Tile Shop Holdings
Annual Report 2018

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, 2018 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 every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 ☐ 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: $300,224,848. As of February 22, 2019, the registrant had 52,921,546 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 COMMENTS12 ITEM 2.PROPERTIES13 ITEM 3.LEGAL PROCEEDINGS13 ITEM 4.MINE SAFETY DISCLOSURES13 PART II ITEM 5.MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES14 ITEM 6.SELECTED FINANCIAL DATA16 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 MATTERS49 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE51 ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES52 PART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES54 ​SIGNATURES80 ​POWER OF ATTORNEY 81 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 man-made tiles, setting and maintenance materials, and related accessories in the United States. Our assortment includesapproximately 6,000 products from around the world. Natural stone products include marble, travertine, granite, quartz, sandstone, slate,and onyx tiles. Man-made products include ceramic, porcelain, glass, cement, wood look, and metal tiles. The majority of our tile productsare sold under our proprietary Rush River and Fired Earth brand names. We purchase our tile products, accessories and tools directly fromour global network of suppliers. We manufacture our own setting and maintenance materials, such as thinset, grout and sealer under ourSuperior brand name, as well as work with other suppliers to manufacture private label products. As of December 31, 2018, we operated 140stores in 31 states and the District of Columbia, with an average size of approximately 20,200 square feet.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 man-made tiles, setting and maintenance materials, and related accessories in the United States.In 2018, we reported net sales and income from operations of $357.3 million and $18.1 million, respectively. Our 2017 and 2016 net saleswere $344.6 million and $324.2 million, respectively, and our 2017 and 2016 income from operations was $25.8 million and $32.9 million,respectively. We opened two new stores in 2018 and intend to open five to seven new stores in 2019. As of December 31, 2018 and 2017,we had total assets of $297.6 million and $270.7 million, respectively.Competitive StrengthsWe believe that the following factors differentiate us from our competitors and position us to continue to grow our specialty retailerbusiness.Broad Product Assortment at Attractive Prices – We offer approximately 6,000 natural stone and made-made products, setting andmaintenance materials, accessories, and tools. We are able to maintain competitive prices by purchasing tile and accessories directly fromproducers and manufacturing 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 free design services and the use of our innovative Design Studio software that helps bring our customers ideas to lifeby enabling them to design and visualize their own customized project. 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.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.Global Sourcing Capabilities – We have long-standing relationships with our tile suppliers throughout the world and work with them todesign 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 store locations from five distribution centers. Our distribution centers, located inMichigan, Oklahoma, New Jersey, Virginia, and Wisconsin, are located to cost effectively service our existing stores.Strategic PlanIn 2018, we made a number of pivotal changes and strategic investments that included:·Adding over 2,000 products to our assortment;·Discontinuing all advertised price promotions;1 Table Of Contents ·Expanding our regional leadership team to help better support our stores;·Hiring over 20 pro market managers directly responsible for pro outreach within the markets we serve;·Launching our pro loyalty program;·Refining our sales and distribution compensation structures designed to attract and retain top talent;·Completing 10 remodels that included a number of our top stores;·Remerchandising all 140 stores;·Implementing a new customer relationship management capability; and·Positioning ourselves to launch a new enterprise resource planning system.Key elements of our 2019 strategy include: Best Assortment – We offer an extensive assortment of approximately 6,000 natural stone and man-made tile products, setting andmaintenance materials, accessories and tools. Our assortment is tailored to provide homeowners and professional customers distinctiveproducts. We feature unique products and partner with industry-leading designers to curate collections that are sold exclusively in ourstores. Our buying team sources products from across the world to provide our customers with good, better and best options to appeal totheir individual tastes and budgets. We are committed to maintaining a product assortment that meets the needs of an upscale, fashionconscious homeowner, as well as all of the professional customers who serve that homeowner. We believe our ongoing emphasis onmaintaining a best-in-class assortment is a critical component of our strategy. 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 recruitment, management and development training practices, whichreduced our sales associate turnover and increased our average manager tenure. The improvement in turnover and manager tenure hascontributed to better product knowledge, store leadership, and overall customer experience. We also engage with our customers through ourwebsite (TileShop.com), which provides inspiration, enhanced product information, and research and design tools that support productselection. Our exceptional 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 differentvignettes of bathrooms, kitchens, fireplaces, foyers and other distinct spaces. We also showcase our products on our website. We arecommitted to maintaining our reputation as a destination store where customers find inspiration. Reaccelerate Store Growth – We plan to increase our existing store base by five to seven stores in 2019. All stores we intend to open in2019 will be located in existing markets where we will be able to leverage economies of scale in marketing, distribution and store talent.Longer term, we believe we have exceptional opportunities to continue to add stores in existing markets and expand into new markets.Additionally, we will continue to focus on strategies to further enhance the return on our new store investments by selecting retail spacesthat provide us the opportunity to reduce 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 our stores. Customers can choose to have their purchases delivered or pickedup at one of our stores. We believe this strategy also positions us well with professional customers who are influenced by the preferences ofindividual homeowners.Our stores are designed to emphasize our products in a visually appealing showroom format. Our average store is approximately 20,200square feet, with a majority of the square footage devoted to the showroom. Several thousand square feet is used for warehouse space, whichis used 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 ourapproximately 6,000 products and up to 50 different vignettes of bathrooms, kitchens, fireplaces, foyers, and other distinct spaces thatshowcase our products. Our showrooms are designed to provide our customers with a better understanding of how to integrate various typesof tile in order to create an attractive presentation in their homes. Many stores are also equipped with a training center designed to teachcustomers how to properly install tile.2 Table Of Contents A staffing model for a typical store consists of a manager, an assistant manager, sales associates, and a warehouse leader. Our store managersare responsible for store operations and for overseeing our customers’ shopping experience. We offer financing to customers through abranded credit card provided by a third-party consumer finance company.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, video and out-of-home advertising. We continuallytest and learn from new media and adjust our programs based on performance.Our website, TileShop.com, supports desktop, tablet, and mobile devices and is designed for consumers, trade professionals and industrystakeholders to learn about our brand, our value propositions, and our product assortment and installation techniques, and to look up ourstore locations and account information. It hosts our Design Studio, a collaborative platform that enables the creation of customized 3Ddesign renderings to scale, allowing customers to bring their ideas to life. On social media, #TheTileShop provides current and prospectivecustomers a high level of brand engagement and enables customers to share their finished projects in our inspiration gallery.ProductsWe offer an extensive and complete assortment of natural stone and man-made tile products, sourced directly from our suppliers. Naturalstone products include marble, travertine, granite, quartz, sandstone, slate, and onyx tiles. Man-made products include ceramic, porcelain,glass, cement, wood look, and metal tiles. Our wide assortment of accessories, including trim pieces, mosaics, pencils, listellos, and otherunique products encourages our customers to make a fashion statement with their tile project and 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 approximately 6,000 different tile products, settingand maintenance materials, and accessory products. The percentage of our net sales represented by each product category was as follows forthe years ended December 31, 2018 and 2017:Years Ended December 31,20182017Man-made tiles46 %43 %Natural stone tiles28 33 Setting and maintenance materials14 11 Accessories10 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 49% of our tilepurchases in 2018. Our largest supplier accounted for approximately 14% of our total purchases in 2018. We believe that alternative andcompetitive suppliers are available for many of our products. The percentage of our total purchases from the following continents was asfollows for the years ended December 31, 2018 and 2017:Years Ended December 31,20182017Asia43 %51 %Europe (including Turkey)31 27 North America21 19 South America5 2 Africa0 1 100 %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 five distribution centers located inMichigan, Oklahoma, New Jersey, Virginia and Wisconsin. We also manufacture many of our setting and maintenance materials inMichigan, 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. We continue to evaluate logistics alternatives to best serve our store base and our customers. We believe that our existingdistribution facilities will continue to play an integral role in our growth strategy, and we expect to establish one or more additionaldistribution centers to support geographic expansion of our store base and to support our store growth plans.CompetitionThe retail tile market is highly-fragmented. We compete directly with regional and local specialty retailers of tile, factory-direct stores, alarge number of privately-owned, single-site stores, and online-only competitors. In addition, we complete with large national homeimprovement centers that offer a wide range of home improvement products, including flooring. 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;·availability 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 do notmaintain their own inventory and instead purchase their tile from domestic manufacturers or distributors when they receive an order from acustomer. We also believe that we offer a broader range of products and stronger in-store customer support than these competitors.EmployeesAs of December 31, 2018, we had 1,738 employees, 1,626 of whom were full-time and none of whom were represented by a union. Of theseemployees, 1,340 work in our stores, 87 work in corporate, store support, infrastructure or similar functions, and 311 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 24 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”). TheSEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that fileelectronically 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 report. We make ourannual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports available onour website, free of charge, as soon as reasonably practicable after such reports have been filed with or furnished to the SEC. Our Code ofBusiness Conduct and Ethics, as well as any waivers from and amendments to the Code of Business Conduct and Ethics, is also posted onour 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 report.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 five to seven stores in 2019. There can be no assurance that we will be able to openstores in new markets at the rate required to achieve market leadership in such markets, identify and obtain favorable store sites, arrangefavorable leases for stores, obtain governmental and other third-party consents, permits, and licenses needed to open or operate stores in atimely manner, train and hire a sufficient number of qualified managers for new stores, attract a strong customer base and brand familiarityin new markets, or successfully compete with established retail tile stores in the new markets that5 Table Of Contents we enter. Failure to open new stores in an effective and cost-efficient manner could place us at a competitive disadvantage as compared toretailers who are more adept than us at managing these challenges, which, in turn, could negatively affect our overall operating results.Our same store sales fluctuate due to a variety of economic, operating, industry and environmental factors and may not be a 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 five to seven additional stores in existing markets during 2019. In future periods, we intendto continue 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, our same store sales and overall operating results may be reduced during the implementation of our expansion strategy.Our expansion strategy will be dependent upon, and limited by, the availability of adequate capital.Our expansion strategy will require 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 approximately 6,000 products that we stock and sell from approximately 250 domestic and international suppliers. Wesource a large number of those products from foreign manufacturers, including 49% of our products from a group of ten suppliers located inAsia, Europe and the United States. Our largest supplier accounted for approximately 14% of our total purchases in 2018. We generally taketitle to these products sourced from foreign suppliers overseas and are responsible for arranging shipment to our distribution centers.Financial instability among key suppliers, political instability, trade restrictions, tariffs, currency exchange rates,6 Table Of Contents and transport capacity and costs are beyond our control and could negatively impact our business if they seriously disrupt the movement ofproducts through our supply chain or 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.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 revenue potential. Additionally, if we misjudge market trends, we maysignificantly overstock unpopular products and be forced to reduce the sales price of such products, which would have a negative impacton our gross profit and cash flow. Conversely, shortages of products that prove popular could cause customers to seek alternative sources ofsuch products, as well as other products they may have purchased from us, which 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.If we fail to hire, train, and retain qualified store managers, sales associates, and other employees, our enhanced customer service couldbe 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.7 Table Of Contents 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 entered into a credit facility with Bank of America, N.A., Fifth Third Bank and Citizens Bank on September 18, 2018. As of December31, 2018, we had borrowed approximately $53.0 million on our revolving line of credit, leaving $45.9 million available for futureborrowings. The terms of our credit facility 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.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;·engage in certain transactions with affiliates;·enter into agreements limiting subsidiary distributions;·enter into agreements limiting the ability to create liens;·amend our organizational documents 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 it to secure that indebtedness. 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 alternatestore locations, 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, environmental issues, or compliance with the Foreign CorruptPractices Act could have an adverse impact on our financial condition and results of operations. Changes in8 Table Of Contents enforcement priorities by governmental agencies charged with enforcing existing laws and regulations could increase our cost of doingbusiness.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.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. Prior to 2018, we used internet, print,and radio advertisements containing discounts and promotional offers to encourage customers to visit our stores. A significant portion ofour advertising was invested to support the opening of new stores and directed at professional customers. Beginning in late 2017, we de-emphasized the use of discount offers to attract customers. Limited use of discount and promotional offers in future periods could fail toattract customers, resulting in a decrease in store traffic. While our marketing strategy continues to support our growth strategy and remainsfocused on professional customers, we have broadened the reach and frequency of our advertising to increase the recognition of our valueproposition and the number of customers served. We may need to further increase our marketing expense to support our business strategiesin the future. If our marketing strategies fail to draw customers in the future, or if the cost of advertising or other marketing materialsincreases significantly, we could experience declines in our net sales and operating results.Natural disasters, changes in climate and geo-political events could adversely affect our operating results.The threat or occurrence of one or more natural disasters or other extreme weather events, whether as a result of climate change or otherwise,and the threat or outbreak of terrorism, civil unrest or other hostilities or conflicts could materially adversely affect our financialperformance. These events may result in damage to, 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.9 Table Of Contents Our business operations could be disrupted if we are unable to protect the integrity and security of our customer information.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.If our management information systems experience disruptions, it could disrupt our business and reduce our net sales.We depend on our management information systems to integrate the activities of our stores, to process orders, to manage inventory, topurchase merchandise and to sell and ship goods on a timely basis. We may experience operational problems with our information systemsas a result of system failures, viruses, computer “hackers” or other causes. We may incur significant expenses in order to repair any suchoperational problems. Any significant disruption or slowdown of our systems could cause information, including data related to customerorders, to be lost or delayed, which could result in delays in the delivery of products to our stores and customers or lost sales. Accordingly,if our network is disrupted, we may experience delayed communications within our operations and between our customers and ourselves.The selection and implementation of information technology initiatives may impact our operational efficiency and productivity.In order to better manage our business, we expect to invest in our information systems. In doing so, we must select the correct investmentsand implement them in an efficient manner. The costs, potential problems and interruptions associated with implementing technologyinitiatives could disrupt or reduce the efficiency of our operations. Furthermore, these initiatives might not provide the anticipated benefitsor provide them in a delayed or more costly manner. Accordingly, issues relating to our selection and implementation of informationtechnology initiatives may negatively impact our business and operating results.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.We are involved in legal proceedings and, while we cannot predict the outcomes of such proceedings and other contingencies withcertainty, some of these outcomes could adversely affect our business, financial condition and results of operations.We are, and may become, involved in shareholder, consumer, employment, tort or other litigation. We cannot predict with certainty 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.10 Table Of Contents The market price of our securities may decline and/or be volatile. The market price of our common stock has fluctuated significantly in the past and may continue to fluctuate in the future. Futurefluctuations could be based on various factors in addition to those 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 27% 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.11 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, alone or together, could have the effect of delaying or preventinghostile takeovers or changes in control or changes in our management without the consent of our Board of Directors. These provisionsinclude:·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 whether to issue shares of preferred stock and to determine the price and otherterms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantlydilute the 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.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. 12 Table Of Contents ITEM 2. PROPERTIESAs of December 31, 2018, we operated 140 stores located in 31 states and the District of Columbia with an average square footage ofapproximately 20,200 square feet. The table below sets forth the store locations (alphabetically by state) of our 140 stores in operation as ofDecember 31, 2018.StateStoresStateStoresStateStoresStateStoresArkansas1 Iowa1 Minnesota7 Oklahoma2 Arizona4 Illinois11 Missouri5 Pennsylvania5 Colorado4 Indiana4 North Carolina4 Rhode Island1 Connecticut3 Kansas2 Nebraska1 South Carolina2 Delaware1 Kentucky3 New Jersey7 Tennessee4 District of Columbia1 Massachusetts3 New Mexico1 Texas17 Florida5 Maryland5 New York8 Virginia6 Georgia4 Michigan7 Ohio8 Wisconsin3 Total140 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 five to seven newstores in 2019. ITEM 3. LEGAL PROCEEDINGSThe Company is, from time to time, subject to claims and disputes arising in the normal course of business. In the opinion of management,while the outcome of such claims and disputes cannot be predicted with certainty, the Company’s ultimate liability in connection withthese matters is not expected to have a material adverse effect on the results of operations, financial position, or cash flows. ITEM 4. MINE SAFETY DISCLOSURESNone. 13 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”.As of February 22, 2019, we had approximately 129 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 22, 2019, we had 52,921,546 shares of common stock outstanding. The last reported sales price for our common stock onFebruary 22, 2019 was $6.14.Dividends Paid Per Share Date Paid AmountMarch 24, 2017 $0.05 May 16, 2017 $0.05 August 15, 2017 $0.05 November 14, 2017 $0.05 March 16, 2018 $0.05 May 11, 2018 $0.05 August 10, 2018 $0.05 November 9, 2018 $0.05 Prior to 2017, we did not pay dividends to our stockholders. Our first dividend was paid on March 24, 2017. On February 19, 2019 wedeclared a $0.05 dividend to stockholders of record as of the close of business on March 4, 2019. This is our 9th consecutive quarterlydividend. The dividend will be paid on March 15, 2019. We intend to continue to pay quarterly dividends in the future; however, we maysuspend or change this program at any time and there can be no guarantee that we will continue to pay dividends in any specific amount orat 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 Securities Total Number ofShares Purchased Average PricePaid per Share Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor Program MaximumNumber of Sharesthat May Yet bePurchased UnderPlans or ProgramsOctober 1, 2018 - October 31, 2018 30,622 (1)$1.43 (1) - -November 1, 2018 - November 30, 2018 14,454 (2) 1.65 (2) - -December 1, 2018 - December 31, 2018 13,150 (3) 0.00 (3) - - 58,226 $1.16 - -(1)We withheld total of 6,547 shares to satisfy tax withholding obligations due upon the vesting of restricted stock grants, as allowed bythe 2012 Omnibus Incentive Plan (the “2012 Plan”). We did not pay cash to repurchase these shares, nor were these repurchases part ofa publicly announced plan or program. We repurchased the remaining 24,075 shares pursuant to the terms of the underlying restrictedstock agreements, as allowed by the 2012 Plan. We paid $0.0001 per share, the par value, to repurchase these shares. These repurchaseswere not part of a publicly announced plan or program.(2)We withheld total of 3,633 shares to satisfy tax withholding obligations due upon the vesting of restricted stock grants, as allowed bythe 2012 Plan. We did not pay cash to repurchase these shares, nor were these repurchases part of a publicly announced plan orprogram. We repurchased remaining 10,821 shares pursuant to the terms of the underlying restricted stock agreements, as allowed14 Table Of Contents by the 2012 Plan. We paid $0.0001 per share, the par value, to repurchase these shares. These repurchases were not part of a publiclyannounced plan or program.(3)We repurchased these shares pursuant to the terms of the underlying restricted stock agreements, as allowed by the 2012 Plan. We paid$0.0001 per share, the par value, to repurchase these shares. These repurchases were not part of a publicly announced plan or program.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, 2014 and ending December 31, 2018, the last trading day offiscal year 2018. The comparison assumes $100 invested at the close of trading on December 31, 2013 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 $137.39 December 31, 2017$53.90 $140.68 $157.31 December 31, 2018$31.70 $126.96 $88.98 15 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, 2018 and 2017 and for the years ended December 31, 2018, 2017, and 2016 and (ii) our audited financialstatements not included elsewhere in this report as of December 31, 2016, 2015, and 2014 and for the years ended December 31, 2015 and2014. 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, 2018 2017 2016 2015 2014 (in thousands, except per share) Statement of Income Data Net sales $357,254 $344,600 $324,157 $292,987 $257,192 Cost of sales 105,915 108,378 97,261 89,377 78,300 Gross profit 251,339 236,222 226,896 203,610 178,892 Selling, general and administrative expenses 233,201 210,376 193,983 174,384 157,316 Income from operations 18,138 25,846 32,913 29,226 21,576 Interest expense (2,690) (1,857) (1,715) (2,584) (3,141) Other income (expense) 152 170 141 130 (506) Income before income taxes 15,600 24,159 31,339 26,772 17,929 Provision for income taxes (5,158) (13,340) (12,876) (11,076) (7,382) Net income $10,442 $10,819 $18,463 $15,696 $10,547 Earnings per share $0.20 $0.21 $0.36 $0.31 $0.21 Weighted average shares outstanding (diluted) 52,089 51,928 51,880 51,305 51,030 Balance Sheet Data Cash and cash equivalents $5,557 $6,621 $6,067 $10,330 $5,759 Inventories 110,095 85,259 74,295 69,878 68,857 Total assets 297,630 270,725 265,273 245,007 252,190 Total debt and capital lease obligations, including currentmaturities(1) 53,576 27,712 29,208 56,812 93,264 Total stockholders' equity 146,347 143,874 138,899 115,201 93,695 Working capital 79,774 43,525 36,013 47,497 52,468 Cash Flow Data Net cash provided by operating activities $18,170 $45,691 $53,552 $60,264 $47,201 Net cash used in investing activities (34,143) (40,549) (27,252) (18,994) (40,552) Net cash provided by (used in) financing activities 14,931 (10,620) (23,866) (36,688) (2,651) Other Selected Financial Data (unaudited) Adjusted EBITDA(2) $49,355 $55,411 $60,429 $57,137 $45,612 Adjusted EBITDA margin(2) 13.8 % 16.1 % 18.6 % 19.5 % 17.7 %Gross margin rate(3) 70.4 % 68.5 % 70.0 % 69.5 % 69.6 %Operating income margin(4) 5.1 % 7.5 % 10.2 % 10.0 % 8.4 %Same stores sales growth (decline)(5) (0.6)% 0.5 % 7.6 % 7.4 % (0.4)%Stores open at end of period 140 138 123 114 107 (1)Amounts as of December 31, 2018, 2017, 2016, and 2015 consist of total debt and capital lease obligations, including currentmaturities, net of debt issuance costs. Amounts as of December 31, 2014 include total debt and capital lease obligations, includingcurrent maturities.16 Table Of Contents (2)We calculate Adjusted EBITDA by taking net income calculated in accordance with accounting principles generally accepted in theUnited States (“GAAP”) and adjusting for interest expense, income taxes, depreciation and amortization, and stock basedcompensation expense. Prior to 2018, we also adjusted for special charges, including equity-related transaction costs, litigation andinvestigation costs, and the write-off of debt issuance costs. We have modified the Adjusted EBITDA presentation for the years endedDecember 31, 2014 through December 31, 2017 to conform to the current presentation. Adjusted EBITDA margin is equal to AdjustedEBITDA divided by net sales. We believe that these non-GAAP measures of financial results provide useful information tomanagement and investors regarding certain financial and business trends relating to our financial condition and results of operations.Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses, for purposesof determining management incentive compensation and for budgeting and planning purposes. These measures are used in monthlyfinancial reports prepared for management and our Board of Directors. We believe that the use of these non-GAAP financial measuresprovides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financialmeasures with other specialty retailers, many of which present similar non-GAAP financial measures to investors.(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 (decline) is the percentage change in sales of comparable stores period-over-period. A store is consideredcomparable on the first day of the 13th full month of operation. When a store is relocated, it is excluded from the same stores salesgrowth calculation. Same store sales growth (decline) amounts include total charges to customers less any actual returns. Beginning in2015, we include the change in the allowance for anticipated sales returns applicable to comparable stores in the same store salescalculation. Prior to 2015, we did not include estimated return provisions or sale allowances in the same store sales calculation, asreturn reserves were calculated on a consolidated level. Same store sales data reported by other companies may be prepared on adifferent basis and therefore may not be useful for purposes of comparing our results to those of other businesses.Reconciliation of Non-GAAP Adjusted EBITDA to GAAP Net IncomeThe reconciliation of Adjusted EBITDA to net income for the years ended December 31, 2014 through December 31, 2018 is as follows:Years Ended December 31,20182017(1)2016(1)2015(1)2014(1)(in thousands)Net income$10,442 $10,819 $18,463 $15,696 $10,547 Interest expense2,690 1,857 1,715 2,584 3,141 Income taxes5,158 13,340 12,876 11,076 7,382 Depreciation & amortization28,396 26,239 23,042 22,236 19,925 Stock based compensation2,669 3,156 4,333 5,545 4,617 Adjusted EBITDA$49,355 $55,411 $60,429 $57,137 $45,612 (1)Prior to 2018, we also adjusted for special charges, including equity-related transaction costs, litigation and investigation costs, andthe write-off of debt issuance costs. We have modified the Adjusted EBITDA presentation for the years ended December 31, 2014through December 31, 2017 to conform to the current presentation.Adjusted EBITDA as a percentage of net sales for the years ended December 31, 2014 through December 31, 2018 is as follows:Years Ended December 31,2018(2)2017(1)(2)2016(1)2015(1)(2)2014(1)% of net salesNet income2.9 %3.1 %5.7 %5.4 %4.1 %Interest expense0.8 0.5 0.5 0.9 1.2 Income taxes1.4 3.9 4.0 3.8 2.9 Depreciation & amortization7.9 7.6 7.1 7.6 7.7 Stock based compensation0.7 0.9 1.3 1.9 1.8 Adjusted EBITDA13.8 %16.1 %18.6 %19.5 %17.7 %(1)Prior to 2018, we also adjusted for special charges, including equity-related transaction costs, litigation and investigation costs, andthe write-off of debt issuance costs. We have modified the Adjusted EBITDA presentation for the years ended December 31, 2014through December 31, 2017 to conform to the current presentation.(2)Amounts do not foot due to rounding.17 Table Of Contents 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 this report. Among other things, those historical consolidated financial statementsinclude more detailed information regarding the basis of presentation for the financial data than is included in the following discussion.This report contains “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities LitigationReform Act of 1995. In some cases, you can identify these statements by forward-looking words 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-looking statements are expressed differently. The forward-looking statements in this report relate to, among other things, our anticipated new store openings, remodeling plans, and growthopportunities; our business strengths, marketing strategies, competitive advantages and role in our industry and markets; our strategicplan and the anticipated benefits of our strategic plan; our intended future process for determining and assessing compensation; ourexpectations for the future use of equity incentive plans; our expectations regarding financing arrangements; our expectations withrespect to dividend payments; supply costs and expectations, including the continued availability of sufficient products from oursuppliers; costs and adequacy of insurance; our expectations with respect to ongoing compliance with the terms of our credit facility; theeffect of regulations on us and our industry and our compliance with such regulations; our expectations regarding the effects of employeerecruiting, training, mentoring, and retention; and our expectations regarding 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.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 in Item 1A, “Risk Factors,” of this report. Our forward-looking statements speak only as of the time that theyare made and do not necessarily reflect our outlook at any other point in time. We undertake no obligation to update publicly anyforward-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 man-made 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, 2018, we operated 140 stores in 31 states and the District of Columbia, with an average size of approximately 20,200 squarefeet.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, and manufacturing anddistribution capabilities, enable us to offer a broad assortment of high-quality products to our customers, who are primarily homeownersand professionals, at competitive prices. We have invested significant resources to develop our proprietary brands and product sources, andwe believe that we are a leading retailer of natural stone and man-made 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 two new stores in 2018, and plan to open five to seven stores in 2019. We believe that there will continue to be additionalexpansion opportunities in the United States and Canada. We expect comparable store sales growth and store unit growth will driveprofitability and operational efficiencies. 19 Table Of Contents The table below sets forth information about our net sales, operating income and stores opened from 2016 to 2018.For the year ended December 31,201820172016(in thousands, except store data)Net sales$357,254 $344,600 $324,157 Income from operations$18,138 $25,846 $32,913 Net cash provided by operating activities$18,170 $45,691 $53,552 New stores opened during period2 15 9 Key Components of our Consolidated Statements of OperationsNet Sales – Net sales represents total charges to customers, net of returns, and includes freight charged to customers. We recognize sales atthe time that the customer takes control of the merchandise or final delivery of the product has occurred. 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 a reserve for anticipated salesreturns that we estimate based on historical returns.Comparable store sales growth is the percentage change in sales of comparable stores period-over-period. A store is considered comparableon the first day of the 13th full month of operation. When a store is relocated, it is excluded from the comparable stores sales growthcalculation. Comparable store sales growth amounts include total charges to customers less any actual returns. We include the change inallowance for anticipated sales returns applicable to comparable stores in the comparable store sales calculation.Cost of Sales – Cost of sales consists primarily of material costs, freight, custom and duty 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 netsales.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, and depreciation and amortization.Pre-opening Costs – Our pre-opening costs are those typically associated with the opening of a new store and generally include rentexpense, compensation costs and promotional costs. We expense pre-opening costs as incurred and include these costs in selling, generaland administrative expenses.Income Taxes – We are subject to income tax in the United States as well as other tax jurisdictions in which we conduct business. 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, and stock based compensation expense. We believe that this non-GAAP measure of financial results provides useful information to management and investors regarding certainfinancial and business trends relating to our financial condition and results of operations. Our management uses this non-GAAP measure tocompare our performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation, andfor budgeting and planning purposes. This measure is used in monthly financial reports prepared for management and our Board ofDirectors. We believe that the use of this non-GAAP financial measure provides an additional tool for investors to use in evaluatingongoing operating results and trends and in comparing our financial measures with other specialty retailers, many of which present asimilar non-GAAP financial measure to investors.20 Table Of Contents The reconciliation of Adjusted EBITDA to net income for the years ended December 31, 2014 through December 31, 2018 is as follows:Years Ended December 31,20182017(1)2016(1)2015(1)2014(1)(in thousands)Net income$10,442 $10,819 $18,463 $15,696 $10,547 Interest expense2,690 1,857 1,715 2,584 3,141 Income taxes5,158 13,340 12,876 11,076 7,382 Depreciation & amortization28,396 26,239 23,042 22,236 19,925 Stock based compensation2,669 3,156 4,333 5,545 4,617 Adjusted EBITDA$49,355 $55,411 $60,429 $57,137 $45,612 (1)Prior to 2018, we also adjusted for special charges, which consisted of equity-related transaction costs, litigation and investigationcosts, and the write-off of debt issuance costs. We have modified the Adjusted EBITDA presentation for the years ended December 31,2014 through December 31, 2017 to conform to the current presentation.Adjusted EBITDA as a percentage of net sales for the years ended December 31, 2014 through December 31, 2018 is as follows:Years Ended December 31,2018(2)2017(1)(2)2016(1)2015(1)(2)2014(1)% of net salesNet income2.9 %3.1 %5.7 %5.4 %4.1 %Interest expense0.8 0.5 0.5 0.9 1.2 Income taxes1.4 3.9 4.0 3.8 2.9 Depreciation & amortization7.9 7.6 7.1 7.6 7.7 Stock based compensation0.7 0.9 1.3 1.9 1.8 Adjusted EBITDA13.8 %16.1 %18.6 %19.5 %17.7 %(1)Prior to 2018, we also adjusted for special charges, which consisted of equity-related transaction costs, litigation and investigationcosts, and the write-off of debt issuance costs. We have modified the Adjusted EBITDA presentation for the years ended December 31,2014 through December 31, 2017 to conform to the current presentation.(2)Amounts do not foot due to rounding.21 Table Of Contents We calculate pretax return on capital employed by taking income from operations divided by capital employed. Capital employed equalstotal assets less accounts payable, income taxes payable, other accrued liabilities, deferred rent and other long-term liabilities. We believethis non-GAAP measure is useful in assessing the effectiveness of our capital allocation over time. Other companies may calculate pretaxreturn on capital employed differently, which limits the usefulness of the measure for comparative purposes.($ in thousands)December 31,2018(1)2017(1)Income from operations$18,138 $25,846 Total Assets288,722 264,503 Less: Accounts payable(27,785)(24,281)Less: Income tax payable(111)(818)Less: Other accrued liabilities(27,269)(23,720)Less: Deferred rent(42,974)(39,739)Less: Other long-term liabilities(4,091)(5,160)Capital Employed186,492 170,785 Pretax Return on Capital Employed9.7 %15.1 %(1)Income statement accounts represent the activity for the fiscal year ended as of each of the balance sheet dates. Balance sheet accountsrepresent the average account balance for the four quarters ended as of each of the balance sheet dates.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.22 Table Of Contents Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017 2018 % of sales 2017 % of sales (in thousands)Net sales $357,254 100.0 % $344,600 100.0 %Cost of sales 105,915 29.6 % 108,378 31.5 %Gross profit 251,339 70.4 % 236,222 68.5 %Selling, general and administrative expenses 233,201 65.3 % 210,376 61.0 %Income from operations 18,138 5.1 % 25,846 7.5 %Interest expense (2,690) (0.8)% (1,857) (0.5)%Other income 152 0.0 % 170 0.0 %Income before income taxes 15,600 4.4 % 24,159 7.0 %Provision for income taxes (5,158) (1.4)% (13,340) (3.9)%Net income $10,442 2.9 % $10,819 3.1 %Net Sales – Net sales for fiscal year 2018 increased $12.7 million, or 3.7%, over fiscal year 2017, primarily due to a $14.8 million increasein net sales from new stores not included in the comparable store base, partially offset by a decrease of $2.1 million in net sales generatedby comparable stores. Comparable store sales declined 0.6% for fiscal year 2018, compared to a comparable store sales growth of 0.5% forfiscal year 2017. The decrease in net sales at comparable stores was primarily attributable to weaker store traffic, which was caused in partby our shift in promotional strategy. Net sales for the fourth quarter of fiscal year 2018 increased $5.4 million, or 6.8%, over the fourthquarter of fiscal year 2017, primarily due to comparable store sales growth of 5.0% during the fourth quarter of fiscal year 2018. Theincrease in sales at comparable stores for the fourth quarter of fiscal year 2018 is attributable to an increase in the average order value due todecreased promotional activity and an increase in the average selling price of products added to our assortment over the last twelve months.Gross Profit – Gross profit increased $15.1 million, or 6.4%, for fiscal year 2018 compared to fiscal year 2017. The gross margin rate was70.4% and 68.5% for fiscal years 2018 and 2017, respectively. Gross profit increased $6.5 million in the fourth quarter of fiscal year 2018compared to the fourth quarter of fiscal year 2017. The gross margin rate was 70.3% and 66.8% during the fourth quarter of fiscal years2018 and 2017, respectively. The increase in gross profit for the year and the fourth quarter was attributable to the increase in sales and thegross margin rate. The improvement in the gross margin rate for the year and the fourth quarter was primarily due to decreased promotionalactivity. Selling, General and Administrative Expenses – Selling, general and administrative expenses increased $22.8 million, or 10.8%, in fiscalyear 2018 compared to fiscal year 2017. The $22.8 million increase was primarily due to an increase in variable selling expenses and $8.6million of planned strategic investments for store and distribution center compensation, regional sales leadership, pro market managers, anddeveloping customer relationship management capabilities. Selling, general and administrative expenses increased $2.1 million, or 3.8%,from $56.1 million in the fourth quarter of fiscal year 2017 to $58.3 million in the fourth quarter of fiscal year 2018. The $2.1 millionincrease was primarily due to $1.7 million in investments in the previously mentioned strategic initiatives.Pre-opening Costs –During fiscal years 2018 and 2017, we recorded pre-opening costs of $0.1 million and $1.7 million, respectively. Thedecrease in pre-opening costs was due to a decrease in the number of new store openings in 2018.Income from Operations – Income from operations decreased by $7.7 million, or 29.8%, for fiscal year 2018 compared to fiscal year 2017.The decrease is attributable to an increase in selling, general and administrative expenses, partially offset by an increase in gross profit.Operating income margin decreased to 5.1% for fiscal year 2018, compared to 7.5% for fiscal year 2017 due to increased selling, generaland administrative expenses that outpaced sales growth and a higher gross margin rate.Interest Expense – Interest expense increased $0.8 million, or 44.9%, for fiscal year 2018 compared to the fiscal year 2017. The increase isdue to an increase in the interest rates and an increase in our average debt balance during fiscal year 2018. Provision for Income Taxes – The income tax provision decreased $8.2 million for fiscal year 2018 compared to fiscal year 2017. Oureffective tax rate was 33.1% in 2018 and 55.2% in 2017. The decrease in the effective tax rate is primarily attributable to the Tax Cuts andJobs Act of 2017 (the “Tax Act”), which reduced the U.S federal statutory tax rate from 35% in 2017 to 21% in 2018. Income tax expensein the fourth quarter of fiscal year 2017 also included a $4.6 million charge to reduce the value of our deferred tax assets in accordance withthe Tax Act. Income tax expense in fiscal year 2018 includes $1.2 million of stock based compensation tax shortfall charges. 23 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 15 stores opened in 2017 and a comparable store sales increase of 0.5%. Net sales for the 15 new stores open less than twelvemonths were $18.8 million during fiscal year 2017. Comparable store sales increased $1.6 million for fiscal year 2017 due to an increase inthe average order value, which was partially offset by a modest decline in traffic. Net sales for the fourth quarter of fiscal year 2017increased $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 forfiscal year 2017 was driven primarily by promotions and competitive pricing activity and product mix changes. Gross profit decreased $0.8million in the fourth quarter of fiscal year 2017 compared to the fourth quarter of fiscal year 2016. The decrease in gross profit is primarilydue to a decrease in the gross margin rate from 69.6% to 66.8% during the fourth quarter of fiscal years 2016 and 2017, respectively. Thegross margin rate decline for the fourth quarter was driven primarily by promotions and competitive pricing activity tied to orders initiatedduring third quarter that were closed in the fourth quarter and orders generated over the Black Friday weekend. Inventory control costs andproduct 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 the costs associated with opening and operating 15 new stores in 2017, including a $9.7 million increase in occupancyexpenses, a $4.2 million increase in compensation expenses, a $2.6 million increase in advertising expenses and a $0.9 million increase intransportation expenses. Additionally, we recorded asset impairment charges of $1.1 million during fiscal year 2017. No asset impairmentcharges 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 fiscal year 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 fiscal year 2016. The increase is dueto 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 TaxAct. The increase in tax expense was partially offset by lower income before income taxes. 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 $5.6million of cash and cash equivalents at December 31, 2018, 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, which will enableus to return excess cash to stockholders. Future dividend payments are subject to the approval of the Board of Directors each quarter.On September 18, 2018, we and our operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Bank of America,N.A., Fifth Third Bank and Citizens Bank (the “Credit Agreement”). The Credit Agreement provides us with a senior credit facilityconsisting of a $100 million revolving line of credit through September 18, 2023. Borrowings pursuant to the Credit Agreement initiallybear interest at a rate of adjusted LIBOR plus 1.75% and may bear interest in a range between adjusted LIBOR plus 1.50% to adjustedLIBOR plus 2.25%, depending on The Tile Shop’s consolidated total rent adjusted leverage ratio. At December 31, 2018, the base interestrate was 6.25% and the LIBOR-based interest rate was 4.52%. The Credit Agreement is secured by virtually all of our assets, including but not limited to, inventory, receivables, equipment and realproperty. The Credit Agreement contains customary events of default, conditions to borrowings, and restrictive covenants, includingrestrictions on our ability to dispose of assets, make acquisitions, incur additional debt, incur liens, or make investments. The CreditAgreement also includes financial and other covenants, including covenants to maintain certain fixed charge coverage ratios andconsolidated total rent adjusted leverage ratios. We were in compliance with the covenants as of December 31, 2018.We drew on the line of credit pursuant to the Credit Agreement to refinance our prior term loan and revolving line of credit, including allinterest outstanding under our prior credit facility, as well as to pay $0.4 million in debt issuance costs in connection with the CreditAgreement. Debt issuance costs are classified as other current assets and other assets on the consolidated balance sheet and amortized on astraight line basis over the life of the Credit Agreement. We recorded a $0.1 million charge in interest expense to write-off certainunamortized deferred financing fees associated with the prior credit facility as of the date of the payoff. Borrowings outstanding consisted$53.0 million on the revolving line of credit as of December 31, 2018. We also have standby letters of credit outstanding related to ourworkers compensation and medical insurance policies. As of December 31, 2018 and 2017, the standby letters of credit totaled $1.1million. There was $45.9 million available for borrowing on the revolving line of credit as of December 31, 2018, which may be used tosupport our growth and for working capital purposes.We believe that our cash flow from operations, together with our existing cash and cash equivalents, and borrowings available under ourcredit facility will be sufficient to fund our operations and anticipated capital expenditures over at least the next 12 months. Capital ExpendituresThe following table summarizes our capital expenditures for the fiscal years ended December 31, 2018, 2017 and 2016.Years Ended December 31,201820172016(in millions)New store building and existing store remodels$25.3 $26.2 $16.2 Information technology infrastructure7.2 7.1 6.9 Distribution and manufacturing facilities2.6 3.1 4.2 General corporate0.2 4.2 -$35.3 $40.6 $27.3 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 U.S. economy, as well as thelocal economies in the markets in which our stores are located. We intend to open five to seven stores during 2019. Total capitalexpenditures are expected to be approximately $25 million in fiscal year 2019. 25 Table Of Contents Cash FlowsThe following table summarizes our cash flow for the years ended December 31, 2018, 2017 and 2016.For the year ended December 31,201820172016(in thousands)Net cash provided by operating activities$18,170 $45,691 $53,552 Net cash used in investing activities(34,143)(40,549)(27,252)Net cash provided by (used in) financing activities14,931 (10,620)(23,866)Operating ActivitiesCash flows from operating activities provide us with a significant source of liquidity. Net cash provided by operating activities was $18.2million, $45.7 million, and $53.6 million in fiscal years 2018, 2017 and 2016, respectively. The decrease in operating cash flows in fiscalyear 2018 compared to fiscal year 2017 was due to a $8.2 million decrease in accounts payable and a $24.8 million increase in inventory.The decrease in operating cash flows in fiscal year 2017 compared to fiscal year 2016 was due to a $7.6 million decrease in net income, an$11.0 million increase in inventory, and $9.5 million paid in connection with the settlement of shareholder litigation. Investing ActivitiesNet cash used in investing activities was $34.1 million, $40.5 million and $27.3 million in fiscal years 2018, 2017 and 2016, respectively.Net cash used in investing activities in fiscal year 2018 was primarily for investing in new stores and store remodels, store merchandising,information technology included a new enterprise resource planning system, and our distribution centers, which included the expansion ofour internal fleet. Net cash used in investing activities in fiscal year 2017 was primarily for capital purchases of store fixtures andequipment, building improvements and leasehold improvements for stores opened or remodeled, routine capital purchases of computerhardware and software, and investments in distribution centers.Financing ActivitiesNet cash provided by (used in) financing activities was $14.9 million, ($10.6 million) and ($23.9 million) in fiscal years 2018, 2017 and2016, respectively. Cash provided by financing activities during fiscal year 2018 included $129.1 million in advances on our revolvingline of credit, which was partially offset by $103.3 million in payments of long-term debt and capital lease obligations and an aggregate of$10.4 million in dividends paid to stockholders. Cash used in financing activities during fiscal year 2017 was primarily for payments oflong-term debt and capital lease obligations of $36.6 million and an aggregate of $10.4 million in dividends paid to stockholders, offset bynet proceeds from long-term debt of $35.0 million. Cash used in financing activities during fiscal year 2016 was primarily for payments oflong-term debt and capital lease obligations of $37.8 million, partially offset by net proceeds from long-term debt of $10.0 million.Off-balance Sheet ArrangementsAs of December 31, 2018 and 2017, 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, 2018 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)$66,176 $2,396 $4,791 $4,791 $54,198 Operating lease obligations (2)562,967 35,247 71,515 72,025 384,180 Capital lease obligations (3)736 215 431 90 -Self-insurance (4)2,155 1,232 619 191 113 Total contractual obligations$632,034 $39,090 $77,356 $77,097 $438,491 (1)Includes total interest of $13.2 million, comprised of $2.4 million of interest for the period of less than 1 year, $4.8 million of interestfor the period of 1 – 3 years, $4.8 million of interest for the period of 4 – 5 years, and $1.2 million of interest for the period of 5+ years.(2)Includes the base or current renewal period for our operating leases through the end of the lease term, including assumed renewals.(3)Includes total interest of $0.2 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, $0.0 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, “Exhibits, Financial Statement Schedules,” in this report.Recognition of RevenueRevenues are recognized when control of promised goods or services is transferred to our customers, in an amount that reflects theconsideration received in exchange for those goods or services. We recognize service revenue, which consists primarily of freight chargesfor home delivery, when the service has been rendered. We are required to charge and collect sales and other taxes on sales to our customersand remit these taxes back to government authorities. Total revenues do not include sales tax because we are a pass-through conduit forcollecting and remitting sales tax. Net sales are reduced by an allowance for anticipated sales returns that we estimate based on historicalreturns. Our process to establish a sales return reserve contains uncertainties because it requires management to make assumptions and toapply judgment to estimate future sales returns and exchanges. The customer may receive a refund or exchange the original product for areplacement of equal or similar quality for a period of six months from the time of original purchase. Products received back under thispolicy are reconditioned pursuant to state laws and resold. We believe our estimate for sales returns is an accurate reflection of futurereturns. Actual return trends have not varied significantly from estimated amounts in prior periods. However, if the nature of sales returnschanges 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 management27 Table Of Contents to make assumptions based on the current rate of sales, age, salability and profitability of inventory, historical percentages that can beaffected by changes in our merchandising mix, customer preferences, rates of sell through and changes in actual shrinkage trends. We 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 May 2014, the Financial Accounting Standards Board (the “FASB”) issued a final standard on revenue from contracts with customers.This new standard introduces a comprehensive revenue recognition model that requires a company to recognize revenue to depict thetransfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods orservices. In 2016, the FASB issued several amendments to the standard. We adopted this standard as of January 1, 2018 using the modifiedretrospective transition method. See Note 2 to our consolidated financial statements included in Item 15, “Exhibits, Financial StatementSchedules,” of this report for further details.​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. We adopted the new standard as of March 31, 2018 using theretrospective transition method. Our restricted cash balance was $0.8 million as of December 31, 2018. Upon adopting the new standard,we no longer present the release of restricted cash as a financing cash inflow. Instead, restricted cash and long-term restricted cash balanceswill be included in the beginning and ending cash, cash equivalents and restricted cash balances in the statement of cash flows. Inconnection with the adoption of this standard, $6.0 million received from restricted cash accounts during the fiscal year ended December31, 2017 that was previously presented as a financing cash inflow was reclassified to cash, cash equivalents and restricted cash balances inthe Consolidated Statement of Cash Flows. Additionally, our $6.7 million contribution to the NMTC fund, the $1.9 million received fromrestricted cash accounts, and the $1.3 million of closing costs incurred in connection with this transaction during the fiscal year endedDecember 31, 2016 that were previously presented financing cash flows were reclassified to cash, cash equivalents and restricted cashbalances. Contributions made by U.S. Bank Community, LLC to new market tax credit fund totaling $3.2 million during the fiscal yearended December 31, 2016 that were previously not considered financing cash inflows as they related to restricted cash are now classified asfinancing cash inflows. See Note 12 for further discussion surrounding New Market Tax Credits.​Accounting Pronouncements Not Yet AdoptedIn 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 heet. The accounting standards update also requires expanded disclosures to helpfinancial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. 28 Table Of Contents We will adopt the new standard effective January 1, 2019 using a modified retrospective approach through a cumulative effect adjustmentto retained earnings as of the beginning of the period of adoption. The standard provides a number of optional practical expedients in transition. We will elect the package of three practical expedientspermitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical leaseclassification. We will also elect to apply the hindsight practical expedient. We will not separate nonlease components from leasecomponents by class of underlying assets where appropriate and we will not apply the recognition requirements of the standard to short-term leases, as allowed by the standard.Upon adopting the new standard, we expect the most significant impact to the financial statements will be the recognition of right of useassets of approximately $142 million to $147 million and lease liabilities of $165 million to $170 million as of January 1, 2019. We willalso adjust the useful life of certain leasehold improvements in the event the application of the hindsight practical expedient results in achange in the expected lease term. We expect that the change in the useful life assigned to certain leasehold improvements will result in a$14 million to $17 million reduction in fixed assets. The adoption of the new standard is not expected to have a material impact on netincome or cash flows. We are in the process of finalizing our discount rate analysis.In June 2016, the FASB issued a final standard on accounting for credit losses. The new standard is effective for us in fiscal 2020 andrequires a change in credit loss calculations using the expected loss method. We are evaluating the effect of the new standard on ourconsolidated financial statements and related disclosures.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 2.25%,depending on our leverage ratio. The base rate is equal to the greatest of: (a) the Federal funds rate plus 0.50%, (b) the Bank of America“prime rate,” and (c) the Eurodollar rate plus 1.00%, in each case plus 0.50% to 1.25% depending on our leverage ratio. The base rate was6.25% at December 31, 2018. Based upon balances and interest rates as of December 31, 2018, 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$0.5 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 $0.5 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 2018 and2017. 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 DATAOur consolidated financial statements and the reports of our independent registered public accounting firm, listed under Item 15, “Exhibits,Financial Statement Schedules,” are included as a separate section of this report beginning on page 55 and are incorporated herein byreference. 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 report present fairly, in all material respects, our financial position, results of operationsand cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.Management’s Annual Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of,our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for externalpurposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Internal control overfinancial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of an issuer’s assets; (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with GAAP, and that an issuer’s receipts and expenditures are beingmade only in accordance with authorizations of its management and directors; and (iii) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use or disposition of an issuer’s assets that could have a material effect on the consolidatedfinancial statements. An internal control material weakness is a significant deficiency, or combination of significant deficiencies, in internalcontrol over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financialstatements will not be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reportingmay not prevent or detect misstatements. Also, the application of any evaluation of effectiveness to future periods is subject to the risk thatcontrols may become inadequate because of changes in conditions, or that compliance with the policies or procedures may deteriorate.As required by Rule 13a-15(c) promulgated under the Exchange Act, our management, with the participation of our Chief Executive Officerand Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2018.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 our internal control over financial reporting was effective as of December 31, 2018.Ernst & Young, LLP, our independent registered public accounting firm, has issued a report on our internal control over financial reportingas of December 31, 2018. See Item 8, “Consolidated Financial Statements and Supplementary Data” of this report. 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, 2018 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 report.NameAgePositionCabell H. Lolmaugh40Chief Executive Officer and President, DirectorKirk L. Geadelmann50Chief Financial OfficerCabell H. Lolmaugh has been our Chief Executive Officer and President and a member of our Board of Directors since January 1, 2019.From February 2018 through December 2018, Mr. Lolmaugh was our Senior Vice President and Chief Operating Officer. Mr. Lolmaughpreviously served as our Vice President, Retail Stores from October 2017 until February 2018, as our Director-Talent Development, leadingour store training programs and strategy, from January 2016 until October 2017, and as our Director of Pro Services, leading ourprofessional 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.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.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)64DirectorCabell H. Lolmaugh40Chief Executive Officer and President; DirectorClass II Directors:Peter H. Kamin(1)(3)57Director; Chairman of the BoardTodd Krasnow(2)(3)62DirectorPhilip B. Livingston(1)61DirectorClass III Directors:Christopher T. Cook(3)50DirectorRobert A. Rucker66Director (1)Member of the Audit Committee.(2)Member of the Compensation Committee.(3)Member of the Nominating and Corporate Governance Committee.Peter J. Jacullo III has served as a member of our Board since August 2012. Previously, Mr. Jacullo served as a member of The Tile Shop’sboard of managers from December 2007 to August 2012. Since July 1987, Mr. Jacullo has been a self-employed investor and consultant,and he currently serves on the board of directors of various privately-held companies. Previously, Mr. Jacullo was a Vice President andDirector of the Boston Consulting Group from May 1984 to July 1987, where he was also employed in various other capacities from May1978 to May 1984. Mr. Jacullo holds an M.B.A. from the University of Chicago and a B.A. in Economics from Johns Hopkins University.We believe that Mr. Jacullo is qualified to serve on our Board in light of the continuity that he provides on our Board and his experience asa professional investor.33 Table Of Contents Cabell H. Lolmaugh has been our Chief Executive Officer and President and a member of our Board of Directors since January 1, 2019.From February 2018 through December 2018, Mr. Lolmaugh was our Senior Vice President and Chief Operating Officer. Mr. Lolmaughpreviously served as our Vice President, Retail Stores from October 2017 until February 2018, as our Director-Talent Development, leadingour store training programs and strategy, from January 2016 until October 2017, and as our Director of Pro Services, leading ourprofessional 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.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, a family limited partnership,and has served as its Managing Partner since January 2012. For the eleven years preceding the formation of 3K Limited Partnership, Mr.Kamin was a founding member and Managing Partner of ValueAct Capital. ValueAct Capital grew into a leading investment managementorganization during Mr. Kamin’s tenure. Prior to founding ValueAct Capital in 2000, Mr. Kamin founded and managed Peak InvestmentL.P. Peak was a limited partnership, organized to make investments in a select number of domestic public and private companies. SinceMay 2012, Mr. Kamin has been a director and member of the governance committee of MAM Software Group, Inc., a publicly-tradedprovider of business automation 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 and of RandWorldwide, Inc. from April 2012 to June 2015, as well as previously serving as a director of several privately held companies. Mr. Kaminholds a B.A. in Economics from Tufts University and an M.B.A. from the Harvard University Graduate School of Business. Mr. Kamin is atrustee of Tufts University. We believe that Mr. Kamin is qualified to serve on our Board due to his significant experience as a director ofpublicly-traded companies and his substantial experience as an investor.Todd Krasnow has served as a member of our Board since August 2012. Previously, Mr. Krasnow served as a member of The Tile Shop’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 previously served as marketing domain expert with Highland Consumer Fund, a venture capital firmfrom June 2007 to September 2017. Mr. Krasnow is currently an operating partner of Porchlight Equity, the successor firm to HighlandConsumer Fund, and has served in such capacity since September 2017. Previously, Mr. Krasnow was the chairman of Zoots, Inc., a drycleaning company from June 2003 to January 2008 and chief executive officer of Zoots, Inc. from February 1998 to June 2003. He served asthe executive vice president of sales and marketing of Staples, Inc. from May 1993 to January 1998 and in other sales and marketingpositions for Staples, Inc. from March 1986 to May 1993. Mr. Krasnow is a director of Carbonite, Inc., a leading cloud back-up and recoverycompany, and is chairman of Carbonite’s compensation committee. Mr. Krasnow is also a director of Ecentria Group, a privately-heldonline marketer of optical, outdoor, and camping gear, and Bakkavor Group plc, a UK-based, publicly-traded maker of fresh prepared meals.Mr. Krasnow holds an M.B.A. from the Harvard University Graduate School of Business and an A.B. in Chemistry from Cornell University.We believe that Mr. Krasnow is qualified to serve on our Board due to his operating and management experience and his expertise in salesand 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 of Ambassadors Group, Inc., a provider of educational travel experiences and online educational research materials, fromMay 2014 to October 2015. Prior to joining Ambassadors Group, Mr. Livingston served as Chief Executive Officer of LexisNexis WebBased Marketing Solutions, a provider of software applications and marketing services for the legal industry, until October 2013. He joinedLexisNexis in April 2009 as Senior Vice President of Practice Management and served in executive management positions from April 2009to October 2013. Previously, Mr. Livingston served as Chief Financial Officer for a number of companies, including World WrestlingEntertainment, Inc., from 2003 to 2005, Catalina Marketing Corporation, from 1995 to 1998, and Celestial Seasonings, Inc., from 1993 to1995. From 1999 to 2003, he served as President of Financial Executives International, one of the leading professional associations ofchief financial officers and controllers. In that role, he led the organization’s support of regulatory and corporate governance reformsculminating in the Sarbanes-Oxley Act. Mr. Livingston has served as a director of Rand Worldwide, Inc., an operator of technology andprofessional services providers to the engineering community, since November 2014, and of Ambassadors Group since May 2014. Hepreviously served as a director of SITO Mobile Ltd., a mobile advertising company, from November 2014 to February 2016 and NexsanTechnologies, Inc., a provider of secondary storage devices and archival compliance software that was acquired by Imation Corp., from2007 to December 2012. He is a current member of the National Association of Corporate Directors and the American Institute of CPAs(AICPA). Mr. Livingston earned a B.A. in Business Management and a B.S. in Government and Politics from the University of Marylandand an M.B.A. in Finance and Accounting from the University of California, Berkeley. We believe that Mr. Livingston is qualified to serveon our Board due to his significant experience in business and finance and his substantial experience as a director of a variety of public andprivate 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 a director of Mattress Firm and of Peerless Events and Tents, LLC, as well as an advisor to the Family Place of Dallas. Heis currently a member of the Young Presidents’ Organization. Mr. Cook has a B.B.A. in Finance from SMU Cox School of Business inDallas, Texas. We believe that Mr. Cook is qualified to serve on our Board due to his in-depth involvement in founding and leading acompany in the consumer retail industry and his experience creating scalable sales culture and scalable systems.Robert A. Rucker founded The Tile Shop in 1985. He has served as a member of our Board since June 2012 and was our interim ChiefExecutive Officer and President from October 2017 until December 2018. Mr. Rucker currently serves as a consultant to the Company. Mr.Rucker also served as our Chief Executive Officer and President from June 2012 until December 2014, as an employee from January 1, 2015through July 31, 2015 and as a consultant from August 1, 2015 through December 31, 2015. Previously, Mr. Rucker served as The TileShop’s Chief Executive Officer and President and as a member of its board of managers. Mr. Rucker holds a B.E.S. in Psychology andHistory from the University of Minnesota.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 directors are Messrs. Jacullo and Lolmaugh, with terms expiring at the annual meeting of stockholders to be held in2019;·The Class II directors are Messrs. Kamin, Krasnow and Livingston, with terms expiring at the annual meeting of stockholders to beheld in 2020; and·The Class III directors are Messrs. Cook and Rucker, with terms expiring at the annual meeting of stockholders to be held in 2021.Our Board met five times between January 1, 2018 and December 31, 2018. 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, 2018 and December 31, 2018.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, 2018.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 Code35 Table Of Contents of Business Conduct and Ethics is available on the “Investor Relations” section of our website, at http://investors.tileshop.com, under the“Governance Documents” heading. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendmentto, or waiver from, a provision of our Code of Ethics and Business Conduct by posting such information on our website at the web addressand location specified above.COMMITTEES OF THE BOARD OF DIRECTORSOur Board has established the following committees: an Audit Committee, a Compensation Committee, and a Nominating and CorporateGovernance Committee. The composition and responsibilities of each committee are described below. Members serve on these committeesuntil their resignation or until otherwise determined by our Board.Audit CommitteeOur Audit Committee oversees our corporate accounting and financial reporting process, the audit of our financial statements, the audit ofinternal controls over financial reporting and other information included in documents containing the audited financial statements. Amongother matters, the Audit Committee evaluates our independent auditor’s qualifications and independence (as required under PublicCompany Accounting Oversight Board (“PCAOB”) Auditing Standard 1301, Communications with Audit Committees), receives from theindependent auditor written disclosures regarding the auditor’s independence required by PCAOB Ethics and Independence Rule 3526,Communication with Audit Committees Concerning Independence, and discusses with the independent auditor, the independent auditor’sindependence. The Audit Committee also determines the engagement, retention, and compensation of the independent auditor; reviews andapproves the scope of the annual audit and the audit fee; discusses with management and the independent auditor the results of the annualaudit and the review of our quarterly financial statements, including the disclosures in our annual and quarterly reports to be filed with theSEC; assesses the performance of the independent auditor; approves the retention of the independent auditor to perform any proposedpermissible 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 the rotation ofpartners of the independent auditor on our engagement team as required by law; reviews our critical accounting policies and estimates; andoversees any internal audit function. Additionally, the Audit Committee oversees compliance with the Code of Business Conduct andEthics, including the compliance work of our Compliance Officer; reviews and approves related person transactions; and reviews andevaluates, on an annual basis, the Audit Committee charter and performance. Our independent registered public accounting firm andmanagement 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 ended December 31, 2018 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, which is available on the “Investor Relations” section of ourwebsite, http://investors.tileshop.com, under the “Governance Documents” heading. The Audit Committee met ten times between January1, 2018 and December 31, 2018.Compensation CommitteeOur Compensation Committee reviews and recommends policies relating to compensation and benefits of our executive officers andemployees and oversees our regulatory compliance with respect to compensation matters. The Compensation Committee annually reviewsand approves corporate goals and objectives relevant to compensation of our chief executive officer and other executive officers, evaluatesthe performance of these officers in light of those goals and objectives, and sets the compensation of these officers based on suchevaluations. The Compensation Committee also reviews and makes recommendations to the Board with respect to director compensationand administers the issuance of stock options, restricted stock and other awards under our equity compensation plans. The CompensationCommittee reviews and prepares the necessary compensation disclosures required by the SEC. Additionally, the Compensation Committeereviews and evaluates, on an annual basis, the Compensation Committee charter and performance.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. TheCompensation Committee operates under a written charter that satisfies the applicable standards of the SEC and Nasdaq, which is availableon the “Investor Relations” section of our website, http://investors.tileshop.com, under the “Governance Documents” heading. TheCompensation Committee met six times between January 1, 2018 and December 31, 2018.36 Table Of Contents 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 Compensation Committee maydelegate any of its responsibilities to a subcommittee comprised of one or more members of the Compensation Committee; provided thatthe Compensation Committee is not permitted to delegate its responsibilities with respect to any executive compensation arrangementsintended to be exempt from Section 16(b) under the Exchange Act by virtue of such arrangements 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; contributes to succession planning; reviews actual and potential conflicts of interest of our directors andofficers other than related person transactions reviewed by the Audit Committee; and oversees the Board self-evaluation process.Additionally, the Governance Committee reviews and evaluates, on an annual basis, 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, http://investors.tileshop.com, underthe “Governance Documents” heading. The Governance Committee met four times between January 1, 2018 and December 31, 2018.37 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, the GovernanceCommittee, 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 2019 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 11, 2019, nor earlier than the close of businesson March 12, 2019. You are advised to review our Bylaws for requirements relating to director nominees.STOCKHOLDER PROPOSALS FOR 2019 ANNUAL MEETING AND 2020 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 24, 2019. 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, 2020. We suggest that proposals for the 2020 Annual Meeting be submitted by certifiedmail, return receipt requested. The proposal must be in accordance with the provision of Rule 14a-8 promulgated by the SEC under theExchange Act.Stockholders who intend to present a proposal or director nomination at the 2019 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 12, 2019 andno later than April 11, 2019. 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 (through December 31, 2018);·Kirk L. Geadelmann, Chief Financial Officer;·Cabell H. Lolmaugh, Senior Vice President and Chief Operating Officer (through December 31, 2018); Chief Executive Officer(beginning January 1, 2019)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 program as circumstances require. Aspart of this review process, we expect to apply the values and the objectives outlined above, together with consideration of the levels ofcompensation that we would be willing to pay to ensure that our compensation remains competitive and meets our retention objectives inlight of the cost to us if we were required to replace a key employee. In addition, we consider the results of non-binding advisory votes onexecutive compensation, commonly referred to as “say-on-pay” votes. At our 2018 Annual Meeting, we held a say-on-pay vote on thecompensation of our named executive officers as described in the proxy statement for that meeting. Stockholders approved thecompensation of the named executive officers by a favorable vote exceeding 97% of votes cast, including abstentions. We are mindful ofthe opinions of our stockholders and considered these results when deciding to retain our general compensation philosophy and coreobjectives for the upcoming fiscal year.Since 2016, our Compensation Committee has engaged Willis Towers Watson as a compensation consultant and considered executivecompensation metrics on a peer group of companies in our industry when assessing executive compensation. We believe that suchinformation, together with other information obtained by the members of our Compensation Committee, helps ensure that ourcompensation program remains competitive. We anticipate that our Compensation Committee will continue to make adjustments inexecutive compensation levels in the future as a result of this market comparison process. Willis Towers Watson meets the independencestandards specified by the SEC.The compensation levels of our named executive officers reflect, to a significant degree, the varying roles and responsibilities of suchexecutives. In 2018, our Interim Chief Executive Officer, Mr. Rucker, elected to forego all but nominal compensation due his long historywith us, his interests as a major stockholder and the interim nature of his position.39 Table Of Contents Executive Compensation Program ComponentsBase Salary. Base salaries of our named executive officers are initially established through arm’s-length negotiation at the time anexecutive is hired, taking into account such executive’s qualifications, experience, and prior salary. Base salaries of our named executiveofficers are approved and reviewed periodically by our Chief Executive Officer, and in the case of our Chief Executive Officer’s base salary,by our Board, and adjustments to base salaries are based on the scope of an executive’s responsibilities, individual contribution, priorexperience, and sustained performance. Decisions regarding salary increases may take into account the executive officer’s current salary,equity or equity-linked interests, and the amounts paid to an executive officer’s peers within our organization. In making decisionsregarding salary increases, we may also draw upon the experience of members of our Board with other companies. Base salaries are alsoreviewed in the case of promotions or other significant changes in responsibility. No formulaic base salary increases are provided to ournamed executive officers. This strategy is consistent with our intent of offering base salaries that are cost-effective while remainingcompetitive.In 2018, our Interim Chief Executive Officer, Robert A. Rucker, elected to receive an annual base salary of a nominal $24,000 due to hislong history 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 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 January 1, 2019, Mr. Geadelmann’s salary was increased to$300,000.Our Senior Vice President and Chief Operating Officer, Cabell Lolmaugh, was promoted to this position in February 2018 at an annual basesalary of $250,000. Effective January 1, 2019 and in connection with his promotion to Chief Executive Officer, Mr. Lolmaugh’s base salarywas increased to $350,000.The actual base salaries earned by all of our named executive officers in 2018, 2017 and 2016 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 to awards under the Omnibus Planand is authorized to provide for the acceleration, termination, assumption, substitution, or conversion of such awards in the event of achange of control or certain other unusual or nonrecurring events or transactions.The types of awards we intend to grant under the Omnibus Plan are as follows:Cash Performance Awards. In April 2016, February 2017, and February 2018 the Board and the Compensation Committee adoptedspecific performance targets and payout levels for each executive officer for the then-current fiscal year.For fiscal year 2018, Mr. Lolmaugh 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, prorated for the partial year during which he was an executive officer. For fiscal years2016, 2017 and 2018, Mr. Geadelmann was eligible to earn target cash incentive compensation equal to 50% of his year-end basesalary, all based on our Adjusted EBITDA for the year. The target incentive compensation was payable if we achieved the AdjustedEBITDA target set forth in our budget, and each of Messrs. Lolmaugh and Geadelmann was 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. Mr. Rucker did not participate in our incentive compensation program.40 Table Of Contents 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 2016, the Compensation Committee approved a payout of 110% of the targetcash incentive compensation to Mr. Geadelmann based on our performance measures. The Compensation Committee did not approveany payouts of the target cash incentive compensation based on our performance in fiscal years 2017 or 2018. The cash incentive compensation for which our named executive officers were eligible in fiscal year 2018 is set forth in the “Grants ofPlan Based Awards in Fiscal Year 2018” table. The actual cash incentive compensation earned by all of our named executive officers infiscal years 2018, 2017 and 2016 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 February 2018, we granted 56,000 non-qualified stock options to Mr. Lolmaugh pursuant to the Omnibus Plan. These stock optionswere granted pursuant to the Omnibus Plan and are subject to time-based vesting over a four-year period.In February 2018, we granted 22,500 shares and 9,000 shares of restricted stock to Mr. Lolmaugh and Mr. Geadelmann, respectively.These shares of restricted stock were granted pursuant to the Omnibus Plan. The risks of forfeiture for these shares of restricted stockwill lapse in four equal annual installments based on continued service.The equity grants made to our named executive officers in fiscal year 2018 are set forth in the “Grants of Plan Based Awards in FiscalYear 2018” 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 $18,500 in 2018 (or $24,500 for employees over 50), and to have the amount of this reduction contributed to the 401(k) plan. In fiscalyears 2017 and 2018, 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 maximum of 5% of such employee’s salary. In 2016, we made a matching contribution of $0.25 for every $1.00 that eachapplicable employee contributed to the 401(k) plan, up to a maximum of 5% of such employee’s salary. Each year, this matchingcontribution vests as to 20% of the aggregate matching contributions for such employee, such that all past and future matchingcontributions will be vested after the employee has been employed by us for a period of five years.Perquisites. From time-to-time, we have provided certain of our named executive officers with perquisites that we believe are reasonable.We do not 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.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 that the Compensation Discussion and Analysis beincluded in our proxy statement and in this Annual Report on Form 10-K for the fiscal year ended December 31, 2018.Compensation Committee of the Board of Directors:Todd Krasnow, ChairmanPeter J. Jacullo III 41 Table Of Contents Summary Compensation TableThe following table provides information regarding the compensation earned during the fiscal years ended December 31, 2016 throughDecember 31, 2018 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)2018 24,000 - - -600 (6)24,600 Interim Chief Executive Officer2017 5,250 100,004 (5) - -25 (6)105,279 and President2016 -95,349 (5) - - -95,349 Kirk Geadelmann2018 285,000 49,950 49,950 -7,125 (7)392,025 Chief Financial Officer2017 279,977 222,290 224,152 -14,145 (7)740,564 2016 240,500 117,975 120,742 137,500 3,735 (7)620,452 Cabell Lolmaugh(4)2018 240,625 (8)124,875 125,392 -3,631 (9)494,523 Senior Vice President and ChiefOperating Officer(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 elsewhere in this report. (2)Represents incentive compensation paid based on our achievement of Adjusted EBITDA financial goals. See “Non-Equity IncentivePlan Compensation” below for additional discussion.(3)Effective January 1, 2019, Mr. Rucker retired as the Company’s Interim Chief Executive Officer and President.(4)Mr. Lolmaugh was not a named executive officer in fiscal year 2016 or 2017.(5)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 2016 and 2017, prior to his appointment as Interim Chief Executive Officer and President. See “Director Compensation”below for additional discussion.(6)Represents employer 401(k) contributions.(7)For fiscal year 2018, represents employer 401(k) contributions. For fiscal year 2017, represents $5,108 of a one-time payout ofaccrued vacation related to a company policy change and $9,037 of employer 401(k) contributions. For fiscal year 2016, representsemployer 401(k) contributions.(8)Includes base salary received by Mr. Lolmaugh for services as Senior Vice President and Chief Operating Officer from February 19,2018 through December 31, 2018 and base salary received by Mr. Lolmaugh for services as Vice President, Retail Stores, fromJanuary 1, 2018 through February 18, 2018.(9)Represents employer 401(k) contributions.42 Table Of Contents Grants of Plan-Based Awards for Fiscal Year 2018The following table sets forth certain information regarding grantsThe following table sets forth certain information regarding grants of plan-based awards during the fiscal year ended December 31, 2018: Name Grant Date Estimated possible payouts under non-equityincentive plan awards ($) (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($) Kirk Geadelmann 2/22/2018 - - - 9,000 (2) - 5.55 49,950 Cabell Lolmaugh 2/22/2018 - - - 22,500 (3) - 5.55 124,875 Cabell Lolmaugh 2/22/2018 - - - - 56,000 (3)5.55 125,392 Kirk Geadelmann N/A 3,563 142,500 285,000 - - - -Cabell Lolmaugh N/A 3,125 125,000 250,000 - - - - (1)Incentive compensation based on our achievement of Adjusted EBITDA financial goals for fiscal 2018. Messrs. Lolmaugh andGeadelmann were each eligible to earn target cash incentive compensation equal to 50% of their respective base salaries, pro-rated forMr. Lolmaugh based on the partial year during which he was an executive officer, based on our Adjusted EBITDA for the year. Thetarget incentive compensation was payable if we achieved the Adjusted EBITDA target set forth in our budget. Messrs. Lolmaugh andGeadelmann were each entitled to receive a partial incentive payment if we achieved at least 90% of our budgeted Adjusted EBITDA,and an incentive of up to double the target incentive amount if we achieved 110% of our budgeted Adjusted EBITDA.(2)Represents shares of restricted stock for which the risks of forfeiture will lapse in four equal annual installments beginning onFebruary 22, 2019 based on continued service.(3)Represents options to acquire shares of common stock that will vest and become exercisable in four equal annual installmentsbeginning on February 22, 2019 based on continued service.Offer Letter AgreementsWe did not enter into an offer letter agreement with Mr. Rucker, but we agreed to pay him an annual base salary of $24,000 for fiscal year2018, due to his long history with us, his interests as a major stockholder and the interim nature of his position. This amount was chosen toavoid triggering 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 February 2018, as the result of arm’s length negotiations, we entered into an offer letter agreement with Mr. Lolmaugh setting forth theterms and conditions of his employment as our Senior Vice President and Chief Operating Officer. Effective January 1, 2019, we updatedMr. Lolmaugh’s offer letter agreement to reflect his new title of Chief Executive Officer and President and to memorialize certaincompensation changes related to his promotion. All other terms of his offer letter agreement remained unchanged.Pursuant to the offer letter agreement, Mr. Lolmaugh is entitled to receive severance benefits if his employment is terminated by us withoutcause at any time or if he resigns for good reason, subject to execution of a full release in our favor. In such an event, Mr. Lolmaugh isentitled to continued payment of his base salary for six months and an additional payment in an amount equal to six times our contributionamount for the monthly health insurance premium for him during the month immediately prior to termination. Upon a change of control,Mr. Lolmaugh is also entitled to full vesting acceleration with respect to any unvested equity awards if he is not offered employment by thesuccessor entity, or if he is terminated without cause or constructively terminated prior to the first anniversary of the change of control.In connection with their offer letter agreements, each of Messrs. Lolmaugh and Geadelmann agreed not to compete, directly or indirectly,with us or solicit any of our employees or business contacts during the term of his employment and for a period of one year thereafter.Notwithstanding the foregoing, we may, at our election, extend the term of the non-compete and non-solicit obligations to which Messrs.Lolmaugh and Geadelmann are subject to for a period of two years following termination of employment, so long as we provide them withcontinued payment of their base salary for twelve months (in lieu of six months) and an additional payment in43 Table Of Contents an amount equal to twelve times (in lieu of six times) our contribution amount for the monthly health insurance premium for him during themonth immediately prior to termination. Non-Equity Incentive Plan CompensationIn February 2018, 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 2018, Messrs. Lolmaugh and Geadelmann were eligible to earn target cash incentivecompensation equal to 50% of his year-end base salary, pro-rated for Mr. Lolmaugh based on the partial year during which he was anexecutive officer, 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. Lolmaugh and Geadelmann, was entitled to receive a partial incentive payment ifwe achieved at least 90% of our budgeted Adjusted EBITDA and an incentive of up to double the target incentive amount if we achieved110% of our budgeted Adjusted EBITDA. See below for a table setting forth the performance targets and payout levels under the plan:Percentage of budgeted Adjusted EBITDA achieved*Percentage of incentive compensation target earned**110%200%105%150%100%100%95%50%90%2.5%* Payout levels for percentages between the listed ranges are proportionately adjusted.** 200% is the maximum payout level and 0% is the minimum payout level (for achievement of less than 90% of budgeted AdjustedEBITDA).The actual Adjusted EBITDA we achieved in fiscal year 2018 was $49.4 million (which was 75% of the Adjusted EBITDA target). Thisdetermination of the Adjusted EBITDA target resulted in no cash incentive compensation to our named executive officers for fiscal year2018. Equity GrantsAll stock options and restricted stock awards issued in fiscal year 2018 to named executive officers were issued pursuant to the OmnibusPlan. Pursuant to the Omnibus Plan, in the event of a change in control, any unvested equity awards may be accelerated at the solediscretion of the Compensation Committee.We have also provided for the acceleration of vesting of equity awards granted to Messrs. Lolmaugh and Geadelmann in the event of ourchange of control. In the event of a change of control, if they are terminated without cause or are otherwise constructively terminated priorto the first anniversary of the change of control, the vesting of any unvested awards will be accelerated in full immediately prior to suchtermination. We believe that these acceleration opportunities will further align the interests of our executives with those of our stockholdersby providing our executives an opportunity to benefit alongside our stockholders in a corporate transaction.44 Table Of Contents Outstanding Equity Awards at Fiscal Year-end for Fiscal Year 2018The following table sets forth certain information regarding outstanding equity awards held by the named executive officers as ofDecember 31, 2018: Option Awards Stock AwardsName Grant Date Number ofSecuritiesUnderlyingUnexercisedOptionsExercisable(#) Number ofSecuritiesUnderlyingOptionsUnexercisable(#) OptionExercisePrice ($) OptionExpirationDate Number ofShares orUnits ofStock ThatHave NotVested (#) MarketValue ofShares orUnits ofStock ThatHave notVested ($) EquityIncentivePlanAwards:Number ofUnearnedShares,Units orother RightsThat HaveNot Vested(#) EquityIncentivePlan Awards:Market orPayoutValue ofUnearnedShares, Unitsor otherRights ThatHave NotVested($)Kirk Geadelmann 8/12/2014 80,000 20,000 (1)10.93 8/12/2021 - - - -Kirk Geadelmann 4/20/2016 5,000 7,500 (2)18.15 4/20/2026 - - - -Kirk Geadelmann 4/20/2016 - - - - 3,900 (3)21,372 - -Kirk Geadelmann 5/11/2017 3,300 9,900 (4)20.35 5/11/2027 - - - -Kirk Geadelmann 5/11/2017 - - - - - - 3,000 (5)16,440 Kirk Geadelmann 5/11/2017 - - - - 2,250 (6)12,330 - -Kirk Geadelmann 11/2/2017 6,625 19,875 (7)8.60 11/2/2027 - - - -Kirk Geadelmann 11/2/2017 - - - - 8,738 (8)47,884 - -Kirk Geadelmann 2/22/2018 - - - - 9,000 (9)49,320 - -Cabell Lolmaugh 8/21/2012 2,750 - 10.00 8/21/2022 - - - -Cabell Lolmaugh 10/21/2014 4,200 1,500 (10)8.58 10/21/2021 - - - -Cabell Lolmaugh 7/14/2015 969 644 (11)14.19 7/14/2022 - - - -Cabell Lolmaugh 10/17/2017 - - - - 9,036 (12)49,517 - -Cabell Lolmaugh 11/6/2017 6,725 20,175 (13)8.50 11/6/2027 - - - -Cabell Lolmaugh 2/22/2018 - 56,000 (14)5.55 2/22/2028 - - - -Cabell Lolmaugh 2/22/2018 - - - - 22,500 (9)123,300 - -(1)These options become exercisable on August 12, 2019.(2)These options become exercisable in three equal annual installments beginning on April 20, 2019.(3)Our purchase option for these shares of restricted stock will lapse in three equal annual installments beginning on April 20, 2019.(4)These options become exercisable in three equal annual installments beginning on May 11, 2019.(5)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.(6)Our purchase option for these shares of restricted stock will lapse in three equal annual installments beginning on May 11, 2019.(7)These options become exercisable in three equal annual installments beginning on November 2, 2019.(8)The risks of forfeiture for these shares of restricted stock will lapse in three equal annual installments beginning on November 2, 2019.(9)The risks of forfeiture for these shares of restricted stock will lapse in four equal annual installments beginning on February 22, 2019.(10)These options become exercisable on October 21, 2019.(11)These options become exercisable in two equal annual installments beginning on July 14, 2019.(12)The risks of forfeiture shares of restricted stock will lapse in three equal annual installments beginning on October 17, 2019.(13)These options become exercisable in three equal annual installments beginning on November 6, 2019.(14)These options become exercisable in four equal annual installments beginning on February 22, 2019.45 Table Of Contents Option Exercises and Stock Vested for Fiscal Year 2018The following named executive officers exercised stock options or had restricted common stock vest during the fiscal year ended December31, 2018.Stock AwardsNameNumber ofShares Acquired onVesting (#)Value Realizedon Vesting ($)Robert Rucker5,038 42,067 Kirk Geadelmann4,962 32,102 Cabell Lolmaugh3,012 20,211 Pension BenefitsWe did not sponsor any defined benefit pension or other actuarial plan for our named executive officers during the fiscal year endedDecember 31, 2018.Nonqualified Deferred CompensationNo nonqualified deferred compensation was paid to or earned by the named executive officers during the fiscal year ended December 31,2018.Potential Payments Upon Termination or Change in ControlAs discussed above in connection with each named executive officer’s offer letter agreement, Messrs. Lolmaugh and Geadelmann areeligible to receive severance benefits in the event that their employment is terminated by us without cause or by the employee for goodreason. Additionally, Messrs. Lolmaugh and Geadelmann are entitled to full vesting of any outstanding equity awards in the event of achange of control, if they are not offered employment by the successor entity, or if they are terminated without cause or are otherwiseconstructively terminated prior to the first anniversary of the change of control. Upon a change in control, Mr. Rucker’s unvested equityawards may have been accelerated at the sole discretion of the Compensation Committee.The amounts payable by us to each of the named executive officers, assuming that each individual’s employment had terminated onDecember 31, 2018, under each scenario are as follows:NameIn Connectionwith a Change inControl ($) (1)By Company Notfor Cause ($) (2)By NEO for GoodReason ($) (2)Robert Rucker -(3) - -Kirk Geadelmann787,867 146,120 146,120 Cabell Lolmaugh553,507 128,620 128,620 (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)Represents continued payment of six months of base salary and company-contributed health insurance costs.(3)Upon a change in control, Mr. Rucker’s unvested equity awards may be accelerated at the sole discretion of the CompensationCommittee.46 Table Of Contents 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. During fiscal year 2019, Mr. Rucker will also receivea consulting fee of $50,000 for his services as a consultant to the Company.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 lapsed on July 13, 2018.On July 11, 2018, Messrs. Cook, Krasnow and Jacullo elected to receive compensation fully in the form of restricted stock granted pursuantto the Omnibus Plan. Messrs. Kamin and Livingston elected to receive compensation as one-half restricted stock and one-half cashcompensation, payable quarterly. The number of shares of our restricted stock granted was equal to the quotient obtained by dividing (i) theamount of the annual fee payable to such non-employee director in the form of restricted stock, as set forth above, by (ii) the averageclosing price on Nasdaq of our common stock over 30 trading days immediately preceding the date of grant. Messrs. Cook, Krasnow andJacullo received 14,570, 14,570 and 12,669 shares of restricted stock, respectively. Messrs. Kamin and Livingston received 11,086 and8,869 shares of restricted stock, respectively. The risks of forfeiture for these shares of restricted stock will lapse on the earlier of our annualmeeting of stockholders in fiscal year 2019 or July 11, 2019, contingent upon the applicable non-employee director’s continue service onour Board.Director Compensation Table for Fiscal Year 2018The following table summarizes the compensation paid to each non-employee director in the fiscal year ended December 31, 2018: NameFees Earnedor Paid inCash ($)Stock Awards($) (1)(2)Total ($)Christopher T. Cook -121,660 121,660 Peter H. Kamin109,375 (3)92,568 201,943 Todd Krasnow43,125 (4)121,660 164,785 Peter J. Jacullo III -105,786 105,786 Philip B. Livingston35,000 (5)74,056 109,056 (1)The table reflects the grant date fair value of the sole award to each director in fiscal year 2018, 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, 2018 wasas follows: Messrs. Cook, Krasnow and Jacullo: 14,570, 14,570 and 12,669 shares of restricted stock, respectively. Messrs. Kamin andLivingston: 11,086 and 8,869 shares of restricted stock, respectively. These shares of restricted stock were granted to the directors onJuly 11, 2018. The risks of forfeiture for these shares of restricted stock will lapse in full on the earlier of our annual meeting ofstockholders in fiscal year 2018 or July 11, 2019. (3)Represents payments of $65,625 paid to Mr. Kamin in fiscal year 2018 for the period from January 1, 2018 to July 11, 2018 due to theelection to receive in cash one-half of director compensation for the prior service period and payments of $43,750 paid to Mr. Kaminin fiscal year 2018 for the period from July 11, 2018 to December 31, 2018 due to the election to receive in cash one-half of directorcompensation for the current service period.(4)Represents payments of $43,125 to Mr. Krasnow in fiscal year 2018 for the period from January 1, 2018 to July 11, 2018 due to theelection to receive in cash one-half of director compensation for the prior service period.(5)Represents payments of $35,000 to Mr. Livingston in fiscal year 2018 for the period from July 11, 2018 to December 31, 2018 due tothe election to receive in cash one-half of director compensation for the current service period. 47 Table Of Contents COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATIONThe Compensation Committee currently consists of Messrs. Jacullo and Krasnow and consisted of these same members in fiscal year 2018.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 Mr. Rucker, who served as our Chief Executive Officer during fiscal year 2018. The pay ratio included below is a reasonable estimatecalculated in a manner consistent with the regulations.For 2018, our last completed fiscal year:·the median of the annual total compensation of all our employees (other than Mr. Rucker) was $39,767; and·the annual total compensation of Mr. Rucker, as reported in the above Summary Compensation Table, was $24,600. Based on this information, for fiscal year 2018 the ratio of the annual total combined compensation of our Chief Executive Officers to themedian of the annual total compensation of all employees was 1 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, 2018 our employee population consisted of approximately 1,738individuals all located in the United States. We selected December 15, 2018, which is within the last three months of 2018, 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 1,738 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 for2018. In making this determination, we annualized the compensation of any full-time employees who were hired in 2018 and wereworking for us on December 15, 2018, 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 is our Chief Executive Officer, 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 2018 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annualtotal compensation of $39,767. 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 $676).Chief Executive Officer Total Compensation. Mr. Rucker had annual total compensation of $24,600, which includes base salary andemployer 401(k) contributions. 48 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 22, 2019, 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 22, 2019. 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 22, 2019 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 52,921,546 shares of our common stock outstanding onFebruary 22, 2019. 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)6,448,065 12.2 %JWTS, Inc.(2)4,441,180 8.4 %The Tile Shop, Inc.(3)3,662,428 6.9 %Capital World Investors(4)3,158,000 6.0 %Executive Officers and Directors:Robert A. Rucker (5)5,711,293 10.8 %Kirk Geadelmann(6)137,708 *Cabell Lolmaugh(7)60,090 *Christopher T. Cook(8)193,129 *Peter J. Jacullo III(2)(9)5,827,866 11.0 %Peter H. Kamin(10)2,202,064 4.2 %Todd Krasnow(11)214,384 *Philip B. Livingston(12)38,883 *All Executive Officers and Directors as a Group (8 persons)(13)14,385,417 27.1 %* Represents beneficial ownership of less than one percent (1%) of the outstanding common stock.(1)Based on a Schedule 13G filed with the SEC on January 31, 2019 by BlackRock, Inc. (“BlackRock”), BlackRock holds sole votingpower over 6,371,225 shares and sole dispositive power over 6,448,065 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 April 12, 2018 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 06877.49 Table Of Contents (3)Based on a Form 5 filed with the SEC on February 14, 2019 by Robert A. Rucker (“Rucker”). Rucker is the sole officer and member ofthe board of directors of TS, Inc., holds sole voting and dispositive power over the securities held by TS, Inc., and may be deemed tobeneficially own the securities held by TS, Inc.(4)Based on a Schedule 13G filed with the SEC on February 14, 2019 by Capital World Investors (“Capital”), Capital holds sole votingand dispositive power over 3,158,000 shares. The business address of Capital is 333 South Hope Street, Los Angeles, CA 90071.(5)Includes 3,662,428 shares of common stock held by TS, Inc., 775,000 shares of common stock held by the Robert Rucker 2017Grantor Retained Annuity Trust, 515,000 shares of common stock held by the Robert Rucker 2017 Grantor Retained Annuity Trust II,500,000 shares held by the Robert Rucker 2018 Grantor Retained Annuity Trust, 3,380 shares of common stock held by Mr. Rucker’sspouse, and 23,660 shares of common stock held by Mr. Rucker as custodian for minor children under the Uniform Gifts to MinorsAct.(6)Includes 23,338 shares of unvested restricted common stock held by Mr. Geadelmann and options to purchase 97,425 shares ofcommon stock that are currently exercisable or will become exercisable within 60 days of February 22, 2019.(7)Includes 25,911 shares of unvested restricted common stock held by Mr. Lolmaugh and options to purchase 28,228 shares of commonstock that are currently exercisable or will become exercisable within 60 days of February 22, 2019.(8)Includes 14,570 shares of unvested restricted common stock held by Mr. Cook. (9)Includes 12,669 shares of unvested restricted common stock held by Mr. Jacullo, 4,441,180 shares of common stock held by JWTS,and 1,024,424 shares of common stock held by the Katherine D. Jacullo Children's 1993 Irrevocable Trust (the “1993 Trust”). Mr.Jacullo is the trustee of the 1993 Trust and disclaims beneficial ownership of the shares of common stock held by the 1993 Trust,except to the extent of his pecuniary interest therein(10)Includes 11,086 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”), 685,036 shares of common stock held by the Peter H. Kamin Revocable Trust datedFebruary 2003 (the “2003 Trust”), 439,021 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”), 204,121 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.(11)Includes 14,570 shares of unvested restricted common stock held by Mr. Krasnow, 10,118 shares of common stock held as power ofattorney for Mr. Krasnow’s mother’s accounts, 2,600 shares of common stock held by Mr. Krasnow’s spouse, 8,000 shares of commonstock held by Hobart Road Charitable Remainder CRUT (“Hobart Road”), and 2,000 shares of common stock held by the Todd &Deborah Krasnow Charitable Remainder CRUT (“CRUT”). Mr. Krasnow is a trustee of each of Hobart Road and CRUT and may bedeemed to have sole voting and investment power over the securities held by these entities. Mr. Krasnow disclaims beneficialownership of the shares of common stock held as power of attorney for his mother’s accounts and by his spouse, except to the extentof his pecuniary interest therein.(12)Includes 8,869 shares of unvested restricted common stock held by Mr. Livingston.(13)Includes 111,013 shares of unvested restricted common stock and options to purchase 126,069 shares of common stock that arecurrently exercisable or will become exercisable within 60 days of February 22, 2019. This group includes all directors and namedexecutive officers individually listed above.50 Table Of Contents EQUITY COMPENSATION PLAN INFORMATIONThe following table presents our equity compensation plan information as of December 31, 2018: (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 1,388,079 (1)12.34 1,734,518 Equity compensation plans not approved bystockholders - - -Total 1,388,079 12.34 1,734,518 (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 director concerninghis background, employment, and affiliations, including family relationships, we have determined that Messrs. Cook, Jacullo, Kamin,Krasnow and Livingston, representing five of our seven directors, do not have a relationship that would interfere with the 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. Lolmaugh, the Company’s ChiefExecutive Officer and President, is not an independent director by virtue of his employment with the Company. Mr. Rucker, our priorInterim Chief Executive Officer and President, is not an independent director by virtue of his prior employment with the Company.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSOther than as described below, since the beginning of fiscal year 2018, 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.On July 9, 2018, Fumitake Nishi, a former Company employee and the brother-in-law of Robert A. Rucker, our former Interim ChiefExecutive Officer and President, and a member of our Board, informed us he had reacquired a majority of the equity of one of our keyvendors, Nanyang Helin Stone Co. Ltd (“Nanyang”). Nanyang supplies us with natural stone products including hand-crafted mosaics,listellos and other accessories. During the years ended December 31, 2018, 2017 and 2016, we purchased $12.0 million, $12.8 million, and$8.4 million of products from Nanyang, respectively. As of December 31, 2018 and 2017, accounts payable due to Nanyang was $1.2million and $0.9 million, respectively. Mr. Nishi’s employment with us was terminated on January 1, 2014 as a result of several violationsof our code of business conduct and ethics policy. Certain of those violations involved his undisclosed ownership of Nanyang at that time. Management and the Audit Committee have evaluated the relationship and determined that it would be in our best interests to continuepurchasing products from Nanyang. We believe Nanyang provides an important combination of quality, product availability and pricing,and relying solely on other vendors to supply similar product to us would not be in our best interests. The Audit Committee andmanagement will continue to review future purchases from Nanyang and compare the pricing for products purchased from Nanyang to thepricing of same or similar products purchased from unrelated vendors.We employed Adam Rucker, son of Robert A. Rucker, our former Interim Chief Executive Officer and President, and a member of ourBoard, as a Director of Information Technology through December 12, 2018. In fiscal years 2018, 2017 and 2016 we paid Adam51 Table Of Contents Rucker a total of $112,000, $120,000 and $140,000, respectively. Adam Rucker also received the standard benefits provided to other of ouremployees during fiscal years 2018, 2017 and 2016.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. 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 2018 and 2017:20182017Audit Fees(1)$615,000 $651,000 Audit-Related Fees(2) - -Tax Fees(3)28,000 -All Other Fees(4) - -$643,000 $651,000 (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.52 Table Of Contents (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.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 2018, all audit and non-audit services performed by our independent auditors were pre-approved in accordance with such pre-approval policies. 53 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 Form 10-K: # #(i)Reports of Independent Registered Public Accounting Firm56 (ii)Consolidated Balance Sheets for the years ended December 31, 2018 and 201757 (iii)Consolidated Statements of Operations for the years ended December 31, 2018, 2017, and 201658 (iv)Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017, and 201659 (iv)Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 201660 (v)Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 201661 (vi)Notes to Consolidated Financial Statements62 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. ExhibitsSee “Exhibit Index” immediately following the signature page of this Form 10-K, which is incorporated herein by reference.ITEM 16. FORM 10-K SUMMARYNot applicable. 54 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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2018, 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, 2018, 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 26, 2019 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.We have served as the Company’s auditor since 2013./s/ Ernst & Young LLPMinneapolis, MinnesotaFebruary 26, 2019 55 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, 2018, 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, 2018, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the2018 consolidated financial statements of the Company and our report dated February 26, 2019 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 26, 2019 56 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesConsolidated Balance SheetsAs of December 31, 2018 and 2017(dollars in thousands, except share and per share data) December 31, December 31, 2018 2017Assets Current assets: Cash and cash equivalents $5,557 $6,621 Restricted cash 825 855 Receivables, net 3,084 2,381 Inventories 110,095 85,259 Income tax receivable 3,548 5,726 Other current assets, net 7,181 4,717 Total Current Assets 130,290 105,559 Property, plant and equipment, net 158,356 151,405 Deferred tax assets 7,225 11,654 Other assets 1,759 2,107 Total Assets $297,630 $270,725 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $25,853 $30,771 Current portion of long-term debt - 8,833 Income tax payable 179 17 Other accrued liabilities 24,484 22,413 Total Current Liabilities 50,516 62,034 Long-term debt, net 53,000 18,182 Capital lease obligation, net 436 576 Deferred rent 43,579 41,290 Other long-term liabilities 3,752 4,769 Total Liabilities 151,283 126,851 Stockholders’ Equity: Common stock, par value $0.0001; authorized: 100,000,000 shares; issued andoutstanding: 52,707,879 and 52,156,850 shares, respectively 5 5 Preferred stock, par value $0.0001; authorized: 10,000,000 shares; issued and outstanding: 0 shares - -Additional paid-in-capital 172,255 180,109 Accumulated deficit (25,857) (36,239)Accumulated other comprehensive loss (56) (1)Total Stockholders' Equity 146,347 143,874 Total Liabilities and Stockholders' Equity $297,630 $270,725 See accompanying Notes to Consolidated Financial Statements. 57 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesConsolidated Statements of OperationsFor the years ended December 31, 2018, 2017 and 2016(dollars in thousands, except share and per share data)201820172016Net sales$357,254 $344,600 $324,157 Cost of sales105,915 108,378 97,261 Gross profit251,339 236,222 226,896 Selling, general and administrative expenses233,201 210,376 193,983 Income from operations18,138 25,846 32,913 Interest expense(2,690)(1,857)(1,715)Other income152 170 141 Income before income taxes15,600 24,159 31,339 Provision for income taxes(5,158)(13,340)(12,876)Net income$10,442 $10,819 $18,463 Income per common share:Basic$0.20 $0.21 $0.36 Diluted$0.20 $0.21 $0.36 Weighted average shares outstanding:Basic51,907,619 51,700,045 51,418,600 Diluted52,089,160 51,927,877 51,880,113 Dividends declared per share$0.20 $0.20 $ -See accompanying Notes to Consolidated Financial Statements. 58 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesConsolidated Statements of Comprehensive Income (Loss)For the years ended December 31, 2018, 2017 and 2016(dollars in thousands) 201820172016Net income$10,442 $10,819 $18,463 Currency translation adjustment(55)45 (35)Other comprehensive (loss) income(55)45 (35)Comprehensive income$10,387 $10,864 $18,428 See accompanying Notes to Consolidated Financial Statements. 59 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 Retainedearnings(deficit) Accumulated othercomprehensive(loss) income TotalBalance 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 Adoption of revenue recognition standard(see Note 2) - - - (60) - (60)Issuance of restricted shares 682,646 - - - - -Cancellation of restricted shares (131,617) - - - - -Stock based compensation - - 2,669 - - 2,669 Tax withholdings related to net sharesettlements of stock based compensationawards - - (119) - - (119)Dividends paid - - (10,404) - - (10,404)Foreign currency translation adjustments - - - - (55) (55)Net income - - - 10,442 - 10,442 Balance at December 31, 2018 52,707,879 $5 $172,255 $(25,857) $(56) $146,347 See accompanying Notes to Consolidated Financial Statements. 60 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesConsolidated Statements Cash FlowsFor the years ended December 31, 2018, 2017 and 2016(dollars in thousands) For the years ended, 2018 2017 2016Cash Flows From Operating Activities Net income $10,442 $10,819 $18,463 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 28,396 26,239 23,042 Amortization of debt issuance costs 756 691 487 Loss on disposals of property, plant and equipment 353 210 447 Impairment charges of property, plant and equipment 652 1,072 -Deferred rent 2,386 3,884 2,382 Stock based compensation 2,669 3,156 4,333 Deferred income taxes 4,429 9,737 (395)Changes in operating assets and liabilities: Receivables (703) 33 (448)Inventories (24,836) (10,964) (4,417)Prepaid expenses and other assets (2,410) 4,159 (5,849)Accounts payable (8,201) 12,048 4,195 Income tax receivable / payable 2,229 (4,159) (1,917)Accrued expenses and other liabilities 2,008 (11,234) 13,229 Net cash provided by operating activities 18,170 45,691 53,552 Cash Flows From Investing Activities Purchases of property, plant and equipment (35,287) (40,556) (27,256)Proceeds from insurance 1,033 - -Proceeds from the sale of property, plant and equipment 111 7 4 Net cash used in investing activities (34,143) (40,549) (27,252)Cash Flows From Financing Activities Payments of long-term debt and capital lease obligations (103,267) (36,575) (37,822)Advances on line of credit 129,095 35,000 10,000 Dividends paid (10,404) (10,366) -Contributions to NMTC fund - - 3,174 Proceeds from exercise of stock options - 1,639 842 Employee taxes paid for shares withheld (119) (318) (56)Debt issuance costs (374) - -Security deposits - - (4)Net cash provided by (used in) financing activities 14,931 (10,620) (23,866)Effect of exchange rate changes on cash (52) 6 (35)Net change in cash (1,094) (5,472) 2,399 Cash, cash equivalents and restricted cash beginning of period 7,476 12,948 10,549 Cash, cash equivalents and restricted cash end of period $6,382 $7,476 $12,948 Cash and cash equivalents 5,557 6,621 6,067 Restricted cash 825 855 3,000 Long-term restricted cash - - 3,881 Cash, cash equivalents and restricted cash end of period $6,382 $7,476 $12,948 Supplemental disclosure of cash flow information Purchases of property, plant and equipment included in accounts payable andaccrued expenses $3,974 $636 $2,271 Cash paid for interest 2,625 1,822 1,811 Cash paid for income taxes, net of refunds 1,507 7,603 15,162 See accompanying Notes to Consolidated Financial Statements. 61 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.The Company is a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in theUnited States. Natural stone products include marble, travertine, granite, quartz, sandstone, slate, and onyx tiles. Man-made productsinclude 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, grout and sealer under the Superiorbrand name. As of December 31, 2018, the Company operated 140 stores in 31 states and the District of Columbia, with an average size ofapproximately 20,200 square feet. The Company also has a sourcing office located in China.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 12, “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 $5.6 million and $6.6 million at December 31, 2018 and 2017, 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 $0.8 million and $3.1million at December 31, 2018 and 2017, 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.Trade ReceivablesTrade receivables are carried at original invoice amount less an estimate made for doubtful accounts. Management determines theallowance for doubtful accounts on a specific identification basis as well as by using historical experience applied to an aging of accounts.Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded whenreceived. The allowance for doubtful accounts was $0.1 million as of December 31, 2018 and 2017. The Company does not accrue intereston accounts receivable.62 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements InventoriesThe Company’s inventory consists of manufactured items and purchased merchandise held for resale. Inventories are stated at the lower ofcost (determined using the weighted-average cost method) or net realizable value. The Company capitalizes the cost of inbound freight,duties, and receiving and handling costs to bring purchased materials into its distribution network. The labor and overhead costs incurredin connection with the production process are included in the value of manufactured finished goods. The Company provides provisions forlosses related to shrinkage and other amounts that are otherwise not expected to be fully recoverable. These provisions are calculated basedon historical shrinkage, selling price, margin and current business trends. These estimates have calculations that require management tomake assumptions based on the current rate of sales, age, salability and profitability of inventory, historical percentages that can be affectedby changes in our merchandising mix, customer preferences, rates of sale through and changes in actual shrinkage trends. The provision forlosses related to shrinkage and other amounts was $0.3 million and $0.2 million as of December 31, 2018 and 2017, respectively.Income TaxesThe Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included inthe financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financialstatement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected toreverse. The Company estimates the degree to which tax assets and credit carry forwards will result in a benefit based on expectedprofitability by tax jurisdiction. A valuation allowance for such tax assets and loss carry forwards is provided when it is determined to bemore likely than not that the benefit of such deferred tax asset will not be realized in future periods. If it becomes more likely than not that atax asset will be used, the related valuation allowance on such assets would be reduced.The Company records interest and penalties relating to uncertain tax positions in income tax expense. As of December 31, 2018 and 2017,the Company has not recognized any liabilities for uncertain tax positions nor has the Company accrued interest and penalties related touncertain tax positions.Revenue RecognitionRevenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount thatreflects the consideration received in exchange for those goods or services. The Company recognizes service revenue, which consistsprimarily of freight charges for home delivery, when the service has been rendered. The Company is required to charge and collect sales andother taxes on sales to the Company's customers and remit these taxes back to government authorities. Total revenues do not include salestax because the Company is a pass-through conduit for collecting and remitting sales tax. Sales are reduced by an allowance for anticipatedsales returns that the Company estimates based on historical returns.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.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;63 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements ·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 store, corporate and distribution employees;·Occupancy, utilities and maintenance costs of store 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. The Companymay issue incentive awards in the form of stock options, restricted stock awards and other equity awards to employees and non-employeedirectors. Compensation expense is recognized on a straight-line basis over the requisite service period, net of actual forfeitures. Certainawards are also subject to forfeiture if the Company fails to attain its Adjusted EBITDA targets. The Company adjusts the cumulativeexpense recognized on awards with performance conditions based on a probability of achieving the performance condition. 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 man-made tiles, setting and maintenance materials, andrelated accessories in stores located in the United States. The Company’s chief operating decision maker only reviews the consolidatedresults of the Company and accordingly, the Company has concluded it has one reportable segment.Advertising CostsAdvertising costs were $8.3 million, $9.5 million and $6.9 million for the years ended December 31, 2018, 2017 and 2016, 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, 2018, 2017 and 2016, the Company reported pre-opening costs of $0.1million, $1.7 million and $0.5 million, respectively.Property, Plant and EquipmentProperty, plant and equipment and leasehold improvements are recorded at cost. Improvements are capitalized while repairs andmaintenance costs are charged to selling, general and administrative expenses when incurred. Property, plant and equipment aredepreciated or amortized using the straight-line method over each asset’s estimated useful life. Leasehold improvements and fixtures atleased locations are amortized using the straight-line method over the shorter of the lease term (including fixed rate renewal terms)64 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements or the estimated useful life of the asset. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from theaccounts and any gain or loss thereon 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 fiscal years ended December 31, 2018 and 2017, the Company recorded asset impairment charges of $0.7 million and$1.1 million, which were classified in selling, general and administrative expenses. No impairment charges were recorded during the yearended December 31, 2016.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, 2018 and 2017, $3.2 million and $0.2 million was included in computer equipment and software, respectively. As of December 31, 2018, $6.6 million wasalso included in construction in progress primarily relating to the Company’s new enterprise resource planning system. The internal usesoftware costs are amortized over estimated useful lives of three to seven years. There was $0.3 million, $0.2 million and $0.5 million ofamortization expense related to capitalized software during the years ended December 31, 2018, 2017 and 2016, 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 takes possession of the property.Tenant improvement allowances are amounts received from a lessor for improvements to leased properties and are amortized against rentexpense over the life of the respective leases. At lease inception, the Company determines the lease term by assuming the exercise of thoserenewal options that are reasonably assured. The exercise of lease renewal options is at the Company’s sole discretion. The lease term isused to determine whether a lease is capital or operating and is used to calculate straight-line rent expense. Additionally, the depreciablelife of leased assets and leasehold improvements is limited by the expected lease term. Rent expense is included in selling, general andadministrative expenses. Certain leases require the Company to pay real estate taxes, insurance, maintenance and other operating expensesassociated with the leased premises. These expenses are also classified in selling, general and administrative 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, 2018 and 2017, an accrual of $0.6 million and $0.3 millionrelated to estimated employee health claims was included in other current liabilities, respectively. As of December 31, 2018 and 2017, anaccrual of $1.6 million and $1.3 million related to estimated workers’ compensation claims was included in other current liabilities,respectively.65 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements The Company has standby letters of credit outstanding related to the Company's workers’ compensation and employee health insurancepolicies. As of December 31, 2018 and 2017, the standby letters of credit totaled $1.1 million.New Accounting PronouncementsRecently Adopted Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued a final standard on revenue from contracts with customers. Thisnew standard introduces a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer ofgoods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In2016, the FASB issued several amendments to the standard. The Company adopted this standard as of January 1, 2018 using the modifiedretrospective transition method. See Note 2, “Revenues,” for further details.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 Company adopted the new standard as of March 31, 2018using the retrospective transition method. The Company’s restricted cash balance was $0.8 million as of December 31, 2018. Uponadopting the new standard, the Company no longer presents the release of restricted cash as a financing cash inflow. Instead, restricted cashand long-term restricted cash balances are included in the beginning and ending cash, cash equivalents and restricted cash balances in theConsolidated Statement of Cash Flows. In connection with the adoption of this standard, $6.0 million received from restricted cashaccounts during the fiscal year ended December 31, 2017 that was previously presented as a financing cash inflow was reclassified to cash,cash equivalents and restricted cash balances in the Consolidated Statement of Cash Flows. Additionally, the Company’s $6.7 millioncontribution to the NMTC fund, the $1.9 million received from restricted cash accounts, and the $1.3 million of closing costs incurred inconnection with this transaction during the fiscal year ended December 31, 2016 that were previously presented financing cash flows werereclassified to cash, cash equivalents and restricted cash balances. Contributions made by U.S. Bank Community, LLC to new market taxcredit fund totaling $3.2 million during the fiscal year ended December 31, 2016 that were previously not considered financing cashinflows as they related to restricted cash are now classified as financing cash inflows. See Note 12 for further discussion surrounding NewMarket Tax Credits.​Accounting Pronouncements Not Yet AdoptedIn 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 accounting standards update also requires expanded disclosures to helpfinancial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The Company will adoptthe new standard effective January 1, 2019 using a modified retrospective approach through a cumulative effect adjustment to retainedearnings as of the beginning of the period of adoption. The standard provides a number of optional practical expedients in transition. The Company will elect the package of three practicalexpedients permitted under the transition guidance within the new standard, which among other things, allows the Company tocarryforward the historical lease classification. The Company will also elect to apply the hindsight practical expedient. The Company willnot separate nonlease components from lease components by class of underlying assets where appropriate and the Company will not applythe recognition requirements of the standard to short-term leases, as allowed by the standard.Upon adopting the new standard, the Company expects the most significant impact to the financial statements will be the recognition ofright of use assets of approximately $142 million to $147 million and lease liabilities of $165 million to $170 million as of January 1,2019. The Company will also adjust the useful life of certain leasehold improvements in the event the application of the hindsightpractical expedient results in a change in the expected lease term. The Company expects that the change in the useful life assigned tocertain leasehold improvements will result in a $14 million to $17 million reduction in fixed assets. The adoption of the new standard isnot expected to have a material impact on net income or cash flows. The Company is in the process of finalizing its discount rate analysis.In June 2016, the FASB issued a final standard on accounting for credit losses. The new standard is effective for the Company in fiscal 2020and requires a change in credit loss calculations using the expected loss method. The Company is evaluating the effect of the new standardon its consolidated financial statements and related disclosures. 66 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 2: RevenuesOn January 1, 2018, the Company adopted Accounting Standards Update No. 2014-09 (Topic 606), “Revenue from Contracts withCustomers,” using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results forreporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continueto be reported in accordance with the Company’s historic accounting under Topic 605. The adoption of Topic 606 had a cumulativeimpact adjustment to opening retained earnings of $0.1 million as of January 1, 2018 and did not have an impact on revenues recognizedfor the year ended December 31, 2018.Revenue RecognitionRevenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount thatreflects the consideration received in exchange for those goods or services. Sales taxes are excluded from revenue.The following table presents revenues disaggregated by product category:Years Ended December 31,20182017Man-made tiles46 %43 %Natural stone tiles28 33 Setting and maintenance materials14 11 Accessories10 11 Delivery service2 2 100 %100 %The Company generates revenues by selling tile products, setting and maintenance materials, accessories, and delivery services to itscustomers through its store locations. The timing of revenue recognition coincides with the transfer of control of goods and services orderedby the customer, which falls into one of three categories described below:·Revenue recognized when an order is placed – If a customer places an order in a store and the contents of their order are available,the Company recognizes revenue concurrent with the exchange of goods for consideration from the customer.·Revenue recognized when an order is picked up – If a customer places an order for items held in a centralized distribution center,the Company requests a deposit from the customer at the time they place the order. Subsequently when the contents of thecustomer’s order are delivered to the store, the customer returns to the store and picks up the items that were ordered. The Companyrecognizes revenue on this transaction when the customer picks up their order.·Revenue recognized when an order is delivered – If a customer places an order in a store and requests delivery of their order, theCompany prepares the contents of their order, initiates the delivery service, and recognizes revenue once the contents of thecustomer’s order are delivered.The Company determines the transaction price of its contracts based on the pricing established at the time a customer places an order. Thetransaction price does not include sales tax as the Company is a pass-through conduit for collecting and remitting sales tax. Any discountsapplied to an order are allocated proportionately to the base price of the goods and services ordered. Deposits made by customers arerecorded in other accrued liabilities. Deferred revenues associated with customer deposits are recognized at the time the Company transferscontrol of the items ordered or renders the delivery service. In the event an order is partially fulfilled as of the end of a reporting period,revenue will be recognized based on the transaction price allocated to the goods delivered and services rendered. The customer depositbalance was $7.4 million and $8.1 million as of December 31, 2018 and 2017, respectively. Revenues recognized during the year endedDecember 31, 2018 included in the customer deposit balance as of the beginning of the period were $7.9 million.The Company extends financing to qualified professional customers who apply for credit. The accounts receivable balance was $3.1million and $2.4 million as of December 31, 2018 and 2017, respectively. Customers who qualify for an account receive 30-day paymentterms. The Company expects that the customer will pay for the goods and services ordered within one year from the date the order isplaced. Accordingly, the Company qualifies for the practical expedient outlined in ASC 606-10-32-18 and does not adjust the promisedamount of consideration for the effects of the financing component. Customers may return purchased items for an exchange or refund. The Company records a reserve for estimated product returns based onthe historical returns trends and the current product sales performance. Historically, the sales returns reserve was presented67 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements net of cost of sales in other current liabilities. Upon adoption of Topic 606, the Company presents the sales returns reserve as an othercurrent liability and the estimated value of the inventory that will be returned as an other current asset in the Consolidated BalanceSheet. The components of the sales returns reserve reflected in the Consolidated Balance Sheet as of December 31, 2018 and 2017 are asfollows:(in thousands)December 31,December 31,20182017(1)Other current liabilities$5,154 $3,139 Other current assets1,498 -Sales returns reserve, net$3,656 $3,139 (1) As of December 31, 2017, the sales returns reserve of $3.1 million was presented net of the expected value of inventory to be returned of$0.9 million.Note 3: Property Plant and Equipment:Property, plant and equipment consisted of the following at December 31: 2018 2017 (in thousands)Land $904 $904 Building and building improvements 25,608 25,417 Leasehold improvements 88,454 84,677 Furniture and fixtures 140,612 129,876 Machinery and equipment 29,424 28,561 Computer equipment and software 33,947 29,851 Vehicles 4,125 3,463 Construction in progress 11,089 6,124 Total property, plant and equipment 334,163 308,873 Less accumulated depreciation (175,807) (157,468)Total property, plant and equipment, net $158,356 $151,405 Depreciation expense on property and equipment, including capital leases, was $28.4 million, $26.2 million and $23.0 million for the yearsended December 31, 2018, 2017 and 2016, 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 years ended December 31, 2018 and 2017, the Companyrecorded asset impairment charges of $0.7 million and $1.1 million, respectively. No impairment charges were recorded during the yearended December 31, 2016. Note 4: Accrued LiabilitiesAccrued liabilities consisted of the following at December 31:20182017(in thousands)Customer deposits$7,383 $8,064 Sales return reserve5,154 3,139 Accrued wages and salaries3,689 2,853 Payroll and sales taxes2,929 2,491 Other current liabilities5,329 5,866 Total accrued liabilities$24,484 $22,413 68 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 5: Long-term Debt Long-term debt, net of debt issuance costs, consisted of the following at December 31: 2018 2017 Unamortized Unamortized Debt Issuance Debt Issuance Principal Costs Principal Costs (in thousands)Term note payable (interest at 3.06% at December 31, 2017) $ - $ - $11,346 $(36)Commercial bank credit facility 53,000 - 15,000 -Variable interest rate bonds (1.69% at December 31, 2017) - - 705 -Total debt obligations 53,000 - 27,051 (36)Less: current portion - - 8,855 (22)Debt obligations, net of current portion $53,000 $ - $18,196 $(14)Approximate annual aggregate maturities of debts are as follows: (in thousands):Fiscal year2019$ -2020 -2021 -2022 -202353,000 Thereafter -Total future maturities payments$53,000 Less: debt issuance costs -Total future maturities payments, net of debt issuance costs$53,000 On September 18, 2018, Holdings and its operating subsidiary, The Tile Shop, LLC, entered into a credit agreement with Bank of America,N.A., Fifth Third Bank and Citizens Bank (the “Credit Agreement”). The Credit Agreement provides the Company with a senior creditfacility consisting of a $100.0 million revolving line of credit through September 18, 2023. Borrowings pursuant to the Credit Agreementinitially bear interest at a rate of adjusted LIBOR plus 1.75% and may bear interest in a range between adjusted LIBOR plus 1.50% toadjusted LIBOR plus 2.25%, depending on The Tile Shop’s consolidated total rent adjusted leverage ratio. At December 31, 2018 the baseinterest rate was 6.25% and the LIBOR-based interest rate was 4.52%. The Credit Agreement is secured by virtually all of the assets of the Company, including but not limited to, inventory, receivables,equipment and real property. The Credit Agreement contains customary events of default, conditions to borrowings, and restrictivecovenants, including restrictions on the Company’s ability to dispose of assets, make acquisitions, incur additional debt, incur liens, ormake investments. The Credit Agreement also includes financial and other covenants, including covenants to maintain certain fixed chargecoverage ratios and consolidated total rent adjusted leverage ratios. The Company was in compliance with the covenants as of December 31, 2018. The Credit Agreement supersedes and replaces in its entirety the Company’s prior senior secured credit facility with Fifth Third Bank datedJune 2, 2015, as amended on April 5, 2018, July 17, 2017, February 10, 2017 and December 9, 2016. The Company drew on the revolvingline of credit pursuant to the Credit Agreement to refinance the existing term loan, revolving line of credit and interest outstanding underthe Company’s prior credit facility, as well as pay $0.4 million in debt issuance costs in connection with the Credit Agreement. Debtissuance costs are classified as other current assets and other assets on the consolidated balance sheet and amortized on a straight line basisover the life of the Credit Agreement. The Company recorded a $0.1 million charge in interest expense to write-off certain unamortizeddeferred financing fees associated with its prior credit facility as of the date of the payoff. Borrowings outstanding consisted of $53.0 million on the revolving line of credit as of December 31, 2018. In addition, the Company hasstandby letters of credit outstanding related to its workers compensation and medical insurance policies. As of December 31, 2018 and2017, the standby letters of credit totaled $1.1 million. There was $45.9 million available for borrowing on the revolving line of credit as ofDecember 31, 2018, which may be used to support the Company’s growth and for working capital purposes.69 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements 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, 2018, minimum lease payments under the Company's capital lease obligation were as follows (in thousands):Fiscal year2019$215 2020216 2021215 202290 2023 -Thereafter -Less: amounts representing interest(160)Present value of future minimum lease payments576 Less: current portion140 Capital lease obligations, net of current portion$436 Note 6: 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, 2018, 2017 and 2016,rent expense was $35.4 million, $33.8 million, and $29.7 million, respectively.Annual minimum rentals under non-cancelable operating leases are as follows, for the years ended December 31 (in thousands):Fiscal year2019$35,247 202035,647 202135,868 202236,182 202335,843 Thereafter384,180 Total future maturities payments$562,967 Legal proceedings:The Company was a nominal defendant in several actions brought derivatively on behalf of the Company by three shareholders. Theplaintiffs alleged that the defendant-directors and/or officers breached their fiduciary duties by failing to adopt adequate internal controlsfor the Company, by approving false and misleading statements issued by the Company, by causing the Company to violate generallyaccepted accounting principles and SEC regulations, and by permitting the Company’s primary product to contain illegal amounts of lead.The complaints also alleged claims for insider trading and/or unjust enrichment. The Company moved to dismiss the actions, or in thealternative, to stay the actions. Before the motions were decided, the parties entered into settlement discussions. The parties entered into aStipulation of Settlement dated April 11, 2018 to resolve all claims in the derivative actions. The settlement also resolved a demand letterdated May 19, 2016 that the Company’s Board of Directors had received from a shareholder about the same matters that were the subjects ofthe derivative actions. By Order and Final Judgment entered on August 23, 2018, the Delaware Court of Chancery approved the settlementof the derivative actions and dismissed them with prejudice. Under the terms of settlement, the Board of Directors adopted, and theCompany implemented, certain changes to its policies and practices that address related70 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements person transactions, insider trading, compliance, and ethics. The Company also paid plaintiffs and their counsel $1.3 million for attorneys’fees, expenses, and incentive awards that the Court awarded to them.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 7: 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, 2018 and 2017 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, 2018December 31, 2017Assets(in thousands)Cash and cash equivalentsLevel 1$5,557 $6,621 Restricted cashLevel 1825 855 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.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 years ended December 31, 2018 and 2017, the Company identified property, plant and equipment that would bedisposed of prior to the end of their useful lives, which resulted in the recognition of a $0.7 million and $1.1 million charge to write-downthese assets to their estimated fair value, respectively. The Company measured the fair value of these assets based on projected cash flowsand an estimated risk-adjusted rate of return. Projected cash flows are considered level 3 inputs. No impairment charges were recordedduring the year ended December 31, 2016. 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.71 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 8: Related Party TransactionsOn July 9, 2018, Fumitake Nishi, a former Company employee and the brother-in-law of Robert A. Rucker, our former Interim ChiefExecutive Officer and President, and a member of the Company’s Board, informed the Company he had reacquired a majority of the equityof one of its key vendors, Nanyang Helin Stone Co. Ltd (“Nanyang”). Nanyang supplies the Company with natural stone productsincluding hand-crafted mosaics, listellos and other accessories. During the years ended December 31, 2018, 2017 and 2016, the Companypurchased $12.0 million, $12.8 million, and $8.4 million of products from Nanyang, respectively. As of December 31, 2018 and 2017, theaccounts payable due to Nanyang was $1.2 million and $0.9 million, respectively. Mr. Nishi’s employment with the Company wasterminated on January 1, 2014 as a result of several violations of the Company’s code of business conduct and ethics policy. Certain ofthose violations involved his undisclosed ownership of Nanyang at that time. Management and the Audit Committee have evaluated the relationship and determined that it would be in the Company’s best interests tocontinue purchasing products from Nanyang. The Company believes Nanyang provides an important combination of quality, productavailability and pricing, and relying solely on other vendors to supply similar product to the Company would not be in the Company’s bestinterests. The Company and the Audit Committee has and will continue to review future purchases from Nanyang and compare the pricingfor products purchased from Nanyang to the pricing of same or similar products purchased from unrelated vendors.The Company employed Adam Rucker, son of Robert A. Rucker, our former Interim Chief Executive Officer and President, and a member ofour Board of Directors, as a Director of Information Technology through December 12, 2018. In fiscal years 2018, 2017 and 2016, theCompany paid Adam Rucker a total of $112,000, $120,000 and $140,000, respectively. Adam Rucker also received the standard benefitsprovided to other Company employees during fiscal years 2018, 2017 and 2016. Note 9: 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: 2018 2017 2016 (in thousands, except share and per share data)Net income $10,442 $10,819 $18,463 Weighted-average shares outstanding - basic 51,907,619 51,700,045 51,418,600 Dilutive common stock equivalents 181,541 227,832 461,513 Weighted-average shares outstanding - diluted 52,089,160 51,927,877 51,880,113 Basic net income per share $0.20 $0.21 $0.36 Diluted net income per share $0.20 $0.21 $0.36 Antidilutive Shares 1,508,616 445,490 373,255 Note 10: Equity Incentive Plans2012 Plan:Under the 2012 Omnibus Award Plan, 5,000,000 shares of the Company’s common stock are reserved for issuance pursuant to a variety ofstock based compensation awards, including stock options, and restricted stock awards.Stock Options:During the years ended December 31, 2018, 2017 and 2016, 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.72 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:201820172016Risk-free interest rate2.75%–3.08%1.89%–2.12%1.15%–1.52%Expected life (in years)5–65–65–7Expected volatility55%–57%51%–55%52%–53%Dividend yield2%–4%1%–2%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 2018and 2017 was determined using the historical dividend payout and a trailing twelve month closing stock price on the grant date. Theexpected dividend yield was zero prior to December 31, 2016 based on the fact that, at that time, the Company had not previously paiddividends. To the extent that actual outcomes differ from the Company's assumptions, the Company is not required to true up grant-date fairvalue-based expense to final intrinsic values. The weighted average fair value of stock options granted was $3.10, $5.88, and $7.37 duringthe years ended December 31, 2018, 2017 and 2016, respectively.Stock based compensation related to options for the years ended December 31, 2018, 2017 and 2016 was $1.0 million, $1.9 million, and$3.2 million, respectively, and was included in selling, general and administrative expenses in the consolidated statements of operations.As of December 31, 2018, the total future compensation cost related to non-vested options not yet recognized in the consolidated statementof operations was $2.0 million and is expected to be recognized over a weighted-average period of 2.4 years.The following table summarizes stock option activity:SharesWeightedAverageExercisePriceWeightedAvg GrantDateFair ValueWeighted AvgRemainingContractualTerm (Years)AggregateIntrinsicValue(in thousands)Balance, January 1, 20162,624,945 $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 Granted176,380 $7.19 $3.10 Exercised -$ -$ -Cancelled/Forfeited(520,865)$18.59 $8.69 Balance, December 31, 20181,388,079 $12.34 $5.80 4.9 $ -Exercisable at December 31, 2018862,663 $13.26 $6.39 3.7 Vested and expected to vest, December 31, 20181,388,079 $12.34 $5.80 4.9 $ - The aggregate intrinsic value is the difference between the exercise price and the closing price of the Company’s stock on December 31. Nostock options were exercised during fiscal year 2018. The intrinsic value of the stock options exercised during fiscal year 2017 was $4.4million. 73 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Options outstanding as of December 31, 2018 are as follows:Range of Exercise PriceWeighted AverageOptionsExercise PriceRemaining ContractualLife-Years$5.00to$10.00687,400 $8.79 6.12 $10.01to$15.00380,304 $12.20 2.81 $15.01to$20.00212,875 $17.86 4.76 $20.01to$25.0074,500 $22.44 5.62 $25.01to$30.0033,000 $29.44 4.56 Restricted Stock:The Company awards restricted common shares to selected employees and non-employee directors. Recipients are not required to provideany consideration upon vesting of the award. 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, January 1, 201679,036 $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 Granted682,646 $6.61 Vested(63,680)$15.88 Forfeited(131,617)$8.70 Nonvested, December 31, 2018762,517 $7.80 The total expense associated with restricted stock for the years ended December 31, 2018, 2017, and 2016 was $1.7 million, $1.2 million,and $1.1 million, respectively. As of December 31, 2018, there was $4.8 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 3.0 years. The fair value ofrestricted stock granted in fiscal years 2018 and 2017 was $4.5 million and $4.4 million, respectively. The total fair value of restrictedstock that vested in fiscal years 2018 and 2017 was $1.2 million and $1.1 million, respectively. Using the closing stock price of $5.48 onDecember 31, 2018, the number of restricted shares outstanding and expected to vest was 758,317, with an intrinsic value of $4.2 million.74 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 11: Income TaxesThe components of the provision for income taxes consist of the following:Years Ended December 31,201820172016(in thousands)CurrentFederal$734 $2,721 $10,831 State638 872 2,560 International23 30 30 Total Current1,395 3,623 13,421 DeferredFederal2,839 9,354 (363)State844 363 (182)International80 - -Total Deferred3,763 9,717 (545)Total Provision for Income Taxes$5,158 $13,340 $12,876 A majority 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 was required to recognize theeffect of the tax law changes in the period of enactment, including determining the transition tax, re-measuring the Company’s U.S. deferredtax assets and liabilities and reassessing the net realizability of the Company’s deferred tax assets and liabilities. Staff Accounting BulletinNo. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) allowed the Company to record provisionalamounts during a measurement period not to extend beyond one year after the enactment date.During 2018, the Company completed its evaluation of the income tax effects of the Tax Act. The Company recorded adjustments to itsprovisional estimates resulting in a $0.2 million reduction income tax expense concurrent with the filing of its 2017 federal and stateincome tax returns. The accounting for the income tax effects of the Tax Act is complete as of December 31, 2018.The following table reflects the effective income tax rate reconciliation for the years ended December 31, 2018, 2017 and 2016: 201820172016Federal statutory rate21.0 %35.0 %35.0 %Tax reform(1.1)18.9 -State income taxes, net of the federal tax benefit5.7 4.1 4.4 Stock based compensation7.6 (2.0)1.6 Other(0.1)(0.8)0.1 Effective tax rate33.1 %55.2 %41.1 %The Company’s effective tax rate for 2018 was 33.1%, compared to 55.2% in 2017, a decrease of 22.1%. The decrease in the effective taxrate is primarily attributable to the Tax Act, which reduced the U.S. federal statutory tax rate from 35% in 2017 to 21% in 2018. Income taxexpense in the fourth quarter of 2017 also included a charge to reduce the value of the Company’s deferred tax assets in accordance withthe Tax Act, which resulted in an 18.9% increase in the Company’s effective tax rate. Income tax expense in 2018 includes stock basedcompensation tax shortfall charges, which increased the Company’s effective tax rate by 7.6%.The Company’s effective tax rate for 2017 was 55.2% in 2017, compared to 41.1% in 2016, an increase of 14.1%. The increase in theeffective tax rate was primarily attributable to charges recorded to reduce the value of the Company’s deferred tax assets in accordance withthe Tax Act, which resulted in an 18.9% increase in the Company’s effective tax rate.75 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Components of net deferred income taxes are as follows at December 31:20182017(in thousands)Deferred income tax assets:Section 743 carryforward$14,730 $16,508 Leasehold improvement reimbursements3,719 3,642 Inventory1,635 1,229 Deferred rent5,960 5,456 Stock based compensation1,239 2,016 Other1,724 1,404 Total deferred income tax assets$29,007 $30,255 Deferred income tax liabilitiesDepreciation19,821 17,403 Other1,961 1,198 Total deferred income tax liabilities21,782 18,601 Net deferred income tax assets$7,225 $11,654 The Company completed its analysis of the impacts of U.S. tax reform in the fourth quarter of fiscal year 2018. Accordingly, the Companyhas recognized the tax consequences of all foreign unremitted earnings and management has no specific plans to indefinitely reinvest theunremitted earnings of its foreign subsidiary as of December 31, 2018. As of December 31, 2018, the total undistributed earnings of theCompany's non-U.S. subsidiary is approximately $0.8 million. The Company has provided deferred taxes of $0.1 million on withholdingtaxes, state taxes, and foreign currency gains and losses due on the repatriation of those earnings.The Company records interest and penalties through income tax relating to uncertain tax positions. As of December 31, 2018, 2017 and2016, 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 2017 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.76 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 12: 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 $3.2 million to the Investment Fund and, by virtue of such contribution, is entitled tosubstantially all of the tax benefits derived from the NMTC, while the Company effectively received net loan proceeds equal to U.S. Bank’scontributions to the Investment Fund. This transaction includes a put/call provision whereby the Company may be obligated or entitled torepurchase U.S. Bank’s interest. The Company believes that U.S. Bank will exercise the put option in December 2023 at the end of therecapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years asprovided in the Internal Revenue Code. The Company is required to be in compliance with various regulations and contractual provisionsthat apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not beingrealized and, therefore, could require the Company to indemnify U.S. Bank for any loss or recapture of NMTCs related to the financing untilsuch time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required inconnection 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 $3.2million, 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 $1.3 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, 2018, the balance of the contribution liability was $2.3 million, of which $0.5million was classified as other accrued liabilities on the consolidated balance sheet and $1.8 million was classified as other long-termliabilities on 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, 2018, the balance in the Investment Fund available forreimbursement to the Company was $0.8 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 the $19.1 million acquisition, rehabilitation, and construction of the Company’s distributioncenter and manufacturing facilities in Durant, Oklahoma. In this transaction, Tile Shop Lending loaned $13.5 million to the Tile ShopInvestment Fund LLC. The investors contributed $5.6 million to the Tile Shop Investment Fund LLC. The investors are entitled to the taxbenefits derived from the NMTC by virtue of their contribution while the Company received the proceeds, net of syndication fees, to applytoward the construction project. This transaction includes a put/call provision whereby the Company may77 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 Tile Shop Investment Fund LLC. The Company concluded that it is the primary beneficiary of the VIE and consolidated the Tile ShopInvestment Fund LLC, as a VIE, in accordance with the accounting standards for consolidation. In 2013, the investors’ contributions of$5.6 million, net of syndication 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 $4.4 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, 2018, the balance of the contribution liability was $2.3 million, of which $0.5million was classified as other accrued liabilities on the consolidated balance sheet and $1.8 million was classified as other long-termliabilities on the consolidated balance sheet. Note 13: 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 $1.6 million, $1.4 million, and $0.5 million ofemployee contributions in 2018, 2017, and 2016 and made no discretionary contributions for any of the years presented. Note 14: Quarterly Financial Data (Unaudited)Quarterly results of operations for the years ended December 31, 2018 and 2017 are summarized below (in thousands, except per shareamounts):First QuarterSecond QuarterThird QuarterFourth Quarter(in thousands)2018Net sales$91,134 $92,914 $89,259 $83,947 Gross profit64,038 65,312 63,011 58,978 Income from operations6,111 7,442 3,880 705 Net income (loss)4,011 4,958 2,553 (1,080)Basic earnings (loss) per share0.08 0.10 0.05 (0.02)Diluted earnings (loss) per share0.08 0.10 0.05 (0.02)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) 78 Table Of ContentsTile Shop Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements Note 15: Subsequent EventOn February 19, 2019, the Company declared a $0.05 dividend to stockholders of record as of the close of business on March 4, 2019.The dividend will be paid on March 15, 2019. 79 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 26, 2019/s/ CABELL H. LOLMAUGH Cabell H. Lolmaugh Chief Executive Officer 80 Table Of Contents POWER OF ATTORNEY Each person whose signature appears below constitutes CABELL H. LOLMAUGH and KIRK L. GEADELMANN, or either of them,as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place andstead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibitsthereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-factand agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorney-in-factand agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following personson behalf of the Registrant and in the capacities and on the date indicated. Signature Date /s/ CABELL H. LOLMAUGH February 26, 2019 Cabell H. Lolmaugh Chief Executive Officer, Director (Principal Executive Officer) /s/ KIRK L. GEADELMANN February 26, 2019 Kirk L. Geadelmann Chief Financial Officer (Principal Financial and Accounting Officer) /s/ PETER H. KAMIN February 26, 2019 Peter H. Kamin Director and Chairman of the Board of Directors /s/ PETER J. JACULLO February 26, 2019 Peter J. Jacullo, Director /s/ TODD KRASNOW February 26, 2019 Todd Krasnow, Director /s/ PHILIP B. LIVINGSTON February 26, 2019 Philip B. Livingston, Director /s/ CHRISTOPHER T. COOK February 26, 2019 Christopher T. Cook, Director /s/ ROBERT A. RUCKER February 26, 2019 Robert A. Rucker, Director 81 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*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.​10.2*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.​10.3*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.​10.4*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.​10.5*Tile Shop Holdings, Inc. Nonstatutory Stock Option Agreement – incorporated by reference to Exhibit 10.4 to theRegistrant’s Current Report on Form 8-K filed July 26, 2013.​10.6*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.​10.7*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.​10.8Stipulation 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.​10.9*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.​10.10*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.​10.11*Employment Agreement between Tile Shop Holdings, Inc. and Cabell Lolmaugh, dated February 19, 2018 – incorporated byreference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 21, 2018.​10.12Credit Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, Tile ShopLending, Inc., certain subsidiaries of The Tile Shop, LLC as borrowers, each lender from time to time party thereto, and Bankof America, N.A., as Administrative Agent, Swing Line Lender and an L/C issuer – incorporated by reference to Exhibit 10.1to the Registrant’s Current Report on Form 8-K filed September 19, 2018.82 Table Of Contents ​10.13Security Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, TileSecurity Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, Tile ShopLending, Inc., The Tile Shop of Michigan, LLC, and Bank of America, N.A., as Administrative Agent – incorporated byreference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed September 19, 2018.​10.14Securities Pledge Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC,Tile Shop Lending, Inc., The Tile Shop of Michigan, LLC, and Bank of America, N.A., as Administrative Agent –incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed September 19, 2018.​10.15Guaranty Agreement, dated as of September 18, 2018, by and among Tile Shop Holdings, Inc., The Tile Shop, LLC, Tile ShopLending, Inc., The Tile Shop of Michigan, LLC, and Bank of America, N.A., as Administrative Agent – incorporated byreference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed September 19, 2018.​21.1Subsidiaries of Tile Shop Holdings, Inc. – incorporated reference to Exhibit 21.1 to the Registrant’s Annual Report on Form10-K for the year ended December 31, 2017.​23.1Consent of Ernst & Young LLP, independent registered public accounting firm – filed herewith.​24.1Power of Attorney (included on the “Signatures” page of this Annual Report on Form 10-K).​31.1Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – filed herewith.​31.2Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – filed herewith.​32.1**Certification by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.​32.2**Certification by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.101.INS+XBRL Instance Document.101.SCH+XBRL Taxonomy Extension Schema Document.101.CAL+XBRL Taxonomy Extension Calculation Linkbase Document.101.DEF+XBRL Taxonomy Extension Definition Linkbase Document.101.LAB+XBRL Taxonomy Extension Label Linkbase Document.101.PRE+XBRL Taxonomy Extension Presentation Linkbase Document.*Management compensatory plan or arrangement.**These certificates are not deemed filed with the Securities and Exchange Commission and are not to be incorporated byreference in any filing we make under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, asamended. 83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 26, 2019, 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, 2018./s/ Ernst & Young LLPMinneapolis, MinnesotaFebruary 26, 2019EXHIBIT 31.1302 CERTIFICATION OF CHIEF EXECUTIVE OFFICERI, Cabell H. Lolmaugh, 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 26, 2019/s/ CABELL H. LOLMAUGH Cabell H. LolmaughChief 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 26, 2019/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, Cabell H.Lolmaugh, the Chief Executive Officer of Tile Shop Holdings, Inc. (the “Company”), hereby certify that the AnnualReport on Form 10-K of the Company for the year ended December 31, 2018 (“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 26, 2019/s/ CABELL H. LOLMAUGH Cabell H. LolmaughChief 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, 2018 (“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 26, 2019/s/ KIRK L. GEADELMANN Kirk L. GeadelmannChief Financial Officer

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