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

July 1, 2018

28,551

$
31

2,935

$
(141,542)

$
210,953

$
127,788

$
(1,257)

$
195,973
Stock-Based Compensation Expense

—

—

—

—

1,117

—

—

1,117
Exercise of Stock Options

38

—

—

—

690

—

—

690
Release of Restricted Shares

31

1

—

—

—

—

—

1
Common Stock Repurchased

—

—

14

(266)

—

—

—

(266)
Translation Adjustment

—

—

—

—

—

—

69

69
Net Income

—

—

—

—

—

5,923

—

5,923
September 30, 2018

28,620

$
32

2,949

$
(141,808)

$
212,760

$
133,711

$
(1,188)

$
203,507

July 1, 2019

28,701

$
30

1,239

$
(142,269)

$
216,159

$
69,055

$
(1,577)

$
141,398
Stock-Based Compensation Expense

—

—

—

—

1,206

—

—

1,206
Release of Restricted Shares

9

—

—

—

—

—

—

—
Common Stock Repurchased and Transferred

—

—

4

(30)

—

—

—

(30)
Translation Adjustment

—

—

—

—

—

—

(87)

(87)
Net Income

—

—

—

—

—

1,045

—

1,045
September 30, 2019

28,710

$
30

1,243

$
(142,299)

$
217,365

$
70,100

$
(1,664)

$
143,532


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

July 1, 2019	28,701	$	30	1,239	$	(142,269)	$	216,159	$	69,055	$	(1,577)	$	141,398
Stock-Based Compensation Expense	—		—	—		—		1,206		—		—		1,206
Release of Restricted Shares	9		—	—		—		—		—		—		—
Common Stock Repurchased	—		—	4		(30)		—		—		—		(30)
Translation Adjustment	—		—	—		—		—		—		(87)		(87)
Net Income	—		—	—		—		—		1,045		—		1,045
September 30, 2019	28,710	$	30	1,243	$	(142,299)	$	217,365	$	70,100	$	(1,664)	$	143,532

July 1, 2020	28,852	$	30	1,309	$	(142,752)	$	219,618	$	101,372	$	(1,308)	$	176,960
Stock-Based Compensation Expense	—		—	—		—		1,146		—		—		1,146
Exercise of Stock Options	11		—	—		—		205		—		—		205
Release of Restricted Shares	8		—	—		—		—		—		—		—
Common Stock Repurchased	—		—	4		(75)		—		—		—		(75)
Translation Adjustment	—		—	—		—		—		—		247		247
Net Income	—		—	—		—		—		15,503		—		15,503
September 30, 2020	28,871	$	30	1,313	$	(142,827)	$	220,969	$	116,875	$	(1,061)	$	193,986

Total

Common Stock

Treasury Stock

Additional

Retained

Stockholders'


Shares

Value

Shares

Value

Capital

Earnings

AOCL

Equity

January 1, 2018

28,490

$
31

2,907

$
(140,875)

$
208,629

$
131,214

$
(1,152)

$
197,847
Stock-Based Compensation Expense

—

—

—

—

3,361

—

—

3,361
Exercise of Stock Options

43

—

—

—

770

—

—

770
Release of Restricted Shares

87

1

—

—

—

—

—

1
Common Stock Repurchased

—

—

42

(933)

—

—

—

(933)
Translation Adjustment

—

—

—

—

—

—

(36)

(36)
Net Income

—

—

—

—

—

2,497

—

2,497
September 30, 2018

28,620

$
32

2,949

$
(141,808)

$
212,760

$
133,711

$
(1,188)

$
203,507

January 1, 2019

28,627

$
32

2,951

$
(141,828)

$
213,744

$
76,835

$
(1,385)

$
147,398
Stock-Based Compensation Expense

—

—

—

—

3,621

—

—

3,621
Release of Restricted Shares

83

—

—

—

—

—

—

—
Common Stock Repurchased and Transferred

—

(2)

(1,708)

(471)

—

—

—

(473)
Translation Adjustment

—

—

—

—

—

—

(279)

(279)
Net Loss

—

—

—

—

—

(6,735)

—

(6,735)
September 30, 2019

28,710

$
30

1,243

$
(142,299)

$
217,365

$
70,100

$
(1,664)

$
143,532


													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	—		—	—		—		3,621		—		—		3,621
Release of Restricted Shares	83		—	—		—		—		—		—		—
Common Stock Repurchased	—		(2)	(1,708)		(471)		—		—		—		(473)
Translation Adjustment	—		—	—		—		—		—		(279)		(279)
Net Loss	—		—	—		—		—		(6,735)		—		(6,735)
September 30, 2019	28,710	$	30	1,243	$	(142,299)	$	217,365	$	70,100	$	(1,664)	$	143,532

January 1, 2020	28,714	$	30	1,245	$	(142,314)	$	218,616	$	86,498	$	(1,580)	$	161,250
Stock-Based Compensation Expense	—		—	—		—		2,112		—		—		2,112
Exercise of Stock Options	14		—	—		—		241		—		—		241
Release of Restricted Shares	143		—	—		—		—		—		—		—
Common Stock Repurchased	—		—	68		(513)		—		—		—		(513)
Translation Adjustment	—		—	—		—		—		—		519		519
Net Income	—		—	—		—		—		30,377		—		30,377
September 30, 2020	28,871	$	30	1,313	$	(142,827)	$	220,969	$	116,875	$	(1,061)	$	193,986

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				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018

									Three Months Ended				Nine Months Ended
									September 30,				September 30,
									2020		2019		2020		2019
Customer Deposits and Store Credits, Beginning Balance	$	(42,888)	$	(45,347)	$	(40,332)	$	(38,546)	$	(55,492)	$	(42,888)	$	(41,571)	$	(40,332)
New Deposits		(281,747)		(285,047)		(876,010)		(873,450)		(324,726)		(281,747)		(870,052)		(876,010)
Recognition of Revenue		263,960		270,469		818,748		815,715		295,833		263,960		793,491		818,748
Sales Tax included in Customer Deposits		15,982		16,622		50,246		50,715		18,389		15,982		49,932		50,246
Other		(343)		(210)		2,312		2,053		2,260		(343)		4,464		2,312
Customer Deposits and Store Credits, Ending Balance	$	(45,036)	$	(43,513)	$	(45,036)	$	(43,513)	$	(63,736)	$	(45,036)	$	(63,736)	$	(45,036)

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 $1.2$1.3 million at September 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 limited 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 September 30,								Nine Months Ended September 30,
	2020				2019				2020				2019
Manufactured Products ¹	$	135,119	46	%	$	108,825	41	%	$	366,632	46	%	$	337,479	41	%
Solid and Engineered Hardwood		80,643	27	%		76,358	29	%		219,444	28	%		241,713	30	%
Moldings and Accessories and Other		45,247	15	%		44,058	17	%		123,769	16	%		138,607	17	%
Installation and Delivery Services		34,824	12	%		34,719	13	%		83,646	10	%		100,949	12	%
Total	$	295,833	100	%	$	263,960	100	%	$	793,491	100	%	$	818,748	100	%

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

2019

2018

Manufactured Products 1

$
108,825

41
%
$
98,580

36
%
$
337,479

41
%
$
289,431

35
%
Solid and Engineered Hardwood

76,358

29
%

89,700

33
%

241,713

30
%

283,987

35
%
Moldings and Accessories and Other

44,058

17
%

48,100

18
%

138,607

17
%

148,404

18
%
Installation and Delivery Services

34,719

13
%

34,089

13
%

100,949

12
%

93,893

12
%
Total

$
263,960

100
%
$
270,469

100
%
$
818,748

100
%
$
815,715

100
%

¹ Includes ~~laminate, vinyl,~~ engineered vinyl plank, laminate, vinyl 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 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.

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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 nine month periods ended September 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 ~~at certain dates, 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 the remaining $4.5 million liability as of September 30, 2020 related to deferred payments as a result of the COVID-19 rent concessions, as well as an additional remaining $0.2 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. The Company adopted the new stand~~ard as of the beginning of the 4~~th ~~quarter of 2019.~~

Note 3. Stockholders’ Equity

Net Income (Loss) per Common Share

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Net Income (Loss)	$	15,503	$	1,045	$	30,377	$	(6,735)
Weighted Average Common Shares Outstanding—Basic		28,859		28,706		28,801		28,681
Effect of Dilutive Securities:
Common Stock Equivalents		475		80		274		—
Weighted Average Common Shares Outstanding—Diluted		29,334		28,786		29,075		28,681
Net Income (Loss) per Common Share—Basic	$	0.54	$	0.04	$	1.05	$	(0.23)
Net Income (Loss) per Common Share—Diluted	$	0.53	$	0.04	$	1.04	$	(0.23)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2019

2018

2019

2018

Net Income (Loss)

$
1,045

$
5,923

$
(6,735)

$
2,497

Weighted Average Common Shares Outstanding—Basic

28,706

28,602

28,681

28,552

Effect of Dilutive Securities:









Common Stock Equivalents

80

155

—

217

Weighted Average Common Shares Outstanding—Diluted

28,786

28,757

28,681

28,769

Net Income (Loss) per Common Share—Basic

$
0.04

$
0.21

$
(0.23)

$
0.09

Net Income (Loss) per Common Share—Diluted

$
0.04

$
0.21

$
(0.23)

$
0.09

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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		Nine Months Ended
	September 30,		September 30,
	2019	2018	2019	2018

					Three Months Ended		Nine Months Ended
					September 30,		September 30,
					2020	2019	2020	2019
Stock Options	608	373	612	272	112	608	390	612
Restricted Shares	243	9	639	9	110	243	113	639

~~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 September 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	24	602	227	469
Options Exercised/RSAs Released	—	(125)	(14)	(211)
Forfeited	(125)	(51)	(332)	(262)
Options Outstanding/Nonvested RSAs, September 30, 2019	632	913
Options Outstanding/Nonvested RSAs, September 30, 2020			574	907

The Company granted a target of 94,591 performance-based RSAs with a grant date fair value of $0.9 million during the nine months ended September 30, 2020 and a target of 100,281 performance-based RSAs with a grant date fair value of $1.1 million during the nine months ended September 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 ~~nine months ended September 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~~Amendment, among other things, temporarily increased 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 temporarily 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 September 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~~credit card 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

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~~defined by the terms of the Credit Agreement (the “Revolving Borrowing Base”). If the outstanding FILO Term Loan 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 September 30, 2020, the Company’s Revolving Credit Facility carried an average interest rate of 3.75% and the FILO Term Loan carried an interest rate of 5.125%.

~~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 September 30, 2020, a total of $76 million was outstanding under the Revolving Credit Facility and $25 million was outstanding under the FILO Term Loan. The Company also had $4 million in letters of credit which reduces its remaining availability. As of September 30, 2020, there was $31 million of availability under the Revolving Credit Facility.

The Revolving Credit Facility is available to the Company up to the lesser of (1) $175 million (had been temporarily increased to $212.5 million until August 30, 2020 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 an 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 $5 million in the first nine months of 2020 associated with the income tax components contained in the Act, and collected the full amount of the income tax benefit in June 2020. As of September 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 September 30, 2020, the Company recognized income tax expense of $7 million, which represented an effective tax rate of 31.0%. For the three months ended September 30, 2019, the Company recognized income tax expense of $0.2 million, which represented an effective tax rate of 17.7%. The variability of the Company’s third-quarter tax rate reflects the timing of deductions as the Company calculated a discrete provision in 2020 because of COVID-19 uncertainty as compared to using an effective tax rate method in 2019.

For the nine months ended September 30, 2020, the Company recognized income tax expense of $4.8 million, which represented an effective tax rate of 13.7%. For the nine months ended September 30, 2019, the Company recognized income tax expense of $0.9 million, which represented an effective tax rate of (14.4)%. The variability of our tax rate in 2020 reflects the timing of deductions on our year-to-date earnings.

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 nine months ended September 30, 2019, the resulting effective tax rate was 17.7% and (14.4%), respectively. For the three and nine months ended September 30, 2018, the resulting effective tax rate was 3.6% and 20.0%, respectively.

$28 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.~~this allowance. As the Company continues to deliver improved operating results, it is reasonably possible that all or some portion of the valuation allowance could be reduced in future periods. 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~~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 commenced on November 1, 2019 when the Company took 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 September 30, 2019:~~

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

Store Leases

Other Leases

Total

Store Leases

Other Leases

Total

Operating lease costs
$
8,250

$
1,005

$
9,255

$
  24,438

$
3,009

$
27,447
Variable lease costs

2,120

259

2,379

6,262

729

6,991
Total
$
10,370

$
1,264

$
11,634

$
  30,700

$
3,738

$
34,438

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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:~~

Nine Months Ended September 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
$
25,011

$
3,308

$
28,319

Right-of-use assets obtained or modified in exchange for operating lease obligations
$
18,171

$
461

$
18,632

Weighted Average Remaining Lease Term (years)

4.73

4.74

4.74

Weighted Average Discount Rate

5.9
%

6.2
%

5.9
%

~~At September 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

$
8,524

$
1,078

$
9,602
2020

32,939

2,741

35,680
2021

26,813

2,264

29,077
2022

20,785

2,219

23,004
2023

14,824

2,255

17,079
Thereafter

20,006

2,075

22,081
Total future minimum lease payments

123,891

12,632

136,523
Less imputed interest

(16,013)

(1,699)

(17,712)
Total

$
107,878

$
10,933

$
118,811

Note 8.7. Commitments and Contingencies

~~Governmental Investigations: DOJ Deferred Prosecution Agreement and SEC Resolution~~

Beginning in 2015, the Company received subpoenas in connection with a criminal investigation conducted by the DOJ and the SEC. The focus of the investigations related to compliance with disclosure and financial reporting and requirements under federal securities laws. The Company cooperated with the investigations and produced documents and other information responsive to subpoenas and other requests. 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, among other things, the Company (1) paid a fine in the amount of $19.1 million to the United States Treasury, (2) forfeited to the U.S. Attorney and the DOJ the sum of $13.9 million, of which up to $6.1 million was submitted by the Company to the SEC in disgorgement and prejudgment interest under the Order and (3) is required to 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

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effective system of internal account controls designed to ensure the making and 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 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 $33 million due to the applicable governmental parties and 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 December 18, 2019, the court issued an order that, aamong other things, granted preliminary approval of the settlement ~~will be finalized~~agreement. Following the preliminary approval, and ~~approved~~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 final approval was granted by the court or as to the ultimate outcome of the litigation. If the settlement agreement is not approved by the court, 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.October 22, 2020. 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.

The Company recognized a charge to earnings of $28 million within selling, general and administrative expense during the fourth quarter of 2018 as its loss became probable and estimable. During the third quarter of 2020, the

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Company recognized an additional charge to earnings for in-store vouchers of $2 million within selling, general and administrative expense as the Company now believes the claim threshold in the settlement agreement will be met. As of September 30, 2020, the remaining accrual related to these matters was $29 million, which has been included in the caption “Accrual for Legal Matters and Settlements Current” on its condensed consolidated balance sheet.

In addition, there are a number of individual claims and lawsuits alleging damages involving Strand Bamboo ~~product. The~~Product (the “Bamboo Flooring Litigation”). While the Company ~~disputes these claims and intends to resolve these through~~believes that a loss associated with the ~~Gold~~Bamboo Flooring Litigation ~~or otherwise defend such matters vigorously. Given the uncertainty of litigation, the preliminary stage of the cases, and the legal standards that must be met for success on the merits,~~is reasonably possible, the Company is unable to reasonably estimate the amount ~~of loss,~~ or range of possible ~~loss, at this time that may result from these actions. Accordingly, no accruals have been made with respect to these matters.~~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~~did not have any expense related to ~~earnings of $0.4 million and $2.9~~ ~~million~~these matters for the nine months ended September 30, ~~2019 and 2018, respectively, within SG&A expenses for these Remaining Laminate Matters.~~2020. As of September 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 nine months ended September 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 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.

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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

Mason Lawsuit

In August 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 (collectively, the “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 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

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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 (the “Mason matter”).~~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 ~~claims and is defending the Mason matter vigorously. In March and April 2019, the Company offered arbitration agreements to the store managers nationwide, which were agreed to by some~~ Mason Putative Class ~~Employees. Conditional certification of a Nationwide Collective Class was granted in May 2019. The Company~~Employees’ claims and continues to defend ~~that~~the matter ~~vigorously through discovery to oppose final certification.~~vigorously. Given the ~~general~~ uncertainty of litigation, the preliminary stage of the case and the legal standards that must be met for, ~~final~~among other things, class certification and success on the merits, the Company cannot reasonably estimate the ~~amount of~~possible loss or range of ~~possible~~ loss, if any, that may result from this ~~action. Accordingly,~~action and therefore no ~~accruals have~~accrual has been made ~~with respect~~related to ~~the Mason 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.

Kramer lawsuit

In November 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, among other items, failure to pay wages and overtime and engaging in unfair business practices (the “Kramer matter”). The Company reached settlement for this matter in the third quarter of 2019. Payment of $4.75 million was made to the settlement administrator on April 6, 2020, for distribution to class members.

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Savidis Lawsuit

~~In September 2019,~~

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 ~~Company entered into an agreement to settle~~“Savidis Plaintiffs”). Ms. Savidis filed a purported class action lawsuit in the ~~Kramer matter, consistent with the terms~~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 ~~Memorandum~~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 ~~Understanding previously disclosed by~~Industrial Relations requesting they be permitted to seek penalties under the ~~Company. Under~~California Private Attorney General Act for the ~~terms of the settlement agreement, the Company will pay $4.75 million to settle the claims~~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~~prior four-year period prior to the filing of ~~all current and/or former Store Managers and Store Managers in Training employed by~~ the ~~Company in California at any time between November 17, 2013 and September 19, 2019~~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 ~~settlement agreement was preliminarily approved by~~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 ~~court on September 19, 2019~~Savidis Putative Class Employees’ claims and ~~a hearing for final approval has been set for January 17, 2020. The settlement agreement is subject~~intends to certain contingencies, including court approval. There can be no assurance that a settlement will be finalized and approved by the court or as to the ultimate outcome of the litigation. If the settlement agreement is not approved by the court, 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 ~~settlement agreement is not approved by~~Company cannot estimate the ~~court, the Kramer matter~~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.

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.~~operations, financial condition and liquidity.

Section 301 Tariffs

On September 10, 2020 several importers of vinyl flooring filed a lawsuit with the Court of International Trade (the “CIT”) challenging the Section 301 tariffs under Lists 3 and 4. The Company ~~accrued within SG&A~~has also filed a ~~$4.75 million liability with~~companion case at the ~~offset~~CIT challenging Section 301 tariffs it has paid and will pay. The action is in its early stages and the ~~caption “Accrual for Legal Matters and Settlements Current” in~~Company is unable to predict the ~~second quarter~~timing or outcome of ~~2019.~~the ruling by CIT.

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Antidumping and Countervailing Duties Investigation

In October 2010, a conglomeration of domestic manufacturers of multilayered wood flooring filed a petition seeking the imposition of antidumping (“AD”) and countervailing duties (“CVD”) with the United States Department of Commerce (“DOC”) and the United States International Trade Commission (“ITC”) against imports of multilayered wood flooring from China. This ruling applies to 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

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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 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.

Results by period for the Company are shown below. The column labeled ‘September 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. There are actions pending if accepted by the CIT that would reduce the Company’s liabilities as described in the footnotes to the table that follows.

The Company recorded net interest expense related to antidumping of $0.4 million for the nine months ended September 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 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

September 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

liability 2
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%
42.57%4
$0.8 million

November 2017

liability4
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
$10.4 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		September 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			liability²
3	December 2013 through	3.3% and 5.92%	0.0%³	$4.7 million
	November 2014			liability³
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%	0.0%	Settled
	November 2016
6	December 2016 through	17.37% and 0.0%	42.57% and 0.0%⁴	$0.5 million receivable
	November 2017			$1.5 million liability⁴
7	December 2017 through	0.0%	Pending⁵	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%⁶	$0.08 million receivable⁶
6	January 2016 through December 2016	0.99% and 1.38%	Final at 3.10% and 2.96%	$0.04 million liability⁷
7	January 2017 through December 2017	1.38% and 1.06%	Pending⁸	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~~CIT 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 CIT 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 is expected~~period to ~~rule on the DOC’s remand~~3.92% (from 13.74%). If accepted by the ~~end~~CIT, the Company will reverse $3.9 million of ~~2019. If the final ruling remains at 6.55% (from 13.74%), the Company’s liability of~~its $4.1 million ~~would decrease by $2.8 million to $1.3 million in the period in which the ruling is finalized.~~

~~In July 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~~liability currently recorded, ~~a receivable of $2.6 million~~ with a corresponding reduction of cost of ~~sales.~~

sales during the quarter when it is accepted.

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^{In September 2020, the CIT received a recommendation from the DOC to reduce the rate for the third annual review period to 0.0% from 17.37%. If accepted by the CIT, the Company will reverse the entire $4.7 million liability currently recorded, with a corresponding reduction of cost of sales, as well as an additional $2.1 million receivable and favorable adjustment to cost of sales for deposits made at previous preliminary rates during the quarter when it is accepted.}

In ~~July~~the third quarter of 2019, the DOC issued the final rates for the sixth annual review period 6 at ~~a maximum of~~ 42.57%. and 0% depending on the vendor. As a result, the Company recorded a liability of ~~$0.8~~$0.8 million with a corresponding reduction inof cost of sales induring the ~~nine months~~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 as of September 30, ~~2019.~~

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 September 30, 2020 was included in other long-term liabilities on the condensed consolidated balance sheet.

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5	⁵In January 2020, the DOC issued a preliminary rate of 0.0% for the seventh annual review period.

In ~~June~~the second quarter of 2018, the DOC issued the final rates for the fifth annual 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~~$0.08 million for deposits made at previous preliminary rates, with a corresponding reduction of cost of sales.

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. The remaining balance, after payments, was approximately $40 thousand as of September 30, 2020.

8	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.

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.

Note 8. Canadian and U.S. Store Closure Costs

During the third quarter of 2020, the Company completed a review of its store footprint and performance. As a result of that review, the Company made the decision to close its 8 Canadian stores as well as 6 stores in the United States. The closure of the Canadian stores reflected the fact that the Company’s performance in these stores has been challenging for a number of years and that all but one of the stores’ leases are expiring in early 2021. The Company believed investing in the Company’s other stores would provide stronger returns. The 6 US stores were underperforming and their prospects for improvement were uncertain due to local market conditions, demographics, and/or the competitive landscape. The stores collectively represent approximately 1.5% of the Company’s annualized revenue and their absence is not expected to have a meaningful impact on cash flow. The Company expects to incur expense of between $4 and $5 million to close these stores in the second half of 2020, including approximately $1.1 million in cumulative foreign exchange losses that are currently included in Other Comprehensive Loss on its condensed consolidated balance sheet. $2.6 million of this expense was recorded in the third quarter of 2020 related to lease and inventory write-downs, employee termination benefits and fixed asset write-offs. The Company expects all fourteen stores to be closed by year end although certain transfers of inventory and clean-up activities will not be fully completed until early in 2021.

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A summary of the store closure costs incurred during the three and nine months ended September 30, 2020 are as follows:


	Three Months Ended		Nine Months Ended
	September 30, 2020		September 30, 2020

Cost of Merchandise Sold:
Inventory write-down and other inventory adjustments	$	761	$	761
Cost of Merchandise Sold Subtotal		761		761
Selling, General, & Administrative Expenses:
Employee termination benefits		411		411
Write-downs of lease and fixed assets		1,362		1,362
Other SG&A store closure costs		30		30
Selling, General, & Administrative Expenses Subtotal		1,803		1,803
Total Store Closure Costs	$	2,564	$	2,564

A reconciliation of the Company’s liability for employee termination benefits and other store closure costs for the nine months ended September 30, 2020 are as follows:


	Employee
	Termination Benefits		Other Costs		Total

Balance as of January 1, 2020	$	-	$	-	$	-
Accrued costs charged to expense		411		130		541
Payments		-		-		-
Balance as of September 30, 2020	$	411	$	130	$	541

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;

expectations related to the ~~outcomes~~closure of ~~legal proceedings~~Canadian and ~~the related~~ certain US stores;

impact on ~~liquidity;~~

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

~~reputational harm;~~

having sufficient inventory for consumer demand;

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

tariffs and exemptions;

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

reputational harm;

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

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obligations under various settlement agreements and other compliance matters;

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

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

inability to open new stores, find suitable locations for our ~~new store concept,~~stores, 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;

renewing store, warehouse, or ~~warehouse~~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, including cybersecurity insurance;

access to and costs of capital;

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

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management information systems disruptions;

alternative e-commerce offerings;

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.

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~~ North America's leading specialty retailers of hard-surface flooring with 423 stores as of September 30, 2020. Our Company seeks to offer the best customer experience online and in ~~North America, offering~~stores, with more than 400 varieties of hard-surface floors featuring a ~~complete purchasing~~range of quality styles and on-trend designs. Our online tools also help empower customers to find the right solution ~~across an~~for the space they’ve envisioned. Our extensive ~~assortment of domestic~~selection includes waterproof vinyl plank, solid and ~~exotic hardwood species,~~ engineered hardwood, laminate, ~~resilient vinyl, waterproof vinyl plank and~~bamboo, porcelain ~~tile. We also feature the renewable flooring products, bamboo~~tile, and cork, ~~and provide~~with a wide ~~selection~~range of flooring enhancements and accessories ~~including moldings, noise-reducing underlayment, adhesives~~to complement. We believe our stores are staffed with flooring experts who provide advice, pro partnership services and ~~flooring tools. We offer~~ installation ~~and delivery services through third-party independent contractors~~options for ~~customers who purchase our floors.~~ ~~At September 30, 2019, we sold~~all of our products, ~~through~~ ~~419~~ ~~Lumber Liquidators stores~~the majority of which is in ~~47 states in the United States~~stock and ~~in Canada, a call center and websites.~~ready for delivery.

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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.

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 store closures, 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 due to their inherent unusual, non-operating, unpredictable, non-recurring, or non-cash nature.

Executive Summary

~~We continue~~Results of operations for the three and nine months ended September 30, 2020 as described below are not necessarily indicative of future results to ~~focus on increasing our~~be expected for the full year due to a number of factors, including seasonality, tariffs and general economic conditions that may impact sales ~~and operating margin, and providing an improved shopping experience~~ for ~~our customers. Throughout~~ the remainder of fiscal 2020. Additionally, we cannot predict the ~~year, our focus will be on driving do-it-yourself, do-it-~~

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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 the initial interest in purchasing a floor often 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 tool called the ~~PictureIt!~~ ~~in June 2019 that allows customers to digitally visualize our floors in their rooms. We also launched the~~ ~~Floor Finder~~ ~~tool at the beginning~~impact of the ~~fourth quarter of 2019~~COVID-19 pandemic to ~~help customers at the beginning of their flooring journey narrow down the floor samples they may want~~our sales, supply chain, and distribution as well as to ~~explore in store.~~overall construction, renovation and consumer spending.

In August 2019, we experienced a network security incident caused by malware that prevented access to several of our information technology systems and data. Following the discovery of the incident, we promptly took actions to isolate and shut down affected systems based on our existing protocols. We implemented our business continuity plan and undertook actions to recover the affected systems; we believe we were successfully able to restore the operation of the systems without loss of business data. Based on the nature of the network security incident, the impact on our information technology systems and the results of the forensic IT analysis, we do not believe confidential customer, employee, or company data was lost or disclosed, but we continue to monitor the situation. Our stores remained open and operating throughout the incident, but were utilizing manual back-up processes for approximately six days which we believe had an adverse impact on sales. We maintain cyber-security and other insurance and have been working collaboratively with our carriers throughout this incident. As of September 30, 2019, we estimate the equipment replaced and costs associated with the incident to date to be approximately $3.5 million. Prior to quarter end, we received an initial recovery from insurance in excess of $2 million, capitalized new equipment, and recorded approximately $0.7 million as a receivable related to further anticipated recovery. The receivable is recorded in “Other Current Assets” on the condensed consolidated balance sheet and does not include any potential business interruption recovery or involuntary gains related to the incident. Incident costs are expected to go higher as the recovery continues.

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 were taken, or the mitigation was unsuccessful, the combination of tariffs would result in more than $56 million of annualized cost to the Company as we historically sourced between 45% and 50% of our merchandise from China. We offset the initial 10% tariffs by negotiating lower prices from our vendors. Starting in June 2019 and continuing through the third quarter we continued to mitigate 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 about 2 times per year, and because the timing of the tariffs does not match the mitigation efforts, comparisons to the prior year are affected.

Net sales in the third quarter of ~~2019 decreased $6.5~~2020 increased $32 million, or ~~2.4%~~12.1%, to ~~$264~~$296 million from the third quarter of ~~2018. Net~~2019. Comparable store sales ~~from comparable stores decreased 3.6% as compared to~~for the third quarter of ~~2018 driven~~2020 increased 10.9% primarily as a result of continued execution against the Company’s transformation plan and healthy consumer demand for home improvement projects. The third quarter of 2019 was unfavorably impacted by ~~soft sales at the beginning of the quarter and compounded by the~~a network security incident in late August, ~~2019. This was somewhat offset~~which the Company believes negatively impacted total revenue by approximately $6 million to $8 million with an ~~improvement~~accompanying reduction in ~~comparable sales during September 2019. We~~gross profit. The Company opened ~~four~~one net new ~~stores~~store in the third quarter of ~~2019~~ 2020 bringing total store count to ~~419~~423 as of September 30, ~~2019.~~ 2020.

Gross profit ~~decreased 5%~~increased 22% in the third quarter of ~~2019~~2020 to ~~$96~~$117 million from ~~$101~~$96 million in the comparable period in ~~2018, including~~2019. Gross Margin increased 320 basis points to 39.4% in the ~~effect~~third quarter of ~~certain duties that related to both periods and influenced by the network security incident. Gross margin decreased to~~2020 from 36.2% in the third quarter of 2019 ~~from 37.2%~~due to lower year-over-year Section 301 tariffs (discussed in the ~~third quarter of 2018. Both periods were impacted by antidumping rate changes but in opposite directions. Excluding these items as shown on the table~~“Section 301 Tariffs” section that follows, Adjusted Gross Profit (a non-GAAP measure) decreased to $96 million in the third quarter of 2019 compared to $98 million in the year-earlier period again influenced by the network security incident. This resulted in an Adjusted Gross Margin (a non-GAAP measure) that improved by 30 basis points to 36.5% in the third quarter of 2019 from 36.2% in the third quarter of 2018. The margin increase was driven byfollows), supply chain efficiency, along with pricing initiatives and a larger mix of higher-margin manufactured products, ~~reduced discounting in stores, merchandising cost-out efforts, including shifting production to lower-cost countries of supply,~~ and ~~retail price increases related to tariff mitigation. The small improvement in Adjusted Gross Margin was achieved despite higher tariff-related costs and with an increased~~a lower mix of ~~lower-margin~~ installation sales. These items were partially offset by higher customer delivery costs associated with promotions.

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SG&A expense decreased ~~0.5%~~0.1% to $93 million, or 31.6% of sales, down 380 basis points in the third quarter of ~~2019~~2020 from the comparable period in ~~2018 but~~2019. SG&A in both quarters included certain costs ~~in both periods~~ related to investigations and ~~lawsuits, as well as a $1.8 million impairment of certain assets related to our decision to exit the hardwood flooring finishing business in~~lawsuits. Additionally, the third quarter ~~of 2018.~~included costs related to Canadian and US store closures in 2020. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) ~~increased $3.9~~decreased 4.9% to $89 million, ~~primarily as a result~~or 29.9% of ~~costs related to ten new stores~~sales, down 530 basis points compared to the ~~third quarter a year ago, higher year-over-year incentive and equity accruals~~same period in the prior year. The reduction in Adjusted SG&A was primarily driven by ~~a reduction in last year’s third quarter to align with lower performance expectations, severance,~~the optimization of our marketing efforts, as we pivoted towards more efficient channels like digital, and ~~costs~~$2.5 million from the final settlement of the business interruption insurance claim related to the ~~corporate headquarters relocation occurring~~August 2019 network security incident, partially offset by an increase in ~~this year’s fourth quarter.~~ credit card fees due to the year-over-year increase in revenue.

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Operating income was $23 million for the third quarter of 2020 compared to $2.2 million for the third quarter of 2019. Adjusted Operating Income (a non-GAAP measure) was $29 million for the third quarter of 2020, a year-over-year increase of more than $25 million compared to Adjusted Operating Income of $3.4 million for the third quarter of 2019. The year-over-year increase was primarily driven by strong sales growth, enhanced gross margin, and strong expense management.

For the three months ended September 30, 2020, the Company recognized income tax expense of $7 million, which represented an effective tax rate of 31.0%. For the three months ended September 30, 2019, the Company recognized income tax expense of $0.2 million, which ~~compares~~represented an effective tax rate of 17.7%. The variability of the Company’s third-quarter tax rate reflects the timing of deductions as the Company calculated a discrete provision in 2020 because of COVID-19 uncertainty as compared to ~~operating~~using an effective tax rate in 2019.

Net income ~~of $6.7 million~~ for the ~~three months ended September 30, 2018. Excluding the Gross Profit and SG&A items discussed above and summarized in the table that follows, Adjusted Operating Income (a non-GAAP measure) was $3.4~~third quarter of 2020 increased $14.5 million to $15.5 million compared to $1 million for the third quarter of 2019, ~~which is a decrease from the~~while Adjusted ~~Operating Income~~Earnings (a non-GAAP measure) for the third quarter of ~~$8.6~~2020 was $20 million, a year-over-year increase of $18 million compared to Adjusted Earnings of $1.9 million for the third quarter of 2018. We believe the most significant drivers of the decrease were higher adjusted SG&A in this year’s third quarter in addition to the impact of the network security incident in August 2019 and soft sales in July 2019.

~~Net income for the three months ended September 30, 2019 was $1 million, or $0.04~~

Earnings per diluted share ~~compared to net income of $5.9 million, or $0.21~~was $0.53 for the third quarter 2020 versus $0.04 in the year-ago quarter. On an adjusted basis, third quarter earnings per diluted share increased $0.60 to $0.67 compared to an Adjusted Earnings per Diluted Share (a non-GAAP measure) of $0.07 for the ~~three months ended September 30, 2018.~~ third quarter of 2019.

As of September 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 September 30,~~end of the fourth quarter 2019 ~~we had $114 million in liquidity, comprised of $6 million of~~while the cash and cash equivalents balance increased by $190 million. As of September 30, 2020, the Company had liquidity of approximately $230 million, consisting of excess availability under its Credit Agreement of $31 million, and ~~$108~~cash and cash equivalents of $199 million. This represents an increase in liquidity of $44 million from June 30, 2020. In addition, the Company’s debt balance as of September 30, 2020 was $101 million, unchanged since amending the Credit Agreement on April 17, 2020.

Based on what we know today about the impact of COVID-19, the Company believes that cash flows from operations, together with the liquidity under its Credit Agreement, provides sufficient liquidity to navigate the current environment.

Other Items

COVID-19 Update

Since the onset of COVID-19, the Company leveraged strategic investments in digital capabilities made over the past 24 months, including the Floor Finder and Picture It! tools, to serve customers at LLFlooring.com. Web traffic has increased meaningfully throughout the year. The Company has also expanded availability of online flooring samples and extended hours for voice and click-to-chat customer support, while also continuing to offer curbside store pickup and enhanced home-delivery options. During the third quarter of 2020 the Company’s stores remained open except for temporary closures necessitated by local market conditions.

Canadian and US Store Closure Costs

During the third quarter of 2020, the Company conducted a comprehensive review of its real estate portfolio. Following the conclusion of this review, the Company made the decision to close its Canadian operations, including all eight stores in Canada, and six underperforming US locations by the end of 2020. The Company will continue to monitor store performance on an ongoing basis. The Company expects to incur expense of between $4 and $5 million to close these stores in the second half of 2020, $2.6 million of ~~availability~~which was recorded in the third quarter of 2020. The Company expects all fourteen stores to be closed by year end although certain transfers of inventory and clean-up activities will not be fully completed until early in 2021.

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Section 301 Tariffs

Beginning in September 2018, goods coming from China were subject to a 10% tariff under ~~our asset-based revolving loan (the “Revolving Loan”~~Section 301, which was increased to 25% in June 2019. On November 7, 2019, the U.S. Trade Representative (“USTR”). granted a retroactive exclusion on certain Click Vinyl and engineered products imported from China. Subsequently, on August 6, 2020, the USTR announced its intention not to extend the exclusion pertaining to those certain flooring products imported from China, and the exclusion expired as of August 7, 2020, which again subjects those products to the 25% Section 301 tariffs. At that time, approximately 43% of the Company’s merchandise receipts originated from China. Approximately 10% of the Company’s merchandise receipts remained subject to the Section 301 tariffs even during the exclusion period; the remaining 33% are now once again subject to the Section 301 tariffs. As the Company continues to execute its alternative sourcing strategy, its goal is to reduce the percentage of goods that are purchased from China to the mid-thirties by the end of 2020 and to continue those efforts in the coming year.

The Company had a benefit of $11 million of operating income in the fourth quarter of 2019 as a result of the retroactive exclusion of these tariffs, which will not be repeated in 2020. The Company also recorded a $27 million receivable related to these tariffs during the fourth quarter of 2019 in the caption “Tariff Recovery Receivable” on the Consolidated Balance Sheets and has collected $19.5 million through the first nine months of 2020. The Company still expects to receive the remaining payments by the end of 2020.

Following the tariffs being reinstated in August 2020, cash flow was reduced as the Company began to pay the tariffs on the product affected by the Section 301 tariff reinstatement. As this product is sold beginning in the fourth quarter, the increased cost of the tariffs will flow through the income statement.

In addition to alternative country sourcing, the Company has other approaches to mitigate the impact of the tariffs, including partnering with current vendors to lower costs and adjusting its pricing. The Company continues to monitor market pricing and promotional strategies to inform and guide its decisions.

Network Security Incident

In August 2019, the Company experienced a network security incident caused by malware that prevented access to several of the Company’s information technology systems and data. Stores remained open and operating throughout the incident, but the Company utilized manual back-up processes for approximately six days. The Company estimated the disruption caused by the event negatively impacted total revenue for the third quarter of 2019 in the range of approximately $6 million to $8 million with an attendant reduction in gross margin. The Company maintains cybersecurity and other insurance coverage and recorded $2.5 million from the final settlement of the business interruption insurance claim in SG&A during the third quarter of 2020.

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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 September 30,

Dollar Amounts

2019

2018

2019 VS 2018

Net Sales

Net Merchandise Sales

86.8
%

87.4
%

(3.0)
%
Net Services Sales

13.2
%

12.6
%

1.8
%
Total Net Sales

100.0
%

100.0
%

(2.4)
%
Gross Profit

36.2
%

37.2
%

(5.0)
%
Selling, General, and Administrative Expenses

35.4
%

34.7
%

(0.5)
%
Operating Income

0.8
%

2.5
%

(67.5)
%
Other Expense

0.3
%

0.2
%

66.2
%
Income Before Income Taxes

0.5
%

2.3
%

(79.3)
%
Income Tax Expense

0.1
%

0.1
%

-
%
Net Income

0.4
%

2.2
%

(82.4)
%


							% Improvement
	% of Net Sales						(Decline) in
	Three Months Ended September 30,						Dollar Amounts
	2020			2019			2020 VS 2019
Net Sales
Net Merchandise Sales		88.2	%		86.8	%		13.9	%
Net Services Sales		11.8	%		13.2	%		0.3	%
Total Net Sales		100.0	%		100.0	%		12.1	%
Gross Profit		39.4	%		36.2	%		21.8	%
Selling, General, and Administrative Expenses		31.6	%		35.4	%		(0.1)	%
Operating Income (Loss)		7.8	%		0.8	%		NM	%
Other Expense		0.2	%		0.3	%		(24.6)	%
Income (Loss) Before Income Taxes		7.6	%		0.5	%		NM	%
Income Tax Expense		2.4	%		0.1	%		NM	%
Net Income (Loss)		5.2	%		0.4	%		NM	%


							% Improvement
	% of Net Sales						(Decline) in
	Nine Months Ended September 30,						Dollar Amounts
	2020			2019			2020 VS 2019
Net Sales
Net Merchandise Sales		89.5	%		87.7	%		(1.1)	%
Net Services Sales		10.5	%		12.3	%		(17.1)	%
Total Net Sales		100.0	%		100.0	%		(3.1)	%
Gross Profit		39.0	%		35.6	%		6.2	%
Selling, General, and Administrative Expenses		34.3	%		36.0	%		(7.7)	%
Operating Income (Loss)		4.8	%		(0.3)	%		NM	%
Other Expense		0.3	%		0.4	%		(17.0)	%
Income (Loss) Before Income Taxes		4.4	%		(0.7)	%		NM	%
Income Tax Expense		0.6	%		0.1	%		NM	%
Net Income (Loss)		3.8	%		(0.8)	%		NM	%

2225

Table of Contents


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
SELECTED SALES DATA		2020			2019			2020			2019
Average Sale¹	$	1,366		$	1,407		$	1,313		$	1,371
Average Retail Price per Unit Sold²		0.7	%		0.8	%		(0.3)	%		(0.3)	%
Comparable Store Sales Increase (Decrease) (%)		10.9	%		(3.6)	%		(4.3)	%		(1.4)	%

Number of Stores Open, end of period		423			419			423			419
Number of Stores Opened in Period, net		1			4			4			6
Number of Stores Relocated in Period³		—			1			1			1

Comparable Stores⁴ (% change to prior year):
Customers Invoiced⁵		13.8	%		(5.2)	%		(1.0)	%		(4.1)	%
Net Sales of Stores Operating for 13 to 36 months		15.5	%		5.9	%		1.9	%		8.9	%
Net Sales of Stores Operating for more than 36 months		10.6	%		(4.0)	%		(4.6)	%		(1.8)	%

Net Sales in Markets with all Stores Comparable (no cannibalization)		11.2	%		(3.1)	%		(3.8)	%		(0.9)	%

% Improvement

% of Net Sales

(Decline) in

Nine Months Ended September 30,

Dollar Amounts

2019

2018

2019 VS 2018

Net Sales

Net Merchandise Sales

87.7
%

88.5
%

(0.6)
%
Net Services Sales

12.3
%

11.5
%

7.5
%
Total Net Sales

100.0
%

100.0
%

0.4
%
Gross Profit

35.6
%

36.4
%

(1.7)
%
Selling, General, and Administrative Expenses

36.0
%

35.9
%

0.6
%
Operating Income (Loss)

(0.3)
%

0.5
%

(160.4)
%
Other Expense (Income)

0.4
%

0.1
%

168.9
%
Income (Loss) Before Income Taxes

(0.7)
%

0.4
%

(288.5)
%
Income Tax Expense (Benefit)

0.1
%

0.1
%

36.0
%
Net Income (Loss)

(0.8)
%

0.3
%

(369.7)
%

Three Months Ended

Nine Months Ended

September 30,

September 30,
SELECTED SALES DATA
2019

2018

2019

2018

Average Sale1 (% change to prior year):
1.7
%

3.8
%

2.6
%

5.1
%
Average Retail Price per Unit Sold2
0.8
%

0.4
%

(0.3)
%

(0.8)
%

Number of Stores Open, end of period
419

409

419

409

Number of Stores Opened in Period, net
4

3

6

16

Number of Stores Relocated in Period3
1

—

1

—

Comparable Stores4 (% change to prior year):








Net Sales
(3.6)
%

2.1
%

(1.4)
%

3.3
%
Customers Invoiced5
(5.2)
%

(1.7)
%

(4.1)
%

(1.8)
%
Net Sales of Stores Operating for 13 to 36 months
5.9
%

7.9
%

8.9
%

9.8
%
Net Sales of Stores Operating for more than 36 months
(4.0)
%

1.9
%

(1.8)
%

3.1
%

Net Sales in Markets with all Stores Comparable (no cannibalization)
(3.1)
%

3.2
%

(0.9)
%

4.0
%

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 third quarter of 2020 increased $32 million, or 12.1%, to $296 million from the third quarter of 2019. Comparable store sales for the third quarter of ~~2019 decreased $6.5 million, or 2.4%, to $264 million from~~2020 increased 10.9% primarily as a result of continued execution against the Company’s transformation plan and healthy consumer demand for home improvement projects. The third quarter of ~~2018. Net sales in comparable stores decreased 3.6% compared to the third quarter of 2018, which we believe~~2019 was ~~driven~~unfavorably impacted by ~~soft sales at the beginning of the quarter compounded by the~~a network security incident in late August, ~~2019. This was partially offset~~which the Company believes negatively impacted total revenue by approximately $6 million to $8 million with an ~~improvement~~accompanying reduction in ~~comparable~~gross profit. By major category, manufactured products grew from 41% of sales ~~for the month of September 2019. We opened four new stores~~ in the third quarter ~~resulting~~of 2019 to 46% of sales in ~~419 stores~~the third quarter of 2020, partially offset by a decline in solid and engineered hardwood products. The vinyl sub-category within manufactured products continues to drive growth due to its outstanding aesthetics, high resilience and waterproof characteristics. Net services sales (install and freight) were flat to the equivalent period in the prior year due an outsized COVID-19 impact on in-home installations. The Company opened one net new store in the third quarter of 2020 bringing total store count to 423 as of September 30, ~~2019.~~

~~Table of Contents~~

2020.

Net sales for the nine months ended September 30, ~~2019 increased $3.0 million, or 0.4%,~~2020 decreased 3.1% from the comparable period in ~~2018, as net sales in~~2019. Healthy consumer demand for home improvement projects throughout the third quarter of 2020 was not enough to offset the impact of COVID-19 on the second quarter of 2020 and comparable stores ~~decreased 1.4%, more than offset by an increase net~~ sales ~~in non-comparable stores~~were negative 4.3% for the nine-month period ended September 30, 2020.

Table of ~~$15 million.~~Contents

Gross Profit

Gross profit ~~decreased 5%~~increased 22% in the third quarter of ~~2019~~2020 to $117 million from $96 million ~~from~~in the comparable period in ~~2018. Both periods were impacted by antidumping rate changes, but~~2019. Gross Margin increased 320 basis points to 39.4% in ~~opposite directions. Gross margin decreased to~~the third quarter of 2020 from 36.2% in the third quarter of 2019 ~~from 37.2%~~due to lower year-over-year Section 301 tariffs (discussed in the third quarter of 2018. Gross margin was unfavorably impacted by expense of $0.8 million related to antidumping rate changes in the three months ended September 30, 2019. Gross margin in 2018 was favorably impacted by antidumping rate changes, which resulted in income of $2.8 million for the three months ended September 30, 2018. Excluding these items from both periods, Adjusted Gross Profit (a non-GAAP measure) decreased by $1.4 million“Section 301 Tariffs” section above), supply chain efficiency, along with pricing initiatives and Adjusted Gross Margin (a non-GAAP measure) improved by 30 basis points, in the three months ended September 30, 2019 as compared to three months ended September 30, 2018. The margin increase was driven by a larger mix of higher-margin manufactured products, ~~reduced discounting in stores, merchandising cost-out efforts, including shifting production to lower-cost countries of supply,~~ and ~~retail price increases related to tariff mitigation. The small improvement in Adjusted Gross Margin was achieved despite higher tariff-related costs and with an increased~~a lower mix of ~~lower-margin~~ installation sales. These items were somewhat offset by higher customer delivery costs associated with promotions.

Gross profit was $310 million and $292 million for the nine months ended September 30, ~~2019 decreased $5.2 million, or 1.7%, from~~2020 and the comparable period in ~~2018.~~2019, respectively, despite the impact of COVID-19 on sales in 2020. Gross ~~margin decreased to~~Margin increased from 35.6% for the first nine months of 2019 ~~from 36.4%~~to 39.0% for the first nine months of ~~2018. Adjusted Gross Margin (a non-GAAP measure) was 35.6% in the nine months ended September 30, 2019,~~2020 primarily due to lower year-over-year Section 301 tariffs, a ~~decrease~~lower mix of 20 basis points from the nine months ended September 30, 2018 driven by higher tariff costs. While we took early actions to mitigate the higher tariff costs, it was not enough to overcome the margin erosion in the first quarterinstallation sales, and a larger mix of ~~2019.~~higher-margin manufactured products.

We believe that each of the following items set forth in the table below 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 exclude the impact of these items.


	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2020				2019				2020				2019
	$		% of Sales		$		% of Sales		$		% of Sales		$		% of Sales

	(dollars in thousands)								(dollars in thousands)
Gross Profit, as reported (GAAP)	$	116,526	39.4	%	$	95,674	36.2	%	$	309,789	39.0	%	$	291,772	35.6	%

Antidumping Adjustments ¹		—	—	%		780	0.3	%		—	—	%		780	0.1	%
HTS Classification Adjustments ²		—	—	%		—	—	%		—	—	%		(779)	(0.1)	%
Store Closure Costs ³		761	0.3	%		—	—	%		761	0.1	%		—	—	%
Sub-Total Items above		761	0.3	%		780	0.3	%		761	0.1	%		1	0.0	%

Adjusted Gross Profit (non-GAAP measures)	$	117,287	39.7	%	$	96,454	36.5	%	$	310,550	39.1	%	$	291,773	35.6	%

Three Months Ended

Nine Months Ended

September 30,

September 30,

2019
2018

2019
2018

(dollars in thousands)

Gross Profit, as reported (GAAP)

$
95,674

$
100,682

$
291,772

$
296,964

Antidumping Adjustments 1

780

(2,822)

780

(4,948)

HTS Classification Adjustments 2

—

—

(779)

—

Sub-Total Items above

780

(2,822)

1

(4,948)

Adjusted Gross Profit (non-GAAP measure)

$
96,454

$
97,860

$
291,773

$
292,016

Represents countervailing and antidumping expense ~~(income)~~ associated with applicable prior-year shipments of engineered hardwood from China.

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

3	Represents the inventory write-offs related to the Canadian and US store closures described above during the three and nine months ended September 30, 2020 described more fully in Note 8 to the condensed consolidated financial statements.

Selling, General and Administrative ~~Expense~~sExpenses

SG&A ~~expenses~~expense decreased ~~0.5%~~0.1% to $93 million, or 31.6% of sales, down 380 basis points in the third quarter of ~~2019 to $93 million~~2020 from ~~$94 million in~~ the comparable period in ~~2018, but~~2019. SG&A in both quarters included certain costs ~~in both years~~ related to investigations and ~~lawsuits. A $1.8~~lawsuits, including $2 million ~~impairment of certain assets~~ related to ~~our decision to exit~~ the ~~finishing business is reflected~~Gold matter in the third quarter of ~~2018.~~2020. Additionally, the third quarter included $2.6 million of costs related to Canadian and US store closures in 2020. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) ~~increased $3.9~~decreased 4.9% to $89 million, ~~primarily as a result~~or 29.9% of ~~costs related to ten new stores~~sales, down 530 basis points compared to the ~~third quarter a year ago, higher year-over-year incentive and equity accruals~~same period in the prior year. The reduction in Adjusted SG&A was primarily driven by ~~a reduction in last year’s third quarter to align with lower performance expectations, severance,~~the optimization of marketing efforts, as the Company pivoted towards more efficient channels like digital, and ~~costs~~$2.5 million from the final settlement of the business interruption insurance claim related to the ~~corporate headquarters relocation occurring~~August 2019 network security incident, partially offset by an increase in ~~this year’s fourth quarter.~~ credit card fees due to the year-over-year increase in revenue.

~~Table of Contents~~

SG&A ~~expenses increased 0.6%~~expense decreased 7.7% to $272 million in the first nine months ~~ended September 30, 2019 to $294 million~~of 2020 from the comparable period in ~~2018. Again both periods~~2019 but included certain costs in both periods related to investigations and ~~lawsuits. A $1.8 million impairment of certain assets~~lawsuits, and costs related to ~~the Company’s decision to exit the finishing business is reflected~~Canadian and US store closures in ~~the third quarter of 2018 as shown in the table that follows.~~2020. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) ~~increased by $7.9~~decreased $21 million, or 7.2%, in the nine months ended September 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.~~COVID crisis and pivoted towards more efficient channels like digital, and $2.5 million from the final settlement of the business interruption insurance claim related to the August 2019 network security incident. In addition, equity

Table of Contents

compensation, supplies and T&E expenses were lower than the equivalent period in the prior year. The ~~increase in~~Company’s focus on expense ~~was due to payroll~~management, liquidity preservation measures and ~~occupancy of new stores partially offset by a~~process efficiency helped deliver the year-over-year reduction in ~~costs allocated to production (as we ceased finishing our own floors in January).~~Adjusted SG&A.

We believe that 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 September 30,								Nine Months Ended September 30,
	2020				2019				2020				2019
	$		% of Sales		$		% of Sales		$		% of Sales		$		% of Sales

	(dollars in thousands)								(dollars in thousands)
SG&A, as reported (GAAP)	$	93,374	31.6	%	$	93,495	35.4	%	$	271,869	34.3	%	$	294,392	36.0	%

Accrual for Legal Matters and Settlements ⁴		2,000	0.7	%		—	—	%		1,500	0.2	%		4,575	0.6	%
Legal and Professional Fees⁵		999	0.3	%		408	0.2	%		2,787	0.4	%		3,403	0.4	%
Store Closure Costs⁶		1,803	0.6	%		—	—	%		1,803	0.2	%		—	—	%
Sub-Total Items above		4,802	1.6	%		408	0.2	%		6,090	0.8	%		7,978	1.0	%

Adjusted SG&A (a non-GAAP measure)	$	88,572	29.9	%	$	93,087	35.2	%	$	265,779	33.5	%	$	286,414	35.0	%

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

2019

2018

(dollars in thousands)

(dollars in thousands)

SG&A, as reported (GAAP)
$
93,495

$
93,987

$
294,392

$
292,628

Accrual for Legal Matters and Settlements 3

—

—

4,575

2,951

Legal and Professional Fees 4

408

2,991

3,403

9,382

All Other 5

—

1,769

—

1,769

Sub-Total Items above

408

4,760

7,978

14,102

Adjusted SG&A (a non-GAAP measure)
$
93,087

$
89,227

$
286,414

$
278,526

This amount represents expense of $2 million related to the ~~charge~~Gold matter in the third quarter of 2020 and a $0.5 million insurance recovery in the second quarter of 2020 of legal fees related to ~~earnings~~certain significant legal action. 2019 reflects a $4.75 million expense for the Kramer ~~matter~~employment case and certain Related Laminate ~~Matters, which is~~Matters. These matters are described more fully in Note 87 to the condensed consolidated financial statements.

⁴

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

incurred by the Company.

⁵

~~All Other in 2018 represents an impairment of certain~~Represents store lease impairments, write down on fixed assets and employee termination benefits related to ~~our decision~~the Canadian and US store closures described more fully in Note 8 to ~~exit~~ the ~~finishing business.~~

condensed consolidated financial statements.

Operating Income (Loss) and Operating Margin

Operating income was $23 million for the ~~three months ended September 30, 2019 was~~third quarter of 2020 compared to $2.2 million for the third quarter of 2019. Adjusted Operating Income (a non-GAAP measure) was $29 million for the third quarter of 2020, a year-over-year increase of more than $25 million compared to Adjusted Operating Income of $3.4 million for the third quarter of 2019. The year-over-year increase was primarily driven strong sales growth, enhanced gross margin, and strong expense management.

Operating income was $38 million for the first nine months of 2020 compared to an operating loss of $2.6 million for the ~~nine months ended September 30, 2019 compared to operating income of $6.7 million and $4.3 million~~equivalent period 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 ~~$3.4~~$45 million for ~~the three~~nine months ended September 30, ~~2019,~~2020, a year-over-year increase of more than $39 million compared to Adjusted Operating Income of ~~$8.6 million for the three months ended September 30, 2018~~. We believe the decrease from the prior period was driven by higher adjusted SG&A in this year’s third quarter in addition to the impact of the network security incident in August 2019 and soft sales in July 2019. Adjusted Operating Income was $5.4 million for the nine months ended September 30, 2019 ~~compared to~~ ~~Adjusted Operating Income of $13.5 million~~ for the ~~nine months ended September 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, costs related to new stores, soft sales early in the third quarter and the network security incident in August 2019. same reasons as described above.

2528

Table of Contents


	Three Months Ended September 30,								Nine Months Ended September 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)	$	23,152	7.8	%	$	2,179	0.8	%	$	37,920	4.8	%	$	(2,620)	(0.3)	%

Gross Margin Items:
Antidumping Adjustments ¹		—	—	%		780	0.3	%		—	—	%		780	0.1	%
HTS Classification Adjustments ²		—	—	%		—	—	%		—	—	%		(779)	(0.1)	%
Store Closure Costs ³		761	0.3	%		—	—	%		761	0.1	%		—	—	%
Gross Margin Subtotal		761	0.3	%		780	0.3	%		761	0.1	%		1	0.0	%

SG&A Items:
Accrual for Legal Matters and Settlements⁴		2,000	0.7	%		—	—	%		1,500	0.2	%		4,575	0.6	%
Legal and Professional Fees⁵		999	0.3	%		408	0.2	%		2,787	0.4	%		3,403	0.4	%
Store Closure Costs⁶		1,803	0.6	%		—	—	%		1,803	0.2	%		—	—	%
SG&A Subtotal		4,802	1.6	%		408	0.2	%		6,090	0.8	%		7,978	1.3	%

Adjusted Operating Income (a non-GAAP measure)	$	28,715	9.7	%	$	3,367	1.3	%	$	44,771	5.6	%	$	5,359	1.0	%

Three Months Ended September 30,

Nine Months Ended September 30,


2019

2018

2019

2018


(dollars in thousands)

(dollars in thousands)

Operating Income (Loss), as reported (GAAP)
$
2,179

$
6,695

$
(2,620)

$
4,336

Gross Margin Items:









Antidumping Adjustments 1

780

(2,822)

780

(4,948)

HTS Classification Adjustments 2

—

—

(779)

—

Gross Margin Subtotal

780

(2,822)

1

(4,948)

SG&A Items:









Accrual for Legal Matters and Settlements 3

—

—

4,575

2,951

Legal and Professional Fees 4

408

2,991

3,403

9,382

All Other 5

—

1,769

—

1,769

SG&A Subtotal

408

4,760

7,978

14,102

Adjusted Operating Income (a non-GAAP measure)
$
3,367

$
8,633

$
5,359

$
13,490

~~1,2,3,4,5~~^1,2,3,4,5,6 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 $0.7 million and $0.9 million for the three months ended September 30, 2020 and 2019, respectively. The Company had other expense of $2.7 million and $3.3 million in the ~~three and~~ nine months ended September 30, ~~2019, respectively,~~2020 and ~~other expense of $0.5 million and $1.2 million in the three and nine months ended September 30, 2018,~~2019, respectively. The expense in both years primarily reflected interest on borrowings on our ~~Revolving Loan.~~ Credit Agreement.

Provision for Income Taxes

~~We have~~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.

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 $5 million in the first nine 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 September 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.

Table of Contents

For the three months ended September 30, 2020, the Company recognized income tax expense of $7 million, which represented an effective tax rate of 31.0%. For the three months ended September 30, 2019, the Company recognized income tax expense of $0.2 million, which represented an effective tax rate of 17.7%. The variability of our tax rate in 2020 reflects the timing of deductions on our quarterly earnings.

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 17.7~~% and (14.4)%, respectively, for the three and nine months ended September 30, 2019. For the three and nine months ended September 30, 2018, the resulting effective tax rate was 3.6% and 20.0%, respectively.

We$28 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.~~this allowance. As the Company continues to deliver improved operating results, it is reasonably possible that all or some portion of the valuation allowance could be reduced in future periods. 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~~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 in future periods.

Diluted Earnings per Share

Net income for the ~~three months ended September 30, 2019 was~~third quarter of 2020 increased $14.5 million to $15.5 million compared to $1 million ~~or $0.04~~for the third quarter of 2019, while Adjusted Earnings (a non-GAAP measure) for the third quarter of 2020 was $20 million, a year-over-year increase of $18 million compared to Adjusted Earnings of $1.9 million for the third quarter of 2019. Earnings per diluted share ~~compared to net income of~~ ~~$5.9 million, or $0.21~~was $0.53 for the third quarter 2020 versus $0.04 in the year ago quarter. On an adjusted basis, third quarter earnings per diluted share increased $0.60 to $0.67 compared to an Adjusted Earnings per Diluted Share of $0.07 for the ~~three months ended September 30, 2018.~~ third quarter of 2019.

Net ~~loss~~income for the first nine months of ~~2019~~2020 was ~~$6.7~~$30 million, ~~resulting in a loss of $0.23~~or $1.04 per diluted share, compared to a net ~~income~~loss of ~~$2.5~~$6.7 million, or ~~$0.09~~$0.23 per diluted share, for the first nine months of ~~2018.~~2019. Adjusted Earnings and Adjusted Earnings per Diluted Share for the first nine months of 2020 were $35 million and $1.21 per diluted share, compared to an Adjusted Loss of $846 thousand and $0.03 per diluted share, for the first nine months of 2019.

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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 September 30,				Nine Months Ended September 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)	$	15,503	$	1,045	$	30,377	$	(6,735)
Net Income (Loss) per Diluted Share (GAAP)	$	0.53	$	0.04	$	1.04	$	(0.23)

Gross Margin Items:
Antidumping Adjustments ¹		—		576		—		576
HTS Classification Adjustments ²		—		—		—		(575)
Store Closure Costs ³		561		—		561		—
Gross Margin Subtotal		561		576		561		1

SG&A Items:
Accrual for Legal Matters and Settlements ⁴		1,476		—		1,107		3,376
Legal and Professional Fees⁵		737		301		2,057		2,511
Store Closure Costs⁶		1,331		—		1,331		—
SG&A Subtotal		3,544		301		4,495		5,888

Adjusted Earnings (Loss)	$	19,608	$	1,922	$	35,433	$	(846)
Adjusted Earnings (Loss) per Diluted Share (a non-GAAP measure)	$	0.67	$	0.07	$	1.21	$	(0.03)

^1,2,3,4,5,6See 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%.

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,

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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

At the beginning of the COVID-19 crisis our near-term focus was on liquidity due to the major disruption to the normal course of our business. Actions taken in the second quarter included:

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

Renegotiating our Credit Agreement (See Note 5)

Altering our store model, hours, and staffing

Replacing our largest annual sale event with alternative promotions

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

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)

Although COVID-19 and many of the newly adopted safety protocols remain, all stores were again operational for the third-quarter.

Inventory buying increased to reflect higher demand for home improvement projects

Temporary expansion of Credit Agreement availability expired without Company needing to access this source of capital

Store model, hours and staffing returning to pre-COVID norms with occasional disruptions due to local conditions

Advertising spending was higher than the second quarter but has not returned to prior-year levels, as we pivoted towards more efficient channels like digital

Resuming more typical terms and arrangements with landlords, vendors and other service providers although many of the longer payment terms are still operative as negotiated during the second quarter

Certain capital spending has resumed including plans to open two to three new stores in the fourth quarter

Our ~~principal~~focus on liquidity remains. There is a great deal of uncertainty related to COVID, including its pervasiveness, its spread as additional activity resumes, how jurisdictions react to flare ups, and ~~capital requirements are for capital expenditures~~what actions may come at both the national, state, and local levels. In the third quarter we continued to ~~maintain~~manage the uncertainty by retaining cash we have generated. Our balance sheet reflects a high cash balance and ~~grow~~the same $101 million of borrowings that we had on April 17, 2020, as we entered into the temporary expansion of our ~~business, for legal settlements, for working capital, and for general corporate purposes.~~ Credit Agreement.

Our principal sources of liquidity at September 30, ~~2019~~2020 were cash from our ongoing operations, ~~$5.6~~$199 million of cash and cash equivalents on our balance sheet and ~~$108~~$31 million of availability under our Revolving Loan. As of September 30, ~~2019,~~2020, the outstanding balance on the FILO Term Loan was $25 ~~million.~~million and it carried an interest rate of 5.125%. As of September 30, ~~2019,~~2020, the outstanding balance on the Revolving Loan was ~~$64.5 million~~$76 million and it carried an average interest rate of ~~3.7%~~3.75%.

The ~~DOJ~~$73 million increase in our cash and ~~SEC settlements, discussed in Note 8 of this Form 10-Q, totaled $33 million and were paid in~~cash equivalents balance during the ~~second~~third quarter of ~~2019 along~~2020 was primarily the result of an increase in accounts payable ($22 million), sell through of inventory ($11 million), collections of tariff receivables ($11 million), growth in customer deposits ($8 million), offset in part by federal and state income tax payments ($5 million) and capital expenditures ($3 million).

Through the nine months ended September 30, 2020, we had $9 million in capital expenditures including opening 5 new stores. As part of our response to COVID-19, we implemented a range of measures to increase financial flexibility as noted above and including slowing capital spending. Our resumed capital spending is targeted with ~~other, smaller settlements. Additionally, we anticipate funding $1 million~~an emphasis on the digital experience of ~~the cash portion of the expected settlement of~~our customers, IT and includes opening two to three stores in Q4.

Final court approval was granted for the Gold ~~Litigation upon the court’s preliminary approval;~~matter in October 2020. As a result we expect to fund the remaining $13 million in cash in the fourth quarter of 2020.

Our focus on liquidity over the past several months has allowed us to build a strong liquidity position to navigate the current COVID-19 environment, and our business is generating solid cash ~~portion is expected to be paid subsequent to the court’s final approval~~

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

We currently expect capital expenditures for 2019 to total between $15 million and $17 million, but we will continue to assess and adjust our level of capital expenditures based on changing circumstances. Included in our capital requirement for 2019, is the funding to open 11 stores, remodel and/or relocate some existing stores, IT investments and meeting 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.~~flow. 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.~~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.

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Merchandise Inventories

Merchandise inventories at September 30, ~~2019~~2020 decreased ~~$11~~$49 million from December 31, ~~2018,~~2019 primarily due to a reduction in inventory buying as ~~we have sold through merchandise that was purchased in advance~~a direct result of the ~~25% tariff on purchases~~outbreak of ~~Chinese goods.~~COVID-19 and better than anticipated net sales growth, particularly in the third quarter of 2020. 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
September 30, 2019

As of
December 31, 2018

As of
September 30, 2018

(in thousands)
Inventory – Available for Sale

$
278,144

$
275,036

$
267,855
Inventory – Inbound In-Transit

28,737

43,236

36,810
Total Merchandise Inventories

$
306,881

$
318,272

$
304,665

Available Inventory Per Store

$
664

$
666

$
655



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

	(in thousands)
Inventory – Available for Sale	$	199,609	$	254,812	$	278,144
Inventory – Inbound In-Transit		37,831		31,557		28,737
Total Merchandise Inventories	$	237,440	$	286,369	$	306,881

Available Inventory Per Store	$	472	$	608	$	664

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Available inventory per store at September 30, ~~2019~~2020 was ~~slightly~~substantially lower than at December 31, ~~2018~~2019 and ~~higher~~significantly lower than at September 30, ~~2018.~~2019. The ~~increase~~decrease in available inventory compared to September 30, ~~2018~~2019 was ~~primarily~~ due in large part to a reduction in inventory buying as a direct result of COVID-19, combined with higher than anticipated sales growth. Inventory was also affected by a lower average cost of inventory ~~from tariffs as well as expanding our engineered assortment with new looks to meet customer demand.~~driven by tariff exclusions granted in the fourth quarter of 2019, improved country-of-origin sourcing, and cost-out negotiations across all categories. Including the reinstatement of the Section 301 tariffs, and currently expected effects of ~~tariffs,~~COVID-19, we ~~expect~~anticipate average inventory to be in the range of ~~$310~~$270 million to ~~$320~~$290 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. As sales rebounded toward the end of the second quarter, we increased our inventory buying resulting in an increase in inbound in-transit as of September 30, 2020.

Cash Flows

Operating Activities. Net cash provided by operating activities was $181 million for the nine months ended September 30, 2020 and was primarily due to the reduction in inventory discussed above, an increase in accounts payable of $31 million, net income of $30 million, an increase in customer deposits of $22 million, and the collection of tariff receivable of $20 million. Net cash used byin operating activities was $17 million for the nine months ended September 30, 2019 and ~~$26 million for the nine months ended September 30, 2018. In 2019,~~was primarily due to a payment of ~~$33~~$34 million to settle the government investigations, ~~was the primary use of cash. It was~~partially offset in part by a reduction in inventory 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 nine months of 2018 was negative primarily due to a $45 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 ~~$13~~$8.9 million and ~~$10~~$13 million ~~respectively,~~ for the nine months ended September 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~Net cash used in investing activities~~Capital expenditure in both ~~nine month~~nine-month periods were primarily related to new store openings and our information technology ~~initiatives; the current year~~initiatives. The 2019 period also had investments related to ~~the~~our new Corporate ~~headquarters.~~Headquarters.

Financing Activities. Net cash provided by financing activities was ~~$23~~$18 million and ~~$27~~$23 million for the nine months ended September 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~The increase~~Net cash provided by financing activities in both nine-month periods was primarily due to net borrowings on our ~~revolving credit facility during the nine months ended September 30, 2019 and 2018, respectively, to settle the government investigations (2019) and legal settlements and to build inventory (2018).~~Credit Agreement.

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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.

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 September 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.

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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 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 September 30, ~~2019.~~2020. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company's disclosure controls and procedures were ~~not~~ effective as of September 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 of directors.

Management believes that these efforts will effectively remediate the material weakness. We have implemented the activities noted above with controls in place as of the third quarter of 2019. However, the material weakness in our internal control over financial reporting will not be considered remediated until the new controls are in operation for 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 September 30, 2019.~~

During the fourth quarter of 2019, management expects to complete testing 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 September 30, 2019 and for the periods presented in accordance with U.S. GAAP.

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Changes in Internal Control over Financial Reporting. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the changes in our internal control over financial reporting during the period ended September 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.

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

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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.

On September 30, 2019, the parties finalized a settlement agreement that is consistent with the terms of the Memorandum of Understanding previously disclosed by the Company, which would resolve the Gold Litigation on a nationwide basis. Under the terms of the 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 settlement agreement is subject to certain contingencies, including court approvals.~~ The settlement agreement makes clear that the settlement 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. ~~There can be no assurance~~On December 18, 2019, the court issued an order that, aamong other things, granted preliminary approval of the settlement ~~will be finalized~~agreement. Following the preliminary approval, and ~~approved~~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 final approval was granted by the court or as to the ultimate outcome of the litigation. If the settlement agreement is not approved by the court, 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.~~October 22, 2020. 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.~~Litigation.

The Company 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. During the ~~offset~~third quarter of 2020, the Company recognized an additional charge to earnings for in-store vouchers of $2 million within selling, general and administrative expense as the Company now believes the claim threshold in the settlement agreement will be met. As of September 30, 2020, the remaining accrual related to these matters was $29 million, which has been included in the caption “Accrual for Legal Matters and Settlements Current” on its condensed consolidated balance sheet related to this settlement as of December 31, 2018. If the settlement agreement is not approved by the 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.

sheet.

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

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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

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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 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 ~~briefing~~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 court’s approval order. On remand, the Virginia Court reconsidered how attorney’s fees for the class lawyers should be calculated for the settlement that includes cash and vouchers, issued a decision, and that decision was subsequently appealed. The legal exposure to the company is ~~now complete.~~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.

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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 nine months ended September 30, ~~2019 and 2018, respectively, within selling, general and administrative expenses for these Related Laminate Matters.~~2020. As of September 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~~. sheet. For the nine months ended September 30, 2019, the Company recognized charges to

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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.

Employment Cases

Mason Lawsuit

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 to the magistrate judge’s class certification decision with the district judge. The district judge denied the Company’s objections in August 2019. The~~ litigation is ~~currently~~ in the discovery stage, which ~~closes in~~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 ~~2020.~~31, 2021.

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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

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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

~~In November 2017, Robert J. Kramer,~~On 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.

~~On September 9, 2019,~~The Company is evaluating the ~~Company entered into an agreement~~Visnack Putative Class Employees' claims and intends to ~~settle~~defend itself vigorously in this matter. Given the ~~Kramer matter, consistent with~~uncertainty of litigation, the ~~terms~~preliminary stage of the ~~Memorandum of Understanding previously disclosed by~~case and the ~~Company. Under the terms of the settlement agreement, 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 and September 19, 2019~~. The settlement agreement was preliminarily approved by the court on September 19, 2019 and a hearing for a final approval has been set for January 17, 2020. 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 or as to the ultimate outcome of the litigation. If the settlement agreement is not approved by the court, 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 ~~settlement agreement is not approved by~~Company cannot estimate the ~~court, the Kramer matter~~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 ~~results of operations. The Company recognized a net charge to earnings of approximately $4.75 million within selling general and administrative expense in its second quarter 2019 financial statements.~~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.

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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

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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 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 of~~CAFC on January 10, 2020 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.

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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. ~~The Company’s best estimate~~Following a decision in a related appeal excluding one of the ~~probable~~

~~Table~~Chinese suppliers from the AD Order, the CAFC remanded the case to the CIT to oversee the DOC’s recalculation of ~~Contents~~

~~additional amounts owed associated with AD and CVD is approximately $5.5 million~~the rate. . In September 2020, the CIT received a recommendation from the DOC to reduce the rate for ~~shipments during~~ the ~~applicable time periods. During~~third annual review period to 0.0% from 17.37%. If accepted by the ~~quarter ended June 30, 2016,~~CIT, the Company will reverse the entire $4.7 million liability currently recorded, ~~this amount in other long-term liabilities in its balance sheet and as~~with a ~~charge to earnings in~~corresponding reduction of cost of sales, ~~on its statement~~as well as an additional $2.1 million receivable and favorable adjustment to cost of ~~operations.~~sales for deposits made at previous preliminary rates during the quarter when it is accepted.

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 $2.6 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 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 recorded a net liability of $0.8 million during the third quarter of 2019 with a corresponding reduction in cost of sales. The Company ~~has~~received payments for the vendor with a final rate of 0.00% and the remaining balance of $0.5 million as of September 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 September 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 September 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 by spring of 2021.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. In September 2019, the DOC extended the deadline for the preliminary AD rates to January 31, 2020. The preliminary CVD rates are expected to be issued on December 13, 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 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 November 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. The preliminary results in this review are expected in December 2020.

Outstanding AD and CVD duties are subject to interest based on the IRS quarterly published rate. The Company has recorded a net ~~$0.2~~$0.4 million of interest ~~income~~expense through the line item Other Expense on the Statement of Operations during the nine months ended September 30, ~~2019.~~2020.

Section 301 Tariffs

Since September 2018, pursuant to Section 301 of the Trade Act of 1974, the United States Trade Representative (“USTR”) has imposed tariffs on certain goods imported from China over four tranches or Lists. Products

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imported by the Company fall within Lists 3 and 4 for which tariffs range from 10% to 25%. On September 10, 2020 several importers of vinyl flooring filed a lawsuit with the CIT challenging the Section 301 tariffs under Lists 3 and 4. The Company has also filed a companion case at the CIT challenging Section 301 tariffs it has paid. The action is in its early stages and the Company is unable to predict the timing or outcome of the ruling by the CIT. If these appeals are successful, the Company should qualify for refunds on these Section 301 tariffs.

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 our annual report on Form 10-K are not~~In light of the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect or business, financial condition and/or results of ~~operations. We do not believe there have been any material changes to those~~ongoing COVID-19 pandemic the Company is supplementing the risk factors previously disclosed in ~~our~~its annual report on Form 10-K for the year ended December 31, ~~2018. We have updated~~2019, with the following risk ~~factor previously reported in our annual report on Form 10-K for the year ended December 31, 2018 below~~factor:

The ongoing COVID-19 pandemic has disrupted, and may continue to ~~reflect the occurrence of the network incident.~~

~~If our management information systems, including our website or our call center, experience disruptions, it could~~ disrupt, our business, which could adversely affect our financial performance

The effects of the ongoing COVID-19 pandemic have included and ~~reduce~~could continue to include disruptions in our ~~net sales.~~

~~We depend~~supply chain, disruptions or restrictions on ~~our management information systems to integrate~~ the ~~activities~~ability of many of our ~~stores, website and call center,~~employees to ~~process orders,~~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 ~~respond to customer inquiries, to manage inventory, to purchase merchandise and to sell and~~

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~~ship goods on~~meet our supply needs in a timely basis. We may experience operational problems with our information systems as a result of system failures, viruses, computer “hackers” or other causes. We may incur significant expenses in order to repair any such operational problems. Any significant disruption or slowdown of our systemsmanner could cause ~~information, including data related~~delays in delivery to ~~customer orders, to be lost or delayed,~~our customers, which could result in ~~delays~~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, 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 ~~delivery~~economies and financial markets of ~~products~~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 ~~stores~~vendors and ~~customers~~other business partners to reduce or ~~lost sales. For example, as we previously disclosed in August 2019, we experienced a malicious network security incident that prevented access~~defer our contractual obligations and obtain other concessions. The extent to ~~several~~which the ongoing COVID-19 pandemic could impact our business, results of ~~our information technology systems~~operations, financial condition and ~~data within our networks. Based~~liquidity is highly uncertain and will depend on future developments, including the ~~nature~~potential geographic spread and duration of the ~~network security incident,~~ongoing COVID-19 pandemic, the ~~impact on our information technology systems~~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.

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 the forensic IT analysis, we do not believe confidential customer, employee or company data was lost or disclosed, but we continue to monitor the situation. Incident costs are expected to go higher as further analysisoperations.

Table of the causes and the remediation continues. Moreover, our entire corporate network, including our telephone lines, is on an Internet-based network, which is vulnerable to certain risks and uncertainties, including changes in the required technology interfaces, website downtime and other technical failures, security breaches and customer privacy concerns. Accordingly, if our network is disrupted or if we cannot successfully maintain our website and call center in good working order, we may experience delayed communications within our operations and between our customers and ourselves, and may not be able to communicate at all via our network, including via telephones connected to our network. Contents

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

The following table presents our share repurchase activity for the quarter ended September 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
July 1, ~~2019~~2020 to July 31, ~~2019~~2020	—	—	—	—
August 1, ~~2019~~2020 to August 31, ~~2019~~2020	—	—	—	—
September 1, ~~2019~~2020 to September 30, ~~2019~~2020	—	—	—	—
Total	—	—	—	—

We repurchased ~~3,677~~3,629 shares of our common stock, at an average price of ~~$8.23,~~$21.52, in connection with the net settlement of shares issued as a result of the vesting of restricted shares during the quarter ended September 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 September 30, ~~2019,~~2020, we had approximately $14.7 million remaining under this authorization.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

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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~~		~~Class Action Settlement in the Kramer Litigation dated September 9, 2019 by and between the Plaintiffs in the Kramer Litigation and Lumber Liquidators, Inc.~~

~~10.2~~		~~Agreement of Compromise and Settlement in the Gold Litigation dated September 30, 2019 by and between the Plaintiffs in the Gold Litigation and Lumber Liquidators, Inc.~~

~~10.3~~		Offer Letter Agreement with Nancy A. Walsh, dated August 9, 2019 (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed August 19, 2019 (File No. 001-33767), and incorporated by reference)

~~10.4~~		Severance Agreement, effective as of September 9, 2019, between the Company and Nancy A. Walsh (filed as Exhibit 10.2 to the Company’s current report on Form 8-K, filed August 19, 2019 (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 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 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 September 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

104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

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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: ~~November 5, 2019~~October 30, 2020	By:	/s/ Nancy A. Walsh
		Nancy A. Walsh
		Chief Financial Officer ~~and Senior Vice President~~ (Principal Financial Officer)

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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


	September 30,		December 31,
	2019		2018
Assets
Current Assets:
Cash and Cash Equivalents	$	5,605	$	11,565
Merchandise Inventories		306,881		318,272
Prepaid Expenses		9,170		6,299
Deposit for Legal Settlement		21,500		21,500
Other Current Assets		9,360		8,667
Total Current Assets		352,516		366,303
Property and Equipment, net		94,052		93,689
Operating Lease Right-of-Use		111,364		—
Goodwill		9,693		9,693
Other Assets		5,724		5,832
Total Assets	$	573,349	$	475,517

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts Payable	$	59,200	$	73,412
Customer Deposits and Store Credits		45,036		40,332
Accrued Compensation		10,870		9,265
Sales and Income Tax Liabilities		4,906		4,200
Accrual for Legal Matters and Settlements Current		68,475		97,625
Operating Lease Liabilities - Current		30,708		—
Other Current Liabilities		18,476		17,290
Total Current Liabilities		237,671		242,124
Other Long-Term Liabilities		13,645		20,203
Operating Lease Liabilities - Long-Term		88,103		—
Deferred Tax Liability		898		792
Credit Agreement		89,500		65,000
Total Liabilities		429,817		328,119

Stockholders’ Equity:
Common Stock ($0.001 par value; 35,000 shares authorized; 29,953 and 31,578 shares issued and 28,710 and 28,627 shares outstanding, respectively)		30		32
Treasury Stock, at cost (1,243 and 2,951 shares, respectively)		(142,299)		(141,828)
Additional Capital		217,365		213,744
Retained Earnings		70,100		76,835
Accumulated Other Comprehensive Loss		(1,664)		(1,385)
Total Stockholders’ Equity		143,532		147,398
Total Liabilities and Stockholders’ Equity	$	573,349	$	475,517


	September 30,		December 31,
	2020		2019
Assets
Current Assets:
Cash and Cash Equivalents	$	199,347	$	8,993
Merchandise Inventories		237,440		286,369
Prepaid Expenses		7,940		8,288
Deposit for Legal Settlement		21,500		21,500
Tariff Recovery Receivable		7,516		27,025
Other Current Assets		6,950		6,938
Total Current Assets		480,693		359,113
Property and Equipment, net		94,202		98,733
Operating Lease Right-of-Use		114,552		121,796
Goodwill		9,693		9,693
Other Assets		7,887		6,674
Total Assets	$	707,027	$	596,009

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts Payable	$	90,194	$	59,827
Customer Deposits and Store Credits		63,736		41,571
Accrued Compensation		14,272		11,742
Sales and Income Tax Liabilities		5,997		7,225
Accrual for Legal Matters and Settlements Current		64,751		67,471
Operating Lease Liabilities - Current		35,341		31,333
Other Current Liabilities		24,305		18,937
Total Current Liabilities		298,596		238,106
Other Long-Term Liabilities		17,426		13,757
Operating Lease Liabilities - Long-Term		95,046		100,470
Deferred Tax Liability		973		426
Credit Agreement		101,000		82,000
Total Liabilities		513,041		434,759

Stockholders’ Equity:
Common Stock ($0.001 par value; 35,000 shares authorized; 30,184 and 29,959 shares issued and 28,871 and 28,714 shares outstanding, respectively)		30		30
Treasury Stock, at cost (1,313 and 1,245 shares, respectively)		(142,827)		(142,314)
Additional Capital		220,969		218,616
Retained Earnings		116,875		86,498
Accumulated Other Comprehensive Loss		(1,061)		(1,580)
Total Stockholders’ Equity		193,986		161,250
Total Liabilities and Stockholders’ Equity	$	707,027	$	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	1920

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2834

Item 4.	Controls and Procedures	2934

	PART II – OTHER INFORMATION	3034

Item 1.	Legal Proceedings	3034

Item 1A.	Risk Factors	3541

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3642

Item 3.	Defaults Upon Senior Securities	3642

Item 4.	Mine Safety Disclosures	3642

Item 5.	Other Information	3742

Item 6.	Exhibits	3742

	Signatures	3944


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

July 1, 2018	28,551	$	31	2,935	$	(141,542)	$	210,953	$	127,788	$	(1,257)	$	195,973
Stock-Based Compensation Expense	—		—	—		—		1,117		—		—		1,117
Exercise of Stock Options	38		—	—		—		690		—		—		690
Release of Restricted Shares	31		1	—		—		—		—		—		1
Common Stock Repurchased	—		—	14		(266)		—		—		—		(266)
Translation Adjustment	—		—	—		—		—		—		69		69
Net Income	—		—	—		—		—		5,923		—		5,923
September 30, 2018	28,620	$	32	2,949	$	(141,808)	$	212,760	$	133,711	$	(1,188)	$	203,507

July 1, 2019	28,701	$	30	1,239	$	(142,269)	$	216,159	$	69,055	$	(1,577)	$	141,398
Stock-Based Compensation Expense	—		—	—		—		1,206		—		—		1,206
Release of Restricted Shares	9		—	—		—		—		—		—		—
Common Stock Repurchased and Transferred	—		—	4		(30)		—		—		—		(30)
Translation Adjustment	—		—	—		—		—		—		(87)		(87)
Net Income	—		—	—		—		—		1,045		—		1,045
September 30, 2019	28,710	$	30	1,243	$	(142,299)	$	217,365	$	70,100	$	(1,664)	$	143,532


	Nine Months Ended September 30,
	2019		2018

Cash Flows from Operating Activities:
Net (Loss) Income	$	(6,735)	$	2,497
Adjustments to Reconcile Net (Loss) Income:
Depreciation and Amortization		12,903		14,042
Stock-Based Compensation Expense		3,621		3,131
(Gain) Loss on Disposal of Fixed Assets		(284)		1,812
Changes in Operating Assets and Liabilities:
Merchandise Inventories		10,270		(44,450)
Accounts Payable		(14,186)		(3,196)
Customer Deposits and Store Credits		4,810		5,079
Prepaid Expenses and Other Current Assets		(3,665)		1,153
Accrual for Legal Matters and Settlements		4,575		2,951
Payments for Legal Matters and Settlements		(33,725)		(2,264)
Other Assets and Liabilities		5,341		(6,584)
Net Cash Used in Operating Activities		(17,075)		(25,829)

Cash Flows from Investing Activities:
Purchases of Property and Equipment		(13,523)		(10,651)
Other Investing Activities		419		553
Net Cash Used in Investing Activities		(13,104)		(10,098)

Cash Flows from Financing Activities:
Borrowings on Credit Agreement		85,500		37,000
Payments on Credit Agreement		(61,000)		(9,000)
Payments on Financed Insurance Obligations		-		(612)
Other Financing Activities		(1,104)		(163)
Net Cash Provided by Financing Activities		23,396		27,225
Effect of Exchange Rates on Cash and Cash Equivalents		823		595
Net Decrease in Cash and Cash Equivalents		(5,960)		(8,107)
Cash and Cash Equivalents, Beginning of Period		11,565		19,938
Cash and Cash Equivalents, End of Period	$	5,605	$	11,831


	Three Months Ended September 30,								Nine Months Ended September 30,
	2019				2018				2019				2018
Manufactured Products 1	$	108,825	41	%	$	98,580	36	%	$	337,479	41	%	$	289,431	35	%
Solid and Engineered Hardwood		76,358	29	%		89,700	33	%		241,713	30	%		283,987	35	%
Moldings and Accessories and Other		44,058	17	%		48,100	18	%		138,607	17	%		148,404	18	%
Installation and Delivery Services		34,719	13	%		34,089	13	%		100,949	12	%		93,893	12	%
Total	$	263,960	100	%	$	270,469	100	%	$	818,748	100	%	$	815,715	100	%


	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	Store Leases		Other Leases		Total		Store Leases		Other Leases		Total

Operating lease costs	$	8,250	$	1,005	$	9,255	$	24,438	$	3,009	$	27,447
Variable lease costs		2,120		259		2,379		6,262		729		6,991
Total	$	10,370	$	1,264	$	11,634	$	30,700	$	3,738	$	34,438


	Operating Leases
	Store Leases		Other Leases		Total
Remainder of 2019	$	8,524	$	1,078	$	9,602
2020		32,939		2,741		35,680
2021		26,813		2,264		29,077
2022		20,785		2,219		23,004
2023		14,824		2,255		17,079
Thereafter		20,006		2,075		22,081
Total future minimum lease payments		123,891		12,632		136,523
Less imputed interest		(16,013)		(1,699)		(17,712)
Total	$	107,878	$	10,933	$	118,811


							% Improvement
	% of Net Sales						(Decline) in
	Three Months Ended September 30,						Dollar Amounts
	2019			2018			2019 VS 2018
Net Sales
Net Merchandise Sales		86.8	%		87.4	%		(3.0)	%
Net Services Sales		13.2	%		12.6	%		1.8	%
Total Net Sales		100.0	%		100.0	%		(2.4)	%
Gross Profit		36.2	%		37.2	%		(5.0)	%
Selling, General, and Administrative Expenses		35.4	%		34.7	%		(0.5)	%
Operating Income		0.8	%		2.5	%		(67.5)	%
Other Expense		0.3	%		0.2	%		66.2	%
Income Before Income Taxes		0.5	%		2.3	%		(79.3)	%
Income Tax Expense		0.1	%		0.1	%		-	%
Net Income		0.4	%		2.2	%		(82.4)	%



	As of September 30, 2019		As of December 31, 2018		As of September 30, 2018
	(in thousands)
Inventory – Available for Sale	$	278,144	$	275,036	$	267,855
Inventory – Inbound In-Transit		28,737		43,236		36,810
Total Merchandise Inventories	$	306,881	$	318,272	$	304,665

Available Inventory Per Store	$	664	$	666	$	655