Tile Shop Holdings
Annual Report 2016

Plain-text annual report

Table Of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K☒ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2016 or☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from toCommission File Number: 001-35629TILE 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 executive offices, including zip code)(763) 852-2950(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act: Title of each className of each exchange on which registeredCommon Stock, $0.0001 par valueThe NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate 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 to be filed 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 filing requirements forthe 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 File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant 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 notbe contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ☒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 thedefinitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12-b2 of the Exchange Act. Large accelerated filer ☒Accelerated filer ☐Non-accelerated filer ☐Smaller reporting company ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equitywas last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscalquarter was approximately: $756,087,352. For purposes of this calculation, the Company has included any shares held by Nabron International Inc. as sharesheld by non-affiliates.As of February 21, 2017, the registrant had 51,609,221 shares of common stock outstanding. 1 Table Of Contents TILE SHOP HOLDINGS, INC. FORM 10-K TABLE OF CONTENTS PART I ITEM 1.BUSINESS1 ITEM1A.RISK FACTORS5 ITEM1B.UNRESOLVED STAFF COMMENTS12 ITEM 2.PROPERTIES13 ITEM 3.LEGAL PROCEEDINGS13 ITEM 4.MINE SAFETY DISCLOSURES14 PART II ITEM 5.MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES15 ITEM 6.SELECTED FINANCIAL DATA17 ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS19 ITEM7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK31 ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA31 ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE31 ITEM9A.CONTROLS AND PROCEDURES32 ITEM9B.OTHER INFORMATION33 PART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE34 ITEM 11.EXECUTIVE COMPENSATION40 ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS51 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE54 ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES55 PART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES57 ​SIGNATURES82 ​POWER OF ATTORNEY 83 2 Table Of Contents PART I ITEM 1. BUSINESSOverviewThe Tile Shop was founded in 1985. We are a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials,and related accessories in the United States. Our assortment includes over 4,000 products from around the world that consist of naturalstone, ceramic, porcelain, glass, cement, wood look, and metal tiles. Natural stone products include marble, granite, quartz, sandstone,travertine, slate, and onyx tiles. The majority of our tile products are sold under our proprietary Rush River and Fired Earth brand names.We purchase our tile products, accessories and tools directly from our network of vendors. We manufacture our own setting andmaintenance materials, such as thinset, grout and sealers under our Superior brand name, as well as work with other vendors to manufactureprivate label products. As of December 31, 2016, we operated 123 stores in 31 states and the District of Columbia, with an average size ofapproximately 21,100 square feet. We also sell our products on our website.We believe that our long-term vendor 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. Wehave invested significant resources to develop our proprietary brands and product sources and believe that we are a leading retailer of stoneand ceramic tiles, accessories, and related materials in the United States.In 2016, we reported net sales and income from operations of $324.2 million and $32.9 million, respectively. Our 2015 and 2014 net saleswere $293.0 million and $257.2 million, respectively, and our 2015 and 2014 income from operations was $29.2 million and $21.6 million,respectively. We opened nine new stores and relocated two stores in 2016 and intend to open twelve to fifteen new stores in 2017. As of theend of fiscal years 2016 and 2015, we had total assets of $265.3 million and $245.0 million, respectively.Organizational HistoryTile Shop Holdings, Inc. (“Holdings,” and together with its wholly owned subsidiaries, the “Company” or “we”) was incorporated inDelaware in June 2012. On August 21, 2012, Holdings consummated the transactions contemplated pursuant to that certain Contributionand 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 Delaware limited liability company (“The Tile Shop”), and certain other parties. Througha series of transactions, The Tile Shop was contributed to and became a subsidiary of Holdings and Holdings effected a businesscombination with and became a successor issuer to JWCAC. These transactions are referred to herein as the “Business Combination.”Competitive StrengthsWe believe that the following factors differentiate us from our competitors and position us to continue to grow our specialty retailerbusiness.Inspiring Customer Experience – In each store, our products are brought to life by showcasing a broad array of the items we offer in up to50 different 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 maintenancematerials, accessories, and tools. We are able to maintain competitive prices by purchasing tile and accessories directly from producers andmanufacturing our own setting and maintenance materials.Customer Service and Satisfaction – Our sales personnel are highly-trained and knowledgeable about the technical and design aspects ofour products. We offer weekly do-it-yourself classes in all of our stores. In addition, we provide one-on-one installation training as requiredto meet customer needs. We accept 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 themto design products exclusively for us. We believe that these direct relationships differentiate us from our competitors.Proprietary Branding – We sell the majority of our products under our proprietary brand names, which help us to differentiate our productsfrom those of our competitors. We offer products across a range of price points and quality levels that allow us to target discrete marketsegments and to appeal to diverse groups of customers.Centralized Distribution System – We service our retail locations from five distribution centers. Our distribution centers, located inMichigan, Oklahoma, New Jersey, Virginia, and Wisconsin, are positioned to cost effectively service our existing stores.1 Table Of Contents Strategic PlanKey elements of our strategy include:Retail Talent Development – We previously made investments to improve our hiring, management and development training practiceswhich have resulted in significant reductions in sales associate turnover and increased our average store manager tenure. The improvementsin turnover and store manager tenure have proven to contribute to an increase in comparable store sales and store profitability. We plan tocontinue placing an emphasis on cultivating talent in our stores through recruiting, training programs and a lucrative career path. Webelieve the ongoing emphasis placed in these areas will continue to reduce turnover and produce the next generation of store leaders tosupport our long-term growth plans.Grow Professional Sales – During 2016, our initiatives focused on the professional customer that resulted in a significant increase inprofessional customer sales relative to total company sales. The professional customer includes tile contractors, custom home builders anddesigners. Key elements of this strategy included joining national and local trade organizations, developing marketing strategies, hostingin-store events, enhancing our product assortment of tool products and refining our credit policies. We believe that our value propositionsincluding a six month return policy, no restocking fees, convenient store hours, tiered discounts, product availability, broad assortment,private label setting materials, in-house credit, free design support and job site delivery are un-paralleled in the marketplace. Ourprofessional strategy enables our store associates to develop relationships with professionals in their trade area. Our corporate marketingteam supports the stores by developing traffic and “leads” through trade organization memberships, direct marketing, co-hosting events inour showrooms and other forms of digital marketing. We continuously expand our product assortment and merchandising square footage ofinstallation materials and tools to meet the changing and growing needs of our professional customers. We have also implemented trainingprograms and a standard operating processes to assist new store sales associates to quickly and successfully develop revenues fromprofessional customers. Creating awareness and increasing the frequency of professional visits to our stores continue to be importantelements of our revenue growth plans in 2017.Strong Execution of Store Unit Growth – We believe we have exceptional opportunities to continue to add stores in existing markets andexpand into new markets. We plan to increase our existing store base by 8 to 12 percent each year over the next several years. The majorityof the stores we intend to open in 2017 will be located in existing markets where we will be able to leverage economies of scale inmarketing, distribution, and store talent. We also intend to enter at least one new market in 2017. Additionally, we will continue to focus onstrategies to further enhance the return on our new store investments by selecting retail spaces that provides us the opportunity to reducethe initial investment to build a new store and, in some cases, the ongoing occupancy costs. Sales ModelWe principally sell our products directly to homeowners and professionals. With regard to individual customers, we believe that due to theaverage cost and relative infrequency of a tile purchase, many of our individual customers conduct extensive research using multiplechannels before making a purchase decision. Our sales strategy emphasizes customer service by providing comprehensive and convenienteducational tools on our website and in our stores for our customers to learn about our products and the tile installation process. Ourwebsite contains a broad range of information regarding our tile products, setting and maintenance materials, and accessories. Customerscan order samples, view catalogs, or purchase products from either our stores or website. In 2016, we introduced our new Digital DesignStudio, a dynamic tool that our customers and sales associates can use to design the layout of a bathroom, kitchen, or other room and makevarious product selections. Customers can choose to have their purchases delivered or picked up at one of our stores. We believe thisstrategy also positions us well with professional 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 21,100square feet, with a majority of the square footage devoted to the showroom and several thousand square feet of warehouse space, which isused primarily to hold customer orders waiting to be picked up or delivered. Our stores are typically accessible from major roadways andhave significant visibility to passing traffic. We can adapt to a range of existing buildings; free-standing or in shopping centers.Unlike many of our competitors, we devote a substantial portion of our retail store space to showrooms, including samples of our over 4,000products and up to 50 different vignettes of bathrooms, kitchens, fireplaces, foyers, outdoor living, and other distinct spaces that showcaseour products. Our showrooms are designed to provide our customers with a better understanding of how to integrate various types of tile inorder to create an attractive presentation in their homes. Many stores are also equipped with a training center designed to teach customershow to properly install tile.A typical store staff consists of a manager, an assistant manager, sales associates, and a warehouse leader. Our store managers are responsiblefor store operations and for overseeing our customers’ shopping experience. We offer financing to customers through a branded credit cardprovided by a third-party consumer finance company.2 Table Of Contents MarketingWe utilize a variety of marketing strategies and programs to acquire and retain customers, including both consumers and tradeprofessionals. Our advertising primarily consists of digital media, direct marketing including email and postal mail, in store events, andmobile and traditional media vehicles, including newspaper circular/print ads, radio, out of home and video. We continually test and learnfrom new media and adjust our programs based on performance.Our e-commerce site, tileshop.com, supports desktop, tablet and mobile devices and is designed for consumers, trade professionals andindustry stakeholders to learn about our brand, our value propositions, our product assortment, installation techniques, and to look up ourstore locations and account information. It hosts our Design Studio, a collaborative platform that enables the creation of customized 3Ddesign renderings to scale, allowing customers to bring their ideas to life. On social media, #TheTileShop provides current and prospectivecustomers a high level of brand engagement and enables customers to share their finished projects in our inspiration gallery. Tileshop.comalso serves as a commerce platform for our customers who want to purchase products within or outside of our physical store footprint.Products can be delivered to a job site, home or store location.ProductsWe offer a complete assortment of tile products, sourced directly from our vendors, including natural stone, ceramic, porcelain, glass,cement, wood look, and metal tiles. Natural stone products include marble, granite, quartz, sandstone, travertine, slate, and onyx tiles. Ourwide assortment of trim pieces, mosaics, pencils, listellos and other unique products encourage our customers to make a fashion statementwith their tile project. This also helps us to deliver a high level of customer satisfaction and drive repeat business. We also offer a broadrange of setting and maintenance materials, such as thinset, grout, sealers, and accessories, including installation tools, shower and bathshelves, drains, and similar products. We sell most of our products under our proprietary brand names, including Superior Adhesives &Chemicals, Superior Tools & Supplies, Rush River, and Fired Earth. In total, we offer over 4,000 different tile products, setting andmaintenance materials and accessory products. The percentage of sales by product category were comprised of the following for the yearsended December 31, 2016 and 2015:Years Ended December 31,20162015Natural Stone37 %39 %Ceramic and porcelain39 35 Setting, maintenance and accessories24 26 100 %100 %ManufacturersWe have long-standing relationships with our vendors throughout the world and work with them to design and manufacture productsexclusively for us. We believe that these direct relationships differentiate us from our competitors. We currently purchase tile products from approximately 200 different suppliers. Our top ten tile vendors accounted for 42% of our tilepurchases in 2016. Our largest supplier accounted for approximately 12% of our total purchases in 2016. We believe that alternative andcompetitive suppliers are available for most of our products. Purchases were made from the following continents for the years endedDecember 31, 2016 and 2015:Years Ended December 31,20162015Asia47 %49 %Europe (including Turkey)33 32 North America17 17 South America3 2 100 %100 %Distribution and Order FulfillmentWe take possession of our products in the country of origin and arrange for transportation to our distribution centers located in Michigan,Oklahoma, New Jersey, Virginia and Wisconsin. We also manufacture many of our setting and maintenance materials in Michigan,Oklahoma, Virginia, and Wisconsin. We maintain a large inventory of products in order to quickly fulfill customer orders.We fulfill customer orders primarily by shipping our products to our stores where customers can either pick them up or arrange for homedelivery. Orders placed on our website are shipped directly to customers’ homes from our distribution centers or a local store.3 Table Of Contents We continue to evaluate logistics alternatives to best serve our retail store base and our customers. We believe that our existing distributionfacilities will continue to play an integral role in our growth strategy, and we expect to establish one or more additional distribution centersto support geographic expansion of our retail store base and to support our store growth plans.CompetitionThe retail tile market is highly-fragmented. We compete directly with large national home centers that offer a wide range of homeimprovement products. In addition, we also compete with regional and local specialty retailers of tile, factory-direct stores, a large numberof privately-owned, single-site stores, and online only competitors. We also compete indirectly with companies that sell other types of floorcoverings, including wood floors, carpet, and vinyl. The barriers of entry into the retail tile industry are relatively low and new or existingtile retailers could enter our markets and increase the competition that we face. Many of our competitors enjoy competitive advantages overus, such as greater name recognition, longer operating histories, more varied product offerings, and greater financial, technical, and otherresources.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 ourcustomers, at an attractive value, in appealing and convenient retail store locations, with exceptional customer service and on-siteinstructional opportunities. Further, while some larger factory-direct competitors manufacture their own products, many of our competitorspurchase their tile from domestic manufacturers or distributors when they receive an order from a customer. We also believe that we offer abroader range of products and stronger in-store customer support than these competitors.EmployeesAs of December 31, 2016, we had 1,448 employees, 1,331 of whom were full-time and none of whom were represented by a union. Of theseemployees, 1,105 work in our stores, 72 work in corporate, store support, infrastructure or similar functions, and 271 work in distributionand manufacturing facilities. We believe that we have good relations with our employees.Property and TrademarksWe have registered and unregistered trademarks for all of our brands, including 19 registered trademarks. We regard our intellectualproperty as having significant value and our brands are an important factor in the marketing of our products. Accordingly, we have taken,and continue to take, appropriate steps to protect our intellectual property.Government RegulationWe are subject to extensive and varied federal, state and local government regulation in the jurisdictions in which we operate, includinglaws and regulations relating to our relationships with our employees, public health and safety, zoning, and fire codes. We operate each ofour stores, offices, and distribution and manufacturing facilities in accordance with standards and procedures designed to comply withapplicable laws, codes, and regulations.Our operations and properties are also subject to federal, state and local laws and regulations relating to the use, storage, handling,generation, transportation, treatment, emission, release, discharge and disposal of hazardous materials, substances and wastes and relating tothe investigation and cleanup of contaminated properties, including off-site disposal locations. We do not incur significant costscomplying with environmental laws and regulations. However, we could be subject to material costs, liabilities, or claims relating toenvironmental compliance in the future, especially in the event 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, includingthose issued and enforced by U.S. Customs and Border Protection. We work closely with our suppliers to ensure compliance with theapplicable laws and regulations in these areas.4 Table Of Contents Financial Information about Geographic AreasA majority of our revenues and profits are generated within the United States and nearly all of our long-lived assets are located within theUnited States as well. In 2014, we opened a sourcing office based in China.Available InformationWe are subject to the reporting requirements of the Securities Exchange Act of 1934 and its rules and regulations, as amended (the “1934Act”). The 1934 Act requires us to file periodic reports, proxy statements and other information with the Securities and ExchangeCommission (“SEC”). Copies of these reports, proxy statements and other information can be read and copied at the SEC Public ReferenceRoom, 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by callingthe SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s website athttp://www.sec.gov.We maintain a website at www.tileshop.com, the contents of which are not part of or incorporated by reference into this Annual Report onForm 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 amendmentsto those reports available on our website, free of charge, as soon as reasonably practicable after such reports have been filed with orfurnished to the SEC. Our Code of Business Conduct and Ethics, as well as any waivers from and amendments to the Code of BusinessConduct and Ethics, are also posted on our website. ITEM 1A. RISK FACTORSThe following are significant factors known to us that could adversely affect our business, financial condition, or operating results, as wellas adversely affect the value of an investment in our common stock. These risks could cause our actual results to differ materially from ourhistorical experience and from results predicted by forward-looking statements. All forward-looking statements made by us are qualified bythe risks described below. There may be additional risks that are not presently material or known. You should carefully consider each of thefollowing risks and all other information set forth in this Annual Report on Form 10-K.Our business, financial condition and operating results are dependent on general economic conditions and discretionary spending by ourcustomers, which in turn are also affected by a variety of factors beyond our control. If such conditions deteriorate, our business,financial condition and operating results may be adversely affected.Our business, financial condition and operating results are affected by general economic conditions and discretionary spending by ourcustomers. Such general 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;·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, increasingvolatility in financial and capital markets may cause some of the above factors to change with a greater degree of frequency and magnitudethan in the past. 5 Table Of Contents Our ability to grow and remain profitable may be limited by direct or indirect competition in the highly-competitive retail tile industry.The retail tile industry in the United States is highly competitive. Participants in the tile industry compete primarily based on productvariety, customer service, store location, and price. There can be no assurance that we will be able to continue to compete favorably withour 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-site stores and online-only competitors. We also compete indirectly with companies that sellother types of floor coverings, including wood floors, carpet, and vinyl sheet. In the past, we have faced periods of heightened competitionthat materially affected our results of operations. Certain of our competitors have greater name recognition, longer operating histories, morevaried product offerings, and substantially greater financial and other resources than us. Accordingly, we may face periods of intensecompetition in the future that could have a material adverse effect on our planned growth and future results of operations. Moreover, thebarriers to entry into the retail tile industry are relatively low. New or existing retailers could enter our markets and increase the competitionthat we face. In addition, manufacturers and vendors of tile and related products, including those whose products we currently sell, couldenter the United States retail tile market and start directly competing with us. Competition in existing and new markets may also prevent ordelay our ability to gain relative market share. Any of the developments described above could have a material adverse effect on ourplanned growth and future results of operations.If we fail to successfully manage the challenges that our planned growth poses or encounter unexpected difficulties during ourexpansion, our revenues and profitability could be materially adversely affected.One of our long-term objectives is to increase revenue and profitability through market share gains. Our ability to achieve market sharegrowth, however, is contingent upon our ability to open new stores and achieve operating results in new stores at the same level as oursimilarly situated current stores. We anticipate opening twelve to fifteen stores in fiscal year 2017. There can be no assurance that we willbe able to open stores in new markets at the rate required to achieve market leadership in such markets, identify and obtain favorable storesites, arrange favorable leases for stores, obtain governmental and other third-party consents, permits, and licenses needed to open oroperate stores in a timely manner, train and hire a sufficient number of qualified managers for new stores, attract a strong customer base andbrand familiarity in new markets, or successfully compete with established retail tile stores in the new markets that we enter. Failure to opennew stores in an effective and cost-efficient manner could place us at a competitive disadvantage as compared to retailers who are moreadept 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 fairindicator of our overall performance.Our same store sales have experienced fluctuations, which can be expected to continue. Numerous factors affect our same store sales results,including among others, the timing of new and relocated store openings, the relative proportion of new and relocated stores to maturestores, cannibalization resulting from the opening of new stores in existing markets, changes in advertising and other operating costs, thetiming and level of markdowns, changes in our product mix, weather conditions, retail trends, the retail sales environment, economicconditions, inflation, the impact of competition, and our ability to execute our business strategy. As a result, same store sales or operatingresults may fluctuate, and may cause the price of our securities to fluctuate significantly. Therefore, we believe that period-to-periodcomparisons of our same store sales may not be a reliable indicator of our future overall operating performance.We intend to open additional stores in both our existing markets and new markets, which poses both the possibility of diminishing salesby existing stores in our existing markets and the risk of a slow ramp-up period for stores in new markets.Our expansion strategy includes plans to open twelve to fifteen additional stores primarily in existing markets during 2017. Because ourstores typically draw customers from their local areas, additional stores may draw customers away from nearby existing stores and maycause same store sales performance at those existing stores to decline, which may adversely affect our overall operating results.Additionally, stores in new markets typically have a ramp-up period before sales become steady enough for such stores to be profitable. Ourability to open additional stores will be dependent on our ability to promote and/or recruit enough qualified store managers, assistant storemanagers, and sales associates. The time and effort required to train and supervise a large number of new managers and associates andintegrate them into our culture may divert resources from our existing stores. If we are unable to profitably open additional stores in bothnew and existing markets and limit the adverse impact of those new stores on existing stores, it may reduce our same store sales and overalloperating 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, andmanufacturing facilities as well as entering new markets. Such capital expenditures will include researching real estate and consumermarkets, leases, inventory, property and equipment costs, integration of new stores and markets into company-wide systems and programs,and other costs associated with new stores and market entry expenses and growth. If cash generated internally is insufficient6 Table Of Contents 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 the amount of capital expenditures that we maymake annually, depending on our leverage ratio. If we fail to obtain sufficient additional capital in the future or we are unable to makecapital expenditures under our credit facility, we could be forced to curtail our expansion strategies by reducing or delaying capitalexpenditures relating to new stores and new market entry. As a result, there can be no assurance that we will be able to fund our currentplans for the opening of new stores or entry into new markets.If we fail to identify and maintain relationships with a sufficient number of suppliers, our ability to obtain products that meet our highquality standards 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 contractualsupply agreements with our suppliers that obligate them to supply us with products exclusively or at specified quantities or prices. As aresult, our current suppliers may decide to sell products to our competitors and may not continue selling products to us. In order to retainthe competitive advantage that we believe results from these relationships, we need to continue to identify, develop and maintainrelationships with qualified suppliers that can satisfy our high standards for quality and our requirements for flooring and other products ina timely and efficient manner at attractive prices. The need to develop new relationships will be particularly important as we seek to expandour operations and enhance our product offerings in the future. The loss of one or more of our existing suppliers or our inability to developrelationships with new suppliers could reduce our competitiveness, slow our plans for further expansion, and cause our net sales andoperating results to be adversely affected.We source the over 4,000 products that we stock and sell from approximately 200 domestic and international vendors. We source a largenumber of those products from foreign manufacturers, including 42% of our products from a group of ten suppliers located in Asia, Europeand the United States. Our largest supplier accounted for approximately 12% of our total purchases in 2016. We generally take title to theseproducts sourced from foreign vendors overseas and are responsible for arranging shipment to our distribution centers. Financial instabilityamong key vendors, political instability, trade restrictions, tariffs, currency exchange rates, and transport capacity and costs are beyond ourcontrol 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 harmeddue to negative publicity and we could be subject to legal risk.We do not control the operations of our suppliers. Accordingly, we cannot guarantee that our suppliers will comply with applicableenvironmental and labor laws and regulations or operate in a legal, ethical, and responsible manner. Violation of environmental, labor orother laws by our suppliers or their failure to operate in a legal, ethical, or responsible manner could reduce demand for our products if, as aresult of such violation or failure, we attract negative publicity. Further, such conduct could expose us to legal risks as a result of thepurchase of products from non-compliant suppliers.Failure to address product safety concerns could adversely affect our sales and results of operations.If our products do not meet applicable safety standards or our customers’ expectations regarding safety, we could experience lost sales andincreased costs and be exposed to legal and reputational risk. All of our vendors must comply with applicable product safety laws, and weare dependent on them to ensure that the products we sell in our stores comply with all safety standards. Events that give rise to actual,potential or perceived product safety concerns could expose us to private ligation and result in costly product recalls and other liabilities.In addition, negative customer perceptions regarding the safety of the products we sell could cause our customers to purchase from ourcompetitors, resulting in a decrease in our sales. In those circumstances, it may be difficult and costly for us to regain the confidence of ourcustomers. If customers are unable to obtain third-party financing at satisfactory rates, sales of our products could be materially adversely affected.Our business, financial condition, and results of operations have been, and may continue to be affected, by various economic factors.Deterioration in the current economic environment could lead to reduced consumer and business spending, including by our customers. Itmay also cause customers to shift their spending to products that we either do not sell or that generate lower profitably for us. Further,reduced access to credit may adversely affect the ability of consumers to purchase our products. This potential reduction in access to creditmay adversely impact our ability to offer customers credit card financing through third party credit providers on terms similar to thoseoffered currently, or at all. In addition, economic conditions, including decreases in access to credit, may result in financial difficultiesleading to restructuring, bankruptcies, liquidations and other unfavorable events for our customers, which may adversely impact ourindustry, business, and results of operations.7 Table Of Contents Any failure by us to successfully anticipate consumer trends may lead to loss of consumer acceptance of our products, resulting inreduced revenues.Our success depends on our ability to anticipate and respond to changing trends in the tile industry and consumer demands in a timelymanner. If we fail to identify and respond to emerging trends, consumer acceptance of our merchandise and our image with current orpotential customers may be harmed, which could reduce our revenues. Additionally, if we misjudge market trends, we may significantlyoverstock unpopular products and be forced to reduce the sales price of such products, which would have a negative impact on our grossprofit and cash flow. Conversely, shortages of products that prove popular could also reduce our revenues.We depend on a few key employees, and if we lose the services of any of our executive officers, we may not be able to run ourbusiness effectively.Our future success depends in part on our ability to attract and retain key executive, merchandising, marketing, and sales personnel. If anyof these key employees ceases to be employed by us, we would have to hire additional qualified personnel. Our ability to successfully hireother experienced and qualified key employees cannot be assured and may be difficult because we face competition for these professionalsfrom our competitors, our suppliers and other companies operating in our industry. As a result, the loss or unavailability of any of our keyemployees could have a material adverse effect on us.We have entered into a $125.0 million credit facility. The burden of this additional debt could adversely affect us, make us morevulnerable to adverse economic or industry conditions, and prevent us from fulfilling our debt obligations or from funding ourexpansion 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 a term loan of $50.0 million and a revolving credit facility of $75.0 million. The terms of our credit facility and the burden of theindebtedness incurred thereunder could have serious consequences for us, such as: ·limiting our ability to obtain additional financing to fund our working capital, capital expenditures, debt service requirements,expansion strategy, 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, andcompetitive conditions; 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 limitour ability to, among other things:·incur indebtedness;·create liens;·engage in mergers or consolidations;·sell assets (including pursuant to sale and leaseback transactions);·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 creditfacility; and·change our lines of business.A breach of any of these covenants could result in an event of default under our credit facility. Upon the occurrence of an event of default,the lender could elect to declare all amounts outstanding under such facility to be immediately due and payable and terminate allcommitments to extend further credit, or seek amendments to our debt agreements that would provide for terms more favorable to suchlender and that we may have to accept under the circumstances. If we were unable to repay those amounts, the lender under our creditfacility could proceed against the collateral granted to them to secure that indebtedness.8 Table Of Contents If we fail to hire, train, and retain qualified store managers, sales associates, and other employees, our enhanced customer servicecould be compromised 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, commissionedsales associates. If we are unable to attract and retain qualified personnel and managers as needed in the future, including qualified salespersonnel, our level of 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 favorableterms, or if one or more of our current leases is terminated prior to expiration of its stated term and we cannot find suitable alternatelocations, our growth and profitability could be negatively impacted.We currently lease all of our store locations. Many of our current leases provide us with the unilateral option to renew for several additionalrental periods at specific rental rates. Our ability to re-negotiate favorable terms on an expiring lease or to negotiate favorable terms for asuitable alternate location, and our ability to negotiate favorable lease terms for additional store locations, could depend on conditions inthe real estate market, competition for desirable properties, our relationships with current and prospective landlords, or other factors that arenot within our control. Any or all of these factors and 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 affectour business.We must comply with various laws and regulations at the local, regional, state, federal, and international levels. These laws and regulationschange frequently and such changes can impose significant costs and other burdens of compliance on our business and vendors. Anychanges in regulations, the imposition 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 ForeignCorrupt Practices Act could have an adverse impact on our financial condition and results of operations. Changes in enforcement prioritiesby governmental agencies charged with enforcing existing laws and regulations could 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 weoperate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could result in anunfavorable change in our effective tax 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 toregional risks.We have a high concentration of stores in the midwest, mid-Atlantic, south and northeast regions. If these markets individually orcollectively suffer an economic downturn or other significant adverse event, there could be an adverse impact on same store sales, revenues,and profitability, and the ability to implement our planned expansion program. Any natural disaster, extended adverse weather or otherserious disruption in these markets due to fire, tornado, hurricane, or any other calamity could damage inventory and could result indecreased 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 relatedaccessories that we sell. These prices may fluctuate based on a number of factors beyond our control, including: oil prices, changes insupply and demand, general economic conditions, labor costs, competition, import duties, tariffs, currency exchange rates, and governmentregulation. In addition, energy costs have fluctuated dramatically in the past and may fluctuate in the future. These fluctuations may resultin an increase in our transportation costs for distribution from the manufacturer to our distribution centers and from our regionaldistribution centers to our retail stores, utility costs for our distribution and manufacturing centers and retail stores, and overall costs topurchase 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 continual rise in material and energy costs could adversely affect consumer spending and demand for our products and increase ouroperating costs, both of which could have a material adverse effect on our financial condition and results of operations.9 Table Of Contents Our success is highly dependent on our ability to provide timely delivery to our customers, and any disruption in our deliverycapabilities or our related planning and control processes may adversely affect our operating results.Our success is due in part to our ability to deliver products quickly to our customers, which requires successful planning and distributioninfrastructure, including ordering, transportation and receipt processing, and the ability of suppliers to meet distribution requirements. Ourability to maintain this success depends on the continued identification and implementation of improvements to our planning processes,distribution infrastructure, and supply chain. We also need to ensure that our distribution infrastructure and supply chain keep pace withour anticipated growth and increased number of stores. The cost of these enhanced processes could be significant and any failure tomaintain, grow, or improve them could adversely affect our operating results. Our business could also be adversely affected if there aredelays in product shipments due to freight difficulties, strikes, or other difficulties at our suppliers’ principal transport providers, orotherwise.Our success depends on the effectiveness of our marketing strategy.We believe that our growth was achieved in part through the effectiveness of our marketing strategies. Historically, we have used internet,print, and radio advertisements to encourage customers to visit our stores. A significant portion of our advertising was invested to supportthe opening of new stores and directed at professional customers. While our marketing strategy continues to support our growth strategyand remains focused on professional customers, we have broadened the reach and frequency of our advertising to increase the recognitionof our value proposition and the number of customers served. We may need to further increase our marketing expense to support ourbusiness strategies in the future. If our marketing strategies fail to draw customers in the future, or if the cost of advertising or othermarketing materials increases significantly, we could experience declines in our net sales and operating results.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,and the threat or outbreak of terrorism, civil unrest or other hostilities or conflicts could materially adversely affect our financialperformance. These events may result in damage to, or destruction or closure of, our stores, distribution centers and other properties. Suchevents can also adversely affect our work force and prevent employees and customers from reaching our stores and other properties, canmodify consumer purchasing patterns and decrease disposable income, and can disrupt or disable portions of our supply chain anddistribution 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 orregulations governing healthcare benefits or labor relations, such as the Affordable Care Act, and health and other insurance costs. If ourlabor and/or benefit costs increase, we may not be able to hire or maintain qualified personnel to the extent necessary to execute ourcompetitive strategy, which could adversely affect our results of operations.Our business operations could be disrupted if our information technology systems fail to perform adequately or if we are unable toprotect the integrity 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 systemsfail to perform as anticipated, we could experience difficulties in virtually any area of our operations, including but not limited toreplenishing inventories or delivering products to store locations in response to consumer demands. It is also possible that our competitorscould develop better online platforms than us, which could negatively impact our internet sales. Any of these or other systems-relatedproblems could, in turn, adversely affect our revenues and profitability.In connection with payment card sales and other transactions, including bank cards, debit cards, credit cards and other merchant cards, weprocess and transmit confidential banking and payment card information. Additionally, as part of our normal business activities, we collectand store sensitive personal information related to our employees, customers, vendors and other parties. Despite our security measures, ourinformation technology and infrastructure may be vulnerable to criminal cyber-attacks or security incidents due to employee error,malfeasance or other vulnerabilities. Any such incidents could compromise our networks and the information stored there could beaccessed, publicly disclosed, lost or stolen. Third parties may have the technology and know-how to breach the security of this information,and our security measures and those of our banks, merchant card processing and other technology vendors may not effectively prohibitothers from obtaining improper access to this information. The techniques used by criminals to obtain unauthorized access to sensitive datachange frequently and often are not recognized until launched against a target; accordingly, we may be unable to anticipate thesetechniques or implement adequate preventative measures.Many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. Thesemandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our customers to lose10 Table Of Contents confidence in the effectiveness of our data security measures. Any security breach, whether successful or not, would harm our reputationand could cause the loss of customers.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 insuranceplans and are responsible for losses up to a certain limit for these respective plans. In 2014, we became self-insured with regard to workers’compensation coverage, in which case we are responsible for losses up to certain retention limits on both a per-claim and aggregate basis.For policies under which we are responsible for losses, we record a liability that represents our estimated cost of claims incurred and unpaidas of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, includinghistorical trends and economic conditions, and is closely monitored and adjusted when warranted by changing circumstances. Fluctuatinghealthcare costs, our significant growth rate and changes from our past experience with workers’ compensation claims could affect theaccuracy of estimates based on historical experience. Should a greater amount of claims occur compared to what was estimated or medicalcosts increase beyond what was expected, our accrued liabilities might not be sufficient and we may be required to record additionalexpense. Unanticipated changes may produce materially different amounts of expense than that reported under these programs, which couldadversely impact our operating results.We are involved in a number of legal proceedings and, while we cannot predict the outcomes of such proceedings and othercontingencies with certainty, 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 theoutcomes of these legal proceedings. The outcome of some of these legal proceedings could require us to take, or refrain from taking,actions which could negatively affect our operations or could require us to pay substantial amounts of money adversely affecting ourfinancial condition and results of operations. Additionally, defending against lawsuits and proceedings may involve significant expenseand 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 tothose otherwise described 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 us 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 theoperating performance of particular companies but may cause declines in the market price of our common stock. The price of our commonstock could fluctuate based upon factors that have little or nothing to do with our company or its performance.If we discontinue or alter our quarterly dividend program, or if we are unable to pay quarterly dividends at intended levels, ourreputation and stock price may be harmed.The payment of, or continuation of, our quarterly dividend is at the discretion of our Board of Directors and is dependent upon our financialcondition, results of operations, capital requirements, general business conditions, tax treatment of dividends in the United States, potentialfuture contractual restrictions contained in credit agreements and other agreements and other factors deemed relevant by our Board ofDirectors. Additionally, because our quarterly dividend program requires the use of a moderate portion of our cash flow, our ability to paydividends will depend on our ability to generate sufficient cash flows from operations in the future. This ability may be subject to certaineconomic, financial, competitive and other factors that are beyond our control. Any failure to pay quarterly dividends after we haveannounced our intention to do so, or any changes to our quarterly dividend program, may negatively impact our reputation, our stock price,and investor confidence in us.11 Table Of Contents We are a holding company with no business operations of our own and depend on cash flow from The Tile Shop to meet ourobligations.We are a holding company with no business operations of our own or material assets other than the equity of our subsidiaries. All of ouroperations are conducted by our subsidiary, The Tile Shop. As a holding company, we will require dividends and other payments from oursubsidiaries to meet cash requirements. The terms of any future credit facility may restrict our subsidiaries from paying dividends andotherwise transferring cash or other assets to us, although our current facility does not restrict this action. If there is an insolvency,liquidation, or other reorganization of any of our subsidiaries, our stockholders likely will have no right to proceed against their assets.Creditors of those subsidiaries will be entitled to payment in full from the sale or other 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. If The Tile Shop is unable to pay dividends ormake other payments to us when needed, we will be unable to satisfy our obligations.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., togetherwith their affiliates, beneficially hold approximately 40% of our outstanding shares of common stock. As a result, these stockholders, ifacting together, have the ability to influence the outcome of corporate actions requiring stockholder approval. This concentration ofownership may have the effect of delaying or preventing 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 impaira takeover attempt.Our certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing changes in control orchanges in our management 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 themembership of a majority 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 Directorsor the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our Board ofDirectors;·the ability of our Board of Directors to determine to issue shares of preferred stock and to determine the price and other terms ofthose shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilutethe ownership of a hostile acquirer;·a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or specialmeeting of our stockholders;·the requirement that a special meeting of stockholders may be called only by the chairman of the Board of Directors, the chiefexecutive officer, or the Board of Directors, which may delay the ability of our stockholders to force consideration of a proposal orto 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 tocancel previously 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 topropose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting asolicitation of proxies to elect the acquirer’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 CorporationLaw, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain businesscombinations without approval of the holders of substantially all of our outstanding common stock. Any provision of our certificate ofincorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit12 Table Of Contents the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that someinvestors are willing to pay for our common stock. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 13 Table Of Contents ITEM 2. PROPERTIESAs of December 31, 2016, we operated 123 stores located in 31 states and the District of Columbia with an average square footage ofapproximately 21,100 square feet. The table below sets forth the locations (alphabetically by state) of our 123 stores in operation as ofDecember 31, 2016.StateStoresStateStoresStateStoresStateStoresArkansas1 Iowa1 Minnesota7 Oklahoma2 Arizona2 Illinois11 Missouri5 Pennsylvania5 Colorado3 Indiana4 North Carolina4 Rhode Island1 Connecticut2 Kansas2 Nebraska1 South Carolina2 Delaware1 Kentucky3 New Jersey6 Tennessee3 District of Columbia1 Massachusetts3 New Mexico1 Texas10 Florida4 Maryland4 New York8 Virginia6 Georgia3 Michigan6 Ohio8 Wisconsin3 Total123 We lease all of our stores. Our approximately 15,000 square foot headquarters in Plymouth, Minnesota is attached to our retail store. Weown four regional facilities used for distribution of purchased product and manufacturing of setting and maintenance materials, located inSpring 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 also lease a distribution facility in Dayton, New Jersey that is 103,000 square feet.We believe that our material property holdings are suitable for our current operations and purposes. We intend to open twelve to fifteen newretail locations in 2017. ITEM 3. LEGAL PROCEEDINGSThe Company, two of its former executive officers, three of its outside directors, two of its former directors, and certain companies affiliatedwith the directors, are defendants in a consolidated class action brought under the federal securities laws and now pending in the UnitedStates District Court for the District of Minnesota under the caption Beaver County Employees’ Retirement Fund, et al. v. Tile ShopHoldings, Inc., et al. Several related actions were filed in 2013 and subsequently consolidated. The plaintiffs are three investors whorepresent classes consisting of (1) all purchasers of Tile Shop common stock between August 22, 2012 and January 28, 2014 (the “classperiod”), seeking to pursue remedies under the Securities Exchange Act of 1934; and (2) all purchasers of Tile Shop common stockpursuant and/or traceable to the Company’s December 2012 registration statement, seeking to pursue remedies under the Securities Act of1933. Six firms who were underwriters in the December 2012 secondary public offering are also named as defendants. The plaintiffs allegethat during the class period, defendants failed to disclose certain related party transactions in the Company’s SEC filings and pressreleases. The plaintiffs assert claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and under Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934. In addition to attorneys’ fees and costs, the plaintiffs seek to recover damages on behalf of classmembers. Subsequent to December 31, 2016, the parties have entered into a Stipulation of Settlement (“Stipulation”) dated January 13,2017 to settle all claims. Pursuant to the Stipulation, $9.5 million will be paid on behalf of all defendants. The Company has agreed topay $5.0 million of that amount and the insurance company providing coverage for the initial tier of the Company’s directors and officer’spolicy has agreed to pay $4.5 million of the settlement. The Company and the insurance provider subsequently transferred money to anescrow account that had been established to hold the settlement fund. The settlement is subject to court approval. The court has scheduleda hearing on whether to grant final approval of the settlement for May 3, 2017.The net charge of $5.0 million was recorded in selling, general and administrative expenses in the Consolidated Statement of Operationsduring the year ended December 31, 2016. The Company recorded a $9.5 million other current liability and a $4.5 million other currentasset in the Consolidated Balance Sheet as of December 31, 2016 to reflect the Company’s obligation to the class and the correspondingreceivable from the insurance company. The Company will pursue recovery of this amount as well as other legal fees incurred in connectionwith this case from its insurance providers who cover losses under the directors and offers policy exceeding the initial tier of coverage.The Company also is a Defendant in three actions brought derivatively on behalf of the Company by three shareholders in the Court ofChancery for the State of Delaware (“Delaware Chancery Court”). Two of the actions were filed in 2015 and then consolidated (the“Consolidated Actions”). On July 31, 2015, the plaintiff-shareholders in the Consolidated Actions filed a consolidated complaint. Theconsolidated complaint names as defendants four current members of the Company’s Board of Directors, two of its former directors, and aformer employee of the Company. The third action (the “Third Action”) was filed on or about September 28, 201614 Table Of Contents against seven members of the Company’s Board of Directors, a former officer, and a former employee. All of the complaints track many ofthe same factual allegations as have been made in the above-described federal securities class action. They allege that the defendant-directors and/or officer breached their fiduciary duties by failing to adopt adequate internal controls for the Company, by approving falseand misleading statements issued by the Company, by causing the Company to violate generally accepted accounting principles and SECregulations, by engaging in or approving alleged insider trading, and by permitting the Company’s primary product to contain illegalamounts of lead. The complaints also allege claims for insider trading and/or unjust enrichment. The complaints seek damages,disgorgement, an award of attorneys’ fees and other expenses, and an order compelling changes to the Company’s corporate governanceand internal procedures. In 2015, the defendants moved to dismiss the Consolidated Actions, or in the alternative, to stay the ConsolidatedActions pending resolution of the Beaver County Employees’ Retirement Fund action described above. Subsequently, upon agreement ofthe parties, the Court entered an Order staying the Consolidated Actions. Recently the Company moved to dismiss the newly-filed ThirdAction, or in the alternative, to stay the Third Action until resolution of the Beaver County Employees’ Retirement Fund action describedabove, or until the Company’s Board of Directors takes action on the demand described below. That motion has not yet been decided.By letter dated May 19, 2016, a shareholder of the Company, through his attorney and prior to filing the Third Action, demanded that theBoard of Directors investigate alleged breaches of fiduciary duty related to the same matters described above, and take action againstcertain present and former officers and directors of the Company. The Board of Directors has appointed a committee of two independentdirectors to investigate and evaluate the matters raised in the demand letter, and to recommend to the Company’s Board of Directors whatactions, if any should be taken by the Company with respect to the matters raised in the demand letter.Given the uncertainty of litigation and the preliminary stage of these cases, the Company cannot reasonably estimate the possible loss orrange of loss that may result from these actions. The Company maintains directors and officers liability insurance policies that may reducethe Company’s exposure, if any. In the event the Company incurs a loss, the Company will pursue recoveries to the maximum extentavailable 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 ofmanagement, while the outcome of such claims and disputes cannot be predicted with certainty, the Company’s ultimate liability inconnection with these matters is not expected to have a material adverse effect on the results of operations, financial position, or cash flows. ITEM 4. MINE SAFETY DISCLOSURESNone. 15 Table Of Contents Part II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIESOur common stock is traded on The NASDAQ Stock Market under the symbol “TTS”. The following table shows the high and low saleprices per share of our common stock as reported on The NASDAQ Stock Market for the periods indicated:Common StockQuarterHighLowFiscal 2015First$12.55 $6.95 Second$15.25 $11.51 Third$15.00 $11.32 Fourth$17.50 $11.67 Fiscal 2016First$16.63 $12.40 Second$20.00 $14.53 Third$21.05 $15.05 Fourth$21.40 $15.95 As of February 21, 2017, we had approximately 34 holders of record of our common stock. This figure does not include the number ofpersons whose securities are held in nominee or “street” name accounts through brokers.As of February 21, 2017, we had outstanding a total of 51,609,221 shares of common stock. The last reported sales price for our commonstock on February 21, 2017 was $18.00.DividendsHistorically, we have not paid dividends to our stockholders. On February 14, 2017 the Company declared a $0.05 dividend tostockholders of record as of the close of business on March 14, 2017. The dividend will be paid on March 24, 2017. It is our intent tocontinue to pay quarterly dividends in the future; however, we may suspend or change this program at any time and there can be noguarantee that we will continue to pay dividends in any specific amount or at any specific time. Securities Authorized for Issuance Under Equity Compensation PlansFor information on our equity compensation plans, refer to Item 12, “Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters.”Recent Sales of Unregistered SecuritiesNone.Issuer Purchases of Equity SecuritiesNone. 16 Table Of Contents Stock Performance Graph The graph and table below present the Company’s cumulative total stockholder returns relative to the performance of the S&P SmallCap600 and the Dow Jones U.S. Furnishings Index for the period commencing August 22, 2012, the date of the Business Combination, andending December 31, 2016, the last trading day of fiscal 2016. The comparison assumes $100 invested at the close of trading on August 22,2012 in (i) the Company’s common stock, (ii) the stocks comprising the S&P SmallCap 600, and (iii) the stocks comprising the Dow JonesU.S. Furnishings Index. All values assume that all dividends were reinvested on the date paid. The points on the graph represent fiscalquarter-end amounts based on the last trading day in each fiscal quarter. The stock price performance included in the line graph below isnot necessarily indicative of future stock price performance.Tile Shop Holdings, Inc.S&P Small Cap 600Dow Jones U.S. Furnishings IndexAugust 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 March 31, 2016$114.69 $150.13 $212.68 June 30, 2016$152.92 $154.81 $214.45 September 30, 2016$127.31 $165.41 $212.37 December 31, 2016$150.38 $183.13 $229.62 17 Table Of Contents ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical financial information derived from (i) our audited financial statements included elsewherein this report as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014 and (ii) our audited financialstatements not included elsewhere in this report as of December 31, 2014 2013 and 2012 and for the years ended December 31, 2012. Thefollowing selected financial data should be read in conjunction with the section entitled “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and the financial statements and the related notes appearing elsewhere in this report. As of December 31, or for the year ended December 31, 2016 2015 2014 2013 2012 (in thousands, except per share data) Statement of Income Data Net sales $324,157 $292,987 $257,192 $229,564 $182,650 Cost of sales 97,261 89,377 78,300 68,755 49,626 Gross profit 226,896 203,610 178,892 160,809 133,024 Selling, general and administrative expenses 193,983 174,384 157,316 127,731 94,716 Deferred compensation expense - - - - 3,897 Income from operations 32,913 29,226 21,576 33,078 34,411 Interest expense 1,715 2,584 3,141 2,581 1,252 Change in fair value of warrants - - - 54,219 82,063 Other income (expense) 141 130 (506) 4 15 Income (loss) before income taxes 31,339 26,772 17,929 (23,718) (48,889) Provision for (benefit) from income taxes(1) 12,876 11,076 7,382 11,942 (2,002) Net income (loss) $18,463 $15,696 $10,547 $(35,660) $(46,887) Earnings per share(1) $0.36 $0.31 $0.21 $(0.72) $(1.31) Weighted average shares outstanding (diluted) 51,880 51,305 51,030 49,600 35,838 Balance Sheet Data Cash and cash equivalents $6,067 $10,330 $5,759 $1,761 $2,987 Inventories 74,295 69,878 68,857 67,756 46,890 Total assets 265,273 245,007 252,190 241,642 176,074 Warrant liability - - - - 95,645 Total debt and capital leaseobligations, including currentmaturities(2) 29,208 56,812 93,264 96,676 74,824 Total stockholders' equity 138,899 115,201 93,695 78,496 (46,130) Working capital 36,013 47,497 52,468 51,719 35,934 Cash Flow Data Net cash provided by operating activities $53,552 $60,264 $47,201 $21,211 $47,222 Net cash used in investing activities (27,252) (18,994) (40,552) (52,955) (29,064) Net cash (used in) provided by financing activities (30,528) (36,688) (2,651) 30,518 (21,454) Other Selected Financial Data (unaudited) Adjusted EBITDA(3) $68,047 $58,420 $47,460 $54,294 $50,634 Adjusted EBITDA margin(3) 21.0 % 19.9 % 18.5 % 23.7 % 27.7 %Gross margin(4) 70.0 % 69.5 % 69.6 % 70.0 % 72.8 %Operating income margin(5) 10.2 % 10.0 % 8.4 % 14.4 % 18.8 %Same stores sales growth(6) 7.6 % 7.4 % (0.4)% 12.4 % 7.1 %Stores open at end of period 123 114 107 88 68 (1)Historical amounts do not include pro forma adjustments for income taxes as a result of our change in tax status, which was effectiveon August 21, 2012 upon consummation of the Business Combination.(2)Amounts as of December 31, 2016 and 2015 consist of total debt and capital lease obligations, including current maturities, net ofdebt issuance costs. Amounts as of December 31, 2014, 2013, and 2012 include total debt and capital lease obligations, includingcurrent maturities.18 Table Of Contents (3)We calculate Adjusted EBITDA by taking net income calculated in accordance with accounting principles generally accepted in theUnited States, or GAAP, and adjusting for interest expense, income taxes, depreciation and amortization, non-cash change in fairvalue of warrants, deferred compensation expense, stock based compensation expense, and special charges including equity relatedtransaction costs, litigation and investigation costs, and the write-off of debt issuance costs. Adjusted EBITDA margin is equal toAdjusted EBITDA divided by net sales. We believe that these non-GAAP measures of financial results provide useful information tomanagement and investors regarding certain financial and business trends relating to our financial condition and results ofoperations. Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses,for purposes of determining management incentive compensation, and for budgeting and planning purposes. These measures are usedin monthly financial reports prepared for management and our Board of Directors. We believe that the use of these non-GAAPfinancial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and incomparing our financial measures with other specialty retailers, many of which present similar non-GAAP financial measures toinvestors.(4)Gross margin is gross profit divided by net sales.(5)Operating income margin is income from operations divided by net sales.(6)Same store sales growth is the percentage change in sales of comparable stores period over period. A store is considered comparableon the first day of the 13th full month of operation. When a store in relocated, it is excluded from the same stores sales growthcalculation. Same store sales growth amounts include total charges to customers less any actual returns. Beginning in 2015, weinclude estimated return provisions and sales allowances in the same store sales calculation. Prior to 2015, we did not includeestimated return provisions or sale allowances in the same store sales calculation, as return reserves were calculated on a consolidatedlevel. Same store sales data reported by other companies may be prepared on a different basis and therefore may not be useful forpurposes of comparing our results to those of other businesses. Reconciliation of Non-GAAP Adjusted EBITDA to GAAP Net Income (Loss)Years Ended December 31,20162015201420132012(in thousands)Net income (loss)$18,463 $15,696 $10,547 $(35,660)$(46,887)Interest expense1,715 2,584 3,141 2,581 1,252 Income taxes12,876 11,076 7,382 11,942 (2,002)Change in fair value of warrants - - -54,219 82,063 Depreciation & amortization23,042 22,236 19,925 14,316 10,530 Deferred compensation expense - - - -3,897 Special charges7,618 1,283 1,848 2,216 400 Stock based compensation4,333 5,545 4,617 4,680 1,381 Adjusted EBITDA$68,047 $58,420 $47,460 $54,294 $50,634 Our management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined inaccordance with GAAP. The principal limitations of these non-GAAP financial measures are that they exclude significant expenses andincome that are required by GAAP to be recognized in our consolidated financial statements. In addition, they are subject to inherentlimitations as they reflect the exercise of judgments by management about which expenses and income are excluded or included indetermining these non-GAAP financial measures. In order to compensate for these limitations, management presents non-GAAP financialmeasures in connection with GAAP results. We urge investors to review the reconciliation of our non-GAAP financial measures to thecomparable GAAP financial measures and not to rely on any single financial measure to evaluate our business. 19 Table Of Contents ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion and analysis together with “Selected Financial Data” and our consolidated financialstatements and related notes included elsewhere in the Annual Report on Form 10-K. Among other things, those historical consolidatedfinancial statements include more detailed information regarding the basis of presentation for the financial data than are included in thefollowing discussion. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the “safe harbor”provisions of the Private Securities Litigation Reform Act of 1995. In some cases you can identify these statements by forward-lookingwords such as “may,” “might,” “will,” “will likely result,” “should,” “anticipates,” “expects,” “intends,” “plans,” “seeks,” “estimates,”“potential,” “continue,” “believes” and similar expressions, although some forward-looking statements are expressed differently. Theforward-looking statements in this Form 10-K relate to, among others things, our anticipated new store openings and growthopportunities; our business strengths, competitive advantages and role in our industry and markets; the anticipated benefits of ourstrategic plan; legal proceedings; our intended future process for determining and assessing compensation; our expectations for thefuture use of equity incentive plans; our expectations regarding financing arrangements; our expectations with respect to dividendpayments; our retail sales and market share expectations; depreciation and amortization expense; supply costs and expectations; costsand adequacy of insurance; our expectations with respect to ongoing compliance with the terms of our credit facility; the effect ofregulations on us and our industry and our compliance with such regulations; our expectations regarding the effects of employeerecruiting, training and mentoring; and our anticipated revenues, expenses, and capital requirements.These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that maycause our actual results, performance, or achievements to differ materially from any expected future results, performance, or achievementsexpressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that couldbe deemed forward-looking statements. These risks and uncertainties include, but are not limited to:·the level of demand for our products;·our ability to grow and remain profitable in the highly competitive retail tile industry;·our ability to access additional capital;·our ability to attract and retain qualified personnel;·changes in general economic, business and industry conditions;·our ability to introduce new products that satisfy market demand; and·legal, regulatory, and tax developments, including additional requirements imposed by changes in domestic and foreign laws andregulations, 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 underlyingassumptions prove incorrect, actual results may vary materially from those expected, estimated, or projected. Such risks and uncertaintiesalso include those set forth under “Risk Factors” in Item 1A of this Form 10-K. Our forward-looking statements speak only as of the timethat they are made and do not necessarily reflect our outlook at any other point in time. Except as required by law or regulation, weundertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or forany other reason. OverviewWe are a specialty retailer of natural and manufactured stone tiles, setting and maintenance materials, and related accessories in the UnitedStates. We offer a wide selection of products, attractive prices, and exceptional customer service in an extensive showroom setting. As ofDecember 31, 2016, we operated 123 stores in 31 states and the District of Columbia, with an average size of approximately 21,100 squarefeet. We also sell our products on our website.We purchase our tile products and accessories directly from suppliers and manufacture our own setting and maintenance materials, such asthinset, grout, and sealers. We believe that our long-term supplier relationships, together with our design, manufacturing and distributioncapabilities, enable us to offer a broad assortment of high-quality products to our customers, who are primarily homeowners andprofessionals, at competitive prices. We have invested significant resources to develop our proprietary brands and product sources, andbelieve that we are a leading retailer of natural and manufactured stone tiles, accessories, and related materials in the United States.We believe that the highly-fragmented United States retail tile market provides us with a significant opportunity to expand our store base.We opened nine new stores and relocated two stores in the United States in 2016, and plan to open twelve to fifteen stores in 2017. Webelieve that there will continue to be additional expansion opportunities in the United States and Canada. We expect store20 Table Of Contents base growth will drive increased net sales and income from operations. Our growth plans also require us to maintain significant inventoryon-hand in order to fulfill orders at these new locations.The table below sets forth information about our net sales, operating income and stores opened from 2014 to 2016.For the year ended December 31,201620152014(in thousands, except store data)Net sales$324,157 $292,987 $257,192 Income from operations$32,913 $29,226 $21,576 New stores opened during period9 7 19 Net cash provided by operating activities was $53.6 million and $60.3 million for 2016 and 2015, respectively, which was used to fundcapital expenditures for opening new stores and daily operations. We expect to continue to fund our capital expenditures and dailyoperations from our operating cash flows. As of December 31, 2016, we had cash of $6.1 million and working capital of $36.0 million.We plan to continue to improve customer service by continuing to make investments in our highly-trained staff in existing stores,recruiting and training for new store staff, and leadership development of our market managers, store managers, senior assistant storemanagers and assistant store managers. 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 twelve to fifteen stores during 2017. Key Components of our Consolidated Statements of OperationsNet Sales – Net sales represents total charges to customers, net of returns, and includes freight charged to customers. We recognize sales atthe time that the customer takes possession of the merchandise or final delivery of the product has occurred. We recognize service revenue,which consists primarily of freight charges for home delivery, when the service has been rendered. We are required to charge and collectsales and other taxes on sales to our customers and remit these taxes back to government authorities. Total revenues do not include sales taxbecause we are a pass-through conduit for collecting and remitting sales tax. The increase in net sales in recent years has been a result ofnew store openings in 2014, 2015 and 2016, as well as increases in comparable store sales in 2015 and 2016.The table below sets forth information about our same store sales growth from 2014 to 2016. Same store sales amounts include amountscharged to customers for orders delivered less the value of orders returned. In general, we consider a store comparable on the first day of the13th full month of operation. For the year ended December 31,201620152014Same store sales growth (decline)7.6 %7.4 %(0.4)%Our increase in same store sales growth is primarily attributable to increases in number of orders, as well as increases in average order size.During 2014, the decrease in comparable sales was attributable to several factors including a challenging macroeconomic environmentduring which time existing home sales decreased, which resulted in a decrease in traffic in our stores. In addition, we experienced higherturnover of store managers and sales associates which also negatively impacted sales during the year. Finally, many of our newly-openedstores were in new markets and we did not have a consistent and disciplined grand-opening marketing plan to drive brand awareness aroundthe time of the grand opening. The same store sales increases in 2015 and 2016 were attributable to the growth in professional customersales, an increase in marketing effectiveness, a reduction of sales associate turnover, an increase in average manager tenure, and investmentsmade to help improve sales performance at newly opened stores.We opened nine, seven, and nineteen new stores in 2016, 2015 and 2014, respectively. We relocated two, zero, and one store in 2016, 2015 and 2014, respectively. Net sales at new stores are generally lowest in the first few months after a location is opened and generallyincrease over time. We expect a store’s net sales to increase faster during its first four years of operation than in its later years. Storelocations 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 thosemarkets.Cost of Sales – Cost of sales consists primarily of material costs, freight, certain shipping and handling costs, duties, delivery of product tocustomers, shrink, damage, as well as costs associated with manufacturing 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. In2016, 2015 and 2014, our gross margin was 70.0%, 69.5%, and 69.6%, respectively. We have been able to maintain relatively21 Table Of Contents stable gross margins as a result of product cost control, moderating our price promotions and training and incenting our store salesassociates 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, and administrative expenses. Payroll costs exclude costs associated with manufacturing labor costs and certain handling andreceiving costs, as those costs are included in cost of sales. In 2016, 2015, and 2014, our selling, general, and administrative expenses as apercentage of net sales was 59.8%, 59.5% and 61.2%, respectively. Selling, general, and administrative expenses increased as a percentageof net sales in 2016 compared to 2015 due to an increase in special charges. Special charges include costs of $7.6 million, $1.3 million, and$1.8 million for the fiscal years 2016, 2015 and 2014, respectively, which primarily relate to litigation expenses.Pre-opening Costs – Our pre-opening costs are those typically associated with the opening of a new store and generally include rentexpense, payroll costs, occupancy costs and promotional costs. Pre-opening costs are expensed as incurred and recorded in selling, generaland 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. Oureffective tax rate for fiscal years 2016, 2015 and 2014 was 41.1%, 41.4% and 41.2%, respectively. Adjusted EBITDAWe calculate Adjusted EBITDA by taking net income calculated in accordance with accounting principles generally accepted in the UnitedStates (“GAAP”) and adjusting for interest expense, income taxes, depreciation and amortization, non-cash change in fair value of warrants,deferred compensation expense, stock based compensation expense, and special charges, which consists of equity related transaction costs,litigation and investigation costs, and losses incurred with the renegotiation of debt. Free cash flows is calculated by taking net cashprovided by operating activities and subtracting net cash used for the purchase of property, plant and equipment. Non-GAAP net incomeexcludes special charges, which consist of shareholder investigation and other litigation costs, equity related transaction costs, and lossesincurred in connection with the renegotiation of debt, and is net of tax.We believe that these non-GAAP measures of financial results provide useful information to management and investors regarding certainfinancial and business trends relating to our financial condition and results of operations. Our management uses these non-GAAP measuresto compare our performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation,and for budgeting and planning purposes. These measures are used in monthly financial reports prepared for management and our Board ofDirectors. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluatingongoing operating results and trends and in comparing our financial measures with other specialty retailers, many of which present similarnon-GAAP financial measures to investors.Years Ended December 31,20162015201420132012(in thousands)Net income (loss)$18,463 $15,696 $10,547 $(35,660)$(46,887)Interest expense1,715 2,584 3,141 2,581 1,252 Income taxes12,876 11,076 7,382 11,942 (2,002)Change in fair value of warrants - - -54,219 82,063 Depreciation & amortization23,042 22,236 19,925 14,316 10,530 Deferred compensation expense - - - -3,897 Special charges7,618 1,283 1,848 2,216 400 Stock based compensation4,333 5,545 4,617 4,680 1,381 Adjusted EBITDA$68,047 $58,420 $47,460 $54,294 $50,634 22 Table Of Contents The reconciliation of net cash provided by operating activities to non-GAAP free cash flows for the years ended December 31, 2016, 2015and 2014 is as follows:Years Ended December 31,201620152014(in thousands)Net cash provided by operating activities$53,552 $60,264 $47,201 Purchase of property, plant and equipment(27,256)(18,994)(41,229)Free cash flow$26,296 $41,270 $5,972 The reconciliation of GAAP income to Non-GAAP income for the years ended December 31, 2016, 2015 and 2014 is as follows:Year Ended December 31, 2016Per SharePretaxNet of TaxAmounts(in thousands, except per share data)GAAP income$31,339 $18,463 $0.36 Special charges:Shareholder and other litigation costs7,618 4,632 0.09 Non-GAAP income$38,957 $23,095 $0.45 Year Ended December 31, 2015Per SharePretaxNet of TaxAmounts(in thousands, except per share data)GAAP income$26,772 $15,696 $0.31 Special charges:Shareholder and other litigation costs1,283 752 0.01 Write-off of debt issuance costs194 114 0.00 Non-GAAP income$28,249 $16,562 $0.32 Year Ended December 31, 2014Per SharePretaxNet of TaxAmounts(in thousands, except per share data)GAAP income$17,929 $10,547 $0.21 Special charges:Shareholder and other litigation costs1,848 1,086 0.02 Non-GAAP income$19,777 $11,633 $0.23 Our management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined inaccordance with GAAP. The principal limitations of these non-GAAP financial measures are that they exclude significant expenses andincome that are required by GAAP to be recognized in our consolidated financial statements. In addition, they are subject to inherentlimitations as they reflect the exercise of judgments by management about which expenses and income are excluded or included indetermining these non-GAAP financial measures. In order to compensate for these limitations, management presents non-GAAP financialmeasures in connection with GAAP results. We urge investors to review the reconciliation of our non-GAAP financial measures to thecomparable GAAP financial measures and not to rely on any single financial measure to evaluate our business.23 Table Of Contents Comparison of the Year Ended December 31, 2016 to the Year Ended December 31, 20152016% of sales2015% of sales(1)(in thousands)Net sales$324,157 $292,987 Cost of sales97,261 30.0 %89,377 30.5 %Gross profit226,896 70.0 %203,610 69.5 %Selling, general and administrative expenses193,983 59.8 %174,384 59.5 %Income from operations32,913 10.2 %29,226 10.0 %Interest expense(1,715)(0.5)%(2,584)(0.9)%Other income141 0.0 %130 0.0 %Income before income taxes31,339 9.7 %26,772 9.1 %Provision for income taxes(12,876)(4.0)%(11,076)(3.8)%Net income$18,463 5.7 %$15,696 5.4 %(1) Amounts do not foot due to roundingNet Sales – Net sales for fiscal year 2016 increased $31.2 million, or 10.6%, to $324.2 million, compared to fiscal year 2015 as net sales incomparable stores increased $22.1 million and net sales in non-comparable stores increased $9.1 million. Net sales increased primarily dueto the 7.6% increase in sales at comparable stores resulting from an increase in professional customer sales, and increases in the number oforders and order size as a result of continued reductions in sales associate turnover, and continued increase in average store manager tenure.The increase in net sales generated by new stores relates to the expansion of our store base by nine locations in fiscal year 2016 and theinclusion of sales for the seven stores that opened in 2015 prior to their inclusion in comparable store sales. Gross Profit – Gross profit increased $23.3 million, or 11.4%, for fiscal year 2016 compared to fiscal year 2015 primarily due to theincrease in net sales. Gross margin increased to 70.0% for fiscal year 2016, from 69.5% for fiscal year 2015. The increase in the grossmargin was primarily attributable to improved inventory control processes and better collection of revenue at stores for customer deliveries.Selling, General and Administrative Expenses – Selling, general, and administrative expenses increased $19.6 million, or 11.2%, in fiscalyear 2016 compared to fiscal year 2015. Selling, general, and administrative expenses as a percentage of net sales increased to 59.8% infiscal year 2016, compared to 59.5% in fiscal year 2015. The increase included a $6.3 million increase in special charges related tolitigation expenses. In addition, selling, general, and administrative expenses also increased due to new store openings and variablecompensation expense associated with comparable store revenue growth, which contributed a $6.4 million increase in payroll, $2.3 millionincrease in rent and occupancy costs, $1.6 million increase in transportation costs and a $0.8 million increase in depreciation. Selling, general, and administrative expenses include special charges of $7.6 million and $1.3 million for fiscal years 2016 and 2015,respectively, which primarily relate to litigation expenses. Pre-opening Costs – Our pre-opening costs are those typically associated with the opening of a new store and generally include rentexpense, payroll costs and promotional costs. We expense pre-opening costs as incurred and include these costs in selling, general andadministrative expenses. During fiscal years 2016 and 2015, we recorded pre-opening costs of $0.9 million and $0.5 million, respectively.This difference reflects the opening of nine new stores and two relocations in 2016 versus seven new stores in 2015.Income from Operations and Operating Margin – As a result of the increase in net sales discussed above, income from operationsincreased by $3.7 million, or 12.6%, for fiscal year 2016 compared to fiscal year 2015. Operating margin increased to 10.2% for fiscal year2016, compared to 10.0% for fiscal year 2015 due to improved sales performance, an increase in gross profit, and strong cost control,partially offset by increased litigation expenses.Interest Expense – Interest expense decreased $0.9 million, or 33.6%, for fiscal year 2016 compared to the fiscal year 2015. The decrease isdue to the reduction of debt in 2016.Income before Income Taxes – Income before income taxes was $31.3 million for fiscal year 2016 compared to $26.8 million for fiscalyear 2015. Provision for Income Taxes – Income tax provision increased $1.8 million for fiscal year 2016 compared to fiscal year 2015 due to highertaxable income.24 Table Of Contents Net Income – Net income increased $2.8 million for fiscal year 2016 compared to fiscal year 2015, primarily due to a comparable storesales increase of 7.6%.Comparison of the Year Ended December 31, 2015 to the Year Ended December 31, 20142015% of sales(1)2014% of sales(in thousands)Net sales$292,987 $257,192 Cost of sales89,377 30.5 %78,300 30.4 %Gross profit203,610 69.5 %178,892 69.6 %Selling, general and administrative expenses174,384 59.5 %157,316 61.2 %Income from operations29,226 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 taxes26,772 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 %(1) Amounts do not foot due to roundingNet Sales – Net sales for fiscal year 2015 increased $35.8 million, or 13.9%, to $293.0 million, compared to fiscal year 2014 as net sales incomparable stores increased $18.9 million and net sales in non-comparable stores increased $16.9 million. Net sales increased primarily dueto the 7.4% increase in sales at comparable stores resulting from an increase in professional customer sales, an increase in marketingeffectiveness, a decrease in sales associate turnover, and an increase in average store manager tenure. The increase in net sales generated bynew stores relates to the expansion of our store base by seven locations in fiscal year 2015 and the inclusion of a full year of sales for thenineteen 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 theincrease in net sales. Gross margin decreased to 69.5% for fiscal year 2015, from 69.6% for fiscal year 2014. The decrease in gross margincan be attributed to a series of pricing tests performed to drive revenue growth during the second quarter of fiscal year 2015 which resultedin a temporary decline in gross margin.Selling, General and Administrative Expenses – Selling, general, and administrative expenses increased $17.1 million, or 10.8%, in fiscalyear 2015 compared to fiscal year 2014. Selling, general, and administrative expenses as a percentage of net sales decreased to 59.5% infiscal year 2015, compared to 61.2% in fiscal year 2014. The increase in selling, general, and administrative expenses was primarily due tonew store openings, which contributed a $10.0 million increase in payroll, $4.2 million increase in rent and occupancy costs, and a $2.3million increase in depreciation.Selling, general, and administrative expenses include special charges of $1.3 million and $1.8 million for fiscal years 2015 and 2014,respectively, which primarily relate to litigation and investigation costs.Pre-opening Costs – Our pre-opening costs are those typically associated with the opening of a new store and generally include rentexpense, payroll costs and promotional costs. We expense pre-opening costs as incurred and include these costs in selling, general andadministrative expenses. During fiscal years 2015 and 2014, we recorded pre-opening costs of $0.5 million and $1.5 million, respectively.The decrease in pre-opening costs was due to a decrease in the number of stores opened in 2015 versus 2014.Income from Operations and Operating Margin – As a result of the increase in net sales discussed above, income from operationsincreased by $7.7 million, or 35.5%, for fiscal year 2015 compared to fiscal year 2014. Operating margin increased to 10.0% for fiscal year2015, compared to 8.4% for fiscal year 2014 due to improved sales 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 isdue to the reduction 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 fiscalyear 2014. The increase was principally due to a 7.4% increase in sales at comparable stores.Provision for Income Taxes – Income tax provision increased $3.7 million for fiscal year 2015 compared to fiscal year 2014 due to highertaxable income.Net Income – Net income increased $5.1 million for fiscal year 2015, compared to fiscal year 2014, due to a comparable store sales increaseof 7.4%.25 Table Of Contents Liquidity and Capital ResourcesOur principal liquidity requirements have been for working capital and capital expenditures. Our principal sources of liquidity are $6.1million of cash and cash equivalents at December 31, 2016, our cash flow from operations, and borrowings available under our creditfacility. We expect to use this liquidity for opening new stores, purchasing additional merchandise inventory, maintaining our existingstores, reducing outstanding debt, and general corporate purposes. We also recently approved the establishment of a regular quarterlydividend that will enable us to return excess cash to stockholders. Future dividend payments are subject to the approval of the Board ofDirectors each quarter.On June 2, 2015, we, and our operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Fifth Third Bank, Bank ofAmerica, N.A., and Huntington National Bank (as subsequently amended, the “Credit Agreement”). On December 9, 2016, the CreditAgreement was amended to permit an additional New Markets Tax Credit Financing arrangement and on February 10, 2017, the CreditAgreement was amended to permit us to make certain dividend payments. The Credit Agreement provides us 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 Agreementis secured by virtually all of our assets, 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 our option. The LIBOR-based rate will rangefrom LIBOR plus 1.50% to 2.00%, depending on our leverage ratio. The base rate is equal to the greatest of: (a) the Federal funds rate plus0.50%, (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 ourleverage ratio. At December 31, 2016 the base interest rate was 4.25% and the LIBOR-based interest rate was 2.27%. Borrowingsoutstanding consisted of $10.0 million on the revolving line of credit and $17.7 million on the term loan as of December 31, 2016. Therewas $65.0 million available for borrowing on the revolving line of credit as of December 31, 2016. To the extent we have an outstandingbalance on our term loan, the credit agreement requires quarterly principal payments as follows (in thousands):PeriodMarch 31, 2017 to June 30, 2017$1,250 September 30, 2017 to June 30, 20181,875 September 30, 2018 to March 31, 20202,500 The Credit Agreement contains customary events of default, conditions to borrowings, and restrictive covenants, including restrictions onour 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. We were in compliancewith the covenants as of December 31, 2016. The Credit Agreement superseded and replaced in its entirety our senior secured credit facility with Bank of America, N.A. dated October 3,2012, as amended 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 the line of credit pursuant to the Credit Agreement to refinance all of the existing indebtedness outstanding underour 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. We also recorded a $0.2 million charge in interest expense to write-offunamortized deferred financing fees associated with the October 3, 2012 credit facility as of the date of the termination.We have a standby letter of credit outstanding related to our workers compensation insurance policy. As of December 31, 2016 and 2015,the standby letter of credit totaled $1.1 million and $0.9 million, respectively.We believe that our cash flow from operations, together with our existing cash and cash equivalents, and borrowings available under ourcredit facility will be sufficient to fund our operations and anticipated capital expenditures over at least the next 12 months. Capital ExpendituresCapital expenditures in 2016, 2015 and 2014 were $27.3 million, $19.0 million and $41.2 million, respectively. During fiscal 2016, $16.2million was for new store build-out and remodels of existing stores, $6.9 million was for our information technology infrastructure in stores, $4.2 million was for investments in our distribution and manufacturing facilities, and the remainder was for general corporate purposes.During fiscal 2015, $15.6 million was for new store build-out and remodels of existing stores, $1.2 million was for investments in ourdistribution and manufacturing facilities, and the remainder was for general corporate purposes. During fiscal 2014, $36.3 million was fornew store build-out and remodels of existing stores, $2.9 million was for expansion of our distribution and manufacturing facilities, and theremainder was for general corporate purposes.Capital expenditures increased in 2016 compared to 2015 primarily due to an increase in the number of stores opened during 2016. Capitalexpenditures decreased in 2015 compared to 2014 due to a decrease in the number of stores opened during 2015. 26 Table Of Contents Our future capital requirements will vary based on the number of additional stores, distribution centers, and manufacturing facilities that weopen and the number of stores that we choose to renovate. Our decisions regarding opening, relocating, or renovating stores, and whether toengage in strategic acquisitions, will be based in part on macroeconomic factors and the general state of the United States economy, as wellas the local economies in the markets in which our stores are located. We intend to open twelve to fifteen stores during 2017. Total capitalexpenditures are expected to be between $30 million and $35 million in 2017. Cash FlowsThe following table summarizes our cash flow data for the years ended December 31, 2016, 2015 and 2014.For the year ended December 31,201620152014(in thousands)Net cash provided by operating activities$53,552 $60,264 $47,201 Net cash used in investing activities(27,252)(18,994)(40,552)Net cash used in financing activities(30,528)(36,688)(2,651)Operating ActivitiesCash flows from operating activities provide us with a significant source of liquidity. Net cash provided by operating activities was $53.6million, $60.3 million, and $47.2 million in 2016, 2015 and 2014, respectively. Cash flows provided by operating activities in 2016 relateto current year earnings, plus non-cash expenses, including depreciation, and a net changes in working capital. The decrease in operatingcash flows in 2016 compared to 2015 was primarily the result of increased inventory purchases during 2016 primarily associated with salesgrowth. The increase in operating cash flows in 2015 compared to 2014 was primarily driven by an increase in net income as well asimproved management of working capital.Investing ActivitiesNet cash used in investing activities was $27.3 million, $19.0 million and $40.6 million in 2016, 2015 and 2014, respectively. Net cashused in investing activities in each period was primarily for capital purchases of store fixtures and equipment, building improvements andleasehold improvements for stores opened or remodeled, routine capital purchases of computer hardware and software, and investments indistribution centers.Financing ActivitiesNet cash used in financing activities was $30.5 million, $36.7 million and $2.7 million in 2016, 2015 and 2014, respectively. Cash usedin financing activities during 2016 was primarily for payments of long-term debt and capital leases obligations of $37.8 million, partiallyoffset by net proceeds from long-term debt of $10.0 million. Cash used in financing activities during 2015 was primarily for payments oflong-term debt and capital lease obligations of $124.0 million, partially offset by net proceeds from long-term debt of $88.0 million. Cashused in financing activities during 2014 was primarily for payments of long-term debt and capital leases.Off-balance Sheet ArrangementsAs of December 31, 2016 and 2015, 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 of operations, liquidity, capital expenditures, or capital resources.27 Table Of Contents Contractual ArrangementsThe following table summarizes certain of our contractual obligations at December 31, 2016 and the effect such obligations are expected tohave on our liquidity and cash flows in future periods:Payment Due by PeriodTotalLess than 1Year2-3 Years4-5 Years5+ Years(in thousands)Long-term debt including principal and interest (1)$29,598 $6,926 $12,057 $10,357 $258 Operating lease obligations (2)521,217 29,722 61,317 61,463 368,715 Capital lease obligations (3)1,163 211 431 431 90 Total contractual obligations$551,978 $36,859 $73,805 $72,251 $369,063 (1)Includes total interest of $1.1 million, comprised of $0.6 million of interest for the period of less than 1 year, $0.4 million of interestfor the period of 1 – 3 years, $0.1 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 $0.4 million, comprised of $0.1 million of interest for the period of less than 1 year, $0.2 million of interestfor the period of 1 – 3 years, $0.1 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 EstimatesOur financial statements are prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requiresus to make estimates, assumptions, and judgments that affect the reported amount of assets, liabilities, revenues, costs and expenses, andrelated disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable underthe circumstances, but all such estimates and assumptions are inherently uncertain and unpredictable. We evaluate our estimates andassumptions 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 thatwould result in material changes to our operating results and financial condition. Our most critical accounting policies are summarizedbelow. For further information on our critical and other significant accounting policies, see the notes to the consolidated financialstatements appearing elsewhere in this Form 10-K.Recognition of RevenueWe recognize sales at the time the customer takes possession of the merchandise or when final delivery of the product has occurred. Werecognize service revenue, which consists primarily of freight charges for home delivery, when the service has been rendered. We arerequired to charge and collect sales and other taxes on sales to our customers and remit these taxes back to government authorities. Totalrevenues do not include sales tax because we are a pass-through conduit for collecting and remitting sales tax. Net sales are reduced by anallowance for anticipated sales returns that we estimate based on historical returns. Our process to establish a sales return reserve containsuncertainties because it requires management to make assumptions and to apply judgment to estimate future sales returns and exchanges.The customer may receive a refund or exchange the original product for a replacement of equal or similar quality for a period of six monthsfrom the time of original purchase. Products received back under this policy are reconditioned pursuant to state laws and resold. We believeour estimate for sales returns is an accurate reflection of future returns. Actual return trends have not varied significantly from estimatedamounts in prior periods. However, if the nature of sales returns changes significantly, our sales could be adversely impacted.Inventory Valuation and ShrinkageOur inventory consists of manufactured items and purchased merchandise held for resale. Inventories are stated at the lower of cost(determined using the weighted-average cost method) or market. We capitalize the cost of inbound freight, duties and receiving andhandling costs to bring purchased materials into our distribution network. The labor and overhead costs incurred in connection with theproduction process are included in the value of manufactured finished goods. We provide provisions for losses related to shrinkage andother amounts that are otherwise not expected to be fully recoverable. These provisions are calculated based on historical shrinkage, sellingprice, margin and current business trends. These estimates have calculations that require management to make assumptions based on thecurrent rate of sales, age, salability and profitability of inventory, historical percentages that can be affected by changes in ourmerchandising mix, customer preferences, rates of sale through and changes in actual shrinkage trends. We do not believe there is areasonable likelihood that there will be a material change in the assumptions we use to calculate our inventory28 Table Of Contents provisions. However, if actual results are not consistent with our estimates and assumptions, we may be exposed to losses that could bematerial.Stock based CompensationWe estimate the fair value of each option grant using the Black Scholes option pricing model. The valuation of stock options is asignificant accounting estimate that requires us to use judgments and assumptions that are likely to have a material impact on our financialstatements. We make predictive assumptions regarding future stock price volatility, employee exercise behavior, and dividend yield. Thecomputation of the expected volatility assumptions used in the option valuation models was based on our historical volatilities. The risk-free interest rate was based on the U.S. Treasury yield at the time of grant. The expected dividend yield was zero for all stock optionsgranted prior to December 31, 2016 based on the fact that, at that time, we had not paid dividends, and we did not have a plan to paydividends in the future. To the extent that actual outcomes differ from our assumptions, we are not required to true up grant-date fair value-based expense to final intrinsic values. However, historical data has a significant bearing on our forward-looking assumptions. Significantvariances between actual and predicted experience could lead to prospective revisions in our assumptions, which could then significantlyimpact the year-over-year comparability of stock based compensation expense.Property, Plant, and EquipmentProperty, plant and equipment are carried at cost less accumulated depreciation, which is amortized over the useful life of the assets.Leasehold improvements are amortized over the shorter of their estimated useful lives or lease period (including expected renewal periods).Property, plant, and equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. Animpairment loss would be recognized when estimated undiscounted future cash flows from the operations and/or disposition of the assetsare less than the carrying amount. Measurement of an impairment loss would be based on the excess of the carrying amount of the assetgroup over its fair value. Fair value is measured using discounted cash flows 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 amaterial change in the estimates or assumptions used to calculate property, plant, and equipment asset impairment losses. However, if actualresults are not consistent with our estimates and assumptions used in determining future cash flows and asset fair values, we may be exposedto losses that could be material.Income TaxesDeferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets andliabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We estimate the degree to which taxassets and loss carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such taxassets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax asset will notbe realized in future periods. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assetswould be reduced. New Accounting PronouncementsRecently Adopted Accounting PronouncementsIn August 2014, the Financial Accounting Standards Board (“FASB”) issued a standard requiring an entity’s management to evaluatewhether there is substantial doubt about an entity’s ability to continue as a going concern within one year after the date of the financialstatements. The guidance also sets forth a series of disclosures that are required in the event the entity’s management concludes that there issubstantial doubt about the entity’s ability to continue as a going concern. The adoption of this new standard did not have a material effecton our financial statements.In February 2015, the FASB issued a new accounting standard that modifies current consolidation guidance. The standard makes changesto both the variable interest entity model and the voting interest entity model, including modifying the evaluation of whether limitedpartnerships or similar legal entities are variable interest entities or voting interest entities and amending the guidance for assessing howrelationships of related parties affect the consolidation analysis of variable interest entities. This standard was effective for us as of thebeginning of fiscal 2016. The adoption of this new standard did not have a material effect on our financial statements.In April 2015, the FASB issued a standard that requires debt issuance costs related to a recognized debt liability to be presented in theConsolidated Balance Sheet as a direct deduction from the carrying amount of that debt liability. We adopted the provisions ofthis statement in the first quarter of 2016 and prior periods have been retrospectively adjusted. The adoption of this standard resulted in a$0.1 million reduction of other current assets, net, a $0.3 million reduction of other assets, a $0.3 million reduction of the current29 Table Of Contents portion of long-term debt, and a $0.1 million reduction of long-term debt in the Consolidated Balance Sheet for the period ended December31, 2015. In March 2016, the FASB issued a standard that amends and simplifies the accounting for stock compensation. The guidance addressesvarious stock compensation aspects including accounting for income taxes, classification of excess tax benefits on the statement of cashflows, forfeitures, minimum statutory tax withholding requirements, and classification of employee taxes paid on the statement of cashflows when an employer withholds shares for tax withholding purposes, among other things. In order to simplify the accounting for stockbased compensation, we made a change in accounting policy to account for forfeitures when they occur, and as a result, we recognized a$0.5 million cumulative-effect reduction to retained earnings under the modified retrospective approach. During the third quarter of 2016,we recognized an adjustment to reduce additional paid-in capital and share based compensation by $0.1 million to account for current yearforfeiture activity. We elected prospective transition for the requirement to classify excess tax benefits as an operating activity in theConsolidated Statement of Cash Flows. The adoption did not have a material impact on the amounts reported in the ConsolidatedStatement of Cash Flows for the year ended December 31, 2016. Additionally, we will prospectively recognize all excess tax benefits andtax deficiencies as income tax expense or benefit in the Consolidated Statement of Operations as a discrete item in the period in whichawards vest. The adoption did not have a material impact on the amounts reported in the Consolidated Statement of Operations for the yearended December 31, 2016. We applied the modified retrospective method to recognize the cumulative effect of previously unrecognizedexcess tax benefits in opening retained earnings. The adoption did not have a material impact on the amounts reported in the ConsolidatedBalance Sheet for the year ended December 31, 2015. We also retrospectively applied the requirement to present employee taxes paidwhen an employer withholds shares for tax-withholding purposes as a financing activity in the Consolidated Statement of Cash Flows. Theadoption did not have a material impact on the amounts reported in the Consolidated Statement of Cash Flows for the years endedDecember 31, 2016 and 2015.​Accounting Pronouncements Not Yet AdoptedIn May 2014, the FASB issued a final standard on revenue from contracts with customers. This new standard introduces a comprehensiverevenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at anamount that reflects the consideration it expects to receive in exchange for those goods or services. In 2016, the FASB issued severalamendments to the standard, including principal versus agent considerations when another party is involved in providing goods or servicesto a customer, the application of identifying performance obligations, and the recognition of expected breakage amounts eitherproportionally in earnings as redemptions occur or when redemption is remote. We continue to assess the impacts of this standard,including evaluating if our current polices to account for samples, gift cards, and sales returns will change under the new standard. As wefinalize our assessment, we will take steps to define our accounting policies under the new standard, establish new processes and controlswhen warranted, and ensure these processes are designed to capture the information necessary to conform to the transitional disclosurerequirements. The standard is effective for us in fiscal 2018 and provides for either full retrospective adoption or modified retrospectiveadoption by which the cumulative effect of the change is recognized in retained earnings at the date of initial application. We have electedto adopt this standard using the modified retrospective approach.In July 2015, the FASB issued a standard which simplifies the subsequent measurement of inventory. Currently, an entity is required tomeasure inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value lessan approximately normal profit margin. The changes require that inventory be measured at the lower of cost and net realizable value,thereby eliminating the use of the other two market methodologies. Net realizable value is defined as the estimated selling prices in theordinary course of business less reasonably predictable costs of completion, disposal, and transportation. These changes become effectivefor us in fiscal 2017. We are currently assessing the effect the new standard will have on our consolidated financial statements.In February 2016, the FASB issued a standard that primarily requires organizations that lease assets to recognize the rights and obligationscreated by those leases on the Consolidated Balance Sheet. The standard is effective in 2019, with early adoption permitted. We arecurrently assessing the effect the new standard will have on our consolidated financial statements.In August 2016, the FASB issued an accounting standards update with new guidance on how certain cash receipts and cash payments arepresented and classified in the statement of cash flows. The amendments in the standards update provide guidance on eight specific cashflow issues. The standards update is effective retrospectively for fiscal years and interim periods beginning after December 15, 2017, withearly adoption permitted. We are currently assessing the effect the new standard will have on our consolidated financial statements.30 Table Of Contents In November 2016, the FASB issued new guidance on restricted cash on the statement of cash flows. The new guidance requires theclassification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. Therefore, amountsgenerally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconcilingthe beginning and ending balances shown on the statement of cash flows. The new standard is effective for fiscal years, and interim periodswithin those fiscal years, beginning after December 15, 2017, with early adoption permitted. The guidance should be appliedretrospectively after adoption. Restricted cash and long-term restricted cash balances were $3.0 million and $3.9 million, respectively, as ofDecember 31, 2016. Upon adopting the new standard, we anticipate that the fluctuations in the restricted cash and long-term restricted cashbalances will impact our statement of cash flows.31 Table Of Contents 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 creditconcentration risk.InflationInflationary factors such as increases in the cost of our products and overhead costs may adversely affect our operating results. Although wedo not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation inthe future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general, and administrativeexpenses as a percentage of revenues if the selling prices of our products do not increase with these increased costs.Interest Rate RiskWe are exposed to interest rate risk through the investment of our cash and cash equivalents. Changes in interest rates affect the interestincome that we earn in connection with these investments, and therefore impact our cash flows and results of operation. We are alsoexposed to interest rate risk in connection with borrowings under our credit facility. Borrowings under our revolving credit facility bearinterest at either a base rate or a LIBOR-based rate, at our option. The LIBOR-based rate ranges from LIBOR plus 1.50% to 2.00%,depending on our leverage ratio. The base rate is equal to the greatest of: (a) the Federal funds rate plus 0.50%, (b) the Fifth Third Bank“prime rate,” and (c) the Eurodollar rate plus 1.00%, in each case plus 0.50% to 1.00% depending on our leverage ratio. The base rate was4.25% at December 31, 2016. Based upon balances and interest rates as of December 31, 2016, holding other variables constant, a onepercentage point increase in interest rates for the next 12-month period would decrease pre-tax earnings and cash flow by approximately$0.3 million. Conversely, a one percentage point decrease in interest rates for the next 12-month period would result in an increase to pre-tax earnings and cash flow of approximately $0.3 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 donot, and do not intend to, engage in the practice of trading derivative securities for profit.Credit Concentration RiskFinancial instruments, which may subject us to concentration of credit risk, consist principally of cash deposits. We maintain cash balancesat financial institutions with strong credit ratings. However, the amounts invested with financial institutions are generally in excess of FDICinsurance limits.Foreign Currency 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 thepurchase of goods in Chinese yuan. Purchases made in Chinese yuan were less than 10% of our total inventory purchases in both 2016 and2015. Our exposure to foreign currency 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 the future, in an effort to mitigate losses associated with these risks, we may at times engage in these transactions. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe consolidated financial statements of the Company and the reports of the independent registered public accounting firm, listed underItem 15 “Exhibits, Financial Statement Schedules,” are included as a separate section of this Annual Report on Form 10-K beginning onpage 57 and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 32 Table Of Contents ITEM 9A. CONTROLS AND PROCEDURESDisclosure Controls and Procedures.Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controlsand procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the“Exchange Act”)) as of the period covered by this report and concluded that our disclosure controls and procedures were effective as of theperiod covered by this report. Our management, including our Chief Executive Officer and Chief Financial Officer, concluded that theconsolidated financial statements included in this Form 10-K present fairly, in all material respects, our financial position, results ofoperations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.Management’s Annual Report on Internal Control over Financial ReportingOur 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 Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for externalpurposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Internal control overfinancial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of an issuer’s assets; (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with GAAP, and that an issuer’s receipts and expenditures are beingmade only in accordance with authorizations of its management and directors; and (iii) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use or disposition of an issuer’s assets that could have a material effect on the consolidatedfinancial statements. An internal control material weakness is a significant deficiency, or combination of significant deficiencies, in internalcontrol 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 reportingmay not prevent or detect misstatements. Also, the application of any evaluation of effectiveness to future periods is subject to the risk thatcontrols may become inadequate 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 Officerand Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2016.Management’s assessment was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control - Integrated Framework (2013 Framework) (“COSO”). Based on management’s assessment, management has concludedthat the Company’s internal control over financial reporting was effective as of December 31, 2016.Ernst & Young, LLP, our independent registered public accounting firm, has issued a report on our internal control over financial reportingas of December 31, 2016. See “Item 8. Consolidated Financial Statements and Supplementary Data.”Changes in Internal Control over Financial Reporting There were no changes in internal control over financial reporting (as defined by Rules 13a-15(f) and 15d-15(f) under the Exchange Act)during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal controlover financial reporting.Inherent Limitations on Effectiveness of ControlsOur management, including our Chief Executive Officer and Chief Financial Officer, intends that our disclosure controls and proceduresand internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives. However, ourmanagement does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent allerrors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance thatthe objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints,and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Theseinherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of asimple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or morepeople or by management override of the controls. The design of any system of controls also is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under allpotential future conditions; over time, controls may become inadequate because of33 Table Of Contents changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a costeffective control system, misstatements due to error or fraud may occur and not be detected. ITEM 9B. OTHER INFORMATION None. 34 Table Of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEDIRECTORS AND EXECUTIVE OFFICERSExecutive OfficersThe following table provides information about our executive officers, including their ages, as of the date of this Form 10-K.NameAgePositionChris R. Homeister48Chief Executive Officer and President, DirectorKirk L. Geadelmann48Chief Financial OfficerJoseph Kinder51Senior Vice President – OperationsCarl Randazzo52Senior Vice President – Real Estate and DevelopmentChris R. Homeister has been our President, Chief Executive Officer and a Director since January 1, 2015. From October 2013 throughDecember 2014, Mr. Homeister was our Chief Operating Officer. From May 2012 through September 2013, Mr. Homeister was ChiefExecutive Officer and founder of Homeister Ventures LLC, a provider of consulting services for private equity, venture capital, retail, andconsumer electronics firms. Prior thereto, from June 2009 through April 2012, Mr. Homeister served as Senior Vice President and GeneralManager of Best Buy Co., Inc.’s Entertainment Business Group, where he was responsible for all elements and the management of thebusiness unit. From April 2005 to May 2009, he held various roles at Best Buy, including Senior Vice President of Digital Merchandisingand Strategic Planning; Vice President of Merchandising, Mobile Electronics and Computing. Prior to Best Buy, Mr. Homeister heldmanagement positions at Gateway, Inc. and Amoco Oil Company. Mr. Homeister earned an M.B.A. from the University of Notre Dame and aB.B.A. in Finance from the University of Iowa. We believe Mr. Homeister is qualified to serve as a director because, as our Chief ExecutiveOfficer, he is familiar with our business and industry and is most capable of effectively identifying strategic priorities and leading theexecution of strategy. Additionally, his past experience in leading global sourcing, merchandising, and retail expansion will benefit us aswe execute our strategic plan.Kirk L. Geadelmann has been our Chief Financial Officer and Senior Vice President since August 2014. Prior to joining the Company, Mr.Geadelmann worked at Best Buy from June 2000 to February 2014 in various management roles including Corporate and InternationalController. During his tenure at Best Buy, Mr. Geadelmann was responsible for overseeing business planning, performance management,financial accounting and SEC reporting functions. Prior to Best Buy, he held roles with BMC Manufacturing, Arthur Andersen, AllianzInsurance and Coopers & Lybrand, where he earned his CPA certification. Mr. Geadelmann earned a B.B.A. in Accounting and RiskManagement 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 SupplyChain Manager from August 1995 until June 2012, as an Assistant Store Manager for The Tile Shop from March 1994 to August 1995, andas a sales person at The Tile Shop from March 1993 to March 1994. Mr. Kinder holds a B.A. in Business from the College of Saint Thomas.Carl Randazzo has been our Senior Vice President — Real Estate and Development since March 2016. Previously, Mr. Randazzo served asSenior Vice President – Retail from June 2012 to February 2016, The Tile Shop’s National Sales Manager from October 2006 until June2012, as a Regional Sales Manager for The Tile Shop from June 2004 to October 2006, as a Store Manager for The Tile Shop from April1994 to June 2004, and as a sales person at The Tile Shop from October 1992 to April 1994. Mr. Randazzo holds a B.S. in Economics fromArizona State University.35 Table Of Contents DirectorsThe following table provides information about our directors, including their ages, as of the date of this Form 10-K. NameAgePositionClass I Directors:Chris R. Homeister48Chief Executive Officer and President; DirectorPeter J. Jacullo III(1)(2)61DirectorClass II Directors:Peter H. Kamin(1)(3)54Director; Chairman of the BoardTodd Krasnow(2)(3)59DirectorPhilip B. Livingston(1)59DirectorClass III Directors:Christopher T. Cook(3)47DirectorRobert A. Rucker64Director (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’sboard of managers from December 2007 to August 2012. Since July 1987, Mr. Jacullo has been a self-employed investor and consultant,and he currently serves on the Board of Directors of various privately-held companies. Previously, Mr. Jacullo was a Vice President andDirector of the Boston Consulting Group from May 1984 to July 1987, where he was also employed in various other capacities from May1978 to May 1984. Mr. Jacullo holds an M.B.A. from the University of Chicago and a B.A. in Economics from Johns Hopkins University.We believe that Mr. Jacullo is qualified to serve on our Board in light of the continuity that he provides on our Board and his experience asa professional investor.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’sboard of managers from January 2012 to August 2012. Mr. Kamin is the founder of 3K Limited Partnership, an investment fund, and hasserved as its Managing Partner since January 2012. For the eleven years preceding the formation of 3K Limited Partnership, Mr. Kamin wasa founding member and Managing Partner of ValueAct Capital. ValueAct Capital grew into a leading investment management organizationduring Mr. Kamin’s tenure. Prior to founding ValueAct Capital in 2000, Mr. Kamin founded and managed Peak Investment L.P. Peak was alimited partnership, organized to make investments in a select number of domestic public and private companies. Since May 2012, Mr.Kamin has been a director and member of the governance committee of MAM Software Group, Inc., a publicly-traded provider of businessautomation and ecommerce solutions for the automotive aftermarket. Mr. Kamin is also a director of several privately-held companies. Mr.Kamin previously served as a director of Ambassadors Group, Inc. from May 2012 to September 2015, of Rand Worldwide, Inc. from April2012 to June 2015, of Adesa, Inc. from April 2007 to December 2011, and of Seitel, Inc. from February 2007 to December 2011, as well aspreviously 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 isqualified to serve on our Board due to his significant experience as a director of publicly-traded companies and his substantial experienceas an investor.Todd Krasnow has served as a member of our Board since August 2012. Previously, Mr. Krasnow served as a member of The Tile Shop’sboard of managers from January 2012 to August 2012. Mr. Krasnow has served as the president of Cobbs Capital, Inc., a private consultingcompany, since January 2005, and as marketing domain expert with Highland Consumer Fund, a venture capital firm, since June 2007.Previously, Mr. Krasnow was the chairman of Zoots, Inc., a dry cleaning company from June 2003 to January 2008 and chief executiveofficer of Zoots, Inc. from February 1998 to June 2003. He served as the executive vice president of sales and marketing of Staples, Inc. fromMay 1993 to January 1998 and in other sales and marketing positions for Staples, Inc. from March 1986 to May 1993. Mr. Krasnow is adirector of Carbonite, a leading cloud back-up and recovery company, and is chairman of Carbonite’s compensation committee. Mr.Krasnow is also a director of Ecentria, a privately held online marketer of optical, outdoor, and camping gear, and Bakkavor, a UK-based,privately owned, maker of fresh prepared meals. Mr. Krasnow holds an M.B.A. from the Harvard University Graduate School of Businessand 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.Philip B. Livingston has served as a member of our Board since August 2016. From March 2016 to August 2016, Mr. Livingston served aspart-time Chief Operating Officer of UASUSA, LLC, a manufacturer of unmanned aircraft systems based in Longmont, Colorado. Mr.Livingston served as Chief Executive Officer and a director of Ambassadors Group, Inc., a provider of educational travel experiences andonline educational research materials, from May 2014 to October 2015. Prior to joining Ambassadors Group, Mr. Livingston served asChief Executive Officer of LexisNexis Web Based Marketing Solutions, a provider of software applications36 Table Of Contents and marketing services for the legal industry, until October 2013. He joined LexisNexis in April 2009 as Senior Vice President of PracticeManagement and served in executive management positions from April 2009 to October 2013. Previously, Mr. Livingston served as ChiefFinancial Officer for a number of companies, including World Wrestling Entertainment, Inc., from 2003 to 2005, Catalina MarketingCorporation, from 1995 to 1998, and Celestial Seasonings, Inc., from 1993 to 1995. From 1999 to 2003, he served as President of FinancialExecutives International, one of the leading professional associations of chief financial officers and controllers. In that role, he led theorganization’s support of regulatory and corporate governance reforms culminating in the Sarbanes-Oxley Act. Mr. Livingston currentlyserves as a director of Rand Worldwide, Inc., an operator of technology and professional services providers to the engineeringcommunity, since November 2014, and Ambassadors Group, since May 2014. He previously served as a director of SITO Mobile Ltd., amobile advertising company, from November 2014 to February 2016 and Nexsan Technologies, Inc., a provider of secondary storagedevices and archival compliance software that was acquired by Imation Corp., from 2007 to December 2012. He is a current member of theNational Association of Corporate Directors and the American Institute of CPAs (AICPA). Mr. Livingston earned a B.A. in BusinessManagement and a B.S. in Government and Politics from the University of Maryland and an M.B.A. in Finance and Accounting from theUniversity of California, Berkeley. We believe that Mr. Livingston is qualified to serve on our Board due to his significant experience inbusiness and finance and his substantial experience as a director of a variety of public and private companies.Christopher T. Cook has served as a member of our Board since September 2014. Mr. Cook founded Sleep Experts, a Texas chain ofmattress retail stores, and served as its Chief Executive Officer from 2004 until its acquisition by Mattress Firm in April 2014. Mr. Cookcontinued to serve as a strategy consultant to the Mattress Firm executive team until April 2016. Mr. Cook was also on the founding teamof SiteStuff, a venture-backed e-commerce company and served as its Executive Vice President of Business Development until 2003. Hecurrently serves as an advisor to the Family Place of Dallas. He is currently a member of the Young Presidents’ Organization. Mr. Cook has aB.B.A. in Finance from SMU Cox School of Business in Dallas, Texas. We believe that Mr. Cook is qualified to serve on our Board due tohis in-depth involvement in founding and leading a company in the consumer retail industry and his experience creating scalable salesculture 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 2012until December 2014. Previously, Mr. Rucker served as The Tile Shop’s Chief Executive Officer and President and as a member of its boardof managers. Mr. Rucker holds a B.E.S. in Psychology and History from the University of Minnesota. We believe that Mr. Rucker isqualified to serve on our Board based on his historical knowledge of The Tile Shop as its founder.In accordance with our Certificate of Incorporation, our Board of Directors (the “Board”) is divided into three classes with staggered three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from thetime of election and qualification until the third annual meeting following election. Except as otherwise provided by law and subject to therights 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. A director elected by the Board to fill a vacancy (otherthan a vacancy created by an increase in the size of the Board) serves for the unexpired term of such director’s predecessor in office anduntil such director’s successor is elected and qualified. A director appointed to fill a position resulting from an increase in the size of theBoard serves until the next annual meeting of stockholders at which the class of directors to which such director is assigned by the Board isto 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 the directors.Our directors are divided among the three classes as follows:·The Class I directors are Messrs. Homeister and Jacullo, with terms expiring at the annual meeting of stockholders to be held in2019;·The Class II directors are Messrs. Kamin, Krasnow and Livingston, with terms expiring at the annual meeting of stockholders to beheld in 2017; and·The Class III directors are Messrs. Cook and Rucker, with terms expiring at the annual meeting of stockholders to be held in 2018.Our Board met four times between January 1, 2016 and December 31, 2016. Each director attended at least 75% of the meetings of theBoard and of any committee of the Board on which such director served that were held between January 1, 2016 and December 31, 2016.37 Table Of Contents INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGSIn October 2011, Joseph Kinder, our Senior Vice President – Operations, was involved in a domestic dispute. Mr. Kinder pled guilty to acharge of contributing 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 May2014 and was subsequently dissolved.SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCESection 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent of a registeredclass of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of commonstock and other equity securities of the Company. These executive officers, directors and greater than ten percent stockholders are requiredby SEC regulation to furnish us with copies of all Section 16(a) forms they file.To our knowledge, based on a review of the copies of such reports furnished to us, our executive officers, directors and greater than tenpercent stockholders complied with all Section 16(a) filing requirements during the fiscal year ended December 31, 2016.CODE OF BUSINESS CONDUCT AND ETHICSWe have adopted a Code of Business Conduct and Ethics that applies to all officers, directors and employees. We intend to maintain thehighest standards of ethical business practices and compliance with all laws and regulations applicable to our business. The Code ofBusiness Conduct and Ethics is available on the “Investor Relations” section of our website, at http://investors.tileshop.com, under the“Governance Documents” heading. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendmentto, or waiver from, a provision of our Code of Ethics and Business Conduct by posting such information on our website at the web addressand location specified above.COMMITTEES OF THE BOARD OF DIRECTORSOur Board has established the following committees: an Audit Committee, a Compensation Committee, and a Nominating and CorporateGovernance Committee. The composition and responsibilities of each committee are described below. Members serve on these committeesuntil their resignation or until otherwise determined by our Board.Audit CommitteeOur Audit Committee oversees our corporate accounting and financial reporting process, the audit of our financial statements, the audit ofinternal controls over financial reporting and other information included in documents containing the audited financial statements. Amongother matters, the Audit Committee evaluates our independent auditors’ qualifications and independence (as required under PublicCompany Accounting Oversight Board (PCAOB) Auditing Standard No. 16, Communications with Audit Committees (AS 16)), receivesfrom the independent auditors written disclosures regarding the auditors independence required by PCAOB Ethics and Independence Rule3526, Communication with Audit Committees Concerning Independence, and discusses with the independent auditors, the independentauditor’s independence. The Audit Committee also determines the engagement, retention, and compensation of the independent auditors;reviews and approves the scope of the annual audit and the audit fee; discusses with management and the independent auditors the resultsof the annual audit and the review of our quarterly financial statements, including the disclosures in our annual and quarterly reports to befiled with the SEC; assesses the performance of the independent auditors; approves the retention of the independent auditors to perform anyproposed permissible non-audit services; reviews our risk assessment and risk management processes; establishes procedures for receiving,retaining, and investigating complaints received by us regarding accounting, internal accounting controls, or audit matters; monitors therotation 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 transactionsand reviews and evaluates, on an annual basis, the Audit Committee charter and performance. Our independent registered publicaccounting firm and management each periodically meet privately with our Audit Committee. The Audit Committee has recommended to the Board that the audited financial statements be included in the Company’s Annual Report onForm 10-K for the fiscal year December 31, 2016 for filing with the SEC.The current members of our Audit Committee are Messrs. Jacullo, Kamin, and Livingston, with Mr. Livingston serving as the chair of theAudit Committee. All members of our Audit Committee meet the requirements for financial literacy under the applicable rules andregulations of the SEC and NASDAQ. Our Board has determined that Mr. Livingston is an audit committee financial expert as definedunder the applicable rules of the SEC and has the requisite financial sophistication as defined under the applicable rules and regulations ofNASDAQ. A description of Mr. Livingston’s experience is set forth above under “Directors.” Messrs. Jacullo, Kamin,38 Table Of Contents and Livingston are independent directors as defined under the applicable rules and regulations of the SEC, NASDAQ and PCAOB. TheAudit Committee operates under a written charter that satisfies the applicable standards of the SEC and NASDAQ, and which is available onthe “Investor Relations” section of our website, at http://investors.tileshop.com, under the “Governance Documents” heading. The AuditCommittee met eight times between January 1, 2016 and December 31, 2016.Compensation CommitteeOur Compensation Committee reviews and recommends policies relating to compensation and benefits of our executive officers andemployees. The Compensation Committee annually reviews and approves corporate goals and objectives relevant to compensation of ourchief executive officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives, andsets the compensation of these officers based on such evaluations. The Compensation Committee also reviews and makes recommendationsto the Board with respect to director compensation and administers the issuance of stock options and other awards under our equitycompensation plans. The Compensation Committee reviews and prepares the necessary compensation disclosures required by the SEC.Additionally, the Compensation Committee reviews and evaluates, on an annual basis, the Compensation Committee charter andperformance.The current members of our Compensation Committee are Messrs. Jacullo and Krasnow, 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 regulationsof the SEC, NASDAQ and Section 162(m) of the Internal Revenue Code of 1986, as amended. The Compensation Committee operatesunder a written charter that satisfies the applicable standards of 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 Compensation Committee metfive times between January 1, 2016 and December 31, 2016.Nominating and Corporate Governance CommitteeOur Nominating and Corporate Governance Committee (the “Nominating Committee”) is responsible for making recommendationsregarding corporate governance; identification, evaluation and nomination of candidates for directorships; and the structure andcomposition of our Board and committees thereof. In addition, the Nominating Committee oversees our corporate governance guidelines;approves our committee charters; oversees compliance with our Code of Business Conduct and Ethics; contributes to succession planning;reviews actual and potential conflicts of interest of our directors and officers other than related person transactions reviewed by the AuditCommittee; and oversees the Board self-evaluation process. Additionally, the Nominating Committee reviews and evaluates, on an annualbasis, the Nominating Committee charter and performance.The current members of our Nominating Committee are Messrs. Cook, Kamin and Krasnow, with Mr. Cook serving as the chair of theNominating Committee. All of the members of our Nominating Committee are independent under the applicable rules and regulations ofNASDAQ. The Nominating Committee operates under a written charter, which is available on the “Investor Relations” section of ourwebsite, at http://investors.tileshop.com, under the “Governance Documents” heading. The Nominating Committee met four times betweenJanuary 1, 2016 and December 31, 2016.39 Table Of Contents DIRECTOR RECOMMENDATION AND NOMINATION PROCESSThe Nominating Committee considers the following criteria, among other criteria that it deems appropriate, in recommending candidatesfor 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 ofmarketing, finance and other elements relevant to the success of a publicly held company;·Experience in our industry;·Experience as a member of the Board of Directors of another publicly held company;·Academic expertise in our area of 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 todiversity of viewpoint, professional experience, education, skill, race, gender and national origin.In assessing director candidates, the Nominating Committee considers diversity, age, skills, and such other factors as it deems appropriategiven the current needs of the Board and the Company, to maintain a balance of knowledge, experience and capability. The NominatingCommittee does not have a formal diversity policy and does not follow any ratio or formula with respect to diversity in order to determinethe appropriate composition of the Board. In the case of incumbent directors whose terms of office are set to expire, the NominatingCommittee reviews these directors’ overall service to the Company during their terms, including the number of meetings attended, level ofparticipation, quality of performance, and any other relationships and transactions that might impair the directors’ independence. In thecase of new director candidates, the Nominating Committee also determines whether the nominee is independent for NASDAQ purposes,which determination is based upon applicable NASDAQ listing standards, applicable SEC rules and regulations and the advice of counsel,if necessary. The Nominating Committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications ofpossible candidates after considering the function and needs of the Board. The Nominating Committee meets to discuss and consider thecandidates’ qualifications and then selects a nominee by majority vote.The Nominating Committee will consider director candidates recommended by stockholders. The Nominating Committee does not intendto alter the manner in which it evaluates candidates, including the minimum criteria set forth above, based on whether or not the candidatewas recommended by a stockholder.To nominate a director for the 2017 Annual Meeting, stockholders must submit such nomination in writing to our Secretary at 14000Carlson Parkway, Plymouth, Minnesota 55441 no later than the close of business on March 14, 2017, nor earlier than the close of businesson April 13, 2017. To nominate a director for the 2018 Annual Meeting, stockholders must submit such nomination in writing to ourSecretary at 14000 Carlson Parkway, Plymouth, Minnesota 55441 no later than the close of business on April 12, 2018, nor earlier than theclose of business on March 13, 2018. You are advised to review our Bylaws for requirements relating to director nominees.STOCKHOLDER PROPOSALS FOR 2017 ANNUAL MEETING AND 2018 ANNUAL MEETINGIn order to have been considered for inclusion in this year’s proxy statement, stockholder proposals must have been submitted in writing tous no later than January 26, 2017. In order to be considered for inclusion in next year’s proxy statement, stockholder proposals must besubmitted in writing to us no later than January 25, 2018. We suggest that proposals for the 2018 Annual Meeting be submitted bycertified mail, return receipt requested. The proposal must be in accordance with the provision of Rule 14a-8 promulgated by the Securitiesand Exchange Commission under the Securities Exchange Act of 1934, as amended.Stockholders who intend to present a proposal or director nomination at the 2017 Annual Meeting without including such proposal ornomination in our proxy statement must, pursuant to our Bylaws, deliver to us notice of such proposal no earlier than March 14, 2017 andno later than April 13, 2017. Stockholders who intend to present a proposal or director nomination at the 2018 Annual Meeting withoutincluding such proposal or nomination in our proxy statement must, pursuant to our Bylaws, deliver to us notice of such proposal no earlierthan March 13, 2018 and no later than April 12, 2018. We reserve the right to reject, rule out of order, or take appropriate action withrespect to any proposal that does not comply with these and other applicable requirements. 40 Table Of Contents ITEM 11. EXECUTIVE COMPENSATIONEXECUTIVE COMPENSATIONCompensation Discussion and AnalysisThis section discusses our policies and decisions with respect to the compensation of our executive officers named in the “SummaryCompensation Table” below and the most important factors relevant to an analysis of these policies and decisions. The “named executiveofficers” to whom this discussion applies are:·Chris R. Homeister, Chief Executive Officer and President (beginning January 1, 2015) and Chief Operating Officer (throughDecember 31, 2014);·Kirk L. Geadelmann, Chief Financial Officer (beginning August 12, 2014);·Joseph Kinder, Senior Vice President – Operations; and·Carl Randazzo, Senior Vice President – Real Estate and Development (beginning March 1, 2016) and Senior Vice President –Retail (through February 29, 2016).·Lynda Stout, Senior Vice President – Retail (from February 29, 2016 through September 30, 2016).All of our named executive officers served as executive officers during the entire 2016 fiscal year, other than Ms. Stout, who only served asan executive officer from February 29, 2016 through September 30, 2016.OverviewWe recognize that our ability to excel depends on the integrity, knowledge, imagination, skill, diversity, and teamwork of our employees.To this end, we strive to create an environment of mutual respect, encouragement, and teamwork that rewards commitment and performanceand is responsive to the needs of our employees. The principles and objectives of our compensation and benefits programs for ouremployees generally, and for our named executive officers specifically, are to:·align compensation incentives with our corporate strategies, business, and financial objectives and the long-term interests of ourstockholders;·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 andcomplementary and to collectively serve all of the executive compensation objectives described above. Accordingly, whether or notspecifically mentioned below, we believe that each individual element, to some extent, serves each of our objectives. Further, while each ofour executive officers has not been, and may not be, compensated with all individual compensation elements, we believe that thecompensation provided to each individual executive officer is, and will be, consistent with the overall compensation philosophy andobjectives set forth above.Compensation Determination ProcessWe review executive compensation annually, including evaluating our philosophy and compensation programs as circumstances require.As part of this review process, we expect to apply the values and the objectives outlined above, together with consideration for the levels ofcompensation that we would be willing to pay to ensure that our compensation remains competitive and that it is meeting our retentionobjectives in light of the cost to us if we were required to replace a key employee. In addition, we consider the results of non-bindingadvisory votes on executive compensation, commonly referred to as “say-on-pay” votes. At our 2016 Annual Meeting, we held a say-on-pay vote on the compensation of our named executive officers as described in the proxy statement for that meeting. Stockholders approvedthe compensation of the named executive officers by a favorable vote exceeding 99% of votes cast, including abstentions. We are mindfulof the opinions of our stockholders and considered these results when deciding to retain our general compensation philosophy and coreobjectives for the upcoming fiscal year.Prior to 2016, our Compensation Committee did not rely on a formal peer group when determining compensation, but made reference togeneral market data and considered establishing a group of comparable companies for this purpose. Additionally, our CompensationCommittee considered engaging a compensation consultant to provide market data on a peer group of companies in our industry. Webelieve that such information, together with other information obtained by the members of our Compensation Committee would helpensure that our compensation program remains competitive. Beginning in 2016, our Compensation Committee engaged Willis TowersWatson as a compensation consultant and considered executive compensation metrics on a peer group of companies in our industry41 Table Of Contents when assessing executive compensation. We anticipate that our Compensation Committee will continue to make adjustments in executivecompensation levels in the future as a result of this more formal market comparison process.The compensation levels of our named executive officers reflect, to a significant degree, the varying roles and responsibilities of suchexecutives. As a result of the assessment by our Board of the roles and responsibilities of our Chief Executive Officer, there is acompensation differential between his compensation levels and those of our other named executive officers.Executive Compensation Program ComponentsBase Salary. Base salaries of our named executive officers are initially established through arm’s-length negotiation at the time anexecutive is hired, taking into account such executive’s qualifications, experience, and prior salary. Base salaries of our named executiveofficers are approved and reviewed periodically by our Chief Executive Officer, and in the case of our Chief Executive Officer’s base salary,by our Board, and adjustments to base salaries are based on the scope of an executive’s responsibilities, individual contribution, priorexperience, and sustained performance. Decisions regarding salary increases may take into account the executive officer’s current salary,equity or equity-linked interests, and the amounts paid to an executive officer’s peers within our Company. In making decisions regardingsalary increases, we may also draw upon the experience of members of our Board with other companies. Base salaries are also reviewed inthe case of promotions or other significant changes in responsibility. No formulaic base salary increases are provided to our namedexecutive officers. This strategy is consistent with our intent of offering base salaries that are cost-effective while remaining competitive.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. Effective January 1, 2015 and in connection with his promotion to Chief Executive Officer, Mr. Homeister’s annual base salarywas increased to $400,000. In April 2016, the Compensation Committee approved an increase to the annual base salary of Mr. Homeister to$475,000 on an annualized basis.Our Chief Financial Officer, Kirk Geadelmann, was hired in August 2014 at an annual base salary of $210,000. In February 2015, theCompensation Committee approved an increase to the annual base salary of Mr. Geadelmann to $212,000 on an annualized basis. In April2016, the Compensation Committee approved an increase to the annual base salary of Mr. Geadelmann to $250,000 on an annualized basis.In anticipation of the consummation of the Business Combination in August 2012, we entered into offer letter agreements with each ofMessrs. Kinder and Randazzo, which provide for annual base salaries of $200,000 each. In February 2014, the Compensation Committeeapproved increases to the base salaries of Messrs. Kinder and Randazzo to $208,000 each, on an annualized basis, and in February 2015,the Compensation Committee approved increases to the base salaries of Messrs. Kinder and Randazzo to $212,000 each, on an annualizedbasis. In April 2016, the Compensation Committee approved increases to the base salaries of Messrs. Kinder and Randazzo to $218,000each, on an annualized basis.Ms. Stout was hired in February 2016 as our Senior Vice President – Retail at an annual base salary of $310,000.The actual base salaries earned by all of our named executive officers in 2016, 2015 and 2014 are set forth in the “Summary CompensationTable.”2012 Omnibus Award Plan. In June 2012, our Board and stockholders adopted an equity award plan, which became effective upon theconsummation of the Business Combination. The principal purpose of the equity award plan is to attract, retain, and motivate selectedemployees, consultants, and directors. As initially adopted, the equity award plan provided for stock based compensation awards. InFebruary 2013, the Compensation Committee and the Board amended the equity award plan to authorize grants of performance-basedawards. At the same time, the plan was renamed the 2012 Omnibus Award Plan (the “Omnibus Plan”). The Compensation Committeeadministers the Omnibus Plan, subject to the right of our Board to assume authority for administration or delegate such authority to anothercommittee of the Board. Awards under the Omnibus Plan may be granted to individuals who are then our officers, employees, directors, orconsultants 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 basedcompensation awards, including stock options and restricted stock awards. As initially adopted, the number of shares reserved for issuanceor transfer pursuant to awards under the Omnibus Plan would increase on the first day of each calendar year beginning in 2013 and endingin 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 immediately preceding calendar year, and (C) such smaller number of shares of common stock asdetermined by our Board. In February 2013, the Compensation Committee and the Board acknowledged that 2,500,000 shares of commonstock were added to the Omnibus Plan reserve effective January 1, 2013 in accordance with the automatic share increase provision, andamended the Omnibus Plan to eliminate the automatic share increase for subsequent years. 42 Table Of Contents In the event of a change of control, as such term is defined in the Omnibus Plan, the administrator may, in its sole discretion, acceleratevesting of awards issued under the Omnibus Plan such that 100% of any such award may become vested and exercisable. Additionally, theadministrator has complete discretion to structure one or more awards under the Omnibus Plan to provide that such awards will becomevested and exercisable on an accelerated basis. The administrator may also make appropriate adjustments to awards under the Omnibus Planand is authorized to provide for the acceleration, termination, assumption, substitution, or conversion of such awards in the event of achange of control or certain other unusual or nonrecurring events or transactions. The types of awards we intend to grant under the Omnibus Plan are as follows:Cash Performance Awards. In February 2014 and 2015, and in April 2016, the Board and the Compensation Committee adoptedspecific performance targets and payout levels for each executive officer for the then-current fiscal year. For fiscal 2014, each of Messrs.Homeister, Geadelmann, Kinder and Randazzo was eligible to earn target cash incentive compensation equal to 50% of his year-endbase salary, based on our Adjusted EBITDA for the year. The target incentive compensation was payable if we achieved the AdjustedEBITDA target set forth in our budget. For fiscal 2014, each of Messrs. Homeister, Geadelmann, Kinder and Randazzo was entitled toreceive a partial incentive payment if we achieved at least 85% of our budgeted Adjusted EBITDA, and an incentive of up to doublethe target incentive amount if we achieved 115% of our budgeted Adjusted EBITDA and attained targeted sales goals. For fiscal 2014,Mr. Geadelmann’s cash incentive arrangement was pro-rated for the partial year during which he was employed with the Company.For fiscal 2015 and 2016, Mr. Homeister was eligible to earn target cash incentive compensation equal to 75% of his year-end basesalary and each of Messrs. Geadelmann, Kinder and Randazzo was eligible to earn target cash incentive compensation equal to 50% ofhis year-end base salary, all based on our Adjusted EBITDA for the year. For fiscal 2016, Ms. Stout was eligible to earn target cashincentive compensation equal to 50% of her year-end base salary, based on our Adjusted EBITDA for the year. The target incentivecompensation was payable if we achieved the Adjusted EBITDA target set forth in our budget. For fiscal 2015, 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 budgetedAdjusted EBITDA and attained targeted sales goals. For fiscal 2016, each of Messrs. Homeister, Geadelmann, Kinder and Randazzo andMs. Stout was entitled to receive a partial incentive payment if we achieved at least 90% of our budgeted Adjusted EBITDA, and anincentive of up to double the target incentive amount if we achieved 110% of our budgeted Adjusted EBITDA and attained targetedsales goals. For fiscal 2016, Ms. Stout’s cash incentive arrangement was pro-rated for the partial year during which she was employedwith the Company.The Compensation Committee reviews and certifies performance following the end of each fiscal year and may also considerdiscretionary factors when making awards. The Compensation Committee did not approve any incentive awards based on theperformance of the Company in fiscal 2014. For fiscal 2015, the Compensation Committee approved a payout of 55% of the target cashincentive compensation to Messrs. Homeister, Geadelmann, Kinder and Randazzo based on Company performance measures. For fiscal2016, the Compensation Committee approved a payout of 110% of the target cash incentive compensation to Messrs. Homeister,Geadelmann, Kinder and Randazzo based on Company performance measures. Due to the termination of Ms. Stout’s employment priorto the end of fiscal year 2016, she did not earn any cash incentive compensation for fiscal 2016.The cash incentive compensation for which our named executive officers were eligible in 2016 are set forth in the “Grants of PlanBased Awards in Fiscal Year 2016” table. The actual cash incentive compensation earned by all of our named executive officers in2016, 2015 and 2014 are set forth in the “Summary Compensation Table.” Equity and Equity-Linked Incentives. We intend to use equity incentive awards pursuant to our Omnibus Plan to link the interests ofour named executive officers with those of our stockholders. The Omnibus Plan provides that the administrator may grant or issue stockoptions and restricted stock or any combination thereof. Stock options may be either nonqualified stock options or incentive stockoptions. We expect vesting of these equity incentive awards to be dependent in whole or in part on continued employment, in order toencourage the retention of our named executive officers through the vesting period of the awards. In some cases, vesting may also bepartially based on the annual appreciation of our common stock. In determining the size of inducement and ongoing equity awards toour named executive officers, our Compensation Committee considers a number of internal factors, such as the relative job scope, thevalue of outstanding equity awards, individual performance history, prior contributions to us, and the size of prior awards, as well asexternal factors such as the levels of unvested equity awards held by our executive officers in relation to their peers at comparablecompanies. The Compensation Committee also intends to consider the foregoing factors for future awards.In February 2016, we granted 100,000 non-qualified stock options to Ms. Stout, all of which were forfeited upon the termination of heremployment. In April 2016, we granted 31,250 non-qualified stock options and 16,250 restricted stock awards to Mr. Homeister,12,500 non-qualified stock options and 6,500 restricted stock awards to Mr. Geadelmann, and 9,375 non-qualified stock options and5,000 restricted stock awards to each of Messrs. Kinder and Randazzo. All stock options and restricted stock awards issued in 2016 tonamed executive officers were issued pursuant to the Omnibus Plan and are subject to time-based43 Table Of Contents vesting over a five-year period. The equity grants made to our named executive officers in 2016 are set forth in the “Grants of PlanBased Awards in Fiscal Year 2016” 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 Shop401(k) Retirement Plan. Employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit, whichwas $18,000 in 2016 (or $24,000 for employees over 50), and to have the amount of this reduction contributed to the 401(k) plan. In 2016, 2015 and 2014, we made a matching 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 such employee’s salary. Each year, this matching contribution vests as to 20% of the aggregate matchingcontributions for such employee, such that all past and future matching contributions will be vested after the employee has been employedby us for a period of five years.Perquisites. From time-to-time, we have provided certain of our named executive officers with perquisites that we believe are reasonable.We do not view perquisites as a significant element of our comprehensive compensation structure, but do believe they can be useful inattracting, motivating, and retaining executive talent. We believe that these additional benefits may assist our executive officers inperforming their duties and provide time efficiencies for our executive officers in appropriate circumstances, and may consider providingadditional perquisites in the future. There are no material perquisites to our named executive officers that are contractual obligationspursuant to written agreements. All future practices regarding perquisites will be approved and subject to periodic review by ourCompensation Committee.Tax Considerations. Our Board considers the potential effects of Section 162(m) of the Code on the compensation paid to our executiveofficers. Section 162(m) disallows a tax deduction for any publicly-held corporation for individual compensation exceeding $1.0 million inany taxable year for the Chief Executive Officer and each of the next three most highly compensated executive officers (other than theChief Financial Officer, if any), unless the compensation is “performance based” or based on another available exemption. We expect thatour Compensation Committee will, where reasonably practicable, seek to qualify the variable compensation paid to our executive officersfor an exemption from the deductibility limitations of Section 162(m), including by awarding stock options that satisfy the “qualifiedperformance-based compensation” exception by virtue of being approved by a qualifying compensation committee of two or more outsidedirectors, being issued pursuant to an underlying plan that sets the maximum number of shares that can be granted to any person within aspecified period and compensating recipients based solely on an increase in the stock price after the grant date (i.e., the exercise price orbase price is greater than or equal to the fair market value of the stock subject to the award on the grant date). In approving the amount andform of compensation for our executive officers in the future, our Compensation Committee will consider all elements of the cost to us ofproviding 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 suchpayments are appropriate to attract and retain executive talent.Compensation Committee ReportThe Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based upon thisreview and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion andAnalysis be included in our proxy statement and in this Annual Report on Form 10-K for the fiscal year ended December 31, 2016.Compensation Committee of the Board of Directors:Todd Krasnow, ChairmanPeter J. Jacullo III 44 Table Of Contents Summary Compensation TableThe following table provides information regarding the compensation earned during the fiscal years ended December 31, 2014 throughDecember 31, 2016 by each of the named executive officers for each year in which each was a Named Executive Officer:Name and Principal PositionFiscalYearSalary ($)StockAwards ($)(1)OptionAwards ($)(1)Non-EquityIncentive PlanCompensation($) (2)All otherCompensation($)TotalChris Homeister (3)2016 456,250 294,938 301,855 391,875 -1,444,918 Chief Executive Officer and2015 400,000 -592,479 165,000 -1,157,479 President2014 300,000 -294,430 - -594,430 Kirk Geadelmann2016 240,500 117,975 120,742 137,500 -616,717 Chief Financial Officer2015 212,000 - -58,300 -270,300 2014 81,932 (4) -492,340 - -574,272 Joseph Kinder2016 216,500 90,750 90,556 119,900 -517,706 Senior Vice President - Operations2015 212,000 - -58,300 -270,300 2014 208,000 - - - -208,000 Carl Randazzo2016 216,500 90,750 90,556 119,900 -517,706 Senior Vice President - Real Estate2015 212,000 - -58,300 -270,300 and Development2014 208,000 - - - -208,000 Lynda Stout(5)2016 185,869 (6) -576,587 (7) -10,786 (8)773,242 Senior Vice President - Retail(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 in accordance with FASB ASC 718. The assumptions used to determine the valuation of the awards are discussed in Note9 to our consolidated financial statements, included herein.(2)Represents incentive compensation paid based on the Company’s achievement of Adjusted EBITDA financial goals. See “Non-Equity Incentive Plan Compensation” below for additional discussion.(3)For fiscal year 2014, Mr. Homeister served as Chief Operating Officer. Effective January 1, 2015, Mr. Homeister serves as theCompany’s Chief Executive Officer and President.(4)Includes pro rata base salary received by Mr. Geadelmann for services as Chief Financial Officer from August 12, 2014 throughDecember 31, 2014.(5)Ms. Stout served as Senior Vice President – Retail from February 29, 2016 through September 30, 2016.(6)Represents pro rata base salary received by Ms. Stout for services as Senior Vice President – Retail from February 29, 2016 throughSeptember 30, 2016.(7)Ms. Stout forfeited all the options granted to her in fiscal year 2016 upon the termination of her employment on September 30, 2016.(8)Represents $4,965 paid to Ms. Stout for her relocation expenses and $5,821 in insurance premium payments made on behalf of Ms.Stout.45 Table Of Contents Grants of Plan-Based Awards for Fiscal 2016The following table sets forth certain information regarding grants of plan-based awards during the fiscal year ended December 31, 2016:NameGrant DateEstimated possible payouts under non-equityincentive plan awards ($) (1)All otherstock awards:Number ofshares ofstock or units(#)All other optionawards: Numberof securitiesunderlyingoptions (#)Exercise orbase price ofoptionawards($/Sh)Grant datefair value ofstock andoptionawards ($)Threshold($)Target($)Maximum($)Chris Homeister4/20/2016 - - - -31,250 (2)18.15 301,855 Chris Homeister4/20/2016 - - -16,250 (3) - -294,938 Kirk Geadelmann4/20/2016 - - - -12,500 (2)18.15 120,742 Kirk Geadelmann4/20/2016 - - -6,500 (3) - -117,975 Joseph Kinder4/20/2016 - - - -9,375 (2)18.15 90,556 Joseph Kinder4/20/2016 - - -5,000 (3) - -90,750 Carl Randazzo4/20/2016 - - - -9,375 (2)18.15 90,556 Carl Randazzo4/20/2016 - - -5,000 (3) - -90,750 Lynda Stout2/29/2016 - - - -100,000 (4)12.62 576,587 Chris HomeisterN/A8,906 356,250 712,500 - - - -Kirk GeadelmannN/A3,125 125,000 250,000 - - - -Joseph KinderN/A2,725 109,000 218,000 - - - -Carl RandazzoN/A2,725 109,000 218,000 - - - -Lynda StoutN/A3,229 129,166 258,333 - - - -(1)Performance bonus based on our achievement of Adjusted EBITDA financial goals for fiscal 2016. 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 and Randazzo and Ms. Stout were each eligible to earn target cash incentive compensation equal to 50% of their respectivebase salaries, based on our Adjusted EBITDA for the year. The target incentive compensation was payable if we achieved theAdjusted EBITDA target set forth in our budget. Messrs. Homeister, Geadelmann, Kinder and Randazzo and Ms. Stout were eachentitled to receive a partial incentive payment if we achieved at least 90% of our budgeted Adjusted EBITDA, and an incentive of upto double the target incentive amount if we achieved 110% of our budgeted Adjusted EBITDA and attained targeted sales goals. Ms.Stout’s cash incentive arrangement was pro-rated for the partial year during which she was employed with us.(2)Represents options to acquire shares of common stock. These options will vest and become exercisable in five equal annualinstallments beginning on April 20, 2017 based on continued service.(3)Represents shares of restricted stock for which our purchase option will lapse in five equal annual installments beginning on April 20,2017 based on continued service.(4)Represents options to acquire shares of common stock. These options were to vest and become exercisable in five equal annualinstallments beginning on February 28, 2017 based on continued service; however, Ms. Stout forfeited these options upon hertermination of employment.Offer Letter AgreementsIn October 2013, as the result of arm’s length negotiations, we entered into an offer letter agreement with Mr. Homeister setting forth theterms and conditions of his employment as our Chief Operating Officer. Pursuant to the offer letter agreement, Mr. Homeister is entitled toreceive severance benefits if his employment is terminated by us without cause at any time or if he resigns for good reason, subject toexecution of a full release in our favor. In such an event, Mr. Homeister is entitled to continued payment of his base salary for six monthsand an additional payment in an amount equal to six times our contribution amount for the monthly health insurance premium for himduring the month immediately prior to termination. Upon a change of control, Mr. Homeister is also entitled to full vesting accelerationwith respect to any unvested equity awards if he is not offered employment by the successor entity, or if he is terminated without cause orconstructively terminated prior to the first anniversary of the change of control. Effective January 1, 2015, we amended Mr. Homeister’soffer letter agreement to reflect his new title of Chief Executive Officer and President and to memorialize certain compensation changesrelated 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 theterms and conditions of his employment as our Chief Financial Officer. In February 2017, we entered into an amendment to this46 Table Of Contents offer letter, which provides that Mr. Geadelmann is entitled to continued payment of his base salary for six months and an additionalpayment in an amount equal to six times our contribution amount for the monthly health insurance premium for him during the monthimmediately prior to termination. Upon a change of control, Mr. Geadelmann is also entitled to full vesting acceleration with respect to anyunvested equity awards if he is not offered employment by the successor entity, or if he is terminated without cause or is constructivelyterminated prior to the first anniversary of the change of control.In June 2012, as the result of arm’s length negotiations, we entered into offer letter agreements with each of Messrs. Kinder and Randazzo,setting forth the terms and conditions of each such individual’s respective employment effective upon consummation of the BusinessCombination. Pursuant to the offer letter agreements, each of Messrs. Kinder and Randazzo is entitled to receive severance benefits if hisemployment is terminated by us without cause at any time or if he resigns for good reason, subject to execution of a full release in our favor.In such an event, each of Messrs. Kinder and Randazzo is entitled to continued payment of his base salary for six months and an additionalpayment in an amount equal to six times our contribution amount for the monthly health insurance premium for him during the monthimmediately prior to termination. Upon a change of control, each of Messrs. Kinder and Randazzo is also entitled to full vestingacceleration with respect to any unvested equity awards if he is not offered employment by the successor entity, or if he is terminatedwithout cause or is constructively terminated prior to the first anniversary of the change of control.In February 2016, as the result of arm’s length negotiations, we entered into an offer letter agreement with Ms. Stout, setting forth the termsand conditions of her employment as our Senior Vice President – Retail. Pursuant to the offer letter agreement, Ms. Stout’s employmentwith us was at-will, and, upon a change in control, her unvested equity awards may have been accelerated at the sole discretion of theCompensation Committee. Ms. Stout’s employment was terminated on September 30, 2016.In connection with their offer letter agreements, each of Messrs. Homeister, Geadelmann, Kinder and Randazzo and Ms. Stout agreed not tocompete, directly or indirectly, with us or solicit any of our employees or business contacts during the term of his or her employment andfor 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 and Randazzo are subject to for a period of two years following termination of employment,provided that we provide the applicable individual with continued payment of his base salary for twelve months (in lieu of six months) andan additional payment in an amount equal to twelve times (in lieu of six times) our contribution amount for the monthly health insurancepremium for him during the month immediately prior to termination. Non-Equity Incentive Plan CompensationIn April 2016, the Board and the Compensation Committee adopted specific performance targets and payout levels for each executiveofficer for the then-current fiscal year. For fiscal 2016, Mr. Homeister was eligible to earn target cash incentive compensation equal to 75%of his year-end base salary and each of Messrs. Geadelmann, Kinder and Randazzo and Ms. Stout was eligible to earn target cash incentivecompensation equal to 50% of his or her year-end base salary, all based on our Adjusted EBITDA for the year. The target compensation waspayable if we achieved the $67.3 million Adjusted EBITDA target set forth in our budget. Each of Messrs. Homeister, Geadelmann, Kinderand Randazzo and Ms. Stout was entitled to receive a partial incentive payment if we achieved at least 90% of our budgeted AdjustedEBITDA and an incentive of up to double the target incentive amount if we achieved 110% of our budgeted Adjusted EBITDA. Ms. Stout’scash incentive arrangement was pro-rated for the partial year during which she was employed with the Company. See below for a tablesetting forth the performance targets and payout levels under the plan:Percentage of budgeted Adjusted EBITDA achieved*Percentage of incentive compensation target earned**110%200%105%150%100%100%95%50%90%2.5%* Payout levels for percentages between the listed ranges are proportionately adjusted.** 200% is the maximum payout level and 0% is the minimum payout level (for achievement of less than 90% of budgeted AdjustedEBITDA).The actual Adjusted EBITDA achieved by the Company in fiscal 2016 was $68.0 million (which was 101% of the Adjusted EBITDAtarget). This determination of the Adjusted EBITDA target resulted in cash incentive compensation to our named executive officers at110% achievement of their applicable cash incentive compensation target. Due to the termination of Ms. Stout’s employment prior to theend of fiscal year 2016, she did not earn any cash incentive compensation for fiscal 2016. The actual amount of the cash incentivecompensation payments to the named executive officers is shown in the “Non-Equity Incentive Plan Compensation” column of theSummary Compensation Table.47 Table Of Contents Equity GrantsIn February 2016, we granted 100,000 non-qualified stock options to Ms. Stout, all of which were forfeited upon the termination of heremployment. In April 2016, we granted 31,250 non-qualified stock options and 16,250 restricted stock awards to Mr. Homeister, 12,500non-qualified stock options and 6,500 restricted stock awards to Mr. Geadelmann, and 9,375 non-qualified stock options and 5,000restricted stock awards to each of Messrs. Kinder and Randazzo. All stock options and restricted stock awards issued in 2016 to namedexecutive officers were issued pursuant to the Omnibus Plan and are subject to time-based vesting over a five-year period.We have provided for the acceleration of vesting of equity awards granted to each of Messrs. Homeister, Kinder and Randazzo in the eventof our change of control. In the event of a change of control, if the individual is terminated without cause or is otherwise constructivelyterminated prior to the first anniversary of the change of control, the vesting of any unvested awards will be accelerated in full immediatelyprior to such termination. We believe that these acceleration opportunities will further align the interests of our executives with those of ourstockholders by providing our executives an opportunity to benefit alongside our stockholders in a corporate transaction.Outstanding Equity Awards at Fiscal Year-end for Fiscal 2016The following table sets forth certain information regarding outstanding equity awards held by the named executive officers as ofDecember 31, 2016:Option AwardsStock AwardsNameGrant DateNumber ofSecuritiesUnderlyingUnexercisedOptionsExercisable (#)Number ofSecuritiesUnderlying OptionsUnexercisable (#)OptionExercisePrice ($)OptionExpirationDateNumber ofShares or UnitsofStock ThatHave NotVested (#)Market Value ofShares or Unitsof Stock ThatHave not Vested($)Chris Homeister10/1/2013150,000 50,000 (1)28.94 10/1/2023 - -Chris Homeister10/1/2013 - - -12,500 (2)244,375 Chris Homeister2/13/201420,000 30,000 (3)13.17 2/13/2021 - -Chris Homeister1/2/201530,000 120,000 (4)8.73 1/2/2022 - -Chris Homeister4/20/2016 -31,250 (5)18.15 4/20/2026 - -Chris Homeister4/20/2016 - - -16,250 (6)317,688 Kirk Geadelmann8/12/201440,000 60,000 (7)10.93 8/12/2021 - -Kirk Geadelmann4/20/2016 -12,500 (5)18.15 4/20/2026 - -Kirk Geadelmann4/20/2016 - - -6,500 (6)127,075 Joseph Kinder8/21/2012247,500 -10.00 8/21/2022 - -Joseph Kinder4/20/2016 -9,375 (5)18.15 4/20/2026 - -Joseph Kinder4/20/2016 - - -5,000 (6)97,750 Carl Randazzo8/21/2012241,500 -10.00 8/21/2022 - -Carl Randazzo4/20/2016 -9,375 (5)18.15 4/20/2026 - -Carl Randazzo4/20/2016 - - -5,000 (6)97,750 (1)These options become exercisable on October 1, 2017.(2)These shares of restricted stock become unrestricted on October 1, 2017. (3)These options become exercisable in three equal annual installments beginning on February 13, 2017.(4)These options become exercisable in four equal annual installments beginning on January 2, 2017.(5)These options become exercisable in five equal annual installments beginning on April 20, 2017.(6)These shares of restricted stock become unrestricted in five equal annual installments beginning on April 20, 2017.(7)These options become exercisable in three equal annual installments beginning on August 12, 2017.48 Table Of Contents Option Exercises and Stock Vested for Fiscal 2016The following named executive officers exercised stock options or had restricted common stock vest during the fiscal year ended December31, 2016.Option ExercisesStock AwardsNameNumber ofAcquired onExercise (#)Value Realizedon Exercise ($)Number ofShares Acquiredon Vesting (#)Value Realizedon Vesting ($)Chris Homeister - -12,500 206,875 Carl Randazzo6,000 50,880 - -Pension BenefitsWe did not sponsor any defined benefit pension or other actuarial plan for its named executive officers during the fiscal year endedDecember 31, 2016.Nonqualified Deferred CompensationNo nonqualified deferred compensation was paid to or earned by the named executive officers during the fiscal year ended December 31,2016.Potential Payments Upon Termination or Change in ControlAs discussed above in connection with each named executive officer’s offer letter agreement, each named executive officer, with theexception of Mr. Geadelmann (until February 2017) and Ms. Stout, may be eligible to receive severance benefits in the event that theiremployment is terminated by us without cause or by the named executive officer for good reason. Additionally, each named executiveofficer, with the exception of Mr. Geadelmann (until February 2017) and Ms. Stout, is entitled to full vesting of any outstanding equityawards in the event of a change of control, if the individual is not offered employment by the successor entity, or if the individual isterminated without cause or is otherwise constructively terminated prior to the first anniversary of the change of control. As of February2017, Mr. Geadelmann is eligible for the same severance and change of control benefits as the other named executive officers. Upon achange of control, Mr. Geadelmann’s and Ms. Stout’s unvested equity awards may be (or may have been, in the case of Ms. Stout)accelerated at the sole discretion of the Compensation Committee.The amounts payable to each of the named executive officers, assuming that each individual's employment had terminated on December31, 2016, under each scenario are as follows:NameIn Connectionwith a Change inControl ($) (1)By Company Notfor Cause ($) (2)By NEO for GoodReason ($) (2)Chris Homeister2,536,848 242,618 242,618 Kirk Geadelmann -(3) - -Joseph Kinder295,424 114,118 114,118 Carl Randazzo290,306 109,000 109,000 Lynda Stout(4) - - -(1)Represents lapse of the risks of forfeiture on all outstanding shares of restricted stock and full vesting of all outstanding options topurchase common stock.(2)Represents payments of six months of base salary and company-contributed health-insurance costs, with the exception of Mr.Randazzo, who does not 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 theCompensation Committee. As of February 2017, Mr. Geadelmann is eligible for the same benefits as the other named executiveofficers.(4)Ms. Stout’s employment was terminated as of September 30, 2016 and she did not receive any severance upon such termination.49 Table Of Contents DIRECTOR COMPENSATIONBeginning in fiscal year 2016, each of our non-employee directors receives an annual fee of $100,000 and the chairperson of our Boardreceives an additional annual fee of $75,000. The chairperson of the Audit Committee receives an additional annual fee of $40,000 and thechairperson of each of the Compensation Committee and Nominating and Corporate Governance Committee receives an additional annualfee of $15,000. The annual period for director compensation runs based on the date of the annual meeting.Previously, each of our non-employee directors received an annual fee of $100,000 and the chairperson of our Board received an additionalannual fee of $150,000, which annual period ran based on the anniversary date of the Business Combination.On August 21, 2015, Messrs. Cook, Krasnow, Jacullo, Rucker and Watts (a former director) elected to receive compensation fully in theform of restricted common stock granted pursuant to the Omnibus Plan upon the anniversary of consummation of the BusinessCombination. Messrs. Kamin and Suttin (a former director) had elected to receive compensation as one-half restricted stock and one-halfcash compensation, payable quarterly. The number of shares of our restricted common stock granted were equal to the quotient obtained bydividing (i) the amount of the annual fee payable to such non-employee director in the form of restricted stock, as set forth above, by (ii) theaverage closing price on NASDAQ of our common stock over 30 trading days immediately preceding the date of grant. Messrs. Cook,Krasnow, Jacullo, and Rucker each received 7,205 shares of restricted stock. Messrs. Kamin and Suttin each received 3,602 shares ofrestricted stock. Mr. Watts received 18,012 shares of restricted stock. The risks of forfeiture for the restricted stock grants lapsed on August21, 2016, with the exception of the restricted stock granted to Mr. Suttin, for which the lapse of the risks of forfeiture was accelerated to July12, 2016, Mr. Suttin’s final day of service on the Board.On August 21, 2016, Messrs. Cook, Jacullo, Livingston and Rucker 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. Messrs. Kamin andKrasnow elected to receive compensation as one-half restricted stock and one-half cash compensation, payable quarterly. The number ofshares of our restricted common stock granted were equal to the quotient obtained by dividing (i) the amount of the annual fee payable tosuch non-employee director in the form of restricted stock, as set forth above, by (ii) the average closing price on NASDAQ of our commonstock over 30 trading days immediately preceding the date of grant. Messrs. Cook, Jacullo, Livingston and Rucker received 6,465, 5,622,8,323 and 5,622 shares of restricted stock, respectively. Messrs. Kamin and Krasnow received 4,919 and 3,233 shares of restricted stock,respectively. The risks of forfeiture for the restricted stock grants will lapse on the earlier of our annual meeting of stockholders in 2017 orAugust 22, 2017, contingent upon the applicable non-employee director’s continued service on our Board. If any restricted stock remainsfor which the risks of forfeiture have not lapsed at the time of a non-employee director’s termination of service on the Board, the Companyhas the option to purchase such shares of restricted stock at a price set forth in the agreements governing such restricted stock. As ofDecember 31, 2016, Messrs. Kamin and Kasnow had each received one payment of cash compensation for the period of August 21, 2016through December 31, 2016.Director Compensation Table for Fiscal 2016The following table summarizes the compensation paid to each non-employee director in the fiscal year ended December 31, 2016: NameFees Earnedor Paid inCash ($)Stock Awards($) (1)(2)Total ($)Christopher T. Cook -109,646 109,646 Peter H. Kamin57,897 (3)83,426 141,323 Todd Krasnow14,375 (4)54,832 69,207 Peter J. Jacullo III -95,349 95,349 Philip B. Livingston -141,158 141,158 Robert A. Rucker -95,349 95,349 Adam L. Suttin(6)30,780 (5) -30,780 William E. Watts(7) - - -(1)The table reflects the grant date fair value of the sole award to each director in fiscal 2016, 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, 2016 wasas follows: Messrs. Cook, Jacullo, Livingston and Rucker: 6,465, 5,622, 8,323 and 5,622 shares, respectively. Messrs. Kamin andKrasnow 4,919 and 3,233 shares, respectively. These shares of restricted stock were granted to the directors on August 22, 2016. Therisks of forfeiture will lapse in full on the earlier of our annual meeting of stockholders in 2017 or August 22, 2017. (3)Represents payments of $36,022 Mr. Kamin in fiscal year 2016 for the period from January 1, 2016 to August 22, 2016 due to theelection to receive in cash one-half of director compensation for the period August 22, 2015 to August 22, 2016. Represents50 Table Of Contents one payment of $21,875 paid to Mr. Kamin in fiscal year 2016 for the period from August 21, 2016 to December 31, 2016 due to theelection to receive in cash one-half of director compensation for the current service period.(4)Represents one payment of $14,375 paid to Mr. Krasnow in fiscal year 2016 for the period from August 21, 2016 to December 31,2016 due to the election to receive in cash one-half of director compensation for the current service period. (5)Represents payments of $30,780 Mr. Suttin in fiscal year 2016 for the period from January 1, 2016 to July 12, 2016 due to theelection to receive in cash one-half of director compensation for the period August 22, 2015 to July 12, 2016.(6)Mr. Suttin served as a director until July 12, 2016.(7)Mr. Watts served as a director until August 22, 2016. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATIONThe Compensation Committee currently consists of Messrs. Jacullo and Krasnow and consisted of these same members in the fiscal yearended December 31, 2016, with the exception of Mr. Watts, who served on the Compensation Committee until his departure from the Boardon August 22, 2016. None of the individuals who currently serve as a member of our Compensation Committee has ever been an executiveofficer or employee of ours. None of our executive officers currently serves, nor in the past year has served, as a member of the board orcompensation committee (or other board committee performing equivalent functions) of any entity that has one or more executive officersserving on our Board or Compensation Committee. 51 Table Of Contents ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERSSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTThe following table sets forth, as of February 21, 2017, 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 asecurity if he, she, or it possesses sole or shared voting or investment power of that security, including options that are currently exercisableor exercisable within 60 days of February 21, 2017. Except as indicated by the footnotes below, we believe, based on the informationfurnished to us, that the persons named in the table below have sole voting and investment power with respect to all shares of commonstock shown that they beneficially own, subject to community property laws where applicable. The information does not necessarilyindicate beneficial ownership for any other purpose.Common stock subject to options currently exercisable or exercisable within 60 days of February 21, 2017 are deemed to be outstandingfor computing the percentage ownership of the person holding these options and the percentage ownership of any group in which theholder is a member but are not deemed outstanding for computing the percentage of any other person.We have based our calculation of the percentage of beneficial ownership based on 51,609,221 shares of our common stock outstanding onFebruary 21, 2017. Unless otherwise noted below, the address for each of the stockholders in the table below is c/o Tile Shop Holdings, Inc., 14000 CarlsonParkway, Plymouth, Minnesota 55441.Name of Beneficial OwnerNumber of SharesBeneficiallyOwnedPercent5% Stockholders:Nabron International , Inc.(1)5,740,537 11.1 %T. Rowe Price Associates, Inc.(2)5,027,380 9.7 %JWTS, Inc.(3)4,441,180 8.6 %BlackRock, Inc.(4)4,023,747 7.8 %The Vanguard Group(5)3,127,224 6.1 %Tremblant Capital Group(6)2,862,035 5.5 %Tile Shop, Inc.(7)2,852,428 5.5 %Executive Officers and Directors:Chris Homeister(8)307,400 *Kirk Geadelmann(9)49,000 *Joseph Kinder(10)254,375 *Carl Randazzo(11)248,375 *Christopher T. Cook(12)81,816 *Peter J. Jacullo III(3)(13)4,712,896 9.1 %Peter H. Kamin(14)1,304,630 2.5 %Todd Krasnow(15)114,190 *Philip B. Livingston(16)15,461 *Robert A. Rucker (7) (17)5,915,255 11.5 %All Executive Officers and Directors as a Group (10 persons)(18)13,003,398 24.8 %* Represents beneficial ownership of less than one percent (1%) of the outstanding common stock.52 Table Of Contents (1)Based on a Form 4 filed with the SEC on March 18, 2016 by Nabron International, Inc., a Bahamas company (“Nabron”), RaymondLong Sing Tang (“Tang”), Jill Marie Franklin (“Franklin”), and Louise Mary Garbarino (“Garbarino”). Tang, Franklin, and Garbarinoare directors of Nabron and may be deemed to have shared voting and investment power over the securities held by Nabron. Thebusiness address of Nabron is 2nd Floor, Le Prince de Galles, 3-5 Avenue des Citronniers, Monaco, 09 MC98000.(2)Based on a Schedule 13G filed with the SEC on February 7, 2017 by T. Rowe Price Associates, Inc. (“T. Rowe”), T. Rowe holds solevoting power over 628,700 shares and sole dispositive power over 5,027,380 shares. The business address of T. Rowe is 100 E. PrattStreet, Baltimore, MD 21202.(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. JaculloIII (“Jacullo”). Jacullo is the sole director of JWTS and may be deemed to have sole voting and investment power over the securitiesheld by JWTS. The business address of JWTS is c/o Peter J. Jacullo III 61 High Ridge Avenue, Ridgefield, Connecticut 06877.(4)Based on a Schedule 13G filed with the SEC on January 30, 2017 by BlackRock, Inc. (“BlackRock”), BlackRock holds sole votingpower over 3,957,012 shares and sole dispositive power over 4,023,747 shares. The business address of BlackRock is 55 East 52ndStreet, New York, NY 10055.(5)Based on a Schedule 13G filed with the SEC on February 10, 2017 by The Vanguard Group (“Vanguard”), Vanguard holds solevoting power over 63,859 shares, shared voting power over 2,300 shares, sole dispositive power over 3,062,665 shares and shareddispositive power over 64,559 shares. The business address of Vanguard is 100 Vanguard Blvd., Malvern, PA 19355.(6)Based on a Schedule 13G/A filed with the SEC on February 14, 2017 by Tremblant Capital Group (“Tremblant”). The businessaddress of Tremblant is 767 Fifth Ave, New York, New York, 10153.(7)Based on a Schedule 13D/A filed with the SEC on June 13, 2013 by The Tile Shop, Inc., a Minnesota corporation (“TS, Inc.”), andRobert A. Rucker (“Rucker”) and on a Form 5 filed with the SEC on February 14, 2017 by Rucker. Rucker is the sole director of TS,Inc. and may be deemed to have sole voting and investment power over the securities held by TS, Inc.(8)Includes 28,750 shares of unvested restricted common stock held by Mr. Homeister and options to purchase 246,250 shares ofcommon stock that are currently exercisable or will become exercisable within 60 days of February 21, 2017.(9)Includes 6,500 shares of unvested restricted common stock held by Mr. Geadelmann and options to purchase 42,500 shares ofcommon stock that are currently exercisable or will become exercisable within 60 days of February 21, 2017.(10)Includes 5,000 shares of unvested restricted common stock held by Mr. Kinder and options to purchase 249,375 shares of commonstock that are currently exercisable or will become exercisable within 60 days of February 21, 2017.(11)Includes 5,000 shares of unvested restricted common stock held by Mr. Randazzo and options to purchase 243,375 shares of commonstock that are currently exercisable or will become exercisable within 60 days of February 21, 2017.(12)Includes 6,465 shares of unvested restricted common stock held by Mr. Cook.(13)Includes 5,622 shares of unvested restricted common stock held by Mr. Jacullo and 4,441,180 shares held by JWTS. (14)Includes 4,919 shares of unvested restricted common stock held by Mr. Kamin, 7,453 shares of common stock held by the Peter H.Kamin Family Foundation (the “Foundation”), 379,059 shares of common stock held by the Peter H. Kamin Revocable Trust datedFebruary 2003 (“2003 Trust”), 228,216 shares of common stock held by the Peter H. Kamin Childrens Trust dated March 1997 (“1997Trust”), 135,361 shares of common stock held by the Peter H. Kamin GST Trust (“GST”), 160,723 shares of common stock held by 3KLimited Partnership (“3K” and, together with Mr. Kamin, Foundation, 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 Foundation, the sole trustee of the2003 Trust, the sole trustee of the 1997 Trust, a trustee of GST, and sole general partner of 3K and may be deemed to have sole votingand investment power over the securities held by these entities. Mr. Kamin disclaims beneficial ownership of the shares of commonstock held by his son, except to the extent of his pecuniary interest therein.(15)Includes 3,233 shares of unvested restricted common stock held by Mr. Krasnow, 2,600 shares of common stock held by Mr.Krasnow’s spouse, 10,000 shares of common stock held by Hobart Road Charitable Remainder CRUT (“Hobart Road”), 4,000 sharesof common stock held by the Todd & Deborah Krasnow Charitable Remainder CRUT (“CRUT”), and 6,000 shares of common stockheld by the Todd & Deborah Krasnow Foundation (“Foundation”). Mr. Krasnow is a trustee of each of Hobart Road, the CRUT andthe Foundation and may be deemed to have sole voting and investment power over the securities held by53 Table Of Contents these entities. Mr. Krasnow disclaims beneficial ownership of the shares of common stock held by his spouse, except to the extent ofhis pecuniary interest therein.(16)Includes 8,323 shares of unvested restricted common stock held by Mr. Livingston.(17)Includes 5,622 shares of unvested restricted common stock held by Mr. Rucker, 2,852,428 shares of common stock held by TS, Inc.,2,800,000 shares of common stock held by the Robert Rucker 2016 Grantor Retained Annuity Trust, 1,430 shares of common stockheld by Mr. Rucker’s spouse, and 10,010 shares of common stock held by Mr. Rucker as custodian for minor children under theUniform Gifts to Minors Act.(18)Includes options to purchase 781,500 shares of common stock that are currently exercisable or will become exercisable within 60days of February 21, 2017.54 Table Of Contents EQUITY COMPENSATION PLAN INFORMATIONThe following table presents our equity compensation plan information as of December 31, 2016:(a)(b)(c)Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rightsWeighted-averageexercise price ofoutstandingoptions, warrants andrights ($)Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding securities reflectedin column (a))Equity compensation plans approved by stockholders2,360,541 (1)13.84 1,885,265 Equity compensation plans not approved by stockholders - - -Total2,360,541 13.84 1,885,265 (1)Represents shares of common stock to be issued upon exercise of currently outstanding options to purchase common stock grantedpursuant to our Omnibus Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEINDEPENDENCE OF THE BOARD OF DIRECTORSAs required under NASDAQ rules and regulations, a majority of the members of a listed company’s Board of Directors must qualify as“independent,” as affirmatively determined by the Board. Based upon information requested from and provided by each directorconcerning his background, employment, and affiliations, including family relationships, we have determined that Messrs. Cook, Jacullo,Kamin, Krasnow and Livingston, representing five of our seven directors, do not have a relationship that would interfere with the exerciseof independent judgment in carrying out the responsibilities of a director and that each of these directors will be “independent” as that termis defined under the applicable SEC rules and regulations and the NASDAQ listing requirements and rules. Mr. Homeister, our ChiefExecutive Officer and President, is not an independent director by virtue of his employment with us. Mr. Rucker, our prior Chief ExecutiveOfficer, is not an independent director by virtue of his prior employment with us.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSOther than as described below, since the beginning of our 2016 fiscal year, there have been no transactions, or series of transactions towhich we were a participant or will be a participant, in which:·the amounts involved exceeded or will exceed $120,000; and·any of our directors, executive officers, holders of more than 5% of our common stock or any member of their immediate family, asdefined in Item 404 of Item S-K of the 1934 Act and interpreted by the SEC in related guidance (collectively, the “RelatedPersons”) had or will have a direct or indirect material interest.We employ Adam Rucker, son of Robert A. Rucker, a member of our Board, as a Director of Information Technology. In fiscal 2016, wepaid Adam Rucker a total of $140,000, consisting of base salary and cash bonus. In fiscal 2015, we paid Adam Rucker a total of $127,000,consisting of base salary and cash bonus. Also in 2015, we granted stock options to Adam Rucker that had a combined grant date fair valueof $44,000. In fiscal 2014, we paid Adam Rucker $104,000 consisting of base salary and cash bonus. Adam Rucker also received thestandard benefits provided to other Company employees during 2016, 2015 and 2014.Compensation arrangements with our named executive officers and directors are described elsewhere in this Annual Report on Form 10-K.There are no family relationships among any of our directors or executive officers. From time to time, we employ related persons and otherfamily members of its officers and directors. Consistent with the policy described below, all such employment arrangements involvingamounts exceeding $50,000 are reviewed by the Audit Committee. We may also sell products to related persons and related persons maypurchase products or services from our vendors for individual use. If such arrangements fall within the terms of the policy described below,they will also be reviewed by the Audit Committee. POLICIES AND PROCEDURES FOR RELATED PERSON TRANSACTIONSEffective upon consummation of the Business Combination, our Board adopted a written related person transaction policy that sets forththe policies and procedures for the review and approval or ratification of related person transactions. This policy is administered55 Table Of Contents by our Audit Committee and covers any transaction, arrangement, or relationship, or any series of similar transactions, arrangements, orrelationships, in which we were or are to be a participant, the amount involved exceeds $50,000 and a related person had or will have adirect or indirect material interest. While the policy covers related person transactions in which the amount involved exceeds $50,000, thepolicy states that related person transactions in which the amount involved exceeds $120,000 are required to be disclosed in applicablefilings as required by the SEC rules and regulations. Our Board determined to set the threshold for approval of related person transactions inthe policy at an amount lower than that which is required to be disclosed under the SEC rules and regulations because we believe that it isappropriate for our Audit Committee to review transactions or potential transactions in which the amount involved exceeds $50,000, asopposed to $120,000. Pursuant to this policy, our Audit Committee will consider (a) the relevant facts and circumstances of the relatedperson transaction, including if the related person transaction is on terms comparable to those that could be obtained in arm’s lengthdealings with an unrelated third-party, (b) the extent of the related person’s interest in the related person transaction, (c) whether the relatedperson transaction contravenes the conflict of interest and corporate opportunity provisions of our Code of Business Conduct and Ethics,(d) whether the relationship underlying the related person transaction at issue is believed to serve the best interest of us and ourstockholders, and (e) the effect that a director’s related person transaction may have on such director’s status as an independent member ofthe Board and eligibility to serve on committees of the Board pursuant to SEC rules and NASDAQ listing standards.Each director, director nominee and executive officer will present to our Audit Committee each proposed related person transaction towhich such director, director nominee or executive officer is a party, including all relevant facts and circumstances relating thereto, and willupdate the Audit Committee as to any material changes to any related person transaction. All related person transactions may only beconsummated if our Audit Committee 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 us to our executive officers or directors; (ii) indebtednessdue from a related person for transactions in the ordinary course of business; (iii) a transaction in which the interest of the related personarises solely from ownership of a class of our securities where all holders of that class of securities receive the same benefit, on a pro-ratabasis, from the transaction; or (iv) a transaction in which the rates or charges involved are determined by competitive bids. Additionally,certain types of transactions have been pre-approved by our audit committee under the policy as not involving a material interest. Thesepre-approved transactions include transactions in the ordinary course of business where the related party’s interest arises only: (a) from hisor her position as a director of another entity that is party to the transaction; (b) from an equity interest of less than 5% in another entity thatis party to the transaction; or (c) from a limited partnership interest of less than 5%, subject to certain limitations. No director will bepermitted 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 SERVICESPRINCIPAL ACCOUNTING FEES AND SERVICESThe following table presents fees for professional services rendered by Ernst & Young, LLP in fiscal year 2016 and 2015:20162015Audit Fees(1)$760,000 $595,000 Audit-Related Fees(2) - -Tax Fees(3) - -All Other Fees(4) - -$760,000 $595,000 (1)Audit Fees were principally for services rendered for the annual financial statement audit, audit of internal control over financialreporting, reviews of the Company’s quarterly reports on Form 10-Q and registration statements filed with the SEC.(2)Audit-Related Fees includes fees for services rendered in connection with accounting and reporting consultations, as well as otheraudits required by contract or regulation.(3)Tax Fees consist of fees billed in the indicated year for professional services with respect to tax compliance, tax advice and taxplanning.(4)All Other Fees consist of fees billed in the indicated year for other permissible work that is not included within the above categorydescriptions.56 Table Of Contents 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 ourindependent auditors. Notwithstanding the foregoing, separate Audit Committee pre-approval shall not be required (a) if the engagementfor services is entered into pursuant to pre-approval policies and procedures established by the Audit Committee regarding the Company’sengagement of the independent auditor (the “Pre-Approval Policy”) as to matters within the scope of the Pre-Approval Policy or (b) for deminimus non-audit services that are approved in accordance with applicable SEC rules. The Audit Committee has determined that therendering of the services other than audit services by its principal accountant is compatible with maintaining the principal accountant’sindependence. For fiscal 2016, all audit and non-audit services performed by our independent auditors were pre-approved in accordancewith such pre-approval policies. 57 Table Of Contents PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of report1. Financial StatementsThe following consolidated financial statements of the Company and its subsidiaries are filed as part of this Annual Report on Form 10-K: #(i)Reports of Independent Registered Public Accounting Firm58 (ii)Consolidated Balance Sheets for the years ended December 31, 2016 and 201560 (iii)Consolidated Statements of Operations for the years ended December 31, 2016, 2015, and 201461 (iv)Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, 2015, and 201462 (iv)Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 201463 (v)Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 201464 (vi)Notes to Consolidated Financial Statements65 2. Financial Statement Schedules The information required to be disclosed within Schedule II – Valuation and Qualifying Accounts is provided within the ConsolidatedFinancial Statements 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 58 Table Of Contents Report of Independent Registered Public Accounting FirmThe Board of Directors and Shareholders ofTile Shop Holdings, Inc. and SubsidiariesWe have audited the accompanying consolidated balance sheets of Tile Shop Holdings, Inc. and Subsidiaries as of December 31, 2016 and2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity (deficit) and cash flows foreach of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that 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 TileShop Holdings, Inc. and Subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flowsfor each of the three years in the period ended December 31, 2016, 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 ShopHoldings, Inc. and Subsidiaries internal control over financial reporting as of December 31, 2016, based on criteria established in InternalControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) andour report dated February 24, 2017 expressed an unqualified opinion thereon. /s/ Ernst & Young LLPMinneapolis, MinnesotaFebruary 24, 2017 59 Table Of Contents Report of Independent Registered Public Accounting FirmThe Board of Directors and Shareholders ofTile Shop Holdings, Inc. and SubsidiariesWe have audited Tile Shop Holdings, Inc. and Subsidiaries (the Company) internal control over financial reporting as of December 31,2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (2013 framework) (the COSO criteria). Tile Shop Holdings, Inc. and Subsidiaries management is responsible formaintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financialreporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility isto express an opinion on the company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financialreporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe thatour 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 offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizationsof management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance 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 financialreporting as of December 31, 2016, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Tile Shop Holdings, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the related consolidatedstatements of operations, comprehensive income (loss), stockholders' equity (deficit) and cash flows for each of the three years in the periodended December 31, 2016 of Tile Shop Holdings, Inc. and Subsidiaries and our report dated February 24, 2017 expressed an unqualifiedopinion thereon. /s/ Ernst & Young LLPMinneapolis, MinnesotaFebruary 24, 2017 60 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesConsolidated Balance SheetsAs of December 31, 2016 and 2015(dollars in thousands, except share and per share data) December 31, December 31, 2016 2015Assets Current assets: Cash and cash equivalents $6,067 $10,330 Restricted cash 3,000 219 Trade receivables, net 2,414 1,966 Inventories 74,295 69,878 Prepaid inventory 110 568 Income tax receivable 1,670 735 Other current assets, net 8,645 3,557 Total Current Assets 96,201 87,253 Property, plant and equipment, net 141,037 135,115 Deferred tax assets 21,391 20,846 Long-term restricted cash 3,881 -Other assets 2,763 1,793 Total Assets $265,273 $245,007 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $20,321 $14,584 Current portion of long-term debt 6,286 4,744 Income tax payable 120 1,101 Other accrued liabilities 33,461 19,327 Total Current Liabilities 60,188 39,756 Long-term debt, net 22,126 51,178 Capital lease obligation, net 697 797 Deferred rent 37,595 34,983 Other long-term liabilities 5,768 3,092 Total Liabilities 126,374 129,806 Stockholders’ Equity: Common stock, par value $0.0001; authorized: 100,000,000 shares; issued andoutstanding: 51,607,143 and 51,437,973 shares, respectively 5 5 Preferred stock, par value $0.0001; authorized: 10,000,000 shares; issued and outstanding: 0 shares - -Additional paid-in-capital 185,998 180,192 Accumulated deficit (47,058) (64,985)Accumulated other comprehensive loss (46) (11)Total Stockholders' Equity 138,899 115,201 Total Liabilities and Stockholders' Equity $265,273 $245,007 See accompanying Notes to Consolidated Financial Statements. 61 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesConsolidated Statements of OperationsFor the years ended December 31, 2016, 2015 and 2014(dollars in thousands, except share and per share data)201620152014Net sales$324,157 $292,987 $257,192 Cost of sales97,261 89,377 78,300 Gross profit226,896 203,610 178,892 Selling, general and administrative expenses193,983 174,384 157,316 Income from operations32,913 29,226 21,576 Interest expense(1,715)(2,584)(3,141)Other income (expense)141 130 (506)Income before income taxes31,339 26,772 17,929 Provision for income taxes(12,876)(11,076)(7,382)Net income$18,463 $15,696 $10,547 Income per common share:Basic$0.36 $0.31 $0.21 Diluted0.36 0.31 0.21 Weighted average shares outstanding:Basic51,418,600 51,161,059 51,015,354 Diluted51,880,113 51,304,982 51,029,790 See accompanying Notes to Consolidated Financial Statements. 62 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesConsolidated Statements of Comprehensive Income (Loss)For the years ended December 31, 2016, 2015 and 2014(dollars in thousands) 201620152014Net income$18,463 $15,696 $10,547 Currency translation adjustment(35)(11) -Other comprehensive (loss) income(35)(11) -Comprehensive income$18,428 $15,685 $10,547 See accompanying Notes to Consolidated Financial Statements. 63 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesConsolidated Statements of Stockholders’ Equity (Deficit)(dollars in thousands, except share data) Common stock Shares Amount Additionalpaid-in-capital Treasuryunits Retained(deficit)earnings Accumulated othercomprehensive(loss) income TotalBalance 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 Reclassification of impact of ASU2016-09 (see Note 1) - - 687 - (536) - 151 Balance at January 1, 2016 51,437,973 $5 $180,879 $ - $(65,521) $(11) $115,352 Issuance of restricted shares 73,384 - - - - - -Stock based compensation - - 4,333 - - - 4,333 Stock option exercises 95,786 - 786 - - - 786 Foreign currency translationadjustments - - - - - (35) (35)Net income - - - - 18,463 - 18,463 Balance at December 31, 2016 51,607,143 $5 $185,998 $ - $(47,058) $(46) $138,899 See accompanying Notes to Consolidated Financial Statements. 64 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesConsolidated Statements Cash FlowsFor the years ended December 31, 2016, 2015 and 2014(dollars in thousands) For the years ended, 2016 2015 2014Cash Flows From Operating Activities Net income $18,463 $15,696 $10,547 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 23,042 22,236 19,925 Amortization of debt issuance costs 487 308 210 Debt issuance cost writeoff - 194 -Loss on disposals of property, plant and equipment 447 143 633 Deferred rent 2,382 2,785 7,364 Stock based compensation 4,333 5,545 4,617 Deferred income taxes (395) 5,743 1,190 Changes in operating assets and liabilities: Trade receivables (448) (254) (514)Inventories (4,417) (1,021) (1,101)Prepaid expenses and other current assets (5,849) (1,387) 3,675 Accounts payable 4,195 945 (5,174)Income tax receivable/ payable (1,917) 5,304 4,591 Accrued expenses and other liabilities 13,229 4,027 1,238 Net cash provided by operating activities 53,552 60,264 47,201 Cash Flows From Investing Activities Proceeds from cash surrender value of life insurance policy - - 687 Change in value of life insurance policy - - (10)Purchases of property, plant and equipment (27,256) (18,994) (41,229)Proceeds from the sale of property, plant and equipment 4 - -Net cash used in investing activities (27,252) (18,994) (40,552)Cash Flows From Financing Activities Release of restricted cash 1,926 - 766 Payments of long-term debt and capital lease obligations (37,822) (124,025) (26,412)Advances on line of credit 10,000 88,000 23,000 Contributions to NMTC fund (6,683) - -Payment of NMTC closing costs 1,269 - -Proceeds from exercise of stock options 842 276 35 Employee taxes paid for shares withheld (56) - -Debt issuance costs - (968) -Security deposits (4) 29 (40)Net cash used in financing activities (30,528) (36,688) (2,651)Effect of exchange rate changes on cash (35) (11) -Net change in cash (4,263) 4,571 3,998 Cash and cash equivalents beginning of period 10,330 5,759 1,761 Cash and cash equivalents end of period $6,067 $10,330 $5,759 Supplemental disclosure of cash flow information Purchases of property, plant and equipment included in accounts payable andaccrued expenses $2,271 $898 $849 Cash paid for interest 1,811 2,692 3,146 Cash paid for income taxes, net of refunds 15,162 22 2,792 See accompanying Notes to Consolidated Financial Statements. 65 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 1: Summary of Significant Accounting PoliciesNature of BusinessTile Shop Holdings, Inc. (“Holdings”, and together with its wholly owned subsidiaries, the “Company”) was incorporated in Delaware inJune 2012. On August 21, 2012, Holdings consummated the transactions contemplated pursuant to that certain Contribution and MergerAgreement dated as of June 27, 2012, among Holdings, JWC Acquisition Corp., a publicly-held Delaware corporation (“JWCAC”), The TileShop, LLC, a privately-held Delaware limited liability company (“The Tile Shop”), and certain other parties. Through a series oftransactions, The Tile Shop was contributed to and became a subsidiary of Holdings and Holdings effected a business combination withand became a successor issuer to JWCAC. These transactions are referred to herein as the “Business Combination.”The Company is a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories inretail locations in the United States. The Company’s assortment includes over 4,000 products from around the world that consist of naturalstone, ceramic, porcelain, glass, cement, wood look, and metal tiles. Natural stone products include marble, granite, quartz, sandstone,travertine, slate, and onyx tiles. The majority of the tile products are sold under the Company's proprietary Rush River and Fired Earthbrand names. The Company purchases tile products, accessories and tools directly from its network of vendors. The Company manufacturesits own setting and maintenance materials, such as thinset, grout, and sealers under the Superior brand name. As of December 31, 2016, theCompany operated 123 stores in 31 states and the District of Columbia, with an average size of approximately 21,100 square feet. TheCompany also sells products on its website.Basis of PresentationThe consolidated financial statements of Holdings include the accounts of its wholly owned subsidiaries, and variable interest entities, forwhich the Company is the primary beneficiary. See Note 11, “New Market Tax Credit,” for the discussion of financing arrangementsinvolving certain entities that are variable interest entities that are included in these consolidated financial statements. All significantintercompany transactions have been eliminated in consolidation.Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requiresmanagement to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. The Companybases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under thecircumstances. The amount of assets and liabilities reported on the Company's balance sheets and the amounts of income and expensesreported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, the accountingfor revenue recognition and related reserves for sales returns, useful lives of property, plant and equipment, determining impairment onlong-lived assets, valuation of inventory, compensation expense on stock based compensation plans and income taxes. Actual results maydiffer from these estimates.ReclassificationCertain amounts in the prior year’s audited financial statements have been reclassified for comparative purposes to conform with the currentyear’s presentation. Specifically, debt issuance costs presented in the prior year Consolidated Balance Sheet have been reclassified toconform to current year presentation. Refer to the “New Accounting Pronouncements” section of this footnote for additional discussion.Cash and Cash EquivalentsThe Company had cash and cash equivalents of $6.1 million and $10.3 million at December 31, 2016, and 2015, respectively. TheCompany considers all highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents. TheCompany accepts a range of debit and credit cards, and these transactions are generally transmitted to a bank for reimbursement within 24hours. The payments due from the banks for these debit and credit card transactions are generally received, or settled, within 24 to 48 hoursof the transmission date. The Company considers all debit and credit card transactions that settle in less than seven days to be cash and cashequivalents. Amounts due from the banks for these transactions classified as cash and cash equivalents totaled $3.0 million and $1.8million at December 31, 2016 and December 31, 2015, respectively.66 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Restricted CashCash and cash equivalents that are restricted as to withdrawal or are under the terms of use for current operations are included in therestricted balance on the balance sheet. Cash and cash equivalents that are restricted as to withdrawal and designated for expenditure in theconstruction of noncurrent assets are included in long-term restricted cash on the balance sheet.Trade ReceivablesTrade receivables are carried at original invoice amount less an estimate made for doubtful accounts. Management determines theallowance for doubtful accounts on a specific identification basis as well as by using historical experience applied to an aging of accounts.Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded whenreceived. The allowance for doubtful accounts was $70,000 and $113,500 as of December 31, 2016 and 2015, respectively. The Companydoes not accrue interest on accounts receivable.InventoriesInventories are stated at the lower of cost (determined using the weighted average cost method) or market. Inventories consist primarily ofmerchandise held for sale. Inventories were comprised of the following at December 31, 2016 and 2015:20162015(in thousands)Finished goods$61,949 $59,503 Raw materials2,312 2,681 Finished goods in transit10,034 7,694 Total$74,295 $69,878 The Company provides provisions for losses related to shrinkage and other amounts that are not otherwise expected to be fully recoverable.These provisions are calculated based on historical shrinkage, selling price, margin and current business trends. The provision for lossesrelated to shrinkage and other amounts was $163,000 and $337,000 as of December 31, 2016 and 2015, respectively.Income TaxesThe Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included inthe financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financialstatement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected toreverse. The Company estimates the degree to which tax assets and credit carry forwards will result in a benefit based on expectedprofitability by tax jurisdiction. A valuation allowance for such tax assets and loss carry forwards is provided when it is determined to bemore likely than not that the benefit of such deferred tax asset will not be realized in future periods. If it becomes more likely than not that atax 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, 2016 and 2015,the Company has not recognized any liabilities for uncertain tax positions nor has the Company accrued interest and penalties related touncertain tax positions.Revenue RecognitionThe Company recognizes sales at the time that the customer takes possession of the merchandise or when final delivery of the product hasoccurred. The Company recognizes service revenue, which consists primarily of freight charges for home delivery, when the service hasbeen rendered. The Company is required to charge and collect sales and other taxes on sales to the Company's customers and remit thesetaxes back to government authorities. Total revenues do not include sales tax because the Company is a pass-through conduit for collectingand remitting sales tax. Sales are reduced by an allowance for anticipated sales returns that the Company estimates based on historicalreturns. The process to establish a sales return reserve contains uncertainties because it requires management to make assumptions and toapply judgment to estimate future returns and exchanges. The customer may receive a refund or exchange the original product for areplacement of equal or similar quality for a period of six months from the time of original purchase. Products received back under thispolicy are reconditioned pursuant to state laws and resold.67 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements The Company generally requires customers to pay a deposit when purchasing inventory that is not regularly carried at the store location, ornot currently in stock. These deposits are included in other accrued liabilities until the customer takes possession of the merchandise.Sales Return ReserveCustomers may return purchased items for an exchange or refund. The Company records a reserve for estimated product returns, net of costof sales based on historical return trends together with current product sales performance. A summary of activity in the Company's salesreturns reserve follows:201620152014(in thousands)Balance at beginning of year$2,781 $3,292 $2,850 Additions for sales returns31,334 26,522 28,517 Deductions from reserve(31,035)(27,033)(28,075)Balance at end of year$3,080 $2,781 $3,292 Cost of Sales and Selling, General and Administrative ExpensesThe following table illustrates the primary costs classified in each major expense category:Cost of Sales·Cost of products 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 inventorySelling, General & Administrative Expenses·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 costsOur largest supplier accounted for approximately 12% of our total purchases in 2016.Stock Based CompensationThe Company recognizes expense for its stock based compensation based on the fair value of the awards that are granted. Compensationexpense is recognized on a straight-line basis over the requisite service period, net of actual forfeitures. The Company may issue incentiveawards in the form of stock options, restricted stock awards and other equity awards to employees and non-employeedirectors. Compensation cost is recognized ratably over the requisite service period of the related stock based compensation award.Concentration of RiskFinancial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalentsand bank deposits. By their nature, all such instruments involve risks including credit risks of non-performance by counterparties. Asubstantial portion of the Company's cash and cash equivalents and bank deposits are invested with banks with high investment gradecredit ratings.68 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements SegmentsThe Company’s operations consist primarily of retail sales of manufactured and natural stone tiles, setting and maintenance materials, andrelated accessories in stores located in the United States and through its website. The Company’s chief operating decision maker onlyreviews the consolidated results of the Company and accordingly, the Company has concluded it has one reportable segment.Advertising CostsAdvertising costs were $6.9 million, $6.5 million and $5.7 million, for the years ended December 31, 2016, 2015 and 2014, respectively,and are included in selling, general and administrative expenses in the consolidated statements of operations. The Company’s advertisingconsists primarily of digital media, direct marketing, events and traditional print media that is expensed at the time the media is distributed.Pre-opening CostsThe Company’s pre-opening costs are those typically associated with the opening of a new store and generally include rent expense,payroll costs and promotional costs. The Company expenses pre-opening costs as incurred which are recorded in selling, general andadministrative expenses. During the years ended December 31, 2016, 2015 and 2014, the Company reported pre-opening costs of $0.9million, $0.5 million and $1.5 million, respectively.Property, Plant and EquipmentProperty, plant equipment and leasehold improvements are recorded at cost. Improvements are capitalized while repairs and maintenancecosts are charged to selling, general and administrative expenses when incurred. Property, plant and equipment are depreciated or amortizedusing the straight-line method over each asset’s estimated useful life. Leasehold improvements and fixtures at leased locations areamortized using the straight-line method over the shorter of the lease term (including renewal terms) or the estimated useful life of the asset.The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and any gain or loss thereonis included in other income and expense.Asset life (in years)Buildings and building improvements40Leasehold improvements8–26Furniture and fixtures2–7Machinery and equipment5–10Computer equipment and software3–7Vehicles5Internal Use SoftwareThe Company capitalizes software development costs incurred during the application development stage related to new software or majorenhancements to the functionality of existing software that is developed solely to meet the Company’s internal operational needs and whenthere are no plans to market the software externally. Costs capitalized include external direct costs of materials and services and internalpayroll and payroll-related costs. Any costs during the preliminary project stage or related to training or maintenance are expensed asincurred. Capitalization ceases when the software project is substantially complete and ready for its intended use. The capitalization andongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain externalfactors, including, but not limited to, technological and economic feasibility, and estimated economic life. As of December 31, 2016 and2015, $0.4 million and $0.9 million was included in computer equipment and software, respectively. The majority of the costs capitalizedrelate to amounts invoiced by external consultants. The costs are amortized over estimated useful lives of three to five years. There was $0.5million, $0.5 million and $0.3 million depreciation expense related to capitalized software during the years ended December 31, 2016, 2015 and 2014, respectively.LeasesThe Company leases its store and corporate headquarters locations. Assets held under capital leases are included in property, plant andequipment and amortization is included in depreciation expense. Operating lease rentals are expensed on a straight-line basis over the lifeof the lease beginning on the date the Company takes possession of the property. Tenant improvement allowances are amounts receivedfrom a lessor for improvements to leased properties and are amortized against rent expense over the life of the respective leases. At leaseinception, the Company determines the lease term by assuming the exercise of those renewal options that are69 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements reasonably assured. The exercise of lease renewal options is at the Company’s sole discretion. The lease term is used to determine whether alease is capital or operating and is used to calculate straight-line rent expense. Additionally, the depreciable life of leased assets andleasehold improvements is limited by the expected lease term. Rent expense is included in selling, general and administrative expenses.Certain leases require the Company to pay real estate taxes, insurance, maintenance and other operating expenses associated with the leasedpremises. These expenses are also classified in selling, general and administrative expenses.Self-InsuranceThe Company is self-insured for certain employee health benefit and workers compensation claims. The Company estimates a liability foraggregate losses below stop-loss coverage limits based on estimates of the ultimate costs to be incurred to settle known claims and claimsnot reported as of the balance sheet date. The estimated liability is not discounted and is based on a number of assumptions and factorsincluding historical trends, and economic conditions. As of December 31, 2016 and 2015, an accrual of $0.7 million and $0.5 millionrelated to estimated employee health benefit claims was included in other current liabilities, respectively. As of December 31, 2016 and2015, an accrual of $1.2 million and $0.6 million related to estimated workers compensation claims was included in other currentliabilities, respectively.The Company has a standby letter of credit outstanding related to the Company's worker's compensation insurance policy. As of December31, 2016 and 2015, the standby letter of credit totaled $1.1 million and $0.9 million, respectively.New Accounting PronouncementsRecently Adopted Accounting PronouncementsIn August 2014, the Financial Accounting Standards Board (“FASB”) issued a standard requiring an entity’s management to evaluatewhether there is substantial doubt about an entity’s ability to continue as a going concern within one year after the date of the financialstatements. The guidance also sets forth a series of disclosures that are required in the event the entity’s management concludes that there issubstantial doubt about the entity’s ability to continue as a going concern. The adoption of this new standard did not have a material effecton the Company’s financial statements.In February 2015, the FASB issued a new accounting standard that modifies current consolidation guidance. The standard makes changesto both the variable interest entity model and the voting interest entity model, including modifying the evaluation of whether limitedpartnerships or similar legal entities are variable interest entities or voting interest entities and amending the guidance for assessing howrelationships of related parties affect the consolidation analysis of variable interest entities. The standard was effective for the Company asof the beginning of fiscal 2016. The adoption of this new standard did not have a material effect on the Company’s financial statements.In April 2015, the FASB issued a standard that requires debt issuance costs related to a recognized debt liability be presented in theConsolidated Balance Sheet as a direct deduction from the carrying amount of that debt liability. The Company adopted the provisions ofthis statement in the first quarter of 2016 and prior periods have been retrospectively adjusted. The adoption of this standard resulted in a$0.1 million reduction of other current assets, net, a $0.3 million reduction of other assets, a $0.3 million reduction of the current portion oflong-term debt, and a $0.1 million reduction of long-term debt in the Consolidated Balance Sheet for the period ended December 31,2015. In March 2016, the FASB issued a standard that amends and simplifies the accounting for stock compensation. The guidance addressesvarious stock compensation aspects including accounting for income taxes, classification of excess tax benefits on the statement of cashflows, forfeitures, minimum statutory tax withholding requirements, and classification of employee taxes paid on the statement of cashflows when an employer withholds shares for tax withholding purposes, among other things. In order to simplify the accounting forstock based compensation, the Company made a change in accounting policy to account for forfeitures when they occur, and as a result, werecognized a $0.5 million cumulative-effect reduction to retained earnings under the modified retrospective approach. During the thirdquarter of 2016, the Company recognized an adjustment to reduce additional paid-in capital and share based compensation by $0.1 millionto account for current year forfeiture activity. We elected prospective transition for the requirement to classify excess tax benefits as anoperating activity in the Consolidated Statement of Cash Flows. The adoption did not have a material impact on the amounts reported inthe Consolidated Statement of Cash Flows for the year ended December 31, 2016. Additionally, the Company will prospectively recognizeall excess tax benefits and tax deficiencies as income tax expense or benefit in the Consolidated Statement of Operations as a discrete itemin the period in which awards vest. The adoption did not have a material impact on the amounts reported in the Consolidated Statement ofOperations for the year ended December 31, 2016. The Company applied the modified retrospective method to recognize the cumulativeeffect of previously unrecognized excess tax benefits in opening retained earnings. The adoption did not have a material impact on theamounts reported in the Consolidated Balance Sheet for the year ended December 31, 2015. The Company also retrospectively applied therequirement to present employee taxes paid70 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements when an employer withholds shares for tax-withholding purposes as a financing activity in the Consolidated Statement of Cash Flows. Theadoption did not have a material impact on the amounts reported in the Consolidated Statement of Cash Flows for the years endedDecember 31, 2016 and 2015.​Accounting Pronouncements Not Yet AdoptedIn May 2014, the FASB issued a final standard on revenue from contracts with customers. This new standard introduces a comprehensiverevenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at anamount that reflects the consideration it expects to receive in exchange for those goods or services. In 2016, the FASB issued severalamendments to the standard, including principal versus agent considerations when another party is involved in providing goods or servicesto a customer, the application of identifying performance obligations, and the recognition of expected breakage amounts eitherproportionally in earnings as redemptions occur or when redemption is remote. The Company continues to assess the impacts of thisstandard, including evaluating if its current polices to account for samples, gift cards, and sales returns will change under the newstandard. As the Company finalizes its assessment, the Company will take steps to define its accounting policies under the new standard,establish new processes and controls when warranted, and ensure these processes are designed to capture the information necessary toconform to the transitional disclosure requirements. The standard is effective for the Company in fiscal 2018 and provides for either fullretrospective adoption or modified retrospective adoption by which the cumulative effect of the change is recognized in retained earningsat the date of initial application. The Company has elected to adopt this standard using the modified retrospective approach.In July 2015, the FASB issued a standard which simplifies the subsequent measurement of inventory. Currently, an entity is required tomeasure inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value lessan approximately normal profit margin. The changes require that inventory be measured at the lower of cost and net realizable value,thereby eliminating the use of the other two market methodologies. Net realizable value is defined as the estimated selling prices in theordinary course of business less reasonably predictable costs of completion, disposal, and transportation. These changes become effectivefor the Company in fiscal 2017. The Company is currently assessing the effect the new standard will have on its consolidated financialstatements.In February 2016, the FASB issued a standard that primarily requires organizations that lease assets to recognize the rights and obligationscreated by those leases on the Consolidated Balance Sheet. The standard is effective in 2019, with early adoption permitted. The Companyis currently assessing the effect the new standard will have on its consolidated financial statements.In August 2016, the FASB issued an accounting standards update with new guidance on how certain cash receipts and cash payments arepresented and classified in the statement of cash flows. The amendments in the standards update provide guidance on eight specific cashflow issues. The standards update is effective retrospectively for fiscal years and interim periods beginning after December 15, 2017, withearly adoption permitted. The Company is currently assessing the effect the new standard will have on its consolidated financial statements.In November 2016, the FASB issued new guidance on restricted cash on the statement of cash flows. The new guidance requires theclassification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. Therefore, amountsgenerally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconcilingthe beginning and ending balances shown on the statement of cash flows. The new standard is effective for fiscal years, and interim periodswithin those fiscal years, beginning after December 15, 2017, with early adoption permitted. The guidance should be appliedretrospectively after adoption. Restricted cash and long-term restricted cash balances were $3.0 million and $3.9 million, respectively, as ofDecember 31, 2016. Upon adopting the new standard, the Company anticipates that the fluctuations in the restricted cash and long-termrestricted cash balances will impact its statement of cash flows.71 Table Of ContentsTile 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 31:20162015(in thousands)Land$904 $904 Building and building improvements21,916 21,515 Leasehold improvements77,404 72,154 Furniture and fixtures119,589 112,376 Machinery and equipment26,433 24,457 Computer equipment and software24,002 15,286 Vehicles3,136 2,859 Construction in progress3,543 2,199 Total property, plant and equipment276,927 251,750 Less accumulated depreciation(135,890)(116,635)Total property, plant and equipment, net$141,037 $135,115 Depreciation expense on property and equipment, including capital leases, was $23.0 million, $22.2 million and $19.9 million for the yearsended December 31, 2016, 2015 and 2014, respectively. No asset impairment charges were recorded for the years ended December 31,2016, 2015, and 2014, respectively. Note 3: Accrued LiabilitiesAccrued liabilities consisted of the following at December 31:20162015(in thousands)Shareholder litigation accrual$9,500 $ -Customer deposits7,742 6,026 Accrued wages and salaries4,962 4,336 Sales return reserve3,080 2,781 Payroll & sales taxes2,691 3,043 Other current liabilities5,486 3,141 Total accrued liabilities$33,461 $19,327 Note 4: Long-term Debt Long-term debt, net of debt issuance costs, consisted of the following at December 31:20162015UnamortizedUnamortizedDebt IssuanceDebt IssuancePrincipalCostsPrincipalCosts(in thousands)Term note payable - interest at 2.27% and 2.18% at December 31, 2016and 2015$17,721 $(114)$47,450 $(428)Commercial bank credit facility10,000 -8,000 -Variable interest rate bonds (0.89% and 0.35% at December 31, 2016and 2015), which mature April 1, 2023, collateralized by buildings andequipment805 -900 -Total debt obligations28,526 (114)56,350 (428)Less: current portion6,350 (64)5,095 (351)Debt obligations, net of current portion$22,176 $(50)$51,255 $(77)72 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Approximate annual aggregate maturities of debts, net of debt issuance costs, are as follows: (in thousands):Fiscal year2017$6,350 20188,855 20192,831 202010,115 2021120 Thereafter255 Total future maturities payments$28,526 Less: debt issuance costs114 Total future maturities payments, net of debt issuance costs$28,412 On June 2, 2015, the Company and its operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Fifth Third Bank,Bank of America, N.A., and Huntington National Bank (as amended, the “Credit Agreement”). On December 9, 2016, the Credit Agreementwas amended to permit an additional New Markets Tax Credit Financing arrangement and on February 10, 2017, the Credit Agreement wasamended to permit the Company to make certain dividend payments. The Credit Agreement provides the Company with a $125.0 millionsenior secured credit facility, comprised of a five-year $50.0 million term loan and a $75.0 million revolving line of credit. The CreditAgreement is secured by virtually all of the assets of the Company, including but not limited to, inventory, receivables, equipment and realproperty. Borrowings pursuant to the Credit Agreement bear interest at either a base rate or a LIBOR-based rate, at the option of theCompany. The LIBOR-based rate will range from LIBOR plus 1.50% to 2.00%, depending on The Tile Shop’s leverage ratio. The base rateis equal to the greatest of: (a) the Federal funds rate plus 0.50%, (b) the Fifth Third Bank “prime rate,” and (c) the Eurodollar rate plus1.00%, in each case plus 0.50% to 1.00% depending on The Tile Shop’s leverage ratio. At December 31, 2016 the base interest rate was4.25% and the LIBOR-based interest rate was 2.27%. Borrowings outstanding consisted of $10.0 million on the revolving line of credit and$17.7 million on the term loan as of December 31, 2016. There was $65.0 million available for borrowing on the revolving line of credit asof December 31, 2016. Additional borrowings pursuant to the Credit Agreement may be used to support the Company’s growth and forworking capital purposes. The Company incurred $1.0 million of debt issuance costs in connection with the Credit Agreement. These costswere capitalized as other current and other noncurrent assets, and will be amortized over the five-year life of the Credit Agreement. The termloan requires quarterly principal payments as follows (in thousands):PeriodMarch 31, 2017 to June 30, 2017$1,250 September 30, 2017 to June 30, 20181,875 September 30, 2018 to March 31, 20202,500 The Credit Agreement contains customary events of default, conditions to borrowings, and restrictive covenants, including restrictions onthe Company’s ability to dispose of assets, make acquisitions, incur additional debt, incur liens, make investments, or enter intotransactions with affiliates on other than terms that could be obtained in an arm’s length transaction. The Credit Agreement also includesfinancial and other covenants including covenants to maintain certain fixed charge coverage ratios and rent adjusted leverage ratios. TheCompany was in compliance with the covenants as of December 31, 2016.The Credit Agreement superseded and replaced in its entirety the Company’s senior secured credit facility with Bank of America, N.A.dated October 3, 2012, as amended on April 30, 2013, July 8, 2013, March 26, 2014 and September 29, 2014. The Company used the $50.0million term loan and $23.0 million drawn on the line of credit pursuant to the Credit Agreement to refinance all of the existingindebtedness outstanding under the Company’s prior credit facility in the amount of approximately $73.0 million, which consisted of$72.8 million in unpaid principal and approximately $0.2 million in accrued and unpaid interest and fees. The Company also recorded a$0.2 million charge in interest expense to write-off of the unamortized deferred financing fees associated with the October 3, 2012 creditfacility as of the date of the termination.As of December 31, 2016 and 2015, the Company had accrued $0.0 million and $0.1 million of interest expense, respectively. Accruedinterest is included in other current liabilities.Capital Leases:The Company has one lease for store facilities that is accounted for as a capital lease. This lease expires in 2022. Assets acquired undercapital leases are included in property, plant and equipment.73 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements As of December 31, 2016, minimum lease payments under the Company's capital lease obligation were as follows (in thousands): Fiscal year2017$211 2018215 2019216 2020216 2021215 Thereafter90 Less: amounts representing interest(366)Present value of future minimum lease payments797 Less: current portion100 Capital lease obligations, net of current portion$697 Note 5: Commitments and ContingenciesOperating leases:The Company leases buildings and office space under various operating lease agreements. In addition to rent, most leases require paymentsof real estate taxes, insurance, and common area maintenance. The leases generally have an initial lease term of ten to fifteen years andcontain renewal options and escalation clauses. For leases that contain fixed escalation of the minimum rent or rent holidays, rent expenseis recognized on a straight-line basis through the end of the lease term including assumed renewals. The difference between the straight-linerent amounts and amounts payable under the leases is recorded as deferred rent. For the years ended December 31, 2016, 2015 and 2014,rent expense was $29.7 million, $27.2 million, and $25.2 million, respectively.Annual minimum rentals under non-cancelable operating leases are as follows, for the years ended December 31 (in thousands): Fiscal year2017$29,722 201830,358 201930,958 202030,833 202130,630 Thereafter368,716 Total future maturities payments$521,217 Legal proceedings:The Company, two of its former executive officers, three of its outside directors, two of its former directors, and certain companies affiliatedwith the directors, are defendants in a consolidated class action brought under the federal securities laws and now pending in the UnitedStates District Court for the District of Minnesota under the caption Beaver County Employees’ Retirement Fund, et al. v. Tile ShopHoldings, Inc., et al. Several related actions were filed in 2013 and subsequently consolidated. The plaintiffs are three investors whorepresent classes consisting of (1) all purchasers of Tile Shop common stock between August 22, 2012 and January 28, 2014 (the “classperiod”), seeking to pursue remedies under the Securities Exchange Act of 1934; and (2) all purchasers of Tile Shop common stockpursuant and/or traceable to the Company’s December 2012 registration statement, seeking to pursue remedies under the Securities Act of1933. Six firms who were underwriters in the December 2012 secondary public offering are also named as defendants. The plaintiffs allegethat during the class period, defendants failed to disclose certain related party transactions in the Company’s SEC filings and pressreleases. The plaintiffs assert claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and under Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934. In addition to attorneys’ fees and costs, the plaintiffs seek to recover damages on behalf of classmembers. Subsequent to December 31, 2016, the parties have entered into a Stipulation of Settlement (“Stipulation”) dated January 13,2017 to settle all claims. Pursuant to the Stipulation, $9.5 million will be paid on behalf of all defendants. The Company has agreed topay $5.0 million of that amount and the insurance company providing coverage for the initial tier of the Company’s directors and officer’spolicy has agreed to pay $4.5 million of the settlement. The Company and the insurance provider subsequently transferred money to anescrow account that had been established to hold the 74 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements settlement fund. The settlement is subject to court approval. The court has scheduled a hearing on whether to grant final approval of thesettlement for May 3, 2017.The net charge of $5.0 million was recorded in selling, general and administrative expenses in the Consolidated Statement of Operationsduring the year ended December 31, 2016. The Company recorded a $9.5 million other current liability and a $4.5 million other currentasset in the Consolidated Balance Sheet as of December 31, 2016 to reflect the Company’s obligation to the class and the correspondingreceivable from the insurance company. The Company will pursue recovery of this amount as well as other legal fees incurred in connectionwith this case from its insurance providers who cover losses under the directors and offers policy exceeding the initial tier of coverage.The Company also is a Defendant in three actions brought derivatively on behalf of the Company by three shareholders in the Court ofChancery for the State of Delaware (“Delaware Chancery Court”). Two of the actions were filed in 2015 and then consolidated (the“Consolidated Actions”). On July 31, 2015, the plaintiff-shareholders in the Consolidated Actions filed a consolidated complaint. Theconsolidated complaint names as defendants four current members of the Company’s Board of Directors, two of its former Directors, and aformer employee of the Company. The third action (the “Third Action”) was filed on or about September 28, 2016 against seven membersof the Company’s Board of Directors, a former officer, and a former employee. All of the complaints track many of the same factualallegations as have been made in the above-described federal securities class action. They allege that the defendant-directors and/or officerbreached their fiduciary duties by failing to adopt adequate internal controls for the Company, by approving false and misleadingstatements issued by the Company, by causing the Company to violate generally accepted accounting principles and SEC regulations, byengaging in or approving alleged insider trading, and by permitting the Company’s primary product to contain illegal amounts of lead. Thecomplaints also allege claims for insider trading and/or unjust enrichment. The complaints seek damages, disgorgement, an award ofattorneys’ fees and other expenses, and an order compelling changes to the Company’s corporate governance and internal procedures. In2015, the defendants moved to dismiss the Consolidated Actions, or in the alternative, to stay the Consolidated Actions pending resolutionof the Beaver County Employees’ Retirement Fund action described above. Subsequently, upon agreement of the parties, the Court enteredan Order staying the Consolidated Actions. Recently the Company moved to dismiss the newly-filed Third Action, or in the alternative, tostay the Third Action until resolution of the Beaver County Employees’ Retirement Fund action described above, or until the Company’sBoard of Directors takes action on the demand described below. That motion has not yet been decided.By letter dated May 19, 2016, a shareholder of the Company, through his attorney and prior to filing the Third Action, demanded that theBoard of Directors investigate alleged breaches of fiduciary duty related to the same matters described above, and take action againstcertain present and former officers and directors of the Company. The Board of Directors has appointed a committee of two independentdirectors to investigate and evaluate the matters raised in the demand letter, and to recommend to the Company’s Board of Directors whatactions, if any should be taken by the Company with respect to the matters raised in the demand letter.Given the uncertainty of litigation and the preliminary stage of these cases, the Company cannot reasonably estimate the possible loss orrange of loss that may result from these actions. The Company maintains directors and officers liability insurance policies that may reducethe Company’s exposure, if any. In the event the Company incurs a loss, the Company will pursue recoveries to the maximum extentavailable 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 ofmanagement, while the outcome of such claims and disputes cannot be predicted with certainty, the Company’s ultimate liability inconnection with these matters is not expected to have a material adverse effect on the results of operations, financial position, or cash flows.Note 6: Fair Value of Financial Instruments:Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measurefair 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, eitherdirectly or indirectly, including:·Quoted prices for similar assets or liabilities in active markets;·Quoted prices for identical or similar assets or liabilities in non-active markets;75 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements ·Inputs other than quoted prices that are observable for the asset or liability; and·Inputs that are derived principally from or corroborated by other observable market data.Level 3 – Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significantmanagement judgment.The following table sets forth by Level within the fair value hierarchy the Company’s financial assets that were accounted for at fair valueon a recurring basis at December 31, 2016 and December 31, 2015 according to the valuation techniques the Company uses to determinetheir fair values. There have been no transfers of assets among the fair value hierarchies presented.PricingFair Value atCategoryDecember 31, 2016December 31, 2015Assets(in thousands)Cash and cash equivalentsLevel 1$6,067 $10,330 Restricted cashLevel 13,000 219 Long-term restricted cashLevel 13,881 -The following methods and assumptions were used to estimate the fair value of each class of financial instrument. There have been nochanges in the valuation techniques used by the Company to value the Company’s financial instruments.·Cash and cash equivalents: Consists of cash on hand and bank deposits. The value was measured using quoted market pricesin active markets. The carrying amount approximates fair value.·Restricted cash: Consists of cash and cash equivalents held in bank deposit accounts restricted as to withdrawal or are underthe terms of use for current operations. The value was measured using quoted market prices in active markets. The carryingamount approximates fair value.·Long term restricted cash: Consists of cash and cash equivalents held in bank deposit accounts restricted as to withdrawal anddesignated for expenditure in the construction of noncurrent assets. The value was measured using quoted market prices inactive markets. The carrying amount approximates fair value.Fair value measurements also apply to certain non-financial assets and liabilities measured at fair value on a nonrecurring basis. Property,plant and equipment is measured at fair value when an impairment is recognized and the related assets are written down to fair value. TheCompany did not recognize any significant impairment losses during 2016 or 2015. The carrying value of the Company’s borrowingsunder its credit agreement approximate fair value based upon the market interest rates available to the Company for debt obligations withsimilar risks and maturities. Note 7: Related Party TransactionsThe Company employs Adam Rucker, son of Robert A. Rucker, a member of our Board of Directors, as a Director of InformationTechnology. In fiscal 2016, the Company paid Adam Rucker a total of $140,000, consisting of base salary and cash bonus. In fiscal 2015,the Company paid Adam Rucker a total of $127,000, consisting of base salary and cash bonus. Also in 2015, the Company granted stockoptions to Adam Rucker that had a combined grant date fair value of $44,000. In fiscal 2014, the Company paid Adam Rucker $104,000consisting of base salary and cash bonus. Adam Rucker also received the standard benefits provided to other Company employees during2016, 2015 and 2014. Note 8: Earnings Per ShareBasic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period.Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, aftertaking into consideration all dilutive potential common shares outstanding during the period.76 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Basic and diluted net income per share was calculated as follows:201620152014(in thousands, except share and per share data)Net income$18,463 $15,696 $10,547 Weighted-average shares outstanding - basic51,418,600 51,161,059 51,015,354 Dilutive common stock equivalents461,513 143,923 14,436 Weighted-average shares outstanding - diluted51,880,113 51,304,982 51,029,790 Basic net income per share$0.36 $0.31 $0.21 Diluted net income per share$0.36 $0.31 $0.21 Antidilutive Shares373,255 568,014 1,042,579 Note 9: Equity Incentive Plans2012 Plan:Under the 2012 Omnibus Award Plan (the “2012 Plan”), 2,500,000 shares of the Company’s common stock were initially reserved forissuance pursuant to a variety of stock based compensation awards, including stock options, and restricted stock awards. The number ofshares initially reserved for issuance or transfer pursuant to awards under the 2012 Plan was to be increased on the first day of each calendaryear 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 ofcommon stock outstanding (on an as-converted basis) on the last day of the immediately preceding calendar year, and (C) such smallernumber of shares of stock as determined by the Company’s Board of Directors. During 2013, (i) 2,500,000 shares of common stock wereadded to the 2012 Plan reserve effective January 1, 2013 in accordance with the automatic share increase provision of the 2012 Plan, (ii) the2012 Plan was amended to eliminate the automatic share increase for subsequent years, and (iii) the 2012 Plan was amended to authorizegrants of performance-based awards, which may be paid in cash or equity. The amendments to the 2012 Plan were approved by theCompany’s stockholders in July 2013.Stock Options:During the years ended December 31, 2016, 2015 and 2014, the Company granted stock options to its employees that included servicecondition requirements. The options provide for certain acceleration of vesting and cancellation of options under different circumstances,such as a change in control, death, disability and termination of service. The Company recognizes compensation expense on a straight-linebasis over the requisite service period, net of actual forfeitures. For the portion of the options that contain both a market and servicecondition, the Company recognizes compensation expense, net of actual 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 usedin the option valuation models are outlined in the following table:201620152014Risk-free interest rate1.15%–1.52%0.90%–1.07%0.78%–1.05%Expected life (in years)5–755Expected volatility52%–53%52%–53%52%The computation of the expected volatility assumptions used in the option valuation models was based on historical volatilities of theCompany. The Company used the “simplified” method for an expected life as prescribed in SEC Staff Accounting Bulletin (“SAB”) No.110, for companies that do not have adequate historical data. The risk-free interest rate was based on the U.S. Treasury yield at the time ofgrant. The expected dividend yield was zero for all stock options granted prior to December 31, 2016 based on the fact that, at that time, theCompany had not paid dividends or a plan to pay dividends in the future. To the extent that actual outcomes differ from the Company'sassumptions, 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 $7.37, $5.00, and $5.13 during the years ended December 31, 2016, 2015 and 2014, respectively.Stock based compensation related to options for the years ended December 31, 2016, 2015 and 2014 was $3.2 million, $3.6 million, and$2.8 million, respectively, and was included in selling, general and administrative expenses in the consolidated statements of operations.As of December 31, 2016, the total future compensation cost related to non-vested options not yet recognized in the consolidated statementof operations was $5.3 million and is expected to be recognized over a weighted-average period of 3.3 years.77 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements The following table summarizes stock option activity:SharesWeightedAverageExercisePriceWeightedAvg GrantDateFair ValueWeighted AvgRemainingContractualTerm (Years)AggregateIntrinsicValue(in thousands)Balance, January 1, 20142,274,917 $14.02 $6.92 8.9 $13,051 Granted768,750 $11.47 $5.13 Exercised(15,917)$10.00 $5.19 Cancelled/Forfeited(556,750)$13.93 $6.60 Balance, December 31, 20142,471,000 $13.27 $6.45 7.6 $38 Granted482,671 $10.91 $5.00 Exercised(69,932)$10.00 $5.17 Cancelled/Forfeited(258,794)$11.81 $5.61 Balance, December 31, 20152,624,945 $13.07 $6.30 6.5 $12,757 Granted443,500 $15.43 $7.37 Exercised(95,786)$10.47 $5.40 Cancelled/Forfeited(612,118)$12.33 $5.68 Balance, December 31, 20162,360,541 $13.84 $6.71 5.7 $15,971 Exercisable at December 31, 20161,358,430 $13.60 $6.79 5.7 Vested and expected to vest, December 31, 20162,660,291 $13.40 $6.46 5.7 $18,834 The aggregate intrinsic value is the difference between the exercise price and the closing price of the Company’s stock on December 31.The intrinsic value of the stock options exercised during 2016 and 2015 was $0.9 million and $0.4 million, respectively.Options outstanding as of December 31, 2016 are as follows:Range of Exercise PriceWeighted AverageOptionsExercise PriceRemaining ContractualLife-Years$5.00to$10.001,090,007 $9.66 5.47 $10.01to$15.00648,034 $12.42 4.97 $15.01to$20.00320,500 $17.76 7.27 $20.01to$25.0064,000 $23.14 6.73 $25.01to$30.00238,000 $29.02 6.72 78 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Restricted Stock:The following table summarizes restricted stock activity:SharesWeighted AvgGrant DateFair ValueNonvested, December 31, 2013230,896 $15.84 Granted76,066 $11.93 Vested(117,727)$15.19 Forfeited -$ -Nonvested, December 31, 2014189,235 $14.67 Granted54,036 $12.45 Vested(164,235)$12.50 Forfeited -$ -Nonvested, December 31, 201579,036 $17.67 Granted73,384 $17.60 Vested(66,536)$15.55 Forfeited -$ -Nonvested, December 31, 201685,884 $19.25 The total expense associated with restricted stock for the years ended December 31, 2016, 2015, and 2014 was $1.1 million, $1.9 million,and $1.8 million, respectively. As of December 31, 2016, there was $1.2 million of total unrecognized expense related to unvestedrestricted stock awards, which are expected to vest, and will be expensed through 2021. The fair value of restricted stock granted in fiscalyear 2016 was $1.3 million. The total fair value of restricted stock that vested during the year ended December 31, 2015 was $0.9 million.Using the closing stock price of $19.55 on December 31, 2016, the number of restricted shares outstanding and expected to vest was85,884, with an intrinsic value of $1.7 million.Note 10: Income TaxesThe Tile Shop, LLC tax returns for periods 2010 through the Business Combination on August 21, 2012 are subject to examination by theIRS; however, these tax liabilities are the responsibility of the former The Tile Shop members. The Company’s federal and state tax returnsfor the periods ended December 31, 2013, December 31, 2014, and December 31, 2015 remain subject to examination.The Company records interest and penalties through income tax relating to uncertain tax positions. As of December 31, 2016, 2015 and2014, the Company has not recognized any liabilities for uncertain tax positions nor has the Company accrued interest and penaltiesrelated to uncertain tax positions.The components of the provision for income taxes (benefit) consist of the following:Years Ended December 31,201620152014(in thousands)CurrentFederal$10,831 $3,691 $4,851 State2,560 1,886 1,351 International30 - -Total Current13,421 5,577 6,202 DeferredFederal(363)5,252 1,076 State(182)247 104 Total Deferred(545)5,499 1,180 Total Provision for Income Taxes$12,876 $11,076 $7,382 A majority of all of the Company's income is from domestic operations.79 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements The following table reflects the effective income tax rate reconciliation for the years ended December 31, 2016, 2015 and 2014: 201620152014Federal statutory rate35.0 %35.0 %35.0 %State income taxes, net of the federal tax benefit4.4 4.4 5.0 Stock based compensation1.6 1.4 1.5 Other0.1 0.6 (0.3)Effective tax rate41.1 %41.4 %41.2 %Components of net deferred income taxes are as follows at December 31:20162015(in thousands)Deferred income tax assets:Section 743 carryforward$27,251 $29,843 Leasehold improvement reimbursements5,299 5,592 Inventory1,707 1,606 Deferred rent6,794 5,549 Stock based compensation3,112 2,488 Other3,064 1,023 Total deferred income tax assets$47,227 $46,101 Deferred income tax liabilitiesDepreciation25,836 25,255 Total deferred income tax liabilities25,836 25,255 Net deferred income tax assets$21,391 $20,846 The Company has not recorded U.S. deferred income taxes on approximately $0.5 million of its non-U.S. subsidiaries' undistributedearnings because such amounts are intended to be reinvested outside the United States indefinitely. If these earnings were repatriated to theUnited States, the Company would be required to accrue and pay U.S. federal income taxes and foreign withholding taxes, as adjusted forforeign tax credits. Note 11: New Market Tax Credit2016 New Market Tax CreditIn December 2016, the Company entered into a financing transaction with U.S. Bank Community, LLC (“U.S. Bank”) related to a $9.2million expansion of the Company’s facility in Durant, Oklahoma. U.S. Bank made a capital contribution to, and Tile Shop Lending made aloan to, Twain Investment Fund 192 LLC (the “Investment Fund”) under a qualified New Markets Tax Credit (“NMTC”) program. TheNMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and is intended to induce capitalinvestment in qualified lower income communities. The Act permits taxpayers to claim credits against their Federal income taxes for up to39% 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.In December 2016, Tile Shop Lending loaned $6.7 million to the Investment Funds at an interest rate of 1.37% per year and with a maturityof December 31, 2046. The Investment Fund then contributed the loan to a CDE, which, in turn, loaned the funds on similar terms to TileShop of Oklahoma, LLC, an indirect, wholly-owned subsidiary of Holdings. The proceeds of the loans from the CDEs (including loansrepresenting the capital contribution made by the investors, net of syndication fees) were used to partially fund the distribution centerproject.In December 2016, the investors also contributed $3.1 million to the Investment Funds and, by virtue of such contribution, are entitled tosubstantially all of the tax benefits derived from the NMTCs, while the Company effectively received net loan proceeds equal to theinvestors’ contributions to the Investment Fund. This transaction includes a put/call provision whereby the Company may be obligated orentitled to repurchase the investors’ interest. The Company believes that the investors will exercise the put option in December 2023 at theend of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of sevenyears as provided in the Internal Revenue Code. The Company is required to be in compliance with various80 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result inprojected tax benefits not being realized and, therefore, could require the Company to indemnify the investors for any loss or recapture ofNMTCs 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”). The ongoing activities of the Investment Funds – collecting and remitting interest and fees and NMTC compliance – were allconsidered in the initial design and are not expected to significantly affect economic performance throughout the life of the InvestmentFunds. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various otherguarantees to the structure; U.S. Bank’s lack of a material interest in the underling economics of the project; and the fact that the Companyis obligated to absorb losses of the Investment Fund. The Company concluded that it is the primary beneficiary of the VIE and consolidatedthe Investment Funds, as a VIE, in accordance with the accounting standards for consolidation. U.S. Bank’s contributions of $3.1 million,are included in cash, restricted cash, long-term restricted cash, other accrued liabilities, and other long-term liabilities in the ConsolidatedBalance Sheet. The benefit of this contribution will be recognized as a decrease in depreciation expense as the Company amortizes thecontribution liability over the seven-year compliance period as it is being earned through the ongoing compliance with the conditions ofthe NMTC program.The Company incurred $1.2 million of closing costs in connection with this transaction which are classified as other current assets andother non-current assets in the Consolidated Balance Sheet. The direct costs incurred in connection with this arrangement will be amortizedover the seven year compliance period of the NMTC program. After closing on this transaction, the Company is able to request reimbursement for certain expenditures made in connection with theexpansion of the distribution center in Durant, Oklahoma from the Investment Fund. Expenditures that qualify for reimbursement includebuilding costs, equipment purchases, and other expenditures tied to the expansion of the facility. As of December 31, 2016, the balanceavailable in the Investment Fund available for reimbursement to the Company was $6.9 million. The Company classified $3.0 million ofthe Investment Fund balance to be used toward the purchase of current assets as restricted cash and $3.9 million of the Investment Fundbalance to be used toward the purchase of long-term assets as long-term restricted cash in the Consolidated Balance Sheet at December 31,2016.2013 New Market Tax CreditIn July 2013, the Company entered into a financing transaction with U.S. Bank and Chase Community Equity (“Chase”, and collectivelywith Chase, the “investors”) related to a $19.1 million acquisition, rehabilitation, and construction of the Company’s distribution centerand manufacturing facilities in Durant, Oklahoma. In this transaction, Tile Shop Lending loaned $13.5 million to the Tile Shop InvestmentFund LLC. The investors contributed $5.6 million to the Tile Shop Investment Fund LLC. The investors are entitled to the tax benefitsderived from the NMTC by virtue of their contribution while the Company received the proceeds, net of syndication fees, to apply towardthe construction project. This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchasethe investors’ interest. The Company believes that the investors will exercise the put option in September 2020 at the end of the recaptureperiod. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided inthe Internal Revenue Code. The Company is required to be in compliance with various regulations and contractual provisions that apply tothe NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and,therefore, could require the Company to indemnify the investors for any loss or recapture of NMTCs related to the financing until such timeas the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connectionwith this arrangement.The Company determined that this financing arrangement contains a VIE. The ongoing activities of the Tile Shop Investment Fund LLC –collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected tosignificantly affect economic performance throughout the life of the Tile Shop Investment Fund LLC. Management considered thecontractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to the structure; theinvestors lack of a material interest in the underling economics of the project; and the fact that the Company is obligated to absorb losses ofthe Investment Fund. The Company concluded that it is the primary beneficiary of the VIE and consolidated the Tile Shop Investment FundLLC, as a VIE, in accordance with the accounting standards for consolidation. In 2013, the investor’s contributions, of $5.6 million, net ofsyndication fees were included in cash, restricted cash, other accrued liabilities and other long-term liabilities in the Consolidated BalanceSheet. The Company incurred $1.2 million of syndication fees in connection with this transaction which were classified as other currentassets and other non-current assets in the Consolidated Balance Sheet. The Company is recognizing the benefit of this net $4.4 millioncontribution over the seven-year compliance period as it is being earned through the on-going compliance with the conditions of theNMTC program. As of December 31, 2016, the balance of the contribution liability was $2.4 million, of which $0.7 million is classified asother accrued liabilities on the Consolidated Balance Sheet and $1.7 million is classified as other long-term liabilities on the ConsolidatedBalance Sheet.81 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 12: Retirement Savings PlanThe Company has a 401(k) profit sharing plan covering substantially all full-time employees. Employee contributions are limited to themaximum amount allowable by the Internal Revenue Code. The Company matched $0.5 million, $0.4 million, and $0.5 million ofemployee contributions in 2016, 2015, and 2014 and made no discretionary contributions for any of the years presented. Note 13: Quarterly Financial Data (Unaudited)Quarterly results of operations for the years ended December 31, 2016 and 2015 are summarized below (in thousands, except per shareamounts):First QuarterSecond QuarterThird QuarterFourth Quarter(in thousands)2016Net sales$84,714 $84,270 $78,559 $76,614 Gross profit59,705 58,699 55,159 53,333 Income from operations11,756 11,709 7,798 1,650 Net income6,758 6,849 4,583 273 Basic earnings per share0.13 0.13 0.09 0.01 Diluted earnings per share0.13 0.13 0.09 0.01 2015Net sales$72,963 $75,706 $72,404 $71,914 Gross profit50,971 51,293 50,713 50,633 Income from operations7,195 8,438 6,666 6,927 Net income3,659 4,490 3,761 3,786 Basic earnings per share0.07 0.09 0.07 0.08 Diluted earnings per share0.07 0.09 0.07 0.08 The decrease in income from operations in the fourth quarter of 2016, compared to the fourth quarter of 2015, is due to a $5.5 million of theincrease in special charges related to litigation discussed in footnote 5.Note 14: Subsequent EventOn February 14, 2017, the Company declared a $0.05 dividend to stockholders of record as of the close of business on March 14, 2017.The dividend will be paid on March 24, 2017. 82 Table Of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto duly authorized. TILE SHOP HOLDINGS, INC. Date: February 24, 2017/s/ CHRIS R. HOMEISTER Chris R. Homeister Chief Executive Officer 83 Table Of Contents POWER OF ATTORNEY Each person whose signature appears below constitutes CHRIS R. HOMEISTER and KIRK L. GEADELMANN, or either of them,as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place andstead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibitsthereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-factand agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorney-in-factand agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following personson behalf of the Registrant and in the capacities and on the date indicated. Signature Date /s/ CHRIS R. HOMEISTER February 24, 2017 Chris R. Homeister Chief Executive Officer, Director (Principal Executive Officer) /s/ KIRK L. GEADELMANN February 24, 2017 Kirk L. Geadelmann Chief Financial Officer (Principal Financial and Accounting Officer) /s/ PETER H. KAMIN February 24, 2017 Peter H. Kamin Director and Chairman of the Board of Directors /s/ PETER J. JACULLO February 24, 2017 Peter J. Jacullo, Director /s/ TODD KRASNOW February 24, 2017 Todd Krasnow, Director /s/ PHILIP B. LIVINGSTON February 24, 2017 Philip B. Livingston, Director /s/ CHRISTOPHER T. COOK February 24, 2017 Christopher T. Cook, Director /s/ ROBERT A. RUCKER February 24, 2017 Robert A. Rucker, Director 84 Table Of Contents TILE SHOP HOLDINGS, INC. EXHIBIT INDEXExhibitNo.Description 2.1Contribution and Merger Agreement, dated June 27, 2012, by and among JWC Acquisition Corp., The Tile Shop, LLC,members of The Tile Shop, LLC, Nabron International, Inc. Tile Shop Merger Sub, Inc. and Sellers’ representative –incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by JWCAC on June 27, 2012.3.1Certificate of Incorporation of Tile Shop Holdings, Inc. – incorporated by reference to Exhibit 3.1 to the Registrant’s Form S-4 filed July 2, 2012.3.2Bylaws of Tile Shop Holdings, Inc. – incorporated by reference to Exhibit 3.2 to the Registrant’s Form S-4 filed July 2, 2012.4.1Specimen Common Stock Certificate – incorporated by reference to Exhibit 4.1 of Amendment No. 1 to the Registrant’s FormS-4 filed July 23, 2012.10.1Registration Rights Agreement, dated June 27, 2012, by and among JWC Acquisition Corp., Tile Shop Holdings, Inc., certainmembers of JWC Acquisition, LLC, Nabron International, Inc., The Tile Shop, Inc., JWTS, Inc. and certain other members ofThe Tile Shop, LLC – incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by JWC AcquisitionCorp. on June 27, 2012.10.2*Offer Letter Agreement, dated June 24, 2012, by and between Tile Shop Holdings, Inc. and Robert A. Rucker – incorporatedby reference to Exhibit 10.6 to the Registrant’s Form S-4 filed July 2, 2012.10.3*Offer Letter Agreement, dated June 24, 2012, by and between Tile Shop Holdings, Inc. and Joseph Kinder – incorporated byreference to Exhibit 10.7 to the Registrant’s Form S-4 filed July 2, 2012.10.4*Offer Letter Agreement, dated June 24, 2012, by and between Tile Shop Holdings, Inc. and Carl Randazzo – incorporated byreference to Exhibit 10.8 to the Registrant’s Form S-4 filed July 2, 2012.10.5*Tile Shop Holdings, Inc. 2012 Omnibus Award Plan (f/k/a 2012 Equity Award Plan) – incorporated by reference to Exhibit10.1 to the Registrant’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 EquityAward 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 by reference to Exhibit 10.13 of Amendment No. 1 to the Registrant’s Form S-4 filed July 23, 2012.10.8*Tile Shop Holdings, Inc. Incentive Stock Option Agreement – incorporated by reference to Exhibit 10.3 to the Registrant’sCurrent Report on Form 8-K filed July 26, 2013.10.9*Tile Shop Holdings, Inc. Nonstatutory Stock Option Agreement – incorporated by reference to Exhibit 10.4 to theRegistrant’s Current Report on Form 8-K filed July 26, 2013.10.10*Tile Shop Holdings, Inc. Stock Restriction Agreement – incorporated by reference to Exhibit 10.5 to the Registrant’s CurrentReport on Form 8-K filed July 26, 2013.10.11*Employment Agreement, between Tile Shop Holdings, Inc. and Chris Homeister, effective October 1, 2013 – incorporated byreference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 1, 2013.10.12*Offer Letter Agreement, between Tile Shop Holdings, Inc. and Kirk Geadelmann, dated June 30, 2014 – incorporated byreference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 3, 2014.85 Table Of Contents 10.13*Amendment to Terms of Employment, effective January 1, 2015, between Tile Shop Holdings, Inc. and Chris Homeister –incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended December 31,2014.10.14*Amendment to Terms of Employment, effective January 1, 2015, between Tile Shop Holdings, Inc. and Robert A. Rucker –incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended December 31,2014.10.15Credit Agreement, dated June 2, 2015, among The Tile Shop, LLC, Tile Shop Holdings, Inc., Fifth Third Bank, and the otherparties named therein – incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 4,2015.10.16Security Agreement, dated June 2, 2015, among The Tile Shop, LLC, Tile Shop Holdings, Inc., Fifth Third Bank, and theother parties named therein – incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filedJune 4, 2015.10.17Guaranty Agreement, dated June 2, 2015, among The Tile Shop, LLC, Tile Shop Holdings, Inc., Fifth Third Bank, and theother parties named therein – incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filedJune 4, 2015.10.18*Offer Letter Agreement, between Tile Shop Holdings, Inc. and Lynda Stout, dated February 29, 2016 – incorporated byreference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.10.19Stipulation of Settlement, among Tile Shop Holdings, Inc., Beaver County Employees’ Retirement Fund and the other partiesthereto, dated January 13, 2017 – incorporated by reference to Exhibit 10.1 to the Registrant’s Amendment to Current Reporton Form 8-K filed January 20, 2017.10.20First Amendment to Credit Agreement, dated December 9, 2016, among The Tile Shop, LLC, Tile Shop Holdings, Inc., FifthThird Bank, and the other parties named therein – incorporated by reference to Exhibit 10.2 to the Registrant’s CurrentReport on Form 8-K filed February 14, 2017.10.21Second Amendment to Credit Agreement, dated February 10, 2017, among The Tile Shop, LLC, Tile Shop Holdings, Inc.,Fifth Third Bank, and the other parties named therein – incorporated by reference to Exhibit 10.1 to the Registrant’s CurrentReport on Form 8-K filed February 14, 2017.21.1Subsidiaries 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 byreference in any filing we make under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, asamended. 86Exhibit 21.1TILE 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 companyThe Tile Shop of Michigan, LLC, a Michigan limited liability companyThe Tile Shop of Oklahoma, LLC, a Delaware limited liability companyTile Shop Lending, Inc., a Delaware corporationThe Tile Shop (Beijing) Trading Company Ltd., a Chinese limited liability companyEXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-183455 and 333-190088)pertaining to the 2012 Omnibus Award Plan of Tile Shop Holdings, Inc. of our reports dated February 24, 2017, withrespect to the consolidated financial statements of Tile Shop Holdings, Inc. and Subsidiaries, and the effectiveness ofinternal control over financial reporting of Tile Shop Holdings, Inc. and Subsidiaries included in this Annual Report(Form 10-K) for the year ended December 31, 2016./s/ Ernst & Young LLPMinneapolis, MinnesotaFebruary 24, 2017EXHIBIT 31.1302 CERTIFICATION OF CHIEF EXECUTIVE OFFICERI, 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 amaterial fact necessary to make the statements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairlypresent in all material respects the financial condition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting(as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period inwhich this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reportingto be designed under our supervision, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles;c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period coveredby this report based on such evaluation; andd.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annualreport) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controlover financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarizeand report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role inthe registrant’s internal control over financial reporting.Date: February 24, 2017/s/ CHRIS R. HOMEISTER Chris R. Homeister,Chief Executive OfficerEXHIBIT 31.2302 CERTIFICATION OF CHIEF EXECUTIVE OFFICERI, 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 amaterial fact necessary to make the statements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairlypresent in all material respects the financial condition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting(as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period inwhich this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reportingto be designed under our supervision, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles;c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period coveredby this report based on such evaluation; andd.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annualreport) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controlover financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarizeand report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role inthe registrant’s internal control over financial reporting.Date: February 24, 2017/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 2002Pursuant 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 Officer of Tile Shop Holdings, Inc. (the “Company”), hereby certify that the AnnualReport on Form 10-K of the Company for the year ended December 31, 2016 (“the Report”) fully complies with therequirements 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 willbe retained by the Company and furnished to the SEC or its staff upon request.Date: February 24, 2017/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 2002Pursuant 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 Officer of Tile Shop Holdings, Inc. (the “Company”), hereby certify that the AnnualReport on Form 10-K of the Company for the year ended December 31, 2016 (“the Report”) fully complies with therequirements 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 willbe retained by the Company and furnished to the SEC or its staff upon request.Date: February 24, 2017/s/ KIRK L. GEADELMANN Kirk L. GeadelmannChief Financial Officer

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