2017 Annual Meeting without includingsuch proposal or nomination in the Company’s proxy statement must, pursuant to the Company’s Bylaws, deliver to the Company notice of suchproposal no earlier than March 14, 2017 and no later than April 13, 2017. The Company reserves the right to reject, rule out of order, or take appropriateaction with respect to any proposal that does not comply with these and other applicable requirements. 37 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 named in the “Summary CompensationTable” and the most important factors relevant to an analysis of these policies and decisions. The “named executive officers” to whom this discussionapplies are: •Chris R. Homeister, Chief Operating Officer (October 1, 2013 through December 31, 2014), Chief Executive Officer and President (beginningJanuary 1, 2015); •Kirk L. Geadelmann, Chief Financial Officer (beginning August 12, 2014); •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 2015 fiscal year. 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 is responsive to the needsof our employees. The principles and objectives of our compensation and benefits programs for our employees generally, and for our named executiveofficers 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. Each of the primary elements of our executive compensation program is discussed in more detail below. While we have identified particularcompensation objectives that each element of executive compensation serves, our compensation programs are designed to be flexible and complementaryand to collectively serve all of the executive compensation objectives described above. Accordingly, whether or not specifically mentioned below, webelieve that each individual element, to some extent, serves each of our objectives. Further, while each of our executive officers has not been, and maynot be, compensated with all individual compensation elements, we believe that the compensation provided to each individual executive officer is, andwill be, consistent with the overall compensation philosophy and objectives set forth above. 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 wewould be willing 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 wewere required to replace a key employee. In addition, we consider the results of non-binding advisory votes on executive compensation, commonlyreferred to as “say-on-pay” votes. At our 2015 Annual Meeting, 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 voteexceeding 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. Our Compensation Committee does not rely on a formal peer group when determining compensation, but does make reference to general market data andmay consider establishing a group of comparable companies for this purpose in the future. Additionally, our Compensation Committee may considerengaging a compensation consultant in future years to provide market data on a peer group of companies in our industry. We believe that suchinformation, together with other information obtained by the members of our Compensation Committee would help ensure that our compensationprogram remains competitive. We anticipate that our Compensation Committee may make adjustments in executive compensation levels in the future asa result of this more formal market comparison process. 38 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 the roles and responsibilities of our Chief Executive Officer, there is a compensation differential between hiscompensation 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’speers within our Company. In making decisions regarding salary increases, we may also draw upon the experience of members of our Board with othercompanies. Base salaries are also reviewed in the case of promotions or other significant changes in responsibility. No formulaic base salary increases areprovided to our named executive officers. This strategy is consistent with our intent of offering base salaries that are cost-effective while remainingcompetitive. Our Chief Executive Officer, Chris R. Homeister, was hired in October 2013 as our Chief Operating Officer at an annual base salary of $300,000. EffectiveJanuary 1, 2015 and in connection with his promotion to Chief Executive Officer, Mr. Homeister’s annual base salary was increased to $400,000. Our Chief Financial Officer, Kirk Geadelmann, was hired in August 2014 at an annual base salary of $210,000. In February 2015, the CompensationCommittee approved an increase to the annual base salary of Mr. Geadelmann to $212,000. In anticipation of the consummation of the Business Combination in August 2012, we entered into offer letter agreements with each of Messrs. Kinderand Randazzo, which provide for annual base salaries of $200,000 each. In February 2014, the Compensation Committee approved increases to the basesalaries of Messrs. Kinder and Randazzo to $208,000 each, on an annualized basis, and in February 2015, the Compensation Committee approvedincreases to the base salaries of Messrs. Kinder and Randazzo to $212,000 each, on an annualized basis. The actual base salaries earned by all of our named executive officers in 2015, 2014 and 2013 are set forth in the “Summary Compensation Table.” 2012 Omnibus Award Plan. In June 2012, our Board and stockholders adopted an equity award plan, which became effective upon the consummation ofthe 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 reserved for issuance or transfer pursuant to awardsunder the Omnibus Plan would increase on the first day of each calendar year beginning in 2013 and ending in 2022, 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-converted basis) on the last day of the immediatelypreceding calendar year, and (C) such smaller number of shares of common stock as determined by our Board. In February 2013, the CompensationCommittee and the Board acknowledged that 2,500,000 shares of common stock were added to the Omnibus Plan reserve effective January 1, 2013 inaccordance with the automatic share increase provision, and amended the Omnibus Plan to eliminate the automatic share increase for subsequent years. 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 acceleratedbasis. 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. 39 The types of awards we intend to grant under the Omnibus Plan are as follows: Cash Performance Awards. In February 2013, 2014, and 2015, the Board and the Compensation Committee adopted specific performance targetsand payout levels for each executive officer for the then-current fiscal year. Fiscal 2013 performance targets and payout levels for Mr. Homeister andfiscal 2014 performance targets and payouts for Mr. Geadelmann were determined upon commencement of employment with the Company. For fiscal2013 and 2014, each of Messrs. Homeister, Geadelmann, Kinder and Randazzo was eligible to earn target cash incentive compensation equal to 50%of his base salary, based on our Adjusted EBITDA for the year. The target incentive compensation was payable if we achieved the Adjusted EBITDAtarget set forth in our budget. Each of Messrs. Homeister, Geadelmann, Kinder and Randazzo was entitled to receive a partial incentive payment if weachieved at least 85% of our budgeted Adjusted EBITDA, and an incentive of up to double the target incentive amount if we achieved 115% of ourbudgeted Adjusted EBITDA and attained targeted sales goals. For fiscal 2013, Mr. Homeister’s cash incentive arrangement was pro-rated for thepartial year during which he was employed with the Company. For fiscal 2014, Mr. Geadelmann’s cash incentive arrangement was pro-rated for thepartial year during which he was employed with the Company. For fiscal 2015, Mr. Homeister was eligible to earn target cash incentive compensation equal to 75% of his base salary and each of Messrs.Geadelmann, Kinder and Randazzo was eligible to earn target cash incentive compensation equal to 50% of his base salary, all based on ourAdjusted EBITDA for the year. The target incentive compensation was payable if we achieved the Adjusted EBITDA target set forth in our budget.Each of Messrs. Homeister, Geadelmann, Kinder and Randazzo was entitled to receive a partial incentive payment if we achieved at least 85% of ourbudgeted Adjusted EBITDA, and an incentive of up to double the target incentive amount if we achieved 115% of our budgeted Adjusted EBITDAand attained targeted sales goals. The Compensation Committee reviews and certifies performance following the end of each fiscal year and may also consider discretionary factorswhen making awards. As a result of this review, for fiscal 2013, the Compensation Committee approved incentive awards in the amount of $30,000 toeach of Messrs. Homeister, Kinder and Randazzo, partially based on the forgoing performance measures and partially based on discretion. TheCompensation Committee did not approve any incentive awards based on the performance of the Company in fiscal 2014. For fiscal 2015, theCompensation Committee approved a payout of 55% of the target cash incentive compensation to Messrs. Homeister, Geadelmann, Kinder andRandazzo based on Company performance measures. The cash bonuses for which our named executive officers were eligible in 2015 are set forth in the “Grants of Plan Based Awards in Fiscal Year 2015”table. The actual cash bonuses earned by all of our named executive officers in 2015, 2014 and 2013 are set forth in the “Summary CompensationTable.” Equity and Equity-Linked Incentives. We intend to use equity incentive awards pursuant to our Omnibus Plan to link the interests of our namedexecutive officers with those of our stockholders. The Omnibus Plan provides that the administrator may grant or issue stock options and restrictedstock or any combination thereof. Stock options may be either nonqualified stock options or incentive stock options. We expect vesting of theseequity incentive awards to be dependent in whole or in part on continued employment, in order to encourage the retention of our named executiveofficers through the vesting period of the awards. In some cases, vesting may also be partially based on the annual appreciation of our common stock.In determining the size of inducement and ongoing equity awards to our named executive officers, our Compensation Committee considers a numberof internal factors, such as the relative job scope, the value of outstanding equity awards, individual performance history, prior contributions to us,and the size of prior awards, as well as external factors such as the levels of unvested equity awards held by our executive officers in relation to theirpeers at comparable companies. The Compensation Committee also intends to consider the foregoing factors for future awards. In January 2015, we granted 150,000 non-qualified stock options to Chris Homeister pursuant to the Omnibus Plan, which are subject to time-basedvesting over a five-year period. The equity grants made to our named executive officers in 2015 are set forth in the “Grants of Plan Based Awards inFiscal Year 2015” table and are discussed in the “Equity Grants” section of this item. Retirement Savings. All of our full-time employees, including our named executive officers, are eligible to participate in The Tile Shop 401(k)Retirement Plan. Employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit, which was $18,000 in 2015(or $24,000 for employees over 50), and to have the amount of this reduction contributed to the 401(k) plan. In 2015, 2014 and 2013, we made amatching contribution of $0.25 for every $1.00 that each applicable employee contributed to the 401(k) plan, up to a maximum of 5% of suchemployee’s salary. Each year, this matching contribution vests as to 20% of the aggregate matching contributions for such employee, such that all pastand future matching contributions will be vested after the employee has been employed by us for a period of five years. 40 Perquisites. From time-to-time, we have provided certain of our named executive officers with perquisites that we believe are reasonable. We do notview perquisites as a significant element of our comprehensive compensation structure, but do believe they can be useful in attracting, motivating, andretaining executive talent. We believe that these additional benefits may assist our executive officers in performing their duties and provide timeefficiencies for our executive officers in appropriate circumstances, and may consider providing additional perquisites in the future. There are no materialperquisites to our named executive officers that are contractual obligations pursuant to written agreements. All future practices regarding perquisites willbe approved and subject 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. We expect that our Compensation Committee will, where reasonablypracticable, seek to qualify the variable compensation paid to our executive officers for an exemption from the deductibility limitations of Section162(m), including by awarding stock options that satisfy the “qualified performance-based compensation” exception by virtue of being approved by aqualifying compensation committee of two or more outside directors, being issued pursuant to an underlying plan that sets the maximum number ofshares that can be granted to any person within a specified period and compensating recipients based solely on an increase in the stock price after thegrant date (i.e., the exercise price or base price is greater than or equal to the fair market value of the stock subject to the award on the grant date). Inapproving the amount and form of compensation for our executive officers in the future, our Compensation Committee will consider all elements of thecost to us of providing such compensation, including the potential impact of Section 162(m). However, our Compensation Committee may, in itsjudgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments areappropriate to attract and retain executive talent. Specifically, the restricted stock granted to Mr. Homeister in October 2013 was not “performancebased.” 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, 2015. Compensation Committee of the Board of Directors: Todd Krasnow, ChairmanPeter J. Jacullo IIIWilliam E. Watts 41 Summary Compensation Table The following table provides information regarding the compensation earned during the fiscal years ended December 31, 2013 through December 31,2015 by each of the named executive officers for each year in which each was a Named Executive Officer: Name and Principal Position FiscalYear Salary ($) Bonus ($) Stock Awards($) OptionAwards ($) Non-EquityIncentive PlanCompensation($) Total ($) Chris Homeister 2015 400,000 - - 592,479 165,000 1,157,479 Chief Executive Officer 2014 300,000 - - 294,430 - 594,430 2013 75,000 30,000 1,447,000 2,740,180 - 4,292,180 Kirk Geadelmann 2015 212,000 - - - 58,300 270,300 Chief Financial Officer 2014 81,932 - - 492,340 - 574,272 Joseph Kinder 2015 212,000 - - - 58,300 270,300 Senior Vice President -Operations 2014 208,000 - - - - 208,000 2013 200,000 30,000 - - - 230,000 Carl Randazzo 2015 212,000 - - - 58,300 270,300 Senior Vice President -Retail 2014 208,000 - - - - 208,000 2013 200,000 30,000 - - - 230,000 (1)The value of stock awards and options in this table represent the fair value of such awards granted or modified during the fiscal year, as computed inaccordance with FASB ASC 718. The assumptions used to determine the valuation of the awards are discussed in Note 9 to our consolidatedfinancial statements, included herein. (2)Represents incentive compensation paid based on the Company’s achievement of Adjusted EBITDA financial goals for fiscal 2015. See “Non-Equity Incentive Plan Compensation” below for additional discussion. (3)From October 1, 2013 through December 31, 2014, Mr. Homeister served as Chief Operating Officer. Effective January 1, 2015, Mr. Homeisterserves as the Company’s Chief Executive Officer and President. (4)Includes pro rata base salary received by Mr. Homeister for services as Chief Operating Officer from October 1, 2013 through December 31, 2013. (5)Mr. Geadelmann was not a named executive officer in fiscal 2013. (6)Includes pro rata base salary received by Mr. Geadelmann for services as Chief Financial Officer from August 12, 2014 through December 31, 2014. Grants of Plan-Based Awards for Fiscal 2015 The following table sets forth certain information regarding grants of plan-based awards during the fiscal year ended December 31, 2015: Name Grant Date Estimated possible payouts under non-equityincentive plan awards ($) All otheroptionawards:Number ofsecuritiesunderlyingoptions (#) Exercise orbase price ofoptionawards($/Sh) Grant datefairvalue ofstockand optionawards ($) Threshold ($) Target ($) Maximum ($) Chris Homeister 1/2/2015 - - - 150,000 8.73 592,479 Chris Homeister N/A 15,000 300,000 600,000 - - - Kirk Geadelmann N/A 5,300 106,000 212,000 - - - Joseph Kinder N/A 5,300 106,000 212,000 - - - Carl Randazzo N/A 5,300 106,000 212,000 - - - (1)Performance bonus based on the Company’s achievement of Adjusted EBITDA financial goals for fiscal 2015. Mr. Homeister was eligible to earntarget cash incentive compensation equal to 75% of his base salary, based on our Adjusted EBITDA for the year. Messrs. Geadelmann, Kinder andRandazzo were each eligible to earn target cash incentive compensation equal to 50% of their respective base salaries, based on our Adjusted EBITDAfor the year. The target incentive compensation was payable if we achieved the Adjusted EBITDA target set forth in our budget. Messrs. Homeister,Geadelmann, Kinder and Randazzo were each entitled to receive a partial incentive payment if we achieved at least 85% of our budgeted AdjustedEBITDA, and an incentive of up to double the target incentive amount if we achieved 115% of our budgeted Adjusted EBITDA and attained targetedsales goals. (1)(1)(2)(3)(4)(5)(6)(1)(2)(2)Represents options to acquire shares of common stock. These options will vest and become exercisable in five equal annual installments beginning onJanuary 2, 2016 based on continued service. 42 Offer Letter Agreements 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 as our Chief Operating Officer. Pursuant to the offer letter agreement, Mr. Homeister is entitled to receive severance benefitsif his employment is terminated by us without cause at any time or if he resigns for good reason, subject to execution of a full release in our favor. In suchan event, Mr. Homeister is entitled to continued payment of his base salary for six months and an additional payment in an amount equal to six times ourcontribution amount for the monthly health insurance premium for him during the month immediately prior to termination. Upon a change of control, Mr.Homeister is also entitled to full vesting acceleration with respect to any unvested equity awards if he is not offered employment by the successor entity,or if he is terminated without cause or constructively terminated prior to the first anniversary of the change of control. Effective January 1, 2015, weamended Mr. Homeister’s offer letter agreement to reflect his new title of Chief Executive Officer and President and to memorialize certain compensationchanges related to his promotion. All other terms of his offer letter agreement remain unchanged. In June 2014, as the result of arm’s length negotiations, we entered into an offer letter agreement with Mr. Geadelmann setting forth the terms andconditions of his employment as our Chief Financial Officer. Pursuant to the offer letter agreement, Mr. Geadelmann’s employment with the Company isat-will, and, upon a change in control, his unvested equity awards may be accelerated at the sole discretion of the Compensation Committee. 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 forththe terms and conditions of each such individual’s respective employment effective upon consummation of the Business Combination. Pursuant to theoffer letter agreements, each of Messrs. Kinder and Randazzo is entitled to receive severance benefits if his employment is terminated by us without causeat any time or if he resigns for good reason, subject to execution of a full release in our favor. In such an event, each of Messrs. Kinder and Randazzo isentitled to continued payment of his base salary for six months and an additional payment in an amount equal to six times our contribution amount forthe monthly health insurance premium for him during the month immediately prior to termination. Upon a change of control, each of Messrs. Kinder andRandazzo is also entitled to full vesting acceleration with respect to any unvested equity awards if he is not offered employment by the successor entity,or if he is terminated without cause or is constructively terminated prior to the first anniversary of the change of control. In connection with their offer letter agreements, each of Messrs. Homeister, Geadelmann, Kinder and Randazzo 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 one year thereafter.Notwithstanding the foregoing, we may, at our election, extend the term of the non-compete and non-solicit obligations to which Messrs. Kinder andRandazzo are subject to for a period of two years following termination of employment, provided that we provide the applicable individual withcontinued payment of his base salary for twelve months (in lieu of six months) and an additional payment in an amount equal to twelve times (in lieu ofsix times) our contribution amount for the monthly health insurance premium for him during the month immediately prior to termination. Non-Equity Incentive Plan Compensation In February 2015, the Board and the Compensation Committee adopted specific performance targets and payout levels for each executive officer for thethen-current fiscal year. For fiscal 2015, Mr. Homeister was eligible to earn target cash incentive compensation equal to 75% of his base salary and eachof Messrs. Geadelmann, Kinder and Randazzo was eligible to earn target cash incentive compensation equal to 50% of his base salary, all based on ourAdjusted EBITDA for the year. The target incentive compensation was payable if we achieved the Adjusted EBITDA target set forth in our budget. Eachof Messrs. Homeister, Geadelmann, Kinder and Randazzo was entitled to receive a partial incentive payment if we achieved at least 85% of our budgetedAdjusted EBITDA, and an incentive of up to double the target incentive amount if we achieved 115% of our budgeted Adjusted EBITDA and attainedtargeted sales goals. For fiscal 2015, the Compensation Committee approved a payout of 55% of the target cash incentive compensation to Messrs.Homeister, Geadelmann, Kinder and Randazzo based on Company performance measures. Equity Grants In January 2015, in connection with his promotion to Chief Executive Officer, the Board granted Mr. Homeister non-qualified stock options to purchase150,000 shares of the Company’s common stock pursuant to the Omnibus Plan. The stock options are exercisable at 100% of the fair market value of theCompany’s common stock on the effective date of grant, will vest in equal installments over a five-year period beginning on January 2, 2016, and expireseven years from the date of the grant. 43 We have provided for the acceleration of vesting of equity awards granted to each of Messrs. Homeister, Kinder and Randazzo in the event of a change ofcontrol of our Company. In the event of a change of control, if the individual is terminated without cause or is otherwise constructively terminated priorto the first anniversary of the change of control, the vesting of any unvested awards will be accelerated in full immediately prior to such termination. Webelieve that these acceleration opportunities will further align the interests of our executives with those of our stockholders by providing our executivesan opportunity to benefit alongside our stockholders in a corporate transaction. Outstanding Equity Awards at Fiscal Year-end for Fiscal 2015 The following table sets forth certain information regarding outstanding equity awards held by the named executive officers as of December 31, 2015: Option Awards Stock Awards Name GrantDate Number ofSecuritiesUnderlyingUnexercisedOptionsExercisable(#) Number ofSecuritiesUnderlyingOptionsUnexercisable(#) EquityIncentivePlanAwards:Number ofSecuritiesUnderlyingUnexercisedUnearnedOptions (#) OptionExercisePrice ($) OptionExpirationDate Number ofShares orUnits ofStock ThatHave NotVested (#) MarketValue ofShares orUnits ofStock ThatHave notVested ($) Chris Homeister 10/1/2013 100,000 100,000 - 28.94 10/1/2023 - - Chris Homeister 10/1/2013 - - - - - 25,000 410,000 Chris Homeister 2/13/2014 10,000 40,000 - 13.17 2/13/21 - - Chris Homeister 1/2/2015 - 150,000 - 8.73 1/2/22 - - Kirk Geadelmann 8/12/2014 20,000 80,000 - 10.93 8/12/21 - - Joseph Kinder 8/21/2012 192,500 55,000 82,500 10.00 8/21/22 - - Carl Randazzo 8/21/2012 192,500 55,000 82,500 10.00 8/21/22 - - (1)These options become exercisable in two equal annual installments beginning on October 1, 2016. (2)These shares of restricted stock will become unrestricted in two equal annual installments beginning on October 1, 2016. (3)These options become exercisable in four equal annual installments beginning on February 13, 2016. (4)These options become exercisable in five equal annual installments beginning on January 2, 2016. (5)These options become exercisable in four equal annual installments beginning on August 12, 2016. (6)These options become exercisable on August 21, 2016. (7)These options become exercisable on August 21, 2016 provided that the Company meets or exceeds certain annual stock price increase targets. Option Exercises and Stock Vested for Fiscal 2015 None of the named executive officers exercised options during the fiscal year ended December 31, 2015. The following named executive officer hadrestricted common stock vest during the fiscal year ended December 31, 2015. Stock Awards Name Number of SharesAcquired Value Realized onVesting ($) Chris Homeister 12,500 151,625 Pension Benefits The Company did not sponsor any defined benefit pension or other actuarial plan for its named executive officers during the fiscal year ended December31, 2015. Nonqualified Deferred Compensation No nonqualified deferred compensation was paid to or earned by the named executive officers during the fiscal year ended December 31, 2015. 44(1)(2)(3)(4)(5)(6)(7)(6)(7) 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, with the exception of Mr.Geadelmann, may be eligible to receive severance benefits in the event that his employment is terminated by the Company without cause or by thenamed executive officer for good reason. Additionally, each named executive officer, with the exception of Mr. Geadelmann, is entitled to full vesting ofany outstanding equity awards in the event of a change of control, if the individual is not offered employment by the successor entity, or if the individualis terminated without cause or is otherwise constructively terminated prior to the first anniversary of the change of control. Upon a change of control, Mr.Geadelmann’s unvested equity awards may be accelerated at the sole discretion of the Compensation Committee. The amounts payable to each of the named executive officers, assuming that each individual's employment had terminated on December 31, 2015, undereach scenario are as follows: Name In Connectionwith a Change inControl ($) By CompanyNot for Cause ($) By NEO forGood Reason ($) Chris Homeister 3,126,737 205,118 205,118 Kirk Geadelmann - - - Joseph Kinder 788,168 111,118 111,118 Carl Randazzo 783,050 106,000 106,000 (1)Represents lapse of the risks of forfeiture on all outstanding shares of restricted stock, in the case of Mr. Homeister, and full vesting of all outstandingoptions to purchase common stock, in the case of the other named executive officers. (2)Represents payments of six months of base salary and company-contributed health-insurance costs, with the exception of Mr. Randazzo who doesnot participate in company-sponsored health insurance. (3)In the event of a change in control, Mr. Geadelmann’s unvested equity awards may be accelerated at the sole discretion of the CompensationCommittee. 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. On August 21, 2014, each of Messrs. Kamin, Krasnow, Jacullo, Suttin, and Watts elected to receive compensation fully in the form of restricted commonstock granted pursuant to the Omnibus Plan upon the anniversary of consummation of the Business Combination. The number of shares of our restrictedcommon stock granted were equal to the quotient obtained by dividing (i) the amount of the annual fee payable to such non-employee director in theform 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. Messrs. Kamin, Krasnow, Jacullo, and Suttin each received 9,270 shares of restricted stock. Mr. Watts received 23,176 sharesof restricted stock. The risks of forfeiture for the restricted stock grants lapsed on August 21, 2015. Upon his election to the Board on September 22, 2014, Mr. Cook elected to receive compensation fully in the form of restricted common stock grantedpursuant to the Omnibus Plan upon anniversary of consummation of the Business Combination. Mr. Cook received 8,146 shares of restricted stock asdirector compensation in accordance with the above-described terms pro-rated to reflect his period of service on the Board. The risks of forfeiture for thisrestricted stock grant lapsed on August 21, 2015. On August 21, 2015, Messrs. Cook, Krasnow, Jacullo, Rucker and Watts elected to receive compensation fully in the form of restricted common stockgranted pursuant to the Omnibus Plan upon the anniversary of consummation of the Business Combination. Messrs. Kamin and Suttin had elected toreceive compensation as one-half restricted stock and one-half cash compensation, payable quarterly. The number of shares of our restricted commonstock granted were equal to the quotient obtained by dividing (i) the amount of the annual fee payable to such non-employee director in the form ofrestricted stock, as set forth above, by (ii) the average closing price on NASDAQ of our common stock over 30 trading days immediately preceding thedate of grant. Messrs. Cook, Krasnow, Jacullo, and Rucker each received 7,205 shares of restricted stock. Messrs. Kamin and Suttin each received 3,602shares of restricted stock. Mr. Watts received 18,012 shares of restricted stock. The risks of forfeiture for the restricted stock grants will lapse on August21, 2016, contingent upon the applicable non-employee director’s continued service on our Board. If any restricted stock remains for which the risks offorfeiture have not lapsed at the time of a non-employee director’s termination of service on the Board, the Company has the option to purchase suchshares of restricted stock at a price set forth in the agreements governing such restricted stock. As of December 31, 2015, Messrs. Kamin and Suttin hadeach received one payment of cash compensation for the period of August 21, 2015 through November 30, 2015. 45(1)(2)(2)(3) Director Compensation Table for Fiscal 2015 The following table summarizes the compensation paid to each non-employee director in the fiscal year ended December 31, 2015: Name Fees Earnedor Paid inCash ($) Stock Awards($) All OtherCompensation($) Total ($) Christopher T. Cook - 89,702 - 89,702 Peter H. Kamin 13,978 44,845 - 58,823 Todd Krasnow - 89,702 - 89,702 Peter J. Jacullo III - 89,702 - 89,702 Robert A. Rucker - 89,702 34,635 124,337 Adam L. Suttin 13,978 44,845 - 58,823 William E. Watts - 224,249 - 224,249 (1)The table reflects the grant date fair value of the sole award to each director in fiscal 2015, as discussed in the narrative above. (2)The aggregate number of shares of restricted stock held by each of the directors listed in the table above as of December 31, 2015 was as follows:Messrs. Cook, Krasnow, Jacullo, and Rucker 7,205 shares each, Messrs. Kamin and Suttin 3,602 shares each, and Mr. Watts 18,012 shares. Theseshares of restricted stock were granted to the directors on August 21, 2015. The risks of forfeiture will lapse in full on August 21, 2016. (3)Represents one payment of $13,978 paid to each of Messrs. Kamin and Suttin in fiscal year 2015 for the period from August 21, 2015 to November30, 2015 due to the election to receive in cash one-half of director compensation for the period from August 21, 2015 to August 21, 2016. (4)Represents payments received by Mr. Rucker as an employee of the Company from January 1, 2015 through July 31, 2015 and as a consultant to theCompany from August 1, 2015 through December 31, 2015, pursuant to the amendment to terms of employment entered into between the Companyand Mr. Rucker as of January 1, 2015 in connection with his transition away from the role of Chief Executive Officer and President. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee currently consists of Messrs. Jacullo, Krasnow, and Watts and consisted of these same members in the fiscal year endedDecember 31, 2015. None of the individuals who currently serve as a member of our Compensation Committee has ever been an executive officer oremployee of ours. None of our executive officers currently serves, nor in the past year has served, as a member of the Board or Compensation Committee(or other Board committee performing equivalent functions) of any entity that has one or more executive officers serving on our Board or CompensationCommittee. 46(1)(2)(3)(4)(3) 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 19, 2016, 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 that are currently exercisable or exercisable within 60 days ofFebruary 19, 2016. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons named in the tablebelow have sole voting and investment power with respect to all shares of common stock shown that they beneficially own, subject to communityproperty laws where applicable. The information does not necessarily indicate beneficial ownership for any other purpose. Common stock subject to options currently exercisable or exercisable within 60 days of February 19, 2016 are deemed to be outstanding for computingthe percentage ownership of the person holding these options and the percentage ownership of any group in which the holder is a member but are notdeemed outstanding for computing the percentage of any other person. We have based our calculation of the percentage of beneficial ownership based on 51,437,973 shares of our common stock outstanding on February 19,2016. 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. Name of Beneficial Owner Number of SharesBeneficially Owned Percent 5% Stockholders: Nabron International , Inc. 6,932,537 13.5%Tile Shop, Inc. 5,802,428 11.3%JWTS, Inc. 4,441,180 8.6%Tremblant Capital Group 4,704,484 9.1%Franklin Resources, Inc. 2,935,979 5.7%Executive Officers and Directors: Chris Homeister 200,000 * Kirk Geadelmann 20,000 * Joseph Kinder 192,500 * Carl Randazzo 192,500 * Chisopher T. Cook 75,351 * Peter J. Jacullo III 4,677,274 9.1%Peter H. Kamin 1,292,258 2.5%Todd Krasnow 188,704 * Robert A. Rucker 6,059,633 11.8%Adam L. Suttin 456,450 * William E. Watts 232,108 * All Executive Officers and Directors as a Group (11 persons) 13,586,778 26.1% * Represents beneficial ownership of less than one percent (1%) of the outstanding common stock. (1) Based on a Form 4 filed with the SEC on November 12, 2015 by Nabron International, Inc., a Bahamas company (“Nabron”), Raymond Long SingTang (“Tang”), Jill Marie Franklin (“Franklin”), and Louise Mary Garbarino (“Garbarino”). Tang, Franklin, and Garbarino are directors of Nabron andmay be deemed to have shared voting and investment power over the securities held by Nabron. The business address of Nabron is 2nd Floor, Le Princede Galles, 3-5 Avenue des Citronniers, Monaco, 09 MC98000. 47(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(3)(11)(12)(13)(2) (14)(15)(16) (2) Based on 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”) and on Form 5 filed with the SEC on February 9, 2016 by Rucker. Rucker is the sole director of TS, Inc. and may be deemed to have solevoting and investment power over the securities held by TS, Inc. (3) Based on 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. The business addressof JWTS is c/o Peter J. Jacullo III 61 High Ridge Avenue, Ridgefield, Connecticut 06877. (4) Based on a schedule 13G/A filed with the SEC on February 16, 2016 by Tremblant Capital Group (“Tremblant”). The business address of Tremblant is767 Fifth Ave, New York, New York, 10153. (5) Based on a Schedule 13G/A filed with the SEC on February 10, 2016 by Franklin Resources, Inc. (“FRI”), Charles B. Johnson, Rupert H. Johnson, andFranklin Advisers, Inc. FRI delegates investment management authority over and voting rights with respect to certain of its beneficially owned securitiesto certain of its Investment Management Subsidiaries pursuant to investment management contracts. When FRI delegates such voting rights, FRI treatsthe Investment Management Subsidiary as having sole investment discretion or voting authority, as the case may be, unless the agreement specifiesotherwise. Accordingly, each Investment Management Subsidiary reports on Schedule 13G that it has sole investment discretion and voting authorityover the securities covered by any such investment management agreement, unless otherwise noted in the Schedule 13G. As a result, for purposes of Rule13d-3 under the Act, the Investment Management Subsidiaries listed in the Schedule 13G may be deemed to be the beneficial owners of the securitiesreported. The business address of FRI is One Franklin Parkway, San Mateo, CA 94403-1906. (6) Includes 25,000 shares of restricted common stock held by Mr. Homeister and options to purchase 150,000 shares of common stock that are currentlyexercisable or will become exercisable within 60 days of February 19, 2016. (7) Represents options to purchase 20,000 shares of common stock held by Mr. Geadelmann that are currently exercisable or will become exercisablewithin 60 days of February 19, 2016. (8) Represents options to purchase 192,500 shares of common stock held by Mr. Kinder that are currently exercisable or will become exercisable within60 days of February 19, 2016. (9) Represents options to purchase 192,500 shares of common stock held by Mr. Randazzo that are currently exercisable or will become exercisablewithin 60 days of February 19, 2016. (10) Includes 7,205 shares of restricted common stock held by Mr. Cook. (11) Includes 7,205 shares of restricted common stock held by Mr. Jacullo. (12) Includes 3,602 shares of restricted common stock held by Mr. Kamin, 379,059 shares of common stock held by the Peter H. Kamin Revocable Trustdated February 2003 (“2003 Trust”), 228,216 shares of common stock held by the Peter H. Kamin Childrens Trust dated March 1997 (“1997 Trust”),135,361 shares of common stock held by the Peter H. Kamin GST Trust (“GST”), 160,723 shares of common stock held by 3K Limited Partnership (“3K”and, together with Mr. Kamin, 2003 Trust, 1997 Trust, GST, and 3K, the “Kamin Entities”), and 100 shares of common stock held by Mr. Kamin’s son. Mr.Kamin is the sole trustee of the 2003 Trust, the sole trustee of the 1997 Trust, a trustee of GST, and sole general partner of 3K and may be deemed to havesole voting and investment power over the securities held by these entities. Mr. Kamin disclaims beneficial ownership of the shares of common stock heldby his son, except to the extent of his pecuniary interest therein. (13) Includes 7,205 shares of restricted common stock held by Mr. Krasnow, 2,600 shares of common stock held by Mr. Krasnow’s spouse, 10,000 sharesof common stock held by Hobart Road Charitable Remainder CRUT (“Hobart Road”), 5,000 shares of common stock held by the Todd & DeborahKrasnow Charitable Remainder CRUT (“CRUT”), and 15,000 shares of common stock held by the Todd & Deborah Krasnow Foundation (“Foundation”).Mr. Krasnow is a trustee of each of Hobart Road, the CRUT and the Foundation and may be deemed to have sole voting and investment power over thesecurities held by these entities. Mr. Krasnow disclaims beneficial ownership of the shares of common stock held by his spouse, except to the extent of hispecuniary interest therein. (14) Includes 7,205 shares of restricted common stock held by Mr. Rucker that are subject to a repurchase option held by the Company. (15) Includes 3,602 shares of restricted common stock held by Mr. 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 the trust,except to the extent of his pecuniary interest therein. (16) Includes 18,012 shares of restricted common stock held by Mr. Watts. 48 EQUITY COMPENSATION PLAN INFORMATION The following table presents our equity compensation plan information as of December 31, 2015: Number ofsecurities to beissued uponexercise ofoutstanding options Weighted-averageexercise price ofoutstanding options($) Number ofsecuritiesremainingavailable forfuture issuanceunder equitycompensationplans Equity compensation plans approved by stockholders 2,624,945 13.07 1,790,031 Equity compensation plans not approved by stockholders - - - TOTAL 2,624,945 13.07 1,790,031 (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 NASDAQ rules and regulations, a majority of the members of a listed company’s board of directors must qualify as “independent,” asaffirmatively determined by the Board. Based upon information requested from and provided by each director concerning his background, employment,and affiliations, including family relationships, we have determined that Messrs. Cook, Jacullo, Kamin, Krasnow, Suttin, and Watts, representing six ofour eight directors, do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of adirector and that each of these directors will be “independent” as that term is defined under the applicable SEC rules and regulations and the NASDAQlisting requirements and rules. Mr. Homeister, the Company’s Chief Executive Officer and President, is not an independent director by virtue of hisemployment with the Company. Mr. Rucker, a prior Chief Executive Officer of the Company, is not an independent director by virtue of his prioremployment with the Company. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Other than as described below, since the beginning of our 2015 fiscal year, there have been no transactions, or series of transactions to which we were aparticipant 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 in Item404 of Item S-K of the 1934 Act and interpreted by the SEC in related guidance (collectively, the “Related Persons”) had or will have a direct orindirect material interest. We employ Adam Rucker, son of Robert A. Rucker, a member of our Board of Directors, as a Director of Information Technology. In fiscal 2015, we paidMr. Rucker a total of $127,158, consisting of $104,583 in base salary and $22,575 as a cash bonus, which cash bonus was earned in fiscal 2015 and paidin fiscal 2016. In February 2015, we granted an option to purchase 8,000 shares of our common stock to Mr. Rucker at an exercise price per share of $8.45that vests over a five year period. Mr. Rucker was granted a second award in July 2015 of 1,916 stock options at a strike price of $14.19 that vest over fiveyears. The combined grant date fair value of these awards was $43,538. Mr. Rucker also received the standard benefits provided to other Companyemployees during 2015. 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. From time to time, the Company employs related persons and other family membersof its officers and directors. Consistent with the policy described below, all such employment arrangements involving amounts exceeding $50,000 arereviewed by the Audit Committee. The Company may also sell products to related persons and related persons may purchase products or services fromCompany vendors for individual use. If such arrangements fall within the terms of the policy described below, they will also be reviewed by the AuditCommittee. 49(1) POLICIES AND PROCEDURES FOR RELATED PERSON TRANSACTIONS Effective upon consummation of the Business Combination, our Board adopted a written related person transaction policy that sets forth the policies andprocedures for the review and approval or ratification of related person transactions. This policy is administered by our Audit Committee and covers anytransaction, arrangement, or relationship, or any series of similar transactions, arrangements, or relationships, in which we were or are to be 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 covers related persontransactions in which the amount involved exceeds $50,000, the policy states that related person transactions in which the amount involved exceeds$120,000 are required to be disclosed in applicable filings as required by the SEC rules and regulations. Our Board determined to set the threshold forapproval of related person transactions in the policy at an amount lower than that which is required to be disclosed under the SEC rules and regulationsbecause we believe that it is appropriate for our Audit Committee to review transactions or potential transactions in which the amount involved exceeds$50,000, as opposed to $120,000. Pursuant to this policy, our Audit Committee will consider (a) the relevant facts and circumstances of the related persontransaction, including if the related person transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelatedthird-party, (b) the extent of the related person’s interest in the related person transaction, (c) whether the related person transaction contravenes theconflict of interest and corporate opportunity provisions of our Code of Business Conduct and Ethics, (d) whether the relationship underlying the relatedperson transaction at issue is believed to serve the best interest of us and our stockholders, and (e) the effect that a director’s related person transactionmay have on such director’s status as an independent member of the Board and eligibility to serve on committees of the Board pursuant to SEC rules andNASDAQ listing standards. Each director, director nominee and executive officer will present to our Audit Committee each proposed related person transaction to which suchdirector, director nominee or executive officer is a party, including all relevant facts and circumstances relating thereto, and will update the AuditCommittee as to any material changes to any related person transaction. All related person transactions may only be consummated if our AuditCommittee has approved or ratified such transaction in accordance with the guidelines set forth in the policy. Related party transactions do not include:(i) the payment of compensation by the Company to an executive officer or director of the Company; (ii) indebtedness due from a related person fortransactions in the ordinary course of business; (iii) a transaction in which the interest of the related person arises solely from ownership of a class ofsecurities of the Company where all holders of that class of securities receive the same benefit, on a pro-rata basis, from the transaction; or (iv) atransaction in which the rates or charges involved are determined by competitive bids. Additionally, certain types of transactions have been pre-approvedby our audit committee under the policy as not involving a material interest. These pre-approved transactions include transactions in the ordinary courseof business where the related party’s interest arises only: (a) from his or her position as a director of another entity that is party to the transaction; (b) froman 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 tocertain limitations. No director will be permitted to participate in the approval of a related person 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 in fiscal year 2015 and 2014: 2015 2014 Audit Fees $555,000 $671,532 Audit-Related Fees — — Tax Fees — — All Other Fees — — $555,000 $671,532 (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. 50(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. For fiscal 2015, all audit and non-audit services performed by our independentauditors were pre-approved in accordance with such pre-approval policies. 51 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 Firm53(ii)Consolidated Balance Sheets for the years ended December 31, 2015 and 201455(iii)Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 201356(iv)Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2015, 2014 and 201357(iv)Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014 and 201358(v)Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 201359(vi)Notes to Consolidated Financial Statements60 2.Financial Statement Schedules The information required to be disclosed within Schedule II – Valuation and Qualifying Accounts is provided within the Consolidated FinancialStatements of the Company, filed as part of this Form 10-K. 3.Exhibits. See “Exhibit Index” immediately following the signature page of this Form 10-K 52 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders ofTile Shop Holdings, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Tile Shop Holdings, Inc. and Subsidiaries as of December 31, 2015 and 2014, and therelated consolidated statements of operations, comprehensive income (loss), stockholders' equity (deficit) and cash flows for each of the three years in theperiod ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express anopinion 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 audits provide 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, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years inthe period ended December 31, 2015, in conformity 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. andSubsidiaries internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2016 expressedan unqualified opinion thereon. /s/ Ernst & Young LLPMinneapolis, MNFebruary 26, 2016 53 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders ofTile Shop Holdings, Inc. and Subsidiaries We have audited Tile Shop Holdings, Inc. and Subsidiaries (the Company) internal control over financial reporting as of December 31, 2015, based oncriteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013framework) (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 internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness 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, 2015, 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 balancesheets of Tile Shop Holdings, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations,comprehensive income (loss), stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2015 of Tile ShopHoldings, Inc. and Subsidiaries and our report dated February 26, 2016 expressed an unqualified opinion thereon. /s/ Ernst & Young LLPMinneapolis, MinnesotaFebruary 26, 2016 54 Tile Shop Holdings, Inc. and SubsidiariesConsolidated Balance SheetsAs of December 31, 2015 and 2014(dollars in thousands, except share and per share data) December 31, 2015 December 31, 2014 Assets Current assets: Cash and cash equivalents $10,330 $5,759 Restricted cash 219 219 Trade receivables, net 1,966 1,712 Inventories 69,878 68,857 Prepaid inventory 568 345 Income tax receivable 735 4,937 Other current assets, net 3,656 2,791 Total Current Assets 87,352 84,620 Property, plant and equipment, net 135,115 139,294 Deferred tax assets 20,846 26,589 Other assets 2,122 1,687 Total Assets $245,435 $252,190 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $14,584 $13,759 Current portion of long-term debt 5,095 3,595 Income tax payable 1,101 - Other accrued liabilities 19,327 14,798 Total Current Liabilities 40,107 32,152 Long-term debt, net 51,255 88,525 Capital lease obligation 797 890 Deferred rent 34,983 33,163 Other long-term liabilities 3,092 3,765 Total Liabilities 130,234 158,495 Stockholders’ Equity: Common stock, par value $0.0001; authorized: 100,000,000 shares; issued and outstanding: 51,437,973and 51,314,005 shares, respectively 5 5 Preferred stock, par value $0.0001; authorized: 10,000,000 shares; issued and outstanding: 0 shares - - Additional paid-in-capital 180,192 174,371 Accumulated deficit (64,985) (80,681)Accumulated other comprehensive (loss) income (11) - Total Stockholders' Equity 115,201 93,695 Total Liabilities and Stockholders' Equity $245,435 $252,190 See accompanying Notes to Consolidated Financial Statements. 55 Tile Shop Holdings, Inc. and SubsidiariesConsolidated Statements of OperationsFor the years ended December 31, 2015, 2014 and 2013(dollars in thousands, except share and per share data) 2015 2014 2013 Net sales $292,987 $257,192 $229,564 Cost of sales 89,377 78,300 68,755 Gross profit 203,610 178,892 160,809 Selling, general and administrative expenses 174,384 157,316 127,731 Income from operations 29,226 21,576 33,078 Interest expense 2,584 3,141 2,581 Change in fair value of warrants - - 54,219 Other income (expense) 130 (506) 4 Income (loss) before income taxes 26,772 17,929 (23,718)Provision for income taxes 11,076 7,382 11,942 Net income (loss) $15,696 $10,547 $(35,660) Income (loss) per common share: Basic $0.31 $0.21 $(0.72)Diluted 0.31 0.21 (0.72) Weighted average shares outstanding: Basic 51,161,059 51,015,354 49,600,396 Diluted 51,304,982 51,029,790 49,600,396 See accompanying Notes to Consolidated Financial Statements. 56 Tile Shop Holdings, Inc. and SubsidiariesConsolidated Statements of Comprehensive Income (Loss)For the years ended December 31, 2015, 2014 and 2013(dollars in thousands) 2015 2014 2013 Net income (loss) $15,696 $10,547 $(35,660)Other comprehensive (loss) income Currency translation adjustment (11) - - Other comprehensive (loss) income (11) - - Comprehensive income (loss) $15,685 $10,547 $(35,660) See accompanying Notes to Consolidated Financial Statements. 57 Tile Shop Holdings, Inc. and SubsidiariesConsolidated Statements of Stockholders’ Equity (Deficit)(dollars in thousands, except share data) Common stock Shares Amount Additionalpaid-in-capital Treasury units Retained(deficit)earnings Accumulatedothercomprehensive(loss) income Total Balance at December 31, 2012 43,177,822 $4 $9,434 $- $(55,568) $- $(46,130)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 - (91,228) - 78,496 Issuance of restricted shares 76,066 - - - - - - Stock based compensation - - 4,617 - - - 4,617 Stock option exercises 8,219 - 35 - - - 35 Net income - - - - 10,547 - 10,547 Balance at December 31, 2014 51,314,005 5 174,371 - (80,681) - 93,695 Issuance of restricted shares 54,036 - - - - - - Stock based compensation - - 5,545 - - - 5,545 Stock option exercises 69,932 - 276 - - - 276 Foreign currency translationadjustments - - - - - (11) (11)Net income - - - - 15,696 - 15,696 Balance at December 31, 2015 51,437,973 $5 $180,192 $- $(64,985) $(11) $115,201 See accompanying Notes to Consolidated Financial Statements. 58 Tile Shop Holdings, Inc. and SubsidiariesConsolidated Statements Cash FlowsFor the years ended December 31, 2015, 2014 and 2013(dollars in thousands) For the years ended, 2015 2014 2013 Cash Flows From Operating Activities Net income (loss) $15,696 $10,547 $(35,660)Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 22,236 19,925 14,316 Amortization of debt issuance costs 308 210 148 Debt issuance cost writeoff 194 - - Loss on disposals of property, plant and equipment 143 633 101 Change in fair value of warrants - - 54,219 Deferred rent 2,785 7,364 6,977 Stock based compensation 5,545 4,617 4,680 Deferred income taxes 5,743 1,190 3,788 Changes in operating assets and liabilities: Trade receivables (254) (514) (189)Inventories (1,021) (1,101) (20,866)Prepaid expenses and other current assets (1,387) 3,675 2,173 Accounts payable 945 (5,174) 2,013 Income tax receivable/ payable 5,304 4,591 (6,999)Payment of deferred compensation - - (6,171)Accrued expenses and other liabilities 4,027 1,238 2,681 Net cash provided by operating activities 60,264 47,201 21,211 Cash Flows From Investing Activities Proceeds from cash surrender value of life insurance policy - 687 - Change in value of life insurance policy - (10) (86)Purchases of property, plant and equipment (18,994) (41,229) (52,869)Net cash used in investing activities (18,994) (40,552) (52,955) Cash Flows From Financing Activities Release of restricted cash - 766 2,471 Payments of long-term debt and capital lease obligations (124,025) (26,412) (3,714)Advances on line of credit 88,000 23,000 25,566 Repurchase of warrants - - (30,108)Repurchase of common units - - (46,000)Proceeds from exercise of warrants - - 82,413 Proceeds from exercise of stock options 276 35 100 Debt issuance costs (968) - (300)Security deposits 29 (40) 90 Net cash (used in) provided by financing activities (36,688) (2,651) 30,518 Effect of exchange rate changes on cash (11) - - Net change in cash 4,571 3,998 (1,226)Cash and cash equivalents beginning of period 5,759 1,761 2,987 Cash and cash equivalents end of period $10,330 $5,759 $1,761 Supplemental disclosure of cash flow information 2015 2014 2013 Increase (decrease) in fixed assets through accounts payable $(120) $(3,934) $4,783 Cash paid for interest 2,692 3,146 2,521 Cash paid for income taxes, net of refunds 22 2,792 15,006 See accompanying Notes to Consolidated Financial Statements 59 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 1: Summary of Significant Accounting Policies Nature of Business: 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.” The Company offers a wide selection of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in retail locationsacross much of the United States. The Company’s assortment includes over 4,000 products from around the world that consist of natural stone, ceramic,porcelain, glass, and metal tiles. Natural stone products including marble, granite, quartz, sandstone, travertine, slate, and onyx tiles. The majority of thetile products are sold under the Company's proprietary Rush River and Fired Earth brands. The Company purchases tile products, accessories and toolsdirectly from its network of vendors. The Company manufactures its own setting and maintenance materials, such as thinset, grout, and sealers under theSuperior brand name. As of December 31, 2015, the Company operated 114 stores in 31 states, with an average size of approximately 21,800 square feet.The Company also sells products on its website. Basis of Presentation: The consolidated financial statements of Holdings include the accounts of its wholly owned subsidiaries, and variable interest entities. See Note 11, “NewMarket Tax Credit,” for the discussion of financing arrangements involving certain entities that are variable interest entities that are included in theseconsolidated financial statements. All significant intercompany transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting practices of the United States (GAAP) requires management tomake estimates and assumptions that affect the amounts reported in the consolidated financial statements. The Company bases its estimates andjudgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amount of assets andliabilities reported on the Company's balance sheets and the amounts of income and expenses reported for each of the periods presented are affected byestimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition and related reserves for sales returns, usefullives of property, plant and equipment, determining impairment on long-lived assets, valuation of inventory, compensation expense on stock basedcompensation plans and income taxes. Actual results may differ from these estimates. Cash and Cash Equivalents: The Company had cash and cash equivalents of $10.3 million and $5.8 million at December 31, 2015, and 2014, respectively. The Company considersall highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents. The Company accepts a range of debitand credit cards, and these transactions are generally transmitted to a bank for reimbursement within 24 hours. The payments due from the banks for thesedebit and credit card transactions are generally received, or settle, within 24 to 48 hours of the transmission date. The Company considers all debit andcredit card transactions that settle in less than seven days to be cash and cash equivalents. Amounts due from the banks for these transactions classified ascash and cash equivalents totaled $1.8 million and $1.9 million at December 31, 2015 and December 31, 2014, respectively. Restricted Cash Cash and cash equivalents that are restricted as to withdrawal or are under the terms of certain contractual arrangements are included in the restrictedbalance on the balance sheet. Trade Receivables: Trade receivables are carried at original invoice amount less an estimate made for doubtful accounts. Management determines the allowance fordoubtful accounts on a specific identification basis as well as by using historical experience applied to an aging of accounts. Trade receivables arewritten off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. The allowance for doubtfulaccounts was $113,500 and $69,500 as of December 31, 2015 and 2014, respectively. The Company does not accrue interest on accounts receivable. 60 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Inventories: Inventories are stated at the lower of cost (determined using the weighted average cost method) or market. Inventories consist primarily of merchandiseheld for sale. Inventories were comprised of the following at December 31, 2015 and 2014: (in thousands) 2015 2014 Finished goods $59,503 $58,323 Raw materials 2,681 2,356 Finished goods in transit 7,694 8,178 Total $69,878 $68,857 The Company provides provisions for losses related to shrinkage and other amounts that are not otherwise expected to be fully recoverable. Theseprovisions are calculated based on historical shrinkage, selling price, margin and current business trends. Income Taxes: The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financialstatements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis ofassets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree towhich tax assets and credit carry forwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such taxassets and loss carry forwards 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. The Company records interest and penalties relating to uncertain tax positions in income tax expense. As of December 31, 2015 and 2014, the Companyhas not recognized any liabilities for uncertain tax positions nor has the Company accrued interest and penalties related to uncertain tax positions. Revenue Recognition: The Company recognizes sales at the time that the customer takes possession of the merchandise or when final delivery of the product has occurred. TheCompany recognizes service revenue, which consists primarily of freight charges for home delivery, when the service has been rendered. The Company isrequired to charge and collect sales and other taxes on sales to the Company's customers and remit these taxes back to government authorities. Totalrevenues do not include sales tax because the Company is a pass-through conduit for collecting and remitting sales tax. Sales are reduced by anallowance for anticipated sales returns that the Company estimates based on historical returns. The process to establish a sales return reserve containsuncertainties because it requires management to make assumptions and to apply judgment to estimate future returns and exchanges. The customer mayreceive a refund or exchange the original product for a replacement of equal or similar quality for a period of six months from the time of originalpurchase. Products received back under this policy are reconditioned pursuant to state laws and resold. The Company generally requires customers to pay a deposit when purchasing inventory that is not regularly carried at the store location, or not currentlyin stock. These deposits are included in other accrued liabilities until the customer takes possession of the merchandise. 61 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Sales Return Reserve Customers may return purchased items for an exchange or refund. The Company records a reserve for estimated product returns, net of cost of sales basedon historical return trends together with current product sales performance. A summary of activity in the Company's sales returns reserve are as follows (inthousands): 2015 2014 2013 Balance at beginning of year $3,292 $2,850 $1,815 Additions for sales returns 26,522 28,517 25,387 Deductions from reserve (27,033) (28,075) (24,352)Balance at end of year $2,781 $3,292 $2,850 Cost of Sales and Selling, General and Administrative Expenses The following table illustrates the primary costs classified in each major expense category: Cost of Sales● Cost of product sold;● Freight expenses to bring products into the Company's distribution centers;● Custom and duty expenses;● Customer shipping and handling expenses;● Physical inventory losses;● Costs incurred at distribution centers in connection with the receiving process;● Labor and overhead costs incurred to manufacture inventory Selling, General & Administrative Expenses (SG&A)● All other payroll and benefit costs for retail, corporate and distribution employees;● Occupancy, utilities and maintenance costs of retail and corporate facilities;● Freight expenses to move inventory from the Company's distribution centers to the Company's stores;● Depreciation and amortization;● Advertising costs Stock Based Compensation: The Company recognizes expense for its stock-based compensation based on the fair value of the awards that are granted. Compensation expense isrecognized only for those awards expected to vest, with forfeitures estimated at the date of grant based on historical experience and futureexpectations. The Company may issue incentive awards in the form of stock options, restricted stock awards and other equity awards to employees andnon-employee directors. Compensation cost is recognized ratably over the requisite service period of the related stock-based compensation 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 theconsolidated results of the Company and accordingly, the Company has concluded it has one reportable segment. Advertising Costs: Advertising costs were $6.5 million, $5.7 million and $6.2 million, for the years ended December 31, 2015, 2014 and 2013, respectively, and are includedin selling, general and administrative expenses in the consolidated statements of operations. The Company’s advertising consists primarily of digitalmedia, direct marketing, event and traditional print media that is expensed at the time the media is distributed. At December 31, 2015 and 2014, therewere $0.6 million and $0.1 million in advertising costs included in the consolidated balance sheets under other current assets, respectively. 62 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Pre-opening costs: The Company’s pre-opening costs are those typically associated with the opening of a new store and generally include rent expense, payroll costs andpromotional costs. The Company expenses pre-opening costs as incurred which are recorded in selling, general and administrative expenses. During theyears ended December 31, 2015, 2014 and 2013, the Company reported pre-opening costs of $0.5 million, $1.5 million and $2.4 million, respectively. Property, Plant and Equipment: Property, plant equipment and leasehold improvements are recorded at cost. Improvements are capitalized while repairs and maintenance costs arecharged to selling, general and administrative expenses when incurred. Property, plant and equipment are depreciated or amortized using the straight-line method over each asset’s estimated useful life. Leasehold improvements and fixtures at leased locations are amortized using the straight-linemethod over the shorter of the lease term (including renewal terms) or the estimated useful life of the asset. The cost and accumulated depreciation ofassets sold or otherwise disposed of are removed from the accounts and any gain or loss thereon is included in other income and expense. Asset life (in years) Buildings and building improvements 40 Leasehold improvements 8-26 Furniture and fixtures 2-7 Machinery and equipment 5-10 Computer equipment and software 3-7 Vehicles 5 Internal Use Software: The Company capitalizes software development costs incurred during the application development stage related to new software or major enhancementsto the functionality of existing software that is developed solely to meet the Company’s internal operational needs and when there are no plans to marketthe software externally. Costs capitalized include external direct costs of materials and services and internal payroll and payroll-related costs. Any costsduring the preliminary project stage or related to training or maintenance are expensed as incurred. Capitalization ceases when the software project issubstantially complete and ready for its intended use. The capitalization and ongoing assessment of recoverability of development costs requiresconsiderable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility, andestimated economic life. As of December 31, 2015 and 2014, $1.7 million was included in computer equipment and software. The majority of the costscapitalized relate to amounts invoiced by external consultants. The costs are amortized over estimated useful lives of three to five years. There was $0.5million, $0.3 million and $0 depreciation expense related to capitalized software during the years ended December 31, 2015, 2014 and 2013,respectively. Leases: The Company leases its store and corporate headquarters locations. Assets held under capital leases are included in property, plant and equipment andamortization is included in depreciation expense. Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on thedate the Company takes possession of the property. Tenant improvement allowances are amounts received from a lessor for improvements to leasedproperties and are amortized against rent expense over the life of the respective leases. At lease inception, the Company determines the lease term byassuming the exercise of those renewal options that are reasonably assured. The exercise of lease renewal options is at the Company’s sole discretion. Thelease term is used to determine whether a lease is capital or operating and is used to calculate straight-line rent expense. Additionally, the depreciable lifeof leased assets and leasehold improvements is limited by the expected lease term. Rent expense is included in SG&A expenses. Certain leases require theCompany to pay real estate taxes, insurance, maintenance and other operating expenses associated with the leased premises. These expenses are alsoclassified in SG&A expenses. 63 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Self-Insurance: The Company is self-insured for certain employee health benefit and workers compensation claims. The Company estimates a liability for aggregatelosses below stop-loss coverage limits based on estimates of the ultimate costs to be incurred to settle known claims and claims not reported as of thebalance sheet date. The estimated liability is not discounted and is based on a number of assumptions and factors including historical trends, andeconomic conditions. As of December 31, 2015 and 2014, an accrual of $0.5 million and $0.3 million related to estimated employee health benefitclaims was included in other current liabilities, respectively. As of December 31, 2015 and 2014, an accrual of $0.6 million and $0.4 million related toestimated workers compensation claims was included in other current liabilities, respectively. The Company has a standby letter of credit outstanding realated to the Company's worker's compensation insurance policy. As of December 31, 2015and 2014, the standby letter of credit totaled $0.9 million and $0.4 million, respectively. New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued a final standard on revenue from contracts with customers. The new standardsets forth a single comprehensive model for recognizing and reporting revenue. The new standard is effective for the Company in its fiscal year 2018,and permits the use of either a retrospective or a cumulative effect transition method. The Company is currently assessing the impact of implementingthe new guidance on its consolidated financial statements. In August 2014, the FASB issued a standard requiring an entity’s management to evaluate whether there is substantial doubt about an entity’s ability tocontinue as a going concern within one year after the date that the financial statements. The guidance also sets forth a series of disclosures that arerequired in the event the entity’s management concludes that there is substantial doubt about the entity’s ability to continue as a going concern. Thenew standard becomes effective for the Company in fiscal 2016 and requires an ongoing evaluation at each interim and annual period thereafter. TheCompany has determined that the adoption of this new guidance will not have an impact on its consolidated financial statements. In February 2015, the FASB issued a new accounting standard that will modify current consolidation guidance. The standard makes changes to both thevariable interest entity model and the voting interest entity model, including modifying the evaluation of whether limited partnerships or similar legalentities are VIEs or voting interest entities and amending the guidance for assessing how relationships of related parties affect the consolidationanalysis of VIEs. The standard is effective for the Company in fiscal 2016. The Company is currently assessing the impact of implementing the newguidance on its consolidated financial statements. In April 2015, the FASB issued a standard that requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as adirect deduction from the carrying amount of that debt liability. The guidance is effective for the Company in its fiscal year 2016 and requiresretrospective application. The Company anticipates reclassifying $2.2 million of unamortized debt issuance costs from other asset accounts to be netagainst debt upon adopting this standard in the first quarter of 2016. In July 2015, the FASB issued a standard which simplifies the subsequent measurement of inventory. Currently, an entity is required to measure itsinventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value less an approximatelynormal profit margin. The changes require that inventory be measured at the lower of cost and net realizable value, thereby eliminating the use of theother two market methodologies. Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonablypredictable costs of completion, disposal, and transportation. Currently, the Company applies the net realizable value market option to measureinventories at the lower of cost or market. These changes become effective for the Company in fiscal 2017. The Company has determined that theadoption of these changes will not have a material impact on its consolidated financial statements. In November 2015, the FASB issued a standard which simplifies the presentation of deferred income taxes. The guidance provides presentationrequirements to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. The standard is effective for fiscalyears beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted for any interim and annualfinancial statements that have not yet been issued. The Company early adopted this standard effective December 31, 2015, retrospectively. Adoption ofthis standard resulted in a $4.2 million and $3.9 million decrease in current deferred tax assets and a $4.2 million and $3.9 million increase in long-termdeferred tax assets in the Company’s Consolidated Balance Sheets at December 31, 2015 and December 31, 2014, respectively. Adoption had no impacton the Company’s results of operations. 64 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 2: Property Plant and Equipment: Property, plant and equipment consisted of the following at December 31 (in thousands): 2015 2014 Land $904 $904 Building and building improvements 21,515 20,492 Leasehold improvements 72,154 68,580 Furniture and fixtures 112,376 103,586 Machinery and equipment 24,457 23,171 Computer equipment and software 15,286 13,407 Vehicles 2,859 2,773 Construction in progress 2,199 1,411 Total property, plant and equipment 251,750 234,324 Less accumulated depreciation (116,635) (95,030)Total property, plant and equipment, net $135,115 $139,294 Depreciation expense on property and equipment, including capital leases, was $22.2 million, $19.9 million and $14.3 million for the years endedDecember 31, 2015, 2014 and 2013, respectively. No asset impairment charges were recorded for the years ended December 31, 2015, 2014, and 2013,respectively. Note 3: Accrued Liabilities Accrued liabilities consisted of the following at December 31 (in thousands): (in thousands) 2015 2014 Customer deposits $6,026 $5,038 Accrued wages and salaries 4,336 3,209 Sales return reserve 2,781 3,292 Taxes 3,043 2,600 Other current liabilities 3,141 659 Total accrued liabilities $19,327 $14,798 Note 4: Long-term Debt Long-term Debt consisted of the following at December 31 (in thousands): 2015 2014 Term note payable - interest at 2.18% and 2.51% at December 31, 2015 and 2014 47,450 17,125 Commercial bank credit facility 8,000 74,000 Variable interest rate (0.35% and 0.37% at both December 31, 2015 and 2014) bonds,which mature April 1, 2023, collateralized by buildings and equipment 900 995 56,350 92,120 Less: current portion 5,095 3,595 Debt obligations, net of current portion $51,255 $88,525 65 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Approximate annual aggregate maturities of debts are as follows: (in thousands): Fiscal year 2016 $5,095 2017 6,350 2018 8,855 2019 10,110 2020 25,565 Thereafter 375 Total future maturities payments $56,350 On June 2, 2015, the Company and its operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Fifth Third Bank, Bank ofAmerica, N.A., and Huntington National Bank (the “Credit Agreement”). The Credit Agreement provides the Company with a $125.0 million seniorsecured credit facility, comprised of a five-year $50.0 million term loan and a $75.0 million revolving line of credit. The Credit Agreement issecured by virtually all of the assets of the Company, including but not limited to, inventory, receivables, equipment and real property. Borrowingspursuant to the Credit Agreement bear interest at either a base rate or a LIBOR-based rate, at the option of the Company. The LIBOR-based rate willrange from LIBOR plus 1.50% to 2.00%, depending on The Tile Shop’s leverage ratio. The base rate is equal to the greatest of: (a) the Federal fundsrate plus 0.50%, (b) the Fifth Third Bank “prime rate,” and (c) the Eurodollar rate plus 1.00%, in each case plus 0.50% to 1.00% depending on TheTile Shop’s leverage ratio. At December 31, 2015 the base interest rate was 4.25% and the LIBOR-based interest rate was 2.18%. Borrowingsoutstanding consisted of $8.0 million on the revolving line of credit and $47.5 million on the term loan as of December 31, 2015. Additionalborrowings pursuant to the Credit Agreement may be used to support the Company’s growth and for working capital purposes. The Companyincurred $1.0 million of debt issuance costs in connection with the Credit Agreement. These costs were capitalized as other current and othernoncurrent assets, and will be amortized over the five-year life of the Credit Agreement. The term loan requires quarterly principal payments asfollows (in thousands): Period December 31, 2015 to June 30, 2017 $1,250 September 30, 2017 to June 30, 2018 1,875 September 30, 2018 to March 31, 2020 2,500 The Credit Agreement contains customary events of default, conditions to borrowings, and restrictive covenants, including restrictions on theCompany’s ability to dispose of assets, make acquisitions, incur additional debt, incur liens, make investments, or enter into transactions withaffiliates on other than terms that could be obtained in an arm’s length transaction. The Credit Agreement also includes financial and othercovenants including covenants to maintain certain fixed charge coverage ratios and rent adjusted leverage ratios. In addition, except with respect topro rata payments made by The Tile Shop or other subsidiaries to the Company or any other equity owner of such entity, the Credit Agreementprohibits the payments of cash dividends. The Company was in compliance with the covenants as of December 31, 2015. The Credit Agreement superseded and replaced in its entirety the Company’s senior secured credit facility with Bank of America, N.A. dated October3, 2012, as amended on April 30, 2013, July 8, 2013, March 26, 2014 and September 29, 2014. The Company used the $50.0 million term loan and$23.0 million drawn on the line of credit pursuant to the Credit Agreement to refinance all of the existing indebtedness outstanding under theCompany’s prior credit facility in the amount of approximately $73.0 million, which consisted of $72.8 million in unpaid principal andapproximately $0.2 million in accrued and unpaid interest and fees. The Company also recorded a $0.2 million charge in interest expense to write-offof the unamortized deferred financing fees associated with the October 3, 2012 credit facility as of the date of the termination. As of December 31, 2015 and 2014, the Company had accrued $0.1 million and $0.4 million of interest expense, respectively. Accrued interest isincluded in other current liabilities. 66 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.Assets acquired under capital leases are included in property, plant and equipment. As of December 31, 2015, minimum lease payments under the Company's capital lease obligation were as follows (in thousands): Fiscal year 2016 217 2017 211 2018 215 2019 216 2020 216 Thereafter 305 Less: amounts representing interest (490)Present value of future minimum lease payments 890 Less: current portion 93 Capital lease obligations, net of current portion $797 Note 5: Commitments and Contingencies Operating leases: The Company leases buildings and office space under various operating lease agreements. In addition to rent, most leases require payments of real estatetaxes, insurance, and common area maintenance. The leases generally have an initial lease term of ten to fifteen 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 basisthrough the end of the lease term including assumed renewals. The difference between the straight-line rent amounts and amounts payable under theleases is recorded as deferred rent. For the years ended December 31, 2015, 2014 and 2013, rent expense was $27.2 million, $25.2 million, and $19.5million, respectively. Annual minimum rentals under non-cancelable operating leases are as follows, for the years ended December 31 (in thousands): Fiscal year 2016 $26,597 2017 27,128 2018 27,690 2019 28,270 2020 28,156 Thereafter 356,104 Total future maturities payments $493,945 Legal proceedings: The Company, two of its former executive officers, five of its outside directors, and certain companies affiliated with the directors, are defendants in aconsolidated class action brought under the federal securities laws and now pending in the United States District Court for the District of Minnesota underthe caption Beaver County Employees’ Retirement Fund, et al. v. Tile Shop Holdings, Inc., et al. Several related actions were filed in 2013, and thenconsolidated. The plaintiffs are three investors who seek to represent a class or classes consisting of (1) all purchasers of Tile Shop common stock betweenAugust 22, 2012 and January 28, 2014 (the “alleged class period”), seeking to pursue remedies under the Securities Exchange Act of 1934; and (2) allpurchasers of Tile Shop common stock pursuant and/or traceable to the Company’s December 2012 registration statements, seeking to pursue remediesunder the Securities Act of 1933. Six firms who were underwriters in the December 2012 secondary public offering are also named as defendants. In theirconsolidated amended complaint (the “complaint”), the plaintiffs allege that during the alleged class period, certain defendants made false or misleadingstatements of material fact in press releases and SEC filings about the Company’s relationships with its vendors, its gross margins, and its supply chainand producer relationships, and that defendants failed to disclose certain related party transactions. The complaint asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In addition to attorney’s fees andcosts, the plaintiffs seek to recover damages on behalf of the members of the purported classes. The defendants are vigorously defending the matter. Thematter is now in discovery. 67 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements The Company also is a Defendant in a consolidated action brought derivatively on behalf of the Company by two shareholders of the Company. Oneaction was first filed in the United States District Court for the District of Minnesota, and then voluntarily dismissed and re-filed in the Court of Chanceryfor the State of Delaware (“Delaware Chancery Court”). The second action was filed in Delaware Chancery Court. The two actions have since beenconsolidated by the Delaware Chancery Court under the caption In re Tile Shop Holdings, Inc. Stockholder Derivative Litigation. On July 31, 2015, theplaintiff-shareholders filed their Verified Consolidated Stockholder Derivative Complaint (“complaint”). The complaint names as defendants sixmembers of the Company’s Board of Directors, and a former employee of the Company. The complaint tracks many of the same factual allegations ashave been made in the above-described federal securities class action. It alleges that the defendant-directors breached their fiduciary duties by failing toadopt adequate internal controls for the Company, by approving false and misleading statements issued by the Company, by causing the Company toviolate generally accepted accounting principles and SEC regulations, by engaging in or approving alleged insider trading, and by permitting theCompany’s primary product to contain illegal amounts of lead. The complaint also alleges claims for insider trading and unjust enrichment. Thecomplaint seeks damages, disgorgement, an award of attorneys’ fees and other expenses, and an order compelling changes to the Company’s corporategovernance and internal procedures. On November 2, 2015, defendants filed a motion to dismiss the derivative action, or in the alternative, to stay itpending resolution of the Beaver County Employees’ Retirement Fund action described above. Subsequently, the parties entered into a stipulation, andthe Court entered an Order, staying the derivative action until resolution of the Beaver County Employees’ Retirement Fund action described above, oruntil a mutually agreeable resolution of the derivative action. Given the uncertainty of litigation and the preliminary stage of these cases, the Company cannot reasonably estimate the possible loss or range of lossthat may result from these actions. The Company maintains directors and officers liability insurance policies that may reduce the Company’s exposure, ifany. In the event the Company incurs a loss, the Company will pursue recoveries to the maximum extent available under these policies. The Company is also, from time to time, subject to claims and disputes arising in the normal course of business. In the opinion of management, while theoutcome of such claims and disputes cannot be predicted with certainty, the Company’s ultimate liability in connection with these matters is notexpected to have a material adverse effect on the results of operations, financial position, or cash flows. Note 6: Fair Value of Financial Instruments: The consolidated financial statements include the following financial instruments: cash and cash equivalents, trade receivables, accounts payable,accrued expenses, capital leases, notes payable and debt. At December 31, 2015 and December 31, 2014, the carrying amount of the Company’s cashand cash equivalents, trade receivables, accounts payable and accrued expenses approximated their fair values due to their short-term maturities. Thecarrying value of the Company’s borrowings and capital lease obligation approximates fair value based upon the market interest rates available to theCompany 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-tier valuation hierarchy based upon observable and non-observable inputs: Level 1 – Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date. Level 2 – Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly orindirectly, including: ■Quoted prices for similar assets or liabilities in active markets; ■Quoted prices for identical or similar assets in non-active markets; ■Inputs other than quoted prices that are observable for the asset or liability; and ■Inputs that are derived principally from or corroborated by other observable market data. Level 3 – Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant managementjudgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participantassumptions. 68 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial StatementsNote 7: Related Party Transactions During the year ended December 31, 2013, the Company made payments of $16.9 million to Beijing Pingxiu (“BP”), owned by a former Companyemployee and brother-in-law of the Company’s then-CEO. BP primarily processed export transactions on an agency basis on behalf of the Company’svendors. The Company ceased business with BP in 2013 and had $0.0 in accounts payable due to BP at December 31, 2013. During the year ended December 31, 2013, the Company made payments of $2.8 million to Nanyang Helin Stone Co. Ltd. (“Nanyang”), a companypartially owned by a former Company employee and brother-in-law of the Company’s then-CEO. The Company notified Nanyang that it would continuebusiness with Nanyang only if the former employee’s ownership was transferred to an unrelated party and the former employee was not an officer ordirector of Nanyang. The Company had $0.5 million in accounts payable due to Nanyang at December 31, 2013. On March 14, 2014, the Company received confirmation that the former employee had transferred his ownership interest and was no longer considered amember of management. The Company commenced purchasing from Nanyang on March 14, 2014. The Company employs Adam Rucker, son of Robert A. Rucker, a member of the Company's Board of Directors, as a Director of Information Technology.In fiscal 2015, the Company paid Mr. Rucker a total of $127,158, consisting of $104,583 in base salary and $22,575 as a cash bonus, which cash bonuswas earned in fiscal 2015 and paid in fiscal 2016. In February 2015, the Company granted an option to purchase 8,000 shares of the Company's commonstock to Mr. Rucker at an exercise price per share of $8.45 that vests over a five year period. Mr. Rucker was granted a second award in July 2015 of 1,916stock options at a strike price of $14.19 that vest over five years. The combined grant date fair value of these awards was $43,538. Mr. Rucker alsoreceived the standard benefits provided to other Company employees during 2015. Note 8: Earnings Per Share Basic earnings per share is calculated by dividing net income (loss) by the weighted-average number of shares outstanding during the period. Dilutedearnings (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding, after taking intoconsideration all dilutive potential common shares outstanding during the period. Basic and diluted net income (loss) per share was calculated as follows (in thousands, except share and per share data): 2015 2014 2013 Net income (loss) $15,696 $10,547 $(35,660)Weighted-average shares outstanding - basic 51,161,059 51,015,354 49,600,396 Dilutive common stock equivalents 143,923 14,436 - Weighted-average shares outstanding - diluted 51,304,982 51,029,790 49,600,396 Basic net income (loss) per share $0.31 $0.21 $(0.72)Diluted net income (loss) per share $0.31 $0.21 $(0.72)Antidulitive Shares 568,014 1,042,579 762,021 For the year ended December 31, 2013, all dilutive securities were excluded from the earnings per share calculation as their effect on earnings per sharewas anti-dilutive. 69 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 9: Equity Incentive Plans 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 for issuanceor 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 in 2022, in anamount equal to the lesser of (A) 2,500,000 shares, (B) six percent (6%) of the shares of common stock outstanding (on an as-converted basis) on the lastday of the immediately preceding calendar year, and (C) such smaller number of shares of stock as determined by the Company’s board of 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 the automatic shareincrease provision of the 2012 Plan, (ii) the 2012 Plan was amended to eliminate the automatic share increase for subsequent years, and (iii) the 2012 Planwas amended to authorize grants of performance-based awards, which may be paid in cash or equity. The amendments to the 2012 Plan were approved bythe Company’s stockholders in July 2013. Stock Options: During the years ended December 31, 2015, 2014 and 2013, the Company granted stock options to its employees that included service conditionrequirements. The options provide for certain acceleration of vesting and cancellation of options under different circumstances, such as a change incontrol, death, disability and termination of service. The Company recognizes compensation expense net of estimated forfeitures on a straight-line basisover the requisite service period. For the portion of the options that contain both a market and service condition, the Company recognizes compensationexpense, net of estimated forfeitures, using graded vesting over the requisite service period. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in the optionvaluation models are outlined in the following table: 2015 2014 2013 Risk-free interest rate 0.90%-1.07% 0.78%-1.05% 0.81%-1.6% Expected life (in years) 5 5 7 Expected volatility 52%-53% 52% 45%-46% The computation of the expected volatility assumptions used in the option valuation models was based on historical volatilities of the Company. TheCompany used the “simplified” method for an expected life as prescribed in SEC Staff Accounting Bulletin (“SAB”) No. 110, for companies that do nothave adequate historical data. The risk-free interest rate was based on the U.S. Treasury yield at the time of grant. The expected dividend yield was zerobased on the fact the company has not paid dividends, nor does it intend to pay dividends in the future. To the extent that actual outcomes differ from theCompany's assumptions, the Company is not required to true up grant-date fair value-based expense to final intrinsic values. The weighted average fairvalue of stock options granted was $5.00, $5.13, and $11.12 during the years ended December 31, 2015, 2014 and 2013, respectively. Stock based compensation related to options for the years ended December 31, 2015, 2014 and 2013 was $3.6 million, $2.8 million, and $3.3 million,respectively, and was included in selling, general and administrative expenses in the consolidated statements of operations. As of December 31, 2015, thetotal future compensation cost related to non-vested options not yet recognized in the consolidated statement of operations was $5.4 million and isexpected to be recognized over a weighted-average period of 1.9 years. 70 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements The following table summarizes stock option activity: Shares WeightedAverageExercise Price Weighted AvgGrant Date FairValue Weighted AvgRemainingContractualTerm (Years) AggregateIntrinsic Value(in thousands) Balance, January 1, 2013 1,751,000 $10.10 $5.19 9.7 $11,784 Granted 709,500 $23.54 $11.12 Exercised (22,999) $10.00 $5.00 Cancelled/Forfeited (162,584) $13.96 $6.87 Balance, December 31, 2013 2,274,917 $14.02 $6.92 8.9 $13,051 Granted 768,750 $11.47 $5.13 Exercised (15,917) $10.00 $5.19 Cancelled/Forfeited (556,750) $13.93 $6.60 Balance, December 31, 2014 2,471,000 $13.27 $6.45 7.6 $38 Granted 482,671 $10.91 $5.00 Exercised (69,932) $10.00 $5.17 Cancelled/Forfeited (258,794) $11.81 $5.61 Balance, December 31, 2015 2,624,945 $13.07 $6.30 6.5 $12,757 Exercisable at December 31, 2015 1,035,631 $13.53 $6.79 6.7 Vested and expected to vest, December 31, 2015 2,330,520 $13.28 $6.44 6.6 $11,365 The aggregate intrinsic value is the difference between the exercise price and the closing price of the Company’s stock on December 31. The intrinsicvalue of the stock options exercised during 2015 and 2014 was $0.4 million and $0 million, respectively. Options outstanding as of December 31, 2015 are as follows: Range of Exercise Price Weighted Average Options Exercise Price RemainingContractualLife-Years $5.00to$10.00 1,517,274 $9.73 6.51 $10.01to$15.00 635,171 $12.26 5.83 $15.01to$20.00 131,500 $17.83 7.13 $20.01to$25.00 83,000 $23.11 7.69 $25.01to$30.00 258,000 $29.05 7.71 Restricted Stock: The following table summarizes restricted stock activity: Shares Weighted Avg GrantDate Fair Value Nonvested, December 31, 2012 295,000 $11.05 Granted 64,230 $28.27 Vested (128,334) $11.05 Forfeited - $- Nonvested, December 31, 2013 230,896 $15.84 Granted 76,066 $11.93 Vested (117,727) $15.19 Forfeited - $- Nonvested, December 31, 2014 189,235 $14.67 Granted 54,036 $12.45 Vested (164,235) $12.50 Forfeited - $- Nonvested, December 31, 2015 79,036 $17.67 The total expense associated with restricted stock for the years ended December 31, 2015, 2014, and 2013 was $1.9 million, $1.8 million, and $1.4million, respectively. As of December 31, 2015, there was $0.7 million of total unrecognized expense related to unvested restricted stock awards, whichare expected to vest, and will be expensed through 2017. The fair value of restricted stock granted in fiscal year 2015 was $0.9 million. The total fairvalue of restricted stock that vested during the year ended December 31, 2014 was $0.7 million. Using the closing stock price of $16.40 on December31, 2015, the number of restricted shares outstanding and expected to vest was 76,691, with an intrinsic value of $1.3 million. 71 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Warrants: In connection with the Business Combination in 2012, the Company issued warrants exercisable for one share of the Company’s common stock for eachoutstanding JWCAC warrant that was formerly exercisable for one share of JWCAC common stock. Total warrants outstanding as of August 21, 2012were 17,833,333 warrants at an exercise price of $11.50 per share. During the year ended December 31, 2013, 7,166,381 warrants were exercised for cashproceeds of $82.4 million and 6,731,938 warrants were exercised on a cashless basis in exchange for 2,790,061 shares. In March 2013, the Companycompleted the purchase of 3,580,004 outstanding warrants in private transactions. The aggregate purchase price to acquire the warrants was $30.1million. These purchases were funded with the cash proceeds received from the exercise of publicly held warrants. In April 2013, the Company directedits transfer agent to notify the holders of any remaining outstanding warrants of the call for early exercise. These warrant holders had until May 12, 2013to exercise their outstanding warrants on a cashless basis. Thereafter, any warrants that remained unexercised were automatically redeemed by theCompany at a redemption price of $0.01 per warrant in cash. On May 15, 2013, the Company automatically redeemed 7,071 warrants. On December 31,2013, December 31, 2014, and December 31, 2015 the Company had no outstanding warrants. Note 10: 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 consolidated financial statements for periods prior to August 21, 2012. The following amounts represent thedetermination of the deferred tax assets and liabilities recognized in the Business Combination. The change in status to a taxable entity and thetransactions consummated as part of the Business Combination resulted in the recognition of deferred tax assets and liabilities based on the expected taxconsequences of temporary differences between the book and tax basis of The Tile Shop’s assets and liabilities at the date of the Business Combinationincluding the following: (i) historical outside basis difference at December 31, 2011, (ii) outside basis differences occurring in 2012 prior to the BusinessCombination, and (iii) the tax basis increase of The Tile Shop membership interests directly held by Holdings related to the Business Combination. AtDecember 31, 2013, outside basis differences originating prior to the Business Combination related primarily to temporary basis differences in inventory,fixed assets, accruals, and Section 743, totaled $6.4 million, which have been tax-effected at a 40% combined federal and state rate. Deferred tax assets of$0 and $0.6 million were recognized and included in the tax benefit for the years ended December 31, 2014 and 2013, respectively. In addition, deferredtax assets of $0 and $0.4 million, during the periods ending December 31, 2014 and December 31, 2013, respectively, were recognized in connectionwith the Business Combination transactions (related to item (iii) above), which enables the Company to realize future tax deductions for the step-up inbasis of the Tile Shop member ownership interests that have been contributed to the Company. These basis differences were credited directly toadditional paid in capital as of the closing of the Business Combination. 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 The Tile Shop members. The Company’s federal and state tax returns for the periods endedDecember 31, 2012, December 31, 2013, and December 31, 2014 remain subject to examination. In accordance with ASC 740-10, the Company records interest and penalties through income tax relating to uncertain tax positions. As of December 31,2015, 2014 and 2013, the Company has not recognized any liabilities for uncertain tax positions nor has the Company accrued interest and penaltiesrelated to uncertain tax positions. 72 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements The components of the provision for income taxes consist of the following (in thousands): Years Ended December 31, 2015 2014 2013 Current Federal $3,691 $4,851 $5,634 State 1,886 1,351 2,520 Total Current 5,577 6,202 8,154 Deferred Federal 5,252 1,076 4,007 State 247 104 (219)Total Deferred 5,499 1,180 3,788 Total Provision for Income Taxes $11,076 $7,382 $11,942 A majority of the Company's income is from domestic operations. The following table reflects the effective income tax rate reconciliation for the years ended December 31, 2015, 2014 and 2013: 2015 2014 2013 Federal statutory rate 35.0% 35.0% 35.0%State income taxes, net of the federal tax benefit 4.4 5.0 (6.4)Warrant expense - - (80.0)Stock based compensation 1.4 1.5 1.9 Other 0.6 (0.3) (0.8)Effective tax rate 41.4% 41.2% (50.3)% Components of net deferred income taxes are as follows at December 31 (in thousands): 2015 2014 Deferred income tax assets: Section 743 carryforward $29,843 $32,728 Leasehold improvement reimbursements 5,592 5,645 Inventory 1,606 1,490 Deferred rent 5,549 3,867 Stock based compensation 2,488 1,352 Other 1,023 894 Total deferred income tax assets $46,101 $45,976 Deferred income tax liabilities Depreciation 25,255 19,387 Total deferred income tax liabilities 25,255 19,387 Net deferred income tax assets $20,846 $26,589 Note 11: New Market Tax Credit In July 2013 the Company entered into a financing transaction with Chase Community Equity (“Chase”), and U.S. Bank Community, LLC (“U.S. Bank”,and, collectively with Chase, the “investors”) related to a $19.1 million acquisition, rehabilitation and construction of the Company’s new distributionand manufacturing center in Durant, Oklahoma. The investors made a capital contribution to, and Tile Shop Lending made a loan to, Chase New MarketTax Credit, The Tile Shop of Oklahoma Investment Fund, LLC, and The Tile Shop Investment Fund LLC (the “Investment Funds”) under a qualified NewMarkets Tax Credit (“NMTC”) program. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and isintended to induce capital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their Federal incometaxes for up to 39% of qualified investments in the equity of community development entities (“CDEs”). CDEs are privately managed investmentinstitutions that are certified to make qualified low-income community investments. 73 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements 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,an indirect, wholly-owned subsidiary of the Company. The proceeds of the loans from the CDEs (including loans representing the capital contributionmade by the investors, 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 the Company effectively received net loan proceeds equal to investor’s contributions to the InvestmentFund. This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase the investors’ interest. TheCompany believes that the investors will exercise the put option in September 2020 at the end of the recapture period. The value attributed to the put/callis de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required tobe in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicablerequirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify the investors for any loss orrecapture of NMTCs related to the financing until such time as the obligation to deliver tax benefits is relieved. The Company does not anticipate anycredit recaptures will be required in connection with this arrangement. The Company has determined that the financing arrangement with the Investment Funds and CDEs contains a variable interest entity (“VIE”). Theongoing activities of the Investment Funds – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial designand are not expected to significantly affect economic performance throughout the life of the Investment Funds. Management considered the contractualarrangements that obligate the Company to deliver tax benefits and provide various other guarantees to the structure; Chase’s and U.S. Bank’s lack of amaterial interest in the underling economics of the project; and the fact that the Company is obligated to absorb losses of the Investment Funds. TheCompany concluded that it is the primary beneficiary of the VIE and consolidated the Investment Funds, as a VIE, in accordance with the accountingstandards for consolidation. Chase’s and U.S. Bank’s contributions of $4.4 million, net of syndication fees, are included in cash, restricted cash, and otherlong-term liabilities in the accompanying consolidated balance sheet. The benefit of this net $4.4 million contribution will be recognized as a decrease indepreciation expense as the Company amortizes the contribution liability over the seven-year compliance period as it is being earned through the on-going compliance with the conditions of the NMTC program. Direct costs of $1.0 million incurred in structuring the financing arrangement are deferredand will be recognized as expense over the forty-year term of the loans. Incremental costs to maintain the structure during the compliance period arerecognized as incurred. Note 12: Retirement Savings Plan The Company has a 401(k) profit sharing plan covering substantially all full-time employees. Employee contributions are limited to the maximumamount allowable by the Internal Revenue Code. The Company matched $0.4 million, $0.5 million, and $0.4 million of employee contributions in 2015,2014, and 2013 and made no discretionary contributions for any of the years presented. 74 Tile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 13: Quarterly Financial Data (Unaudited) Quarterly results of operations for the years ended December 31, 2015 and 2014 are summarized below (in thousands, except per share amounts): First Second Third Fourth Quarter Quarter Quarter Quarter 2015 Net sales $72,963 $75,706 $72,404 $71,914 Gross profit 50,971 51,293 50,713 50,633 Income from operations 7,195 8,438 6,666 6,927 Net income 3,659 4,490 3,761 3,786 Basic earnings per share 0.07 0.09 0.07 0.08 Diluted earnings per share 0.07 0.09 0.07 0.08 2014 Net sales $64,379 $66,665 $62,806 $63,342 Gross profit 44,933 46,502 43,458 43,999 Income from operations 6,961 7,120 3,706 3,789 Net income 3,709 3,828 1,504 1,506 Basic earnings per share 0.07 0.08 0.03 0.03 Diluted earnings per share 0.07 0.07 0.03 0.03 75 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 besigned on its behalf by the undersigned, thereunto duly authorized. TILE SHOP HOLDINGS, INC. Date: February 26, 2016 /s/ CHRIS R. HOMEISTER Chris R. Homeister Chief Executive Officer 76 POWER OF ATTORNEY Each person whose signature appears below constitutes CHRIS R. HOMEISTER and KIRK L. GEADELMANN, or either of them, as his true andlawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, tosign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform eachand every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do inperson, hereby ratifying and confirming all said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtuethereof. 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/ CHRIS R. HOMEISTER February 26, 2016 Chris R. Homeister Chief Executive Officer, Director (Principal Executive Officer) /s/ KIRK L. GEADELMANN February 26, 2016 Kirk L. Geadelmann Chief Financial Officer (Principal Financial and Accounting Officer) /s/ WILLIAM E. WATTS February 26, 2016 William E. Watts Director and Chairman of the Board of Directors /s/ PETER J. JACULLO February 26, 2016 Peter J. Jacullo, Director /s/ PETER H. KAMIN February 26, 2016 Peter H. Kamin, Director /s/ TODD KRASNOW February 26, 2016 Todd Krasnow, Director /s/ADAM L. SUTTIN February 26, 2016 Adam L. Suttin, Director /s/ CHRISTOPHER T. COOK February 26, 2016 Christopher T. Cook, Director /s/ ROBERT A. RUCKER February 26, 2016 Robert A. Rucker, Director 77 TILE SHOP HOLDINGS, INC. EXHIBIT INDEX ExhibitNo.Description 2.1Contribution and Merger Agreement, dated June 27, 2012, by and among JWC Acquisition Corp., The Tile Shop, LLC, members of The TileShop, LLC, Nabron International, Inc. Tile Shop Merger Sub, Inc. and Sellers’ representative – incorporated by reference to exhibit 2.1 to theCurrent 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-4 dated 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-4 dated July23, 2012. 10.1Registration Rights Agreement, dated June 27, 2012, by and among JWC Acquisition Corp., Tile Shop Holdings, Inc., certain members of JWCAcquisition, LLC, Nabron International, Inc., The Tile Shop, Inc., JWTS, Inc. and certain other members of The Tile Shop, LLC – incorporatedby 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 by reference toExhibit 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 reference toExhibit 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 reference toExhibit 10.8 to the Registrant’s Form S-4 dated July 2, 2012. 10.5*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. 10.6*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. 10.7Form of Indemnification Agreement by and between Tile Shop Holdings, Inc. and each of its directors and executive officers – incorporated byreference to Exhibit 10.11 of Amendment No. 1 to the Registrant’s Form S-4 dated July 23, 2012. 10.8Credit Agreement, dated as of October 3, 2012, by and among the Company, The Tile Shop, certain subsidiaries of The Tile Shop, each lenderfrom time to time party thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer – incorporated byreference to Exhibit 10.1 to the Registrant’s Form 8-K dated October 3, 2012. 10.9Security Agreement, dated as of October 3, 2012, by and among the Company, The Tile Shop, ILTS, LLC, JWC Acquisition Corp., The TileShop of Michigan, LLC, and Bank of America, N.A., as Administrative Agent – incorporated by reference to Exhibit 10.2 to the Registrant’sForm 8-K dated October 3, 2012. 10.10Guaranty Agreement, dated as of October 3, 2012, by and among the Company, The Tile Shop, ILTS, LLC, JWC Acquisition Corp., The TileShop of Michigan, LLC, and Bank of America, N.A., as Administrative Agent – incorporated by reference to Exhibit 10.3 to the Registrant’sForm 8-K dated October 3, 2012. 10.11Amendment No. 1 to Credit Agreement, dated as of April 30, 2013, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, certainsubsidiaries of The Tile Shop, LLC and Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer – incorporated byreference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 10.12*Tile Shop Holdings, Inc. Incentive Stock Option Agreement – incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report onForm 8-K filed July 26, 2013. 78 10.13*Tile Shop Holdings, Inc. Nonstatutory Stock Option Agreement – incorporated by reference to Exhibit 10.4 to the Registrant’s Current Reporton Form 8-K filed July 26, 2013. 10.14*Tile Shop Holdings, Inc. Stock Restriction Agreement – incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form8-K filed July 26, 2013. 10.15Amendment No. 2 to Credit Agreement, dated as of July 8, 2013, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, certainsubsidiaries of The Tile Shop, LLC and Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer – incorporated byreference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013. 10.16*Employment Agreement, between Tile Shop Holdings, Inc. and Chris Homeister, effective October 1, 2013 – incorporated by reference toExhibit 10.1 to the Registrant’s Current Report on Form 8-K dated October 1, 2013. 10.17Amendment No. 3 to Credit Agreement, dated as of March 26, 2014, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, certainsubsidiaries of The Tile Shop, LLC and Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer – incorporated byreference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed May 9, 2014. 10.18Amendment No. 4 to Credit Agreement, dated as of September 29, 2014, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, certainsubsidiaries of The Tile Shop, LLC and Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer – incorporated byreference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed September 29, 2014. 10.19*Offer Letter Agreement, between Tile Shop Holdings, Inc. and Kirk Geadelmann, dated June 30, 2014 – incorporated by reference to Exhibit10.1 to the Registrant’s Current Report on Form 8-K dated July 3, 2014. 10.20*Amendment to Terms of Employment, effective January 1, 2015, between Tile Shop Holdings, Inc. and Chris Homeister – incorporated byreference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year eanded December 31, 2014. 10.21*Amendment to Terms of Employment, effective January 1, 2015, between Tile Shop Holdings, Inc. and Robert A. Rucker – incorporated byreference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year eanded December 31, 2014. 10.22Credit Agreement, dated June 2, 2015, among The Tile Shop, LLC, Tile Shop Holdings, Inc., Fifth Third Bank, and the other parties namedtherein – incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated June 4, 2015. 10.23Security Agreement, dated June 2, 2015, among The Tile Shop, LLC, Tile Shop Holdings, Inc., Fifth Third Bank, and the other parties namedtherein – incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated June 4, 2015. 10.24Guaranty Agreement, dated June 2, 2015, among The Tile Shop, LLC, Tile Shop Holdings, Inc., Fifth Third Bank, and the other parties namedtherein – incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated June 4, 2015. 21.1Subsidiaries of Tile Shop Holdings, Inc. – filed herewith. 23.1Consent of Ernst & Young 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 any filingwe make under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. 79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 2012Omnibus Award Plan of Tile Shop Holdings, Inc. of our reports dated February 26, 2016 with respect to the consolidated financial statements of TileShop Holdings, Inc. and Subsidiaries, and the effectiveness of internal control over financial reporting of Tile Shop Holdings, Inc. and Subsidiariesincluded in this Annual report (Form 10-K) for the year ended December 31, 2015. /s/ Ernst & Young LLPMinneapolis, MNFebruary 26, 2016 EXHIBIT 31.1 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Chris R. Homeister, 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 make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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) and 15d-15(f)) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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 theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date: February 26, 2016/s/ CHRIS R. HOMEISTER Chris R. Homeister,Chief Executive Officer  EXHIBIT 31.2 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Kirk L. Geadelmann, 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 make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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) and 15d-15(f)) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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 theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date: February 26, 2016/s/ KIRK L. GEADELMANN Kirk L. Geadelmann,Chief Financial Officer  Exhibit 32.1Certification Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906of 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, Chris R. Homeister, the Chief Executive Officerof Tile Shop Holdings, Inc. (the “Company”), hereby certify that the Annual Report on Form 10-K of the Company for the year ended December 31, 2015(“the Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in theReport 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 Company andfurnished to the SEC or its staff upon request. Date: February 26, 2016/s/ CHRIS R. HOMEISTER Chris R. HomeisterChief Executive Officer  Exhibit 32.2Certification Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906of 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, Kirk L. Geadelmann, the Chief Financial Officerof Tile Shop Holdings, Inc. (the “Company”), hereby certify that the Annual Report on Form 10-K of the Company for the year ended December 31, 2015(“the Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in theReport 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 Company andfurnished to the SEC or its staff upon request. Date: February 26, 2016/s/ KIRK L. GEADELMANN Kirk L. GeadelmannChief Financial Officer 

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