Lumber Liquidators Holdings, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited, in thousands)

Total

Common Stock

Treasury Stock

Additional

Retained

Stockholders'


Shares

Value

Shares

Value

Capital

Earnings

AOCL

Equity

March 31, 2018

28,540

$
31

2,930

$
(141,439)

$
209,676

$
129,242

$
(1,184)

$
196,326
Stock-Based Compensation Expense

—

—

—

—

1,237

—

—

1,237
Exercise of Stock Options

3

—

—

—

40

—

—

40
Release of Restricted Shares

8

—

—

—

—

—

—

—
Common Stock Repurchased

—

—

5

(103)

—

—

—

(103)
Translation Adjustment

—

—

—

—

—

—

(73)

(73)
Net Loss

—

—

—

—

—

(1,454)

—

(1,454)
June 30, 2018

28,551

$
31

2,935

$
(141,542)

$
210,953

$
127,788

$
(1,257)

$
195,973

March 31, 2019

28,682

$
32

2,979

$
(142,157)

$
214,798

$
71,911

$
(1,268)

$
143,316
Stock-Based Compensation Expense

—

—

—

—

1,361

—

—

1,361
Exercise of Stock Options

—

—

—

—

—

—

—

—
Release of Restricted Shares

19

—

—

—

—

—

—

—
Common Stock Repurchased and Transferred

—

(2)

(1,740)

(112)

—

—

—

(114)
Translation Adjustment

—

—

—

—

—

—

(309)

(309)
Net Loss

—

—

—

—

—

(2,856)

—

(2,856)
June 30, 2019

28,701

$
30

1,239

$
(142,269)

$
216,159

$
69,055

$
(1,577)

$
141,398


													Total
	Common Stock			Treasury Stock			Additional		Retained				Stockholders'
	Shares	Value		Shares	Value		Capital		Earnings		AOCL		Equity

April 1, 2019	28,682	$	32	2,979	$	(142,157)	$	214,798	$	71,911	$	(1,268)	$	143,316
Stock-Based Compensation Expense	—		—	—		—		1,361		—		—		1,361
Release of Restricted Shares	19		—	—		—		—		—		—		—
Common Stock Repurchased	—		(2)	(1,740)		(112)		—		—		—		(114)
Translation Adjustment	—		—	—		—		—		—		(309)		(309)
Net Loss	—		—	—		—		—		(2,856)		—		(2,856)
June 30, 2019	28,701	$	30	1,239	$	(142,269)	$	216,159	$	69,055	$	(1,577)	$	141,398

April 1, 2020	28,812	$	30	1,293	$	(142,630)	$	218,736	$	98,733	$	(1,535)	$	173,334
Stock-Based Compensation Expense	—		—	—		—		846		—		—		846
Exercise of Stock Options	3		—	—		—		36		—		—		36
Release of Restricted Shares	37		—	—		—		—		—		—		—
Common Stock Repurchased	—		—	16		(122)		—		—		—		(122)
Translation Adjustment	—		—	—		—		—		—		227		227
Net Income	—		—	—		—		—		2,639		—		2,639
June 30, 2020	28,852	$	30	1,309	$	(142,752)	$	219,618	$	101,372	$	(1,308)	$	176,960

Total

Common Stock

Treasury Stock

Additional

Retained

Stockholders'


Shares

Value

Shares

Value

Capital

Earnings

AOCL

Equity

December 31, 2017

28,490

$
31

2,907

$
(140,875)

$
208,629

$
131,214

$
(1,152)

$
197,847
Stock-Based Compensation Expense

—

—

—

—

2,244

—

—

2,244
Exercise of Stock Options

6

—

—

—

80

—

—

80
Release of Restricted Shares

55

—

—

—

—

—

—

—
Common Stock Repurchased

—

—

28

(667)

—

—

—

(667)
Translation Adjustment

—

—

—

—

—

—

(105)

(105)
Net Loss

—

—

—

—

—

(3,426)

—

(3,426)
June 30, 2018

28,551

$
31

2,935

$
(141,542)

$
210,953

$
127,788

$
(1,257)

$
195,973

December 31, 2018

28,627

$
32

2,951

$
(141,828)

$
213,744

$
76,835

$
(1,385)

$
147,398
Stock-Based Compensation Expense

—

—

—

—

2,415

—

—

2,415
Release of Restricted Shares

74

—

—

—

—

—

—

—
Common Stock Repurchased and Transferred

—

(2)

(1,712)

(441)

—

—

—

(443)
Translation Adjustment

—

—

—

—

—

—

(192)

(192)
Net Loss

—

—

—

—

—

(7,780)

—

(7,780)
June 30, 2019

28,701

$
30

1,239

$
(142,269)

$
216,159

$
69,055

$
(1,577)

$
141,398


													Total
	Common Stock			Treasury Stock			Additional		Retained				Stockholders'
	Shares	Value		Shares	Value		Capital		Earnings		AOCL		Equity

January 1, 2019	28,627	$	32	2,951	$	(141,828)	$	213,744	$	76,835	$	(1,385)	$	147,398
Stock-Based Compensation Expense	—		—	—		—		2,415		—		—		2,415
Release of Restricted Shares	74		—	—		—		—		—		—		—
Common Stock Repurchased	—		(2)	(1,712)		(441)		—		—		—		(443)
Translation Adjustment	—		—	—		—		—		—		(192)		(192)
Net Loss	—		—	—		—		—		(7,780)		—		(7,780)
June 30, 2019	28,701	$	30	1,239	$	(142,269)	$	216,159	$	69,055	$	(1,577)	$	141,398

January 1, 2020	28,714	$	30	1,245	$	(142,314)	$	218,616	$	86,498	$	(1,580)	$	161,250
Stock-Based Compensation Expense	—		—	—		—		966		—		—		966
Exercise of Stock Options	3		—	—		—		36		—		—		36
Release of Restricted Shares	135		—	—		—		—		—		—		—
Common Stock Repurchased	—		—	64		(438)		—		—		—		(438)
Translation Adjustment	—		—	—		—		—		—		272		272
Net Income	—		—	—		—		—		14,874		—		14,874
June 30, 2020	28,852	$	30	1,309	$	(142,752)	$	219,618	$	101,372	$	(1,308)	$	176,960

See accompanying notes to condensed consolidated financial statements

Table of Contents

the customer including any discounts. The Company generally requires customers to pay a deposit, equal to approximately half of the retail sales value, when ordering merchandise not regularly carried in a given location or not currently in stock. In addition, the Company generally does not extend credit to its customers with payment due in full at the time the customer takes possession of merchandise or when the service is provided. Customer payments and deposits received in advance of the customer taking possession of the merchandise or receiving the services are recorded as deferred revenues in the accompanying condensed consolidated balance sheet caption ~~Customer~~“Customer Deposits and Store Credits.”

The following table shows the activity in this account for the periods noted:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018

									Three Months Ended				Six Months Ended
									June 30,				June 30,
									2020		2019		2020		2019
Customer Deposits and Store Credits, Beginning Balance	$	(47,633)	$	(43,493)	$	(40,332)	$	(38,546)	$	(37,836)	$	(47,633)	$	(41,571)	$	(40,332)
New Deposits		(302,429)		(302,881)		(594,262)		(588,403)		(264,473)		(302,429)		(545,326)		(594,262)
Recognition of Revenue		288,567		283,474		554,787		545,246		230,284		288,567		497,658		554,787
Sales Tax included in Customer Deposits		17,483		17,487		34,264		34,092		14,862		17,483		31,543		34,264
Other		1,124		66		2,655		2,264		1,671		1,124		2,204		2,655
Customer Deposits and Store Credits, Ending Balance	$	(42,888)	$	(45,347)	$	(42,888)	$	(45,347)	$	(55,492)	$	(42,888)	$	(55,492)	$	(42,888)

Subject to limitations under the Company’s policy, return of unopened merchandise is accepted for 90 days. Due to the impact of COVID-19, the Company temporarily extended its return policy an additional 60 days starting in March 2020. The amount of revenue recognized for flooring merchandise is adjusted for expected returns, which are estimated based on the Company’s historical data, current sales levels, and forecasted economic trends. The Company uses the expected value method to estimate returns because it has a large number of contracts with similar characteristics. The Company reduces revenue by the amount of expected returns and records it within ~~accrued expenses and other~~“Other Current Liabilities” on the condensed consolidated balance sheet. The Company continues to estimate the amount of returns based on ~~the~~ historical data. In addition, the Company recognizes a related asset for the right to recover returned merchandise and records it in the ~~other~~

~~Table of Contents~~

~~current assets~~“Other Current Assets” caption of the accompanying condensed consolidated balance sheet. This amount was ~~$1.~~4$1.3 million at June 30, ~~2019.~~2020. The Company recognizes sales commissions as incurred since the amortization period is less than one year. The Company offers a range of limited warranties for the durability of the finish on its prefinished products. These limited warranties range from one to 100 years, with lifetime warranties for certain of the Company’s products. Warranty reserves are based primarily on claims experience, sales history and other considerations. Warranty costs are recorded in cost of sales.

In total, the Company offers hundreds of different flooring products; however, no single flooring product represented a significant portion of its sales mix. By major product category, the Company’s sales mix was as follows:


	Three Months Ended June 30,								Six Months Ended June 30,
	2020				2019				2020				2019
Manufactured Products ¹	$	112,441	49	%	$	118,212	41	%	$	231,478	46	%	$	228,679	41	%
Solid and Engineered Hardwood		62,164	27	%		83,547	29	%		138,773	28	%		165,382	30	%
Moldings and Accessories and Other		35,450	15	%		48,899	17	%		78,586	16	%		94,496	17	%
Installation and Delivery Services		20,229	9	%		37,909	13	%		48,821	10	%		66,230	12	%
Total	$	230,284	100	%	$	288,567	100	%	$	497,658	100	%	$	554,787	100	%

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2018

Manufactured Products 1

$
118,212

41
%
$
99,920

35
%
$
228,679

41
%
$
190,848

35
%
Solid and Engineered Hardwood

83,547

29
%

97,640

35
%

165,382

30
%

194,332

36
%
Moldings and Accessories and Other

48,899

17
%

51,407

18
%

94,496

17
%

100,302

18
%
Installation and Delivery Services

37,909

13
%

34,507

12
%

66,230

12
%

59,764

11
%
Total

$
288,567

100
%
$
283,474

100
%
$
554,787

100
%
$
545,246

100
%

¹ Includes laminate, vinyl, engineered vinyl plank and porcelain tile.

Cost of Sales

Cost of sales includes the cost of products sold, including tariffs, the cost of installation services, and transportation costs from vendors to the Company’s distribution centers or store locations. It also includes ~~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

Table of Contents

customers, certain costs of quality control procedures, warranty and customer satisfaction costs, inventory adjustments including obsolescence and shrinkage, and costs to produce samples, which are net of vendor allowances.

The Company ~~ceased finishing floors in January 2019, as previously disclosed in the Form 10-K~~offers a range of limited warranties for the ~~year ended December 31, 2018.~~durability of the finish on its prefinished products to its services provided. These limited warranties range from one to 100 years, with lifetime warranties for certain of the Company’s products. 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. Warranty costs are recorded in cost of sales. The Company seeks recovery from its vendors and third-party independent contractors of installation services for certain amounts paid.

~~Leases~~Vendor allowances primarily consist of volume rebates that are earned as a result of attaining certain purchase levels and reimbursement for the cost of producing samples. Vendor allowances are accrued as earned, with those allowances received as a result of attaining certain purchase levels accrued over the incentive period based on estimates of purchases. Volume rebates earned are initially recorded as a reduction in merchandise inventories and a subsequent reduction in cost of sales when the related product is sold. Reimbursement received for the cost of producing samples is recorded as an offset against cost of sales.

Recent Accounting Pronouncements Adopted

In ~~February 2016,~~April 2020, the FASB staff issued ~~Accounting Standards Update No. 2016-02 (“ASU 2016-02”), which created ASC Topic 842, Leases,~~a question and ~~superseded~~answer document (the “Lease Modification Q&A”) focused on the application of lease accounting ~~requirements in Topic 840, Leases. In summary, Topic 842 requires organizations that~~guidance to lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which included an option to not restate comparative periods in transition and elect to use the effective date of ASC 842concessions obtained as ~~the date of initial application of transition, which the Company elected. As~~ a result of the ~~adoption of ASC 842 on January 1, 2019,~~COVID-19 pandemic. Under existing lease guidance, the Company ~~recorded both operating~~would have to determine, on a lease ~~right-of-use (“ROU”) assets~~by lease basis, if a lease concession obtained was a result of ~~$113 million and~~a new arrangement reached with the lessor (treated within the lease liabilities of $121 million. The adoption of ASC 842 had an immaterial impact on the Company’s condensed consolidated statements of operations and condensed consolidated statements of cash flows for the three and six month periods ended June 30, 2019. The Company elected the package of practical expedients permittedmodification accounting framework) or if a lease concession obtained was under the ~~transition guidance~~enforceable rights and obligations within the ~~new standard, which among other things, allowed the Company to carryforward the historical~~existing lease ~~classification.~~

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets and operating lease liabilities on the condensed consolidated balance sheets. The operating lease ROU assets and operating lease liabilities are recognized as the present value of the future minimum lease payments overagreement (precluded from applying the lease ~~term at commencement date. As most of~~modification accounting framework). The Lease Modification Q&A allows lessees, if certain criteria have been met, to bypass the leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also is adjusted for any lease payments madelease-by-lease analysis, and ~~excludes lease~~

~~Table of Contents~~

~~incentives and initial direct costs incurred. The Company’s lease terms may include options~~instead elect to ~~extend or terminate~~either apply the lease ~~typically, at the Company’s own discretion.~~modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. Many of the Company’s leases include both lease (e.g., payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs) which are accounted for as a single lease component as the Company has elected ~~the~~to apply this practical expedient ~~to group lease and non-lease components~~ for ~~all leases. Lease expense~~the period beginning as of April 1, 2020 for ~~minimum lease payments is recognized on a straight-line basis over the term of the agreement.~~

~~The Company made an accounting policy election that~~those agreements where total payments under ~~agreements with an initial term of 12 months~~the modified lease are substantially the same or less ~~will not be included~~than the original agreement. Included in “Operating Lease Liabilities - Current” on the condensed consolidated balance sheet ~~but~~is a $5.4 million liability as of June 30, 2020 related to deferred payments as a result of the COVID-19 rent concessions, as well as an additional $0.4 million included in “Operating Lease Liabilities - Long-Term.” The deferred payments will be ~~recognized in the condensed consolidated statements of operations on a straight-line basis~~made over the ~~term~~remainder of the lease term in accordance with each concession agreement.

~~Additional information and disclosures required by this new standard are contained in “Note 7,~~ ~~Leases.”~~

~~Recent Accounting Pronouncements Not Yet Adopted~~

In August 2018, the FASB issued Accounting Standards Update No. 2018‑15 (“ASU 2018‑15”), which provides guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract, as initially published in Accounting Standards Update No. 2015‑05, ~~Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement~~. In summary, the new standard requires customers of cloud computing services to recognize an intangible asset for the software license and, to the extent that payments attributable to the software license are made over time, a liability is also recognized. The new standard also allows customers of cloud computing services to capitalize certain implementation costs. The amendments in ASU 2018‑15 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Therefore, the new standard will become effective for the Company at the beginning of its 2020 fiscal year, although early adoption is permitted for all entities. The Company will evaluate the impact of ASU 2018‑15 when recording cloud computing arrangements.

Note 3. Stockholders’ Equity

Net ~~Loss~~Income (Loss) per Common Share

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Net Income (Loss)	$	2,639	$	(2,856)	$	14,874	$	(7,780)
Weighted Average Common Shares Outstanding—Basic		28,831		28,692		28,776		28,669
Effect of Dilutive Securities:
Common Stock Equivalents		61		—		113		—
Weighted Average Common Shares Outstanding—Diluted		28,892		28,692		28,889		28,669
Net Income (Loss) per Common Share—Basic	$	0.09	$	(0.10)	$	0.52	$	(0.27)
Net Income (Loss) per Common Share—Diluted	$	0.09	$	(0.10)	$	0.51	$	(0.27)

Three Months Ended

Six Months Ended

June 30,

June 30,


2019

2018

2019

2018

Net Loss

$
(2,856)

$
(1,454)

$
(7,780)

$
(3,426)

Weighted Average Common Shares Outstanding—Basic

28,692

28,546

28,669

28,527

Effect of Dilutive Securities:









Common Stock Equivalents

—

—

—

—

Weighted Average Common Shares Outstanding—Diluted

28,692

28,546

28,669

28,527

Net Loss per Common Share—Basic

$
(0.10)

$
(0.05)

$
(0.27)

$
(0.12)

Net Loss per Common Share—Diluted

$
(0.10)

$
(0.05)

$
(0.27)

$
(0.12)

Table of Contents

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


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2019	2018	2019	2018

					Three Months Ended		Six Months Ended
					June 30,		June 30,
					2020	2019	2020	2019
Stock Options	644	702	644	671	598	644	544	644
Restricted Shares	839	419	613	369	742	839	419	613

~~Table of Contents~~

Stock Repurchase Program

The Company’s board of directors has authorized the repurchase of up to $150 million of the Company’s common stock. At June 30, ~~2019,~~2020, the Company had approximately $14.7 million remaining under this authorization. The Company has ~~not~~0t repurchased any shares of its common stock under this program in more than three years.

Note 4. Stock-based Compensation

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


		Restricted Stock
	Stock Options	Awards
Options Outstanding/Nonvested RSAs, December 31, 2018	733	487

				Restricted Stock
			Stock Options	Awards
Options Outstanding/Nonvested RSAs, January 1, 2020			693	911
Granted	—	565	197	451
Options Exercised/RSAs Released	—	(114)	(3)	(200)
Forfeited	(89)	(40)	(271)	(225)
Options Outstanding/Nonvested RSAs, June 30, 2019	644	898
Options Outstanding/Nonvested RSAs, June 30, 2020			616	937

The Company granted a target of 94,591 performance-based RSAs with a grant date fair value of $0.9 million during the six months ended June, 2020 and a target of 100,281 performance-based RSAs with a grant date fair value of $1.1 million during the six months ended June 30, ~~2019~~2019. The 2020 performance-based RSAs were awarded to certain members of senior management in connection with the achievement of specific key financial metrics and a ~~target~~relative total shareholder return multiple measured over a three-year period and also vest over a three-year period. The number of ~~30,887~~2020 performance-based ~~RSAs with a grant date fair value~~awards that will ultimately vest is contingent upon the achievement of ~~$0.7 million during~~these key financial metrics and the ~~six months ended June 30, 2018. These shares~~results of the relative total shareholder return multiple by the end of year three. The 2019 performance-based RSAs were awarded to certain members of senior management in connection with the achievement of specific key financial metrics measured over a two-year period and vest over a three-year period. The number of 2019 performance-based awards that will ultimately vest is contingent upon the achievement of these key financial metrics by the end of year two. The Company assesses the probability of achieving these metrics on a quarterly basis. For these awards, the Company recognizes the fair value expense ratably over the performance and vesting period. ~~Once these amounts have been determined, half of the shares will vest at the end of year two and the remaining half will vest at the end of year three.~~ These awards are included above in RSAs Granted.

Note 5. Credit Agreement

~~On March 29, 2019, the~~The Company ~~entered into~~has a ~~Fourth Amended and Restated Credit Agreement~~credit agreement (the “Credit Agreement”) with Bank of America, N.A. and Wells Fargo Bank, National Association (the “Lenders”). ~~The Credit Agreement amended and restated~~On April 17, 2020, the ~~Third Amended and Restated Revolving~~Company entered into a First Amendment to the Credit Agreement (the ~~“Prior Agreement”~~“Amendment”)~~. Under~~ with the ~~Credit Agreement,~~Lenders. The execution of the ~~Lenders increased~~Amendment, among other things, temporarily increases the maximum amount of borrowings under the ~~revolving credit facility~~Revolving Credit Facility (the “Revolving Credit Facility”) from ~~$150 million under the Prior Agreement to~~ $175 million ~~and added a new~~to $212.5 million until August 30, 2020, subject to the borrowing bases described below. The total size of the Credit Agreement increased to $237.5 million, inclusive of the first in-last out $25 million term loan (the “FILO Term Loan”) for a total of $200 million, subject to the borrowing bases described below. The Company also has the option to increase the Revolving Credit Facility to a maximum total amount of $225 million, subject to the satisfaction of the conditions to such increase as specified in the Credit Agreement..

As of June 30, 2019, a total of $64.5 million was outstanding under the Revolving Credit Facility and $25 million was outstanding under the FILO Term Loan. The Company also had $2.9 million in letters of credit which factor into its remaining availability.

The Revolving Credit Facility and the FILO Term Loan mature on March 29, 2024 and are secured by security interests in the Collateral (as defined in the Credit Agreement), which includes substantially all assets of the Company including, among other things, the Company’s inventory and accounts receivables, and the Company’s East Coast

Table of Contents

distribution center located in Sandston, Virginia. Under the terms of the Credit Agreement, the Company has the ability to release the East Coast distribution center from the Collateral under certain conditions.

The ~~Revolving Credit Facility is available to~~Amendment permanently increased the Company up to the lesser of (1) $175 million or (2) a revolving borrowing base equal to the sum of specified percentages of the Borrowers’ eligible credit card receivables, eligible inventory (including eligible in-transit inventory), and eligible owned real estate, less certain reserves, all of which are defined by the terms of the Credit Agreement (the “Revolving Borrowing Base”). If the outstanding FILO Term Loan

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~~exceeds the FILO Borrowing Base~~margin for LIBOR Rate Loans (as defined in the ~~Credit Agreement)~~Amendment) to (i) 2.50% to 3.00% over the applicable LIBOR Rate (as defined in the Amendment) with respect to Revolving Loans (as defined in the Amendment) and (ii) 3.75% to 4.50% over the applicable LIBOR Rate with respect to FILO Term Loans (as defined in the Amendment), in each case (for one, two, three or six month interest periods as selected by the ~~amount of such~~Company) depending on the Company’s average daily excess ~~reduces~~borrowing availability under the Revolving ~~Borrowing Base.~~Credit Facility during the most recently completed fiscal quarter. The Amendment also permanently increased the unused commitment fee of 0.25% per annum to 0.50% per annum on the average daily unused amount of the Revolving Credit Facility during the most recently completed calendar quarter. As of June 30, 2020, the Company’s Revolving Credit Facility carried an average interest rate of 3.50% and the FILO Term Loan carried an interest rate of 4.75%.

~~Loans~~Prior to the Amendment, loans outstanding under the Credit Agreement ~~can bear~~bore interest based on the Base Rate (as defined in the Credit Agreement) or the LIBOR Rate (as defined in the Credit Agreement). Interest on Base Rate loans iswas charged at varying per annum rates computed by applying a margin ranging from (i) 0.25% to 0.75% over the Base Rate with respect to revolving loans and (ii) 1.25% to 2.00% over the Base Rate with respect to the FILO Term Loan, in each case depending on the ~~Borrowers’~~Company’s average daily excess borrowing availability under the Revolving Credit Facility during the most recently completed fiscal quarter. Interest on LIBOR Rate loans and fees for standby letters of credit ~~are~~were charged at varying per annum rates computed by applying a margin ranging from (i) 1.25% to 1.75% over the applicable LIBOR Rate with respect to revolving loans and (ii) 2.25% to 3.00% over the applicable LIBOR Rate with respect to the FILO Term Loan, in each case depending on the Company’s’ average daily excess borrowing availability under the Revolving Credit Facility during the most recently completed fiscal quarter.

As of June 30, 2020, a total of $76 million was outstanding under the Revolving Credit Facility and $25 million was outstanding under the FILO Term Loan. As of June 30, 2020, there was $59 million of availability under the Revolving Credit Facility. The Company also had $4 million in letters of credit which reduces its remaining availability.

The Revolving Credit Facility is available to the Company up to the lesser of (1) $175 million (temporarily increased to $212.5 million under the Amendment) or (2) a revolving borrowing base equal to the sum of specified percentages of the Company’s eligible inventory (including eligible in-transit inventory), eligible credit card receivables, and eligible owned real estate, less certain reserves, all of which are defined by the terms of the Credit Agreement (the “Revolving Borrowing Base”). If the outstanding FILO Term Loan exceeds the FILO Borrowing Base (as defined in the Credit Agreement), the amount of such excess reduces availability under the Revolving Borrowing Base. The Company retained to option to increase the Revolving Credit Facility to a maximum total amount of $225 million, subject to the satisfaction of the conditions to such increase as specified in the Credit Agreement.

The Credit Agreement contains a fixed charge coverage ratio covenant that becomes effective only when specified availability under the Revolving Credit Facility falls below the greater of $17.5 million or 10% of the Combined Loan Cap (as defined in the Credit Agreement).

Note 6. Income Taxes

The Company calculates its quarterly tax provision pursuant to the guidelines in Accounting Standards Codification ("ASC") 740-270 "Income Taxes." Generally, ASC 740-270 requires companies to estimate the annual effective tax rate for current year ordinary income. The estimated annual effective tax rate represents the best estimate of the tax provision in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date ordinary income or loss to calculate the year-to-date interim tax provision. Due to the current disruption in the economy related to the COVID-19 pandemic and the impact this has on making a reliable estimate of the annual effective tax rate as of the current reporting period, the Company has applied the actual year-to-date effective tax rate for the current-period tax provision.

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The CARES Act (the “Act”) was enacted on March 27, 2020. The Act retroactively changed the eligibility of certain assets for expense treatment in the year placed in service, back to 2018, and permitted any net operating loss for the tax years 2018, 2019 and 2020 to be carried back for five years. The Company recorded an income tax benefit of $4.8 million in the first six months of 2020 associated with the income tax components contained in the Act, and as of June 2020 the Company has collected the full amount of the income tax benefit. As of June 30, 2020, the Company has completed an initial analysis of the tax effects of the Act but continues to monitor developments by federal and state rulemaking authorities regarding implementation of the Act. The Company has made reasonable estimates of the effects of the Act and will adjust, if needed, as new laws or guidance becomes available.

For the three months ended June 30, 2020, the Company recognized income tax expense of $2.2 million, which represented an effective tax rate of 45.7%. For the three months ended June 30, 2019, the Company recognized income tax expense of $0.4 million, which represented an effective tax rate of (16.8)%. The variability of our tax rate in 2020 reflects the timing of deductions and the Act on our quarterly earnings.

For the six months ended June 30, 2020, the Company recognized an income tax benefit of $2.1 million, which represented an effective tax rate of (16.7)%. For the six months ended June 30, 2019, the Company recognized income tax expense of $0.6 million, which represented an effective tax rate of (8.7)%. The income tax benefit for the six months ended June 30, 2020 included the impact of the enactment of the Act, as discussed above.

The Company has a full valuation allowance recorded against its net deferred tax assets ~~which effectively offsets its federal taxes at the statutory rate~~ of 21%. However, it does record tax expense each period for income taxes incurred in certain state and foreign jurisdictions. For the three and six months ended June 30, 2019, the resulting effective tax rate was (16.8)% and (8.7)%, respectively. For the three and six months ended June 30, 2018, the resulting effective tax rate was (15.5)% and (13.2)%, respectively.

$27 million. The Company intends to maintain a valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. A reduction in the valuation allowance could result in a significant decrease in income tax expense in the period that the release is recorded. However, the exact timing and amount of any reduction in the Company’s valuation allowance are unknown at this time and will be subject to the earnings level it achieves in future periods.

~~Note 7.Leases~~

The Company has operating leases for all of its stores, current corporate headquarters in Toano, Virginia, its distribution center on the west coast, supplemental office facilities and certain equipment. The Company has also entered into an agreement for a future corporate headquarters in Richmond, Virginia which has a ten-year term and expected future minimum rental payments of approximately $15.4 million that commences in the fourth quarter of 2019 once the Company takes possession of the property. The store location leases are operating leases and generally have five-year base periods with one or more five-year renewal periods. The current corporate headquarters in Toano, Virginia and the supplemental office facility in Richmond, Virginia have operating leases with base terms running through December 31, 2019 and November 30, 2020, respectively. The distribution center on the west coast has an operating lease with a base term running through October 31, 2024.

~~The cost components of the Company’s operating leases recorded in SG&A on the condensed consolidated statement of operations were as follows for the period ended June 30, 2019:~~

Three Months Ended June 30, 2019

Six Months Ended June 30, 2019

Store Leases

Other Leases

Total

Store Leases

Other Leases

Total

Operating lease costs
$
8,150

$
1,010

$
9,160

$
16,193

$
2,003

$
18,196
Variable lease costs

1,930

198

2,128

3,883

397

4,280
Total
$
10,080

$
1,208

$
11,288

$
20,076

$
2,400

$
22,476

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~~Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities which are paid as incurred.~~

~~Other information related to leases were as follows:~~

Six Months Ended June 30, 2019

Store Leases

Other Leases

Total

Supplemental Cash Flows Information

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases
$
16,555

$
2,195

$
18,750

Right-of-use assets obtained or modified in exchange for operating lease obligations
$
13,085

$
461

$
13,546

Weighted Average Remaining Lease Term (years)

4.71

4.79

4.72

Weighted Average Discount Rate

5.98
%

6.15
%

5.99
%

~~At June 30, 2019, the future minimum rental payments under non-cancellable operating leases were as follows:~~

Operating Leases

Store Leases

Other Leases

Total
Remainder of 2019

$
16,832

$
2,191

$
19,023
2020

32,051

2,741

34,792
2021

25,840

2,264

28,104
2022

19,804

2,219

22,023
2023

13,841

2,255

16,096
Thereafter

17,104

2,075

19,179
Total future minimum lease payments

125,472

13,745

139,217
Less imputed interest

(16,373)

(1,871)

(18,244)
Total

$
109,099

$
11,874

$
120,973

Note 8.7. Commitments and Contingencies

~~Governmental Investigations~~

In 2015 and early 2016, the Company received subpoenas issued in connection with a criminal investigation being conducted by the DOJ and the SEC. The focus of the investigations primarily related to compliance with disclosure and financial reporting and requirements under the federal securities laws. The Company cooperated with the investigations and produced documents and other information responsive to subpoenas and other requests received from the parties. In March of 2019 prior to filing its Form 10-K, the Company reached an agreement with the U.S. Attorney, the DOJ and SEC regarding the investigation (the “Settlement Agreements”). The Company entered into a Deferred Prosecution Agreement (“DPA”) with the U.S. Attorney and the DOJ and a Cease-and-Desist Order (the “Order”) with the SEC, under which it is required, among other things, to (1) pay a fine in the amount of $19.1 million to the United States Treasury, (2) forfeit to the U.S. Attorney and the DOJ the sum of $13.9 million, of which up to $6.1 million will be submitted by the Company to the SEC in disgorgement and prejudgment interest under the Order and (3) adopt a new compliance program, or modify its existing one, including internal controls, compliance policies, and procedures in order to ensure that the Company maintains an effective system of internal account controls designed to ensure the making and

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~~keeping of fair and accurate books, records and accounts, as well as a compliance program designed to prevent and detect violations of certain federal securities laws throughout its operations.~~

The Settlement Agreements also provide that the Company will continue to cooperate with the U.S. Attorney, the DOJ and the SEC in all matters relating to the conduct described in the Settlement Agreements and, at the request of the U.S. Attorney, the DOJ or the SEC, the Company will cooperate fully with other domestic or foreign law enforcement authorities and agencies in any investigation of the Company in any and all matters relating to the Settlement Agreements. In the event the Company breaches the DPA, there is a risk the government would seek to impose remedies provided for in the DPA, including instituting criminal prosecution against the Company.

The Company accrued a charge of $33 million within selling, general and administrative (“SG&A”) expenses in its December 31, 2018 financial statements, reflecting the amounts owed under the Settlement Agreements. During the second quarter of 2019, the Company remitted all amounts due to the applicable governmental parties and has relieved the applicable portion of the liability in the caption “Accrual for Legal Matters and Settlements Current” on its balance sheet.

Litigation Relating to Bamboo Flooring

In 2014, Dana Gold filed a purported class action lawsuit alleging that certain bamboo flooring that the Company sells (the “Strand Bamboo Product”) is defective (the “Gold Litigation”). ~~The plaintiffs sought financial damages and, in addition to attorneys’ fees and costs, the plaintiffs wanted a declaration that the Company’s actions violated the law.~~

On ~~March 15,~~September 30, 2019, the ~~Company entered into~~parties finalized a settlement agreement that is consistent with the terms of the Memorandum of Understanding ~~(the “Gold MOU”),~~previously disclosed by the Company, which would resolve the Gold Litigation on a nationwide basis. Under the terms of the ~~Gold MOU,~~settlement agreement, the Company will contribute $14 million in cash and provide $14 million in store-credit vouchers, with a potential additional $2 million in store-credit vouchers based on obtaining a claim’s percentage of more than 7%, for an aggregate settlement of up to $30 million. The ~~Gold MOU is subject to certain contingencies, including the execution of a definitive~~ settlement agreement ~~board approval and court approvals of~~clearly indicates that the ~~definitive~~ settlement ~~agreement. The entry into the Gold MOU or any subsequent execution of a definitive settlement agreement~~ does not constitute or include an admission by the Company of any fault or liability, and the Company does not admit any fault, wrongdoing or liability.

On December 18, 2019, the court issued an order that, among other things, granted preliminary approval of the settlement agreement. Following the preliminary approval, and pursuant to the terms of the settlement agreement, in December 2019, the Company paid $1 million for settlement of administrative costs, which is part of the Gold Cash Payment, to the plaintiff’s settlement escrow account.

Notice has been disseminated to the class members by the settlement administrator and a Final Approval and Settlement Hearing is currently scheduled for September 24, 2020. Only seven objectors filed objections to the settlement agreement that will be addressed at the Final Approval and Settlement Hearing. The settlement agreement is subject to certain contingencies, including court approval. There can be no assurance that a settlement will be finalized and approved by the court at the Final Approval and Settlement Hearing or as to the ultimate outcome of the litigation.

If a final, court-approved settlement is not reached, the Company will defend the matter vigorously and believes there are meritorious defenses and legal standards that must be met for, among other things, success on the merits. The Company ~~accrued within SG&A a $28 million liability with the offset in the caption “Accrual for Legal Matters and Settlements Current” in its December 31, 2018 financial statements. The Company~~ has notified its insurance carriers and continues to pursue coverage,, but the insurers to date have denied

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coverage. As the insurance claim is still pending, the Company has not recognized any insurance recovery related to the Gold Litigation.

~~In addition, there are~~The Company recognized a ~~number~~charge to earnings of ~~other claims~~$28 million within selling, general and ~~lawsuits alleging damages similar~~administrative expense during the fourth quarter of 2018 as its loss became probable and estimable. As of June 30, 2020, the remaining accrual related to ~~those~~these matters was $27 million, which has been included in the ~~Gold Litigation. The Company disputes these claims~~caption “Accrual for Legal Matters and ~~intends to defend such matters vigorously. Given~~Settlements Current” on its condensed consolidated balance sheet. If the ~~uncertainty of litigation,~~settlement agreement is not approved by the ~~preliminary stage of the cases, and the legal standards that must be met for success on the merits,~~court or the Company ~~is unable~~incurs additional losses with respect to ~~estimate~~ the ~~amount of loss, or range of possible loss, at this time~~Bamboo Flooring Litigation (as defined below), the actual losses that may result from these ~~actions. Accordingly, no accruals have been made with respect to these matters.~~actions may exceed this amount. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity.

In addition, there are a number of individual claims and lawsuits alleging damages involving Strand Bamboo Product (the “Bamboo Flooring Litigation”). While the Company believes that a loss associated with the Bamboo Flooring Litigation is reasonably possible, the Company is unable to reasonably estimate the amount or range of possible loss. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity. The Company disputes the claims in the Bamboo Flooring Litigation and intends to defend such matters vigorously.

Litigation Relating to Chinese Laminates

Formaldehyde-Abrasion MDLs

On March 15, 2018, the Company entered into a settlement agreement with the lead plaintiffs in the Formaldehyde MDL (as defined in Part II, Item 1 of this Form 10-Q) and Abrasion MDL (as defined in Part II, Item 1 of this Form 10-Q), cases more fully described in Part II, Item 1 of this Form 10-Q. Under the terms of the settlement agreement, the Company agreed to fund $22 million in cash and provide $14 million in store-credit vouchers for an

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aggregate settlement of $36 million to settle claims brought on behalf of purchasers of Chinese-manufactured laminate flooring sold by the Company between January 1, 2009 and May 31, 2015. The Company deposited $22 million into an escrow account administered by the court and plaintiffs’ counsel in accordance with the final settlement. The final approval order by the United States District Court for the Eastern District of Virginia has been appealed and is pending. The Company does not anticipate any change to its obligations, but must wait until the appeals are adjudicated or withdrawn. If the appeals were to result in the settlement being set aside, the Company would receive $21.5 million back from the escrow agent. Accordingly, the Company has accounted for the payment of $21.5 million ~~as a deposit~~which is included in the ~~accompanying~~caption “Deposit for Legal Settlement” on its condensed consolidated ~~financial statements.~~balance sheet. While insurance carriers initially denied coverage with respect to the Formaldehyde MDL and Abrasion MDL, the Company continues to pursue recoveries that the Company believes are appropriate. The $36 million aggregate settlement amount was accrued within SG&A expenses in 2017.

For approximately three years after a final ruling has been reached in this matter, plaintiffs will be able to redeem vouchers for product. Some of the states have alternative expiration dates while others have an indefinite amount of time to redeem vouchers. The Company will account for the sales of these products by relieving the relevant liability, reducing inventory used in the transaction and offsetting SG&A expenses for any profit. The Company does not know the timing or pace of voucher redemption.

In addition to those purchasers who opted out of the above settlement (the “Opt Outs”), there are a number of individual claims and lawsuits alleging personal injuries, breach of warranty claims, or violation of state consumer protection statutes that remain pending (collectively, the “Related Laminate Matters”). Certain of these Related Laminate Matters were settled in 2019 and 2018, while some remain in settlement negotiations. The Company ~~recognized charges to earnings of $0.4 million and $2.9~~ ~~million~~did not have any expense for this matter for the six months ended June 30, ~~2019 and 2018, respectively, within SG&A expenses for these Remaining Laminate Matters.~~2020. As of June 30, ~~2019,~~2020, the remaining accrual related to these matters was $0.1 million, which has been included in the caption “Accrual for Legal Matters and Settlements Current” on the condensed consolidated balance sheet. For the six months ended June 30, 2019, the Company recognized charges to earnings of $0.4 million within SG&A expenses for these Remaining Laminate Matters. While the Company believes that a further loss associated with the Opt Outs and Related Laminate Matters is reasonably possible, the Company is unable to reasonably estimate the amount or range of possible loss beyond what has been

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provided. If the Company incurs losses with the respect to the Opt Outs or further losses with respect to Related Laminate Matters, the ultimate resolution of these actions could have a material adverse effect on the Company’s results of operations, financial condition, and liquidity.

Canadian Litigation

On or about April 1, 2015, Sarah Steele (“Steele”) filed a purported class action lawsuit in the Ontario, Canada Superior Court of Justice against the Company. In the complaint, Steele’s allegations include strict liability, breach of implied warranty of fitness for a particular purpose, breach of implied warranty of merchantability, fraud by concealment, civil negligence, negligent misrepresentation and breach of implied covenant of good faith and fair dealing. Steele did not quantify any alleged damages in her complaint, but seeks compensatory damages, punitive, exemplary and aggravated damages, statutory remedies, attorneys’ fees and costs. While the Company believes that a loss associated with the Steele litigation is possible, the Company is unable to reasonably estimate the amount or range of possible loss.

Employee Classification Matters

~~On or about~~Mason Lawsuit

In August ~~15,~~ 2017, Ashleigh Mason, Dan Morse, Ryan Carroll and Osagie Ehigie filed a purported class action lawsuit in the United States District Court for the Eastern District of New York on behalf of all current and former store managers, store managers in training, installation sales managers and similarly situated current and former employees ~~holding comparable positions but different titles~~ (collectively, the ~~“Putative~~“Mason Putative Class Employees”) alleging that the Company violated the Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”) by classifying the Mason Putative Class Employees as exempt. The alleged violations include failure to pay for overtime work. The plaintiffs ~~seek~~sought certification of the Mason Putative Class Employees for (i) a collective action covering the period beginning three years prior to the filing of the complaint (plus a tolling period) through the disposition of this action for the Mason Putative Class Employees nationwide in connection with FLSA and (ii) a class action covering the period beginning six years prior to the filing of the complaint (plus a tolling period) through the disposition of this action for members of the Mason Putative Class Employees who currently are or were employed in New York in connection with NYLL. The plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, the plaintiffs seek class certification, unspecified amounts for

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unpaid wages and overtime wages, liquidated and/or punitive damages, declaratory relief, restitution, statutory penalties, injunctive relief and other damages.

In November 2018, the plaintiffs filed a motion requesting conditional certification for all store managers and store managers in training who worked within the federal statute of limitations period. In May 2019, the magistrate judge granted the plaintiffs’ motion for conditional certification. The litigation is in the discovery stage, which was extended by the Court from May 2020 to December 18, 2020, and due to COVID-19 complications impacting discovery, the deadline has again been extended to March 31, 2021.

The Company disputes the Mason Putative Class Employees’ claims and ~~intends~~continues to defend the ~~matters~~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 ~~is unable to~~cannot reasonably estimate the ~~amount of~~possible loss or range of ~~possible~~ loss, ~~at this time~~if any, that may result from ~~these actions. Accordingly,~~this action and therefore no ~~accruals have~~accrual has been made ~~with respect~~related to ~~this matter.~~this. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity.

~~On or about~~Kramer lawsuit

In November ~~17,~~ 2017, Robert J. Kramer, on behalf of himself and all others similarly situated (collectively, the “Kramer Plaintiffs”) filed a purported class action lawsuit in the Superior Court of California, County of Sacramento on behalf of all current and former store managers, all others with similar job functions and/or titles and all current and former employees classified as non-exempt or incorrectly classified as exempt and who worked for the Company in the State of California (collectively, the “CSM Employees”) alleging violation of the California Labor Code including,

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among other items, failure to pay wages and overtime and engaging in unfair business practices (the “Kramer matter”).

~~In July 2019, the~~ The Company ~~entered into a Memorandum of Understanding (“Kramer MOU”) with the lead plaintiff~~reached settlement for this matter in the ~~Kramer~~ ~~matter. Under~~third quarter of 2019. Payment of $4.75 million was made to the ~~terms~~settlement administrator on April 6, 2020, for distribution to class members.

Savidis Lawsuit

On April 9, 2020, Lumber Liquidators was served with a lawsuit filed by Tanya Savidis, on behalf of herself and all others similarly situated (collectively, the “Savidis Plaintiffs”). Ms. Savidis filed a purported class action lawsuit in the Superior Court of California, County of Alameda on March 6, 2020, on behalf of all current and former Lumber Liquidators employees employed as non-exempt employees. The complaint alleges violation of the ~~Kramer MOU,~~California Labor Code including, among other items, failure to pay minimum wages and overtime wages, failure to provide meal periods, failure to permit rest breaks, failure to reimburse business expenses, failure to provide accurate wage statements, failure to pay all wages due upon separation within the ~~Company will pay $4.75 million~~required time, and engaging in unfair business practices (the “Savidis matter”). On or about May 22, 2020, the Savidis Plaintiffs provided notice to ~~settle~~ the ~~claims~~California Department of Industrial Relations requesting they be permitted to seek penalties under the California Private Attorney General Act for the same substantive alleged violations asserted in the ~~Kramer~~ ~~matter (or which could have been asserted in~~Complaint. The Savidis Plaintiffs seek certification of a class action covering the ~~Kramer matter) on behalf of~~ ~~all current and/or former Store Managers and Store Managers in Training employed by~~prior four-year period prior to the ~~Company at any time between November 17, 2013 until the time of preliminary approval~~filing of the ~~settlement by~~complaint to the ~~court~~date of class certification (the “California Employee Class”), as well as a subclass of class members who separated their employment within three years of the filing of the suit to the date of class certification (the “Waiting Time Subclass”). The ~~Kramer MOU is subject~~Savidis Plaintiffs did not quantify any alleged damages but, in addition to ~~certain contingencies, including~~attorneys’ fees and costs, seek statutory penalties, unspecified amounts for unpaid wages, benefits, and penalties, interest, and other damages.

The Company disputes the ~~execution of a definitive settlement agreement~~Savidis Putative Class Employees’ claims and ~~court approvals of the definitive settlement agreement. There can be no assurance that a settlement will be finalized and approved or as~~intends to ~~the ultimate outcome of the litigation. If a final, court-approved settlement is not reached, the Company will~~ defend the matter ~~vigorously~~vigorously. Given the uncertainty of litigation, the preliminary stage of the case and ~~believes there are meritorious defenses and~~the legal standards that must be met for, among other things, class certification and success on the ~~merits. If~~merits, the ~~parties are unable~~Company cannot estimate the reasonably possible loss or range of loss, if any, that may result from this action and therefore no accrual has been made related to ~~finalize the settlement, the Kramer matter~~this. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity.

Visnack Lawsuit

On June 29, 2020, Michael Visnack, on behalf of himself and all others similarly situated (collectively, the “Visnack Plaintiffs”) filed a purported class action lawsuit in the Superior Court of California, County of San Diego, on behalf of all current and former store managers, and others similarly situated. The Complaint alleges violation of the California Labor Code including, among other items, failure to pay wages and overtime, wage statement violations, meal and rest break violations, unpaid reimbursements and waiting time, and engaging in unfair business practices (the “Visnack matter”). The Visnack Plaintiffs seek certification of a class period beginning September 20, 2019, through the date of Notice of Class Certification, if granted. The Visnack Plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, they seek unspecified amounts for each of the causes of action such as unpaid wages and overtime wages, failure to provide meal periods and rest breaks, payroll record and wage statement violations, failure to reimburse expenses and waiting time, liquidated and/or punitive damages, declaratory relief, restitution, statutory penalties, injunctive relief and other damages.

The Company is evaluating the Visnack Putative Class Employees' claims and intends to defend itself vigorously in this matter. 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, if any, that may result from this action and therefore no accrual has been made related to this. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of ~~operations. As a result of these developments, the Company determined that a probable loss has been incurred~~operations, financial condition and has accrued within SG&A a $4.75 million liability during the quarter ended June 30, 2019 offset in the caption “Accrual for Legal Matters and Settlements Current” on its condensed consolidated financial statements.liquidity.

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

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Commerce (“DOC”) and the United States International Trade Commission (“ITC”) against imports of multilayered wood flooring from China. This ruling applies to companies importing multilayered wood flooring from Chinese suppliers subject to the AD and CVD orders. The Company’s multilayered wood flooring imports from China accounted for approximately 7%6% and 8%7% of its flooring purchases in ~~2018~~2019 and ~~2017,~~2018, respectively. The Company’s consistent view through the course of this matter has been, and remains, that its imports are neither dumped nor subsidized. As such, it has appealed the original imposition of AD and CVD fees.

As part of its processes in these proceedings, the DOC conducts annual reviews of the AD and CVD rates. In such cases, the DOC will issue preliminary rates that are not binding and are 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. At the time of import, the Company makes deposits at the then prevailing rate, even while the annual review is in process. When rates are declared final by the DOC, the Company accrues a receivable or payable depending on where that final rate compares to the deposits it has made. The Company and/or the domestic manufacturers can appeal the final rate for any period and can place a hold on final settlement by U.S. Customs and Border Protection while the appeals are pending.

In addition to its overall appeal of the imposition of AD and CVD, which is still pending, the Company as well as other involved parties have appealed many of the final rate determinations. Those appeals are pending and, at times, have resulted in delays in settling the shortfalls and refunds shown in the table below. Because of the length of time for

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finalization of rates as well as appeals, any subsequent adjustment of AD and CVD rates typically flows through a period different from those in which the inventory was originally purchased and/or sold.

The first 5‑year Sunset Review of the AD and CVD orders on multilayered wood flooring (the “Sunset Review”) began in November 2016 at the ITC to determine whether to terminate the orders. The Company participated fully in this Sunset Review. In December 2017, the ITC determined that the AD and CVD orders will remain in place.

Results by period for the Company are shown below. The column labeled ‘June 30, ~~2019~~2020 Receivable/Liability Balance’ represents the amount the Company would receive or pay (net of any collections or payments) as the result of subsequent adjustment to rates whether due to finalization by the DOC or because of action of a court based on appeals by various parties. It does not include any initial amounts paid for AD or CVD in the current period at the in-effect rate at that time.

The Company recorded net interest expense related to antidumping of ~~$0.6~~$0.1 million for the six months ended June 30, ~~2019,~~2020, with the amount included in other expense on the condensed consolidated statements of operations. The estimated associated interest payable and receivable for each period is not included in the table below ~~and~~but is included in the same financial statement line item on the Company’s condensed consolidated balance sheet as the associated liability and receivable balance for each period.

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Review

Rates at which

June 30, 2019
Period
Period Covered
Company
Final Rate
Receivable/Liability

Deposited

Balance
Antidumping
1
May 2011 through
6.78% and 3.3%
0.73%1
$1.3 million

November 2012

receivable1
2
December 2012 through
3.30%
13.74%2
$4.1 million

November 2013

liability2
3
December 2013 through
3.3% and 5.92%
17.37%
$5.5 million

November 2014

liability
4
December 2014 through
5.92% and 13.74%
0.0%
$0.03 million

November 2015

receivable
5
December 2015 through
5.92%. 13.74%. and 17.37%
0.0%3
$2.6 million

November 2016

receivable3
6
December 2016 through
17.37% and 0.0%
Pending4
NA

November 2017

7
December 2017 through
0.00%
Pending
NA

November 2018

Included on the Condensed Consolidated Balance Sheet in
Other Current Assets
$2.63 million

Included on the Condensed Consolidated Balance Sheet in
Other Assets
$1.3 million

Included on the Condensed Consolidated Balance Sheet in
Other Long-Term Liabilities
$9.6 million
Countervailing
1&2
April 2011 through
1.50%
0.83% / 0.99%
$0.2 million

December 2012

receivable
3
January 2013 through
December 2013
1.50%
1.38%
$0.05 million
receivable
4
January 2014 through
December 2014
1.50% and 0.83%
1.06%
$0.02 million
receivable
5
January 2015 through
December 2015
0.83% and 0.99%
Final at 0.11% and 0.85%5
$0.08 million
receivable 5
6
January 2016 through
December 2016
0.99% and 1.38%
Pending
NA
7
January 2017 through
December 2017
1.38% and 1.06%
Pending
NA
8
January 2018 through
December 2018
1.06%
Pending
NA

Included on the Condensed Consolidated Balance Sheet in
Other Current Assets
$0.08 million

Included on the Condensed Consolidated Balance Sheet in
Other Assets
$0.27 million


Review		Rates at which		June 30, 2020
Period	Period Covered	Company	Final Rate	Receivable/Liability
		Deposited		Balance
Antidumping
1	May 2011 through	6.78% and 3.3%	0.73%¹	$1.3 million
	November 2012			receivable¹
2	December 2012 through	3.30%	3.92% ²	$4.1 million
	November 2013			liability ²
3	December 2013 through	3.3% and 5.92%	17.37%	$4.7 million
	November 2014			liability
4	December 2014 through	5.92% and 13.74%	0.0%	Settled
	November 2015
5	December 2015 through	5.92%. 13.74%. and 17.37%	0.00%	Settled
	November 2016
6	December 2016 through	17.37% and 0.0%	42.57% and 0.00%³	$0.5 million receivable
	November 2017			$1.5 million liability³
7	December 2017 through	0.00%	Pending⁴	NA
	November 2018
			Included on the Condensed Consolidated Balance Sheet in Other Current Assets	$0.5 million
			Included on the Condensed Consolidated Balance Sheet in Other Assets	$1.3 million
			Included on the Condensed Consolidated Balance Sheet in Other Long-Term Liabilities	$10.3 million
Countervailing
1&2	April 2011 through	1.50%	0.83% / 0.99%	$0.2 million
	December 2012			receivable
3	January 2013 through December 2013	1.50%	1.38%	$0.05 million receivable
4	January 2014 through December 2014	1.50% and 0.83%	1.06%	$0.02 million receivable
5	January 2015 through December 2015	0.83% and 0.99%	Final at 0.11% and 0.85%⁵	$0.08 million receivable⁵
6	January 2016 through December 2016	0.99% and 1.38%	Final at 3.10% and 2.96%	$0.04 million liability⁶
7	January 2017 through December 2017	1.38% and 1.06%	Pending⁷	NA
8	January 2018 through December 2018	1.06%	Pending	NA
			Included on the Condensed Consolidated Balance Sheet in Other Current Assets	$0.1 million
			Included on the Condensed Consolidated Balance Sheet in Other Assets	$0.3 million
			Included on the Condensed Consolidated Balance Sheet in Other Current Liabilities	$0.04 million

In ~~June~~the second quarter of 2018, the Court of International Trade sustained the DOC’s recommendation to reduce the rate for the first annual review period to 0.73% (from 5.92%). As a result, ~~in the second quarter of 2018~~ the Company reversed its ~~$0.8~~$0.8 million liability and recorded a $1.3 million receivable with a corresponding reduction of cost of ~~sales.~~

sales during the year ended December 31, 2018.

AsIn the second quarter of 2020, the Court of International Trade received a ~~result of the remand~~recommendation from ~~CIT, in June 2019~~ the DOC ~~proposed~~ to reduce the AD rate ~~to 6.55%~~ for the second annual review ~~period. The CIT~~period to 3.92% (from 13.74%). If accepted by the Court of International Trade, the Company will reverse $3.9 million of its $4.1 million liability currently recorded, with a corresponding reduction of cost of sales during the quarter when it is ~~expected to rule~~accepted.

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In the third quarter of 2019, the DOC issued the final rates for the sixth annual review period at 42.57% and 0% depending on the ~~DOC’s remand by~~vendor. As a result, the ~~end of 2019. If the final ruling remains at 6.55% (from 13.74%), the Company’s~~Company recorded a liability of ~~$4.1~~$0.8 million ~~would decrease by $2.8~~with a corresponding reduction of cost of sales during the year ended December 31, 2019. The Company received payments during 2019 for its vendor with a final rate of 0% and the remaining balance of $0.5 million ~~to $1.3~~as of June 30, 2020 was included in other current assets on the condensed consolidated balance sheet. The vendors with a final rate of 42.57% are under appeal and the balance of $1.5 million as of June 30, 2020 was included in other long-term liabilities on the ~~period in which the ruling is finalized~~.

condensed consolidated balance sheet.

4	³In January 2020, the DOC issued a preliminary rate of 0.0% for the seventh annual review period.

In ~~July~~the second quarter of 2018, the DOC issued the final rates for ~~review period 5 at 0.0%. As a result, in~~ the ~~third quarter of 2018 the Company recorded a receivable of $2.8 million with a corresponding reduction of cost of sales.~~

⁴

~~In July 2019, the DOC issued the final rates for review period 6 at a maximimum of 42.57%. With the finalization of the AD rate for the sixth~~fifth annual review ~~the Company expects to record a liability of approximately $0.8 million during the third quarter of 2019.~~

⁵

~~In June 2018, the DOC issued the final rates for review~~ period 5 at 0.11% and 0.85% depending on the vendor. As a result, in the second quarter of 2018, the Company recorded a receivable of $0.07 million for deposits made at previous preliminary rates, with a corresponding reduction of cost of sales.

6	In the third quarter of 2019, the DOC issued the final rates for the sixth annual review period at 3.1% and 2.96% depending on the vendor. As a result, the Company recorded a liability of $0.4 million with a corresponding reduction of cost of sales during the year ended December 31, 2019.

7	In January 2020, the DOC issued a preliminary rate of 24.61% for the seventh annual review period. If the preliminary rate remains at 24.61%, the Company will record a liability of $2 million in the period in which the ruling is finalized.

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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, its ultimate liability in connection with these matters is not expected to have a material adverse effect on the Company’s results of operations, financial position or liquidity.

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 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 the Company’s 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. These risks include, without limitation, the impact on us of any of the following:

an overall decline in the health of the economy, the hard-surface flooring industry, the housing market and overall consumer spending, including the effects of the COVID-19 pandemic;

impact on sales, ability to obtain and distribute products, and employee safety and retention, including the effects of the COVID-19 pandemic;

obligations related to and impacts of new laws and regulations, including pertaining to tariffs and exemptions;

the outcomes of legal proceedings, and the related impact on liquidity;

obtaining products from abroad, including the effects of COVID-19 and tariffs, as well as the effects of antidumping and countervailing duties;

~~the outcomes of legal proceedings and the related impact on liquidity;~~

reputational harm;

~~reputational harm;~~

~~obligations related to and impacts of new laws and regulations, including tariffs;~~

obligations under various settlement agreements and other compliance matters;

~~disruptions related~~disruption due to ~~our corporate headquarters relocation;~~

cybersecurity threats, including any impacts from a network security incident;

~~the effect of pricing strategies~~

inability to open new stores, find suitable locations, and fund other capital expenditures;

inability to execute on our key initiatives or such key initiatives do not yield desired results;

managing growth;

transportation costs;

damage to our assets;

disruption in our ability to distribute our ~~products;~~

products, including due to disruptions from the impacts of severe weather;

operating stores in Canada and an office in China;

managing third-party installers and product delivery companies;

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~~renewing store or warehouse leases;~~

renewing store, warehouse, or other corporate leases;

having sufficient suppliers;

our, and our suppliers’, compliance with complex and evolving rules, regulations, and laws at the federal, state, and local level;

disruption in our ability to obtain products from our suppliers;

product liability claims;

availability of suitable hardwood, including due to disruptions from the impacts of severe weather;

~~changes in economic conditions, both domestic and abroad;~~

sufficient insurance ~~coverage;~~

coverage, including cybersecurity insurance;

access to and costs of capital;

~~disruption due to cybersecurity threats;~~

the handling of confidential customer information, including the impacts from the California Consumer Privacy Act;

management information systems disruptions;

alternative e-commerce offerings;

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our advertising and overall marketing strategy;

anticipating consumer trends;

competition;

impact of changes in accounting guidance, including the implementation guidelines and interpretations;

maintenance of valuation allowances on deferred tax assets and the impacts thereof;

internal ~~controls including those over tariffs;~~

controls;

stock price volatility; and

anti-takeover ~~provisions.~~

provisions

Information regarding risks and uncertainties is contained in the Company’s ~~other~~ reports filed with the SEC, including the Item 1A, “Risk Factors,” section of this quarterly report and the Form ~~10‑K~~10-K for the year ended December 31, ~~2018.~~2019.

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~~10-K for the year ended December 31, ~~2018.~~2019.

Overview

Lumber Liquidators is one of the leading specialty retailers of hard-surface flooring in North America, offering a complete purchasing solution across an extensive assortment of domestic and exotic hardwood species, engineered hardwood, laminate, resilient vinyl, waterproof vinyl plank and porcelain tile. We also feature the renewable flooring products bamboo and cork and provide a wide selection of flooring enhancements and accessories, including moldings, noise-reducing underlayment, adhesives and flooring tools. We offer installation and delivery services through third-party independent contractors for customers who purchase our floors. At June 30, ~~2019,~~2020, we sold our products through ~~415~~ ~~Lumber Liquidators~~422 stores in 47 states in the United States and in Canada, a call center and websites.

We believe we have achieved a reputation for offering great value, superior service, and a broad selection of high-quality 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 hard-surface flooring market. The foundation for our value proposition is strengthened by our unique store model, the industry expertise of our people, and our singular focus on hard-surface ~~flooring, and our advertising reach and frequency.~~flooring.

To supplement the financial measures prepared in accordance with GAAP, we use the following non-GAAP financial measures: (i) Adjusted Gross Profit, (ii) Adjusted Gross Margin, (iii) Adjusted SG&A, ~~and~~ (iv) Adjusted SG&A as a percentage of sales, (v) Adjusted Operating ~~Income.~~Income, (vi) Adjusted Operating Margin, (vii) Adjusted Earnings and (viii) Adjusted Earnings per Diluted Share. The non-GAAP financial measures should be viewed in addition to, and not in lieu of, financial measures calculated in accordance with GAAP. These supplemental measures may vary from, and may not be comparable to, similarly titled measures by other companies.

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The non-GAAP financial measures are presented because management uses these non-GAAP financial measures to evaluate our operating performance and to determine incentive compensation. Therefore, we believe that the presentation of non-GAAP financial measures provides useful supplementary information to, and facilitates additional analysis by, investors. The presented non-GAAP financial measures exclude items that management does not believe reflect our core operating performance, which include regulatory and legal settlements and associated legal and operating costs, and changes in antidumping and countervailing duties, as such items are outside of our control or due to their inherent unusual, non-operating, unpredictable, non-recurring, or non-cash nature.

~~Executive Summary~~

~~We continue to focus~~Impact of COVID-19 Pandemic on ~~increasing~~Our Business

The second quarter of 2020 was significantly affected by the COVID-19 pandemic but throughout we remained focused on serving our ~~sales~~customers while keeping the health and ~~operating margin,~~safety of employees and ~~providing an improved shopping experience for our customers. During~~customers paramount. The results of the second quarter were atypical; readers should exercise caution before drawing conclusions, in considering trends, and/or in making judgements about profitability and cash flows. We operated in a variety of ~~2019~~operating models (fully open, curbside-pickup, online) during the quarter and ~~throughout~~utilized safety measures such as personal protective equipment for employees and customers. Additional measures included contact-free and appointment-based engagement with customers, adding barriers at registers and social distancing signage and guidelines to our stores. These practices were implemented to comply with state and local ordinances along with recommendations from the CDC and State Boards of Health. By early July, 98% of stores were fully open, with less than 10 operating by appointment only. Only one store remained closed since the onset of the pandemic due to a unique store design while others closed periodically as warranted by market conditions. In addition, late in the first quarter we suspended third-party inventory count procedures at our stores, but we resumed these third-party count procedures by the end of the second quarter. As reported in the Company’s first quarter earnings release, quarter-to-date comparable store sales were down approximately 30% through the week ended May 23. Improving performance in June resulted in a negative 21.3% comparable store sales for the full quarter.

Throughout the quarter, we leveraged strategic investments in digital capabilities made over the past 18 months, including the Floor Finder and Picture It! tools, to serve customers at LLFlooring.com. Web traffic has increased meaningfully particularly when store showrooms were less available. We have also expanded availability of online flooring samples and extended our hours for voice and click-to-chat customer support, while also continuing to offer curbside store pickup and enhanced home-delivery options.

In April, as a result of reduced demand and the changes in our operating models due to COVID-19, we temporarily furloughed a number of store associates and reduced operating hours in our distribution centers. As demand returned through the quarter, we recalled associates, and as of late June, had invited all furloughed employees back to work and had returned to normal operations in our distribution centers. We implemented a range of other measures to increase financial flexibility and maintain agility during this challenging time. These measures included reducing costs, managing inventory flow, deferring and abating certain payments, and delaying or stopping non-critical projects, including a pause in the planned opening of certain new stores and reducing capital spending. We also implemented a temporary reduction in all salaried corporate employee compensation and Board of Directors’ compensation. As a result of improved business trends, the temporary reduction ended effective July 1, 2020.

As a result of these actions and managing working capital, the Company’s liquidity position has improved during the second quarter by $55 million from March 31, 2020. As of June 30, 2020, the Company had $76 million outstanding under its revolving credit facility and $25 million outstanding under its FILO Term Loan along with $127 million of cash and cash equivalents on its balance sheet. As of June 30, 2020, the Company had $186 million in liquidity, comprised of $127 million of cash and cash equivalents and $59 million of availability under the Credit Agreement. In April 2020, the Company amended its Credit Agreement as described in Note 5 of this Form 10-Q. Please see the “Liquidity and Capital Resources” discussion later in this MD&A for further discussion of cash in the quarter. Material items affecting the income statement will be discussed in their respective areas within this MD&A.

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Executive Summary

Results of operations for the three and six months ended June 30, 2020 as described below are not necessarily indicative of future results to be expected for the full year due to a number of factors, including seasonality and general economic conditions that may impact sales for the remainder of fiscal 2020. Additionally, we cannot predict the year, our focus will be on driving do-it-yourself, do-it-for-me, and Pro traffic into our stores, enhancing the customer experience across both our digital platform and within our stores and improving our operational effectiveness. Our research indicates that

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the initial interest in purchasing a floor begins with digital browsing online, and we believe that by providing an improved digital experience and better website performance, we will not only grow our e-commerce sales, but also drive traffic into our stores. Once customers are in our stores, we believe that our store model provides a competitive advantage by allowing our knowledgeable sales associates to assist customers throughout the project design and purchase process in a more intimate environment, from product selection to installation. We introduced a new tool called the ~~PictureIt!~~ ~~in the second quarter that allows customers to digitally visualize our floors in their rooms.~~

Tariffs continue to play a role in year-over-year comparisons. Beginning in September 2018, tariffs on goods coming from China received an additional 10% tariff. Beginning in June 2019, the tariffs increased to 25%. If no mitigation steps are taken, or the mitigation is unsuccessful, the combination of tariffs will result in more than $50 million of annualized cost to the Company as we source between 45% and 50% of our merchandise from China. We offset the initial 10% tariffs by negotiating lower prices from our vendors. We are in the midst of mitigating the latest increase to tariffs by increasing prices, negotiating lower prices from our vendors, sourcing product from alternative countries where possible, and finding other cost savings. Because our inventory turns over about 2.5 times per year, and because the timingimpact of the ~~tariffs does not match the mitigation efforts, comparisons~~COVID-19 pandemic to ~~the prior year are affected.~~our sales, supply chain, and distribution as well as to overall construction, renovation and consumer spending.

Net sales in the second quarter of ~~2019 increased $5.1~~2020 decreased $58 million, or ~~1.8%~~20%, to ~~$289~~$230 million from the second quarter of ~~2018. Net~~2019. Comparable store sales ~~from stores open less than 13 months~~ for the second quarter of 2020 were ~~$6.4 million. Net sales in comparable stores~~ ~~were flat, as a decline in merchandise sales was mostly offset~~down 21.3% driven by the ~~expansion~~impact of ~~installation services~~COVID-19, but improved sequentially as the quarter progressed and improved compared to ~~a lesser extent raising prices on certain products following~~ the ~~tariff announcements noted above. We~~previously reported quarter-to-date decline of approximately 30% through May 23. The Company opened ~~three~~two net new stores ~~and closed one~~ in the second quarter of 2020 bringing total store count to ~~415~~422 as of June 30, ~~2019.~~ 2020.

Gross profit ~~increased 1.2%~~decreased 14% in the second quarter of ~~2019~~2020 to ~~$102~~$88 million from ~~$101~~$102 million in the comparable period in ~~2018,~~2019, including the ~~effect~~2019 positive impact of ~~certain duties that~~classification adjustments related to ~~prior periods. Gross margin decreased to 35.5%~~tariffs as shown in the ~~second quarter of 2019 from 35.7% in the second quarter of 2018.~~tables that follow. Without this item, Adjusted Gross Profit (a non-GAAP measure) ~~increased 2.5% to $102 million in the second quarter of 2019 compared to $99 million in the year-earlier period. This resulted in an~~decreased approximately $13 million. Adjusted Gross Margin (a non-GAAP measure) ~~that improved by 20~~increased 309 basis points to 38.3% in the second quarter of 2020 from 35.2% in the second quarter of 2019 ~~from 35.0% in the second quarter of 2018. Additional~~as margin enhancement efforts, Section 301 tariff ~~costs on products originating in China were offset~~exclusions and supply chain efficiency positively impacted results. Adjusted Gross Margin was also aided by ~~lower costs from vendors and higher selling prices, along with an improved~~a larger mix of higher-margin manufactured ~~products.~~products, a lower mix of installation labor sales, and reduced discounting in stores. These items were somewhat offset by a higher year-over-year inventory obsolescence charge and higher customer delivery costs associated with delivery promotions.

SG&A expense ~~increased 1.6%~~decreased 21% to ~~$104~~$82 million in the second quarter of ~~2019~~2020 from the comparable period in ~~2018~~2019 but included certain costs in both ~~years~~periods related to investigations and ~~lawsuits, including a $4.75 million accrual in the second quarter of 2019 related to the Kramer employment case discussed more fully in Note 8.~~lawsuits. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) ~~increased $1.9~~decreased 17%, or $16 million, compared to the same period in the prior year. The reduction in Adjusted SG&A was primarily driven by lower advertising expense as ~~a result of increases~~the Company reduced its promotional cadence in response to the COVID crisis; lower payroll and ~~advertising. Occupancy costs were relatively flat~~benefits expense as the ~~full-year effect~~Company took steps to align staffing with demand levels while also implementing temporary salary reductions for corporate office personnel and the Board of ~~opening nine new stores, net, during~~Directors; and lower transaction- and business-related costs due to lower sales. The Company’s focus on expense management, liquidity preservation measures and process efficiency helped deliver the ~~preceding four quarters~~year-over-year reduction in Adjusted SG&A in the quarter.

Operating income was ~~offset by a benefit from a landlord who compensated the Company for the early termination of a lease.~~

~~Operating loss was $1.4 million and $0.9~~$6 million for the ~~three months ended June 30, 2019 and 2018, respectively. Excluding~~second quarter of 2020 compared to an operating loss of $1.4 million for the ~~items discussed above and summarized in the table below,~~second quarter of 2019. Adjusted Operating Income (a non-GAAP measure) ~~grew to $3.6~~was $6.5 million infor the second quarter of ~~2019,~~2020, a year-over-year increase of over $2.9 million compared to $3adjusted operating income of $3.6 million infor the second quarter of ~~2018.~~ 2019. The year-over-year increase was primarily driven by the work to enhance gross margin while also diligently managing expenses.

~~Net loss~~

Income tax expense was $2.2 million for the ~~three months ended June 30, 2019 was $2.9~~second quarter of 2020 compared to income tax expense of $0.4 million ~~or $0.10 per diluted share,~~for the second quarter of 2019. The variability of our tax rate in 2020 reflects the timing of deductions and the CARES Act on our quarterly earnings.

Net income for the second quarter of 2020 increased $5.5 million to $2.6 million compared to a net loss of ~~$1.5~~$2.9 million ~~or $0.05~~for the second quarter of 2019, while Adjusted Earnings (a non-GAAP measure) for the second quarter of 2020 was $3 million, a year-over-year increase of $2.2 million compared to Adjusted Earnings of $820 thousand for the second quarter of 2019.

Earnings per diluted share was $0.09 for the ~~three months ended June 30, 2018.~~second quarter 2020 versus a loss per share of $0.10 in the year ago quarter. On an adjusted basis, second quarter earnings per diluted share increased $0.07 to $0.10 compared to an adjusted earnings per diluted share of $0.03 for the second quarter of 2019.

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As of June 30, ~~2019, we~~2020, the Company had ~~$64.5~~$76 million outstanding under ~~the Revolving Credit Facility~~its revolving credit facility and $25 million outstanding under ~~the~~its FILO Term ~~Loan, which, collectively,~~Loan. Collectively, this is upa $19 million increase from the ~~$65 million that was outstanding at December 31, 2018. At~~end of the fourth quarter 2019 while the cash and cash equivalents balance increased by $118 million. As of June 30, ~~2019, we~~2020, the Company had ~~$117~~$186 million in liquidity, comprised of ~~$13~~$127 million of cash and cash equivalents and ~~$104~~$59 million of availability under ~~our asset-based revolving loan (the “Revolving Loan”).~~ the Credit Agreement.

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Results of Operations

We believe the selected sales data, the percentage relationship between net sales and major categories in the condensed consolidated statements of operations and the percentage change in the dollar amounts of each of the items presented below are important in evaluating the performance of our business operations.


							% Improvement
	% of Net Sales						(Decline) in
	Three Months Ended June 30,						Dollar Amounts
	2019			2018			2019 VS 2018

																% Improvement
										% of Net Sales						(Decline) in
										Three Months Ended June 30,						Dollar Amounts
										2020			2019			2020 VS 2019
Net Sales
Net Merchandise Sales		86.9	%		87.8	%		0.7	%		91.2	%		86.9	%		(16.2)	%
Net Services Sales		13.1	%		12.2	%		9.9	%		8.8	%		13.1	%		(46.6)	%
Total Net Sales		100.0	%		100.0	%		1.8	%		100.0	%		100.0	%		(20.2)	%
Gross Profit		35.5	%		35.7	%		1.2	%		38.3	%		35.5	%		(13.9)	%
Selling, General, and Administrative Expenses		36.0	%		36.1	%		1.6	%		35.7	%		36.0	%		(20.8)	%
Operating Loss		(0.5)	%		(0.3)	%		50.8	%
Operating Income (Loss)											2.6	%		(0.5)	%		NM	%
Other Expense (Income)		0.4	%		0.1	%		208.7	%		0.5	%		0.4	%		6.9	%
Loss Before Income Taxes		(0.8)	%		(0.4)	%		94.2	%
Income (Loss) Before Income Taxes											2.1	%		(0.8)	%		NM	%
Income Tax Expense (Benefit)		0.1	%		0.1	%		110.8	%		1.0	%		0.1	%		440.9	%
Net Loss		(1.0)	%		(0.5)	%		96.4	%

							% Improvement
	% of Net Sales						(Decline) in
	Six Months Ended June 30,						Dollar Amounts
	2019			2018			2019 VS 2018
Net Income (Loss)											1.1	%		(1.0)	%		NM	%

																% Improvement
										% of Net Sales						(Decline) in
										Six Months Ended June 30,						Dollar Amounts
										2020			2019			2020 VS 2019
Net Sales
Net Merchandise Sales		88.1	%		89.0	%		0.6	%		90.2	%		88.1	%		(8.1)	%
Net Services Sales		11.9	%		11.0	%		10.8	%		9.8	%		11.9	%		(26.3)	%
Total Net Sales		100.0	%		100.0	%		1.7	%		100.0	%		100.0	%		(10.3)	%
Gross Profit		35.3	%		36.0	%		(0.1)	%		38.8	%		35.3	%		(1.4)	%
Selling, General, and Administrative Expenses		36.2	%		36.4	%		1.1	%		35.9	%		36.2	%		(11.2)	%
Operating Loss		(0.9)	%		(0.4)	%		103.4	%
Operating Income (Loss)											3.0	%		(0.9)	%		NM	%
Other Expense (Income)		0.4	%		0.1	%		253.5	%		0.4	%		0.4	%		(14.2)	%
Loss Before Income Taxes		(1.3)	%		(0.6)	%		136.5	%
Income (Loss) Before Income Taxes											2.6	%		(1.3)	%		NM	%
Income Tax Expense (Benefit)		0.1	%		0.1	%		56.0	%		(0.4)	%		0.1	%		NM	%
Net Loss		(1.4)	%		(0.6)	%		127.1	%
Net Income (Loss)											3.0	%		(1.4)	%		NM	%

2223

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		Three Months Ended						Six Months Ended
		June 30,						June 30,
SELECTED SALES DATA		2020			2019			2020			2019
Average Sale¹	$	1,209		$	1,405		$	1,284		$	1,354
Average Retail Price per Unit Sold²		(4.8)	%		0.4	%		(1.1)	%		(0.8)	%
Comparable Store Sales (Decrease) (%)		(21.3)	%		(0.1)	%		(11.6)	%		(0.4)	%

Number of Stores Open, end of period		422			415			422			415
Number of Stores Opened in Period, net		2			2			3			2
Number of Stores Relocated in Period³		—			—			1			—

Comparable Stores⁴ (% change to prior year):
Customers Invoiced⁵		(7.3)	%		(2.5)	%		(6.4)	%		(0.3)	%
Net Sales of Stores Operating for 13 to 36 months		(15.9)	%		12.9	%		(6.5)	%		8.9	%
Net Sales of Stores Operating for more than 36 months		(21.6)	%		(0.3)	%		(11.8)	%		(0.3)	%

Net Sales in Markets with all Stores Comparable (no cannibalization)		(20.9)	%		0.4	%		(11.2)	%		0.1	%

Three Months Ended

Six Months Ended

June 30,

June 30,
SELECTED SALES DATA
2019

2018



2019

2018

Average Sale1
2.5
%

4.6
%

1.3
%

4.7
%
Average Retail Price per Unit Sold2
0.4
%

(1.9)
%

(0.8)
%

(1.5)
%

Number of Stores Open, end of period
415

406

415

406

Number of Stores Opened in Period, net
2

8

2

13

Number of Stores Relocated in Period3
—

—

—

—

Comparable Stores4 (% change to prior year):








Net Sales
(0.1)
%

4.7
%

(0.4)
%

3.8
%
Customers Invoiced5
(2.5)
%

0.1
%

(0.3)
%

(0.9)
%
Net Sales of Stores Operating for 13 to 36 months
12.9
%

6.3
%

8.9
%

6.9
%
Net Sales of Stores Operating for more than 36 months
(0.3)
%

4.6
%

(0.3)
%

3.7
%

Net Sales in Markets with all Stores Comparable (no cannibalization)
0.4
%

5.3
%

0.1
%

4.3
%

Average sale is defined as the average invoiced sales order, measured quarterly, excluding returns as well as transactions under $100 (which are generally sample orders or add-on/accessories to existing orders).

Average retail price per unit (square feet for flooring and other units of measures for moldings and accessories) sold is calculated on a total company basis and excludes non-merchandise revenue.

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

⁴

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

⁵

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

NM Not meaningful.

Net Sales

Net sales in the second quarter of 2020 decreased $58 million, or 20%, to $230 million from the second quarter of 2019. Comparable store sales for the second quarter of ~~2019 increased $5.1 million, or 1.8%, to $289 million from the second quarter of 2018 which was~~2020 were down 21.3% driven by ~~stores that have been open less than thirteen months. Net sales in comparable stores~~ ~~were flat in~~ the impact of COVID-19, but improved sequentially as the quarter progressed and improved compared to the previously reported second ~~quarter, as a small~~quarter-to-date decline ~~in merchandise sales was mostly offset by the expansion~~ of ~~installation services. We~~approximately 30% through May 23. The Company opened three new stores and closed one in the second quarter ~~resulting in 415 stores~~of 2020 bringing total store count to 422 as of June 30, ~~2019. The decline in merchandise sales reflected lower performance in the bamboo and hardwood categories. Partially offsetting, the~~2020. By major category, manufactured ~~category~~products grew tofrom 41% of ~~our~~ sales in the second quarter of 2019 to 49% of sales in the second quarter of 2020, partially offset by a decline in solid and ~~continued~~engineered hardwood products. The vinyl sub-category within manufactured products continues to ~~outperform as customers’ desire for water-resistant flooring remains strong.~~ drive growth due to its outstanding aesthetics, high resilience and waterproof characteristics. Net services sales (install and freight) decreased 47% in the three months ended June 30, 2020 from the second quarter of 2019 due an outsized COVID-19 impact on in-home installations.

Net sales for the six months ended June 30, ~~2019 increased $9.5 million, or 1.7%,~~2020 decreased 10% from the comparable period in ~~2018,~~2019. Through the week ending March 21, 2020, the Company’s year-to-date comparable store sales increased approximately 4%, but as ~~net sales in~~the impact of COVID-19 began to broadly impact consumers, orders declined significantly and first half comparable stores ~~decreased slightly (0.4%), and net~~ sales ~~in non-comparable stores increased $12 million.~~fell to negative 11.6% by the end of the six month period ended June 30, 2020.

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Gross Profit

Gross profit ~~increased 1.2%~~decreased 14% in the second quarter of ~~2019~~2020 to $88 million from $102 million ~~from~~in the comparable period in ~~2018. Gross margin decreased~~2019, including the 2019 positive impact of classification adjustments related to ~~35.5%~~tariffs as shown in the second quarter of 2019 from 35.7% in the second quarter of 2018. Gross margin was favorably impacted by the Harmonized Tarriff Schedule (“HTS”) in the current period, and antidumping rate changes to prior periods, which generated income of $0.8 million and $2.1 million for the three months ended June 30, 2019 and 2018, respectively. Excluding these items from both periods,tables that follow. Without this item, Adjusted Gross Profit (a non-GAAP measure) ~~increased by $2.5 million and~~decreased approximately $13 million. Adjusted Gross Margin (a non-GAAP measure) increased ~~by 20~~309 basis points to 38.3% in the ~~three months ended June 30,~~second quarter of 2020 from 35.2% in the second quarter of 2019 as ~~compared to three months ended June 30, 2018. The~~ margin ~~increase~~enhancement efforts, Section 301 tariff exclusions and supply chain efficiency positively impacted results. Adjusted Gross Margin was ~~driven~~also aided by a larger mix of higher-margin manufactured products, a lower mix of installation labor sales, and reduced discounting in stores. These items were somewhat offset by a higher ~~mix of manufactured products, reduced discounting in the stores, the absence of a significant~~year-over-year inventory obsolescence charge ~~related to bamboo in the year-ago period,~~ and ~~an increase to prices in reaction to tariffs (late in the 2019 second quarter). This improvement was achieved despite~~ higher customer delivery costs ~~of tariffs and even~~associated with ~~an increased mix of installation sales, which carry lower gross margins.~~ delivery promotions.

~~Table of Contents~~

Gross profit was $193 million and $196 million for ~~both~~ the six months ended June 30, ~~2019~~2020 and the comparable period in ~~2018.~~2019, respectively, despite the impact of COVID-19 on sales in 2020. Adjusted Gross ~~margin decreased to 35.3%~~Margin increased from 35.2% for the first six months of 2019 ~~from 36.0%~~to 38.8% for the first six months of ~~2018. Adjusted Gross Margin (a non-GAAP measure) was 35.2%~~2020 primarily due margin enhancement efforts, tariff exclusions and supply chain efficiency positively impacted results.

Tariffs played a significant role in year-over-year comparisons. Beginning in September 2018, goods coming from China received an additional 10% tariff. Beginning in June 2019, the ~~six months ended June 30, 2019, a decrease of 40 basis points from the six months ended June 30, 2018 driven by higher tariff costs.~~

We believe that each of the items that follow can distort the visibility of our ongoing operating performance and that the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that excludetariffs increased to 25%. In order to mitigate the impact of tariffs, we reduced discounting in the stores, implemented merchandising cost-out efforts and enacted retail price increases. On November 7, 2019, the United States Trade Representative (“USTR”) ruled on a request made by certain interested parties, including the Company, and retroactively excluded certain flooring products imported from China from the Section 301 tariffs. The granted exclusion applies retroactively from the date the tariffs were originally implemented on September 24, 2018 through August 7, 2020. The Company is monitoring the expiration of this exclusion currently slated for August 7, 2020. Should the tariff exclusion not be extended, there would be an impact to cash flow related to future product purchases, but a delayed impact to gross margin based primarily on the flow of inventory. The Company recorded a $27 million receivable related to these ~~items.~~tariffs during the fourth quarter of 2019 in the caption “Tariff Recovery Receivable” on the Consolidated Balance Sheets and has collected $9 million through the first six months of 2020. The Company still expects to receive the remaining payments by the end of 2020.

			��
	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2020					2019				2020				2019
	$			% of Sales		$		% of Sales		$		% of Sales		$		% of Sales

	(dollars in thousands)									(dollars in thousands)
Gross Profit, as reported (GAAP)	$	88,292		38.3	%	$	102,487	35.5	%	$	193,263	38.8	%	$	196,098	35.3	%

HTS Classification Adjustments ¹		—		—	%		(779)	(0.3)	%		—	—	%		(779)	(0.1)	%
Sub-Total Items above		—		—	%		(779)	(0.3)	%		—	—	%		(779)	(0.1)	%

Adjusted Gross Profit (non-GAAP measures)	$	88,292		38.3	%	$	101,708	35.2	%	$	193,263	38.8	%	$	195,319	35.2	%

Three Months Ended

Six Months Ended

June 30,

June 30,

2019
2018

2019
2018

(dollars in thousands)

Gross Profit, as reported (GAAP)

$
102,487

$
101,310

$
196,098

$
196,282

Antidumping Adjustments 1

—

(2,126)

—

(2,126)

HTS Classification Adjustments 2

(779)

—

(779)

—

Sub-Total Items above

(779)

(2,126)

(779)

(2,126)

Adjusted Gross Profit (non-GAAP measures)

$
101,708

$
99,184

$
195,319

$
194,156

Represents countervailing and antidumping income of $2.1 million associated with applicable prior-year shipments of engineered hardwood from China for both the three and six months ended June 30, 2018.

Represents classification adjustments related to the HTS duty categorization in prior periods during the three and six months ended June 30, 2019.

Selling, General and Administrative ~~Expense~~sExpenses

SG&A ~~expenses increased 1.6%~~expense decreased 21% to $82 million in the second quarter of ~~2019 to $104 million~~2020 from ~~$102 million in~~ the comparable period in ~~2018~~2019 but included certain costs in both ~~years~~periods related to investigations and ~~lawsuits including an accrual to settle the Kramer employment case discussed in Note 8.~~lawsuits. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) ~~increased $1.9~~decreased 17%, or $16 million, to the same period in the prior year. The reduction in Adjusted SG&A was primarily ~~as a result of increases in payroll and advertising. Occupancy costs were relatively flat~~driven by lower advertising expense as the ~~full-year effect of opening nine new stores, net, during~~Company reduced its promotional cadence in reaction to the ~~preceding four quarters was offset by a benefit from a landlord who compensated~~COVID crisis; lower payroll, overtime and benefits expense as the Company took steps to align staffing with demand levels while also implementing temporary salary reductions for ~~early termination~~corporate office personnel and the Board of ~~a lease.~~Directors; and lower credit card, bank fees and other transaction-related

Table of Contents

costs due to lower sales. In addition, equity compensation, supplies and T&E expenses were lower versus second quarter last year. The Company’s focus on expense management, liquidity preservation measures and process efficiency helped deliver the year-over-year reduction in Adjusted SG&A ~~expenses increased 1.1%~~in the quarter.

SG&A expense decreased 11% to $178 million in the first ~~half~~six months of ~~2019 to $201 million~~2020 from the comparable period in ~~2018. Again both periods~~2019 but included certain costs in both periods related to investigations and ~~lawsuits~~lawsuits. Excluding these items as shown in the table that ~~follows. Excluding these items from both periods,~~follows, Adjusted SG&A (a non-GAAP measure) ~~increased by $4~~decreased $16 million, or 8.3%, in the six months ended June 30, ~~2019~~2020. The reduction in Adjusted SG&A was primarily driven by lower advertising expense as ~~compared~~the Company reduced its promotional cadence in reaction to the ~~year-ago period. The increase in~~COVID crisis; lower payroll and benefits expense ~~was~~as the Company took steps to align staffing with demand levels while also implementing temporary salary reductions for corporate office personnel; and lower transaction-related costs due to ~~payroll and occupancy of new stores partially offset by a reduction in costs allocated to production (as we ceased finishing our own floors in January).~~lower sales.

We believe that ~~each of~~ the following items ~~that follow~~set forth in the table below can distort the visibility of our ongoing performance and that the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that exclude the impact of these items.

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2018

(dollars in thousands)

SG&A, as reported (GAAP)
$
103,864

$
102,223

$
200,896

$
198,641

Accrual for Legal Matters and Settlements 3

4,750

2,701

4,575

2,951

Legal and Professional Fees 4

1,017

3,325

2,995

6,391

Sub-Total Items above

5,767

6,026

7,570

9,342

Adjusted SG&A (a non-GAAP measure)
$
98,097

$
96,197

$
193,326

$
189,299


	Three Months Ended June 30,								Six Months Ended June 30,
	2020				2019				2020				2019
	$		% of Sales		$		% of Sales		$		% of Sales		$		% of Sales

	(dollars in thousands)								(dollars in thousands)
SG&A, as reported (GAAP)	$	82,288	35.7	%	$	103,864	36.0	%	$	178,495	35.9	%	$	200,896	36.2	%

(Recovery) Accrual for Legal Matters and Settlements ²		(500)	(0.2)	%		4,750	1.6	%		(500)	(0.1)	%		4,575	0.8	%
Legal and Professional Fees³		995	0.4	%		1,017	0.4	%		1,788	0.4	%		2,995	0.5	%
Sub-Total Items above		495	0.2	%		5,767	2.0	%		1,288	0.3	%		7,570	1.3	%

Adjusted SG&A (a non-GAAP measure)	$	81,793	35.5	%	$	98,097	34.0	%	$	177,207	35.6	%	$	193,326	34.9	%

~~Table of Contents~~

This amount represents a $0.5 million insurance recovery in the ~~charge~~second quarter of 2020 of legal fees related to ~~earnings~~certain significant legal action. A $4.75 million expense was recorded in the second quarter of 2019 for the Kramer ~~matter~~employment case and certain Related Laminate Matters, which is described more fully in Note 87 to the condensed consolidated financial ~~statements.~~

statements filed in the June 30, 2020 Form 10-Q.

⁴

Represents charges to earnings related to our defense of certain significant legal actions during the period. This does not include all legal costs ~~incurred by the Company.~~

we incurred.

Operating Income (Loss) and Operating Margin

Operating ~~losses~~income was $6 million for the ~~three and six months ended June 30, 2019 were~~second quarter of 2020 compared to an operating loss of $1.4 million ~~and $4.8 million, respectively, compared to operating losses~~for the second quarter of ~~$0.9 million and $2.4 million in the comparable periods in 2018.~~ ~~Excluding the gross margin and SG&A items discussed above and summarized in the table below,~~2019. Adjusted Operating Income (a non-GAAP measure) was $6.5 million for the second quarter of 2020, a year-over-year increase of over $2.9 million compared to adjusted operating income of $3.6 million for the ~~three months ended June 30, 2019, compared to~~ ~~Adjusted Operating Income~~second quarter of ~~$3 million for the three months ended June 30, 2018~~.2019. The year-over-year increase ~~from the prior period~~ was primarily driven by the ~~improvement in Adjusted Gross Margin. Adjusted Operating Income was $2 million for the six months ended June 30, 2019, compared~~work to ~~Adjusted Operating Income~~enhance gross margin while also diligently managing expenses.

Table of ~~$4.9 million for the six months ended June 30, 2018. The decrease in Adjusted Operating Income for the year to date was driven by the impact of tariffs on margin during the first quarter of 2019.~~Contents

We believe that ~~each of these~~the following items set forth in the table below can distort the visibility of our ongoing performance and that the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that exclude the impact of these items.


	Three Months Ended June 30,								Six Months Ended June 30,
	2020				2019				2020				2019
	$		% of Sales		$		% of Sales		$		% of Sales		$		% of Sales

	(dollars in thousands)								(dollars in thousands)
Operating Income (Loss), as reported (GAAP)	$	6,004	2.6	%	$	(1,377)	(0.5)	%	$	14,768	3.0	%	$	(4,798)	(0.9)	%

Gross Margin Items:
HTS Classification Adjustments ¹		—	—	%		(779)	(0.3)	%		—	—	%		(779)	(0.1)	%
Gross Margin Subtotal		—	—	%		(779)	(0.3)	%		—	—	%		(779)	(0.1)	%

SG&A Items:
(Recovery) Accrual for Legal Matters and Settlements²		(500)	(0.2)	%		4,750	1.6	%		(500)	(0.1)	%		4,575	0.8	%
Legal and Professional Fees³		995	0.4	%		1,017	0.4	%		1,788	0.3	%		2,995	0.5	%
SG&A Subtotal		495	0.2	%		5,767	2.0	%		1,288	0.2	%		7,570	1.3	%

Adjusted Operating Income (a non-GAAP measure)	$	6,499	2.8	%	$	3,611	1.2	%	$	16,056	3.2	%	$	1,993	0.3	%

Three Months Ended June 30,

Six Months Ended June 30,


2019

2018

2019

2018


(dollars in thousands)

(dollars in thousands)

Operating Loss, as reported (GAAP)
$
(1,377)

$
(913)

$
(4,798)

$
(2,359)

Gross Margin Items:









Antidumping Adjustments 1

—

(2,126)

—

(2,126)

HTS Classification Adjustments 2

(779)

—

(779)

—

Gross Margin Subtotal

(779)

(2,126)

(779)

(2,126)

SG&A Items:









Accrual for Legal Matters and Settlements 3

4,750

2,701

4,575

2,951

Legal and Professional Fees 4

1,017

3,325

2,995

6,391

SG&A Subtotal

5,767

6,026

7,570

9,342

Adjusted Operating Income (a non-GAAP measure)
$
3,611

$
2,987

$
1,993

$
4,857

~~1,2,3,4~~^1,2,3 See the Gross Profit and SG&A sections above for more detailed explanations of these individual items.

Other Expense

WeThe Company had other expense of $1.1 million for both the three months ended June 30, 2020 and the three months ended June 30, 2019. The Company had other expense of $2 million and $2.4 million in the ~~three and~~ six months ended June 30, ~~2019, respectively,~~2020 and ~~other expense of $0.3 million and $0.7 million in the three and six months ended June 30, 2018,~~2019, respectively. The expense in both years primarily reflected interest on borrowings on our ~~Revolving Loan.~~Credit Agreement.

Provision for Income Taxes

WeThe Company calculates its quarterly tax provision pursuant to the guidelines in Accounting Standards Codification ("ASC") 740-270 "Income Taxes." Generally, ASC 740-270 requires companies to estimate the annual effective tax rate for current year ordinary income. The estimated annual effective tax rate represents the best estimate of the tax provision in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date ordinary income or loss to calculate the year-to-date interim tax provision. Due to the current disruption in the economy related to the COVID-19 pandemic and the impact this has on making a reliable estimate of the annual effective tax rate as of the current reporting period, the Company has applied the actual year-to-date effective tax rate for the current-period tax provision.

The CARES Act (the “Act”) was enacted on March 27, 2020. The Act retroactively changed the eligibility of certain assets for expense treatment in the year placed in service, back to 2018, and permitted any net operating loss for the tax years 2018, 2019 and 2020 to be carried back for five years. The Company recorded an income tax benefit of $4.8 million in the first six months of 2020 associated with the income tax components contained in the Act, and as of June 2020 we have collected the full amount of the tax benefit. As of June 30, 2020, the Company has completed an initial analysis of the tax effects of the Act but continues to monitor developments by federal and state rulemaking authorities regarding implementation of the Act. The Company has made reasonable estimates of the effects of the Act and will adjust, if needed, as new laws or guidance becomes available.

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The Company has a full valuation allowance recorded against ~~our~~its net deferred tax assets ~~which effectively offsets our federal taxes at the statutory rate~~ of ~~21%. However, we recorded a tax expense each period for income taxes incurred in certain state and foreign jurisdictions resulting in an effective tax rate of~~ (16.8)% and (8.7)%, respectively, for the three and six months ended June 30, 2019. For the three and six months ended June 30, 2018, the resulting effective tax rate was (15.5)% and (13.2)%, respectively.

We$27 million. The Company intends to maintain a valuation allowance on ~~our~~its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. A reduction in the valuation allowance could result in a significant

~~Table of Contents~~

decrease in income tax expense in the period that the release is recorded. However, the exact timing and amount of any reduction in ~~our~~the Company’s valuation allowance are unknown at this time and will be subject to the earnings level ~~we achieve~~it achieves in future periods.

Diluted Earnings per Share

Net ~~loss~~income for the ~~three months ended June 30, 2019~~second quarter of 2020 was $2.6 million, or $0.09 per diluted share, compared to net loss of $2.9 million, or $0.10 per diluted share, for the second quarter of 2019. Adjusted Earnings and Adjusted Earnings per Diluted Share (non-GAAP measures) for the second quarter of 2020 were $3 million and $0.10 per diluted share, respectively, compared to Adjusted Earnings of $820 thousand and $0.03 per diluted share for the second quarter of 2019.

Net income for the first six months of 2020 was $15 million, or $0.51 per diluted share, compared to a net loss of ~~$1.5~~$7.8 million, or ~~$0.05 per diluted share, for the three months ended June 30, 2018. Net loss for the first six months of 2019 was $7.8 million, resulting in a loss of~~ $0.27 ~~per diluted share, compared to a net loss of $3.4 million, resulting in a loss of $0.12~~ per diluted share, for the first six months of ~~2018.~~2019. Adjusted Earnings and Adjusted EPS for the first six months of 2020 were $16 million and $0.55 per diluted share, compared to an Adjusted Loss of $2.8 million and $0.10 per diluted share, for the first six months of 2019.

We believe that each of the items below can distort the visibility of our ongoing performance and that the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that exclude the impact of these items.


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(dollars in thousands, except per share amounts)				(dollars in thousands, except per share amounts)
Net Income (Loss), as reported (GAAP)	$	2,639	$	(2,856)	$	14,874	$	(7,780)
Net Income (Loss) per Diluted Share (GAAP)	$	0.09	$	(0.10)	$	0.51	$	(0.27)

Gross Margin Items:
HTS Classification Adjustments ¹		—		(576)		—		(576)
Gross Margin Subtotal		—		(576)		—		(576)

SG&A Items:
(Recovery) Accrual for Legal Matters and Settlements ²		(369)		3,510		(369)		3,381
Legal and Professional Fees³		735		742		1,321		2,213
SG&A Subtotal		366		4,252		952		5,594

Adjusted Earnings (Loss)	$	3,005	$	820	$	15,826	$	(2,762)
Adjusted Earnings (Loss) per Diluted Share (a non-GAAP measure)	$	0.10	$	0.03	$	0.55	$	(0.10)

^1,2,3 See the Gross Profit and SG&A sections above for more detailed explanations of these individual items. These items have been tax affected at the Company’s federal incremental rate of 26.1%.

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Seasonality

Our net sales fluctuate slightly as a result of seasonal factors, and we adjust merchandise inventories in anticipation of those factors, causing variations in our build of merchandise inventories. Generally, we experience higher-than-average net sales in the spring and fall, when more home remodeling activities are taking place, and lower-than-average net sales in the winter months and during the hottest summer months. These seasonal fluctuations, however, are minimized to some extent by our national presence, as markets experience different seasonal characteristics. Those historical trends have been affected by the COVID-19 pandemic.

Liquidity and Capital Resources

~~Our principal~~At the beginning of the COVID-19 crisis our near-term focus was on liquidity ~~and capital requirements are for capital expenditures~~due to ~~maintain and grow~~the major disruption to the normal course of our ~~business, for legal settlements, for working capital, and for general corporate purposes.~~ business. We have maintained that focus throughout the second quarter of 2020. Actions in the quarter included:

Renegotiating our Credit Agreement

Altering our store model, hours, and staffing

Replacing our largest annual sale event with alternative promotions

Altering our typical advertising cadence to reflect the reality of less in-person consumers and greater digital focus, particularly early in the quarter

Adjusting inventory buying plans to reflect lower volumes of activity

Negotiating new terms with merchandise vendors, landlords and other service providers to allow for longer payment terms and or reductions in fees

Implementing temporary salary reductions and furloughs

Eliminating spending on certain capital and operating activities including the opening of new stores

Taking advantage of opportunities in Federal, State, and Local regulatory changes (e.g., the CARES Act).

Our principal sources of liquidity at June 30, ~~2019~~2020 were ~~$13~~cash from our ongoing operations, $127 million of cash and cash equivalents on our balance sheet and ~~$104~~$59 million of availability under our Revolving Loan. As of June 30, ~~2019,~~2020, the outstanding balance on the FILO Term Loan was $25 ~~million.~~million and it carried an interest rate of 4.75%. As of June 30, ~~2019,~~2020, the outstanding balance on the Revolving Loan was ~~$64.5 million~~$76 million and it carried an average interest rate of ~~4.1%~~3.5%.

~~The DOJ and SEC settlements, discussed in Note 8 of this Form 10-Q, totaled $33 million and were paid in~~

To provide additional liquidity, on April ~~2019 along with other, smaller settlements. Additionally,~~17, 2020, we anticipate funding $1 million of the cash portion of the expected settlement of the Gold Litigation upon the court’s preliminary approval; the remaining $13 million of the cash portion is expected to be paid subsequententered into a First Amendment to the ~~court’s final approval. In certain circumstances, $6 million (of the $13 million) could be paid as early as the fourth quarter of 2019.~~

~~On March 29, 2019, we amended our Prior~~ Credit Agreement to add incremental borrowing capacity of up to ~~$50~~$37.5 million through August 2020, and ~~to extend~~increased the ~~maturity to 2024,~~margin rate which is described more fully in Note 5 to the condensed consolidated financial statements.

~~We currently expect~~

The $104 million increase in our cash and cash equivalent balance from March to June was primarily the result of cash borrowed following the credit amendment ($37 million), sell through of inventory ($21 million), growth in customer deposits ($18 million), deferrals of rent, payroll tax under the CARES Act, and sales tax ($9 million), collections of tariff receivables ($9 million), cash generated by operations ($9 million), and collection of cash tax refund ($5 million) offset in part by capital expenditures.

Through the six months ended June 30, 2020, we had $7.2 million in capital expenditures ~~for 2019~~including opening four new stores. As part of our response to ~~total between $15 million~~COVID-19, we are implementing a range of measures to increase financial flexibility including delaying or stopping non-critical projects such as pausing the planned opening of certain new stores and ~~$18 million, but~~reducing capital spending. We expect to reduce capital expenditures from our original 2020 plan. We expect to open one new store in Q3, and our current plans include opening a small number of stores in Q4, dependent on demand trends and ongoing liquidity considerations.

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Although COVID-19 has created uncertainty regarding general economic conditions, we ~~will~~ continue to ~~assess~~transact business and adjust our level of capital expenditures based on changing circumstances. Included in our capital requirement for 2019, is the funding to open 10 to 15 stores, remodel and/or relocate some existing stores, IT investments, and meet any obligations related to the relocation of our corporate headquarters.

~~Although certain matters remain outstanding, we have taken significant steps to eliminate uncertainty associated with legal and regulatory matters previously discussed.~~generate cash daily. We believe that cash flows from operations, together with the liquidity ~~sources mentioned above,~~under our Credit Agreement will be sufficient to meet our obligations, fund our settlements, operations and anticipated capital expenditures for the next 12 months. We prepare our forecasted cash flow and liquidity estimates based on assumptions that we believe to be reasonable, but are also inherently uncertain. Actual future cash flows could differ from these estimates.

Merchandise Inventories

Merchandise inventories at June 30, ~~2019~~2020 decreased ~~$15~~$38 million from December 31, ~~2018,~~2019 primarily due to a reduction in inventory buying to reflect lower volumes of activity along with delays in shipments of inventory produced in Asia, both as a direct result of the outbreak of COVID-19. In addition, we ~~have sold through merchandise that was purchased~~had focused initiatives in ~~advance~~the first half of ~~an announced, but subsequently postponed, 25% tariff on~~

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~~purchases of Chinese goods.~~2020 to sell unproductive inventory. We consider merchandise inventories either “available for sale” or “inbound in-transit,” based on whether we have physically received and inspected the products at an individual store location, in our distribution centers or in another facility where we control and monitor inspection.

Merchandise inventories and available inventory per store in operation were as follows:



							As of June 30, 2020		As of December 31, 2019		As of June 30, 2019


	As of June 30, 2019		As of December 31, 2018		As of June 30, 2018
	(in thousands)
							(in thousands)
Inventory – Available for Sale	$	267,089	$	275,036	$	250,673	$	227,418	$	254,812	$	267,089
Inventory – Inbound In-Transit		36,611		43,236		46,125		21,304		31,557		36,611
Total Merchandise Inventories	$	303,700	$	318,272	$	296,798	$	248,722	$	286,369	$	303,700


Available Inventory Per Store	$	644	$	666	$	617	$	539	$	608	$	644

Available inventory per store at June 30, ~~2019~~2020 was lower than at December 31, ~~2018~~2019 and ~~higher~~significantly lower than at June 30, ~~2018.~~2019. The ~~increase~~decrease in available inventory compared to June 30, ~~2018~~2019 was ~~primarily~~ due in large part to ~~an initiative to have, on hand~~lower average cost of inventory driven by tariff exclusions granted in ~~our stores, our top-selling floors~~the fourth quarter of 2019, improved country-of-origin sourcing, and ~~expanding our engineered assortment with new looks to meet customer demand.~~cost-out negotiations across all categories. Including the currently expected effects of ~~tariffs,~~COVID-19, we ~~expect~~anticipate average inventory to be in the range of $280 million to $300 million ~~to $325 million through~~by the ~~balance~~end of the year.

Inbound in-transit inventory generally varies due to the timing of certain international shipments and certain seasonal factors, including international holidays, rainy seasons, and specific merchandise category planning. During the first half of 2020 we experienced a decrease in inbound in-transit as we reacted to COVID-19.

Cash Flows

Operating Activities. Net cash provided by operating activities was $106 million for the six months ended June 30, 2020 and was primarily due to a $36 million reduction in inventory, net income of $15 million, an increase in customer deposits of $14 million, and collections of tariff recovery receivables of $10 million. Net cash used byin operating activities was $14 million for the six months ended June 30, 2019 and ~~$22 million for the six months ended June 30, 2018. In 2019,~~was primarily due to a payment of $33 million to settle the government investigations, ~~was the primary use of cash. It was~~partially offset in part by a reduction in inventory of $13 million as we sold through inventory purchased late in 2018 in advance of the announced higher tariff. Net cash used in operating activities in the first half of 2018 was negative primarily due to a $39 million increase in inventory purchases, which was the result of a purposeful build of inventory to enhance the Company’s in-stock position at the store level. This was partially offset by increases in accounts payable and customer deposits.

Investing Activities. Net cash used in investing activities was ~~$8.8~~$6.3 million and ~~$6.6~~$8.8 million ~~respectively,~~ for the six months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~Net cash used in investing activities~~Capital expenditure in both ~~six month~~six-month periods were primarily related to new store openings and our information technology ~~initiatives; the current year also had investments related to the new Corporate headquarters.~~initiatives.

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Financing Activities. Net cash provided by financing activities was ~~$23~~$18 million and ~~$19~~$23 million for the six months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~The increase~~Net cash provided by financing activities in both six-month periods was primarily due to net borrowings on our ~~revolving credit facility during the six months ended June 30, 2019 and 2018, respectively, to settle the government investigations (2019) and build inventory (2018).~~Credit Agreement.

Critical Accounting Policies and Estimates

Critical accounting policies are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or conditions. We have had no significant changes in our Critical Accounting Policies and Estimates since our annual report on Form ~~10‑K~~10-K for the year ended December 31, ~~2018.~~2019.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk.

We are exposed to interest rate risk through the investment of our cash and cash equivalents. We invest our cash in short-term investments with maturities of three months or less. Changes in interest rates affect the interest income we earn, and therefore impact our cash flows and results of operations. In addition, borrowings under our Credit Agreement are exposed to interest rate risk due to the variable rate of the facility, and the expected transition from the LIBOR reference rate in 2021. As of June 30, ~~2019,~~2020, we had ~~$64.5~~$76 million outstanding under the Revolving Credit Facility and $25 million outstanding under the FILO Term ~~Loan~~.Loan.

We currently do not engage in any interest rate hedging activity. However, in the future, in an effort to mitigate losses associated with interest rate risks, we may at times enter into derivative financial instruments, although we have not historically done so. We do not, and do not intend to, engage in the practice of trading derivative securities for profit.

Exchange Rate Risk.

Less than two percent of our revenue, expense and capital purchasing activities are transacted in currencies other than the U.S. dollar, including the Euro, Canadian dollar, Chinese yuan and Brazilian real.

We currently do not engage in any exchange rate hedging activity. However, in the future, in an effort to mitigate losses associated with these risks, we may at times engage in transactions involving various derivative instruments to hedge revenues, inventory purchases, assets and liabilities denominated in foreign currencies.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and ~~interim~~our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarter ended June 30, ~~2019.~~2020. Based on this evaluation, our Chief Executive Officer and our ~~interim~~ Chief Financial Officer concluded that the Company's disclosure controls and procedures were ~~not~~ effective as of June 30, 2019 due to the material weakness in internal control over financial reporting related to the classification of imported products identified in the annual report on Form 10-K for the year ended December 31, 2018, as described below. 2020.

~~Material Weakness in Internal Control Over Financial Reporting~~.A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. As noted in our Form 10-K, we did not maintain effective controls over the classification of imported products under the Harmonized Tariff System. This classification is the basis on which tariff obligations on imported products are calculated. We believe that this weakness was the result of inconsistent documentation of product specifications, an overreliance upon the knowledge and expertise of certain individuals, and review controls that did not operate at a level of precision to detect and correct these errors.

~~Remediation of Material Weakness~~. ~~Management has been actively engaged in developing and implementing a remediation plan to address the material weakness noted above.~~ The remediation actions we are taking and expect to take will include designing a process whereby 1) complete product specifications have been documented in a consistent manner, 2) review processes are consistently applied for newly created products, and 3) review processes are added to sample previously assigned codes to ensure continued applicability. Employees hired as part of this process will have the requisite experience and expertise with customs and duties. Management will also provide regular reporting on remediation measures to the Audit Committee of the Board.

Management believes that these efforts will effectively remediate the material weakness. While significant progress has been made related to the remediation activities noted above, the material weakness in our internal control over financial reporting will not be considered remediated until the new controls are fully implemented, in operation for

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a sufficient period of time and tested and concluded by management to be designed and operating effectively. Because the reliability of the internal control process requires repeatable execution, the successful remediation of this material weakness will require review and evidence of effectiveness prior to management concluding that the controls are effective and there is no assurance that additional remediation steps will not be necessary. Accordingly, the material weakness in our internal controls over financial reporting over the classification of imported products under the Harmonized Tariff System ~~had not been fully remediated as of June 30, 2019.~~

During fiscal year 2019, management will test and evaluate the implementation of the new processes established as a result of the remediation plans, and the related internal controls to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material error in the financial statements. Notwithstanding the identified material weaknesses, management believes the condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows at June 30, 2019 and for the periods presented in accordance with U.S. GAAP.

Changes in Internal Control over Financial Reporting. The Company’s management, with the participation of the Company’s Chief Executive Officer and interim Chief Financial Officer, evaluated the changes in our internal control over financial reporting during the period ended June 30, 2019.

~~Except as noted in the preceding paragraphs, there~~There has been no change in our internal control over financial reporting that occurred during the most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II
OTHER INFORMATION

Item 1. Legal Proceedings.

Litigation Relating to Bamboo Flooring

On or about December 8, 2014, Dana 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 that the Company sells is defective (the “Gold Litigation”). Plaintiffs narrowed the complaint to the Company’s Morning Star Strand Bamboo flooring (the “Strand Bamboo Product”) sold to residents of California, Florida, Illinois, Minnesota, Pennsylvania and West Virginia for personal, family or household use. The Gold Litigation alleges that the Company engaged in deceptive trade practices in conjunction with the sale of the Strand Bamboo Products. The plaintiffs did not quantify any alleged damages in their complaint but, in addition to attorneys’ fees and costs, the plaintiffs sought a declaration that the Company’s actions violate the law and that it is financially responsible for notifying all purported class members, injunctive relief requiring the Company to replace and/or repair all of the Strand Bamboo Product installed in structures owned by the purported class members and a declaration that the Company must disgorge, for the benefit of the purported classes, all or part of the profits received from the sale of the allegedly defective Strand Bamboo Product and/or to make full restitution to the plaintiffs and the purported class members. ~~In November 2017, the court granted the plaintiffs’ motion for class certification with respect to the six states. The Company appealed the decision, but the petition for appeal was denied.~~

On ~~January 2,~~September 30, 2019, the ~~court denied the Company’s motion for summary judgment. The Company participated in court-ordered mediation sessions. Trial, which was previously scheduled for February 25, 2019, has been postponed.~~

~~Following~~parties finalized a settlement ~~discussions~~agreement that is consistent with the ~~respect to~~terms of the ~~Gold Litigation, on March 15, 2019, the Company entered into a~~ Memorandum of Understanding ~~(the “Gold MOU”),~~previously disclosed by the Company, which would resolve the Gold Litigation on a nationwide basis. Under the terms of the ~~Gold MOU,~~settlement agreement, the Company will contribute $14 million in cash (the “Gold Cash Payment”) and provide $14 million in store-credit vouchers, with a potential additional $2 million in store-credit vouchers based on ~~obtaining~~having a claim’s percentage of more than 7%, for an aggregate settlement of up to $30 million. The ~~Gold MOU is subject to certain contingencies, including the execution of a definitive~~ settlement agreement ~~board approval of~~makes clear that the ~~definitive~~ settlement ~~agreement and court approvals. The entry into the Gold MOU or any subsequent execution of a definitive settlement agreement~~ does not constitute or include an admission by the Company of any fault or liability and the Company does

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not admit any fault, wrongdoing or liability. On December 18, 2019, the court issued an order that, among other things, granted preliminary approval of the settlement agreement. Following the preliminary approval, and pursuant to the terms of the settlement agreement, in December 2019, the Company paid $1 million for settlement administrative costs, which is part of the Gold Cash Payment, to the plaintiff’s settlement escrow account.

Notice has been disseminated to class members by the settlement administrator, and a Final Approval and Settlement Hearing is currently scheduled for September 24, 2020. Only seven objectors filed objections to the Settlement Agreement that will be addressed at the Final Approval and Settlement Hearing. The settlement agreement is subject to certain contingencies, including court approval. There can be no assurance that a settlement will be finalized and approved by the court at the Final Approval and Settlement Hearing or as to the ultimate outcome of the litigation.

If a final, court-approved settlement is not reached, the Company will defend the matter vigorously and believes there are meritorious defenses and legal standards that must be met for, among other things, success on the merits. The Company has notified its insurance carriers and continues to pursue coverage, but the insurers to date have denied coverage. As the insurance claim is still pending, the Company has not recognized any insurance recovery related to the Gold Litigation.

~~As a result of these developments, the~~The Company ~~has determined that a probable loss has been incurred and~~ recognized a charge to earnings of $28 million within selling, general and administrative expense during the fourth quarter of 2018 ~~with~~as its loss became probable and estimable. As of June 30, 2020, the ~~offset~~remaining accrual related to these matters was $27 million, which has been included in the caption “Accrual for Legal Matters and Settlements Current” on its condensed consolidated balance ~~sheet related to this potential settlement as of December 31, 2018.~~sheet. If the ~~Company does not execute a definitive~~ settlement agreement ~~consistent with~~is not approved by the ~~Gold MOU~~court or the Company incurs additional losses with respect to the Bamboo Flooring Litigation (as defined below), the actual losses that may result from these actions may exceed this amount. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and ~~liquidity.~~liquidity.

In addition, there are a number of ~~other~~individual claims and lawsuits alleging damages ~~similar to those in the Gold Litigation~~involving Strand Bamboo Product (the “Bamboo Flooring Litigation”). While the Company believes that a loss associated with the Bamboo Flooring Litigation is reasonably possible, the Company is unable to reasonably estimate the amount or range of possible loss. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s

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results of operations, financial condition and liquidity. The Company disputes the claims in the Bamboo Flooring Litigation and intends to defend such matters ~~vigorously~~.vigorously.

Litigation Relating to Chinese Laminates

Formaldehyde-Abrasion MDLs

Beginning on or about March 3, 2015, numerous purported class action cases were filed in various ~~U.S.~~United States federal district courts and state courts involving claims of excessive formaldehyde emissions from the Company’s Chinese-manufactured laminate flooring products. The purported classes consisted of all ~~U.S.~~United States consumers that purchased the relevant products during certain time periods. Plaintiffs in these cases challenged the Company’s labeling of its products as compliant with the California Air Resources Board Regulation and alleged claims for fraudulent concealment, breach of warranty, negligent misrepresentation and violation of various state consumer protection statutes. The plaintiffs sought various forms of declaratory and injunctive relief and unquantified damages, including restitution and actual, compensatory, consequential and, in certain cases, punitive damages, as well as interest, costs and attorneys’ fees incurred by the plaintiffs and other purported class members in connection with the alleged claims. The United States Judicial Panel on Multidistrict Litigation (the “MDL Panel”) transferred and consolidated the federal cases to the United States District Court for the Eastern District of Virginia (the “Virginia Court”). The consolidated case in the Virginia Court is captioned In re: Lumber Liquidators Chinese-Manufactured Flooring Products Marketing, Sales, Practices and Products Liability Litigation (the “Formaldehyde MDL”).

Beginning on or about May 20, 2015, multiple class actions were filed in the United States District Court for the Central District of California and other district courts located in the place of residence of each non-California plaintiffs consisting of ~~U.S.~~United States consumers who purchased the Company’s Chinese-manufactured laminate flooring products challenging certain representations about the durability and abrasion class ratings of such products. These plaintiffs asserted claims for fraudulent concealment, breach of warranty and violation of various state consumer protection statutes. The plaintiffs did not quantify any alleged damages in these cases; however, in addition to attorneys’ fees and costs, they did seek an order (i) certifying the action as a class action, (ii) adopting the plaintiffs’ class definitions and finding that the plaintiffs are their proper representatives, (iii) appointing their counsel as class counsel, (iv) granting injunctive relief to prohibit the Company from continuing to advertise and/or sell laminate flooring products with false abrasion class ratings, (v) providing restitution of all monies the Company received from the plaintiffs and class members and (vi) providing damages (actual, compensatory and consequential), as well as punitive damages. On October 3, 2016, the MDL Panel transferred and consolidated the abrasion class actions to the Virginia Court. The

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consolidated case is captioned In re: Lumber Liquidators Chinese-Manufactured Laminate Flooring Durability Marketing and Sales Practices Litigation (the “Abrasion MDL”).

On March 15, 2018, the Company entered into a settlement agreement to jointly settle the Formaldehyde MDL and the Abrasion MDL. Under the terms of the settlement agreement, the Company agreed to fund $22 million (the ~~“Cash~~“MDL Cash Payment”) and provide $14 million in store-credit vouchers for an aggregate settlement amount of $36 million to settle claims brought on behalf of purchasers of Chinese-manufactured laminate flooring sold by the Company between January 1, 2009 and May 31, 2015. The $36 million aggregate settlement amount was accrued in 2017. On June 16, 2018, the Virginia Court issued an order that, among other things, granted preliminary approval of the settlement agreement. Following the preliminary approval, and pursuant to the terms of the settlement agreement, in June 2018, the Company ~~in June,~~ paid $0.5 million for settlement administration costs, which is part of the MDL Cash Payment, to the plaintiffs’ settlement escrow account. Subsequent to the Final Approval and Fairness Hearing held on October 3, 2018, the Court approved the settlement on October 9, 2018 and, as a result, the Company paid $21.5 million in cash into the plaintiffs’ settlement escrow account.

On November 8, 2018, an individual filed a Notice of Appeal in the United States Court of Appeals for the Fourth Circuit (the “Appeals Court”) challenging the settlement. On December 14, 2018, another individual filed a Notice of Appeal in the Appeals Court. Subsequently, the Appeals Court consolidated both ~~appeals~~appeals. On March 10, 2020, the Appeals Court upheld the order approving the settlement agreement, and ~~entered a briefing schedule.~~vacated the award of attorney’s fees, requiring the Virginia Court to reconsider the award of attorneys’ fees to the lawyers representing the class. The Appeals Court determined that the Settlement Agreement was fair, reasonable, and adequate, and upheld the district

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court’s approval order. On remand, the Virginia Court is reconsidering how attorney’s fees for the class lawyers should be calculated for the settlement that includes cash and vouchers. The issue has been briefed by the class and the objectors. The legal exposure to the company is the same, and the company is pleased that the settlement agreement was upheld. Vouchers, which generally have a three-year life, will be distributed by the administrator upon order of the Virginia Court. ~~At December 31, 2018,~~To date, the Company’s obligations related to Formaldehyde MDL and Abrasion MDL consisted of a short-term payable of ~~$35.5~~$36 million with $14 million expected to be satisfied by the issuance of vouchers. If the appeals were to result in the settlement being set aside, the Company would receive $21.5 million back from the escrow agent. Accordingly, the Company has accounted for the payment of $21.5 million as a deposit in the ~~accompanying~~caption “Deposit for Legal Settlements” on its condensed consolidated ~~financial statements.~~balance sheets. The Company has no liability accrued related to the appeals.

In addition to those purchasers who elected to opt out of the above settlement (the “Opt Outs”), there are a number of individual claims and lawsuits alleging personal injuries, breach of warranty claims or violation of state consumer protection statutes that remain pending (collectively, the “Related Laminate Matters”). Certain of these Related Laminate Matters were settled in ~~2019 and 2018.~~2019. The Company ~~recognized charges to earnings of $0.4 million and $2.9 million~~did not have any expense for these matters for the six months ended June 30, ~~2019 and 2018, respectively, within selling, general and administrative expenses for these Related Laminate Matters.~~2020. As of June 30, ~~2019,~~2020, the remaining accrual related to these matters was $0.1 million, which has been included in the caption “Accrual for Legal Matters and Settlements Current” on the condensed consolidated balance sheet. For the six months ended June 30, 2019, the Company recognized charges to earnings of $0.4 million within SG&A expenses for these Remaining Laminate Matters. While the Company believes that a further loss associated with the Opt Outs and Related Laminate Matters is possible, the Company is unable to reasonably estimate the amount or range of possible loss beyond what has been provided. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity.

Canadian Litigation

On or about April 1, 2015, Sarah Steele (“Steele”) filed a purported class action lawsuit in the Ontario, Canada Superior Court of Justice against the Company. In the complaint, Steele’s allegations include strict liability, breach of implied warranty of fitness for a particular purpose, breach of implied warranty of merchantability, fraud by concealment, civil negligence, negligent misrepresentation and breach of implied covenant of good faith and fair ~~dealing.~~dealing relating to the Company’s Chinese-manufactured laminate flooring products. Steele did not quantify any alleged damages in her complaint, but seeks compensatory damages, punitive, exemplary and aggravated damages, statutory remedies, attorneys’ fees and costs. While the Company believes that a further loss associated with the Steele litigation is possible, the Company is unable to reasonably estimate the amount or range of possible loss.

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Employment Cases

Mason Lawsuit

~~On or about~~In August ~~15,~~ 2017, Ashleigh Mason, Dan Morse, Ryan Carroll and Osagie Ehigie filed a purported class action lawsuit in the United States District Court for the Eastern District of New York on behalf of all current and former store managers, store managers in training, installation sales managers and similarly situated current and former employees ~~holding comparable positions but different titles~~ (collectively, the ~~“Putative~~“Mason Putative Class Employees”) alleging that the Company violated the Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”) by classifying the Mason Putative Class Employees as exempt. The alleged violations include failure to pay for overtime work. The plaintiffs ~~seek~~sought certification of the Mason Putative Class Employees for (i) a collective action covering the period beginning three years prior to the filing of the complaint (plus a tolling period) through the disposition of this action for the Mason Putative Class Employees nationwide in connection with FLSA and (ii) a class action covering the period beginning six years prior to the filing of the complaint (plus a tolling period) through the disposition of this action for members of the Mason Putative Class Employees who currently are or were employed in New York in connection with NYLL. The plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, the plaintiffs seek class certification, unspecified amounts for unpaid wages and overtime wages, liquidated and/or punitive damages, declaratory relief, restitution, statutory penalties, injunctive relief and other ~~damages.~~damages.

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In November 2018, the plaintiffs filed a motion requesting conditional certification for all store managers and store managers in training who worked within the federal statute of limitations period. In May 2019, the magistrate judge granted plaintiffs’ motion for conditional certification. The ~~Company filed objections~~litigation is in the discovery stage, which was extended by the Court from May 2020 to December 18, 2020, and due to COVID-19 complications impacting discovery, the ~~magistrate judge’s class certification decision with the district judge. That motion is currently pending.~~deadline has again been extended to March 31, 2021.

The Company disputes the Mason Putative Class Employees’ claims and continues 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 reasonably estimate the possible loss or range of loss, if any, that may result from this action and therefore no accrual has been made related to this. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity.

Savidis Lawsuit

On April 9, 2020, Lumber Liquidators was served with a lawsuit filed by Tanya Savidis, on behalf of herself and all others similarly situated (collectively, the “Savidis Plaintiffs”). Ms. Savidis filed a purported class action lawsuit in the Superior Court of California, County of Alameda on March 6, 2020, on behalf of all current and former Lumber Liquidators employees employed as non-exempt employees. The complaint alleges violation of the California Labor Code including, among other items, failure to pay minimum wages and overtime wages, failure to provide meal periods, failure to permit rest breaks, failure to reimburse business expenses, failure to provide accurate wage statements, failure to pay all wages due upon separation within the required time, and engaging in unfair business practices (the “Savidis matter”). On or about May 22, 2020, the Savidis Plaintiffs provided notice to the California Department of Industrial Relations requesting they be permitted to seek penalties under the California Private Attorney General Act for the same substantive alleged violations asserted in the Complaint. The Savidis Plaintiffs seek certification of a class action covering the prior four-year period prior to the filing of the complaint to the date of class certification (the “California Employee Class”), as well as a subclass of class members who separated their employment within three years of the filing of the suit to the date of class certification (the “Waiting Time Subclass”). The Savidis Plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, seek statutory penalties, unspecified amounts for unpaid wages, benefits, and penalties, interest, and other damages.

The Company disputes the Savidis Putative Class Employees’ 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, if any, that may result from this action and therefore no accrual has been made related to this. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity.

~~Kramer~~Visnack Lawsuit

On ~~or about November 17, 2017, Robert J. Kramer,~~June 29, 2020, Michael Visnack, on behalf of himself and all others similarly situated (collectively, the ~~“Kramer~~“Visnack Plaintiffs”) filed a purported class action lawsuit in the Superior Court of California, County of ~~Sacramento~~San Diego, on behalf of all current and former store managers, ~~all~~and others with similar job functions and/or titles and all current and former employees classified as non-exempt or incorrectly classified as exempt and who worked for the Company in the State of California (collectively, the “CSM Employees”) allegingsimilarly situated. The Complaint alleges violation of the California Labor Code including, among other items, failure to pay wages and overtime, wage statement violations, meal and rest break violations, unpaid reimbursements and waiting time, and engaging in unfair business practices (the ~~“Kramer~~“Visnack matter”). The ~~Kramer~~Visnack Plaintiffs seek certification of ~~the CSM Employees for~~ a class ~~action covering the prior four-year~~ period ~~prior to the filing of the complaint~~beginning September 20, 2019, through the ~~disposition~~date of this action for the CSM Employees who currently are or were employed in California (the “California SM Class”). On or about February 19, 2019, the Kramer Plaintiffs filed a first amended complaint adding a claim for penalties under the California Private Attorney General Act for the same substantive alleged violations asserted in the Complaint.Notice of Class Certification, if granted. The ~~Kramer~~Visnack Plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, ~~the Kramer Plaintiffs~~they seek unspecified amounts for each of the causes of action such as unpaid wages and overtime wages, failure to provide meal periods and rest breaks, payroll record and wage statement violations, failure to reimburse expenses and waiting time, liquidated and/or punitive damages, declaratory relief, restitution, statutory penalties, injunctive relief and other ~~damages.~~damages.

~~In July 2019,~~The Company is evaluating the ~~Company entered into a Memorandum~~Visnack Putative Class Employees' claims and intends to defend itself vigorously in this matter. Given the uncertainty of ~~Understanding (“Kramer MOU”) with~~litigation, the ~~lead plaintiff in the~~ ~~Kramer~~ ~~matter. Under the terms~~preliminary stage of the ~~Kramer MOU,~~case and the ~~Company will pay $4.75 million to settle the claims asserted in the~~ ~~Kramer~~ ~~matter (or which could have been asserted in the~~ ~~Kramer~~ ~~matter) on behalf of~~ all current and/or former store managers and store managers in training employed by the Company at any time between November 17, 2013 until the time of preliminary approval of the settlement by the court~~. The Kramer MOU is subject to certain contingencies, including the execution of a definitive settlement agreement and court approvals of the definitive~~legal standards that

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settlement agreement. There can be no assurance that a settlement will be finalized and approved or as to the ultimate outcome of the litigation. If a final, court-approved settlement is not reached, the Company will defend the matter vigorously and believes there are meritorious defenses and legal standards that must be met for, among other things, class certification and success on the ~~merits. If~~merits, the ~~parties are unable~~Company cannot estimate the reasonably possible loss or range of loss, if any, that may result from this action and therefore no accrual has been made related to ~~finalize the settlement, the Kramer matter~~this. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and results of operations. However, as a result of these developments, the Company has determined that a probable loss has been incurred and has recognized a net charge to earnings of approximately $4.75 million within selling general and administrative expense during the quarter ended June 30, 2019.liquidity.

Antidumping and Countervailing Duties Investigation

In October 2010, a conglomeration of domestic manufacturers of multilayered wood flooring (“Petitioners”) 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 companies importing multilayered wood flooring from Chinese suppliers subject to the AD and CVD orders. The Company’s multilayered wood flooring imports from China accounted for approximately 7%6% and 8%7% of its flooring purchases in ~~2018~~2019 and ~~2017,~~2018, respectively. The Company’s consistent view through the course of this matter has been, and remains, that its imports are neither dumped nor subsidized.

As part of its processes in these proceedings, following the original investigation, the DOC conducts annual administrative reviews of the CVD and AD rates. In such cases, the DOC will issue preliminary rates that are not binding and are 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. The Company will begin to pay the finalized rates on each applicable future purchase when recognized by ~~U.S.~~United States Customs and Border Protection.

The DOC made its initial determinations in the original investigation regarding CVD and AD rates on April 6, 2011 and May 26, 2011, respectively. On December 8, 2011, orders were issued setting final AD and CVD rates at a maximum of 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 initial determinations.

Following the issuance of these orders, a number of appeals were filed by several parties, including the Company, with the Court of International Trade (“CIT”) challenging, among other things, certain facts and methodologies that may impact the validity of the AD and CVD orders and the applicable rates. The Company participated in appeals of both the AD order and CVD order. On February 15, 2017, the Court of Appeals for the Federal Circuit (“CAFC”) vacated the CIT’s prior decision and remanded with instructions to the DOC to recalculate its AD rate. On remand, the DOC granted a 0% AD rate to eight Chinese suppliers, but did not exclude them permanently from the AD order. Nor did the CIT terminate the AD order. In July 2018, the CIT issued a judgment sustaining the DOC’s calculation of 0% for the eight suppliers, but also excluded three of them from the AD order. Certain Chinese suppliers and the Petitioners have appealed this judgment to the CAFC. The Company is evaluating the impact of the CIT’s judgment on its previously recorded expense related to the AD rates in the original investigation and subsequent annual reviews discussed below. Because of the length of time for finalization of rates as well as appeals, any subsequent adjustment of CVD and AD rates typically flows through a period different from those in which the inventory was originally purchased and/or sold.

In the first DOC annual review in this matter, AD rates for the period from May 26, 2011 through November 30, 2012, and CVD rates from April 6, 2011 through December 31, 2011, were modified to a maximum of 5.92% and a maximum of 0.83%, respectively, which resulted in an additional payment obligation for the Company, based on best estimates and shipments during the applicable window, of $0.8 million. The Company recorded this as a long-term liability on its accompanying condensed consolidated balance sheet and in cost of sales in its second quarter 2015 financial statements. These AD rates were appealed to the CIT by several parties, including the Company. On remand from the CIT, the DOC has reduced the AD rate to a maximum of 0.73%. In June 2018, the CIT sustained the reduced AD rate of a maximum of 0.73% but did remand back to the DOC the issue regarding the calculation of the electricity

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rate, which, depending on that outcome, may cause a ~~revision~~further reduction to the final AD rate. That remand from the DOC is ~~still pending. The CIT has stayed~~expected to proceed in 2020 with the ~~DOC remand pending~~CIT’s lifting of a stay expected soon now that the ~~final disposition~~CAFC on January 10, 2020

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issued its decision in the appeal of the original ~~investigation at the CAFC.~~investigation. This ruling from the CIT resulted in the Company reversing the $0.8 million accrual and recording a receivable of approximately $1.3 million during the second quarter of 2018.

The second annual review of the AD and CVD rates was initiated in February 2014. Pursuant to the second annual review, in early July 2015, the DOC finalized the AD rate for the period from December 1, 2012 through November 30, 2013 at a maximum of 13.74% and the CVD rate for the period from January 1, 2012 through December 31, 2012 at a maximum of 0.99%. The Company believes the best estimate of the probable additional amounts owed was $4.1 million for shipments during the applicable time periods, which was recorded as a long-term liability on its accompanying condensed consolidated balance sheet and included in cost of sales in its second quarter 2015 financial statements. Beginning in July 2015, the Company began depositing these rates on each applicable purchase. The Company and other parties appealed the AD rates relating to this second annual review to the CIT. In June 2018, the court remanded the case back to the DOC to recalculate several of its adjustments. In its June 2019 remand, the DOC reduced the AD rate to 6.55%. ~~The~~On March 11, 2020, the CIT ~~is expected to rule on~~affirmed the DOC’s 1^stremand which reduced the AD rate to 6.55%, but requested another recalculation by the ~~end~~DOC. On May 8, 2020, the CIT received a second remand from the DOC which further reduced the AD rate for the second annual review period to 3.92% (from 13.74%). If accepted by the CIT, the Company will reverse $3.9 million of ~~2019. If the final ruling remains at 6.55%, the Company’s liability of~~its $4.1 million ~~would decrease by $2.8 million to $1.3 million~~liability currently recorded, with a corresponding reduction of cost of sales in the period ~~in which~~it is accepted by the ~~ruling is finalized.~~CIT.

The third annual review of the AD and CVD rates was initiated in February 2015. The third AD review covered shipments from December 1, 2013 through November 30, 2014. The third CVD review covered shipments from January 1, 2013 through December 31, 2013. In May 2016, the DOC issued the final CVD rate in the third review, which was a maximum of 1.38%. On July 13, 2016, the DOC set the final AD rate at a maximum of 17.37%. The Company appealed the AD rates to the CIT. In November 2018, the CIT issued an opinion sustaining the DOC’s results, and that decision was appealed to the CAFC by certain plaintiff interveners in January 2019. That CAFC decision is expected to be issued by the fall of 2020. The CAFC is expected to reduce the AD rate to 0% since the Chinese exporter on which the 17.37% rate was based has since been excluded from the AD order. The Company’s best estimate of the probable additional amounts owed associated with AD and CVD is approximately $5.5 million for shipments during the applicable time periods. During the quarter ended June 30, 2016, the Company recorded this amount in other long-term liabilities in its balance sheet and as a charge to earnings in cost of sales on its statement of operations. After payments received, the remaining liability was $4.7 million as of June 30, 2020, included in the caption “Other Long-Term Liabilities” on the condensed consolidated balance sheets.

The ~~DOC initiated the~~fourth annual period has been resolved including appeals.

The fifth annual review of AD and CVD rates in February 2017. The AD review covers shipments from December 1, 2015 through November 30, 2016. The CVD review covers shipments from January 1, 2015 through December 31, 2015. In June 2018, the DOC issued the final CVD rate in the fifth review, which was a maximum of 0.85% (with one company having a maximum rate of 0.11%). In July 2018, the DOC issued the final AD rate in the fifth review, which was a maximum of 0.00% and, the Company recorded a receivable in the amount of $2.8 million in other current assets in its balance sheet. In connection with the issuance of the final CVD rate, with one company having a maximum rate of 0.11%, the Company recorded a receivable of less than $100 thousand.period has been resolved including appeals.

The first 5-year Sunset Review of the AD and CVD orders on multilayered wood flooring (the “Sunset Review”) began in November 2016 at the ITC to determine whether to terminate the orders. The Company participated fully in this Sunset Review. In December 2017, the ITC determined that the AD and CVD orders will remain in place. The appeal of this determination by certain importers was filed but not subsequently pursued.

The DOC initiated the sixth annual review of AD and CVD rates in February 2018. The AD review covers shipments from December 1, 2016 through November 30, 2017. The CVD review covers shipments from January 1, 2016 through December 31, 2016. In July 2019, the DOC issued the final AD rate in the sixth annual review, which was a maximum of 42.57% (with one company having a maximum rate of 0.00%), and the final CVD rate in the sixth annual review, which was a maximum of 3.2%. With the finalization of the AD rate for the sixth annual review, the Company ~~expects to record~~recorded a net liability of ~~approximately~~ $0.8 million during the third quarter of ~~2019.~~2019 with a corresponding reduction in cost of sales. The Company ~~currently plans to~~received payments for the vendor with a final rate of 0.00% and the remaining balance of $0.5 million as of June 30, 2020 was included in “Other Current Assets” on the condensed consolidated balance sheet. The vendors with a final rate of 42.57% are under appeal and the balance of $1.5 million as of June 30, 2020 was included in other long-term liabilities on the condensed consolidated balance sheet. With the finalization of the CVD rate for the sixth annual review, the Company recorded a liability of $0.4 million during 2019 with a corresponding reduction in sales. The remaining balance, after payments, was approximately $40 thousand as of June 30, 2020. The Company and other parties have appealed the final AD rate ~~ruling.~~ruling to the CIT, which is expected to issue its decision in the fall of 2020.However there was not a stay placed on this period.

The DOC initiated the seventh annual review of the AD and CVD rates in March ~~2019, which is expected to follow the same schedule as the preceding reviews.~~2019. The AD review covers shipments from December 1, 2017 through November 30, 2018. The CVD review covers shipments from January 1, 2017 through December 31, 2017.

In January 2020, the DOC issued non-binding preliminary results in the seventh

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annual review for CVD rates and AD rates. The preliminary AD rate was a maximum of 0.00%. The preliminary CVD rate was a maximum of 24.61%. The final CVD and AD rates in the seventh annual review are currently expected to be issued in September 2020. If the preliminary ruling regarding the CVD rate were to be finalized, the Company anticipates it would record a net liability of approximately $2 million. If the preliminary CVD rate were to be finalized, the Company currently expects that it would appeal such ruling.

In February 2020, the DOC initiated the eighth annual review of AD and CVD rates. The AD review will cover shipments from December 1, 2018 through November 30, 2019. The CVD review covers shipments from January 1, 2018 through December 31, 2018.

Outstanding AD and CVD duties are subject to interest based on the IRS quarterly published rate. The Company has recorded a net ~~$0.2 and $0.6~~$0.1 million of interest expense through the line item Other Expense on the Statement of Operations during the three ~~and six~~ months ~~ending~~ended June 30, ~~2019, respectively.~~2020.

Other Matters

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in our annual report on Form 10-K for the year ended December 31, ~~2018,~~2019, which could materially affect our business, financial condition or future results. ~~The risks described~~In light of the ongoing COVID-19 pandemic the Company is supplementing the risk factors previously disclosed in ~~our~~its annual report on Form 10-K ~~are not~~for the ~~only risks we face. Additional risks~~year ended December 31, 2019, with the following risk factor:

The ongoing COVID-19 pandemic has disrupted, and ~~uncertainties not currently known~~may continue to ~~us or that we currently deem to be immaterial also may materially~~disrupt, our business, which could adversely affect our financial performance

The effects of the ongoing COVID-19 pandemic have included and could continue to include disruptions in our supply chain, disruptions or restrictions on the ability of many of our employees to work effectively, including because of illness, quarantines, government actions, facility closures or other restrictions, as well as temporary closures of certain of our showrooms, or the facilities of our customers or suppliers. The inability of our suppliers to meet our supply needs in a timely manner could cause delays in delivery to our customers, which could result in the cancellation of orders, customers’ refusal to accept deliveries, discounts to selling prices, and termination of customer relationships, any of which could have a material adverse effect on our business, financial condition, ~~and/or~~ results of operations. and liquidity. Even if we are able to find alternate sources for our supply needs, they may cost more, which could adversely impact our profitability and financial condition.

In addition, the ongoing COVID-19 pandemic has resulted in a widespread health crisis that is adversely affecting the economies and financial markets of many countries, including the United States and Canada, which has resulted in an economic downturn and a spike in unemployment that may negatively affect demand for our products. Considering the significant uncertainty as to how states will react to COVID-19 resurgence and the uncertain customer demand environment, we are working with our vendors and other business partners to reduce or defer our contractual obligations and obtain other concessions. The extent to which the ongoing COVID-19 pandemic could impact our business, results of operations, financial condition and liquidity is highly uncertain and will depend on future developments, including the potential geographic spread and duration of the ongoing COVID-19 pandemic, the severity of the disease and the actions that may be taken by various governmental authorities and other third parties in response to the outbreak. The potential impacts to the Company likely will not be fully recoverable.

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The ongoing COVID-19 pandemic is a highly fluid and rapidly evolving situation, and we cannot anticipate with any certainty the length, scope or severity of such restrictions in each of the jurisdictions that we operate. We believe that business disruption relating to the ongoing COVID-19 pandemic will continue to negatively impact the United States, Canada and the global economy which could adversely impact our business, liquidity, financial condition and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table presents our share repurchase activity for the quarter ended June 30, ~~2019~~2020 (in thousands, except per share amounts):


			Total Number	Maximum Dollar Value
			~~Total Number~~of Shares	~~Maximum Dollar Value~~
			~~of Shares~~	of Shares That May Yet
			Purchased as	Be Purchased as
	Total Number	Average	Part of Publicly	Part of Publicly
	of Shares	Price Paid	Announced	Announced
Period	Purchased¹	per Share¹	Programs²	Programs²
April 1, ~~2019~~2020 to April 30, ~~2019~~2020	—	—	—	—
May 1, ~~2019~~2020 to May 31, ~~2019~~2020	—	—	—	—
June 1, ~~2019~~2020 to June 30, ~~2019~~2020	—	—	—	—
Total	—	—	—	—

We repurchased ~~10,360~~16,151 shares of our common stock, at an average price of ~~$10.78,~~$7.37, in connection with the net settlement of shares issued as a result of the vesting of restricted shares during the quarter ended June 30, ~~2019.~~

2020.

Our initial stock repurchase program, which authorized the repurchase of up to $50 million in common stock, was authorized by our board of directors and publicly announced on February 22, 2012. Our board of directors subsequently authorized two additional stock repurchase programs, each of which authorized the repurchase of up to an additional $50 million in common stock. These programs have been publicly announced on November 15, 2012 and February 19, 2014, respectively, and are currently indefinitely suspended until we are better able to evaluate the long-term customer demand and assess our estimates of operations and cash flow. At June 30, ~~2019,~~2020, we had approximately $14.7 million remaining under this authorization.

Item 3. Defaults Upon Senior Securities.

None.

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Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

~~None.~~

Item 6. Exhibits.

The exhibits listed in the following exhibit index are furnished as part of this report.

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EXHIBIT INDEX


Exhibit
Number		Exhibit Description
~~Exhibit~~
~~Number~~		~~Exhibit Description~~

10.1		First Amendment to Fourth Amended and Restated Credit Agreement, dated as of April 17, 2020, among Lumber Liquidators Holdings, Inc. ~~Amended~~ and ~~Restated 2011 Equity Compensation Plan~~its domestic subsidiaries, including Lumber Liquidators, Inc. and Lumber Liquidators Services, LLC (collectively, the “Borrowers”), Bank of America, N.A. as administrative agent and collateral agent, and Bank of America, N.A. and Wells Fargo Bank, National Association, as Lenders (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed ~~May 23, 2019~~on April 20, 2020 (File No. 001-33767), and incorporated by reference)

10.2		Severance Agreement, dated as of May 27, 2020, by and between Lumber Liquidators Holdings, Inc. and Charles E. Tyson (filed as Exhibit 10.1 to the Company’s current report on Form ~~of Restricted Award Agreement (Director), effective~~8-K, filed on May ~~22, 2019~~28, 2020 (File No. 001-33767) and incorporated by reference)

31.1		Certification of Principal Executive Officer of Lumber Liquidators Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial ~~and Accounting~~ Officer of Lumber Liquidators Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Principal Executive Officer and Principal Financial ~~and Accounting~~ Officer of Lumber Liquidators Holdings, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		The following financial statements from the Company’s Form ~~10‑Q~~10-Q for the quarter ended June 30, ~~2019,~~2020, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements

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~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		LUMBER LIQUIDATORS HOLDINGS, INC.
		(Registrant)

Date: August ~~6, 2019~~4, 2020	By:	/s/ ~~Timothy J. Mulvaney~~Nancy A. Walsh
		~~Timothy J. Mulvaney~~Nancy A. Walsh
		~~Interim~~ Chief Financial Officer ~~and~~ ~~Senior Vice President, Chief Accounting Officer~~(Principal Financial Officer)
		~~(Principal Financial and Accounting Officer)~~

3841


Delaware	27-1310817
~~Delaware~~	~~27-1310817~~
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

~~3000 John Deere Road~~4901 Bakers Mill Lane ~~Toano,~~ Richmond, Virginia	~~23168~~23230
(Address of Principal Executive Offices)	(Zip Code)


Title of each class:	Trading Symbol:	Name of exchange on which registered:
Common Stock, par value $0.001 per share	LL	New York Stock Exchange


◻ Large accelerated filer	☒ ⌧Accelerated filer	◻ Non-accelerated filer	☐ Smaller reporting company	☐ Emerging growth company


	June 30,		December 31,
	2019		2018
Assets
Current Assets:
Cash and Cash Equivalents	$	12,727	$	11,565
Merchandise Inventories		303,700		318,272
Prepaid Expenses		9,142		6,299
Deposit for Legal Settlement		21,500		21,500
Other Current Assets		9,307		8,667
Total Current Assets		356,376		366,303
Property and Equipment, net		93,074		93,689
Operating Lease Right-of-Use		113,375		—
Goodwill		9,693		9,693
Other Assets		5,792		5,832
Total Assets	$	578,310	$	475,517

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts Payable	$	67,826	$	73,412
Customer Deposits and Store Credits		42,888		40,332
Accrued Compensation		9,050		9,265
Sales and Income Tax Liabilities		4,838		4,200
Accrual for Legal Matters and Settlements Current		68,475		97,625
Operating Lease Liabilities - Current		30,711		—
Other Current Liabilities		19,355		17,290
Total Current Liabilities		243,143		242,124
Other Long-Term Liabilities		13,144		20,203
Operating Lease Liabilities - Long-Term		90,262		—
Deferred Tax Liability		863		792
Credit Agreement		89,500		65,000
Total Liabilities		436,912		328,119

Stockholders’ Equity:
Common Stock ($0.001 par value; 35,000 shares authorized; 29,941 and 31,578 shares issued and 28,701 and 28,627 shares outstanding, respectively)		30		32
Treasury Stock, at cost (1,239 and 2,951 shares, respectively)		(142,269)		(141,828)
Additional Capital		216,159		213,744
Retained Earnings		69,055		76,835
Accumulated Other Comprehensive Loss		(1,577)		(1,385)
Total Stockholders’ Equity		141,398		147,398
Total Liabilities and Stockholders’ Equity	$	578,310	$	475,517


	June 30,		December 31,
	2020		2019
Assets
Current Assets:
Cash and Cash Equivalents	$	126,737	$	8,993
Merchandise Inventories		248,722		286,369
Prepaid Expenses		8,544		8,288
Deposit for Legal Settlement		21,500		21,500
Tariff Recovery Receivable		18,285		27,025
Other Current Assets		5,545		6,938
Total Current Assets		429,333		359,113
Property and Equipment, net		96,864		98,733
Operating Lease Right-of-Use		121,544		121,796
Goodwill		9,693		9,693
Other Assets		7,046		6,674
Total Assets	$	664,480	$	596,009

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts Payable	$	68,516	$	59,827
Customer Deposits and Store Credits		55,492		41,571
Accrued Compensation		11,506		11,742
Sales and Income Tax Liabilities		9,722		7,225
Accrual for Legal Matters and Settlements Current		62,786		67,471
Operating Lease Liabilities - Current		36,740		31,333
Other Current Liabilities		23,998		18,937
Total Current Liabilities		268,760		238,106
Other Long-Term Liabilities		15,708		13,757
Operating Lease Liabilities - Long-Term		101,131		100,470
Deferred Tax Liability		921		426
Credit Agreement		101,000		82,000
Total Liabilities		487,520		434,759

Stockholders’ Equity:
Common Stock ($0.001 par value; 35,000 shares authorized; 30,161 and 29,959 shares issued and 28,852 and 28,714 shares outstanding, respectively)		30		30
Treasury Stock, at cost (1,309 and 1,245 shares, respectively)		(142,752)		(142,314)
Additional Capital		219,618		218,616
Retained Earnings		101,372		86,498
Accumulated Other Comprehensive Loss		(1,308)		(1,580)
Total Stockholders’ Equity		176,960		161,250
Total Liabilities and Stockholders’ Equity	$	664,480	$	596,009


		Page
		~~Page~~

	PART I – FINANCIAL INFORMATION	2

Item 1.	Condensed Consolidated Financial Statements	2

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2831

Item 4.	Controls and Procedures	2831

	PART II – OTHER INFORMATION	2932

Item 1.	Legal Proceedings	2932

Item 1A.	Risk Factors	3538

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3539

Item 3.	Defaults Upon Senior Securities	3539

Item 4.	Mine Safety Disclosures	3639

Item 5.	Other Information	3639

Item 6.	Exhibits	3639

	Signatures	3841


													Total
	Common Stock			Treasury Stock			Additional		Retained				Stockholders'
	Shares	Value		Shares	Value		Capital		Earnings		AOCL		Equity

March 31, 2018	28,540	$	31	2,930	$	(141,439)	$	209,676	$	129,242	$	(1,184)	$	196,326
Stock-Based Compensation Expense	—		—	—		—		1,237		—		—		1,237
Exercise of Stock Options	3		—	—		—		40		—		—		40
Release of Restricted Shares	8		—	—		—		—		—		—		—
Common Stock Repurchased	—		—	5		(103)		—		—		—		(103)
Translation Adjustment	—		—	—		—		—		—		(73)		(73)
Net Loss	—		—	—		—		—		(1,454)		—		(1,454)
June 30, 2018	28,551	$	31	2,935	$	(141,542)	$	210,953	$	127,788	$	(1,257)	$	195,973

March 31, 2019	28,682	$	32	2,979	$	(142,157)	$	214,798	$	71,911	$	(1,268)	$	143,316
Stock-Based Compensation Expense	—		—	—		—		1,361		—		—		1,361
Exercise of Stock Options	—		—	—		—		—		—		—		—
Release of Restricted Shares	19		—	—		—		—		—		—		—
Common Stock Repurchased and Transferred	—		(2)	(1,740)		(112)		—		—		—		(114)
Translation Adjustment	—		—	—		—		—		—		(309)		(309)
Net Loss	—		—	—		—		—		(2,856)		—		(2,856)
June 30, 2019	28,701	$	30	1,239	$	(142,269)	$	216,159	$	69,055	$	(1,577)	$	141,398


	Three Months Ended June 30, 2019						Six Months Ended June 30, 2019
	Store Leases		Other Leases		Total		Store Leases		Other Leases		Total

Operating lease costs	$	8,150	$	1,010	$	9,160	$	16,193	$	2,003	$	18,196
Variable lease costs		1,930		198		2,128		3,883		397		4,280
Total	$	10,080	$	1,208	$	11,288	$	20,076	$	2,400	$	22,476


	Operating Leases
	Store Leases		Other Leases		Total
Remainder of 2019	$	16,832	$	2,191	$	19,023
2020		32,051		2,741		34,792
2021		25,840		2,264		28,104
2022		19,804		2,219		22,023
2023		13,841		2,255		16,096
Thereafter		17,104		2,075		19,179
Total future minimum lease payments		125,472		13,745		139,217
Less imputed interest		(16,373)		(1,871)		(18,244)
Total	$	109,099	$	11,874	$	120,973