See accompanying notes to condensed consolidated financial statements

Lumber Liquidators Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

See accompanying notes to condensed consolidated financial statements

Lumber Liquidators Holdings, Inc.

Condensed Consolidated Statements of Other Comprehensive Income (Loss)

(in thousands)

(unaudited)

See accompanying notes to condensed consolidated financial statements

Lumber Liquidators Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

See accompanying notes to condensed consolidated financial statements

Lumber Liquidators Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share data and per share amounts)

(unaudited)

Lumber Liquidators Holdings, Inc. and its direct and indirect subsidiaries (collectively and, where applicable, individually, the “Company”) engage in business as a multi-channel specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories, operating as a single business segment. The Company offers an extensive assortment of exotic and domestic hardwood species, engineered hardwood, laminate and vinyl plank flooring direct to the consumer. The Company also features the renewable flooring products, bamboo and cork, and provides a wide selection of flooring enhancements and accessories, including moldings, noise-reducing underlay, adhesives and flooring tools. These products are primarily sold under the Company’s private label brands, including the premium Bellawood brand floors. The Company also provides in-home delivery and installation services to certain of its customers. The Company sells primarily to homeowners or to contractors on behalf of homeowners through a network of 354361 store locations in primary or secondary metropolitan areas in 46 states and nine store locations in Canada at JuneSeptember 30, 2015. In addition to the store locations, the Company’s products may be ordered, and customer questions/concerns addressed, through both its call center in Toano, Virginia, and its website,www.lumberliquidators.com. The Company finishes the majority of the Bellawood products on its finishing lines in Toano, Virginia, which along with the call center and corporate offices, represent the “Corporate Headquarters.”

 The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission. While these statements reflect all normal recurring adjustments which are, inIn the opinion of management, all adjustments (consisting of normal and recurring adjustments except those otherwise described herein) considered necessary for a fair presentation ofhave been included in the results of the interim period,accompanying condensed consolidated financial statements. However, they do not include all of the information and footnotes required by United States (“U.S.”) generally accepted accounting principles for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s annual report filed on Form 10-K for the year ended December 31, 2014.

The condensed consolidated financial statements of the Company include the accounts of its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Certain amounts have been reclassified to conform to the current presentation.

In 2014, the Company entered into an arrangement to begin to vertically integrate its domestic hardwood supply to feed its finishing lines. During the quarter ended June 30, 2015, the Company decided to discontinue certain of these vertical integration initiatives, which were previously consolidated as a variable interest entity, and terminated its prior arrangement. As a result, upon deconsolidation of the variable interest entity, the Company has recorded a charge of $1,457 in cost of sales for the nine months ended September 30, 2015 in its accompanying condensed consolidated statements of income upon deconsolidation of the variable interest entity.income. The charge was measured as the difference between the fair value of the assets received upon termination and the carrying value of the related net assets.

Results of operations for the three and sixnine months ended JuneSeptember 30, 2015 are not necessarily indicative of the results to be expected for the full year.

Fair Value of Financial Instruments

The carrying amounts of financial instruments such as cash and cash equivalents, accounts payable, other liabilities and borrowings under the revolving credit agreement approximate fair value because of the short-term nature of these items. Of these financial instruments, the cash equivalents are classified as Level 1 as defined in the Financial Accounting Standards Board ASC 820 (“ASC 820”) fair value hierarchy.

Certain non-financial assets, including property and equipment, have been written down and measured in the condensed consolidated financial statements at fair value. Fair value was based on expected future cash flows using Level 3 inputs under ASC 820.

Merchandise Inventories

The Company values merchandise inventories at the lower of cost or market value. The Company periodically reviews the carrying value of items in inventory and records an impairment chargea lower of cost or market adjustment when there is evidence that the utility of inventory will be less than its cost. In determining market value, the Company makes judgments and estimates as to the market value of its products, based on factors such as historical results and current sales trends. Although the Company believes its products are appropriately valued as of the balance sheet date, there can be no assurance that future events or changes in key assumptions would not significantly impact their value.

On May 7, 2015, the Company announced that it would suspend the sale of laminate flooring sourced from China. At JuneSeptember 30, 2015, the Company held merchandise inventories of that product in both its distribution centers and its retail stores with a cost of $19,828.$19,828 and coordinated moldings with a cost of $2,484. This cost assumes the Company sells this product through its retail stores. The Company continues to evaluate theand assess alternatives for disposition of these products and the potential releaseimplications these alternatives would have on the Company’s business. The Company’s future decision regarding the disposition of these products is subject to consideration and assessment of customer sentiment, market conditions, findings by regulatory agencies, legal proceedings, alternative channels for disposition and other factors. If the Company were to pursue or be required to pursue a disposition of these products other than through its retail stores, it is likely that the net realizable value of the suspension. In determiningaffected inventory would be materially less than its current carrying value.

Based on the foregoing, the Company concluded that as of September 30, 2015, the net realizable value of these products exceeded their cost. The Company’s considerations in arriving at this flooring exceeded its cost, the Company considered:conclusion included:

During the quarter ended June 30, 2015, the Company recorded an impairment charge of approximately $339within cost of sales on its condensed consolidated statements of incomerelated to its laminate flooring sourced from China, primarily for flooring with less than job-lot quantities on hand as the Company does not currently intend to purchase additional quantities of such product. Should future events or key assumptions, including the potential channels for disposition of the laminate flooring sourced from China, differ from current expectations, the Company may be required to record a material impairment charge related to this flooring.

During the quarter ended June 30, 2015, the Company appointed its founder as acting chief executive officer. As a result ofIn connection with this and other management changes, the Company determined that it would refocus on its core business and it would not pursue an expansion into the tile flooring business in the near term. In 2014, the Company had begun to sell tile flooring and related accessories in three stores as a potential growth opportunity.As a result, in the second quarter of 2015, the Company recorded a lower of cost or market adjustment of $3,663 for certain tile flooring and related accessories, which is recorded in cost of sales onfor the nine months ended September 30, 2015 in the accompanying condensed consolidated statements of income.

Impairment of Long-Lived Assets

The Company evaluates potential impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired, and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. If the fair value of the assets is less than the carrying value, an impairment loss is recorded based on the difference between the values.

In the secondthird quarter of 2015, the Company concluded thatfinalized the termination of its decisionagreement relating to not pursue an expansion intocertain vertical integration initiatives which changed the tile flooring business in the near term was a triggering event requiring assessmentCompany’s expectations of impairment for certain of itsfuture cash flows from related long-lived assets. As a result, the Company reviewed thetested certain long-lived assets for impairment related to its store locations selling a significant assortment of tile flooring.impairment. The Company recorded a $1,350$3,043 impairment charge within selling, general and administrative (“SG&A”) expenses onfor the three months ended September 30, 3015 in its accompanying condensed consolidated statements of income. The impairment charge was measured under an income approach utilizing forecasted discounted cash flows. Fair value was based on expected future cash flows using Level 3 inputs under ASC 820. The most significant unobservable input used in the fair value analysis relates to the estimated sales price of the long-lived assets.

In the second quarter of 2015, the Company concluded that its decision not to pursue an expansion into the tile flooring business in the near term was a triggering event requiring assessment of recoverability for certain of its long-lived assets. As a result, the Company tested the long-lived assets for impairment related to its store locations selling a significant assortment of tile flooring. In the second quarter of 2015, the Company recorded a $1,350 impairment charge, which is recorded within SG&A expenses for the nine months ended September 30, 3015 in the accompanying condensed consolidated statements of income. The impairment charge was measured under an income approach utilizing forecasted discounted cash flows. Fair value was based on expected future cash flows using Level 3 inputs under ASC 820. The most significant unobservable input used in the fair value analysis relates to the estimated sales price of the long-lived assets.

Recognition of Net Sales

The Company recognizes net sales for products purchased at the time the customer takes possession of the merchandise. Service revenue, primarily installation revenue and freight charges for in-home delivery, is included in net sales and recognized when the service has been rendered. The Company reports sales exclusive of sales taxes collected from customers and remitted to governmental taxing authorities, and net of an allowance for anticipated sales returns based on historical and current sales trends and experience. The sales returns allowance and related charges were not significant for the three and sixnine month periods ended JuneSeptember 30, 2015 and 2014.

Cost of Sales

Cost of sales includes the cost of the product sold, cost of installation services, transportation costs from vendor to the Company’s distribution centers or store locations, any applicable finishing costs related to production of the Company’s proprietary brands, transportation costs from distribution centers to store locations, transportation costs for the delivery of products from store locations to customers, certain costs of quality control procedures, warranty and customer satisfaction costs, inventory adjustments including shrinkage, and costs to produce samples, reduced by vendor allowances.

The Company offers a range of limited warranties addressing matters ranging from the durability of the finish on its prefinished products to the services it provides. Warranty reserves are based primarily on claims experience, sales history and other considerations, including payments made to satisfy customers for claims not directly related to the warranty on the Company’s products. The total reserve was $4,254 at June 30, 2015, which includes additional reserves for the Company’s air quality testing program, and $1,568 at December 31, 2014. Warranty and customer satisfaction costs are recorded in cost of sales.

In early March 2015, the Company began voluntarily offering free indoor air quality screening to certain of its flooring customers, predominately those who had purchased laminate flooring sourced from China. From early March through June 30,China, to address customer questions about the air quality in their homes. In the third quarter of 2015, approximately 41,4006,200 testing kits were sent to Lumber Liquidators customers through the program, andfor a total of approximately 22,600 of those47,600 testing kits weresent as of September 30, 2015. In total, approximately 28,500 of testing kits have been returned. Of those returned, over 90% indicated indoor air concentrations of formaldehyde within the guidelines set by the World Health Organization (“WHO”) as protective against sensory irritation and long-term health effects. The Company has been and continues to directly contact the customers whose test results indicate an indoor formaldehyde level in excess of the WHO guideline for additional investigation and next steps. These “Phase 2” steps primarily consist of independent third-party laboratory testing of flooring samples from these customers. If the results of this testing indicates that the flooring is contributing to formaldehyde levels in a customer’s home at elevated rates, the Company will work with the customer, at the Company’s discretion, to replace the customer’s floor or compensate the customer for the cost of the floor as part of “Phase 3”. Throughout the third quarter of 2015, the Company facilitated customers with elevated Phase 1 testing results to complete Phase 2. To date, the Company did not record a reserve for Phase 3 based on the results it has received to date from the testing of customer flooring samples. The Company believes the test results and number of tests obtained to date provided a reasonable basis to support its assertion that a material reserve related to the replacement of customer floors was not warranted.  The Company will, however, continue to evaluate the results of each phase of the indoor air quality testing program.  Should its results differ from current trends, the Company could record a material charge in future periods.

The Company incurred $2,412 of direct costs primarily related to purchases of testing kits and professional fees in the three months ended September 30, 2015. Direct costs related to this testing program of $4,876 and $7,231 were included in cost of sales$9,643 for the three and sixnine months ended JuneSeptember 30, 2015, respectively.2015. At JuneSeptember 30, 2015, the Company’s warranty and customer satisfactionCompany had a reserve included $2,350of $2,261 for estimated future costs to evaluate whether the laminate flooring purchased from the Company was the primary driver of the air quality testing results being above WHO standards. The reserve was based on actual experience to date, estimated using information through the filing date of the financial statements and was included in other current liabilities as a portion of the total warranty and customer satisfaction reserve.liabilities. Should the Company’s actual experience related to results of its indoor air quality testing program and subsequent follow-up with customers differ from these estimates, additional reserves for customer satisfaction and warranty costs may be recorded in the future.

ForA rollforward of the reserve for the Company’s air quality testing program was as follows:

Additionally, for the three and nine months ended JuneSeptember 30, 2015, the Company incurred customer satisfaction costs of $934,$197 and $1,131, respectively, including a warranty and customer satisfaction reserve of $357,$100 at September 30, 2015, primarily related to projects using certain laminate or engineered hardwood products that were incomplete as of the date sales of such laminate and engineered hardwood products were suspended during the second quarter of 2015. These costs were incurred to ensure customers could complete their projects in a satisfactory manner. Refer to Footnote 8,7,Commitments and Contingencies,for a discussion on engineered hardwood products that were suspended during the quarter.of these products.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers.” The new standard provides a single, comprehensive model for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The new standard requires an entity to recognize revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods or services to a customer. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, “Revenue From Contracts with Customers (Topic 606): Deferral of the Effective Date,” which deferred the effective date of the standard by one year. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently assessing the impact of the adoption of this new standard on its consolidated financial statements and footnote disclosures and has not yet selected a method of adoption.

Net (Loss) Income per Common Share

The following table sets forth the computation of basic and diluted net income (loss) per common share:

The following have been excluded from the computation of Weighted Average Common Shares Outstanding—Diluted because the effect would be anti-dilutive:

Stock Repurchase Program

The Company’s board of directors has authorized the repurchase of up to $150,000 of the Company’s common stock. At JuneSeptember 30, 2015, the Company had $14,728 remaining under this authorization. During the three and sixnine months ended JuneSeptember 30, 2015, the Company did not repurchase any shares of its common stock under this program. During the three months ended JuneSeptember 30, 2014, the Company repurchased 246,200257,000 shares of its common stock at an average price of $84.20$57.24 per share for an aggregate cost of $20,729.$14,711. During the sixnine months ended JuneSeptember 30, 2014, the Company repurchased 414,200671,200 shares of its common stock at an average price of $90.36$77.68 per share for an aggregate cost of $37,427.$52,138.

The following table summarizes share activity related to stock options and restricted stock awards (“RSAs”):

For the three months ended JuneSeptember 30, 2015, the Company recorded a benefit for stock-based compensation expense of $729$1,287 which included grants to certain members of senior management and approximately $103 for certain employees as part of initiatives to retain and motivate these employees. The retention grants vest over a resultthree year period. For the nine months ended September 30, 2015, the Company recorded stock-based compensation expense of $1,883, including the retention grants which were offset by the impact of actual forfeitures in the period, due primarily to the resignation of the Company’s chief executive officer in May 2015. For the sixthree and nine months ended June 30, 2015, the Company recorded stock-based compensation expense of $597. For the three and six months ended JuneSeptember 30, 2014, the Company recorded stock-based compensation expense of $1,264$1,261 and $2,777,$4,040, respectively.

As of JuneSeptember 30, 2015, the Company leased 30 of its store locations and the Corporate Headquarters, which includes a store location, representing 8.5%8.4% of the total number of store leases in operation, from entities controlled by the Company’s founder and acting chief executive officer (“Controlled Companies”). As of JuneSeptember 30, 2014, the Company leased 2829 of its locations and the Corporate Headquarters, which included a store location, representing 8.4%8.6% of the total number of store leases in operation at that time, from Controlled Companies. Rental expense related to Controlled Companies was as follows:

The Company’s effective tax rate in the three months ended JuneSeptember 30, 2015 was impacted primarily by a decrease in state taxes, offset by uncertainty around the deductibilityreversal of certain legal accrualsuncertain tax position liabilities and revised projected pretax income for the remainder of 2015.  The year-over-year difference in the Company’s effective tax rate resulted primarily from the uncertainty around the deductibility of certainnon-deductible legal accruals.

On April 24, 2015, the Company, exclusive of the non-domestic subsidiaries, entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. as administrative agent, collateral agent and lender (the “Bank”). The Credit Agreement amended and restated the Amended and Restated Credit Agreement that was entered into between Lumber Liquidators, Inc. and the Bank on February 21, 2012 and amended on March 27, 2015. Under the Credit Agreement, the Bank agreed to provide the Company with an asset-based revolving credit facility (the “Revolving Credit Facility”) under which the Company may obtain loans and letters of credit from the Bank up to a maximum aggregate outstanding principal amount of the lesser of $100,000 or a calculated borrowing base. Letters of credit are subject to a sublimit of $20,000 (subject to the borrowing base). The Company has the option to increase the Revolving Credit Facility up to a maximum of $175,000 subject to the satisfaction of the conditions to such increase specified in the Credit Agreement. The Credit Agreement expires on April 24, 2020, is guaranteed by the Company and certain of its domestic subsidiaries and secured primarily by the Company’s inventory and credit card receivables.

The Revolving Credit Facility has no mandated payment provisions and a fee of 0.15% per annum on any unused portion, paid quarterly in arrears. Loans outstanding under the Revolving Credit Facility can bear interest based on the Base Rate or the LIBOR Rate, each as defined in the Credit Agreement. Interest on Base Rate loans is charged at varying per annum rates computed by applying a margin ranging from 0.125% to 0.375% (dependent on the Company’s average daily excess borrowing availability during the most recently completed fiscal quarter) over the applicable base interest rate (defined as the greatest of the prime rate, a specified federal funds rate plus 0.50%, or the one-month LIBOR Rate plus 1.00%). Interest on LIBOR Rate loans and fees for standby letters of credit are charged at varying per annum rates computed by applying a margin ranging from 1.125% to 1.375% (dependent on the Company’s average daily excess borrowing availability during the most recently completed fiscal quarter) over the applicable LIBOR rate for one, two, three or six month interest periods as selected by the Company.

The Credit Agreement contains a fixed charge coverage ratio covenant that becomes effective in the event that the Company’s excess borrowing availability under the Revolving Credit Facility at any time during the term of the Revolving Credit Facility falls below the greater of $10,000 or 10% of the borrowing base.

At June 30, 2015, the Company had $78,963 available to borrow under the Revolving Credit Facility and $20,000 in outstanding borrowings.

Government Investigations

Lacey Act Related Matters

On September 26, 2013, sealed search warrants were executed at the Company’s corporate offices in Toano and Richmond, Virginia by the Department of Homeland Security’s Immigration and Customs Enforcement and the U.S. Fish and Wildlife Service. The search warrants requested information, primarily documentation, related to the importation of certain of the Company’s wood flooring products in accordance with the Lacey Act. Since then, the Company has been cooperatingcooperated with the federal authorities, including the Department of Justice (“DOJ”), in their investigation. The

On October 7, 2015, Lumber Liquidators, Inc. (“LLI”) reached a settlement with the DOJ has indicated in prior communications that it is seeking criminal chargesconnection with this investigation. Under the terms of a Plea Agreement with the DOJ (the “Plea Agreement”) executed on October 7, 2015, LLI agreed to plead guilty to one felony count for entry of goods by means of false statements and four misdemeanor due care counts under the Lacey Act. These violations do not require LLI to have acted with a deliberate or willful intent to violate the law, and LLI did not stipulate that it acted with such deliberate or willful intent. As part of the settlement, LLI agreed to pay a combined total of $10,000 in fines, community service payments and forfeited proceeds. The payments include a $7,800 fine, community service contributions of $880 and $350 to the National Fish and Wildlife Foundation and the Rhinoceros and Tiger Conservation fund, respectively, and a $969 forfeiture payment. The Company through its Special Committee of the board of directors (the “Special Committee”), expects to continue to communicate with the DOJ regarding its intentions and possible courses of actionhad previously recorded this amount in this matter.

Based on the information available, including communications with the DOJ, the best estimate of the probable loss that may result from this action is approximately $10,000, which was recorded in other current liabilities and SG&A expenses in the first quarter of 2015. At September 30, 2015, $6,200 was included in current liabilities and $3,800 was included in other long-term liabilities on the accompanying condensed consolidated balance sheet. The Company believesexpects to pay $6,200 of the settlement amount in the first quarter of 2016, $2,000 to be paid in the first quarter of 2017 and $1,800 to be paid in the first quarter of 2018.

LLI also has agreed in the Plea Agreement to implement an environmental compliance plan (the “Compliance Plan”) for a probation period of five years. If LLI fails to implement the Compliance Plan within three months of sentencing, it has agreed to cease the importation of hardwood flooring until the DOJ determines that there is at least a reasonable possibility that a loss greater than or less than the amount accrued may be incurred,Compliance Plan has been satisfactorily implemented. During the first four years, LLI has agreed to engage an outside consulting firm to conduct audits of compliance with the Compliance Plan and certain requirements of the Lacey Act.

The Company has agreed to guarantee all payments and performance due from LLI, including but is unablenot limited to estimatepayments for fines, community service, forfeited proceeds and special assessments and the amount at this time.performance of LLI’s obligations under and compliance with the Compliance Plan and related audits.

In addition, as part of its internal compliance review procedures in the second quarter of 2015, the Company determined that there were Lacey Act compliance concerns related to a limited amount of its engineered hardwood sourced from China. Theflooring. As a result, the Company suspended sales of approximately $4,100$4,069 of this product pending further investigation, and brought this matter to the attention of the DOJ. TheDuring the investigation, the Company determined that there were no compliance concerns with respect to approximately $914 of the suspended engineered hardwood flooring. In connection with the Plea Agreement with the DOJ, has asserted its rightthe Company also reached a settlement with the DOJ related to the remaining $3,155 of suspended engineered hardwood flooring. Pursuant to a Complaint for Forfeiture In Rem and a Stipulation for Settlement and Joint Motion for Entry of Consent Order of Forfeiture (the “Consent”), the DOJ agreed to accept a $3,155 payment in lieu of a civil forfeiture of this product and has expressed that it will accept $3,155 as substitute assetsproduct. The Company had previously recorded this amount in lieu of forfeiture. At this time, the DOJ has indicated that it will not seek criminal charges related to this matter. Based on the information available, the best estimate of the probable loss that may result from this matter is $3,155, which was recorded in other current liabilities and SG&A expenses in the second quarter of 2015 and it is included in current liabilities on the accompanying condensed consolidated balance sheet. The Company paid this amount in October 2015 pending entry of the Consent and, pursuant to a motion granted, is now permitted to sell the suspended engineered hardwood flooring and retain any proceeds of the sale.

The Plea Agreement was approved by the United States District Court for the Eastern District of Virginia on October 22, 2015. A sentencing hearing related to the Plea Agreement is scheduled to be held on February 1, 2016. No date has been set for entry of the Consent.

Securities Laws

In March 2015, the Company received a grand jury subpoena issued in connection with a criminal investigation being conducted by the U.S. Attorney’s Office for the Eastern District of Virginia (the “U.S. Attorney”). In addition, on May 19, 2015 and July 13, 2015, the Company received subpoenas from the New York Regional Office of the SEC in connection with an inquiry by the SEC staff. Based on the subpoenas, the Company believes the focus of both the U.S. Attorney investigation and SEC investigation primarily relate to compliance with disclosure, financial reporting and trading requirements under the securities laws since 2011.

In March 2015, a Special Committee of the Board of Directors (the “Special Committee”) was formed of independent directors to make decisions surrounding this matter, among others. The Company, along with the Special Committee, is fully cooperating with the U.S. Attorney’s subpoena, the SEC’s subpoenas and the related investigations by the U.S. Attorney and SEC staff. Given that the U.S. Attorney and SEC staff are in the early stage of the investigation, the Company cannot estimate the reasonably possible loss or range of loss that may result from this matter.

California Air Resources Board

The Company believes that the California Air Resources Board (“CARB”) is regularly looking at the entire industry to ensure compliance with its emissions standards. While conducting routine inspections of the Company’s products, CARB has performed “deconstructive” testing on those products as well as (the Company believes) products from others in the industry. In CARB’s preliminary findings, some of the samples of the Company’s finished product that CARB deconstructed and tested exceeded the CARB limits for raw composite wood cores. This could occur for numerous reasons, including one or more of the variability factors associated with this type of testing. In May 2015, CARB notified the Company that additional samples of finished products were obtained in 2014, some of which, based on deconstructive testing, exceeded the CARB limits for raw composite wood cores. CARB has further informed the Company that it has performed additional deconstructive testing on certain finished products it obtained in March 2015, with certain of the samples of the Company’s products exceeding the CARB limits for raw composite wood cores.

The Company believes that CARB is continuing its work on this matter. The Company has been fully cooperative with CARB and has provided itas CARB continues to work on this matter by, among other things, providing CARB with requested information related to the products theyCARB tested. Based on discussions with CARB regarding the recentMay 2015 suspension of sales of laminate flooring sourced from China, the Company has decided to removeremoved this flooring from its stores in California for the time being.California. While the Company believes that CARB may assert a claim against the Company, the Company cannot estimate the reasonably possible loss or range of loss that may result from this matter given that CARB is still conducting its investigation and no notice of violation has been issued.matter.

Securities Litigation Matter

On or about November 26, 2013, Gregg Kiken ("Kiken") filed a securities class action lawsuit (the "Kiken Lawsuit"), which was subsequently amended, in the United States District Court for the Eastern District of Virginia against the Company, its founder, former Chief Executive Officer and President, former Chief Financial Officer and former Chief Merchandising Officer (collectively, the "Kiken Defendants"). On or about September 17, 2014, the City of Hallandale Beach Police Officers' and Firefighters' Personnel Retirement Trust ("Hallandale") filed a securities class action lawsuit (the "Hallandale Lawsuit") in the United States District Court for the Eastern District of Virginia against the Company, its former Chief Executive Officer and President and its former Chief Financial Officer (collectively, the "Hallandale Defendants," and with the Kiken Defendants, the "Defendants"). On March 23, 2015, the court consolidated the Kiken Lawsuit with the Hallandale Lawsuit, appointed lead plaintiffs and lead counsel for the consolidated action, and captioned the consolidated action asIn re Lumber Liquidators Holdings, Inc. Securities Litigation.

The lead plaintiffs filed a consolidated amended complaint on April 22, 2015. The consolidated amended complaint alleges that the Defendants made material false and/or misleading statements that caused losses to investors. In particular, the lead plaintiffs allege that the Defendants made material misstatements or omissions related to their compliance with the federal Lacey Act, the chemical content of certain of their wood products, and their supply chain and inventory position. The lead plaintiffs do not quantify any alleged damages in their consolidated amended complaint but, in addition to attorneys' fees and costs, they seek to recover damages on behalf of themselves and other persons who purchased or otherwise acquired the Company’s stock during the putative class period at allegedly inflated prices and purportedly suffered financial harm as a result. The Company disputes these claims and intends to defend the matter vigorously. On June 2, 2015, theThe Defendants have moved to dismiss the consolidated amended complaint but this motion isthe court has not yet fully briefed.ruled on the motions. Given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.

NW Bamboo Matter

On February 27, 2014, NW Bamboo Trim, Inc. (“NWBT”) filed suit in the Circuit Court of the City of Richmond, Virginia against the Company and a supplier of bamboo trim products (the “Supplier”). In its complaint, NWBT alleges that (i) the Company breached a contract with NWBT by not purchasing certain products from NWBT, (ii) the Company tortiously interfered with NWBT’s relationship with the Supplier, and (iii) the Company and the Supplier conspired to harm NWBT’s business. The Company filed a motion seeking to dismiss the claims, which was granted as it pertained to the breach of contract claim. The case is proceeding on the remaining two causes of action.

On October 12, 2015, as part of its required discovery disclosures, NWBT identified a valuation of its business of approximately $2,800 as the basis for its compensatory damages claim. NWBT also seeks punitive damages in the amount of $350 plus pre-judgment interest, treble damages and attorney’s fees. The Company disputes NWBT’s claims and intends to defend the matter vigorously. Given the uncertainty of litigation, the legal standards and burdens that must be met to establish the elements of NWBT claims, issues around the support for and calculation of any purported damages, and questions about the merits of the case, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.

TCPA Matter

On or about March 4, 2014, Richard Wade Architects, P.C. (“RWA”) filed a lawsuit in the United States District Court for the Northern District of Illinois (the “RWA Lawsuit”), which was subsequently amended, alleging that the Company violated the Telephone Consumer Protection Act (“TCPA”), the Illinois Consumer Fraud Act and the common law by sending an unsolicited facsimile advertisement to RWA and a proposed class. RWA seekssought recourse on its own behalf as well as other similarly situated parties who are members of the proposed class that received unsolicited facsimile advertisements from the Company. The TCPA provides for recovery of actual damages or five hundred dollars for each violation, whichever is greater. If it is determined that a defendant acted willfully or knowingly in violating the TCPA, the amount of the award may be increased by up to three times the amount provided above. Although the Company believesbelieved it hashad valid defenses to the claims asserted, it has entered into a settlement of the claims in the RWA Lawsuit, whichLawsuit. On September 3, 2015, the court has preliminarily approved.Court entered an order granting final approval to the settlement and certifying a settlement class. Under the proposed settlement agreement, the Company would paypaid a total of $300 including the plaintiffs’ attorneys’ fees, class notice and administration costs, a sum to RWA and cash payments to members of the settlement class who file valid claims. Based upon the terms of the proposedThe settlement the best estimate of the probable loss that may result from this action is $300, whichamount was accrued in 2014.2014 and was paid into an escrow fund on August 18, 2015. The motion forsettlement payment was released to class counsel on October 16, 2015 after the final approval of the settlement is set for August 6, 2015. In the event the court does not grantorder became a final approval of the proposed settlement, the Company intends to continue to defend this case vigorously but given the current status of the case, legal standards that must be met for, among other things, class certification and success on the merits, it would not be possible at this time for the Company to estimate the reasonably possible loss or range of loss that may result from this action. non-appealable order.

Prop 65 Matter

On or about July 23, 2014, Global Community Monitor and Sunshine Park LLC (together, the “Prop 65 Plaintiffs”) filed a lawsuit, which was subsequently amended, in the Superior Court of the State of California, County of Alameda, against the Company. In the amended complaint, the Prop 65 Plaintiffs allege that the Company violated California’s Safe Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code section 25249.5, et seq. (“Proposition 65”). In particular, the Prop 65 Plaintiffs allege that the Company failed to warn consumers in California that certain of the Company’s products (collectively, the “Products”) emit formaldehyde in excess of the applicable safe harbor limits. The Prop 65 Plaintiffs did not quantify any alleged damages in their amended complaint but, in addition to attorneys’ fees and costs, the Prop 65 Plaintiffs seek (i) equitable relief involving the reformulation of the Products, additional warnings related to the Products, the issuance of notices to certain of the purchasers of the Products (the “Customers”) and the waiver of restocking fees for Customers who return the Products and (ii) civil penalties in the amount of two thousand five hundred dollars per day for each violation of Proposition 65.

The Company filed a counterclaim against the Prop 65 Plaintiffs for trade libel, unfair business practices, intentional interference with a prospective business advantage, negligent interference with economic relations, and declaratory relief. The Prop 65 Plaintiffs filed a motion to dismiss the Company’s counterclaim, which was granted by the court on April 15, 2015.

Among other things, the court’s order callscalled for the Company to pay the Prop 65 Plaintiffs’ fees and costs incurred in filing and arguing the Company’s motion to dismiss. Although the Company believesbelieved its counterclaim had merit and an award of fees and costs was not warranted, it entered into a settlement agreement with the Company’s best estimateProp 65 Plaintiffs in connection with the court’s order and the Company paid a total of the probable loss$250 for the Prop 65 Plaintiffs’ fees and costs, isof which $175 which the Companywas accrued in the second quarter of 2015. The Company believes that there is at least a reasonable possibility that a loss up to $250 may be incurred for the Prop 65 Plaintiffs’ fees and costs. 

The Company disputes the claims of the Prop 65 Plaintiffs and intends to defend the matter vigorously. Given the uncertainty of litigation the preliminary stage of the case, and the legal standards that must be met for, among other things, success on the merits, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.

Gold Matter

On or about December 8, 2014, Dana Gold (“Gold”) filed a purported class action lawsuit in the United States District Court for the Northern District of California alleging that the Morning Star bamboo flooring (the “Bamboo Product”) that the Company sells is defective. On February 13, 2015, Gold filed an amended complaint on February 13, 2015, which added three additional plaintiffs (collectively with Gold, “Gold Plaintiffs”). Gold Plaintiffs allege that the Company has engaged in unfair business practices and unfair competition by falsely representing the quality and characteristics of the Bamboo Product and by concealing the Bamboo Product’s defective nature. Gold Plaintiffs seek the certification of five separate classes: (i) individuals in the United States who own homes or other structures where the Bamboo Product has been installed or where the Bamboo Product has been removed and replaced; (ii) individuals who are California residents and purchased the Bamboo Product for personal, family, or household use or who paid to replace the Bamboo Product; and (iii) the same description but for residents in New York, Illinois and West Virginia. Gold Plaintiffs did not quantify any alleged damages in their complaint but, in addition to attorneys’ fees and costs, Gold Plaintiffs seek (i) a declaration that the Company is financially responsible for notifying all purported class members, (ii) injunctive relief requiring the Company to replace and/or repair all of the Bamboo Product installed in structures owned by the purported class members, and (iii) a declaration that the Company must disgorge, for the benefit of the purported classes, all or part of its profits received from the sale of the defective Bamboo Product and/or to make full restitution to Gold Plaintiffs and the purported class members. On August 3, 2015, the

The Company moved to dismiss the amended complaint but thisand the motion is not yet fully briefed. A hearing was held on the motion and the court took the motion under submission. The Company disputes the Gold Plaintiffs’ claims and intends to defend the matter vigorously. Given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.

Litigation Relating to Products Liability

Beginning on or about March 3, 2015, numerous purported class action cases were filed in various U.S. federal district courts and state courts involving claims of excessive formaldehyde emissions from the Company’s flooring products (collectively, the “Products Liability Cases”). These cases included the first-filed case,Balero v. Lumber Liquidators, Inc., which was filed in the Superior Court of the State of California for the County of Alameda on or about December 11, 2014 (the “Balero Litigation”). The plaintiffs in these various actions sought recovery under a variety of theories, which although not identical are generally similar, including negligence, breach of warranty, state consumer protection act violations, state unfair competition act violations, state deceptive trade practices act violations, false advertising, fraudulent concealment, negligent misrepresentation, failure to warn, unjust enrichment and similar claims. The purported classes consisted either or both of all U.S. consumers or state consumers that purchased the subject products in certain time periods. The plaintiffs also sought various forms of declaratory and injunctive relief and various damages, including restitution, actual, compensatory, consequential, and, in certain cases, punitive damages, and interest, costs, and attorneys’ fees incurred by the plaintiffs and other purported class members in connection with the alleged claims, and orders certifying the actions as class actions. Plaintiffs had not quantified damages sought from the Company in these class actions. However, in one proceeding, the plaintiff sent a demand letter requesting $12 for his individual claim.

In one of these cases,Silverthorn v. Lumber Liquidators, Inc., et. al., filed in the United States District Court for the Northern District of California on March 27,On June 12, 2015, (the “Silverthorn Litigation”), the plaintiff filed a motion for an order (i) requiring the Company to notify consumers of the Silverthorn Litigation, (ii) requiring us to provide plaintiff’s counsel’s contact information, and (iii) granting plaintiff expedited discovery. In another of these cases,Washington v. Lumber Liquidators, Inc., filed in the United States District Court for the Northern District of California on March 31, 2015 (the “Washington Litigation”), the plaintiffs filed a motion seeking to enjoin the Company from continuing with its air quality testing program. On April 22, 2015, the Company filed oppositions to each of these motions, and on May 15, 2015, the Court entered an order staying the resolution of both motions pending the decision of the United States Judicial Panel on Multi District Litigation (the “MDL Panel”) on consolidation and transfer of all of the related formaldehyde cases. In a third case,Lyznick v. Lumber Liquidators, Inc., (the “Lyznick Litigation”) filed in the United States District Court for the Central District of California on April 16, 2015, plaintiffs also filed a motion for a preliminary injunction to change the communications from Lumber Liquidators and third party laboratories to consumers in connection with its air quality testing program. On June 12, 2015, the Court entered an order staying resolution of the motion pending the MDL Panel’s decision on consolidation and transfer. The Lyznick Litigation not only alleges that the flooring products emit excessive levels of formaldehyde, but also alleges that Lumber Liquidators and third party laboratories engaged in unlawful business practices and deceptive and fraudulent activities in connection with efforts to provide in-home air quality test kits to certain of the Company’s customers.

On June 12, 2015, the MDL Panel issued an order transferring and consolidating 10 of the related federal class actions to the United States District Court for the Eastern District of Virginia. On June 16, 2015,Virginia (the “Virginia Court”). In a series of subsequent conditional transfer orders, the MDL Panel issued a Conditional Transfer Order (“CTO”) transferringhas transferred the additional actions outstanding at that time. On July 1, 2015 and July 14, 2015, the MDL Panel issued two additional CTOs. Almost all of the pending federalother cases including the Balero Litigation, Lyznick Litigation, Silverthorn Litigation and Washington Litigation, have now been transferred to the Eastern District of Virginia.Virginia Court. The Company is still in the process of removing some of the state court class actionscontinues to federal court, after which time it will also seek to have theseany newly filed cases transferred and consolidated. Ultimately,consolidated in the Virginia Court and ultimately, the Company expects all federal class actions involving formaldehyde allegations, including any newly filed cases, to be transferred and consolidated in the Eastern DistrictVirginia Court. The consolidated case in the Virginia Court is captionedIn re: Lumber Liquidators Chinese-Manufactured Flooring Products Marketing, Sales, Practices and Products Liability Litigation.

Pursuant to court order, plaintiffs filed a Representative Class Action Complaint in the Virginia Court on September 11, 2015. The complaint challenged the Company’s labeling of Virginia.its flooring products and asserted claims under California, New York, Illinois, Florida and Texas law for fraudulent concealment, violation of consumer protection statutes, negligent misrepresentation and declaratory relief, as well as a claim for breach of implied warranty under California law. Thereafter, on September 18, 2015, plaintiffs filed the First Amended Representative Class Action Complaint (“FARC”) in which they added implied warranty claims under New York, Illinois, Florida and Texas law, as well as a federal warranty claim. The Company filed a motion to dismiss and answered the FARC. The court has not yet ruled on the motion to dismiss. The Company also filed a motion to strike nationwide class allegations and a motion to strike all claims of personal injury made in class action complaints.

In addition, on or about April 1, 2015, Sarah Steele (“Steele”) filed a purported class action lawsuit in the Ontario, Canada Superior Court of Justice against us.the Company. In the complaint, Steele’s allegations include (i) strict liability, (ii) breach of implied warranty of fitness for a particular purpose, (iii) breach of implied warranty of merchantability, (iv) fraud by concealment, (v) civil negligence, (vi) negligent misrepresentation, and (vii) breach of implied covenant of good faith and fair dealing. Steele did not quantify any alleged damages in her complaint but, in addition to attorneys’ fees and costs, Steele seeks (i) compensatory damages, (ii) punitive, exemplary and aggravated damages, and (iii) statutory remedies related to the Company’s breach of various laws including the Sales of Goods Act, the Consumer Protection Act, the Competition Act, the Consumer Packaging and LabellingLabeling Act and the Canada Consumer Product Safety Act.

The Company disputes the plaintiffs’plaintiff’s claims and intends to defend these matters vigorously. Given the uncertainty of litigation, the preliminary stage of these cases and the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannot estimate the reasonably possible loss or range of loss that may result from these actions.

In connection with the Products Liability Cases, on April 22, 2015, five of the Company’s general and umbrella liability insurers brought an action in the United States District Court for the Eastern District of Virginia, (the “Virginia Action”).  Through the Virginia Action, these insurers sought a declaratory judgment that they were not obligated to defend or indemnify the Company in connection with the lawsuits asserted against the Company arising out of its sale of laminate flooring sourced from China.  One insurer also asserted a claim seeking reformation of one policy to include a “total pollution exclusion” endorsement, contending that it was omitted from that policy as the result of a mutual mistake. 

On April 27, 2015, the Company filed a similar but more comprehensive action against nine of its general, umbrella and excess insurers (including the five Plaintiffs in the Virginia Action) in the Circuit Court for Dane County, Wisconsin (where four of the insurers are domiciled) (the “Wisconsin Action”).  In the Wisconsin Action, the Company asserted breach of contract claims against its general liability insurers, alleging that these insurers had wrongfully failed to defend the Company in connection with the Chinese-manufactured laminate flooring claims.  The Company also asserted breach of contract and bad faith claims against two of its general liability insurers, arising out of the manner in which those insurers computed retrospective premiums under their policies in connection with the Chinese-manufactured laminate flooring lawsuits.  Finally, the Company sought declaratory relief from the court as to its rights and the insurers’ responsibilities under their policies.

On May 22, 2015, theThe Company moved to dismiss the Virginia Action, contending that the federal court should abstain from deciding the case in favor of the more comprehensive state-court Wisconsin Action.  Thereafter,By order dated September 4, 2015, the court largely denied the Company’s motion to dismiss, allowing the Virginia Action to proceed.  While the court dismissed the reformation claim without prejudice, as pled with insufficient specificity, the court granted leave to amend, and an amended complaint was filed on September 15, 2015.  The Company has filed a motion to dismiss the amended complaint but the court has not yet ruled on that motion.

The four insurers who were not plaintiffs in the Virginia Action have filed motions to intervene as plaintiffs in the Virginia Action, in an effort to make the Virginia Action “as comprehensive” as the Wisconsin Action.  The Company has opposed the motions to intervene.  Briefings on all of these motions are complete,intervene, and the Company is awaiting an argument datea decision from the court.

The defendant-insurers in the Wisconsin Action have filed motions to dismiss or stay the Wisconsin Action in favor of the Virginia Action.  The defendants in the Wisconsin Action have also moved for protective orders seeking to forestall their obligation to respond to discovery requests that the Company promulgated in the Wisconsin Action.  The Company plans to opposehas opposed these motions. Themotions, and the Wisconsin court has set a status conference for August 6, 2015, at which the Company expects the courtyet to set briefing schedules and an argument date.rule on them.

Litigation Relating to Abrasion Claims

Two cases have been filed against the Company alleging false advertising claims for statements about abrasion ratings for certain of its flooring products.On May 20, 2015, a purported class action titledAbad v. Lumber Liquidators, Inc. was filed on May 20, 2015 in the United States District Court for the Central District of California. TheAbad complaint originally soughtCalifornia and two amended complaints were subsequently filed. In the Second Amended Complaint (“SAC”), the plaintiffs (collectively, the “Abrasion Plaintiffs”) seek to certify a national class composed of “all consumers who purchased Chinese-made laminate flooring from Lumber Liquidators in California which Lumber Liquidators has advertised has an ‘AC3’ rating from the time of their introduction in the marketplace through and including the date of class notice.”Ryan v. Lumber Liquidators, Inc.was filed on May 21, 2015“All Persons in the United States District Court for the District of Nevada. TheRyan complaint sought to certify a class of “all consumers who purchased Chinese-made laminate flooring from Lumber Liquidators in Nevada which Lumber Liquidators has advertised has an ‘AC3’ rating from the time of their introduction in the marketplace through and including the date of class notice.” Both cases were filed by the same attorneys.

On July 3, 2015, the Company and theAbad plaintiffs filed a stipulation seeking leave for plaintiffs to file an amended complaint that would consolidateRyanand seek certification of additional subclasses. The parties also stipulated to have theRyan case dismissed once an amended complaint was filed. On July 15, 2015, the court approved the stipulation and a First Amended Complaint (“FAC”) was filed in the Central District of California. On July 23, 2015, the court dismissed theRyancase.

In the FAC, the plaintiffs Jesus Abad, Ken Solorio, Julie Solorio, Craig Weiss, Steve Cottington, Patty Cottington, Craig Lyznick, Frances Ann Haygood, Jose Saldivar, Chris Williams, Brian Bennett, Kelly Ryan and Christopher Manzo (collectively, the “Abrasion Plaintiffs”) now allege that the Company made false statements about laminate wood flooring products’ abrasion class ratings. The Abrasion Plaintiffs allege violations of the federal Magnuson-Moss Warranty Act, California’s Unfair Competition Law, California’s False Advertising Law, the California Consumer Legal Remedies Act, the New Jersey Consumer Fraud Act, the Florida Deceptive and Unfair Trade Practices Act, the Texas Deceptive Trade Practices – Consumer Protection Act, Nevada’s Deceptive Trade Practices Act, fraudulent concealment and breach of implied warranty.

The Abrasion Plaintiffs now seek to certify six subclasses of “all persons in [California, North Carolina, Texas, New Jersey, Florida and Nevada] who purchased one or moreDefendant’s Dream Home brand laminate flooring products from Defendant for personal use in their homes, that was manufactured by” or, for Defendant in China, which was advertised by Defendantthe alternative, 32 statewide classes from California, North Carolina, Texas, New Jersey, Florida, Nevada, Connecticut, Iowa, Minnesota, Nebraska, Georgia, Maryland, Massachusetts, New York, West Virginia, Kansas, Kentucky, Mississippi, Pennsylvania, South Carolina, Tennessee, Virginia, Washington, Maine, Michigan, Missouri, Ohio, Oklahoma, Wisconsin, Indiana, Illinois and Louisiana. The SAC alleges violations of each of these states’ consumer protections statutes and the federal Magnuson-Moss Warranty Act, as having an Abrasion Class ratingwell as breach of ‘AC3’.”implied warranty and fraudulent concealment. The Abrasion Plaintiffs did not quantify any alleged damages in their complaintthe SAC but, in addition to attorneys’ fees and costs, seek an order certifying the action as a class action, an order adopting the Abrasion Plaintiffs’ class definitions and finding that the Abrasion Plaintiffs are their proper representatives, an order appointing their counsel as class counsel, injunctive relief prohibiting the Company from continuing to advertise and/or sell laminate flooring products with false abrasion class ratings, restitution of all monies it received from the Abrasion Plaintiffs and class members, damages (actual, compensatory, and consequential) and punitive damages.

The Company filed a motion to dismiss the SAC. A hearing on the motion has been scheduled and briefing on the motion is ongoing. The Company disputes the Abrasion Plaintiffs’ claims and intends to defend these matters vigorously. Given the uncertainty of litigation, the preliminary stage of these cases, the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannot estimate the reasonably possible loss or range of loss that may result from these actions.

Morris Matter

On or about August 18, 2015, Kevin Morris (“Morris”) filed a purported class action lawsuit in the Circuit Court of the Twentieth Judicial Circuit in St. Clair County, Illinois alleging that the Casa de Colour Collection by Dura-Wood flooring (the “Morris Product”), a brand of solid wood flooring sold by the Company, is defective due to warping, cupping and buckling. Morris alleges that the Company has engaged in unfair business practices and unfair competition by falsely representing the quality and characteristics of the Morris Product and by concealing the Morris Product’s defective nature. In particular, Morris’s allegations include (i) common law fraud, (ii) breach of implied warranty, (iii) breach of express warranty, (iv) breach of contract, (v) breach of duty of good faith and fair dealing, (vi) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (the “ICFA”) and (vii) violation of the Uniform Deceptive Trade Practices Act (the “UDTPA”). Morris did not quantify any alleged damages in his complaint but, in addition to attorneys’ fees and costs, Morris seeks (i) certification of the purposed class, (ii) injunctive relief requiring the Company to replace and/or repair all Morris Products installed in structures owned by the purported class, (iii) an award of compensatory, consequential and statutory damages, pre-judgment interest and post-judgment interest, (iv) a declaration that the Company must disgorge, for the benefit of the purported class, all or part of the Company’s profits received from the sale of the Morris Product and/or to make full restitution to Morris and the purported class, (v) a judgment for actual damages for injuries suffered by Morris and the purported class as a result of the Company’s violation of the ICFA and (vi) a judgment awarding Morris and the purported class reasonable attorneys’ fees and costs in accordance with the UDTPA. On September 25, 2015, the Company removed the action to the United States District Court for the Southern District of Illinois. The Company disputes Morris’s claims and intends to defend the matter vigorously. Given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.

Derivative Litigation Matters

Consolidated Cases

On or about March 11, 2015, R. Andre Klein (“Klein”) filed a shareholder derivative suit in the United States District Court for the Eastern District of Virginia against the Company’s directors at that time, as well as its Senior Vice President, Supply Chain, former Chief Merchandising Officer and former Chief Financial Officer (collectively, the “Klein Defendants”). On or about April 1, 2015, Phuc Doan (“Doan”) filed a shareholder derivative suit in the United States District Court for the Eastern District of Virginia against the Company’s directors at that time, as well as its Senior Vice President, Supply Chain, former Chief Merchandising Officer and former Chief Financial Officer (collectively, the “Doan Defendants”). On or about April 15, 2015, Amalgamated Bank, as trustee for the Longview 600 Small Cap Index Fund, filed a shareholder derivative suit in the United States District Court for the Eastern District of Virginia against the Company’s directors at that time, as well as its former Chief Merchandising Officer, former Chief Financial Officer, Senior Vice President, Supply Chain and its former Chief Executive Officer and President (collectively, the “Amalgamated Defendants,” and, with the Klein and Doan Defendants, the “Individual Defendants”). The Company was named as a nominal defendant only in these three suits.

On May 27, 2015, the court consolidated the Klein, Doan, and Amalgamated Bank suits, appointed lead plaintiffs and lead counsel for the consolidated action, and captioned the consolidated action asIn re Lumber Liquidators Holdings, Inc. Shareholder Derivative Litigation. In the complaints, Klein’s, Doan’s and Amalgamated Bank’s (collectively, “Plaintiffs”) allegations include (i) breach of fiduciary duties, (ii) abuse of control, (iii) gross mismanagement, (iv) unjust enrichment, (v) insider trading, (vi) corporate waste, (vii) common-law conspiracy, and (viii) statutory conspiracy. Plaintiffs did not quantify any alleged damages in their complaints but, in addition to attorneys’ fees and costs, Plaintiffs seek (1) a declaration that the Individual Defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company, (2) a determination and award to the Company of the damages sustained by the Company as a result of the violations of each of the Individual Defendants, jointly and severally, (3) a directive to the Company and the Individual Defendants to take all necessary actions to reform and improve the Company’s corporate governance and internal procedures to comply with applicable laws and to protect the Company and its shareholders from a repeat of the events that led to the filing of this action, (4) a determination and award to the Company of exemplary damages in an amount necessary to punish the Individual Defendants and to make an example of the Individual Defendants to the community according to proof of trial, (5) the awarding of restitution to the Company from the Individual Defendants, (6) a requirement that the Company establish corporate policies and procedures prohibiting the use of Chinese manufacturers of its products, (7) a prohibition against the Company using wood or wood products from the Russian Far East, (8) a requirement that the Company establish corporate policies and procedures to ensure compliance with CARB standards for all of its flooring products, and (9) disgorgement and payment to the Company of all compensation and profits made by the Individual Defendants, and each of them, at any time during which such Individual Defendants were breaching fiduciary duties owed to the Company and/or committing, or aiding and abetting the commitment of, corporate waste.

Additionally, in May 2015, the Company received a shareholder demand from Timothy Horton (“Horton”). The allegations and demands made by Horton overlap substantially with those raised in the consolidated action. On June 11, 2015, the Special Committee exercised its authority to create a three-person Demand Review Committee, which is comprised of three independent directors and tasked with investigating the claims made in the consolidated action and the Horton demand letter and making a recommendation to the board of directors as to whether it would be in the best interests of the Company to pursue any of those claims. On July 27, 2015,Thereafter, the members of the Demand Review Committee filed a motion to stay the consolidated action pending completion by the Demand Review Committee of its investigation and recommendation to the board of directors. This motion is not yet fully briefed.

On July 27, 2015,Further, in the consolidated action, the Company filed a motion to dismiss based on the failure to make a demand upon the Company’s board of directors, and the Individual Defendants filed a motion to dismiss based on the failure to state a claim. These motions are not yet fully briefed.briefed and pending before the court. Based on the uncertainty of litigation and the preliminary stage of the case, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.

Costello Matter

On or about March 6, 2015, James Costello (“Costello”) filed a shareholder derivative suit in the Court of Chancery of the State of Delaware against the Company’s directors at that time (the “Costello Derivative Defendants”). The Company was named as a nominal defendant only. InOn April 1, 2015, the case was voluntarily stayed. On June 19, 2015, the stay was lifted at Costello’s request and Costello subsequently filed an amended complaint. The amended complaint added the Company’s Senior Vice President, Supply Chain, former Chief Merchandising Officer and former Chief Financial Officer as defendants (along with the Derivative Defendants, the “Costello Defendants”). Costello’s allegations include (i) breach of fiduciary duties, (ii) gross mismanagement, (iii) unjust enrichment, and (iv) insider selling and the misappropriation of certain of our information in connection therewith. Costello did not quantify any alleged damages in histhe amended complaint but, in addition to attorneys’ fees and costs, Costello seeks (i) against the Costello Defendants and in the Company’s favor the amount of damages sustained by the Company as a result of the Costello Defendants’ breaches of fiduciary duties, gross mismanagement and unjust enrichment, (ii) extraordinary equitable and/or injunctive relief, including attaching, impounding, imposing a constructive trust on or otherwise restricting the proceeds of the Costello Defendants’ trading activities or their assets, and (iii) awarding to the Company restitution from the Costello Defendants, and each of them, and ordering disgorgement of all profits, benefits and other compensation obtained by the Costello Defendants. On April 1, 2015, the case was voluntarily stayed.

In May 2015, the Company received Horton’s shareholder demand. The allegationsDefendants; and demands made by Horton overlap substantially with those raised by Costello. On June 11, 2015, the Special Committee exercised its authority to create a three-person Demand Review Committee, which is comprised of three independent directors and tasked with investigating the claims made in Costello action and the Horton demand letter and making a recommendation to the board of directors as to whether it would be in the best interests of the Company to pursue any of those claims. On July 27, 2015, the members of the Demand Review Committee filed a motion to stay the Costello action pending completion by the Demand Review Committee of its investigation and recommendation to the board of directors. This motion is not yet fully briefed.

On June 19, 2015, the stay was lifted at Costello’s request and Costello subsequently filed an amended complaint. The amended complaint added the Company’s Senior Vice President, Supply Chain, former Chief Merchandising Officer and former Chief Financial Officer as defendants and seeks(iv) additional equitable and/or injunctive relief that would require the Company to institute certain compliance policies and procedures. On July 9, 2015, the

The Company filed a motion to dismiss the amended complaint based on the failure to make a demand upon the Company’s board of directors and the Costello Defendants filed a motion to dismiss based on the failure to state a claim and the exculpatory provision in the Company’s Certificate of Incorporation. These motions are not yet fully briefed. On September 14, 2015, the parties entered into a stipulation voluntarily staying the case until the Demand Review Committee has an opportunity to investigate Costello’s allegations and make a recommendation to the Company’s board of directors, and the board of directors has the opportunity to act on that recommendation. The court has approved the stipulation.

Based on the uncertainty of litigation and the preliminary stage of the case, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.

McBride Matter

On or about March 27, 2015, James Michael McBride (“McBride”) filed a shareholder derivative suit in the Circuit Court of the City of Williamsburg and County of James City, Virginia against the Company’s directors at that time, as well as its former Chief Merchandising Officer and former Chief Financial Officer (collectively, the “McBride Defendants”). The Company was named as a nominal defendant only. In the complaint, McBride’s allegations include (i) breach of fiduciary duties, (ii) gross mismanagement, (iii) abuse of control, (iv) insider trading, and (v) unjust enrichment. McBride did not quantify any alleged damages in his complaint but, in addition to attorneys’ fees and costs, McBride seeks (i) the awarding, against the McBride Defendants, and in favor of the Company, of damages sustained by the Company as a result of certain of the McBride Defendants’ breaches of their fiduciary duties and (ii) a directive to the Company to (a) take all necessary actions to reform and improve its corporate governance and internal procedures, (b) comply with its existing governance obligations and all applicable laws and (c) protect the Company and its investors from a recurrence of the events that led to the filing of this action. On July 6, 2015, McBride filed an amended complaint. The amended complaint added claims for statutory conspiracy and common law conspiracy and, in connection with the statutory conspiracy claim, seeks damages in the amount of three times the actual damages incurred by the Company as the result of the alleged wrongful acts. Pursuant to a voluntary agreement between the parties, the defendants have not yet responded to the amended complaint. Based on the uncertainty of litigation and the preliminary stage of the case, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.

Antidumping and Countervailing Duties Investigation

In October 2010, a conglomeration of domestic manufacturers of multilayered wood flooring filed a petition seeking the imposition of antidumping (“AD”) and countervailing duties (“CVD”) with the United States Department of Commerce (“DOC”) and the United States International Trade Commission (“ITC”) against imports of multilayered wood flooring from China. This ruling applies to the Company’s engineered hardwood imported from China, which accounted for approximately 10% of its flooring purchases in 2014 and approximately 11%9% of its flooring purchases in the first sixnine months of 2015.

The DOC made preliminary determinations regarding CVD and AD rates in April 2011 and May 2011, respectively. In December 2011, after certain determinations were made by the ITC and DOC, orders were issued setting final AD and CVD rates at 3.3% and 1.5%, respectively. These rates became effective in the form of additional duty deposits, which the Company has paid, and applied retroactively to the DOC preliminary determinations of April 2011 and May 2011.

Following the issuance of the orders, a number of appeals were filed by several parties, including the Company, with the Court of International Trade (“CIT”) challenging various aspects of the determinations made by both the ITC and DOC, including certain aspects that may impact the validity of the AD and CVD orders and the applicable rates. The appeal of the CVD order was dismissed in June 2015. On January 23, 2015, the CIT issued a decision rejecting the challenge of the AD rate for all but one Chinese exporter. This decision was finalized on July 6, 2015, appealed to the Court of Appeals for the Federal Circuit on July 31, 2015 and may take a year to conclude.

As part of its processes in these proceedings, the DOC conducts annual reviews of the CVD and AD rates. In such cases, the DOC will issue preliminary rates that are not binding and were subject to comment by interested parties. After consideration of the comments received, the DOC will issue final rates for the applicable period, which may lag by a year or more. As rates are adjusted through the administrative reviews, the Company adjusts its payments prospectively based on the final rate.

In the first DOC annual review in this matter, rates were modified for AD rates through November 2012 and for CVD rates through 2011. Specifically, the AD rate was set at 5.92% and the CVD rate was set at 0.83%. These rates are being appealed to the CIT by several parties, including the Company. Nevertheless, at June 30, 2015, the Company was paying these rates on each applicable purchase. Based on what has been paid by the Company to date for the periods covered by the first annual review, the Company believes its best estimate of the probable loss was approximately $833 for shipments during the applicable time periods covered by the first annual review, which the Company recorded as a long-term liability in ourits accompanying condensed consolidated balance sheet and in cost of sales in its second quarter 2015 condensed consolidated financial statements.  

In January 2015, pursuant to the second annual review, the DOC issued a non-binding preliminary AD rate of 18.27% for purchases from December 2012 through November 2013 and a preliminary CVD rate of 0.97% for purchases in fiscal year 2012. The rates were finalized in early July 2015 with the AD rate set at 13.74% and the CVD rate set at 0.99%. The Company plans to appealhas appealed these rates. As these rates are now confirmed, the Company believes its best estimate of the probable loss was approximately $4,089 for shipments during the applicable time periods, which the Company recorded as a long-term liability on its accompanying condensed consolidated balance sheet and in cost of sales in its second quarter 2015 condensed consolidated financial statements. Beginning in July 2015, the Company began paying these rates on each applicable purchase.

If these rates remain in effect for shipments subsequent to November 2013 (AD) and shipments subsequent to December 2012 (CVD), the Company would owe an additional $5,076$5,561 for all shipments through JuneSeptember 30, 2015. As no rates have been finalized for these periods, the Company has not recorded an accrual in its condensed consolidated financial statements for the impact of higher rates for the time periods subsequent to the second annual review. Based on the information available, the Company believes there is at least a reasonable possibility that an additional charge may be incurred in the range of $0 to $5,076.$5,561. A loss greater than this amount may be incurred, but the Company is unable to estimate the amount at this time.

The third annual review of the AD and CVD rates has beenwas initiated in February 2015, with preliminary rates expected in SeptemberDecember 2015. Any change in the applicable rates as a result of the third annual review would apply to imports occurring after the second period of review.

Other Matters

The Company is also, from time to time, subject to claims and disputes arising in the normal course of business. In the opinion of management, while the outcome of any such claims and disputes cannot be predicted with certainty, the Company’s ultimate liability in connection with these matters is not expected to have a material adverse effect on the results of operations, financial position or cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Note Regarding Forward-Looking Statements

This report includes statements of the Company’s expectations, intentions, plans and beliefs that constitute “forward-looking

“forward-looking statements” within the meanings of the Private Securities Litigation Reform Act of 1995. These statements, which may be identified by words such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “thinks,” “estimates,” “seeks,” “predicts,” “could,” “projects,” “potential” and other similar terms and phrases, are based on the beliefs of our management, as well as assumptions made by, and information currently available to, the Company’s management as of the date of such statements. These statements are subject to risks and uncertainties, all of which are difficult to predict and many of which are beyond the Company’s control. Forward-looking statements in this report may include, without limitation, statements regarding legal matters and settlement discussions, the terms of and compliance with the Plea Agreement and the Compliance Plan, the Company’s ability to borrow under its asset-backed revolving credit facility, elevated levels of legal and professional fees, elevated levels of payroll and stock-based compensation expense, sales growth, comparable store net sales, number of stores providing installation services, impact of cannibalization, price changes, inventory availability and inventory per store, inventory valuation, earnings performance, stock-based compensation expense, margins, return on invested capital, advertising costs, costs to administer the Company’s indoor air quality testing program, intention to conduct additional investigation and reviews in connection with certain consumers’ indoor air quality tests, strategic direction, the scale of the expansion of and transition to the Company’s laminate products sourced from Europe and North America, supply chain, the demand for the Company’s products, benefits from an improving housing market, construction of engineered hardwood as to not be subject to anti-dumping and countervailing duties, ultimate resolution of governmental investigations, and store openings and remodels. The Company’s actual results could differ materially from those projected in or contemplated by the forward-looking statements as a result of potential risks, uncertainties and other factors including, but not limited to, changes in general economic and financial conditions, such as the rate of unemployment, consumer access to credit, and interest rate; the volatility in mortgage rates; the legislative/regulatory climate; political unrest in the countries of the Company’s suppliers; the amount necessary to and the ability to retain and motivate Company employees; the availability of sufficient suitable hardwood; the impact on the Company if the Company is unable to maintain quality control over our products; the cost and effect on the Company’s reputation of, and consumers’ purchasing decisions in connection with, unfavorable allegations surrounding the product quality of the Company’s laminates sourced from China; the Company’s suppliers’ ability to meet its quality assurance requirements; disruption in the Company’s suppliers’ abilities to supply needed inventory; the impact on the Company’s business of its expansion of laminate products sourced from Europe and North America;America and the flooring industry’s demand for product from these regions; disruptions or delays in the production, shipment, delivery or processing through ports of entry; the strength of the Company’s competitors and their ability to increase their market share; slower growth in personal income; the number of customers requesting and cost associated with addressing the Company’s indoor air quality testing program; the ability to collect necessary additional information from applicable customers in connection with indoor air quality test results; changes in business and consumer spending and the demand for the Company’s products; changes in transportation costs; the rate of growth of residential remodeling and new home construction; the demand for and profitability of installation services; changes in the scope or rates of any antidumping or countervailing duty rates applicable to the Company’s products; the duration, costs and outcome of pending or potential litigation or governmental investigations; ability to successfully and timely implement the Compliance Plan; ability to make timely payments pursuant to the terms of the Plea Agreement; ability to borrow under its asset-backed revolving credit facility; ability to reach an appropriate resolution in connection with the governmental investigations; ultimate disposition of the laminate flooring sourced from China at or above current valuation; and inventory levels. The Company specifically disclaims any obligation to update these statements, which speak only as of the dates on which such statements are made, except as may be required under the federal securities laws. Information regarding these additional risks and uncertainties is contained in the Company’s other reports filed with the Securities and Exchange Commission (“SEC”), including the Item 1A, “Risk Factors,” section of (i) the Form 10-K for the year ended December 31, 2014, and (ii) the Form 10-Q for the quarter ended March 31, 2015 and (iii) this Form 10-Q for the quarter ended September 30, 2015.

This management discussion should be read in conjunction with the financial statements and notes included in Part I, Item 1. “Financial Statements” of this quarterly report and the audited financial statements and notes and management discussion included in the Company’s annual report filed on Form 10-K for the year ended December 31, 2014.

Overview

Lumber Liquidators is the largest specialty retailer of hardwood flooring in North America. At JuneSeptember 30, 2015, we sold our products through 363370 Lumber Liquidators stores in 46 states in the United States (“U.S.”) and in Canada, a call center, websites and catalogs. We believe we have achieved a reputation for offering great value, superior service and a broad selection of high-quality hardwood flooring products. With a balance of price, selection, quality, availability and service, we believe our value proposition is the most complete within a highly-fragmented hardwood flooring market. Sourcing directly from the mill provides the foundation for this value proposition, further strengthened by our unique store model, the industry expertise of our people, our singular focus on hard-surface flooring and our expansion of our advertising reach and frequency.

On May 21, 2015, the Company announced that it had accepted the resignation of its chief executive officer. Our founder has, at the request of the board of directors, agreed to serve as our acting chief executive officer while a national search is conducted to identify a replacement. We have engaged outside resources to assist us in identifying the right candidate and are actively searching; however, a specific timetable has not been set. Under the leadership of our founder and acting chief executive officer, we are focused on certain key initiatives including:and have begun to make progress on them. The key initiatives include:

Executive Summary of Results

Our results for the quarter ended JuneSeptember 30, 2015 were impacted by the following key items:

Settlement of Lacey Act Investigations

On October 7, 2015, we announced that the Company had entered into a settlement with the Environment and Natural Resources Division of the Department of Justice (“DOJ”) related to our compliance with the Lacey Act. The court approved this settlement on October 22, 2015 and formal sentencing is scheduled for February 1, 2016. This matter focused on some of our hardwood flooring purchase orders and import declarations made concerning the origin of the timber of those orders and concluded the DOJ’s inquiry launched in 2013. As part of the settlement, we agreed to plead guilty to violations of a Customs law and the Lacey Act, and pay a combined total of $10.0 million in fines, community service payments and forfeited proceeds. The payments include a $7.8 million fine, community service contributions of $0.9 million and $0.4 million to the National Fish and Wildlife Foundation and the Rhinoceros and Tiger Conservation fund, respectively, and a $1.0 million forfeiture payment. We had recorded this amount in SG&A expenses in the first quarter of 2015. At September 30, 2015, $6.2 million was included in current liabilities and $3.8 million was included in other long-term liabilities on the accompanying condensed consolidated balance sheet. We expect to pay $6.2 million of the settlement amount in the first quarter of 2016, $2.0 million in the first quarter of 2017 and $1.8 million in the first quarter of 2018.

The agreement includes four misdemeanor due care violations of the Lacey Act and a single felony charge for entry of goods by means of false statements. These violations, including the Class E felony, do not require us to have acted with a deliberate or willful intent to violate the law, and we did not stipulate that we acted with such deliberate or willful intent. We also agreed to implement an Environmental Compliance Plan (the “Compliance Plan”) to ensure future compliance with the Lacey Act. The agreement requires third-party audits of our compliance with the Compliance Plan and the Lacey Act within 18 months, 35 months and 48 months. In addition to implementation of a stringent Lacey Act compliance program, extensive review of and enhancements to our compliance programs in general are in process.  Based on our current expectations, we anticipate implementation and ongoing compliance costs of these enhancements to cost up to $3.5 million through 2016, of which approximately $0.5 million to $1.0 million is expected to be incurred in the fourth quarter of 2015. We believe the ongoing costs of our compliance program will be higher than historical levels as we implement the Compliance Plan, however, the scope of those costs will be determined by future sourcing initiatives and other factors.

In addition, as previously disclosed, we determined in the second quarter of 2015 that there were Lacey Act compliance concerns related to a limited amount of our engineered hardwood flooring. As a result, we suspended sales of approximately $4.1 million of this product pending further investigation, and voluntarily brought this matter to the attention of the DOJ. We had also suspended purchases of this product from certain suppliers. During our investigation, we determined that there were no compliance concerns with respect to approximately $0.9 million of the suspended engineered hardwood flooring. As part of the agreement with the DOJ, we also reached a settlement with the DOJ related to the remaining $3.2 million of suspended engineered hardwood flooring. In the settlement, the DOJ will accept a $3.2 million payment in lieu of a civil forfeiture of this product. We had previously recorded this amount in SG&A expenses in the second quarter of 2015, and it is included in current liabilities on the accompanying condensed consolidated balance sheet. We paid this amount in October 2015 pending entry of the consent by the court, and based on a motion granted by the court, are now permitted to sell the suspended engineered hardwood flooring and retain any proceeds of the sale.

We anticipate that net sales of engineered hardwood will continue to be impacted due to our transition of purchases of this product to certain new suppliers. We believe gross margin and sales mix trends will continue to be adversely impacted until our full assortment of engineered hardwood is available, which is not expected until mid-2016.

We fully cooperated with federal authorities and are continuing to make significant enhancements to our sourcing and compliance practices. We do not believe the settlement or related payments will impact our ability to borrow under our asset-based revolving credit facility.

Update on Laminate Flooring Sourced from China

On March 1, 2015, the Broadcast aired in which certain unfavorable allegations were made surrounding the product quality of our laminates sourced from China. Shortly thereafter, we began voluntarily offering free indoor air quality screening kits to certain of our flooring customers, predominately those who had purchased laminate flooring sourced from China. Refer toOther Matters for further discussion of this program and related costs.

On May 7, 2015, the Companywe suspended the sale of itsour laminate products sourced from China pending further assessment of the situation. BasedAt September 30, 2015, we held merchandise inventories of that product in both our distribution centers and our retail stores with a cost of $19.8 million and coordinated moldings with a cost of $2.8 million. This cost assumes we sell this product through our retail stores. We continue to evaluate and assess alternatives for disposition of these products and the potential implications these alternatives would have on Special Committee’s effortsour business. Our future decision regarding the disposition of these products is subject to date,consideration and assessment of customer sentiment, market conditions, findings by regulatory agencies, legal proceedings, alternative channels for disposition and other factors. If we were to pursue or be required to pursue a disposition of these products other than through our retail stores, it appears that our Chinese laminate flooring suppliers have sold product to usis likely that the suppliers have certified and labeled as compliant with California formaldehyde standards. However, we continue to review the underlying certification and labeling processes and practices of our suppliers. We are considering a number of factors, including specific evaluationnet realizable value of the suspended laminate flooring from China, when determining the alternatives related to the suspended flooring.affected inventory would be materially less than its current carrying value.

We believe the Broadcast has negatively impacted our net sales for the quarter ended June 30, 2015, as evidenced by the trend in comparable store sales immediately prior to the Broadcast and for the second quarter.since its airing. We also believe net sales were negatively impacted by constraints on inventory caused by the suspension of sales of laminates sourced from China. Due to a varietyChina and limited availability of factors including customer behavior and competitive factors, a determination of the impact of these events on our net sales and gross margin was impracticable.substitute product.

In order to meet customer demand, we have shifted the sourcing of laminate products previously manufactured in China to suppliers located in Europe and North America. We believe the flooring industry’s greater demand for products from these regions will increase thehave higher unit costs significantly overthan those forof similar products previously sourced from China. We expect theOur transition to these new suppliers to occuroccurred throughout the summer,third quarter, and we believe we will have full availability of our entire assortment of laminatecertain products in the fall of 2015. If the scalewere not available for a significant portion of the expansionquarter. We are evaluating our laminate assortment and will address necessary changes based on market conditions. If market conditions or customer demand significantly variesvary from our estimates, the availability of certain products in future periods may be impacted, either increasing customer wait time or increasing the carrying levels of certain products.

On March 4, 2015, we received notice from the Consumer Product Safety Commission (“CPSC”) that it has requested samples of our laminate flooring manufactured in China. We have been fully cooperating with the CPSC and have provided testing and safety information to the CPSC staff.  On March 9, 2015, we submitted an initial report in accordance with Section 15 of the Consumer Product Safety Act.  On April 9, 2015, at the CPSC’s request, we submitted a Section 15b full report.  We have been in ongoing discussionscooperating with the CPSC aboutand have provided testing and safety information to the CPSC staff.  Further, we have discussed our air quality testing program with the CPSC and are providinghave provided the CPSC with frequent updates. The CPSC has recently obtained additional samples of our laminate flooring manufactured in China forand has been conducting further formaldehyde emissions testing.testing and is continuing to review this matter.

We also have received requests for information from various state attorneys general regarding our laminate flooring sourced from China. We have been fully cooperating with these requests. Additionally, refer to Part II, Item I –Legal Proceedingsfor a complete discussion of legal matters that relate to these products and which could have a significant adverse effect on our business and financial condition.

Current Trends

Net Sales and Gross Margin. As we enter the fall flooring season in late August, the number of months post the Broadcast increases and our laminate assortment is returned to full in-stock levels, we believe customer demand and our ability to fulfill it will strengthen. We plan to adjust our promotional pricing in response to anticipated consumer demand. Additionally, net sales of engineered hardwood may be impacted in the second half of 2015 due to constrained inventory levels as a result of the suspension of purchases and sales of certain engineered hardwood products sourced from China. At this time, we continue to be unable to estimate longer-term customer demand trends and the long-term impact to our brand from the various allegations and investigations.

We believe gross margin in the second half of 2015 will be adversely impacted as compared to the second half of 2014 as we continue to invest in our value proposition to drive customer traffic, primarily through pricing; increase our sales of laminates sourced outside of China; and modify our assortment of engineered hardwood to those not subject to CVD and AD. Additionally, we believe gross margin and sales mix trends will continue to be adversely impacted until our full assortment of laminates and engineered hardwood are available. During the second quarter of 2015, we focused on the reduction of our inventory levels and began to rationalize our product assortment. We expect to continue to simplify our product assortment which may result in an increase in clearance product. As we sell through clearance product, our average selling price could be reduced and our gross margin adversely impacted.

Selling, General and Administrative Expenses. With respect to SG&A expenses in the second half of 2015, we expect an increase in payroll as we implement initiatives to retain and motivate our employees, and we expect legal and professional fees to remain elevated while the various legal proceedings and regulatory investigations continue.

Results of Operations

Net Sales

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¹A remodeled store remains a comparable store as long as it is relocated within the primary trade area.

²Average sale, calculated on a total company basis, is defined as the average invoiced sale per customer, measured on a monthly basis and excluding transactions of less than $250 (which are generally sample orders, or add-ons or fill-ins to previous orders) and of more than $30,000 (which are usually contractor orders).

³Average retail price per unit sold is calculated on a total company basis and excludes non-merchandise revenue.

⁴A store is generally considered comparable on the first day of the thirteenth full calendar month after opening.

⁵Change in number of customers invoiced is calculated by applying the average sale to total net sales at comparable stores.

⁶A cannibalized market has at least one comparable store and one non-comparable store.

Net sales for the secondthird quarter of 2015 decreased $15.1$30.0 million, or 5.8%11.3%, over the secondthird quarter of 2014 as an increase in net sales in non-comparable stores of $11.1$8.9 million was more than fully offset by a decrease in net sales in comparable stores of $26.2$38.9 million. Net sales for the sixnine months ended JuneSeptember 30, 2015 decreased $1.5$31.5 million, or 0.3%4.1%, over the same prior year period as an increase in net sales in non-comparable stores of $29.2$38.1 million was more than fully offset by a decrease in net sales in comparable stores of $30.7$69.5 million. Net sales in 2015 were primarily impacted by the following factors:

We believed our lower inventory levels in certain key merchandise categories, primarily laminates, vinyl plank and engineered hardwoods, reduced our ability to convert customer demand into invoiced sales during the second and third quarters of 2014. Additionally, we believed net sales in the three and sixnine month periods ended JuneSeptember 30, 2014 were negatively impacted by the unusually severe winter weather experienced in the U.S. and Canada during 2014. OurIn addition, we believed that our reduced customer traffic coincided with certain weak macroeconomic trends related to residential remodeling, including existing home sales, which were lower in 2014 than the corresponding periods in 2013. Additionally, we believed our constrained inventory levels in certain key merchandise categories, primarily laminates, vinyl plank and engineered hardwoods, reduced our ability to convert customer demand into invoiced sales during the second quarter of 2014.

Gross Profit and Gross Margin