The Tile Shop (NASDAQ: TTS)

A Deadly Mosaic: Poisoned Tile, Bad Actors, Unsustainable Margins, and a Stock Ready to Crack
October 21, 2013

Infitialis Research Collective

The Tile Shop: Executive Summary

Acting on a whistleblower tip, the Infitialis Research Collective has invested several months investigating The Tile Shops business operations and miraculous stock market rise. Frankly, we were shocked at the extent of management malfeasance uncovered and the clear and present danger this Company represents to the public at large. 1. After listing via a SPAC a little over a year ago at $10.00/share, Tile Shops share price has increased more than 2.5x to all-time highs on the back of the Companys suspiciously high EBITDA margins, aggressive growth plan to more than triple its store count, and heavy cheerleading from sell-side analysts 2. However, independent laboratory testing results indicate a significant number of The Tile Shop products have DANGEROUS lead contaminations up to 13,900% greater than the United States Consumer Product Safety Commission limits for products that come in contact with children 3. The Tile Shops lead contaminated products represent a clear and present danger to consume r safety as the tiles are recommended for kitchen and bath installation in close proximity to food prep and shower areas, significantly increasing the probability of lead transmission to children 4. In addition to consumers abandoning The Tile Shop due to significant concerns about product safety, the liabilities associated with any potential product recalls, regulatory investigations, and class action litigation could swamp the Companys very limited liquidity and less than $3.8mm in available cash 5. The Companys current m anagement team is wholly unfit for public company stewardship with a Founder/CEO convicted of FRAUD and the SVP of Operations is presently out on PROBATION 6. The Tile Shops LTM EBITDA margins of 27.0% is more than 2x its peer comparables and will compress due to its reliance on mickey-mouse Chinese suppliers and increasing overhead costs 7. The Tile Shops plan to more than double the historical store expansion rate appears nothing more than a scheme to jack the share price based on the false mirage of growth as opposed to creating long term value for all public shareholders 8. The Chan Brothers, with their dubious and notorious lineage in Hong Kong real estate, have been selling down their ~30% ownership stake in The Tile Shop acquired for $12mm at $10.00/15.00/24.25 per share and will likely dump more on the market when their current 150 day lock-up agreement expires at the end of the month Long investors in The Tile Shop should consider immediately reducing the position as public dissemination of these dangerous lead concerns will likely lead to a massive correction in the Companys stock price. Speculative investors should consider a short position in The Tile Shop as it appears overvalued on a fundamental basis at 23.9x FV/EBITDA and 55.8x P/E consensus FY13 sell-side estimates and the issues uncovered in this report will likely accelerate a pricing correction.

Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective

The Tile Shop Introduction

Founded in 1985 by current CEO Mr. Robert Rucker with a single store in Rochester, Minnesota, The Tile Shop (Tile Shop or the Company)(NASDAQ: TTS) is currently one of the largest specialty retailers of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the United States. As of June 30, 2013, the Company had 75 stores in 25 states with an average footprint of 23,000 square feet.

Capitalization $mm, excl. share price Current Share Price Outstanding Shares Dilutive Effect of Options Market Capitalization Less: Cash Add: Debt , Capital Leases, & Other Enterprise Value 10/17/2013 $25.61 51.1 1.1 $1,337.1 3.8 98.6 $1,431.8

Valuation Multiples $mm; Consensus Est 2q13 LTM EBITDA 2013E EBITDA 2014E EBITDA 2q13 LTM Net Income 2013E Net Income 2014E Net Income Stores, $mm per location Figure $55.4 $60.0 $77.3 ($108.8) $24.0 $33.5 75 Multiple 25.9x 23.9x 18.5x NM 55.8x 39.9x $19.1

After going public via a SPAC on only 08/22/12 at $10.00/share (it never would have passed a convention IPO due diligence process), Tile Shops share price has increased more than 2.5x to all time highs on the back of the Companys aggressive growth plan to more than triple its store count, shockingly high EBITDA margins relative to its comparables, and heavy cheerleading from sell-side analysts, including CreditSuisse adding the Company to its Top U.S. Investment Ideas List on 09/05/13 with $31 PT. With equity investors blindly bidding up all stocks related to the United States residential housing recovery, The Tile Shop shareholders have ignored critical questions about the history of the business operation and the safety of the products that have allowed the Company to earn shockingly fat margins. Currently trading at 23.9x FV/EBITDA and 55.8x P/E consensus FY13 sell-side estimates, The Tile Shops market valuation is egregiously rich before even considering the significant business issues discussed in this report. Moreover, the current consensus sell-side financial estimates will become unreliable once consumers abandon The Tile Shop in droves due to very serious health and safety concerns about the Companys core tile products.

Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective

DANGEROUS Levels of Lead Contamination in The Tile Shop Products Significant Recall, Remediation, and Class Action Risks
The Tile Shop claims to be able to earn sustainable EBITDA margins of >25%, more than 2x its similar big-box home improvement competitors, because its Vertically Integrated Value Chain allows it to minimize cost, maintain quality, and reduce risk. Specifically, approximately 58% of The Tile Shops purchased products are sourced from Asia, and primarily from three Chinese suppliers of dubious lineage based on PIERS U.S. customs import data. The Tile Shop August 2013 Investor Presentation Slides 7 & 8

Moreover, as part of its consumer advertising campaigns, The Tile Shop repeatedly stresses that its unique sourcing process allows it to guarantee the finished product is inspected to ensure quality control and always made to our high standards, at every stage of production. However, the Companys boisterous claims appear to be nothing more than a dangerous form of unsubstantiated puffery because independent laboratory testing of The Tile Shop products raises serious concerns about significant lead contamination of the tiles sold in its stores throughout the United States.

Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective

Independent Lab Tests Indicate DANGEROUS Lead Contamination in Tiles

We recently acquired a variety of tile samples from the Companys retail locations in the critical East Coast, Midwest, and Western regions of The Tile Shops geographic footprint. After the tiles were individually logged/ tagged, split-sampled, , and bagged, the samples were dispatched to a United States Consumer Product Safety Commission (CPSC) and ISO/IEC 17025 accredited independent laboratory for lead concentration testing utilizing the Environmental Protection Agency (EPA) approved methodologies. For additional discussion of the tile testing process, please review Appendix 1: Laboratory Testing Methodology. The independent laboratory testing results are simply shocking and indicate a significant number of The Tile Shop tile products currently being sold to consumers and installed in homes have dangerous lead concentrations significantly higher than the CPSC total lead content limit as of 08/14/11 of 100 parts per million (ppm) for products that come in contact with children.

Selected Independent Laboratory Lead Testing Results

Tile Name Glass Smokey 3 x 6 in Egeum Azure 4 x 4 in Egeum Azure 4 x 4 in Honey Onyx Medley 12 x 12 in Imperial Bianco Gloss 3 x 6 in Glass Smokey 3 x 6 in Honey Onyx Medley 12 x 12 in TTS SKU 615701 682800 682800 655883 441955 615701 655883 The Tile Shop Location Mid-West East-Coast Mid-West Mid-West East-Coast East-Coast Western Lead Concentration, PPM (mg/kg) 14,000 1,100 420 230 110 98 89 Lead Safety Threshold (mg/kg) 100 100 100 100 100 100 100 % Over Threshold 13,900% 1,000% 320% 130% 10% N/M N/M

Significance of Lead Contamination in Tiles

The Tile Shops products appear to present a significant health risk for multiple reasons. First, as a reminder of basic high school chemistry, lead is a heavy metal that is toxic for 4 Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective humans, and is associated with lowered levels of learning, impaired hearing, brain damage and, at high levels, fatalities in children. Second, The Tile Shop specifically advertises its products for kitchen and bath applications, dramatically increasing the probability of lead transmission to humans, and specifically children, once the tile is installed because of the direct contact with food preparation areas in kitchens and with bare skin in bathrooms via floors, shower-stalls, etc. Finally, as The Tile Shop encourages DIY installations, there is a significantly greater probability the homeowner will create excessive amounts of lead-contaminated dust and spread these dangerous lead contaminations throughout their home as part of the tile fitting, cutting and installation process due to a lack of hazardous materials handling training and experience.

Sample Lead Testing Laboratory Results CPSC Lead Limit: 100 mg/kg Glass Smokey 3 x 6 in: Mid-West - 14,000 PPM Lead Content
REDACTED REDACTED

Egeum Azure 4 x 4 in: East-Coast - 1,100 PPM Lead Content

REDACTED REDACTED

Egeum Azure 4 x 4 in: Mid-West - 420 ppm Lead Content

REDACTED

REDACTED

Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective

Business and Liability Implications of The Tile Shops Lead Contamination

As DIY customers become aware of the significant potential health and safety risks of installing lead contaminated tiles from The Tile Shop in their homes, the economic consequences for The Tile Shop will be catastrophic. Customers will simply purchase tiles, a fungible commodity product, at other established retailers, such as Home Depot and Lowes, which utilize robust sourcing processes and procedures to ensure the safety of products on their shelves, which will kill The Tile Shops future revenue, cash flow, and store expansion plans. In addition to the catastrophic effect on The Tile Shops future earnings potential, the Company will face a potentially paralyzing drain on its liquidity as it resolves the effects of the lead-contaminated tiles already in its inventory and installed in customers homes. As of

06/30/13, The Tile Shop reported $58.7mm of inventories, or more than 25% of its total assets, all of which should be tested for lead contaminants, and the contaminated product will have to be responsibly disposed. More significantly, as of 06/30/13, The Tile Shop had only $3.8mm in cash and equivalents available, yet is burdened by $98.6mm in debt, capital leases, and deferred rent obligations. A product recall and replacement inventory expenses could quickly swamp The Tile Shops already stretched liquidity and put it in violation of its debt covenants, quickly precipitating a bankruptcy filing. Even more serious than the lead-contaminated inventory issue, The Tile Shop faces potentially crippling liabilities from regulatory actions and class-action lawsuits regarding damages associated with its sale of lead contaminated products. For example, The Tile Shop may be liable for the removal, remediation, and replacement of lead-contaminated tiles sold during its 28 years of sourcing tile from China. Previous class-action cases for China sourced and other lead-contaminated products have been for tens to hundreds of millions of dollars, including Mattels lead contaminated toys, $80mm for sulfurous drywall installed in homes in Florida, and the $200mm suit against WASA for lead contamination in drinking water. 6 Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective

Bad Actors Founder/CEO Convicted of FRAUD, SVP Currently on PROBATION

The Tile Shop currently has a very thin management bench as it is still undergoing the painful transition to overcome its prior material weaknesses on internal controls as a family operated business to a publicly-traded corporation. Moreover, the prior history of the current management team should raise significant concerns for investors based on their track record of fraud, criminal behavior, and business failures. The Tile Shop August 2013 Investor Presentation Slides 14

CEO/Founder Convicted of FRAUD

On 09/26/05, Mr. Robert Rucker, Founder/CEO, was convicted of fraud in a civil case with his ex-wife for misrepresenting and failing to disclose information relating to the financial condition of The Tile Shop to a neutral business appraiser retained to value the Company as part of their divorce proceedings. In the fiery post-trial ruling, Judge Kaman of the Minnesota Civil Court awarded Katherine Rucker pre-judgment interest, costs, and disbursements of an additional $4.2mm (vs. the original $2.4mm divorce settlement) in light of Robert Ruckers fraudulent behavior and disingenuous scheming in a ham-fisted scheme attempting to minimize the compensation paid to the mother of his child. To fully understand the fraud conviction against Mr. Robert Rucker, Founder/CEO, it is useful to review the dramatic saga of The Tile Shop business. Founded in 1985 with a single 7 Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective store in Rochester, Minnesota, Mr. Robert Rucker had a 50% equity interest along with his partner and CFO, Mr. Rodney Sill, who owned the other 50% equity interest. On 04/06/00, Mr. Robert Rucker filed for divorce from his wife of 24 years, Ms. Katherine Rucker, and a neutral business appraiser was jointly retained to value their marital assets, including the 50% equity ownership of The Tile Shop, as of 12/31/00, when the Company had 14 stores in the upper Midwest. As part of purportedly neutral business appraisal process, Mr. Robert Rucker provided false and misleading information as well as financial records that were intentionally and fraudulently altered to cause The Tile Shops appraised value to be grossly understated for the purpose of the divorce. Mr. Robert Rucker supervised his attorney and employees as they created a doom and gloom financial forecast that in his own words was the worst possible damn scenario to be shared with the neutral business appraiser. Specifically, The Tile Shop financial forecast Mr. Robert Rucker represented as accurate for FY01-FY03 had the store count remaining static at 14, annual revenue barely growing from $46.9mm to only $49.6mm, gross margins shrinking a dreadful 710bps from 61.2% in FY01 to 54.0% in FY03, and net income before tax dropping from $2.9mm in FY01 to $2.3mm in 2003. Based on the financial forecast Mr. Robert Rucker represented as being truthful and accurate, the 50% equity interest in The Tile Shop was valued at $7.125mm, or $1.02mm per store on an enterprise value basis. As the neutral business appraisal process was being completed for the divorce, Mr. Robert Rucker was simultaneously utilizing for business planning a second set of significantly more bullish financial forecast that were not shared with his wife, which forecast $6.9 mm of net income in FY01 while also engaging in lease discussions to open as many as 6 new stores the instant the divorce was finalized. According to The Tile Shops FY01 audited financial

statements, the Company generated $51.8mm in revenue and $6.7mm in net income before taxes. In other words, the internal financial forecast that Mr. Robert Rucker possessed and 8 Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective utilized, but fraudulently withheld from the neutral business appraiser, were almost perfectly accurate. Almost two years after the divorce was finalized, Ms. Katherine Rucker became aware of her ex-husbands skull-drudgery regarding The Tile Shops financial forecast and filed a fraud upon the court civil action in the Hennepin County District Court in Minnesota. After a bench trial in March 2005, Judge Kaman found Mr. Robert Rucker guilty of fraud by misrepresenting or failing to disclose information relating to the financial condition of The Tile Shop to the neutral business appraiser as part of the state court supervised the divorce proceedings. Based on the finding of fraud upon the court against Mr. Robert Rucker on post-trial motions, Judge Kaman granted Ms. Katherine Rucker equitable relief by setting aside the prior divorce settlement. Judge Kaman thereafter redistributed the value of The Tile Shop as a marital asset and awarded Ms. Katherine Rucker an additional $4.2mm in pre-judgment interest, costs, and penalties based on the revised appraisal utilizing the correct financial forecast, for $30.7mm enterprise valuation or an implied $2.2mm per store (including penalties and interest due). After settling the fraud complaint with Mr. Robert Rucker, Ms. Katherine Rucker subsequently sued his attorney and law firm for being complicit in the egregiously fraudulent scheme for $10.1mm in damages, which included a trebling award from the original action. Ms. Katherine Rucker successfully litigated the case all the way through a judgment in the Minnesota Supreme Court on 01/05/11 and then settled for a confidential amount rumored to be in the mid-seven figures. In summary, it is shocking to see the CEO of a $1.5bn NASDAQ company was convicted of fraud just a few years ago for intentionally mis-marking The Tile Shop financials in a ham-fisted scheme attempting to minimize the lawful compensation paid to the mother of his 9 Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective child. Moreover, even under the revised valuation of The Tile Shop imposed by the court after the fraud conviction of Mr. Robert Rucker, each store was valued at only approximately $2.2mm including penalties and interest due, versus the $19.1mm valuation the equity market currently ascribes to each of the Companys stores and the $1.4mm new store opening cost described by the current Tile Shop management team.

Senior VP of Operations Currently on PROBATION

After Founder & CEO Mr. Robert Rucker, the second-highest compensated executive in FY12 was Mr. Joseph Andrew Kinder, the Senior Vice President - Operations, who took home $1.96mm in total compensation, including base salary, bonus, and options awards. Starting as a Sale Associate in one of the original Tile Shop locations in 1993, Mr. Kinder rose through the ranks to become Mr. Robert Ruckers right-hand man, overseeing all distribution/manufacturing and managing the international purchasing reportedly critical to The Tile Shops outsized margins. However, Mr. Kinders failure in oversight to prevent the significant lead contamination in The Tile Shops products sold to consumers is not exceedingly shocking considering he is currently out on PROBATION until next year after getting involved in a domestic dispute and altercation with responding police officers. After screaming FUCK YOU, I cant believe you called the cops at his wife in front of their two young children upon the arrival of the police, Mr. Kinder was arrested and charged with two gross misdemeanors (a felony charge, for Domestic Assault By Strangulation, was eventually dropped). In addition, Mr. Kinder appears to have been previously indicted for a DUI in Minnesota in 1993, which provides further evidence of his criminal behavior, poor decision making, and general lack of self-control. If Mr. Kinder has a similar behavioral outburst over the next few months and gets his probation revoked, he will be returned to Culver County Jail (where he has already served three days as part of his conviction) to complete the remainder of his sentence, making it nearly impossible for The Tile Shops vertically integrated value chain to continue to operate aft er 10 Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective losing this key-man. Moreover, most recent investors in The Tile Shop seem to be completely unaware of the criminal record of Mr. Joseph Kinder or the caliber of characters the Founder/CEO, Mr. Robert Rucker, relies upon to operate his business as a going concern. Finally, although on 10/01/13 The Tile Shop announced it had hired Mr. Chris Homeister, age 44, as Chief Operating Officer for an annual base salary of $300k, his previous experience at the failing retailer Best Buy (NYSE: BBY) does not inspire much confidence in his ability to effectively manage a retail growth strategy or effectively supervise Mr. Joseph Kinder and the apparently now demoted Mr. Carl Randazzo, the current Senior Vice President - Retail. For example, while at Best Buy, Mr. Chris Homesiter spearheaded their disastrous venture into the pawnshop industry to buy/sell used video games like Game Stop (NYSE: GME) and attempted restructuring of the Rhapsody RealNetworks Best Buy Digital Music Store (a purported iTunes competitor). Neither of these unsuccessful ventures appears remotely applicable to a DIY tile retailer. Moreover, this announcement may be indicative the Companys Founder/CEO, Mr. Robert Rucker, is looking to spend more time at his Hawaii beach-house with his new wife, Ms. Lee Shoon, and less time continuing to nurture growth at the Company as a hands-on manager. Mr. Joseph Kinder, Senior V.P. Operations, Carver County Sherriff Booking Photo

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Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective Mr. Joseph Kinder, Senior V.P. Minnesota Criminal Records History

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Unsustainable Margins for a Commodity Product Significant Near Term Pricing and Cost Pressures
Tile is a classic fungible commodity product (assuming it is not contaminated with dangerous amounts of lead). Once purchased or installed, it is virtually impossible to determine if a tile was sourced from a commercial flooring supplier, big-box home improvement supplier, or a DIY consumer retailer like The Tile Shop. The Home Depot (NYSE: HD) continues to roll out its Expo format stores and Lowes is making significant investments in store refurbishments, both of which features full room vignettes similar to The Tile Shop and allow customers to pick out all remodeling fixtures and accessories, such as sink, cabinetry, appliances, etc., in a onestop format, as opposed to going to The Tile Shop solely for tile/stone and then having to source all the other pieces of a kitchen or bath renovation from alternative suppliers while ensuring the harmony of the various pieces. More importantly, The Home Depot and Lowes, despite their significantly larger economies of scale in sourcing and existing nation-wide geographic footprint, are happy to earn 13.2% and 10.6% EBITDA margins, respectively, versus The Tile Shops 27.0% LTM EBITDA margins. The consumer tile sector is becoming more price-competitive as more price discovery occurs on-line and the Companys margins will dramatically compress if they continue to

attempt to gain market share. In summary,

The Tile Shop is not selling stretchy yoga pants or iPads la $LULU or $AAPL; its colored tile.
Peer Median: 11.4%

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Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective In addition to revenue pricing pressure from larger-scale and better capitalized nationwide incumbent home improvement retailers, The Tile Shop is also facing significant margin pressure on the cost side. In the last quarter alone, it hired an additional 22 people as corporate staff (which is expected to adversely affect margins by 200bps going forward) to help complete its corporate infrastructure after the prior material weakness issues with financial reporting. In addition, The Tile Shop recently announced a $1.0mm advertising venture (~17% of FY12A net cash flow) with Pocket Hercules. Shareholders should review below a sample advertisement developed by The Tile Shop management team to determine if they believe this venture to be the best use of the Companys limited funds and if it will be accretive to net margins. Naked Guy in Shower Advertisements $1mm Per Year or 17% of FY12A Net Cash Flow

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Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective Finally, in an apparent attempt to pull forward sales to hit its 3q13 revenue and samestore sales growth numbers for sell-side expectations, The Tile Shop ran, in quick succession, several heavily promoted discount sales at the end of last month. On September 22-23, all floor and wall tiles were 15% off in all stores for a Fall is Beautiful Sale and on September 26, an flash sale offered 25% off on all online purchases. This margin dilutive cannibalization of future quarters sales is extremely toxic to the business prospects of the Tile Shop and should give current shareholders significant concern about the long-term earnings potential of the business. September 20-23, 2013 End of Quarter Sale 15% Off

September 26, 2013 25% Off Online Flash Sale

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Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective

Unsustainable and Unachievable Store Expansion Plans

Much of the current investor excitement regarding The Tile Shop revolves around Wall Street expectations of the Company rapidly increasing its store count. Since its founding in 1985, The Tile Shop has generally funded its annual single-digit store expansion to adjacent geographic areas by utilizing organically generated internal cash flow. This historical rate of expansion has allowed it to optimize the capacity of its regional distribution centers (critical for the significant transportation costs of heavy tile) and perform adequate site diligence on potential retail locations demographics and potential tile demand to ensure the long-term business success of the store.

However, since going public, The Tile Shop management team has turbocharged Wall Street expectations to expanding to 140-150 stores as a near term opportunity over the next few years and reaching >400 stores thereafter. Rapidly increasing the rate of its geographic footprint

expansion will likely be dilutive to the Companys business operations as it 1) expands into m arginal locations with lower annual earnings potential, 2) in-fill stores will cannibalize existing store sales (for example, the new stores opening this fall in Norwalk and Danbury CT, respectively, are less than 30 miles apart and are also very close to the existing store in Scarsdale, NY, and 3) the dramatic increase in store openings is outstripping the supply of its experienced Assistant & Head Store Managers ready to move to a new location and handle the start-up a new store, which will dramatically decrease customer satisfaction and critical repeat and referral sales. After reviewing The Tile Shop saga and managements turbo-charged store expansion plans, investors would be wise to review the trajectory of a similar SPAC-funded disaster: American

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Infitialis Research Collective

Apparel. After completing a SPAC listing in December 2006 with Endeavor Acquisition Corp (which ironically utilized the same IR firm as The Tile Shop: ICR Inc.), shares initially popped on investors excitement of managements promise to open >800 stores worldwide , but slowing SSS growth and management issues precipitated a dramatic decline in the share price and multiple near-bankruptcy rescue financings. Moreover, store count has actually declined over the last few years and is now below 250.

Moreover, prudent investors should not rely upon The Tile Shops store expansion plans at face value based on the prior history of broken promises and fraudulent misrepresentations by CEO/Founder Mr. Robert Rucker. For example, on 03/06/01 and 04/07/01, despite operating only 20 stores at the time, The Tile Shop indicated, in order to increase its working capital facility, with Wells Fargo, the Companys primary bank, it planned to operate 50 stores by no later than January 1, 2005. In actuality, it took The Tile Shop until the end 2011, nearly 6 years after its original bank forecast, and despite purportedly robust financial results between 2005 and 2011, to open its 50th store. Based on The Tile Shops management teams prior track of providing fraudulent and

misleading financial forecasts in an attempt maliciously achieve its internal goals, it seems prudent for investors to heavily discount The Tile Shops purported store expansion plans currently built into the share price.

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Infitialis Research Collective

Landmines Abound: Dubious SPAC History with $450mm Valuation, Material Weaknesses, and Chan Brothers/Nabron Lock-Up Expiration
First, because The Tile Shop elected to access the public equity markets via a SPAC transaction on 08/22/12 at $10.00/share as opposed to a traditional IPO listing process, it is important for current investors to contemplate the structural considerations of this alternative financial product. Because of the relatively short and defined time period available for a SPAC to source and execute a transaction or face liquidation, the management teams are often rushed to complete any potential acquisition by a drop-dead date, despite whatever last minute due diligence concerns arise during closing. As a result of this adverse selection bias for acquisitions, the average return for the 111 SPACs between 2004 and 2013 which successfully acquired a company was -14.4%, according to SPAC Analytics. By contrast, the Russell 3000stock index returned +5.9% in that same period. Its not just that SPAC returns are terrible. There have been some spectacular failures and frauds, which have completely wiped out equity holders, as SPACs have rushed into market fads like energy, water, and China. For The Tile Shop, the SPAC due diligence process appears extremely rushed and the sellers valuation range is extremely concerning relative to the current market price. Between 05/08/12 and 06/27/12, less than 50 calendar days, the entire transaction structure was negotiated, due diligence was purportedly completed, and the merger agreement was executed. More concerning for current Tile Shop stock holders, the sellers of the Company, including Mr. Robert Rucker, was willing to entertain merger discussions as low as $450mm in enterprise valuation (9.0x expected EBITDA for 2012) versus the current $1,431.8mm market enterprise price (23.9x street EBITDA expectations for 2013). Moreover, The Tile Shop was adequately capitalized at the time of the merger to allow Mr. Robert Rucker to continue the historical organic store expansion rate of 5-8 new stores per year and no other stockholders had an apparent rushing need to monetize their investment in the Company. What does Mr. Robert Rucker know that the market is currently not considering? 18 Report on The Tile Shop (NASDAQ: TTS)

Infitialis Research Collective Next, during 2012, The Tile Shops auditors identified several material weaknesses in their financial reporting, including, but not limited to, a lack of sufficiently competent personnel, a lack of financial close processes, and deficient financial reporting systems to ensure the accurate and timely reporting of the Companys financial results. While The Tile Shop has supposedly remediated these issues after hiring Mr. Tim Clayton as CFO, investors would still be prudent to review the Companys reported financials with appropriate skepticism in light of the management teams limited public company experience, rapid business expansion, and historical issues. For example, since The Tile Shop allows unlimited product returns without any restocking fees (unlike any of its peers and potentially allows the Company to pull forward phantom revenue and SSS growth metrics), can investors really have robust confidence that the $58.7mm in purported inventories (~25% of total assets and growing faster than sales) as of 06/30/13 is ready to be sold to customers, instead of being contaminated with lead and/or consisting of boxes of broken, chipped, or discolored returned tiles from previous failed renovation projects? Lastly, the Ronnie and Gerald Chan brothers of Hong Kong currently control ~22.5% of The Tile Shops equity via their Bahamian shell company Nabron International, Inc. After

acquiring an original 30% equity interest in The Tile Shop for only $12.0mm in total consideration in October 2002 (for an approximately $2.2mm per store enterprise valuation versus the current market valuation of $19.1mm per store), they have been highly motivated sellers at $15.00/share and $24.25/share of the Company since going public via the SPAC at $10.00/share. As their 150-day lockup from the most recent secondary share sell-down expires at the end of this month, it would not be surprising if they dumped a significant portion of their remaining $360mm equity value ownership stake on the market (~60 days trading volume) at these current stratospheric valuation levels. In addition to the share overhang, the Chan

Brothers intertwined involvement in the situation raises further questions about the Companys Report on The Tile Shop (NASDAQ: TTS)

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Infitialis Research Collective lead contaminated tile product sourcing relationships in China in light of the numerous accusations of their involvement in significant corruption and fraud throughout Asia. Overall, this situation appears disturbingly similar to Enron Corporation, where Mr. Ronnie Chan served as a Board of Directors and Audit Committee member leading up to its infamous Chapter 11 bankruptcy filing and was selling shares for his personal account up to the firms sordid collapse. Finally, the Chan Brothers are not the only insiders selling, as a variety other Board of Directors and management team members have been selling shares and indicating more shares are forthcoming over the next 90 days via multiple form 144 registrations. Mr. Ronnie Chan: Enron Corporation 1998 Board of Directors Picture Standing to the left of Mr. Jeff Skilling (seated) and Mr. Kenneth Lay (seated)

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Valuation: The Tile Shop Trades at an Unsustainable Premium to its Comparables and Intrinsic Value
Currently trading at 23.9x FV/EBITDA and 55.8x P/E consensus FY13 sell-side estimates, The Tile Shops market valuation appears egregiously rich relative to its public comparables in the home improvement retailer, best-in-class consumer product retailers, and high-growth retailer sectors, which trade at a median of 11.0x FV EBITDA and 20.5x P/E consensus FY13 estimates. In light of all the serious business issues identified earlier in this report, The Tile Shops current premium valuation appears completely unsustainable. The Tile Shop Trading Comparables
Company High Growth Retailers MICHAEL KORS HOLDINGS LTD LULULEMON ATHLETICA INC FRESH MARKET INC/THE MATTRESS FIRM HOLDING CORP FRANCESCAS HOLDINGS CORP Best-in-Class AUTOZONE INC DICK'S SPORTING GOODS INC GNC HOLDINGS INC-CL A Home Improvement HOME DEPOT INC LOWE'S COS INC TRACTOR SUPPLY COMPANY LUMBER LIQUIDATORS HOLDINGS TOPPS TILES PLC Ticker KORS US Equity LULU US Equity TFM US Equity MFRM US Equity FRAN US Equity AZO US Equity DKS US Equity GNC US Equity HD US Equity LOW US Equity TSCO US Equity LL US Equity TPT LN Equity Price $73.75 $72.45 $52.98 $31.90 $17.08 $429.13 $52.05 $55.60 EV $14,974.9 $10,508.1 $2,561.3 $1,080.3 $753.1 $14,716.2 $6,518.3 $5,298.5 FV $14,335.7 $9,897.9 $2,590.4 $1,306.6 $713.5 $18,583.6 $6,398.1 $6,331.4 LTM EBITDA Dividend Margin Yield 32.1% 28.5% 11.3% 10.7% 28.4% 21.9% 11.2% 20.3% 13.2% 10.6% 11.4% 12.7% 10.4% 32.1% 17.1% 12.7% 10.4% 27.0% ------4.8% 1.0% 1.9% 1.3% 0.7% -1.5% 4.8% 1.9% 1.4% 0.7% -FV-Revenue LTM FY13E 5.0x 5.1x 1.8x 1.2x 4.1x 2.0x 1.0x 1.7x 1.4x 1.0x 1.3x 1.7x 0.8x 5.1x 2.2x 1.7x 0.8x 7.0x 4.8x 6.0x 1.7x 1.1x 2.1x 2.0x 1.0x 2.4x 1.5x 1.1x 1.8x 2.9x 1.2x 6.0x 2.3x 1.8x 1.0x 6.2x FY14E 3.9x 5.0x 1.4x 1.0x 1.7x 1.9x 0.9x 2.2x 1.4x 1.1x 1.6x 2.6x 1.1x 5.0x 2.0x 1.6x 0.9x 4.8x FV-EBIDTA LTM FY13E 16.0x 16.8x 15.8x 11.6x 14.4x 9.3x 8.6x 8.8x 11.4x 9.9x 11.3x 15.6x 6.9x 16.8x 12.0x 11.4x 6.9x 25.9x 15.0x 21.7x 14.8x 9.5x 7.7x 8.9x 9.3x 11.8x 11.0x 10.4x 15.4x 21.5x 10.6x 21.7x 12.9x 11.0x 7.7x 23.9x FY14E 12.2x 17.1x 12.2x 8.1x 6.4x 8.5x 8.0x 10.3x 10.0x 9.4x 13.5x 17.4x 9.5x 17.4x 11.0x 10.0x 6.4x 18.5x LTM 28.8x 36.7x 35.8x 18.8x 26.7x 15.1x 20.7x 14.3x 21.9x 22.0x 23.0x 31.4x 8.9x 36.7x 23.4x 22.0x 8.9x NM P/E FY13E 26.6x 37.0x 34.6x 18.0x 15.0x 13.8x 19.8x 19.4x 20.5x 22.4x 29.6x 39.8x 17.2x 39.8x 24.1x 20.5x 13.8x 55.8x FY14E 21.8x 29.0x 28.4x 14.6x 12.4x 12.2x 16.8x 16.1x 17.3x 18.5x 25.3x 32.5x 14.8x 32.5x 20.0x 17.3x 12.2x 39.9x

$75.74 $108,493.3 $117,832.3 $49.02 $51,558.7 $59,346.7 $66.44 $9,276.2 $9,221.8 $107.09 $2,945.8 $2,861.1 86.00 165.2 209.8 Max Mean Median Min $117,832.3 $19,202.2 $6,398.1 209.8 $1,337.1 $1,431.8

TILE SHOP HLDGS INC

TTS US Equity

$25.61

In addition to the significant trading multiple premium to comparable peers, The Tile Shop is also trading at a significant premium to its DCF intrinsic value. For example, even under exceedingly bullish scenarios of continued double-digit annual revenue growth with outsized EBITDA margins, a FV/EBITDA exit multiple of 10.0x after FY23, and a 10% discount rate, the Companys DCF value is approximately $16.11 per share The Tile Shop Intrinsic DCF Valuation
Illustrative DCF Valuation Revenue % rev growth EBITDA % EBITDA Margin EBIT Tax Rate EBIT*(1-T) (+) Depreciation Operating CF (-) Working Capital (-) CAPEX FCF Terminal Value Discount Rate Exit FV/EBITDA Multiple PV of Cash Flows Terminal Value Enterpise Value Net Debt Equity Value Diluted Shares Out Per Share Value FY14E $299.3 29.0% $77.3 25.8% $55.9 39.5% $33.8 $21.4 $55.2 $10.1 $35.7 $9.5 $0 FY15E $377.2 26.0% $103.2 27.4% $78.1 39.5% $47.2 $25.2 $72.4 $11.7 $38.3 $22.4 $0 10% 10.0x $275.4 29.4% $661.6 70.6% $937.0 100.0% $94.8 $842.2 52.3 $16.11 DCF Sensitivity Analysis - Exit Multiple & Discount Rate - $/Share Discount Rate $16.11 9% 10% 11% 8.0x $14.94 $13.58 $12.35 Exit 9.0x $16.34 $14.85 $13.50 Multiple 10.0x $17.74 $16.11 $14.64 11.0x $19.14 $17.38 $15.79 FY16E $433.7 15.0% $124.3 28.7% $84.3 39.5% $51.0 $40.0 $91.0 $8.5 $40.0 $42.5 $0 FY17E $498.8 15.0% $138.2 27.7% $97.0 39.5% $58.7 $41.2 $99.9 $9.8 $41.2 $48.9 $0 FY18E $573.6 15.0% $154.0 26.8% $111.5 39.5% $67.5 $42.4 $109.9 $11.2 $42.4 $56.3 $0 FY19E $645.3 12.5% $156.3 24.2% $112.6 39.5% $68.1 $43.7 $111.8 $10.8 $43.7 $57.3 $0 FY20E $726.0 12.5% $171.7 23.6% $126.6 39.5% $76.6 $45.0 $121.6 $12.1 $45.0 $64.5 $0 FY21E $798.6 10.0% $161.7 20.3% $115.3 39.5% $69.8 $46.4 $116.2 $10.9 $46.4 $58.9 $0 FY22E $878.5 10.0% $174.6 19.9% $126.9 39.5% $76.8 $47.8 $124.5 $12.0 $47.8 $64.8 $0 FY23E $966.3 10.0% $188.8 19.5% $139.6 39.5% $84.4 $49.2 $133.6 $13.2 $49.2 $71.3 $0 TV

$0 $1,887.6

12% $11.24 $12.28 $13.31 $14.35

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Conclusions
Acting on a whistleblower tip, the Infitialis Research Collective has invested several months investigating The Tile Shops business operations and miraculous stock market rise. Frankly, we were shocked at the extent of management malfeasance uncovered and the clear and present danger this Company represents to the public at large. 1. After listing via a SPAC a little over a year ago at $10.00/share, Tile Shops share price has nearly

tripled to all-time highs on the back of the Companys suspiciously high EBITDA margins, aggressive growth plan to more than triple its store count, and heavy cheerleading from sell-side analysts 2. However, independent laboratory testing results indicate a significant number of The Tile Shop products have DANGEROUS lead contaminations up to 13,900% greater than the United States Consumer Product Safety Commission limits for products that come in contact with children 3. The Tile Shops lead contaminated products represent a clear and present danger to consumer safety

as the tiles are recommended for kitchen and bath installation in close proximity to food prep and shower areas, significantly increasing the probability of lead transmission to children 4. In addition to consumers abandoning The Tile Shop due to significant concerns about product safety,

the liabilities associated with any potential product recalls, regulatory investigations, and class action litigation could swamp the Companys very limited liquidity and less than $3.8mm in available cash 5. The Companys current management team is wholly unfit for public company stewardship with a The Tile Shops LTM EBITDA margins of 27.0% is more than 2x its peer comparables and will The Tile Shops plan to more than double the historical store expansion rate appears to be nothing

Founder/CEO convicted of FRAUD and the SVP of Operations is presently out on PROBATION 6.

compress due to its previous reliance on mickey-mouse Chinese suppliers and increasing overhead costs 7.

more than a scheme to jack the share price based on the false mirage of growth as opposed to create long term value for all public shareholders 8. The Chan Brothers, with their dubious and notorious lineage in Hong Kong real estate, have been

selling down their ~30% ownership stake in The Tile Shop acquired for $12mm at $10.00/15.00/24.25 per share and will likely dump more when their current 150 day lock-up agreement expires at the end of the month Long investors in The Tile Shop should consider immediately reducing the position as public dissemination of these dangerous lead concerns will likely lead to a massive correction in the Companys stock price. Speculative investors should consider a short position in The Tile Shop as it appears overvalued on a fundamental basis at 26.0x FV/EBITDA and 61.2x P/E consensus FY13 sell-side estimates and the issues uncovered in this report will likely accelerate a pricing correction.

Disclaimer The author of this report is short TTS.

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Appendix 1: Laboratory Testing Methodology

We recently acquired a variety of tile samples from the Companys retail locations in the critical East Coast, Midwest, and Western regions of The Tile Shops geographic footprint. After the tiles were individually logged/ tagged, split-sampled, and bagged, the samples were dispatched to a United States Consumer Product Safety Commission (CPSC) and ISO/IEC 17025 accredited independent laboratory for lead concentration testing utilizing the Environmental Protection Agency (EPA) approved methodologies of Flame Atomic Absorption Spectrophotometry and Acid Digestion of Sediments, Sludges, and Soils. Based on multiple conversations with The Tile Shop representatives in the East, Midwest and Western regions, we received repeated reassurances that its products were safe for DIY installation and use in homes with children, including for kitchen back-splashes near food-prep areas and in childrens bathroom bath/shower surrounds, were direct skin contact is expected. Below are excerpts of one

illustrative conversation with a Tile Shop sales associate (dubbed MP3 available here): Question: Is the Glass Smokey 3x6in (SKU 615701) appropriate for a childrens bath and shower Answer: Sure, absolutely Question: Are they [Glass Smokey 3x6in (SKU 615701)] popular in childrens baths now? Answer: Childrens, guest baths, kitchens they are popular everywhere right now Question: Are there any contaminates in the tiles we should be concerned about? Answer: Not in the tiles, no Question: Is that tile [Egeum Azure 4x4 (SKU: 682800)] appropriate for a kitchen backsplash Answer: Yeah, absolutely The independent laboratory testing results are simply shocking and indicate a significant number of The Tile Shop tile products currently being sold to consumers have dangerous lead concentrations significantly higher than the CPSC total lead content limit as of 08/14/11 of 100 parts per million (ppm) for products that come in contact with children.

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Appendix 2: Select Independent Laboratory Lead Concentration Testing Results

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