Tile Shop Holdings
Annual Report 2017

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, 2017 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, a smaller reporting company, or emerginggrowth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒Accelerated filer ☐ Non-accelerated filer ☐Smaller reporting company ☐ (Do not check if a smaller reporting company)Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐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: $819,229,877. As of February 16, 2018, the registrant had 52,152,031 shares of common stock outstanding. Table Of Contents TILE SHOP HOLDINGS, INC. FORM 10-K TABLE OF CONTENTS PART I ITEM 1.BUSINESS1 ITEM1A.RISK FACTORS5 ITEM1B.UNRESOLVED STAFF COMMENTS13 ITEM 2.PROPERTIES14 ITEM 3.LEGAL PROCEEDINGS14 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 RISK30 ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA30 ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE30 ITEM9A.CONTROLS AND PROCEDURES31 ITEM9B.OTHER INFORMATION32 PART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE33 ITEM 11.EXECUTIVE COMPENSATION39 ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS52 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE55 ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES56 PART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES58 ​SIGNATURES82 ​POWER OF ATTORNEY 83 Table Of Contents PART I ITEM 1. BUSINESSOverviewThe Tile Shop, LLC (“The Tile Shop”) was founded in 1985 and Tile Shop Holdings, Inc. (“Holdings,” and together with its wholly ownedsubsidiaries, including The Tile Shop, the “Company” or “we”) was incorporated in Delaware in June 2012. We are a specialty retailer ofnatural stone and manufactured tiles, setting and maintenance materials, and related accessories in the United States. Our assortmentincludes over 4,000 products from around the world. Natural stone products include marble, travertine, granite, quartz, sandstone, slate, andonyx tiles. Manufactured tiles include ceramic, porcelain, glass, cement, wood look, and metal tiles. The majority of our tile products aresold under our proprietary Rush River and Fired Earth brand names. We purchase our tile products, accessories and tools directly from ournetwork of suppliers. We manufacture our own setting and maintenance materials, such as thinset and sealers under our Superior brandname, as well as work with other suppliers to manufacture private label products. As of December 31, 2017, we operated 138 stores in 31states and the District of Columbia, with an average size of approximately 20,300 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 ofnatural stone and manufactured tiles, setting and maintenance materials, and related accessories in the United States.In 2017, we reported net sales and income from operations of $344.6 million and $25.8 million, respectively. Our 2016 and 2015 net saleswere $324.2 million and $293.0 million, respectively, and our 2016 and 2015 income from operations was $32.9 million and $29.2 million,respectively. We opened fifteen new stores in 2017 and intend to open three new stores in 2018. As of the end of fiscal years 2017and 2016, we had total assets of $270.7 million and $265.3 million, respectively.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 suppliers 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 helps us to differentiate ourproducts from those of our competitors. We offer products across a range of price points and quality levels that allow us to target discretemarket segments 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.Strategic PlanKey elements of our strategy include: Best Assortment – We offer an extensive assortment of over 4,000 natural stone and manufactured tile products, setting and maintenancematerials, accessories and tools. Our assortment is tailored to provide homeowners and professional customers distinctive fashion-forwardproducts. We feature unique products and partner with industry-leading designers to curate collections that are sold1 Table Of Contents exclusively in our stores. Our buying team sources products from across the world to provide our customers with good, better and bestoptions to appeal to their individual tastes and budgets. We continuously refine our product assortment of setting and maintenanceproducts, including installation materials and tools, to meet the changing and growing needs of our professional customers. We believe theongoing emphasis placed on maintaining a best-in-class assortment is a critical component of our strategy. In 2018, we plan to add asignificant number of new products to our assortment. We are committed to maintaining a product assortment that meets the needs of anupscale, fashion conscious homeowner, as well as all of the professional customers who serve that homeowner. Best Service – We are committed to providing our customers a high degree of in-store service through our motivated, well-trained storeteam members. We continue to make investments to improve our hiring, management and development training practices which haveresulted in significant reductions in sales associate turnover and increased our average manager tenure. The improvement in turnover andmanager tenure has proven to contribute to better product knowledge, store leadership, and overall customer experience. We also engagewith our customers through our e-commerce website (TileShop.com), which provides inspiration, enhanced product information andresearch and design tools that support product selection. In 2018, we plan to add to the number of regional sales leader positions, increasesales and warehouse staff compensation, and invest in customer relationship management and content management capabilities. Ourexceptional customer service gives customers the ability to design with confidence. Best Presentation – We bring our products to life in our stores by showcasing a broad array of the items we offer in up to 50 differentbathroom, kitchen, fireplace, foyer and other vignettes. We also showcase our products on our website. In 2018, we plan to continuerefining our website to provide more inspirational and informative content, promote our design appointment capabilities, enhance oursampling process, and introduce a new platform to promote professional customer commerce. Additionally, we plan to make investments toremodel vignettes in approximately 30 stores, enhance our in-store merchandising and simplify the process to execute product transitions.We are committed to maintaining our reputation as a destination store where customers find inspiration. We plan to increase our existing store base by three stores in 2018. All stores we intend to open in 2018 will be located in existing marketswhere we will be able to leverage economies of scale in marketing, distribution and store talent. Longer term, we believe we haveexceptional opportunities to continue to add stores in existing markets and expand into new markets. Additionally, we will continue tofocus on strategies to further enhance the return on our new store investments by selecting retail spaces that provide us the opportunity toreduce the 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. Customers can choose to have their purchasesdelivered or picked up at one of our stores. We believe this strategy also positions us well with professional customers who are influencedby the preferences of individual homeowners.Our stores are designed to emphasize our products in a visually appealing showroom format. Our average store is approximately 20,300square 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, whether free-standing or in shopping centers. Allof our stores are leased.Unlike many of our competitors, we devote a substantial portion of our 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, and our product assortment and installation techniques, and to lookup our store locations and account information. It hosts our Design Studio, a collaborative platform that enables the creation of customized3D design renderings to scale, allowing customers to bring their ideas to life. On social media, #TheTileShop provides current andprospective customers a high level of brand engagement and enables customers to share their finished projects in our inspiration gallery.TileShop.com also serves as a commerce platform for our customers who want to purchase products within or outside of our physical storefootprint. Products can be delivered to a job site, home, or store location.ProductsWe offer an extensive and complete assortment of natural stone and manufactured tile products, sourced directly from our suppliers. Naturalstone products include marble, travertine, granite, quartz, sandstone, slate, and onyx tiles. Manufactured tiles include ceramic, porcelain,glass, cement, wood look, and metal tiles. Our wide assortment of accessories, including trim pieces, mosaics, pencils, listellos, and otherunique products encourage our customers to make a fashion statement with their tile project. This also helps us to deliver a high level ofcustomer satisfaction and drive repeat business. We also offer a broad range of setting and maintenance materials, such as thinset, grout,sealers, and accessories, including installation tools, shower and bath shelves, drains, and similar products. We also offer customers deliveryservice through third-party freight providers. 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, 2017 and 2016:Years Ended December 31,20172016Manufactured tiles43 %39 %Natural stone tiles33 37 Setting and maintenance materials11 11 Accessories11 11 Delivery service2 2 100 %100 %SuppliersWe have long-standing relationships with our suppliers 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 250 different suppliers. Our top ten tile suppliers accounted for 50% of our tilepurchases in 2017. Our largest supplier accounted for approximately 18% of our total purchases in 2017. 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, 2017 and 2016:Years Ended December 31,20172016Asia51 %47 %Europe (including Turkey)27 33 North America19 17 South America2 3 Africa1 0 100 %100 %3 Table Of Contents 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. We continueto evaluate logistics alternatives to best serve our store base and our customers. We believe that our existing distribution facilities willcontinue to play an integral role in our growth strategy, and we expect to establish one or more additional distribution centers to supportgeographic expansion of our store base and to support our store growth plans.CompetitionThe retail tile market is highly-fragmented. We compete directly with large national home improvement centers that offer a wide range ofhome improvement products, including flooring. In addition, we also compete with regional and local specialty retailers of tile, factory-direct stores, a large number of privately-owned, single-site stores, and online-only competitors. We also compete indirectly withcompanies that sell other types of floor coverings, including wood floors, carpet, and vinyl. The barriers of entry into the retail tile industryare relatively low and new or existing tile retailers could enter our markets and increase the competition that we face. Many of ourcompetitors enjoy competitive advantages over us, such as greater name recognition, longer operating histories, more varied productofferings, and greater financial, technical, and other resources.We believe that the key competitive factors in the retail tile industry include:·product assortment;·product presentation;·customer service;·store location;·immediacy of inventory; and·price.We believe that we compete favorably with respect to each of these factors by providing a highly diverse selection of products to ourcustomers, at an attractive value, in appealing and convenient store locations, with exceptional customer service and on-site instructionalopportunities. Further, while some larger factory-direct competitors manufacture their own products, many of our competitors purchase theirtile from domestic manufacturers or distributors when they receive an order from a customer. We also believe that we offer a broader rangeof products and stronger in-store customer support than these competitors.EmployeesAs of December 31, 2017, we had 1,634 employees, 1,488 of whom were full-time and none of whom were represented by a union. Of theseemployees, 1,292 work in our stores, 76 work in corporate, store support, infrastructure or similar functions, and 266 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 20 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 relatingto the 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 claims4 Table Of Contents relating to environmental compliance in the future, especially in the event of changes in existing laws and regulations or in theirinterpretation.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.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. We have also established a sourcing office based in China.Available InformationWe are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Exchange Actrequires us to file periodic reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Copiesof these reports, proxy statements and other information can be read and copied at the SEC Public Reference Room, 100 F Street, N.E.,Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers thatfile electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s website at http://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 amendments tothose reports available on our website, free of charge, as soon as reasonably practicable after such reports have been filed with or furnishedto the SEC. Our Code of Business Conduct and Ethics, as well as any waivers from and amendments to the Code of Business Conduct andEthics, is 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;·trade relations and tariffs;·tax rates and tax policy; and·other matters that influence consumer confidence and spending.5 Table Of Contents 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. 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 suppliers 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 three stores in fiscal year 2018. There can be no assurance that we will be able toopen stores in new markets at the rate required to achieve market leadership in such markets, identify and obtain favorable store sites,arrange favorable leases for stores, obtain governmental and other third-party consents, permits, and licenses needed to open or operatestores in a timely manner, train and hire a sufficient number of qualified managers for new stores, attract a strong customer base and brandfamiliarity in new markets, or successfully compete with established retail tile stores in the new markets that we enter. Failure to open newstores in an effective and cost-efficient manner could place us at a competitive disadvantage as compared to retailers who are more adeptthan 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 three additional stores in existing markets during 2018. In future periods, we intend tocontinue opening stores in new and existing markets. Because our stores typically draw customers from their local areas, additional storesmay draw customers away from nearby existing stores and may cause same store sales performance at those existing stores to decline, whichmay adversely affect our overall operating results. Additionally, stores in new markets typically have a ramp-up period before sales becomesteady enough for such stores to be profitable. Our ability to open additional stores will be dependent on our ability to promote and/orrecruit enough qualified store managers, assistant store managers, and sales associates. The time and effort required to train and supervise alarge number of new managers and associates and integrate them into our culture may divert resources from our existing stores. If we areunable to profitably open additional stores in both new and existing markets and limit the adverse impact of those new stores on existingstores, it may reduce our same store sales and overall operating results during the implementation of our expansion strategy.6 Table Of Contents Our expansion strategy will be dependent upon, and limited by, the availability of adequate capital.Our expansion strategy will require adequate capital for, among other purposes, opening new stores, distribution centers, and manufacturingfacilities, as well as entering new markets. Such expenditures will include researching real estate and consumer markets, leases, inventory,property and equipment costs, integration of new stores and markets into company-wide systems and programs, and other costs associatedwith new stores and market entry expenses and growth. If cash generated internally is insufficient to fund capital requirements, we willrequire additional debt or equity financing. Adequate financing may not be available or, if available, may not be available on termssatisfactory to us. In addition, our credit facility may limit the amount of capital expenditures that we may make annually, depending onour leverage ratio. If we fail to obtain sufficient additional capital in the future or we are unable to make capital expenditures under ourcredit facility, we could be forced to curtail our expansion strategies by reducing or delaying capital expenditures relating to new stores andnew market entry. As a result, there can be no assurance that we will be able to fund our current plans for the opening of new stores or entryinto 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 250 domestic and international suppliers. We source a largenumber of those products from foreign manufacturers, including 50% of our products from a group of ten suppliers located in Asia, Europeand the United States. Our largest supplier accounted for approximately 18% of our total purchases in 2017. We generally take title tothese products sourced from foreign suppliers overseas and are responsible for arranging shipment to our distribution centers. Financialinstability among key suppliers, political instability, trade restrictions, tariffs, currency exchange rates, and transport capacity and costs arebeyond our control and could negatively impact our business if they seriously disrupt the movement of products through our supply chainor increase the costs of our products.Our ability to offer compelling products, particularly products made of unique stone, depends on the continued availability of sufficientsuitable natural products.Our business strategy depends on offering a wide assortment of compelling products to our customers. We sell, among other things,products made from various natural stones from quarries throughout the world. Our ability to obtain an adequate volume and quality ofhard-to-find products depends on our suppliers ability to furnish those products, which, in turn, could be affected by many things,including the exhaustion of stone quarries. If our suppliers cannot deliver sufficient products, and we cannot find replacement suppliers, ournet sales and operating results may be adversely affected.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 suppliers 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.7 Table Of Contents 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.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 these employees, we may not be able to run our businesseffectively.Our future success depends in part on our ability to attract and retain key executive, merchandising, marketing, and sales personnel. 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. Specifically, our founder and former Chief Executive Officer currently serves as ourinterim Chief Executive Officer and no assurance can be given that a suitable replacement can be hired.The burden of debt under our existing credit facility and additional debt could adversely affect us, make us more vulnerable toadverse economic or industry conditions, and prevent us from fulfilling our debt obligations or from funding our strategies. We have entered into a credit facility with Fifth Third Bank, Bank of America, N.A., and The Huntington National Bank on June 2, 2015.As of December 31, 2017, our term loan balance was $11.3 million and the balance on our revolving line of credit was $15.0 million. Theamount of available future borrowings on our revolving credit facility was $60.0 million as of December 31, 2017. The terms of our creditfacility and the burden of the indebtedness 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.8 Table Of Contents 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. 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 and certain distribution center locations. Many of our current leases provide us with theunilateral option to renew for several additional rental periods at specific rental rates. Our ability to renegotiate favorable terms on anexpiring lease or to negotiate favorable terms for a suitable alternate location, and our ability to negotiate favorable lease terms foradditional store locations, could depend on conditions in the real estate market, competition for desirable properties, our relationships withcurrent and prospective landlords, or other factors that are not within our control. Any or all of these factors and conditions couldnegatively 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 suppliers. Anychanges in regulations, the imposition of additional regulations, or the enactment of any new legislation that affects 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.9 Table Of Contents The final impacts of the Tax Cuts and Jobs Act could be materially different from our current estimates, which could have an adverseeffect on our business and results of operations.On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted into law and the new legislation contains severalkey tax provisions that affect us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of thecorporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes inthe period of enactment, including determining the transition tax, re-measuring our U.S. deferred tax assets and liabilities and reassessingthe net realizability of our deferred tax assets and liabilities. Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of theTax Cuts and Jobs Act (“SAB 118”) allows us to record provisional amounts during a measurement period not to extend beyond one year ofthe enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation isexpected over the next twelve months, we consider the accounting of the transition tax, deferred tax re-measurements, and other items to beincomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. Our estimated impact of thenew law is based on management's current knowledge and assumptions. We expect to record any adjustments in the next year in accordancewith the guidance provided in SAB 118.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 stores, utility costs for our distribution and manufacturing centers and stores, and overall costs to purchaseproducts from our suppliers.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.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 containing discounts and promotional offers to encourage customers to visit our stores. A significantportion of our advertising was invested to support the opening of new stores and directed at professional customers. In future periods, weintend to de-emphasize the use of discount offers to attract customers. Limited use of discount and promotional offers in future periodscould fail to attract customers resulting in a decrease in store traffic. 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,10 Table Of Contents or if the cost of advertising or other marketing materials increases significantly, we could experience declines in our net sales and operatingresults.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, suppliers 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 suppliers 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 loseconfidence 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. We are also 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 employeehealth insurance costs increase beyond what was expected, our accrued liabilities might not be sufficient and we may be required to recordadditional expense. Unanticipated changes may produce materially different amounts of expense than that reported under these programs,which could adversely impact our operating results.11 Table Of Contents 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.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 and executive officers, together with their affiliates, beneficially hold approximately 25% of our outstanding shares ofcommon stock. As a result, these stockholders, if acting together, have the ability to influence the outcome of corporate actions requiringstockholder approval. This concentration of ownership may have the effect of delaying or preventing a change in control and mightadversely affect the market price of our securities.12 Table Of Contents 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 limit the opportunity for ourstockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing topay for our common stock. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 13 Table Of Contents ITEM 2. PROPERTIESAs of December 31, 2017, we operated 138 stores located in 31 states and the District of Columbia with an average square footage ofapproximately 20,300 square feet. The table below sets forth the locations (alphabetically by state) of our 138 stores in operation as ofDecember 31, 2017.StateStoresStateStoresStateStoresStateStoresArkansas1 Iowa1 Minnesota7 Oklahoma2 Arizona4 Illinois11 Missouri5 Pennsylvania5 Colorado4 Indiana4 North Carolina4 Rhode Island1 Connecticut2 Kansas2 Nebraska1 South Carolina2 Delaware1 Kentucky3 New Jersey7 Tennessee4 District of Columbia1 Massachusetts3 New Mexico1 Texas16 Florida5 Maryland5 New York8 Virginia6 Georgia4 Michigan7 Ohio8 Wisconsin3 Total138 We lease all of our stores. Our approximately 15,000 square foot headquarters in Plymouth, Minnesota is attached to our store. We own fourregional facilities used for distribution of purchased product and manufacturing of setting and maintenance materials, located in SpringValley, Wisconsin; Ottawa Lake, Michigan; Ridgeway, Virginia; and Durant, Oklahoma, which consist of 69,000, 271,000, 134,000, and260,000 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 three new retaillocations in 2018. ITEM 3. LEGAL PROCEEDINGSThe Company was a defendant in a consolidated class action arising in 2013 alleging it failed to disclose certain related party transactionsin the Company’s SEC filings and press releases. In January 2017, the plaintiffs and the Company agreed to settle the lawsuit for $9.5million. The court approved the settlement and entered an order dismissing the action on June 14, 2017.The Company also is a nominal defendant in three actions brought derivatively on behalf of the Company by three shareholders in2015. The plaintiffs allege that the defendant-directors and/or officers breached their fiduciary duties by failing to adopt adequate internalcontrols for the Company, by approving false and misleading statements issued by the Company, by causing the Company to violategenerally accepted accounting principles and SEC regulations, 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 Company moved to dismiss theactions, or in the alternative, to stay the actions. Those motions have not yet been decided. ​By letter dated May 19, 2016, a shareholder of the Company demanded that the Board of Directors investigate alleged breaches of fiduciaryduty related to the same matters described above and take action against certain present and former officers and directors of the Company.The Board of Directors has appointed a committee of two independent directors to investigate and evaluate the matters raised in thedemand letter, and to recommend to the Company’s Board of Directors what actions, if any, should be taken by the Company with respectto the matters raised in the demand letter. ​​Based on the Company’s assessment of the derivative actions and demand, the range of resulting loss is not expected to have a materialimpact on the Company’s financial statements. 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 cashflows. ITEM 4. MINE SAFETY DISCLOSURESNone. 14 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 sale pricesper share of our common stock as reported on The Nasdaq Stock Market for the periods indicated:Common StockQuarterHighLowFiscal Year 2016First$16.63 $12.40 Second$20.00 $14.53 Third$21.05 $15.05 Fourth$21.40 $15.95 Fiscal Year 2017First$20.90 $17.25 Second$22.40 $18.90 Third$20.90 $12.05 Fourth$13.20 $8.08 As of February 16, 2018, we had approximately 85 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 16, 2018, we had outstanding a total of 52,152,031 shares of common stock. The last reported sales price for our commonstock on February 16, 2018 was $8.45.Dividends Paid Per ShareDate PaidAmountMarch 24, 2017$0.05 May 16, 2017$0.05 August 15, 2017$0.05 November 14, 2017$0.05 Prior to 2017, we did not pay dividends to our stockholders. On February 21, 2018 we declared a $0.05 dividend to stockholders of recordas of the close of business on March 5, 2018. The dividend will be paid on March 16, 2018. It is our intent to continue to pay quarterlydividends in the future; however, we may suspend or change this program at any time and there can be no guarantee that we will continueto 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. 15 Table Of Contents Stock Performance Graph The graph and table below present our cumulative total stockholder returns relative to the performance of the S&P SmallCap 600 and theDow Jones U.S. Furnishings Index for the period commencing December 31, 2013 and ending December 31, 2017, the last trading day offiscal year 2017. The comparison assumes $100 invested at the close of trading on December 31, 2012 in (i) our common stock, (ii) thestocks comprising the S&P SmallCap 600, and (iii) the stocks comprising the Dow Jones U.S. Furnishings Index. All values assume that alldividends were reinvested on the date paid. The points on the graph represent fiscal quarter-end amounts based on the last trading day ineach fiscal quarter. The stock price performance included in the line graph below is not necessarily indicative of future stock priceperformance.Tile Shop Holdings, Inc.S&P Small Cap 600Dow Jones U.S. Furnishings IndexDecember 31, 2013$100.00 $100.00 $100.00 December 31, 2014$49.14 $104.44 $112.97 December 31, 2015$90.76 $100.93 $124.17 December 31, 2016$108.19 $125.91 $137.38 December 31, 2017$53.90 $140.68 $157.31 16 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, 2017 and 2016 and for the years ended December 31, 2017, 2016, and 2015 and (ii) our audited financialstatements not included elsewhere in this report as of December 31, 2015, 2014, and 2013 and for the years ended December 31, 2014and 2013. The following selected financial data should be read in conjunction with the section entitled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and the financial statements and the related notes appearing elsewhere in thisreport. As of December 31, or for the year ended December 31, 2017 2016 2015 2014 2013 (in thousands, except per share) Statement of Income Data Net sales $344,600 $324,157 $292,987 $257,192 $229,564 Cost of sales 108,378 97,261 89,377 78,300 68,755 Gross profit 236,222 226,896 203,610 178,892 160,809 Selling, general and administrative expenses 210,376 193,983 174,384 157,316 127,731 Income from operations 25,846 32,913 29,226 21,576 33,078 Interest expense 1,857 1,715 2,584 3,141 2,581 Change in fair value of warrants - - - - 54,219 Other income (expense) 170 141 130 (506) 4 Income (loss) before income taxes 24,159 31,339 26,772 17,929 (23,718) Provision for income taxes 13,340 12,876 11,076 7,382 11,942 Net income (loss) $10,819 $18,463 $15,696 $10,547 $(35,660) Earnings per share $0.21 $0.36 $0.31 $0.21 $(0.72) Weighted average shares outstanding (diluted) 51,928 51,880 51,305 51,030 49,600 Balance Sheet Data Cash and cash equivalents $6,621 $6,067 $10,330 $5,759 $1,761 Inventories 85,259 74,295 69,878 68,857 67,756 Total assets 270,725 265,273 245,007 252,190 241,642 Total debt and capital leaseobligations, including currentmaturities(1) 27,712 29,208 56,812 93,264 96,676 Total stockholders' equity 143,874 138,899 115,201 93,695 78,496 Working capital 43,525 36,013 47,497 52,468 51,719 Cash Flow Data Net cash provided by operating activities $45,691 $53,552 $60,264 $47,201 $21,211 Net cash used in investing activities (40,549) (27,252) (18,994) (40,552) (52,955) Net cash (used in) provided by financing activities (4,594) (30,528) (36,688) (2,651) 30,518 Other Selected Financial Data (unaudited) Adjusted EBITDA(2) $57,173 $68,047 $58,420 $47,460 $54,294 Adjusted EBITDA margin(2) 16.6 % 21.0 % 19.9 % 18.5 % 23.7 %Gross margin rate(3) 68.5 % 70.0 % 69.5 % 69.6 % 70.0 %Operating income margin(4) 7.5 % 10.2 % 10.0 % 8.4 % 14.4 %Same stores sales growth(5) 0.5 % 7.6 % 7.4 % (0.4)% 12.4 %Stores open at end of period 138 123 114 107 88 (1)Amounts as of December 31, 2017, 2016, and 2015 consist of total debt and capital lease obligations, including current maturities,net of debt issuance costs. Amounts as of December 31, 2014 and 2013 include total debt and capital lease obligations, includingcurrent maturities.(2)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, stock based compensation expense, and special charges, which consists of equity-related transaction costs,litigation and investigation costs, and the write-off of debt issuance costs. Adjusted EBITDA margin is equal to Adjusted EBITDAdivided by net sales. We believe that these non-GAAP measures of financial results provide useful information to management andinvestors regarding certain financial and business trends relating to our financial condition and results of17 Table Of Contents operations. Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses,for purposes of determining management incentive compensation 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.(3)Gross margin rate is gross profit divided by net sales.(4)Operating income margin is income from operations divided by net sales.(5)Same store sales growth is the percentage change in sales of comparable stores period over period. A store is considered 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 the change in the allowance for anticipated sales returns applicable to comparable stores in the same store sales calculation.Prior to 2015, we did not include estimated return provisions or sale allowances in the same store sales calculation, as return reserveswere calculated on a consolidated level. Same store sales data reported by other companies may be prepared on a different basis andtherefore may not be useful for purposes of comparing our results to those of other businesses. Reconciliation of Non-GAAP Adjusted EBITDA to GAAP Net Income (Loss)Years Ended December 31,20172016201520142013(in thousands)Net income (loss)$10,819 $18,463 $15,696 $10,547 $(35,660)Interest expense1,857 1,715 2,584 3,141 2,581 Income taxes13,340 12,876 11,076 7,382 11,942 Change in fair value of warrants - - - -54,219 Depreciation & amortization26,239 23,042 22,236 19,925 14,316 Special charges1,762 7,618 1,283 1,848 2,216 Stock based compensation3,156 4,333 5,545 4,617 4,680 Adjusted EBITDA$57,173 $68,047 $58,420 $47,460 $54,294 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. 18 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 “anticipate,” “believe,” “can,” “continue,” “could,” “depend,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,”“project,” “seek,” “should,” “target,” “will,” “will likely result,” “would,” and similar expressions, although some forward-lookingstatements are expressed differently. The forward-looking statements in this Form 10-K relate to, among other things, our anticipated newstore openings, remodeling plans, and growth opportunities; our business strengths, marketing strategies, competitive advantages androle in our industry and markets; our strategic plan and the anticipated benefits of our strategic plan; legal proceedings; our intendedfuture process for determining and assessing compensation; our expectations for the future use of equity incentive plans; our expectationsregarding financing arrangements; our expectations with respect to dividend payments; supply costs and expectations, including thecontinued availability of sufficient products from our suppliers; costs and adequacy of insurance; our expectations with respect toongoing compliance with the terms of our credit facility; the effect of regulations on us and our industry and our compliance with suchregulations; our expectations regarding the effects of employee recruiting, training, mentoring, and retention; and our expectationsregarding the impact of federal corporate tax reform.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. We undertake no obligation to update publiclyany forward-looking statements, whether as a result of new information, future events, or for any other reason. OverviewWe are a specialty retailer of natural stone and manufactured 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, 2017, we operated 138 stores in 31 states and the District of Columbia, with an average size of approximately 20,300 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, and webelieve that we are a leading retailer of natural stone and manufactured tiles, setting and maintenance materials, and related accessories inthe 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 fifteen new stores in the United States in 2017, and plan to open three stores in 2018. We believe that there will continue to beadditional expansion opportunities in the United States and Canada. We expect store growth will drive increased net19 Table Of Contents sales and income from operations. Our growth plans also require us to maintain significant inventory on-hand in order to fulfill orders atthese new locations.The table below sets forth information about our net sales, operating income and stores opened from 2015 to 2017.For the year ended December 31,201720162015(in thousands, except store data)Net sales$344,600 $324,157 $292,987 Income from operations$25,846 $32,913 $29,226 New stores opened during period15 9 7 Net cash provided by operating activities was $45.7 million, $53.6 million and $60.3 million for 2017, 2016 and 2015, respectively,which was used to fund operations, new stores, construction activities and debt repayments. We expect to continue to fund the majority ofour capital expenditures and daily operations from our operating cash flows. As of December 31, 2017, we had cash of $6.6 million andworking capital of $43.5 million. 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 at thetime that the customer takes possession of the merchandise or when final delivery of the product has occurred. We recognize servicerevenue, which consists primarily of freight charges for home delivery, when the service has been rendered. We are required to charge andcollect sales and other taxes on sales to our customers and remit these taxes back to government authorities. Total revenues do not includesales tax because we are a pass-through conduit for collecting and remitting sales tax. Sales are reduced by an allowance for anticipatedsales returns that we estimate based on historical returns.Same store sales growth is the percentage change in sales of comparable stores period-over-period. A store is considered comparable on thefirst day of the 13th full month of operation. When a store in relocated, it is excluded from the same stores sales growth calculation. Samestore sales growth amounts include total charges to customers less any actual returns. We include the change in allowance for anticipatedsales returns applicable to comparable stores in the same store sales calculation.Cost of Sales Cost of sales consists primarily of material costs, freight, custom and duties fees, and storage and delivery of product to thecustomers, as well as physical inventory losses and costs associated with manufacturing of setting and maintenance materials. Gross Profit Gross profit is net sales less cost of sales. Gross margin rate is the percentage determined by dividing gross profit by net sales.Selling, General and Administrative Expenses Selling, general, and administrative expenses consists primarily of compensation costs,occupancy, utilities, maintenance costs, advertising cost, shipping and transportation expenses to move inventory from our distributioncenters to our stores, depreciation and amortization.Pre-opening Costs Our pre-opening costs are those typically associated with the opening of new stores and generally include rent expense,compensation costs and promotional costs. We expense pre-opening costs as incurred and include these costs in selling, general, andadministrative expenses.Income Taxes We are subject to income tax in the United States as well as other tax jurisdictions in which we conduct business. Non-GAAP MeasuresWe 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,stock based compensation expense, and special charges, which consists of equity-related transaction costs, litigation and investigationcosts, and the write-off of debt issuance costs. Non-GAAP net income excludes special charges, which consist of shareholder investigationand other litigation costs, tax reform costs, and the write-off of debt issuance costs, 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 tool20 Table Of Contents for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with other specialtyretailers, many of which present similar non-GAAP financial measures to investors.The reconciliation of Adjusted EBITDA to net income (loss) for the years ended December 31, 2013 through December 31, 2017 is asfollows:Years Ended December 31,20172016201520142013(in thousands)Net income (loss)$10,819 $18,463 $15,696 $10,547 $(35,660)Interest expense1,857 1,715 2,584 3,141 2,581 Income taxes13,340 12,876 11,076 7,382 11,942 Change in fair value of warrants - - - -54,219 Depreciation & amortization26,239 23,042 22,236 19,925 14,316 Special charges1,762 7,618 1,283 1,848 2,216 Stock based compensation3,156 4,333 5,545 4,617 4,680 Adjusted EBITDA$57,173 $68,047 $58,420 $47,460 $54,294 The reconciliation of GAAP income to Non-GAAP income for the years ended December 31, 2017, 2016 and 2015 is as follows:Year Ended December 31, 2017Per SharePretaxNet of TaxAmounts(in thousands, except per share data)GAAP income$24,159 $10,819 $0.21 Special charges:Shareholder and other litigation costs1,762 1,112 0.02 Tax reform(1) -4,562 0.09 Non-GAAP income$25,921 $16,493 $0.32 (1)Represents an adjustment for impacts of a change in the income tax provision due to the re-measurement of deferred income taxpositions to reflect the new corporate tax rates pursuant to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). This provisional amountis subject to adjustment during the measurement period of up to one year following the December 2017 enactment of the Tax Act, asprovided by recent SEC guidance.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 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 to21 Table Of Contents inherent limitations 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.22 Table Of Contents Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016 2017 % of sales 2016 % of sales (in thousands)Net sales $344,600 100.0 % $324,157 100.0 %Cost of sales 108,378 31.5 % 97,261 30.0 %Gross profit 236,222 68.5 % 226,896 70.0 %Selling, general and administrative expenses 210,376 61.0 % 193,983 59.8 %Income from operations 25,846 7.5 % 32,913 10.2 %Interest expense (1,857) (0.5)% (1,715) (0.5)%Other income 170 0.0 % 141 0.0 %Income before income taxes 24,159 7.0 % 31,339 9.7 %Provision for income taxes (13,340) (3.9)% (12,876) (4.0)%Net income $10,819 3.1 % $18,463 5.7 %Net Sales – Net sales for fiscal year 2017 increased $20.4 million, or 6.3%, over fiscal year 2016, primarily due to an increase in net salesgenerated by fifteen stores opened in 2017 and a comparable store sales increase of 0.5%. Net sales for the fifteen new stores open less thantwelve months were $18.8 million during the fiscal year 2017. Comparable store sales increased $1.6 million for the fiscal year 2017 due toan increase in the average order value, which was partially offset by a modest decline in traffic. Net sales for the fourth quarter of fiscal year2017 increased $2.0 million, or 2.6%, over the fourth quarter of fiscal year 2016, primarily due to sales from stores not included in thecomparable store base, offset by a comparable store sales decrease of 4.9%. Traffic weakened during the fourth quarter of fiscal year 2017.Gross Profit – Gross profit increased $9.3 million, or 4.1%, for fiscal year 2017 compared to fiscal year 2016, primarily due to the increasein net sales. The gross margin rate decreased to 68.5% in fiscal year 2017 from 70.0% for fiscal year 2016. The gross margin rate decline forthe fiscal year 2017 was driven primarily by promotions and competitive pricing activity and product mix changes. Gross profit decreased$0.8 million in the fourth quarter of fiscal year 2017 compared to the fourth quarter of fiscal year 2016. The decrease in gross profit isprimarily due to a decrease in the gross margin rate from 69.6% to 66.8% during the three months ended December 31, 2016 and 2017,respectively. The gross margin rate decline for the fourth quarter was driven primarily by promotions and competitive pricing activity tiedto orders initiated during third quarter that were closed in the fourth quarter and orders generated over the Black Friday weekend. Inventorycontrol costs and product mix changes also contributed to the decrease in gross margin for the quarter.Selling, General and Administrative Expenses – Selling, general, and administrative expenses increased $16.4 million, or 8.5%, in fiscalyear 2017 compared to fiscal year 2016. Selling, general, and administrative expenses as a percentage of net sales increased to61.0% in fiscal year 2017 from 59.8% for the fiscal year 2016. The primary driver for the selling, general, and administrative expensesincrease was due to the costs associated with opening and operating fifteen new stores in 2017, including a $9.7 million increase inoccupancy expenses, a $4.2 million increase in compensation expenses, a $2.6 million increase in advertising expenses and a $0.9million increase in transportation expenses. Additionally, we recorded asset impairment charges of $1.1 million during fiscal year2017. No asset impairment charges were recognized in fiscal year 2016. Selling, general, and administrative expenses include special charges of $1.8 million and $7.6 million for fiscal years 2017 and 2016,respectively, which consist of litigation expenses. Pre-opening Costs –During fiscal years 2017 and 2016, we recorded pre-opening costs of $1.7 million and $0.9 million, respectively. Theincrease in pre-opening costs was due to an increase in the number of new store openings in 2017.Income from Operations – Income from operations decreased by $7.1 million, or 21.5%, for fiscal year 2017 compared to fiscal year 2016. The decrease is attributable to an increase in selling, general and administrative expenses and a lower gross margin rate. Operating incomemargin decreased to 7.5% for fiscal year 2017, compared to 10.2% for fiscal year 2016 due to increased selling, general and administrativeexpenses that outpaced sales growth and a lower gross margin rate.Interest Expense – Interest expense increased $0.1 million, or 8.3%, for fiscal year 2017 compared to the fiscal year 2016. The increase isdue to an increase in the interest rates during fiscal year 2017. Provision for Income Taxes – The income tax provision increased $0.5 million for fiscal year 2017 compared to fiscal year 2016. Oureffective tax rate was 55.2% in 2017 and 41.1% in 2016. The increase in tax expense and our overall tax rate was primarily due to a $4.6million charge taken during the fourth quarter of fiscal year 2017 to reduce the value of our deferred tax assets in accordance with the TaxCuts and Jobs Act of 2017. The increase in tax expense was partially offset by lower income before income taxes. 23 Table Of Contents Comparison of the Year Ended December 31, 2016 to the Year Ended December 31, 2015 2016 % of sales 2015 % of sales(1) (in thousands)Net sales $324,157 100.0 % $292,987 100.0 %Cost of sales 97,261 30.0 % 89,377 30.5 %Gross profit 226,896 70.0 % 203,610 69.5 %Selling, general and administrative expenses 193,983 59.8 % 174,384 59.5 %Income from operations 32,913 10.2 % 29,226 10.0 %Interest expense (1,715) (0.5)% (2,584) (0.9)%Other income 141 0.0 % 130 0.0 %Income before income taxes 31,339 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, increases in the number of ordersand order size as a result of continued reductions in sales associate turnover and a continued increase in average store manager tenure. Theincrease 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 the increasein net sales. Gross margin rate increased to 70.0% for fiscal year 2016, from 69.5% for fiscal year 2015. The increase in the gross margin ratewas 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 sales growth, which contributed a $6.4 million increase in compensation expenses, a $2.3 million increase in occupancy expenses, $1.6 million increase in transportation expenses and a $0.8 million increase indepreciation. 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 – During fiscal years 2016 and 2015, we recorded pre-opening costs of $0.9 million and $0.5 million, respectively. Thisdifference reflects the opening of nine new stores and two relocations in 2016 versus seven new stores in 2015.Income from Operations – As a result of the increase in net sales discussed above, income from operations increased by $3.7 million, or12.6%, for fiscal year 2016 compared to fiscal year 2015. Operating income margin increased to 10.2% for fiscal year 2016, compared to10.0% for fiscal year 2015 due to improved sales performance, an increase in gross profit, and strong cost control, partially offset byincreased litigation expenses.Interest Expense – Interest expense decreased $0.9 million, or 33.6%, for fiscal year 2016 compared to fiscal year 2015. The decrease is dueto the reduction of debt in fiscal year 2016.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 Liquidity and Capital ResourcesOur principal liquidity requirements have been for working capital and capital expenditures. Our principal sources of liquidity are $6.6million of cash and cash equivalents at December 31, 2017, 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 intend to continue our regular quarterly dividend that will enable usto return excess cash to stockholders. Future dividend payments are subject to the approval of the Board of Directors 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 again was amended on July 17, 2017 toadjust the consolidated fixed charge coverage ratio from 2.00:1.00 to 1.50:1.00 to provide greater flexibility in declaring and makingdividend payments or other distributions to stockholders. The Credit Agreement provides us with a $125.0 million senior secured creditfacility, comprised of a five-year $50.0 million term loan and a $75.0 million revolving line of credit. The Credit Agreement is secured byvirtually all of our assets, including but not limited to inventory, receivables, equipment and real property. Borrowings pursuant to theCredit Agreement bear interest at either a base rate or a LIBOR-based rate, at our option. The LIBOR-based rate will range from LIBOR plus1.50% 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) theFifth 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. AtDecember 31, 2017 the base interest rate was 5.00% and the LIBOR-based interest rate was 3.06%. Borrowings outstanding consisted of$11.3 million on the term loan and $15.0 million on the revolving line of credit as of December 31, 2017. There was $60.0 millionavailable for borrowing on the revolving line of credit as of December 31, 2017. We can elect to prepay the term loan without incurring apenalty. To the extent we have an outstanding balance on our term loan, the credit agreement requires quarterly principal payments asfollows (in thousands):PeriodMarch 31, 2018 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, 2017. We intend to make principal payments due in future periods using cash from operations.We have standby letters of credit outstanding related to our workers’ compensation and employee health insurance policies. As ofDecember 31, 2017 and 2016, the standby letters of credit totaled $1.1 million.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 2017, 2016 and 2015 were $40.6 million, $27.3 million and $19.0 million, respectively. The increase in capitalexpenditures is primarily due to the accelerated pace of new store openings. We opened fifteen, nine and seven stores during fiscal years2017, 2016 and 2015, respectively. During fiscal year 2017, $26.2 million was for new store build-out and remodels of existing stores, $7.1million was for our information technology infrastructure in stores, $3.1 million was for investments in our distribution and manufacturingfacilities, and the remainder was for general corporate purposes. During fiscal year 2016, $16.2 million was for new store build-out andremodels of existing stores, $6.9 million was for our information technology infrastructure in stores, $4.2 million was for investments in ourdistribution and manufacturing facilities, and the remainder was for general corporate purposes. During fiscal year 2015, $15.6 million wasfor new store build-out and remodels of existing stores, $1.2 million was for investments in our distribution and manufacturing facilities,and the remainder was for general corporate purposes.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 three stores during 2018. We also plan to remodelapproximately 30 stores to support our product presentation strategy. Total capital expenditures are expected to be between $27 millionand $32 million in fiscal year 2018.25 Table Of Contents Cash FlowsThe following table summarizes our cash flow data for the years ended December 31, 2017, 2016 and 2015.For the year ended December 31,201720162015(in thousands)Net cash provided by operating activities$45,691 $53,552 $60,264 Net cash used in investing activities(40,549)(27,252)(18,994)Net cash used in financing activities(4,594)(30,528)(36,688)Operating ActivitiesCash flows from operating activities provide us with a significant source of liquidity. Net cash provided by operating activities was $45.7million, $53.6 million, and $60.3 million in fiscal years 2017, 2016 and 2015, respectively. The decrease in operating cash flows in fiscalyear 2017 compared to fiscal year 2016 was due to lower net income, an increase in inventory, and the settlement of the shareholderlitigation. The decrease in operating cash flows in fiscal year 2016 compared to fiscal year 2015 was primarily the result of increasedinventory purchases during fiscal year 2016, which was associated with sales growth. Investing ActivitiesNet cash used in investing activities was $40.5 million, $27.3 million and $19.0 million in fiscal years 2017, 2016 and 2015, respectively.Net cash used in investing activities in each period was primarily for capital purchases of store fixtures and equipment, buildingimprovements and leasehold improvements for stores opened or remodeled, routine capital purchases of computer hardware and software,and investments in distribution centers.Financing ActivitiesNet cash used in financing activities was $4.6 million, $30.5 million and $36.7 million in fiscal years 2017, 2016 and 2015, respectively.Cash used in financing activities during fiscal year 2017 was primarily for payments of long-term debt and capital lease obligations of$36.6 million and an aggregate of $10.4 million in dividends paid to stockholders, offset by net proceeds from long-term debt of $35.0million and the release of restricted cash totaling $6.0 million. Cash used in financing activities during fiscal year 2016 was primarily forpayments of long-term debt and capital lease obligations of $37.8 million, partially offset by net proceeds from long-term debt of $10.0million. Cash used in financing activities during fiscal year 2015 was primarily for payments of long-term debt and capital leases.Off-balance Sheet ArrangementsAs of December 31, 2017 and 2016, 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.26 Table Of Contents Contractual ArrangementsThe following table summarizes certain of our contractual obligations at December 31, 2017 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)$28,039 $9,548 $18,106 $253 $132 Operating lease obligations (2)580,997 34,142 69,540 69,247 408,068 Capital lease obligations (3)952 216 431 215 90 Self-insurance(4)1,300 1,300 - - -Total contractual obligations$611,288 $45,206 $88,077 $69,715 $408,290 (1)Includes total interest of $1.0 million, comprised of $0.7 million of interest for the period of less than 1 year, $0.3 million of interestfor the period of 1 – 3 years, $0.0 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 $0.3 million, comprised of $0.1 million of interest for the period of less than 1 year, $0.1 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.(4)Self-insurance includes our employee health and workers’ compensation insurance policies. 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 in Item 15 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 net realizable value. We capitalize the cost of inbound freight, duties andreceiving and handling costs to bring purchased materials into our distribution network. The labor and overhead costs incurred inconnection with the production process are included in the value of manufactured finished goods. We provide provisions for losses relatedto shrinkage and other amounts that are otherwise not expected to be fully recoverable. These provisions are calculated based on historicalshrinkage, selling price, margin and current business trends. These estimates have calculations that require management to makeassumptions based on the current rate of sales, age, salability and profitability of inventory, historical percentages that can be27 Table Of Contents affected by changes in our merchandising mix, customer preferences, rates of sale through and changes in actual shrinkage trends. We donot believe there is a reasonable likelihood that there will be a material change in the assumptions we use to calculate our inventoryprovisions. However, if actual results are not consistent with our estimates and assumptions, we may be exposed to losses that could bematerial.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 is recognized when estimated undiscounted future cash flows from the operations and/or disposition of the assets are lessthan the carrying amount. Measurement of an impairment loss is based on the excess of the carrying amount of the asset group over its fairvalue. Fair value is measured using discounted cash flows or independent opinions of value, as appropriate.If actual results are not consistent with our estimates and assumptions used in determining future cash flows and asset fair values, we may beexposed to 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 July 2015, the Financial Accounting Standards Board (“FASB”) issued a standard that simplifies the subsequent measurement ofinventory. Previously, an entity was required to measure inventory at the lower of cost or market, whereby market can be replacement cost,net realizable value, or net realizable value less an approximately normal profit margin. The changes required that inventory be measured atthe lower of cost and net realizable value, thereby eliminating the use of the other two market methodologies. Net realizable value isdefined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, andtransportation. The standard was effective for us at the beginning of fiscal year 2017. The adoption of this new standard did not have amaterial effect on our financial statements.​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. Upon adoption of the new standard on January 1, 2018,we will present the gross sales returns reserve as a component of other accrued liabilities and establish a return asset that will be classified asa component of other current assets, net in the consolidated balance sheet. Currently, we present our sales returns reserve net of the value ofthe return assets as a component of other accrued liabilities in the consolidated balance sheet. Based on our assessment to date, theunderlying principles of the new standard, relating to the measurement of revenue and the timing of recognition, are closely aligned withour current business model and practices. As a result, other than the presentation of a gross sales returns reserve and a returns asset in theconsolidated balance sheet, the adoption of this standard is not expected to have a material impact on our 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 for fiscal year 2019, with early adoption permitted. Weexpect the primary impact on our consolidated balance sheets upon adoption will be the recognition, on a discounted basis, of ourminimum commitments under non-cancelable operating leases resulting in the recording of right of use assets and lease obligations. Ourminimum commitments under non-cancelable operating leases are disclosed in Note 5 to our consolidated financial statements included inPart IV, Item 15 of this Annual Report on Form 10-K. We have identified our lease management28 Table Of Contents system and are in the process of identifying and evaluating the applicable leases. We are currently assessing the effect the new standardwill 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 provide guidance on eight specific cash flow issues. The standardsupdate is effective for us in fiscal year 2018 and should be applied retrospectively. We are currently assessing the effect the new standardwill have on our 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 in the statement of cash flows. The new standard is effective for us in fiscal year 2018, with earlyadoption permitted. The guidance should be applied retrospectively after adoption. Our restricted cash balance was $0.9 million as ofDecember 31, 2017. Upon adopting the new standard, we anticipate that we will no longer present the release of restricted cash as afinancing cash inflow. Instead, restricted cash and long-term restricted cash balances will be included in the beginning and ending cash,cash equivalents and restricted cash balances in the statement of cash flows.29 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 profit 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 was5.00% at December 31, 2017. Based upon balances and interest rates as of December 31, 2017, 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. We do not, and do not intend to, engage in the practice of tradingderivative 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 15% of our total inventory purchases in both 2017 and2016. 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 58 and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 30 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 Annual Report on Form 10-K present fairly, in all material respects, our financialposition, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in theUnited 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, 2017.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, 2017.Ernst & Young, LLP, our independent registered public accounting firm, has issued a report on our internal control over financial reportingas of December 31, 2017. See Part II, “Item 8. Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form10-K. 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, 2017 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 of31 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. 32 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.NameAgePositionRobert A. Rucker65Interim Chief Executive Officer and President, DirectorKirk L. Geadelmann49Chief Financial OfficerCabell H. Lolmaugh39Senior Vice President and Chief Operating OfficerRobert A. Rucker has been our interim Chief Executive Officer and President since October 2017. Mr. Rucker has also served as a member ofour Board of Directors since June 2012 and was previously our Chief Executive Officer and President from June 2012 until December 2014.Mr. Rucker also served as an employee from January 1, 2015 through July 31, 2015 and as a consultant from August 1, 2015 throughDecember 31, 2015. Previously, Mr. Rucker served as The Tile Shop’s Chief Executive Officer and President and as a member of its board ofmanagers. Mr. Rucker holds a B.E.S. in Psychology and History from the University of Minnesota.Kirk L. Geadelmann has been our Chief Financial Officer and Senior Vice President since August 2014. Mr. Geadelmann previously workedat Best Buy from June 2000 to February 2014 in various management roles including Corporate and International Controller. During histenure at Best Buy, Mr. Geadelmann was responsible for overseeing business planning, performance management, financial accounting andSEC reporting functions. Prior to Best Buy, Mr. Geadelmann held roles with BMC Manufacturing, Arthur Andersen, Allianz Insurance andCoopers & Lybrand, where he earned his CPA certification. Mr. Geadelmann earned a B.B.A. in Accounting and Risk Management from theUniversity of Wisconsin-Madison.Cabell H. Lolmaugh has been our Senior Vice President and Chief Operating Officer since February 2018. Mr. Lolmaugh previously servedas our Vice President, Retail Stores from October 2017 until February 2018. Previously, Mr. Lolmaugh served as our Director-TalentDevelopment, leading our store training programs and strategy, from January 2016 until October 2017, and Director of Pro Services, leadingour professional customer strategy, from July 2014 through January 2016. Mr. Lolmaugh served in numerous key roles at a store level fromJanuary 2002 through July 2014. Prior to joining us, Mr. Lolmaugh served in the United States Marine Corps.Board of DirectorsThe following table provides information about the members of our Board of Directors (the “Board”), including their ages, as of the datehereof. NameAgePositionClass I Directors:Peter J. Jacullo III(1)(2)62DirectorClass II Directors:Peter H. Kamin(1)(3)55Director; Chairman of the BoardTodd Krasnow(2)(3)60DirectorPhilip B. Livingston(1)60DirectorClass III Directors:Christopher T. Cook(3)48DirectorRobert A. Rucker65Interim Chief Executive Office and President; Director (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 other33 Table Of Contents capacities from May 1978 to May 1984. Mr. Jacullo holds an M.B.A. from the University of Chicago and a B.A. in Economics from JohnsHopkins University. We believe that Mr. Jacullo is qualified to serve on our Board in light of the continuity that he provides on our Boardand his experience as a 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 from June 2007 toSeptember 2017. Mr. Krasnow is currently an operating partner of Porchlight Equity, the successor firm to Highland Consumer Fund, andhas served in such capacity since September 2017. Previously, Mr. Krasnow was the chairman of Zoots, Inc., a dry cleaning company fromJune 2003 to January 2008 and chief executive officer of Zoots, Inc. from February 1998 to June 2003. He served as the executive vicepresident of sales and marketing of Staples, Inc. from May 1993 to January 1998 and in other sales and marketing positions for Staples, Inc.from March 1986 to May 1993. Mr. Krasnow is a director of Carbonite, a leading cloud back-up and recovery company, and is chairman ofCarbonite’s compensation committee. Mr. Krasnow is also a director of Ecentria, a privately held online marketer of optical, outdoor, andcamping gear, and Bakkavor, a UK-based, publicly traded, maker of fresh prepared meals. Mr. Krasnow holds an M.B.A. from the HarvardUniversity Graduate School of Business and an A.B. in Chemistry from Cornell University. We believe that Mr. Krasnow is qualified toserve on our Board due to his operating and management experience and his expertise in sales and marketing.Philip B. Livingston has served as a member of our Board since August 2016. Since June 2017, Mr. Livingston has been Managing Directorof 3K Limited Partnership, a private investment firm. From March 2016 to August 2016, Mr. Livingston served as part-time Chief OperatingOfficer of UASUSA, LLC, a manufacturer of unmanned aircraft systems based in Longmont, Colorado. Mr. Livingston served as ChiefExecutive Officer and a director of Ambassadors Group, Inc., a provider of educational travel experiences and online educational researchmaterials, from May 2014 to October 2015. Prior to joining Ambassadors Group, Mr. Livingston served as Chief Executive Officer ofLexisNexis Web Based Marketing Solutions, a provider of software applications and marketing services for the legal industry, until October2013. He joined LexisNexis in April 2009 as Senior Vice President of Practice Management and served in executive management positionsfrom April 2009 to October 2013. Previously, Mr. Livingston served as Chief Financial Officer for a number of companies, including WorldWrestling Entertainment, Inc., from 2003 to 2005, Catalina Marketing Corporation, from 1995 to 1998, and Celestial Seasonings, Inc., from1993 to 1995. From 1999 to 2003, he served as President of Financial Executives International, one of the leading professionalassociations of chief financial officers and controllers. In that role, he led the organization’s support of regulatory and corporate governancereforms culminating in the Sarbanes-Oxley Act. Mr. Livingston currently serves as a director of Rand Worldwide, Inc., an operator oftechnology and professional services providers to the engineering community, since November 2014, and Ambassadors Group, since May2014. He previously served as a director of SITO Mobile Ltd., a mobile advertising company, from November 2014 to February 2016 andNexsan Technologies, Inc., a provider of secondary storage devices and archival compliance software that was acquired by Imation Corp.,from 2007 to December 2012. He is a current member of the National Association of Corporate Directors and the American Institute ofCPAs (AICPA). Mr. Livingston earned a B.A. in Business Management and a B.S. in Government and Politics from the University ofMaryland and an M.B.A. in Finance and Accounting from the University of California, Berkeley. We believe that Mr. Livingston isqualified to serve on our Board due to his significant experience in business and finance and his substantial experience as a director of avariety of public and private companies.34 Table Of Contents 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.In accordance with our Certificate of Incorporation, our Board is divided into three classes with staggered three-year terms. At each annualmeeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election andqualification until the third annual meeting following election. Except as otherwise provided by law and subject to the rights of any classor series of preferred stock, vacancies on our Board (including a vacancy created by an increase in the size of the Board) may be filled onlyby the affirmative vote of a majority of the remaining directors. A director elected by the Board to fill a vacancy (other than a vacancycreated by an increase in the size of the Board) serves for the unexpired term of such director’s predecessor in office and until such director’ssuccessor is elected and qualified. A director appointed to fill a position resulting from an increase in the size of the Board serves until thenext annual meeting of stockholders at which the class of directors to which such director is assigned by the Board is to be elected bystockholders and until such director’s successor is elected and qualified. Any additional directorships resulting from an increase in thenumber of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of thedirectors.Our directors are divided among the three classes as follows:·The Class I director is Mr. Jacullo, with a term expiring at the annual meeting of stockholders to be held in 2019;·The Class II directors are Messrs. Kamin, Krasnow and Livingston, with terms expiring at the annual meeting of stockholders to beheld in 2020; 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, 2017 and December 31, 2017. 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, 2017 and December 31, 2017.INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGSPeter 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 our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock andother equity securities. These executive officers, directors and greater than ten percent stockholders are required by SEC regulation tofurnish 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, 2017, except that Mr.Krasnow filed a Form 4 on May 9, 2017 to report two sales of common stock that occurred on May 1 and 2, 2017.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.35 Table Of Contents 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 our Annual Report on Form 10-Kfor the fiscal year December 31, 2017 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. Allmembers of our Audit Committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC andNasdaq. Our Board has determined that Mr. Livingston is an audit committee financial expert as defined under the applicable rules of theSEC and has the requisite financial sophistication as defined under the applicable rules and regulations of Nasdaq. A description of Mr.Livingston’s experience is set forth above under “Directors.” Messrs. Jacullo, Kamin, and Livingston are independent directors as definedunder the applicable rules and regulations of the SEC, Nasdaq and PCAOB. The Audit Committee operates under a written charter thatsatisfies the applicable standards of the SEC and Nasdaq, and which is available on the “Investor Relations” section of our website, athttp://investors.tileshop.com, under the “Governance Documents” heading. The Audit Committee met ten times between January 1, 2017and December 31, 2017.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, restricted stock and other awards underour equity compensation plans. The Compensation Committee reviews and prepares the necessary compensation disclosures required bythe 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. All of themembers of our Compensation Committee are independent under the applicable rules and regulations of the SEC, and Nasdaq, and werealso independent under the prior version of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). TheCompensation Committee operates under a written charter that satisfies the applicable standards of the SEC and Nasdaq, and which isavailable on the “Investor Relations” section of our website, at http://investors.tileshop.com, under the “Governance Documents” heading.The Compensation Committee met four times between January 1, 2017 and December 31, 2017.The Compensation Committee may approve executive compensation arrangements or, in its discretion, may recommend such matters to thefull Board for approval. All executive compensation is based on assessments of executive performance, which are prepared by theCompensation Committee and submitted to the full Board for review and discussion. All Compensation Committee recommendationsregarding director compensation are subject to approval by the full Board. Pursuant to its charter, the Compensation36 Table Of Contents Committee may delegate any of its responsibilities to a subcommittee comprised of one or more members of the Compensation Committee;provided that the Compensation Committee is not permitted to delegate its responsibilities with respect to any executive compensationarrangements intended to comply with the prior version of Section 162(m) of the Code by virtue of it being approved by a committee of“outside directors” or intended to be exempt from Section 16(b) under the Exchange Act by virtue of it being approved by a committee of“non-employee directors.”No executive officers may be present during any Compensation Committee voting or deliberations with respect to our Chief ExecutiveOfficer’s compensation. Our Chief Executive Officer may, at the Compensation Committee’s discretion, be present during any other votingor deliberations regarding compensation of our other executive officers.Nominating and Corporate Governance CommitteeOur Nominating and Corporate Governance Committee (the “Governance 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 Governance 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 Governance Committee reviews and evaluates, on an annualbasis, the Governance Committee charter and performance.The current members of our Governance Committee are Messrs. Cook, Kamin and Krasnow, with Mr. Cook serving as the chair. All of themembers of our Governance Committee are independent under the applicable rules and regulations of Nasdaq. The Governance Committeeoperates under a written charter, which is available on the “Investor Relations” section of our website, at http://investors.tileshop.com,under the “Governance Documents” heading. The Governance Committee met three times between January 1, 2017 and December 31,2017.37 Table Of Contents DIRECTOR RECOMMENDATION AND NOMINATION PROCESSThe Governance 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, ethnicity, gender identity, sexual orientation and nationalorigin.In assessing director candidates, the Governance Committee considers diversity, age, skills, and such other factors as it deems appropriategiven our current needs and the current needs of the Board, to maintain a balance of knowledge, experience and capability. TheGovernance Committee does not have a formal diversity policy and does not follow any ratio or formula with respect to diversity in order todetermine the appropriate composition of the Board. However, to advance our goal of promoting Board diversity, theGovernance Committee, and any search firm retained by the Governance Committee, includes in its list of director candidates for potentialrecommendation to the Board one or more qualified women and minority candidates. In the case of incumbent directors whose terms ofoffice are set to expire, the Governance Committee reviews these directors’ overall service to us during their terms, including the number ofmeetings attended, level of participation, quality of performance, and any other relationships and transactions that might impair thedirectors’ independence. In the case of new director candidates, the Governance Committee also determines whether the nominee isindependent for Nasdaq purposes, which determination is based upon applicable Nasdaq listing standards, applicable SEC rules andregulations and the advice of counsel, if necessary. The Governance Committee conducts any appropriate and necessary inquiries into thebackgrounds and qualifications of possible candidates after considering the function and needs of the Board. The Governance Committeemeets to discuss and consider the candidates’ qualifications and then selects a nominee by majority vote.The Governance Committee will consider director candidates recommended by stockholders. The Governance 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 2018 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 April 12, 2018, nor earlier than the close of businesson March 13, 2018. You are advised to review our Bylaws for requirements relating to director nominees.STOCKHOLDER PROPOSALS FOR 2018 ANNUAL MEETING AND 2019 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, 2018. 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, 2019. We suggest that proposals for the 2019 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 SEC underthe Exchange Act.Stockholders who intend to present a proposal or director nomination at the 2018 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 13, 2018 andno later than April 12, 2018. We reserve the right to reject, rule out of order, or take appropriate action with respect to any proposal thatdoes not comply with these and other applicable requirements. 38 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:·Robert A. Rucker, interim Chief Executive Officer and President (beginning October 27, 2017)·Chris R. Homeister, former Chief Executive Officer and President (through October 27, 2017) ·Kirk L. Geadelmann, Chief Financial Officer;·Carl Randazzo, former Senior Vice President – Real Estate and Development (from March 1, 2016 through October 1, 2017) andSenior Vice President – Retail (through February 29, 2016); and·Joyce Maruniak, former Senior Vice President – Supply Chain, Logistics, Store Warehouses, and Manufacturing (from March 6,2017 through November 20, 2017).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 2017 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 98% 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 industry whenassessing 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.39 Table Of Contents 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 former Chief Executive Officer, Mr. Homeister,there was a compensation differential between his compensation levels and those of our other named executive officers. Our interim ChiefExecutive Officer, Mr. Rucker, has elected to forego all but nominal compensation due his long history with us, his interests as a majorstockholder and the interim nature of his position.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 Interim Chief Executive Officer, and in the case of our Interim’s Chief ExecutiveOfficer’s base salary, by our Board, and adjustments to base salaries are based on the scope of an executive’s responsibilities, individualcontribution, prior experience, and sustained performance. Decisions regarding salary increases may take into account the executiveofficer’s current salary, equity or equity-linked interests, and the amounts paid to an executive officer’s peers within our organization. Inmaking decisions regarding salary increases, we may also draw upon the experience of members of our Board with other companies. Basesalaries are also reviewed in the case of promotions or other significant changes in responsibility. No formulaic base salary increases areprovided to our named executive officers. This strategy is consistent with our intent of offering base salaries that are cost-effective whileremaining competitive.Our Interim Chief Executive Officer, Robert A. Rucker, has elected to receive an annual base salary of a nominal $24,000 due to his longhistory with us, his interests as a major stockholder and the interim nature of his position. This amount was chosen to avoid triggeringovertime pay requirements.Our former Chief Executive Officer, Chris R. Homeister, was hired in October 2013 as our Chief Operating Officer at an annual base salaryof $300,000. Effective January 1, 2015 and in connection with his promotion to Chief Executive Officer, Mr. Homeister’s annual basesalary was increased to $400,000. In April 2016, the Compensation Committee approved an increase to Mr. Homeister’s base salary to$475,000 and in February 2017, the Compensation Committee approved an increase to Mr. Homeister’s base salary to $500,000, each on anannualized basis. Mr. Homeister’s employment ended in October 2017.Our Chief Financial Officer, Kirk Geadelmann, was hired in August 2014 at an annual base salary of $210,000. The CompensationCommittee subsequently approved increases to Mr. Geadelmann’s base salary to $212,000 in February 2015, to $250,000 in April 2016,and to $285,000 in February 2017, each on an annualized basis.Effective August 2012, we entered into an offer letter agreement with Mr. Randazzo, which provided for an annual base salary of $200,000.The Compensation Committee subsequently approved increases to Mr. Randazzo’s base salary to $208,000 in February 2014, to $212,000in February 2015, to $218,000 in April 2016, and to $224,500 in February 2017, each on an annualized basis. Mr. Randazzo’s employmentended in October 2017.Ms. Maruniak was hired in March 2017 as our Senior Vice President – Supply Chain, Logistics, Store Warehouses, and Manufacturing at anannual base salary of $240,000. Ms. Maruniak’s employment ended in November 2017.The actual base salaries earned by all of our named executive officers in 2017, 2016 and 2015 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 on August21, 2012. The principal purpose of the equity award plan is to attract, retain, and motivate selected employees, consultants, and directors.As initially adopted, the equity award plan provided for stock based compensation awards. In February 2013, the Compensation Committeeand the Board amended the equity award plan to authorize grants of performance-based awards. At the same time, the plan was renamed the2012 Omnibus Award Plan (the “Omnibus Plan”). The Compensation Committee administers the Omnibus Plan, subject to the right of ourBoard to assume authority for administration or delegate such authority to another committee of the Board. Awards under the Omnibus Planmay be granted to individuals who are then our officers, employees, directors, or consultants or are the officers, employees, directors, orconsultants of our subsidiaries.Under the Omnibus Plan, 5,000,000 shares of our common stock have been reserved for issuance pursuant to a variety of stock basedcompensation awards, including stock options and restricted stock awards.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 to40 Table Of Contents awards under the Omnibus Plan and is authorized to provide for the acceleration, termination, assumption, substitution, or conversion ofsuch awards in the event of a change 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 2015, April 2016, and February 2017 the Board and the Compensation Committee adoptedspecific performance targets and payout levels for each executive officer for the then-current fiscal year.For fiscal years 2015, 2016 and 2017, Mr. Homeister was eligible to earn target cash incentive compensation equal to 75% of his year-end base salary and each of Messrs. Geadelmann, and Randazzo was eligible to earn target cash incentive compensation equal to 50%of his year-end base salary, all based on our Adjusted EBITDA for the year. For fiscal 2017, Ms. Maruniak was eligible to earn targetcash incentive compensation equal to 50% of her year-end base salary, pro-rated for the partial year during which she was employedwith us, based on our Adjusted EBITDA for the year. Mr. Rucker does not participate in our incentive compensation program. Thetarget incentive compensation was payable if we achieved the Adjusted EBITDA target set forth in our budget. For fiscal year 2015,each of Messrs. Homeister, Geadelmann, and Randazzo was entitled to receive a partial incentive payment if we achieved at least 85%of our budgeted 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 years 2016 and 2017, each of Messrs. Homeister, Geadelmann, andRandazzo, and Ms. Maruniak 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 andattained targeted sales goals.The Compensation Committee reviews and certifies performance following the end of each fiscal year and may also considerdiscretionary factors when making awards. For fiscal year 2015, the Compensation Committee approved a payout of 55% of the targetcash incentive compensation to Messrs. Homeister, Geadelmann, and Randazzo based on our performance measures. For fiscal 2016,the Compensation Committee approved a payout of 110% of the target cash incentive compensation to Messrs. Homeister,Geadelmann, and Randazzo based on our performance measures. The Compensation Committee did not approve any payouts of thetarget cash incentive compensation based on our performance in fiscal year 2017.The cash incentive compensation for which our named executive officers were eligible in 2017 is set forth in the “Grants of Plan BasedAwards in Fiscal Year 2017” table. The actual cash incentive compensation earned by all of our named executive officers in fiscalyears 2017, 2016 and 2015 is 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 March 2017, we granted 40,000 non-qualified stock options to Ms. Maruniak. In May 2017, we granted 25,900 non-qualified stockoptions to Mr. Homeister, 13,200 non-qualified stock options to Mr. Geadelmann, and 7,700 non-qualified stock options to Mr.Randazzo. In November 2017, we granted 26,500 non-qualified stock options to Mr. Geadelmann. These stock options were grantedpursuant to the Omnibus Plan and are subject to time-based vesting over a four-year period, other than the stock options granted to Ms.Maruniak, which are subject to time-based vesting over a five-year period. Messrs. Homeister and Randazzo and Ms. Maruniakforfeited these unvested stock options upon termination of their employment.In March 2017, we granted 20,000 shares of restricted stock to Ms. Maruniak. In May 2017, we also granted 6,100 shares of restrictedstock to Mr. Homeister, 3,000 shares of restricted stock to Mr. Geadelmann, and 1,850 shares of restricted stock to Mr. Randazzo. InNovember 2017, we granted 11,650 shares of restricted stock to each of Mr. Geadelmann and Ms. Maruniak. These shares of restrictedstock were granted pursuant to the Omnibus Plan. Our purchase option for the shares of restricted stock granted in May 2017 will lapsein four equal annual installments based on continued service. Our purchase option for the shares of restricted stock granted in March2017 will lapse in five equal annual installments based on continued service. The risks of forfeiture for the shares of restricted stockgranted in November 2017 will lapse in four equal annual installments based on continued service. We repurchased these shares ofrestricted stock from Messrs. Homeister and Randazzo and from Ms. Maruniak upon termination of their employment.41 Table Of Contents In May 2017, we also granted 6,100 performance-based restricted stock awards to Mr. Homeister, 3,000 performance-based restrictedstock awards to Mr. Geadelmann, and 1,850 performance-based restricted stock awards to Mr. Randazzo. These performance-basedrestricted stock awards were granted pursuant to the Omnibus Plan. Our purchase option for these shares of restricted stock will lapse inthree equal annual installments based on our performance. We repurchased these shares of restricted stock from Messrs. Homeister andRandazzo upon termination of their employment.In July 2017, due to his status as a non-employee director and prior to his appointment as our interim Chief Executive Officer, Mr.Rucker was granted 5,038 restricted stock awards, which vest on the earlier of our next annual meeting of stockholders and July 13,2018.The equity grants made to our named executive officers in fiscal year 2017 are set forth in the “Grants of Plan Based Awards in FiscalYear 2017” 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 2017 (or $24,000 for employees over 50), and to have the amount of this reduction contributed to the 401(k) plan. In 2017,we made a matching contribution of $0.50 for every $1.00 that each applicable employee contributed to the 401(k) plan, up to a maximumof 5% of such employee’s salary. In 2016 and 2015, we made a matching contribution of $0.25 for every $1.00 that each applicableemployee contributed to the 401(k) plan, up to a maximum of 5% of such employee’s salary. Each year, this matching contribution vests asto 20% of the aggregate matching contributions for such employee, such that all past and future matching contributions will be vested afterthe employee has been employed by us for a period of five years.Perquisites. From time-to-time, we have provided certain of our named executive officers with perquisites that we believe are reasonable.We do not 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. For fiscal year 2017 and for prior years, our Board considered the potential effects of Section 162(m) of the Code onthe compensation paid to our executive officers. The version of Section 162(m) applicable for fiscal year 2017 and prior years disallowed atax deduction by any publicly-held corporation for individual compensation exceeding $1.0 million in any taxable year for the ChiefExecutive Officer and each of the next three most highly compensated executive officers (other than the Chief Financial Officer, if any),unless the compensation was “performance based” or based on another available exemption. The Tax Act eliminated the “performancebased” exception for compensation payments beginning in fiscal year 2018 and expanded the application of Section 162(m) to the ChiefExecutive Officer, Chief Financial Officer and each of the next three most highly compensated executive officers. While our CompensationCommittee will be further analyzing the impact of this change as well as the other changes resulting from the Tax Act on our compensationstructure, at present it does not anticipate any changes because it continues to consider our performance an important factor in determiningour compensation.Compensation Committee ReportThe Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based upon thisreview and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion andAnalysis be included in our proxy statement and in this Annual Report on Form 10-K for the fiscal year ended December 31, 2017.Compensation Committee of the Board of Directors:Todd Krasnow, ChairmanPeter J. Jacullo III 42 Table Of Contents Summary Compensation TableThe following table provides information regarding the compensation earned during the fiscal years ended December 31, 2015 throughDecember 31, 2017 by each of the named executive officers for each year in which each was a Named Executive Officer:Name and Principal PositionFiscalYearSalary ($)StockAwards ($)(1)OptionAwards ($)(1)Non-EquityIncentive PlanCompensation($) (2)All otherCompensation($)TotalRobert A. Rucker(3)2017 5,250 100,004 (8) - -25 (9)105,279 Interim Chief Executive Officer2016 -95,349 (8) - - -95,349 and President2015 34,635 (7)89,702 (8) - -433 (9)124,770 Chris Homeister (4)2017 408,627 248,270 243,570 -403,159 (10)1,303,626 Former Chief Executive Officer2016 456,250 294,938 301,855 391,875 3,960 (10)1,448,878 and President2015 400,000 -592,479 165,000 3,312 (10)1,160,791 Kirk Geadelmann2017 279,977 222,290 224,152 -14,145 (11)740,564 Chief Financial Officer2016 240,500 117,975 120,742 137,500 3,735 (11)620,452 2015 212,000 - -58,300 2,647 (11)272,947 Carl Randazzo(5)2017 168,378 75,295 (12)72,413 (12) -15,680 (13)331,766 Former Senior Vice President -2016 216,500 90,750 90,556 119,900 3,435 (13)521,141 Real Estate and Development2015 212,000 - -58,300 2,644 (13)272,944 Joyce Maruniak(6)2017 170,000 458,190 (14)301,994 (14) -123,149 (15)1,053,333 Former Senior Vice President -Supply Chain, Logistics, StoreWarehouses, and Manufacturing(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 our achievement of Adjusted EBITDA financial goals. See “Non-Equity IncentivePlan Compensation” below for additional discussion.(3)Mr. Rucker was appointed as Interim Chief Executive Officer and President on October 27, 2017. Mr. Rucker also served as anemployee from January 1, 2015 through July 31, 2015 and as a consultant from August 1, 2015 through December 31, 2015.(4)Mr. Homeister served as Chief Executive Officer and President through October 27, 2017.(5)Mr. Randazzo served as Senior Vice President – Real Estate and Development from March 1, 2016 through October 1, 2017 and asSenior Vice President – Retail through February 29, 2016.(6)Ms. Maruniak served as Senior Vice President – Supply Chain, Logistics, Store Warehouses, and Manufacturing from March 6, 2017through November 20, 2017.(7)Represents payments received by Mr. Rucker as an employee from January 1, 2015 through July 31, 2015 and as a consultant fromAugust 1, 2015 through December 31, 2015, pursuant to the amendment to terms of employment entered into between the us and Mr.Rucker as of January 1, 2015 in connection with his transition from the role of Chief Executive Officer and President.(8)Represents the grant date fair value of the restricted stock issued to Mr. Rucker for his service as a non-employee director in each offiscal years 2015, 2016, and 2017, prior to his appointment as Interim Chief Executive Officer and President. See “DirectorCompensation” below for additional discussion.(9)Represents employer 401(k) contributions.(10)For 2017, represents $253,647 of continued payment of six months of base salary and company-contributed health insurance costs,$122,739 of acceleration of vesting of options to purchase 30,000 shares, $18,268 of a one-time payout of accrued vacation related toa company policy change, and $8,505 of employer 401(k) contributions. For 2016 and 2015, represents employer 401(k)contributions.(11)For 2017, represents $9,037 of employer 401(k) contributions and $5,108 of a one-time payout of accrued vacation related to acompany policy change. For 2016 and 2015, represents employer 401(k) contributions.43 Table Of Contents (12)Mr. Randazzo forfeited all the equity awards granted to him in fiscal year 2017 upon the termination of his employment on October 1,2017.(13)For 2017, represents $8,384 of a one-time payout of accrued vacation related to a company policy change and $7,296 of employer401(k) contributions. For 2016 and 2015, represents employer 401(k) contributions.(14)Ms. Maruniak forfeited all the equity awards granted to her in fiscal year 2017 upon the termination of her employment on November20, 2017.(15)Represents $120,000 of continued payment of six months of base salary in connection with the termination of Ms. Maruniak’semployment on November 20, 2017 and $3,149 of employer 401(k) contributions.Grants of Plan-Based Awards for Fiscal Year 2017The following table sets forth certain information regarding grants of plan-based awards during the fiscal year ended December 31, 2017:NameGrant DateEstimated possible payouts under non-equityincentive plan awards ($) (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 Homeister5/11/2017 - - - -25,900 (2)20.35 243,570 Chris Homeister5/11/2017 - - -6,100 (3) - -124,135 Chris Homeister5/11/2017 - - -6,100 (4) - -124,135 Kirk Geadelmann5/11/2017 - - - -13,200 (2)20.35 124,136 Kirk Geadelmann5/11/2017 - - -3,000 (3) - -61,050 Kirk Geadelmann5/11/2017 - - -3,000 (4) - -61,050 Kirk Geadelmann11/2/2017 - - -11,650 (5) - -100,190 Kirk Geadelmann11/2/2017 - - - -26,500 (6)8.60 100,016 Carl Randazzo5/11/2017 - - - -7,700 (2)20.35 72,413 Carl Randazzo5/11/2017 - - -1,850 (3) - -37,648 Carl Randazzo5/11/2017 - - -1,850 (4) - -37,648 Joyce Maruniak3/6/2017 - - - -40,000 (7)17.90 301,994 Joyce Maruniak3/6/2017 - - -20,000 (8) - -358,000 Joyce Maruniak11/2/2017 - - -11,650 (5) - -100,190 Chris HomeisterN/A9,375 375,000 750,000 - - - -Kirk GeadelmannN/A3,563 142,500 285,000 - - - -Carl RandazzoN/A2,806 112,250 224,500 - - - -Joyce MaruniakN/A3,000 120,000 240,000 - - - -(1)Incentive compensation bonus based on our achievement of Adjusted EBITDA financial goals for fiscal 2017. Mr. Homeister waseligible to earn target cash incentive compensation equal to 75% of his base salary, based on our Adjusted EBITDA for the year.Messrs. Geadelmann, and Randazzo and Ms. Maruniak were each eligible to earn target cash incentive compensation equal to 50% oftheir respective base salaries, pro-rated for Ms. Maruniak based on the partial year during which she was employed with us, based onour Adjusted EBITDA for the year. The target incentive compensation was payable if we achieved the Adjusted EBITDA target setforth in our budget. Messrs. Homeister, Geadelmann, and Randazzo and Ms. Maruniak were each entitled to receive a partial incentivepayment if we achieved at least 90% of our budgeted Adjusted EBITDA, and an incentive of up to double the target incentive amountif we achieved 110% of our budgeted Adjusted EBITDA. (2)Represents options to acquire shares of common stock that will vest and become exercisable in four equal annual installmentsbeginning on May 11, 2018 based on continued service. Messrs. Homeister and Randazzo forfeited these options upon terminationof their employment.(3)Represents shares of restricted stock for which our purchase option will lapse in four equal annual installments beginning on May 11,2018 based on continued service. We repurchased these shares of restricted stock from Messrs. Homeister and Randazzo upontermination of their employment.(4)Represents shares of performance-based restricted stock for which our purchase option will lapse on May 11, 2020 based on ourachievement of our three-year Adjusted EBITDA target. We repurchased these shares of performance-based restricted stock fromMessrs. Homeister and Randazzo upon their termination of their employment.44 Table Of Contents (5)Represents shares of restricted stock for which the risks of forfeiture will lapse in four equal annual installments beginning onNovember 2, 2018.(6)Represents options to acquire shares of common stock. These options will vest and become exercisable in four equal annualinstallments beginning on November 2, 2018. Ms. Maruniak forfeited these options upon termination of her employment.(7)Represents options to acquire shares of common stock that will vest and become exercisable in five equal installments beginning onMarch 6, 2018 based on continued service. Ms. Maruniak forfeited these options upon termination of her employment.(8)Represents shares of restricted stock for which our purchase option will lapse in five equal annual installments beginning on March 6,2018 based on continued service. We repurchased these shares of restricted stock from Ms. Maruniak upon termination of heremployment.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 was entitled toreceive severance benefits if his employment was terminated by us without cause at any time or if he resigned for good reason, subject toexecution of a full release in our favor. In such an event, Mr. Homeister was 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 was also entitled to full vesting accelerationwith respect to any unvested equity awards if he was not offered employment by the successor entity, or if he was terminated without causeor constructively 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 remained unchanged. Mr. Homeister’s employment was terminated onOctober 27, 2017. As severance, Mr. Homeister received continued payment of his base salary for six months and an additional payment inan amount equal to six times our contribution amount for the last monthly health insurance premium for him. We accelerated the vesting ofoptions to purchase 30,000 shares granted under the Omnibus Plan and scheduled to vest on January 2, 2018, which would have otherwiseexpired in connection with Mr. Homeister’s termination, and to permit the exercise of all of Mr. Homeister’s vested stock options throughDecember 31, 2018. We have not entered into an offer letter agreement with Mr. Rucker, but we have agreed to pay him an annual base salary of $24,000, due tohis long history with us, his interests as a major stockholder and the interim nature of his position. This amount was chosen to avoidtriggering overtime pay requirements.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 this offer letter,which provides that Mr. Geadelmann is entitled to continued payment of his base salary for six months and an additional payment in anamount equal to six times our contribution amount for the monthly health insurance premium for him during the month immediately priorto termination. Upon a change of control, Mr. Geadelmann is also entitled to full vesting acceleration with respect to any unvested equityawards if he is not offered employment by the successor entity, or if he is terminated without cause or is constructively terminated prior tothe first anniversary of the change of control.In June 2012, as the result of arm’s length negotiations, we entered into an offer letter agreement with Mr. Randazzo setting forth the termsand conditions of his employment. Pursuant to the offer letter agreement, Mr. Randazzo was entitled to receive severance benefits if hisemployment was terminated by us without cause at any time or if he resigned for good reason, subject to execution of a full release in ourfavor. In such an event, Mr. Randazzo was entitled to continued payment of his base salary for six months and an additional payment in anamount equal to six times our contribution amount for the monthly health insurance premium for him during the month immediately priorto termination. Upon a change of control, Mr. Randazzo was also entitled to full vesting acceleration with respect to any unvested equityawards if he was not offered employment by the successor entity, or if he was terminated without cause or constructively terminated prior tothe first anniversary of the change of control. Mr. Randazzo resigned as Senior Vice President – Real Estate and Development on August15, 2017 and served in a transition capacity until October 1, 2017. Mr. Randazzo did not receive any severance in connection with hisresignation.In March 2017, as the result of arm’s length negotiations, we entered into an offer letter agreement with Ms. Maruniak, setting forth theterms and conditions of her employment as our Senior Vice President – Supply Chain, Logistics, Store Warehouses, and Manufacturing.Pursuant to the offer letter agreement, Ms. Maruniak’s employment with us was at-will, and, upon a change in control, her unvested equityawards may have been accelerated at the sole discretion of the Compensation Committee. Ms. Maruniak’s employment was terminated onNovember 20, 2017. As severance, Ms. Maruniak received continued payment of her base salary for six months.In connection with their offer letter agreements, each of Messrs. Homeister, Geadelmann, and Randazzo and Ms. Maruniak 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 the45 Table Of Contents non-compete and non-solicit obligations to which Mr. Randazzo is subject to for a period of two years following termination ofemployment, so long as we provide him with continued payment of his base salary for twelve months (in lieu of six months) and anadditional 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 February 2017, the Board and the Compensation Committee adopted specific performance targets and payout levels for each executiveofficer for the then-current fiscal year. For fiscal year 2017, Mr. Homeister was eligible to earn target cash incentive compensation equal to75% of his year-end base salary and each of Messrs. Geadelmann and Randazzo and Ms. Maruniak was eligible to earn target cash incentivecompensation equal to 50% of his or her year-end base salary, pro-rated for Ms. Maruniak based on the partial year during which she wasemployed with us, all based on our Adjusted EBITDA for the year. The target compensation was payable if we achieved the AdjustedEBITDA target set forth in our budget. Each of Messrs. Homeister, Geadelmann, and Randazzo and Ms. Maruniak was entitled to receive apartial incentive payment if we achieved at least 90% of our budgeted Adjusted EBITDA and an incentive of up to double the targetincentive amount if we achieved 110% of our budgeted Adjusted EBITDA. See below for a table setting forth the performance targets andpayout 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 we achieved in fiscal year 2017 was $57.2 million (which was 73% of the Adjusted EBITDA target). Thisdetermination of the Adjusted EBITDA target resulted in no cash incentive compensation to our named executive officers for fiscal year2017.Equity GrantsAll stock options and restricted stock awards issued in fiscal year 2017 to named executive officers were issued pursuant to the OmnibusPlan. Pursuant to the Omnibus Plan, in the event of a change in control, any unvested equity awards may be accelerated at the solediscretion of the Compensation Committee.We have also provided for the acceleration of vesting of equity awards granted to Mr. Geadelmann in the event of our change of control. Inthe event of a change of control, if he is terminated without cause or is otherwise constructively terminated prior to the first anniversary ofthe change of control, the vesting of any unvested awards will be accelerated in full immediately prior to such termination. We believe thatthese acceleration opportunities will further align the interests of our executives with those of our stockholders by providing our executivesan opportunity to benefit alongside our stockholders in a corporate transaction. Each of Messrs. Homeister and Randazzo were also eligiblefor such accelerated vesting prior to termination of their employment.46 Table Of Contents Outstanding Equity Awards at Fiscal Year-end for Fiscal Year 2017The following table sets forth certain information regarding outstanding equity awards held by the named executive officers as ofDecember 31, 2017: Option Awards Stock AwardsName Grant Date Number ofSecuritiesUnderlyingUnexercisedOptionsExercisable(#) Number ofSecuritiesUnderlyingOptionsUnexercisable(#) OptionExercisePrice ($) OptionExpirationDate Number ofShares orUnits ofStock ThatHave NotVested (#) MarketValue ofShares orUnits ofStock ThatHave notVested ($) StockAwards||EquityIncentivePlan Awards:Number ofUnearnedShares, Unitsor otherRights ThatHave NotVested(#) StockAwards||EquityIncentivePlan Awards:Market orPayout Valueof UnearnedShares, Unitsor otherRights ThatHave NotVested($)Chris Homeister 10/1/2013 200,000 - 28.94 12/31/2018(1) - - - -Chris Homeister 2/13/2014 30,000 - 13.17 12/31/2018(1) - - - -Chris Homeister 1/2/2015 90,000 (2) - 8.73 12/31/2018(1) - - - -Chris Homeister 4/20/2016 6,250 - 18.15 12/31/2018(1) - - - -Robert Rucker 7/11/2017 - - - - 5,038 (3) - - -Kirk Geadelmann 8/12/2014 60,000 40,000 (4)10.93 8/12/2021 - - - -Kirk Geadelmann 4/20/2016 2,500 10,000 (5)18.15 4/20/2026 - - - -Kirk Geadelmann 4/20/2016 - - - - 5,200 (6)49,920 - -Kirk Geadelmann 5/11/2017 - 13,200 (7)20.35 5/11/2027 - - - -Kirk Geadelmann 5/11/2017 - - - - - - 3,000 (8)28,800 Kirk Geadelmann 5/11/2017 - - - - 3,000 (9)28,800 - -Kirk Geadelmann 11/2/2017 - 26,500 (10)8.60 11/2/2027 - - - -Kirk Geadelmann 11/2/2017 - - - - 11,650 (11)111,840 - -(1)In connection with termination of Mr. Homeister’s employment, we have permitted Mr. Homeister to exercise his vested stock optionsthrough December 31, 2018.(2)In connection with termination of Mr. Homeister’s employment, we accelerated the vesting of options to purchase 30,000 sharesscheduled to vest on January 2, 2018, which would have otherwise expired in connection with Mr. Homeister’s termination.(3)Our purchase option for these shares of restricted stock will lapse on the earlier of (a) the date of our next annual meeting ofstockholders and (b) July 13, 2018.(4)These options become exercisable in two equal annual installments beginning on August 12, 2018.(5)These options become exercisable in four equal annual installments beginning on April 20, 2018.(6)Our purchase option for these shares of restricted stock will lapse in four equal annual installments beginning on April 20, 2018.(7)These options become exercisable in four equal annual installments beginning on May 11, 2018.(8)Our purchase option for these shares of restricted stock will lapse on May 11, 2020, based on our achievement of our three-yearAdjusted EBITDA target.(9)Our purchase option for these shares of restricted stock will lapse in four equal annual installments beginning on May 11, 2018.(10)These options become exercisable in four equal annual installments beginning on November 2, 2018.(11)The risks of forfeiture for these shares of restricted stock will lapse in four equal annual installments beginning on November 2, 2018.47 Table Of Contents Option Exercises and Stock Vested for Fiscal Year 2017The following named executive officers exercised stock options or had restricted common stock vest during the fiscal year ended December31, 2017. Option Awards Stock AwardsName Number ofSharesAcquired onExercise (#) Value Realizedon Exercise ($) Number ofShares Acquiredon Vesting (#) Value Realizedon Vesting ($)Chris Homeister - - 15,750 226,188 Robert Rucker - - 5,622 113,846 Kirk Geadelmann - - 1,300 26,975 Carl Randazzo - - 1,000 20,750 Carl Randazzo 157,500 897,848 - -Pension BenefitsWe did not sponsor any defined benefit pension or other actuarial plan for its named executive officers during the fiscal year endedDecember 31, 2017.Nonqualified Deferred CompensationNo nonqualified deferred compensation was paid to or earned by the named executive officers during the fiscal year ended December 31,2017.Potential Payments Upon Termination or Change in ControlAs discussed above in connection with each named executive officer’s offer letter agreement, Mr. Geadelmann is eligible to receiveseverance benefits in the event that his employment is terminated by us without cause or by him for good reason. Additionally, Mr.Geadelmann is entitled to full vesting of any outstanding equity awards in the event of a change of control, if he is not offered employmentby the successor entity, or if he is terminated without cause or is otherwise constructively terminated prior to the first anniversary of thechange of control. Messrs. Homeister and Randazzo were each also eligible for the same benefits prior to their termination. Upon a changeof control, Mr. Rucker’s unvested equity awards may be accelerated at the sole discretion of the Compensation Committee. Ms. Maruniak’sunvested equity awards may have also been accelerated at the sole discretion of the Compensation Committee upon a change of control.The table below sets forth what each of Messrs. Homeister and Randazzo and Ms. Maruniak actually received in connection with theirterminations.The amounts payable by us to each of the named executive officers, assuming that each individual’s employment had terminated onDecember 31, 2017, under each scenario are as follows:NameIn Connectionwith a Change inControl ($) (1)By Company Notfor Cause ($) (2)By NEO for GoodReason ($) (2)Chris Homeister -376,386 (3) -Robert Rucker -(4) - -Kirk Geadelmann980,500 146,147 146,147 Carl Randazzo(5) - - -Joyce Maruniak(6) -120,000 (6) -(1)Unless otherwise noted, represents lapse of our purchase option or the risks of forfeiture, as applicable, on all outstanding shares ofrestricted stock and full vesting of all outstanding options to purchase common stock.(2)Unless otherwise noted, represents continued payment of six months of base salary and company-contributed health insurance costs.(3)Mr. Homeister’s employment ended on October 27, 2017. This amount represents continued payment of six months of base salary andcompany-contributed health insurance costs, as well as the acceleration of vesting of options to purchase 30,000 shares.(4)In the event of a change of control, Mr. Rucker’s unvested equity awards may be accelerated at the sole discretion of theCompensation Committee.48 Table Of Contents (5)Mr. Randazzo’s employment ended on October 1, 2017 and he did not receive any severance upon his termination of hisemployment.(6)Ms. Maruniak’s employment ended on November 20, 2017. This amount represents continued payment of six months of base salary.DIRECTOR COMPENSATIONEach of our non-employee directors receives an annual fee of $100,000 and the chairperson of our Board receives an additional annual feeof $75,000. The chairperson of the Audit Committee receives an additional annual fee of $40,000 and the chairperson of each of theCompensation Committee and Nominating and Corporate Governance Committee receives an additional annual fee of $15,000. Theannual period for director compensation runs based on the date of the annual meeting.On August 21, 2016, Messrs. Cook, Jacullo, Livingston and Rucker elected to receive compensation fully in the form of restricted stockgranted pursuant to the Omnibus Plan. Messrs. Kamin and Krasnow elected to receive compensation as one-half restricted stock and one-half cash compensation, payable quarterly. The number of shares of our restricted stock granted was 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, Jacullo,Livingston and Rucker received 6,465, 5,622, 8,323 and 5,622 shares of restricted stock, respectively. Messrs. Kamin and Krasnow received4,919 and 3,233 shares of restricted stock, respectively. Our purchase option for the restricted stock lapsed on July 13, 2017.On July 13, 2017, Messrs. Cook, Jacullo, Livingston and Rucker elected to receive compensation fully in the form of restricted stockgranted pursuant to the Omnibus Plan. Messrs. Kamin and Krasnow elected to receive compensation as one-half restricted stock and one-half cash compensation, payable quarterly. The number of shares of our restricted stock granted was 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, Jacullo,Livingston and Rucker received 5,793, 5,038, 7,053, and 5,038 shares of restricted stock, respectively. Messrs. Kamin and Krasnowreceived 4,408 and 2,897 shares of restricted stock, respectively. Our purchase option for the restricted stock lapses on the earlier of ourannual meeting of stockholders in 2018 or July 13, 2018, contingent upon the applicable non-employee director’s continued service on ourBoard. Until our purchase option lapses, upon a non-employee director’s termination of service on the Board, we have the option topurchase such shares of restricted stock at a price set forth in the respective restricted stock agreement.Director Compensation Table for Fiscal Year 2017The following table summarizes the compensation paid to each non-employee director in the fiscal year ended December 31, 2017: NameFees Earnedor Paid inCash ($)Stock Awards($) (1)(2)Total ($)Christopher T. Cook -114,991 114,991 Peter H. Kamin87,500 (3)87,499 174,999 Todd Krasnow57,500 (4)57,505 115,005 Peter J. Jacullo III -100,004 100,004 Philip B. Livingston -140,002 140,002 Robert A. Rucker -100,004 (5)100,004 (1)The table reflects the grant date fair value of the sole award to each director in fiscal year 2017, 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, 2017 wasas follows: Messrs. Cook, Jacullo, Livingston and Rucker: 5,793, 5,038, 7,053, and 5,038 shares of restricted stock, respectively.Messrs. Kamin and Krasnow: 4,408 and 2,897 shares of restricted stock, respectively. These shares of restricted stock were granted tothe directors on July 13, 2017. Our purchase option will lapse in full on the earlier of our annual meeting of stockholders in 2018 orJuly 13, 2018. (3)Represents payments of $65,625 to Mr. Kamin in fiscal year 2017 for the period from January 1, 2017 to July 13, 2017 due to theelection to receive in cash one-half of director compensation for the period August 22, 2016 to July 13, 2017. Represents onepayment of $21,875 paid to Mr. Kamin in fiscal year 2017 for the period from July 13, 2017 to December 31, 2017 due to the electionto receive in cash one-half of director compensation for the current service period.49 Table Of Contents (4)Represents payments of $43,125 to Mr. Krasnow in fiscal year 2017 for the period from January 1, 2017 to July 13, 2017 due to theelection to receive in cash one-half of director compensation for the period August 22, 2016 to July 13, 2017. Represents onepayment of $14,375 paid to Mr. Krasnow in fiscal year 2017 for the period from July 13, 2017 to December 31, 2017 due to theelection to receive in cash one-half of director compensation for the current service period.(5)Represents payments made to Mr. Rucker as director compensation prior to his appointment as interim Chief Executive Officer andPresident on October 17, 2017. Mr. Rucker will receive no further compensation as a director while he serves as interim ChiefExecutive Officer and President. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATIONThe Compensation Committee currently consists of Messrs. Jacullo and Krasnow and consisted of these same members in fiscal year 2017.None of our Compensation Committee members has ever been an executive officer or employee of ours. None of our executive officerscurrently serves, nor in the past year has served, as a member of the board or compensation committee (or other board committee performingequivalent functions) of any entity that has one or more executive officers serving on our Board or Compensation Committee.PAY RATIOAs required by the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations, we are providing the followinginformation about the relationship of the median annual total compensation of our employees and the annual total combined compensationof Messrs. Homeister and Rucker, each of whom served as our Chief Executive Officer during fiscal year 2017. The pay ratio includedbelow is a reasonable estimate calculated in a manner consistent with the regulations.For 2017, our last completed fiscal year:·the median of the annual total compensation of all our employees (other than Messrs. Homeister and Rucker) was $34,238; and·the annual total combined compensation of Messrs. Homeister and Rucker, as reported in the above Summary CompensationTable, was $1,408,905. Based on this information, for fiscal year 2017 the ratio of the annual total combined compensation of our Chief Executive Officers to themedian of the annual total compensation of all employees was 42 to 1.To identify the median of the annual total compensation of all our employees, as well as to determine the annual total compensation of ourmedian employee and our Chief Executive Officers, we did the following:Employee Count. We determined that, as of December 15, 2017 our employee population consisted of approximately 1,667individuals all located in the United States. We selected December 15, 2017, which is within the last three months of 2017, as the dateupon which we would identify the median employee because it enabled us to make such identification in a reasonably efficient andeconomical manner. Our employee population for purposes of the pay ratio calculation consisted of approximately 1,667 individuals,all of whom were located in the United States. We have excluded the individuals located in China from the pay ratio calculationpursuant to the de minimis exemption, as our employee population in China is less than 1% of our total employee population.Median Employee. To identify the median employee from our employee population, we compared the amount of salary, wages, tipsand overtime pay of our employees as reflected in our payroll records as reported to the Internal Revenue Service on Form W-2 for2017. In making this determination, we annualized the compensation of any full-time employees who were hired in 2017 and wereworking for us on December 15, 2017, but did not work for us the entire fiscal year. We identified our median employee using thiscompensation measure, which was consistently applied to all our employees included in the calculation. Since all our includedemployees are located in the United States, as are our Chief Executive Officers, we did not make any cost-of-living adjustments inidentifying the median employee.Median Employee Total Compensation. Once we identified our median employee, we combined all of the elements of suchemployee’s compensation for 2017 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annualtotal compensation of $34,238. The difference between such employee’s salary, wages, tips and overtime pay and the employee’sannual total compensation represents the value of our matching contributions to participants in The Tile Shop 401(k) Retirement Plan(estimated at $788).50 Table Of Contents Chief Executive Officers Total Compensation. Since two individuals served as our Chief Executive Officer during fiscal 2017, wecombined the annual total compensation of each of Messrs. Homeister and Rucker pursuant to Instruction 10 to Item 402(u) ofRegulation S-K in order to arrive at the annual total combined compensation of $1,408,905. Mr. Homeister had annual totalcompensation of $1,303,626, which includes base salary, stock and option awards, and accrued severance. Mr. Rucker had annual totalcompensation of $105,279, which includes base salary and stock awards. Due to the termination of Mr. Homeister’s employment inOctober 2017, his annual total compensation includes accrued severance, which we would not anticipate to be included in annual totalcompensation in future years. 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 16, 2018, 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 16, 2018. 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 16, 2018 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 52,152,031 shares of our common stock outstanding onFebruary 16, 2018. 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:BlackRock, Inc.(1)5,823,901 11.2 %JWTS, Inc.(2)4,441,180 8.5 %The Vanguard Group(3)3,087,650 5.9 %Executive Officers and Directors:Robert A. Rucker (4)5,711,293 11.0 %Chris Homeister(5)373,107 *Kirk Geadelmann(6)98,720 *Carl Randazzo(7)48,187 *Joyce Maruniak(8) -*Christopher T. Cook(9)138,559 *Peter J. Jacullo III(2)(10)4,978,601 9.5 %Peter H. Kamin(11)1,566,995 3.0 %Todd Krasnow(12)109,696 *Philip B. Livingston(13)30,014 *All Executive Officers and Directors as a Group (8 persons)(14)12,652,022 24.2 %* Represents beneficial ownership of less than one percent (1%) of the outstanding common stock.52 Table Of Contents (1)Based on a Schedule 13G filed with the SEC on January 19, 2018 by BlackRock, Inc. (“BlackRock”), BlackRock holds sole votingpower over 5,761,631 shares and sole dispositive power over 5,823,901 shares. The business address of BlackRock is 55 East 52ndStreet, New York, NY 10055.(2)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.(3)Based on a Schedule 13G filed with the SEC on February 9, 2018 by The Vanguard Group (“Vanguard”), Vanguard holds sole votingpower over 76,070 shares, shared voting power over 2,300 shares, sole dispositive power over 3,012,780 shares and shared dispositivepower over 74,870 shares. The business address of Vanguard is 100 Vanguard Blvd., Malvern, PA 19355.(4)Includes 5,038 shares of unvested restricted common stock held by Mr. Rucker, 652,428 shares of common stock held by The TileShop, Inc. (“TS, Inc.”), 500,000 shares of common stock held by the Robert Rucker 2016 Grantor Retained Annuity Trust, 2,000,000shares of common stock held by the Robert Rucker 2017 Grantor Retained Annuity Trust, 2,300,000 shares of common stock held bythe Robert Rucker 2017 Grantor Retained Annuity Trust II, 3,380 shares of common stock held by Mr. Rucker’s spouse, and 23,660shares of common stock held by Mr. Rucker as custodian for minor children under the Uniform Gifts to Minors Act. Mr. Rucker is thesole officer and member of the board of directors of TS, Inc., holds sole voting and dispositive power over the securities held by TS,Inc., and may be deemed to beneficially own the securities held by TS, Inc.(5)Includes options to purchase 326,250 shares of common stock that are currently exercisable. Mr. Homeister’s employment ended inOctober 2017.(6)Includes 22,850 shares of unvested restricted common stock held by Mr. Geadelmann and options to purchase 65,000 shares ofcommon stock that are currently exercisable or will become exercisable within 60 days of February 16, 2018.(7)Mr. Randazzo’s employment ended in October 2017.(8)Ms. Maruniak’s employment ended in November 2017.(9)Includes 5,793 shares of unvested restricted common stock held by Mr. Cook. (10)Includes 5,038 shares of unvested restricted common stock held by Mr. Jacullo, 4,441,180 shares of common stock held by JWTS, and187,828 shares of common stock held by the Katherine D. Jacullo Children's 1993 Irrevocable Trust (the “1993 Trust”). Mr. Jacullo isthe trustee of the 1993 Trust and disclaims beneficial ownership of the shares of common stock held by the 1993 Trust, except to theextent of his pecuniary interest therein(11)Includes 4,408 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”), 469,286 shares of common stock held by the Peter H. Kamin Revocable Trust datedFebruary 2003 (the “2003 Trust”), 285,481 shares of common stock held by the Peter H. Kamin Childrens Trust dated March 1997(the “1997 Trust”), 135,361 shares of common stock held by the Peter H. Kamin GST Trust (“GST”), 171,604 shares of common stockheld by 3K Limited Partnership (“3K”), and 100 shares of common stock held by Mr. Kamin’s son. Mr. Kamin is the sole trustee of theFoundation, the sole trustee of the 2003 Trust, the sole trustee of the 1997 Trust, a trustee of GST, and the sole general partner of 3Kand may be deemed to have sole voting and investment power over the securities held by these entities. Mr. Kamin disclaimsbeneficial ownership of the shares of common stock held by his son, except to the extent of his pecuniary interest therein.(12)Includes 2,897 shares of unvested restricted common stock held by Mr. Krasnow, 2,600 shares of common stock held by Mr.Krasnow’s spouse, 8,000 shares of common stock held by Hobart Road Charitable Remainder CRUT (“Hobart Road”), and 2,000shares of common stock held by the Todd & Deborah Krasnow Charitable Remainder CRUT (“CRUT”). Mr. Krasnow is a trustee ofeach of Hobart Road and CRUT and may be deemed to have sole voting and investment power over the securities held by theseentities. Mr. Krasnow disclaims beneficial ownership of the shares of common stock held by his spouse, except to the extent of hispecuniary interest therein.(13)Includes 7,053 shares of unvested restricted common stock held by Mr. Livingston.(14)Includes 65,125 shares of unvested restricted common stock and options to purchase 71,096 shares of common stock that arecurrently exercisable or will become exercisable within 60 days of February 16, 2018. This group includes all directors and namedexecutive officers individually listed above, other than Chris Homeister, Carl Randazzo and Joyce Maruniak, who are no53 Table Of Contents longer executive officers of the Company as of the date hereof. This group also includes Cabell Lolmaugh, who is an executiveofficer of the Company but not a named executive officer as of the date hereof.54 Table Of Contents EQUITY COMPENSATION PLAN INFORMATIONThe following table presents our equity compensation plan information as of December 31, 2017: (a) (b) (c) Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights Weighted-averageexercise price ofoutstandingoptions, warrants andrights ($) Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding securities reflectedin column (a))Equity compensation plans approved by stockholders 1,732,564 (1)14.74 1,942,062 Equity compensation plans not approved bystockholders - - -Total 1,732,564 14.74 1,942,062 (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 six directors, do not have a relationship that would interfere with the exercise ofindependent judgment in carrying out the responsibilities of a director and that each of these directors will be “independent” as that term isdefined under the applicable SEC rules and regulations and the Nasdaq listing requirements and rules. Mr. Rucker, our Interim ChiefExecutive Officer and President, is not an independent director by virtue of his employment with us. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSOther than as described below, since the beginning of fiscal year 2017, there have been no transactions, or series of transactions to which wewere 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 (individually a “related person”and collectively, the “related persons”) had or will have a direct or indirect material interest.We employ Adam Rucker, son of Robert A. Rucker, our interim Chief Executive Officer and President, and a member of our Board, as aDirector of Information Technology. In fiscal year 2017, we paid Adam Rucker a total of $120,000, consisting of base salary. In fiscal year2016, we paid Adam Rucker a total of $140,000, consisting of base salary and cash bonus. In fiscal year 2015, we paid Adam Rucker a totalof $127,000, consisting of base salary and cash bonus. Also in fiscal year 2015, we granted stock options to Adam Rucker that had acombined grant date fair value of $44,000. Adam Rucker also received the standard benefits provided to other of our employees duringfiscal years 2017, 2016 and 2015.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 suppliers for individual use. If such arrangements fall within the terms of the policy described below,they will also be reviewed by the Audit Committee. 55 Table Of Contents POLICIES AND PROCEDURES FOR RELATED PERSON TRANSACTIONSOur Board has in place a written related person transaction policy that sets forth the policies and procedures for the review and approval orratification of related person transactions. This policy is administered by our Audit Committee and covers any transaction, arrangement, orrelationship, or any series of similar transactions, arrangements, or relationships, in which we were or are to be a participant, the amountinvolved exceeds $50,000 and a related person had or will have a direct or indirect material interest. While the policy covers related persontransactions in which the amount involved exceeds $50,000, the policy states that related person transactions in which the amountinvolved exceeds $120,000 are required to be disclosed in applicable filings as required by the SEC rules and regulations. Our Boarddetermined to set the threshold for approval of related person transactions in the policy at an amount lower than that which is required to bedisclosed under the SEC rules and regulations because we believe that it is appropriate for our Audit Committee to review transactions orpotential transactions in which the amount involved exceeds $50,000, as opposed to $120,000. Pursuant to this policy, our AuditCommittee will consider (a) the relevant facts and circumstances of the related person transaction, including if the related persontransaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third-party, (b) the extent ofthe related person’s interest in the related person transaction, (c) whether the related person transaction contravenes the conflict of interestand corporate opportunity provisions of our Code of Business Conduct and Ethics, (d) whether the relationship underlying the relatedperson transaction at issue is believed to serve the best interest of us and our stockholders, and (e) the effect that a director’s related persontransaction may have on such director’s status as an independent member of the Board and eligibility to serve on committees of the Boardpursuant to SEC rules and Nasdaq listing standards.Each related person will present to our Audit Committee each proposed related person transaction to which such related person is a party,including all relevant facts and circumstances relating thereto, and will update the Audit Committee as to any material changes to anyrelated person transaction. All related person transactions may only be consummated if our Audit Committee has approved or ratified suchtransaction in accordance with the guidelines set forth in the policy. Related party transactions do not include: (i) the payment ofcompensation by us to our executive officers or directors; (ii) indebtedness due from a related person for transactions in the ordinary course; (iii) a transaction in which the interest of the related person arises solely from ownership of a class of our securities where all holders of thatclass of securities receive the same benefit, on a pro-rata basis, from the transaction; or (iv) a transaction in which the rates or chargesinvolved are determined by competitive bids. Additionally, certain types of transactions have been pre-approved by our audit committeeunder the policy as not involving a material interest. These pre-approved transactions include transactions in the ordinary course ofbusiness where the related party’s interest arises only: (a) from his or her position as a director of another entity that is party to thetransaction; (b) from an equity interest of less than 5% in another entity that is party to the transaction; or (c) from a limited partnershipinterest of less than 5%, subject to certain limitations. No director will be permitted to participate in the approval of a related persontransaction 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 2017 and 2016:20172016Audit Fees(1)$651,000 $760,000 Audit-Related Fees(2) - -Tax Fees(3) - -All Other Fees(4) - -$651,000 $760,000 (1)Audit Fees were principally for services rendered for the annual financial statement audit, audit of internal control over financialreporting, reviews of our 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 our engagementof the independent auditor (the “Pre-Approval Policy”) as to matters within the scope of the Pre-Approval Policy or (b) for de minimus non-audit services that are approved in accordance with applicable SEC rules. The Audit Committee has determined that the rendering of theservices other than audit services by its principal accountant is compatible with maintaining the principal accountant’s independence. Forfiscal year 2017, all audit and non-audit services performed by our independent auditors were pre-approved in accordance with 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 Firm59 (ii)Consolidated Balance Sheets for the years ended December 31, 2017 and 201661 (iii)Consolidated Statements of Operations for the years ended December 31, 2017, 2016, and 201562 (iv)Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016, and 201563 (iv)Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 201564 (v)Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 201565 (vi)Notes to Consolidated Financial Statements66 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, which is incorporated herein by reference. 58 Table Of Contents Report of Independent Registered Public Accounting FirmThe Board of Directors and Shareholders ofTile Shop Holdings, Inc. and SubsidiariesOpinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Tile Shop Holdings, Inc. and Subsidiaries (the “Company”) as ofDecember 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equityand cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, thefinancial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2017, 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) (PCAOB), theCompany’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report datedFebruary 21, 2018 expressed an unqualified opinion thereon.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on theCompany’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to beindependent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Ouraudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding theamounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significantestimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our auditsprovide a reasonable basis for our opinion. /s/ Ernst & Young LLPWe have served as the Company’s auditor since 2013.Minneapolis, MinnesotaFebruary 21, 2018 59 Table Of Contents Report of Independent Registered Public Accounting FirmThe Board of Directors and Shareholders ofTile Shop Holdings, Inc. and SubsidiariesOpinion on Internal Control over Financial ReportingWe have audited Tile Shop Holdings, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2017, based oncriteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (2013 framework) (the COSO criteria). In our opinion, Tile Shop Holdings, Inc. and Subsidiaries (the Company) maintained, inall material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the2017 consolidated financial statements of the Company and our report dated February 21, 2018 expressed an unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Controlover Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based onour audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company inaccordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission andthe PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing suchother procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA 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/s/ Ernst & Young LLPMinneapolis, MinnesotaFebruary 21, 2018 60 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesConsolidated Balance SheetsAs of December 31, 2017 and 2016(dollars in thousands, except share and per share data) December 31, December 31, 2017 2016Assets Current assets: Cash and cash equivalents $6,621 $6,067 Restricted cash 855 3,000 Trade receivables, net 2,381 2,414 Inventories 85,259 74,295 Income tax receivable 5,726 1,670 Other current assets, net 4,717 8,755 Total Current Assets 105,559 96,201 Property, plant and equipment, net 151,405 141,037 Deferred tax assets 11,654 21,391 Long-term restricted cash - 3,881 Other assets 2,107 2,763 Total Assets $270,725 $265,273 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $30,771 $20,321 Current portion of long-term debt 8,833 6,286 Income tax payable 17 120 Other accrued liabilities 22,413 33,461 Total Current Liabilities 62,034 60,188 Long-term debt, net 18,182 22,126 Capital lease obligation, net 576 697 Deferred rent 41,290 37,595 Other long-term liabilities 4,769 5,768 Total Liabilities 126,851 126,374 Stockholders’ Equity: Common stock, par value $0.0001; authorized: 100,000,000 shares; issued andoutstanding: 52,156,850 and 51,607,143 shares, respectively 5 5 Preferred stock, par value $0.0001; authorized: 10,000,000 shares; issued and outstanding: 0 shares - -Additional paid-in-capital 180,109 185,998 Accumulated deficit (36,239) (47,058)Accumulated other comprehensive loss (1) (46)Total Stockholders' Equity 143,874 138,899 Total Liabilities and Stockholders' Equity $270,725 $265,273 See accompanying Notes to Consolidated Financial Statements. 61 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesConsolidated Statements of OperationsFor the years ended December 31, 2017, 2016 and 2015(dollars in thousands, except share and per share data)201720162015Net sales$344,600 $324,157 $292,987 Cost of sales108,378 97,261 89,377 Gross profit236,222 226,896 203,610 Selling, general and administrative expenses210,376 193,983 174,384 Income from operations25,846 32,913 29,226 Interest expense(1,857)(1,715)(2,584)Other income (expense)170 141 130 Income before income taxes24,159 31,339 26,772 Provision for income taxes(13,340)(12,876)(11,076)Net income$10,819 $18,463 $15,696 Income per common share:Basic$0.21 $0.36 $0.31 Diluted0.21 0.36 0.31 Weighted average shares outstanding:Basic51,700,045 51,418,600 51,161,059 Diluted51,927,877 51,880,113 51,304,982 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, 2017, 2016 and 2015(dollars in thousands) 201720162015Net income$10,819 $18,463 $15,696 Currency translation adjustment45 (35)(11)Other comprehensive income (loss)45 (35)(11)Comprehensive income$10,864 $18,428 $15,685 See accompanying Notes to Consolidated Financial Statements. 63 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesConsolidated Statements of Stockholders’ Equity(dollars in thousands, except share data) Common stock Shares Amount Additionalpaid-in-capital AccumulatedDeficit Accumulated othercomprehensive(loss) income TotalBalance 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 translation adjustments - - - - (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 ASU 2016-09 - - 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 - 842 - - 842 Tax withholdings related to net sharesettlements of stock-based compensationawards - - (56) - - (56)Foreign currency translation adjustments - - - - (35) (35)Net income - - - 18,463 - 18,463 Balance at December 31, 2016 51,607,143 $5 $185,998 $(47,058) $(46) $138,899 Issuance of restricted shares 324,184 - - - - -Cancellation of restricted shares (87,849) - - - - -Stock based compensation - - 3,156 - - 3,156 Stock option exercises 313,372 - 1,639 - - 1,639 Tax withholdings related to net sharesettlements of stock-based compensationawards - - (318) - - (318)Dividends paid - - (10,366) - - (10,366)Foreign currency translation adjustments - - - - 45 45 Net income - - - 10,819 - 10,819 Balance at December 31, 2017 52,156,850 $5 $180,109 $(36,239) $(1) $143,874 See accompanying Notes to Consolidated Financial Statements. 64 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesConsolidated Statements Cash FlowsFor the years ended December 31, 2017, 2016 and 2015(dollars in thousands) For the years ended, 2017 2016 2015Cash Flows From Operating Activities Net income $10,819 $18,463 $15,696 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 26,239 23,042 22,236 Amortization of debt issuance costs 691 487 308 Debt issuance cost writeoff - - 194 Loss on disposals of property, plant and equipment 210 447 143 Impairment charges of property, plant and equipment 1,072 - -Deferred rent 3,884 2,382 2,785 Stock based compensation 3,156 4,333 5,545 Deferred income taxes 9,737 (395) 5,743 Changes in operating assets and liabilities: Trade receivables 33 (448) (254)Inventories (10,964) (4,417) (1,021)Prepaid expenses and other current assets 4,159 (5,849) (1,387)Accounts payable 12,048 4,195 945 Income tax receivable/payable (4,159) (1,917) 5,304 Accrued expenses and other liabilities (11,234) 13,229 4,027 Net cash provided by operating activities 45,691 53,552 60,264 Cash Flows From Investing Activities Purchases of property, plant and equipment (40,556) (27,256) (18,994)Proceeds from the sale of property, plant and equipment 7 4 -Net cash used in investing activities (40,549) (27,252) (18,994)Cash Flows From Financing Activities Release of restricted cash 6,026 1,926 -Payments of long-term debt and capital lease obligations (36,575) (37,822) (124,025)Advances on line of credit 35,000 10,000 88,000 Dividends paid (10,366) - -Contributions to NMTC fund - (6,683) -Payment of NMTC closing costs - 1,269 -Proceeds from exercise of stock options 1,639 842 276 Employee taxes paid for shares withheld (318) (56) -Debt issuance costs - - (968)Security deposits - (4) 29 Net cash used in financing activities (4,594) (30,528) (36,688)Effect of exchange rate changes on cash 6 (35) (11)Net change in cash 554 (4,263) 4,571 Cash and cash equivalents beginning of period 6,067 10,330 5,759 Cash and cash equivalents end of period $6,621 $6,067 $10,330 Supplemental disclosure of cash flow information Purchases of property, plant and equipment included in accounts payable andaccrued expenses $636 $2,271 $898 Cash paid for interest 1,822 1,811 2,692 Cash paid for income taxes, net of refunds 7,603 15,162 22 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 natural stone and manufactured tiles, setting and maintenance materials, and related accessories inthe United States. Natural stone products include marble, travertine, granite, quartz, sandstone, slate, and onyx tiles. Manufactured tilesinclude ceramic, porcelain, glass, cement, wood look, and metal tiles. The majority of the tile products are sold under the Company'sproprietary Rush River and Fired Earth brand names. The Company purchases tile products, accessories and tools directly from its networkof suppliers. The Company manufactures its own setting and maintenance materials, such as thinset and sealers under the Superior brandname. As of December 31, 2017, the Company operated 138 stores in 31 states and the District of Columbia, with an average size ofapproximately 20,300 square feet. The Company 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 Company’sestimates and judgments are based on historical experience and 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 ofproperty, plant and equipment, valuation of inventory, and income taxes. Actual results may differ from these estimates.Cash and Cash EquivalentsThe Company had cash and cash equivalents of $6.6 million and $6.1 million at December 31, 2017 and 2016, respectively. The Companyconsiders all highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents. The Companyaccepts a range of debit and credit cards, and these transactions are generally transmitted to a bank for reimbursement within 24 hours. Thepayments due from the banks for these debit and credit card transactions are generally received, or settled, within 24 to 48 hours of thetransmission 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 $3.1 million and $3.0million at December 31, 2017 and 2016, respectively.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 are66 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements recorded when received. The allowance for doubtful accounts was $0.1 million as of December 31, 2017 and 2016. The Company does notaccrue interest on accounts receivable.InventoriesInventories are stated at the lower of cost (determined using the weighted average cost method) or net realizable value. Inventories consistprimarily of merchandise held for sale. Our largest supplier accounted for approximately 18% of our total purchases in 2017. Inventorieswere comprised of the following at December 31, 2017 and 2016:20172016(in thousands)Finished goods$65,843 $61,949 Raw materials1,660 2,312 Finished goods in transit17,756 10,034 Total$85,259 $74,295 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 $0.2 million for both December 31, 2017 and 2016.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, 2017 and 2016,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 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 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 process to establish a sales return reserve contains uncertaintiesbecause it requires management to make assumptions and to apply judgment to estimate future returns and exchanges. The customer mayreceive a refund or exchange the original product for a replacement of equal or similar quality for a period of six months from the time oforiginal purchase. Products received back under this policy are reconditioned pursuant to state laws and resold. The Company records areserve for estimated product returns, based on historical return trends together with current product sales performance. A summary ofactivity in the Company's sales returns reserve follows:67 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements 201720162015(in thousands)Balance at beginning of year$3,080 $2,781 $3,292 Additions to sales return reserve30,177 31,334 26,522 Deductions from sales return reserve(30,118)(31,035)(27,033)Balance at end of year$3,139 $3,080 $2,781 Cost of Sales and Selling, General and Administrative ExpensesThe primary costs classified in each major expense category are:Cost of Sales·Materials cost;·Shipping and transportation 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; and·Labor and overhead costs incurred to manufacture inventorySelling, General & Administrative Expenses·All compensation costs for retail, corporate and distribution employees;·Occupancy, utilities and maintenance costs of retail and corporate facilities;·Shipping and transportation expenses to move inventory from the Company's distribution centers to the Company's stores;·Depreciation and amortization; and·Advertising costsStock Based CompensationThe Company recognizes expense for its stock based compensation based on the fair value of the awards on the grant date. Compensationexpense is recognized on a straight-line basis over the requisite service period, net of actual forfeitures. Certain awards are also subject toforfeiture if the Company fails to attain its Adjusted EBITDA targets. The Company adjusts the cumulative expense recognized on awardswith performance conditions based on a probability of achieving the performance condition. The Company may issue incentive awards inthe form of stock options, restricted stock awards and other equity awards to employees and non-employee directors. Compensation cost isrecognized 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.SegmentsThe Company’s operations consist primarily of retail sales of natural stone and manufactured 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.68 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Advertising CostsAdvertising costs were $9.5 million, $6.9 million and $6.5 million for the years ended December 31, 2017, 2016 and 2015, 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,compensation 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, 2017, 2016 and 2015, the Company reported pre-opening costs of $1.7million, $0.9 million and $0.5 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 fixed rate renewal terms) or the estimated useful life ofthe asset. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and any gain or lossthereon is included in other income and expense.Asset life (in years)Buildings and building improvements40Leasehold improvements8–26Furniture and fixtures2–7Machinery and equipment5–10Computer equipment and software3–7Vehicles5The Company evaluates potential impairment losses on long-lived assets used in operations when events and circumstances indicate thatthe assets may be impaired, and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts ofthose assets. If impairment exists and the undiscounted cash flows estimated to be generated by those assets are less than the carryingamount of those assets, an impairment loss is recorded based on the difference between the carrying value and fair value of theassets. During the year ended December 31, 2017, the Company recorded asset impairment charges of $1.1 million, which were classified inselling, general and administrative expenses. No impairment charges were recorded during the years ended December 31, 2016 or 2015.Internal 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 internalcompensation costs. Any costs during the preliminary project stage or related to training or maintenance are expensed as incurred.Capitalization ceases when the software project is substantially complete and ready for its intended use. The capitalization and ongoingassessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors,including, but not limited to, technological and economic feasibility, and estimated economic life. As of December 31, 2017 and 2016,$0.2 million and $0.4 million was included in computer equipment and software, respectively. The majority of the costs capitalized relateto amounts invoiced by external consultants. The costs are amortized over estimated useful lives of three to five years. There was $0.2million, $0.5 million and $0.5 million depreciation expense related to capitalized software during the years ended December 31, 2017,2016 and 2015, respectively.LeasesThe Company leases its store locations and corporate headquarters. We also lease our distribution center in Dayton, New Jersey. Assets heldunder capital leases are included in property, plant and equipment and amortization is included in depreciation expense. Operating leaserentals are expensed on a straight-line basis over the life of the lease beginning on the date the Company takes69 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements possession of the property. Tenant improvement allowances are amounts received from a lessor for improvements to leased properties andare amortized against rent expense over the life of the respective leases. At lease inception, the Company determines the lease term byassuming the exercise of those renewal options that are reasonably assured. The exercise of lease renewal options is at the Company’s solediscretion. The lease term is used to determine whether a lease is capital or operating and is used to calculate straight-line rent expense.Additionally, the depreciable life of leased assets and leasehold improvements is limited by the expected lease term. Rent expense isincluded 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 leased premises. These expenses are also classified in selling, general andadministrative expenses.Self-InsuranceThe Company is self-insured for certain employee health 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, 2017 and 2016, an accrual of $0.3 million and $0.7 millionrelated to estimated employee health claims was included in other current liabilities, respectively. As of December 31, 2017 and 2016, anaccrual of $1.3 million and $1.2 million related to estimated workers’ compensation claims was included in other current liabilities,respectively.The Company has standby letters of credit outstanding related to the Company's workers’ compensation and employee health insurancepolicies. As of December 31, 2017 and 2016, the standby letters of credit totaled $1.1 million.New Accounting PronouncementsRecently Adopted Accounting PronouncementsIn July 2015, the Financial Accounting Standards Board (“FASB”) issued a standard that simplifies the subsequent measurement ofinventory. Previously, an entity was required to measure inventory at the lower of cost or market, whereby market can be replacement cost,net realizable value, or net realizable value less an approximately normal profit margin. The changes required that inventory be measured atthe lower of cost and net realizable value, thereby eliminating the use of the other two market methodologies. Net realizable value isdefined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, andtransportation. The standard was effective for the Company at the beginning of fiscal year 2017. The adoption of this new standard did nothave a material effect on the Company’s financial statements.​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. Upon adoption of the new standard on January 1, 2018, theCompany will present the gross sales returns reserve as a component of other accrued liabilities and establish a return asset that will beclassified as a component of other current assets, net in the consolidated balance sheet. Currently, the Company presents its sales returnsreserve net of the value of the return assets as a component of other accrued liabilities in the consolidated balance sheet. Based on theCompany’s assessment to date, the underlying principles of the new standard, relating to the measurement of revenue and the timing ofrecognition, are closely aligned with the Company’s current business model and practices. As a result, other than the presentation of a grosssales returns reserve and a returns asset in the consolidated balance sheet, the adoption of this standard is not expected to have a materialimpact on the Company’s 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 fiscal year 2019, with early adoption permitted. TheCompany expects the primary impact upon adoption will be the recognition, on a discounted basis, of minimum commitments under non-cancelable operating leases on the consolidated balance sheets resulting in the recording of right of use assets and lease obligations. TheCompany’s minimum commitments under non-cancelable operating leases are disclosed in Note 5. The Company has identified its leasemanagement system and is in the process of identifying and evaluating the applicable leases. The Company is currently assessing the effectthe new standard will have on its consolidated financial statements.70 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to 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 provide guidance on eight specific cash flow issues. The standardsupdate is effective for the Company in fiscal year 2018 and should be applied retrospectively. The Company is currently assessing theeffect 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 in the statement of cash flows. The new standard is effective for the Company in fiscal year 2018,with early adoption permitted. The guidance should be applied retrospectively after adoption. The Company’s restricted cash balance was$0.9 million as of December 31, 2017. Upon adopting the new standard, the Company anticipates that it will no longer present the releaseof restricted cash as a financing cash inflow. Instead, restricted cash and long-term restricted cash balances will be included in thebeginning and ending cash, cash equivalents and restricted cash balances in the statement of cash flows. Note 2: Property Plant and Equipment:Property, plant and equipment consisted of the following at December 31: 2017 2016 (in thousands)Land $904 $904 Building and building improvements 25,417 21,916 Leasehold improvements 84,677 77,404 Furniture and fixtures 129,876 119,589 Machinery and equipment 28,561 26,433 Computer equipment and software 29,851 24,002 Vehicles 3,463 3,136 Construction in progress 6,124 3,543 Total property, plant and equipment 308,873 276,927 Less accumulated depreciation (157,468) (135,890)Total property, plant and equipment, net $151,405 $141,037 Depreciation expense on property and equipment, including capital leases, was $26.2 million, $23.0 million and $22.2 million for the yearsended December 31, 2017, 2016 and 2015, respectively. Property, plant and equipment is measured at fair value when an impairment isrecognized and the related assets are written down to fair value. During the year ended December 31, 2017, the Company recorded assetimpairment charges of $1.1 million. No impairment charges were recorded during the years ended December 31, 2016 or 2015. Note 3: Accrued LiabilitiesAccrued liabilities consisted of the following at December 31: 2017 2016 (in thousands)Shareholder litigation accrual $ - $9,500 Customer deposits 8,064 7,742 Accrued wages and salaries 2,853 4,962 Sales return reserve 3,139 3,080 Payroll and sales taxes 2,491 2,691 Other current liabilities 5,866 5,486 Total accrued liabilities $22,413 $33,461 71 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 4: Long-term Debt Long-term debt, net of debt issuance costs, consisted of the following at December 31: 2017 2016 Unamortized Unamortized Debt Issuance Debt Issuance Principal Costs Principal Costs (in thousands)Term note payable - interest at 3.06% and 2.27% at December 31, 2017and 2016 $11,346 $(36) $17,721 $(114)Commercial bank credit facility 15,000 - 10,000 -Variable interest rate bonds (1.69% and 0.89% at December 31, 2017and 2016), which mature April 1, 2023, collateralized by buildings andequipment 705 - 805 -Total debt obligations 27,051 (36) 28,526 (114)Less: current portion 8,855 (22) 6,350 (64)Debt obligations, net of current portion $18,196 $(14) $22,176 $(50)Approximate annual aggregate maturities of debts, net of debt issuance costs, are as follows: (in thousands):Fiscal year2018$8,855 20192,706 202015,115 2021120 2022125 Thereafter130 Total future maturities payments$27,051 Less: debt issuance costs36 Total future maturities payments, net of debt issuance costs$27,015 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 again was amended on July 17, 2017 to adjustthe consolidated fixed charge coverage ratio from 2.00:1.00 to 1.50:1.00 to provide greater flexibility in declaring and making dividendpayments or other distributions to shareholders. The Credit Agreement provides the Company with a $125.0 million senior secured creditfacility, comprised of a five-year $50.0 million term loan and a $75.0 million revolving line of credit. The Credit Agreement is secured byvirtually all of the assets of the Company, including but not limited to, inventory, receivables, equipment and real property. Borrowingspursuant to the Credit Agreement bear interest at either a base rate or a LIBOR-based rate, at the option of the Company. The LIBOR-basedrate will range from LIBOR plus 1.50% to 2.00%, depending on The Tile Shop’s leverage ratio. The base rate is equal to the greatest of: (a)the Federal 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% to1.00% depending on The Tile Shop’s leverage ratio. At December 31, 2017 the base interest rate was 5.00% and the LIBOR-based interestrate was 3.06%. Borrowings outstanding consisted of $11.3 million on the term loan and $15.0 million on the revolving line of credit as ofDecember 31, 2017. There was $60.0 million available for borrowing on the revolving line of credit as of December 31, 2017. TheCompany can elect to prepay the term loan without incurring a penalty. Additional borrowings pursuant to the Credit Agreement may beused to support the Company’s growth and for working capital purposes. The term loan requires quarterly principal payments as follows (inthousands):PeriodMarch 31, 2018 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 also72 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements includes financial and other covenants including covenants to maintain certain fixed charge coverage ratios and rent adjusted leverageratios. The Company was in compliance with the covenants as of December 31, 2017.Capital Leases:The Company has one store lease that is accounted for as a capital lease. This lease expires in 2022. Assets acquired under capital leases areincluded in property, plant and equipment.As of December 31, 2017, minimum lease payments under the Company's capital lease obligation were as follows (in thousands): Fiscal year2018$215 2019216 2020216 2021215 202290 Thereafter -Less: amounts representing interest(255)Present value of future minimum lease payments697 Less: current portion121 Capital lease obligations, net of current portion$576 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, 2017, 2016 and 2015,rent expense was $33.8 million, $29.7 million, and $27.2 million, respectively.Annual minimum rentals under non-cancelable operating leases are as follows, for the years ended December 31 (in thousands): Fiscal year2018$34,142 201934,725 202034,815 202134,541 202234,706 Thereafter408,068 Total future maturities payments$580,997 Legal proceedings:The Company was a defendant in a consolidated class action arising in 2013 alleging it failed to disclose certain related party transactionsin the Company’s SEC filings and press releases. In January 2017, the plaintiffs and the Company agreed to settle the lawsuit for $9.5million. The court approved the settlement, and entered an order dismissing the action on June 14, 2017.The Company also is a nominal defendant in three actions brought derivatively on behalf of the Company by three shareholders in2015. The plaintiffs allege that the defendant-directors and/or officers breached their fiduciary duties by failing to adopt adequate internalcontrols for the Company, by approving false and misleading statements issued by the Company, by causing the Company to violategenerally accepted accounting principles and SEC regulations, 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 Company moved to dismiss theactions, or in the alternative, to stay the actions. Those motions have not yet been decided. 73 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements ​By letter dated May 19, 2016, a shareholder of the Company demanded that the Board of Directors investigate alleged breaches of fiduciaryduty related to the same matters described above and take action against certain present and former officers and directors of the Company.The Board of Directors has appointed a committee of two independent directors to investigate and evaluate the matters raised in thedemand letter, and to recommend to the Company’s Board of Directors what actions, if any, should be taken by the Company with respectto the matters raised in the demand letter. ​Based on the Company’s assessment of the derivative actions and demand, the range of resulting loss is not expected to have a materialimpact on the Company’s financial statements. 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 cashflows. 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;·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, 2017 and 2016 according to the valuation techniques the Company uses to determine their fair values.There have been no transfers of assets among the fair value hierarchies presented.PricingFair Value atCategoryDecember 31, 2017December 31, 2016Assets(in thousands)Cash and cash equivalentsLevel 1$6,621 $6,067 Restricted cashLevel 1855 3,000 Long-term restricted cashLevel 1 -3,881 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.74 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements ·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 fairvalue. During the year ended December 31, 2017, the Company identified property, plant and equipment that would be disposed of prior tothe end of their useful lives which resulted in the recognition of a $1.1 million charge to write-down these assets to their estimated fairvalue. The Company measured the fair value of these assets based on projected cash flows and an estimated risk-adjusted rate of return.Projected cash flows are considered level 3 inputs. No impairment charges were recorded during the years ended December 31, 2016 and2015. The carrying value of the Company’s borrowings under its credit agreement approximate fair value based upon level 2 inputs of the marketinterest rates available to the Company for debt obligations with similar risks and maturities.Note 7: Related Party TransactionsThe Company employs Adam Rucker, son of Robert A. Rucker, our interim Chief Executive Officer and President, and a member of ourBoard of Directors, as a Director of Information Technology. In fiscal year 2017, the Company paid Adam Rucker a total of $120,000,consisting of base salary. In fiscal year 2016, the Company paid Adam Rucker a total of $140,000, consisting of base salary and cash bonus.In fiscal year 2015, the Company paid Adam Rucker a total of $127,000, consisting of base salary and cash bonus. Also in fiscal year 2015,the Company granted stock options to Adam Rucker that had a combined grant date fair value of $44,000. Adam Rucker also received thestandard benefits provided to other Company employees during fiscal years 2017, 2016 and 2015. 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.Basic and diluted net income per share was calculated as follows: 2017 2016 2015 (in thousands, except share and per share data)Net income $10,819 $18,463 $15,696 Weighted-average shares outstanding - basic 51,700,045 51,418,600 51,161,059 Dilutive common stock equivalents 227,832 461,513 143,923 Weighted-average shares outstanding - diluted 51,927,877 51,880,113 51,304,982 Basic net income per share $0.21 $0.36 $0.31 Diluted net income per share $0.21 $0.36 $0.31 Antidilutive Shares 445,490 373,255 568,014 Note 9: Equity Incentive Plans2012 Plan:Under the 2012 Omnibus Award Plan (the “2012 Plan”), 5,000,000 shares of the Company’s common stock are reserved for issuancepursuant to a variety of stock based compensation awards, including stock options, and restricted stock awards.Stock Options:During the years ended December 31, 2017, 2016 and 2015, 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. 75 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements 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:201720162015Risk-free interest rate1.89%–2.12%1.15%–1.52%0.90%–1.07%Expected life (in years)5–65–75Expected volatility51%–55%52%–53%52%–53%Dividend yield1%–2%0%–0%0%–0%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 to calculate the expected term of options granted due to the lack of adequatehistorical data. The risk-free interest rate was based on the U.S. Treasury yield at the time of grant. The expected dividend yield for 2017was determined using the historical dividend payout and a trailing twelve month closing stock price on the grant date. The expecteddividend yield was zero prior to December 31, 2016 based on the fact that, at that time, the Company had not paid dividends prior toDecember 31, 2016. To the extent that actual outcomes differ from the Company's assumptions, the Company is not required to true upgrant-date fair value-based expense to final intrinsic values. The weighted average fair value of stock options granted was $5.88, $7.37,and $5.00 during the years ended December 31, 2017, 2016 and 2015, respectively.Stock based compensation related to options for the years ended December 31, 2017, 2016 and 2015 was $1.9 million, $3.2 million, and$3.6 million, respectively, and was included in selling, general and administrative expenses in the consolidated statements of operations.As of December 31, 2017, the total future compensation cost related to non-vested options not yet recognized in the consolidated statementof operations was $3.0 million and is expected to be recognized over a weighted-average period of 3.1 years.The following table summarizes stock option activity:SharesWeightedAverageExercisePriceWeightedAvg GrantDateFair ValueWeighted AvgRemainingContractualTerm (Years)AggregateIntrinsicValue(in thousands)Balance, January 1, 20152,471,000 $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 Granted305,150 $13.49 $5.88 Exercised(313,372)$10.07 $5.44 Cancelled/Forfeited(619,755)$13.04 $6.29 Balance, December 31, 20171,732,564 $14.74 $6.95 4.5 $365 Exercisable at December 31, 20171,114,835 $15.98 $7.65 3.5 Vested and expected to vest, December 31, 20172,032,314 $14.04 $6.59 4.5 $365 The aggregate intrinsic value is the difference between the exercise price and the closing price of the Company’s stock on December 31.The intrinsic value of the stock options exercised during 2017 and 2016 was $4.4 million and $0.9 million, respectively.76 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Options outstanding as of December 31, 2017 are as follows:Range of Exercise PriceWeighted AverageOptionsExercise PriceRemaining ContractualLife-Years$5.00to$10.00652,411 $9.22 5.30 $10.01to$15.00509,478 $12.32 3.81 $15.01to$20.00244,875 $17.87 5.75 $20.01to$25.0087,800 $22.39 6.71 $25.01to$30.00238,000 $29.02 1.73 Restricted Stock:The Company awards restricted common shares to selected employees and non-employee directors. Recipients are not required to provideany consideration other than continued services. Restricted share awards are subject to certain restrictions on transfer, and all or part of theshares awarded may be subject to forfeiture upon the occurrence of certain events, including employment termination. Certain awards arealso subject to forfeiture if the Company fails to attain its Adjusted EBITDA targets. The restricted common shares are valued at the grantdate fair value and expensed over the requisite service period or the vesting term of the awards. The Company adjusts the cumulativeexpense recognized on awards with performance conditions based on the probability of achieving the performance condition.The following table summarizes restricted stock activity:SharesWeighted AvgGrant DateFair ValueNonvested, 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 Granted324,184 $13.55 Vested(47,051)$19.93 Forfeited(87,849)$17.71 Nonvested, December 31, 2017275,168 $13.03 The total expense associated with restricted stock for the years ended December 31, 2017, 2016, and 2015 was $1.2 million, $1.1 million,and $1.9 million, respectively. As of December 31, 2017, there was $2.9 million of total unrecognized expense related to unvestedrestricted stock awards, which are expected to vest, and will be expensed over a weighted-average period of 3.3 years. The fair value ofrestricted stock granted in fiscal year 2017 was $4.4 million. The total fair value of restricted stock that vested during the year endedDecember 31, 2016 was $1.3 million. Using the closing stock price of $9.60 on December 31, 2017, the number of restricted sharesoutstanding and expected to vest was 269,768, with an intrinsic value of $2.6 million.77 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 10: Income TaxesThe components of the provision for income taxes consist of the following:Years Ended December 31,201720162015(in thousands)CurrentFederal$2,721 $10,831 $3,691 State872 2,560 1,886 International30 30 -Total Current3,623 13,421 5,577 DeferredFederal9,354 (363)5,252 State363 (182)247 Total Deferred9,717 (545)5,499 Total Provision for Income Taxes$13,340 $12,876 $11,076 A majority of all of the Company's income is from domestic operations.On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted into law and the new legislation contains severalkey tax provisions that affected the Company, including, but not limited to, a reduction of the corporate income tax rate to 21% effectiveJanuary 1, 2018 and a one-time mandatory transition tax on accumulated foreign earnings. The Company is required to recognize the effectof the tax law changes in the period of enactment, including determining the transition tax, re-measuring the Company’s U.S. deferred taxassets and liabilities and reassessing the net realizability of the Company’s deferred tax assets and liabilities. Staff Accounting Bulletin No.118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) allows the Company to record provisional amountsduring a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarterof 2017, and ongoing guidance and accounting interpretation is expected over the next 12 months, the Company considers the accountingof the transition tax, deferred tax re-measurements, and other items to be provisional due to the forthcoming guidance and the Company’songoing analysis of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period inaccordance with SAB 118.The following table reflects the effective income tax rate reconciliation for the years ended December 31, 2017, 2016 and 2015: 2017 2016 2015Federal statutory rate 35.0 % 35.0 % 35.0 %Tax reform(1) 18.9 - - State income taxes, net of the federal tax benefit 4.1 4.4 4.4 Stock based compensation (2.0) 1.6 1.4 Other (0.8) 0.1 0.6 Effective tax rate 55.2 % 41.1 % 41.4 %(1)Due to the Tax Act, the Company re-measured its U.S. deferred tax assets as of December 31, 2017 from 35% to 21%, resulting in $4.6million of income tax expense.78 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Components of net deferred income taxes are as follows at December 31:20172016(in thousands)Deferred income tax assets:Section 743 carryforward$16,508 $27,251 Leasehold improvement reimbursements3,642 5,299 Inventory1,229 1,707 Deferred rent5,456 6,794 Stock based compensation2,016 3,112 Other206 3,064 Total deferred income tax assets$29,057 $47,227 Deferred income tax liabilitiesDepreciation17,403 25,836 Total deferred income tax liabilities17,403 25,836 Net deferred income tax assets$11,654 $21,391 The Company has not recorded United States deferred income taxes on approximately $0.7 million of its non-U.S. subsidiaries'undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. The transition tax notedabove will result in including the previously untaxed foreign earnings in the Company’s 2017 federal and state taxable income. If theseearnings were repatriated to the United States, the Company would be required to accrue and pay local country withholding taxes andpotential United States state taxes. The additional tax obligation associated with the repatriation of earnings generated outside of theUnited States would not have a material impact on the Company’s financial statements. As part of its ongoing analysis on the impacts of theTax Act, the Company continues to analyze its potential tax liabilities. The Company records interest and penalties through income tax relating to uncertain tax positions. As of December 31, 2017, 2016 and2015, the Company has not recognized any liabilities for uncertain tax positions nor has the Company accrued interest and penaltiesrelated to uncertain tax positions.The Company's federal income tax returns for fiscal years 2015 through 2016 tax years are still subject to examination in the U.S. Variousstate and foreign jurisdiction tax years remain open to examination. The Company believes that any potential assessment would beimmaterial to its financial statements.79 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements 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, Inc.(“Tile Shop Lending”) made a loan to, Twain Investment Fund 192 LLC (the “Investment Fund”) under a qualified New Markets Tax Credit(“NMTC”) program. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and is intendedto induce capital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their Federalincome taxes for up to 39% of qualified investments in the equity of community development entities (“CDEs”). CDEs are privatelymanaged investment institutions that are certified to make qualified low-income community investments.In this transaction, Tile Shop Lending loaned $6.7 million to the Investment Fund at an interest rate of 1.37% per year and with a maturitydate of December 31, 2046. The Investment Fund then contributed the loan to a CDE, which, in turn, loaned the funds on similar terms toTile Shop 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 U.S. Bank, net of syndication fees) were used to partially fund the distribution centerproject. In December 2016, U.S. Bank also contributed $3.1 million to the Investment Funds and, by virtue of such contribution, is entitled tosubstantially all of the tax benefits derived from the NMTCs, while the Company effectively received net loan proceeds equal to U.S.Bank’s contributions to the Investment Fund. This transaction includes a put/call provision whereby the Company may be obligated orentitled to repurchase U.S. Bank’s interest. The Company believes that U.S. Bank will exercise the put option in December 2023 at the endof 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 various regulations and contractualprovisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits notbeing realized and, therefore, could require the Company to indemnify U.S. Bank for any loss or recapture of NMTCs related to thefinancing until such time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will berequired in connection with this arrangement. The Company has determined that the financing arrangement with the Investment Fund and CDEs contains a variable interest entity(“VIE”). The ongoing activities of the Investment Fund – 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 InvestmentFund. 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 Fund, as a VIE, in accordance with the accounting standards for consolidation. In 2016, U.S. Bank’s contributions of $3.1million, net of syndications fees, were included in cash, restricted cash, other accrued liabilities and other long-term liabilities in theconsolidated balance sheet. The Company incurred $1.2 million of syndication fees in connection with this transaction, which wereclassified as other current assets and other non-current assets in the consolidated balance sheet. The Company is recognizing the benefit ofthis net $1.9 million contribution over the seven-year compliance period as it is being earned through the on-going compliance with theconditions of the NMTC program. As of December 31, 2017, the balance of the contribution liability was $2.7 million, of which $0.4million is classified as other accrued liabilities on the consolidated balance sheet and $2.3 million is classified as other long-term liabilitieson the consolidated balance sheet.The Company is able to request reimbursement for certain expenditures made in connection with the expansion of the distribution center inDurant, Oklahoma from the Investment Fund. Expenditures that qualify for reimbursement include building costs, equipment purchases,and other expenditures tied to the expansion of the facility. During the fiscal year ended December 31, 2017, the Company receivedreimbursements totaling $6.0 million from the investment fund. As of December 31, 2017, the balance in the Investment Fund available forreimbursement to the Company was $0.9 million.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 US. Bank, 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 may80 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements be obligated or entitled to repurchase the investors’ interest. The Company believes that the investors will exercise the put option inSeptember 2020 at the end 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 seven years as provided in the Internal Revenue Code. The Company is required to be in compliance with variousregulations 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 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 investors’ 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, 2017, the balance of the contribution liability was $1.7 million, of which $0.7 million is classified asother accrued liabilities on the consolidated balance sheet and $1.0 million is classified as other long-term liabilities on the consolidatedbalance sheet. 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 $1.4 million, $0.5 million, and $0.4 million ofemployee contributions in 2017, 2016, and 2015 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, 2017 and 2016 are summarized below (in thousands, except per shareamounts):First QuarterSecond QuarterThird QuarterFourth Quarter(in thousands)2017Net sales$92,135 $89,464 $84,421 $78,580 Gross profit64,745 62,348 56,662 52,467 Income (loss) from operations13,533 11,600 4,377 (3,664)Net income (loss)8,009 7,723 2,438 (7,351)Basic earnings (loss) per share0.16 0.15 0.05 (0.14)Diluted earnings (loss) per share0.15 0.15 0.05 (0.14)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 Note 14: Subsequent EventOn February 21, 2018, the Company declared a $0.05 dividend to stockholders of record as of the close of business on March 5, 2018.The dividend will be paid on March 16, 2018. 81 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 21, 2018/s/ ROBERT A. RUCKER Robert A. Rucker Interim Chief Executive Officer 82 Table Of Contents POWER OF ATTORNEY Each person whose signature appears below constitutes ROBERT A. RUCKER and KIRK L. GEADELMANN, or either of them, ashis true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead,in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto,and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact andagent, 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/ ROBERT A. RUCKER February 21, 2018 Robert A. Rucker Interim Chief Executive Officer, Director (Principal Executive Officer) /s/ KIRK L. GEADELMANN February 21, 2018 Kirk L. Geadelmann Chief Financial Officer (Principal Financial and Accounting Officer) /s/ PETER H. KAMIN February 21, 2018 Peter H. Kamin Director and Chairman of the Board of Directors /s/ PETER J. JACULLO February 21, 2018 Peter J. Jacullo, Director /s/ TODD KRASNOW February 21, 2018 Todd Krasnow, Director /s/ PHILIP B. LIVINGSTON February 21, 2018 Philip B. Livingston, Director /s/ CHRISTOPHER T. COOK February 21, 2018 Christopher T. Cook, Director 83 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 (Reg. No. 333-182482) dated July 2, 2012.​3.2Bylaws of Tile Shop Holdings, Inc. – incorporated by reference to Exhibit 3.2 to the Registrant’s Form S-4 (Reg. No. 333-182482) dated 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 (Reg. No. 333-182482) dated July 23, 2012.​10.1*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 dated July 2, 2012.​10.2*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 dated July 2, 2012.​10.3*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.​10.4*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.​10.5*Form 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 dated July 23, 2012.​10.6*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.​10.7Tile 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.​10.8*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.​10.9*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.​10.10*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.​10.11*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.​10.12*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 31,2014.84 Table Of Contents ​10.13*Credit 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.​10.14*Security 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.​10.15*Guaranty 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.​10.16*Stipulation 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.​10.17*First 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.​10.18*Second 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.​10.19*Amendment to Offer Letter Agreement, dated April 21, 2017, between Tile Shop Holdings, Inc. and Kirk Geadelmann -incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,2017.​10.20*Offer Letter Agreement, dated February 17, 2017, between Tile Shop Holdings, Inc. and Joyce Maruniak - incorporated byreference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.​10.21*Confidential Separation Agreement and Release dated March 20, 2017 between the Tile Shop Holdings, Inc. and JosephKinder - incorporated by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2017.​10.22*Third Amendment to Credit Agreement, dated July 17, 2017, among The Tile Shop, LLC, Tile Shop Holdings, Inc., FifthThird Bank, and the other parties named therein – incorporated by reference to Exhibit 10.1 to the Registrant’s CurrentReport on Form 8-K filed July 19, 2017.​10.23*Tile Shop Holdings, Inc. Stock Restriction Agreement – incorporated by reference to Exhibit 10.2 to the Registrant’sQuarterly Report on Form 10-Q for the quarter September 30, 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.85 Table Of Contents **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 21, 2018, 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, 2017./s/ Ernst & Young LLPMinneapolis, MinnesotaFebruary 21, 2018EXHIBIT 31.1302 CERTIFICATION OF CHIEF EXECUTIVE OFFICERI, Robert A. Rucker, certify that:1.I have reviewed this annual report on Form 10-K of Tile Shop Holdings, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state 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, summarize andreport 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 21, 2018/s/ ROBERT A. RUCKER Robert A. RuckerChief 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, summarize andreport 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 21, 2018/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, Robert A.Rucker, the Chief Executive Officer of Tile Shop Holdings, Inc. (the “Company”), hereby certify that the Annual Reporton Form 10-K of the Company for the year ended December 31, 2017 (“the Report”) fully complies with the requirementsof section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairlypresents, 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 21, 2018/s/ ROBERT A. RUCKER Robert A. RuckerChief 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, 2017 (“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 21, 2018/s/ KIRK L. GEADELMANN Kirk L. GeadelmannChief Financial Officer

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