Lumber Liquidators Holdings, Inc. (Form: 10-Q, Received: 11/06/2019 06:07:53)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33767

Lumber Liquidators Holdings, Inc.

(Exact name of registrant as specified in its charter)


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

3000 John Deere Road Toano, Virginia	23168
(Address of Principal Executive Offices)	(Zip Code)

(757) 259-4280

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ◻ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act:


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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). ☐ Yes ☒ No

As of November 1, 2019, there are 28,709,830 shares of the registrant’s common stock, par value of $0.001 per share, outstanding.

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LUMBER LIQUIDATORS HOLDINGS, INC.

Quarterly Report on Form 10‑Q

For the quarter ended September 30, 2019

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		Page

	PART I – FINANCIAL INFORMATION	2

Item 1.	Condensed Consolidated Financial Statements	2

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	29

	PART II – OTHER INFORMATION	30

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Mine Safety Disclosures	36

Item 5.	Other Information	37

Item 6.	Exhibits	37

	Signatures	39

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PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

Lumber Liquidators Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)


	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

See accompanying notes to condensed consolidated financial statements

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Lumber Liquidators Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)


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

Net Sales
Net Merchandise Sales	$	229,241	$	236,380	$	717,799	$	721,822
Net Services Sales		34,719		34,089		100,949		93,893
Total Net Sales		263,960		270,469		818,748		815,715
Cost of Sales
Cost of Merchandise Sold		142,404		144,490		451,631		449,508
Cost of Services Sold		25,882		25,297		75,345		69,243
Total Cost of Sales		168,286		169,787		526,976		518,751
Gross Profit		95,674		100,682		291,772		296,964
Selling, General and Administrative Expenses		93,495		93,987		294,392		292,628
Operating Income (Loss)		2,179		6,695		(2,620)		4,336
Other Expense		909		547		3,265		1,214
Income (Loss) Before Income Taxes		1,270		6,148		(5,885)		3,122
Income Tax Expense		225		225		850		625
Net Income (Loss)	$	1,045	$	5,923	$	(6,735)	$	2,497
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
Weighted Average Common Shares Outstanding:
Basic		28,706		28,602		28,681		28,552
Diluted		28,786		28,757		28,681		28,769

See accompanying notes to condensed consolidated financial statements

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Lumber Liquidators Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited, in thousands)


	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
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments		(87)		69		(279)		(36)
Total Other Comprehensive Income (Loss)		(87)		69		(279)		(36)
Comprehensive Income (Loss)	$	958	$	5,992	$	(7,014)	$	2,461

See accompanying notes to condensed consolidated financial statements

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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

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

See accompanying notes to condensed consolidated financial statements

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Lumber Liquidators Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)


	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

See accompanying notes to condensed consolidated financial statements

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Lumber Liquidators Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Amounts in thousands, except per share amounts)

Note 1. Basis of Presentation

Lumber Liquidators Holdings, Inc. and its direct and indirect subsidiaries (collectively and, where applicable, individually, the “Company”) engage in business as a multi-channel specialty retailer of hard-surface flooring, and hard-surface flooring enhancements and accessories, operating as a single operating segment. The Company offers an extensive assortment of exotic and domestic hardwood species, engineered hardwood, laminate, resilient vinyl, waterproof vinyl plank and porcelain tile flooring direct to the consumer. The Company also features the renewable flooring products, bamboo and cork, and provides a wide selection of flooring enhancements and accessories, including moldings, noise-reducing underlayment, adhesives and flooring tools. The Company also provides in-home delivery and installation services to its customers. The Company sells primarily to homeowners or to contractors on behalf of homeowners through a network of store locations in metropolitan areas. As of September 30, 2019, the Company’s stores spanned 47 states in the United States (“U.S.”) and included eight stores in Canada. In addition to the store locations, the Company’s products may be ordered, and customer questions/concerns addressed, through both its call center in Toano, Virginia and its website, www.lumberliquidators.com. Until January 2019, the Company finished the majority of its Bellawood products on its finishing lines in Toano, Virginia, which along with the call center, corporate offices, and a distribution center, represent the “Corporate Headquarters.” In July of 2018, the Company announced its plan to sell its finishing line equipment to an unaffiliated third-party purchaser and to relocate its corporate headquarters to Richmond, Virginia, in 2019. The Company ceased finishing floors in January 2019.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10‑Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal and recurring adjustments except those otherwise described herein) considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. However, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s annual report filed on Form 10‑K for the year ended December 31, 2018.

The condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

Results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of future results to be expected for the full year due to a number of factors, including seasonality.

Note 2. Summary of Significant Accounting Policies

Fair Value of Financial Instruments

The carrying amounts of financial instruments such as cash and cash equivalents, accounts payable and other liabilities approximate fair value because of the short-term nature of these items. The carrying amount of obligations under the Credit Agreement approximates fair value due to the variable rate of interest.

Merchandise Inventories

The Company values merchandise inventories at the lower of merchandise cost or net realizable value. The Company determines merchandise cost using the weighted average method. All of the hardwood flooring the Company purchases from suppliers is either prefinished or unfinished and in immediate saleable form. Inventory cost includes the costs of bringing an article to its existing condition and location, such as shipping and handling and import tariffs. The Company periodically reviews the carrying value of items in inventory and records a lower of cost or net realizable value

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adjustment when there is evidence that the utility of inventory will be less than its cost. In determining net realizable value, the Company makes judgments and estimates as to the market value of its products, based on factors such as historical results and current sales trends. Although the Company believes its products are appropriately valued as of the balance sheet date, there can be no assurance that future events or changes in key assumptions would not significantly impact their value.

Recognition of Net Sales

The Company generates revenues primarily by retailing merchandise flooring and accessories in the form of solid and engineered hardwood, bamboo, cork, laminate, resilient vinyl, waterproof vinyl plank and porcelain tile flooring. Additionally, the Company expands its revenues by offering services to deliver and/or install this merchandise for its customers; it considers these services to be separate performance obligations. The separate performance obligations are detailed on the customer’s invoice(s) and the customer often purchases flooring merchandise without purchasing installation or delivery services. Sales occur through a network of 419 stores, which spanned 47 states including eight stores in Canada, at September 30, 2019. In addition, both the merchandise and services can be ordered through a call center and from the Company’s website, www.lumberliquidators.com. The Company’s agreements with its customers are of short duration (less than a year) and as such the Company has elected not to disclose revenue for partially satisfied contracts that will be completed in the days following the end of a period as permitted by GAAP. The Company reports its revenues exclusive of sales taxes collected from customers and remitted to governmental taxing authorities, consistent with past practice.

Revenue is based on consideration specified in a contract with a customer, and excludes any sales incentives from vendors and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer or performing service for a customer. Revenues from installation and delivery services are recognized when the delivery is made or the installation is complete, which approximates the recognition of revenue over time due to the short duration of service provided. The price of the Company’s merchandise and services are specified in the respective contracts and detailed on the invoice reviewed with 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 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
Customer Deposits and Store Credits, Beginning Balance	$	(42,888)	$	(45,347)	$	(40,332)	$	(38,546)
New Deposits		(281,747)		(285,047)		(876,010)		(873,450)
Recognition of Revenue		263,960		270,469		818,748		815,715
Sales Tax included in Customer Deposits		15,982		16,622		50,246		50,715
Other		(343)		(210)		2,312		2,053
Customer Deposits and Store Credits, Ending Balance	$	(45,036)	$	(43,513)	$	(45,036)	$	(43,513)

Subject to limitations under the Company’s policy, return of unopened merchandise is accepted for 90 days. 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 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

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current assets caption of the accompanying condensed consolidated balance sheet. This amount was $1.2 million at September 30, 2019. 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,
	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 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. The Company ceased finishing floors in January 2019, as previously disclosed in the Form 10-K for the year ended December 31, 2018.

Leases

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), which created ASC Topic 842, Leases, and superseded the lease accounting requirements in Topic 840, Leases. In summary, Topic 842 requires organizations that 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 842 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, the Company recorded both operating lease right-of-use (“ROU”) assets of $113 million and 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 permitted under the transition guidance within the new standard, which among other things, allowed the Company to carryforward the historical 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 over the lease term at commencement date. As most of 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 made and excludes lease

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incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease at certain dates, typically at the Company’s own discretion. 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 practical expedient to group lease and non-lease components for all leases. Lease expense 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 payments under agreements with an initial term of 12 months or less will not be included on the condensed consolidated balance sheet but will be recognized in the condensed consolidated statements of operations on a straight-line basis over the term of the 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 standard as of the beginning of the 4th 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,
	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

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
Stock Options	608	373	612	272
Restricted Shares	243	9	639	9

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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, the Company had approximately $14.7 million remaining under this authorization. The Company has not 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
Granted	24	602
Options Exercised/RSAs Released	—	(125)
Forfeited	(125)	(51)
Options Outstanding/Nonvested RSAs, September 30, 2019	632	913

The Company granted 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 and a target of 30,887 performance-based RSAs with a grant date fair value of $0.7 million during the nine months ended September 30, 2018. These shares 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 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 Company entered into a Fourth Amended and Restated 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 the Third Amended and Restated Revolving Credit Agreement (the “Prior Agreement”). Under the Credit Agreement, the Lenders increased the maximum amount of borrowings under the revolving credit facility (the “Revolving Credit Facility”) from $150 million under the Prior Agreement to $175 million and added a new 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 receivables, and the Company’s East Coast 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 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 (as defined in the Credit Agreement), the amount of such excess reduces availability under the Revolving Borrowing Base.

Loans outstanding under the Credit Agreement can bear 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 is 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’ 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 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.

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 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.

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

Note 7.Leases

The Company has operating leases for all of its stores, current corporate headquarters in Toano, Virginia, its distribution center on the west coast, supplemental office facilities and certain equipment. The Company has also entered into an agreement for a future corporate headquarters in Richmond, Virginia which has a ten-year term and expected future minimum rental payments of approximately $15.4 million that 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. 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 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 and provide $14 million in store-credit vouchers, with a potential additional $2 million in store-credit vouchers based on obtaining a claim’s percentage of more than 7%, for an aggregate settlement of up to $30 million. The settlement agreement is subject to certain contingencies, including court approvals. The settlement agreement does not constitute or include an admission by the Company of any fault or liability and the Company does not admit any fault, wrongdoing or liability. 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, success on the merits. The Company accrued within SG&A a $28 million liability with the offset in the caption “Accrual for Legal Matters and Settlements Current” in its December 31, 2018 financial statements. The Company has notified its insurance carriers and continues to pursue coverage, but the insurers to date have denied coverage. As the insurance claim is still pending, the Company has not recognized any insurance recovery related to the Gold Litigation.

In addition, there are a number of individual claims and lawsuits alleging damages involving Strand Bamboo product. The Company disputes these claims and intends to resolve these through the Gold 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, the Company is unable to 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. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition, and liquidity.

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 in the accompanying condensed consolidated financial statements. The $36 million aggregate settlement amount was accrued within SG&A expenses in 2017.

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

In addition to those purchasers who opted out of the above settlement (the “Opt Outs”), there are a number of individual claims and lawsuits alleging personal injuries, breach of warranty claims, or violation of state consumer protection statutes that remain pending (collectively, the “Related Laminate Matters”). Certain of these Related Laminate Matters were settled in 2019 and 2018, while some remain in settlement negotiations. The Company recognized charges to earnings of $0.4 million and $2.9 million for the nine months ended September 30, 2019 and 2018, respectively, within SG&A expenses for these Remaining Laminate Matters. As of September 30, 2019, 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. 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.

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

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”).

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 continues to defend that matter vigorously through discovery to oppose final certification. Given the general uncertainty of litigation, the legal standards that must be met for final certification, and success on the merits, the Company cannot reasonably estimate the amount of loss, or range of possible loss, if any, that may result from this action. Accordingly, no accruals have been made with respect to the Mason matter. Any such losses could potentially have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition, and liquidity.

In September 2019, the Company entered into an agreement to settle the Kramer matter, consistent with the terms of the Memorandum of Understanding previously disclosed by 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 in California 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 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 the settlement agreement is not approved by the court, the Kramer matter could have a material adverse effect on the Company’s financial condition and results of operations. The Company accrued within SG&A a $4.75 million liability with the offset in the caption “Accrual for Legal Matters and Settlements Current” in the second quarter of 2019.

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% and 8% of its flooring purchases in 2018 and 2017, 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 Receivable/Liability Balance’ represents the amount the Company would receive or pay (net of any collections or payments) as the result of subsequent adjustment to rates whether due to finalization by the DOC or because of action of a court based on appeals by various parties. It does not include any initial amounts paid for AD or CVD in the current period at the in-effect rate at that time.

The Company recorded net interest expense related to antidumping of $0.4 million for the nine months ended September 30, 2019, 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

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

As a result of the remand 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 to rule on the DOC’s remand by the end of 2019. If the final ruling remains at 6.55% (from 13.74%), the Company’s liability of $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 recorded a receivable of $2.6 million with a corresponding reduction of cost of sales.

⁴

In July 2019, the DOC issued the final rates for review period 6 at a maximum of 42.57%. As a result, the Company recorded a liability of $0.8 million with a corresponding reduction in cost of sales in the nine months ended September 30, 2019.

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⁵

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

Other Matters

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

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

Cautionary Note Regarding Forward-Looking Statements

This report includes statements of the Company’s expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meanings of the Private Securities Litigation Reform Act of 1995. These statements, which may be identified by words such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “thinks,” “estimates,” “seeks,” “predicts,” “could,” “projects,” “potential” and other similar terms and phrases, are based on the beliefs of the Company’s management, as well as assumptions made by, and information currently available to, the Company’s management as of the date of such statements. These statements are subject to risks and uncertainties, all of which are difficult to predict and many of which are beyond the Company’s control. These risks include, without limitation, the impact on us of any of the following:

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

reputational harm;

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

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

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, 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;

operating stores in Canada and an office in China;

managing third-party installers and product delivery companies;

renewing store or warehouse 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;

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 the Form 10‑K for the year ended December 31, 2018.

This management discussion should be read in conjunction with the financial statements and notes included in Part I, Item 1. “Financial Statements” of this quarterly report and the audited financial statements and notes and management discussion included in the Company’s annual report filed on Form 10‑K for the year ended December 31, 2018.

Overview

Lumber Liquidators is one of the leading specialty retailers of hard-surface flooring in North America, offering a complete purchasing solution across an extensive assortment of domestic and exotic hardwood species, engineered hardwood, laminate, resilient vinyl, waterproof vinyl plank and porcelain tile. We also feature the renewable flooring products, bamboo and cork, and provide a wide selection of flooring enhancements and accessories, including moldings, noise-reducing underlayment, adhesives and flooring tools. We offer installation and delivery services through third-party independent contractors for customers who purchase our floors. At September 30, 2019, we sold our products through 419 Lumber Liquidators stores in 47 states in the United States and in Canada, a call center and websites.

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

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 Operating Income. 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 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 to focus on increasing our sales and operating margin, and providing an improved shopping experience for our customers. Throughout the remainder of 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 of the fourth quarter of 2019 to help customers at the beginning of their flooring journey narrow down the floor samples they may want to explore in store.

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 million, or 2.4%, to $264 million from the third quarter of 2018. Net sales from comparable stores decreased 3.6% as compared to the third quarter of 2018 driven by soft sales at the beginning of the quarter and compounded by the network security incident in August 2019. This was somewhat offset by an improvement in comparable sales during September 2019. We opened four new stores in the third quarter of 2019 bringing total store count to 419 as of September 30, 2019.

Gross profit decreased 5% in the third quarter of 2019 to $96 million from $101 million in the comparable period in 2018, including the effect of certain duties that related to both periods and influenced by the network security incident. Gross margin decreased to 36.2% in the third quarter of 2019 from 37.2% 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 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 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 mix of lower-margin installation sales.

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SG&A expense decreased 0.5% to $93 million in the third quarter of 2019 from the comparable period in 2018 but 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 the third quarter of 2018. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) increased $3.9 million primarily as a result of costs related to ten new stores compared to the third quarter a year ago, higher year-over-year incentive and equity accruals driven by a reduction in last year’s third quarter to align with lower performance expectations, severance, and costs related to the corporate headquarters relocation occurring in this year’s fourth quarter.

Operating income was $2.2 million for the three months ended September 30, 2019, which compares to operating 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 million for the third quarter of 2019, which is a decrease from the Adjusted Operating Income (a non-GAAP measure) of $8.6 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.

As of September 30, 2019, we had $64.5 million outstanding under the Revolving Credit Facility and $25 million outstanding under the FILO Term Loan, which, collectively, is up from the $65 million that was outstanding at December 31, 2018. At September 30, 2019, we had $114 million in liquidity, comprised of $6 million of cash and cash equivalents and $108 million of availability under our asset-based revolving loan (the “Revolving Loan”).

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)	%

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							% 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 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.

Net Sales

Net sales for the third quarter of 2019 decreased $6.5 million, or 2.4%, to $264 million from the third quarter of 2018. Net sales in comparable stores decreased 3.6% compared to the third quarter of 2018, which we believe was driven by soft sales at the beginning of the quarter compounded by the network security incident in late August 2019. This was partially offset by an improvement in comparable sales for the month of September 2019. We opened four new stores in the third quarter resulting in 419 stores as of September 30, 2019.

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Net sales for the nine months ended September 30, 2019 increased $3.0 million, or 0.4%, from the comparable period in 2018, as net sales in comparable stores decreased 1.4%, more than offset by an increase net sales in non-comparable stores of $15 million.

Gross Profit

Gross profit decreased 5% in the third quarter of 2019 to $96 million from the comparable period in 2018. Both periods were impacted by antidumping rate changes, but in opposite directions. Gross margin decreased to 36.2% in the third quarter of 2019 from 37.2% 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 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 mix of lower-margin installation sales. Gross profit for the nine months ended September 30, 2019 decreased $5.2 million, or 1.7%, from the comparable period in 2018. Gross margin decreased to 35.6% for the first nine months of 2019 from 36.4% 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, a decrease 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 quarter of 2019.

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,
	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 nine months ended September 30, 2019.

Selling, General and Administrative Expenses

SG&A expenses decreased 0.5% in the third quarter of 2019 to $93 million from $94 million in the comparable period in 2018, but included certain costs in both years related to investigations and lawsuits. A $1.8 million impairment of certain assets related to our decision to exit the finishing business is reflected in the third quarter of 2018. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) increased $3.9 million primarily as a result of costs related to ten new stores compared to the third quarter a year ago, higher year-over-year incentive and equity accruals driven by a reduction in last year’s third quarter to align with lower performance expectations, severance, and costs related to the corporate headquarters relocation occurring in this year’s fourth quarter.

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SG&A expenses increased 0.6% in the nine months ended September 30, 2019 to $294 million from the comparable period in 2018. Again both periods included certain costs related to investigations and lawsuits. A $1.8 million impairment of certain assets related to the Company’s decision to exit the finishing business is reflected in the third quarter of 2018 as shown in the table that follows. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) increased by $7.9 million in the nine months ended September 30, 2019 as compared to the year-ago period. The increase in expense was due to payroll and occupancy of new stores partially offset by a reduction in costs allocated to production (as we ceased finishing our own floors in January).

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,
	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 the charge to earnings for the Kramer matter and certain Related Laminate Matters, which is described more fully in Note 8 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.

⁵

All Other in 2018 represents an impairment of certain assets related to our decision to exit the finishing business.

Operating Income (Loss) and Operating Margin

Operating income for the three months ended September 30, 2019 was $2.2 million and 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 in the comparable periods in 2018. Excluding the gross margin and SG&A items discussed above and summarized in the table below, Adjusted Operating Income (a non-GAAP measure) was $3.4 million for the three months ended September 30, 2019, 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.

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	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 See the Gross Profit and SG&A sections above for more detailed explanations of these individual items.

Other Expense

We had other expense of $0.9 million and $3.3 million in the three and nine months ended September 30, 2019, respectively, and other expense of $0.5 million and $1.2 million in the three and nine months ended September 30, 2018, respectively. The expense in both years primarily reflected interest on borrowings on our Revolving Loan.

Provision for Income Taxes

We have a full valuation allowance recorded against our 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 maintain a valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. A reduction in the valuation allowance could result in a significant decrease in income tax expense in the period that the release is recorded. However, the exact timing and amount of any reduction in our valuation allowance are unknown at this time and will be subject to the earnings level we achieve in future periods.

Diluted Earnings per Share

Net income for the three months ended September 30, 2019 was $1 million, or $0.04 per diluted share, compared to net income of $5.9 million, or $0.21 per diluted share, for the three months ended September 30, 2018. Net loss for the first nine months of 2019 was $6.7 million, resulting in a loss of $0.23 per diluted share, compared to net income of $2.5 million, or $0.09 per diluted share, for the first nine months of 2018.

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.

Liquidity and Capital Resources

Our principal liquidity and capital requirements are for capital expenditures to maintain and grow our business, for legal settlements, for working capital, and for general corporate purposes. Our principal sources of liquidity at September 30, 2019 were cash from our ongoing operations, $5.6 million of cash and cash equivalents on our balance sheet and $108 million of availability under our Revolving Loan. As September 30, 2019, the outstanding balance on the FILO Term Loan was $25 million. As of September 30, 2019, the outstanding balance on the Revolving Loan was $64.5 million and it carried an average interest rate of 3.7%.

The DOJ and SEC settlements, discussed in Note 8 of this Form 10-Q, totaled $33 million and were paid in the second quarter of 2019 along with other, smaller settlements. Additionally, we anticipate funding $1 million of the cash portion of the expected settlement of the Gold Litigation upon the court’s preliminary approval; the remaining $13 million of the cash portion is expected to be paid 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. We believe that cash flows from operations, together with liquidity sources mentioned above, will be sufficient to fund our settlements, operations and anticipated capital expenditures. for the next 12 months. We prepare our forecasted cash flow and liquidity estimates based on assumptions that we believe to be reasonable, but are also inherently uncertain. Actual future cash flows could differ from these estimates.

Merchandise Inventories

Merchandise inventories at September 30, 2019 decreased $11 million from December 31, 2018, as we have sold through merchandise that was purchased in advance of the 25% tariff on purchases of Chinese goods. 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

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Available inventory per store at September 30, 2019 was slightly lower than at December 31, 2018 and higher than at September 30, 2018. The increase in inventory compared to September 30, 2018 was primarily due higher average cost of inventory from tariffs as well as expanding our engineered assortment with new looks to meet customer demand. Including the effects of tariffs, we expect inventory to be in the range of $310 million to $320 million through the balance 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.

Cash Flows

Operating Activities. Net cash used by 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, a payment of $33 million to settle the government investigations was the primary use of cash. It was 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 million and $10 million, respectively, for the nine months ended September 30, 2019 and 2018, respectively. Net cash used in investing activities in both nine month periods were primarily related to new store openings and our information technology initiatives; the current year also had investments related to the new Corporate headquarters.

Financing Activities. Net cash provided by financing activities was $23 million and $27 million for the nine months ended September 30, 2019 and 2018, respectively. The increase 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).

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 for the year ended December 31, 2018.

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, we had $64.5 million outstanding under the Revolving Credit Facility and $25 million outstanding under the FILO Term 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. 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.

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 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 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 and provide $14 million in store-credit vouchers, with a potential additional $2 million in store-credit vouchers based on obtaining a claim’s percentage of more than 7%, for an aggregate settlement of up to $30 million. The 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 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, success on the merits. The Company has notified its insurance carriers and continues to pursue coverage, but the insurers to date have denied coverage. As the insurance claim is still pending, the Company has not recognized any insurance recovery related to the Gold Litigation.

The Company recognized a charge to earnings of $28 million within selling, general and administrative expense during the fourth quarter of 2018 with the offset 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.

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.

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

Beginning on or about May 20, 2015, multiple class actions were filed in the United States District Court for the Central District of California and other district courts located in the place of residence of each non-California plaintiffs consisting of U.S. 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 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, the Company, in June, paid $0.5 million for settlement administration costs, which is part of the 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 and briefing is now complete. Vouchers, which generally have a three-year life, will be distributed by the administrator upon order of the Virginia Court. At December 31, 2018, the Company’s obligations related to Formaldehyde MDL and Abrasion MDL consisted of a short-term payable of $35.5 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 condensed consolidated financial statements. 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. The Company recognized charges to earnings of $0.4 million and $2.9 million for the nine months ended September 30, 2019 and 2018, respectively, within selling, general and administrative expenses for these Related Laminate Matters. As of September 30, 2019, 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. 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. 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 March 2020.

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The Company disputes the Mason 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 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 Kramer Plaintiffs seek certification of the CSM Employees for a class action covering the prior four-year period prior to the filing of the complaint through the disposition 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. The Kramer Plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, the Kramer Plaintiffs seek unspecified amounts for unpaid wages and overtime wages, liquidated and/or punitive damages, declaratory relief, restitution, statutory penalties, injunctive relief and other damages.

On September 9, 2019, the Company entered into an agreement to settle the Kramer matter, consistent with the terms of the Memorandum of Understanding previously disclosed by 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 the settlement agreement is not approved by the court, the Kramer matter could have a material adverse effect on the Company’s 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.

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% and 8% of its flooring purchases in 2018 and 2017, respectively. The Company’s consistent view through the course of this matter has been, and remains, that its imports are neither dumped nor subsidized.

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

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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. 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 to the final AD rate. That remand from the DOC is still pending. The CIT has stayed the DOC remand pending the final disposition of the appeal of the original investigation at the CAFC. 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 CIT is expected to rule on the DOC’s remand by the end of 2019. If the final ruling remains at 6.55%, the Company’s liability of $4.1 million would decrease by $2.8 million to $1.3 million in the period in which the ruling is finalized.

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, that decision was appealed to the CAFC by certain plaintiff interveners in January 2019. The Company’s best estimate of the probable

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additional amounts owed associated with AD and CVD is approximately $5.5 million for shipments during the applicable time periods. During the quarter ended June 30, 2016, the Company recorded this amount in other long-term liabilities in its balance sheet and as a charge to earnings in cost of sales on its statement of operations.

The DOC initiated 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.

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%, 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 liability of $0.8 million during the third quarter of 2019 with a corresponding reduction in cost of sales. The Company has appealed the final AD rate ruling.

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.

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

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, which could materially affect our business, financial condition or future results. The risks described in our annual report on Form 10-K are not 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 risk factors previously disclosed in our annual report on Form 10-K for the year ended December 31, 2018. We have updated the risk factor previously reported in our annual report on Form 10-K for the year ended December 31, 2018 below 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 and reduce our net sales.

We depend on our management information systems to integrate the activities of our stores, website and call center, to process orders, to respond to customer inquiries, to manage inventory, to purchase merchandise and to sell and

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ship goods on 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 systems could cause information, including data related to customer orders, to be lost or delayed, which could result in delays in the delivery of products to our stores and customers or lost sales. For example, as we previously disclosed in August 2019, we experienced a malicious network security incident that prevented access to several of our information technology systems and data within our networks. 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. Incident costs are expected to go higher as further analysis 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.

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 (in thousands, except per share amounts):


			Total Number	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 to July 31, 2019	—	—	—	—
August 1, 2019 to August 31, 2019	—	—	—	—
September 1, 2019 to September 30, 2019	—	—	—	—
Total	—	—	—	—

We repurchased 3,677 shares of our common stock, at an average price of $8.23, 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.

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, 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.

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

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 for the quarter ended September 30, 2019, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements

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SIGNATURES

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	By:	/s/ Nancy A. Walsh
		Nancy A. Walsh
		Chief Financial Officer and Senior Vice President (Principal Financial Officer)

Exhibit 10.1

LAW OFFICE OF DOMINIC J. MESSIHA, PC

DOMINIC J. MESSIHA, Bar No. 204544

11601 Wilshire Blvd, Suite 500

Los Angeles, CA 90025

310.575.1815 (phone)

310.650.8580 (direct)

310.575.1890 (fax)

Dominic@MessihaLegal.com

JUSTIN R. MARINO (NYS Attorney ID: 4580262)

STEVENSON MARINO LLP

(admitted Pro Hac Vice)

75 Maiden Lane, Suite 402

New York, NY 10038

Telephone: (212) 939-7228

Facsimile: (212) 531-6129

Email: jmarino@stevensonmarino.com

ATTORNEYS FOR PLAINTIFF

Robert J. Kramer, on behalf of himself
and all others similarly situated

KARIN M. COGBILL, Bar No. 244606

ANGELA MEAKIN, Bar No. 297169

Littler Mendelson, P.C.

50 W. San Fernando, 7th Floor
San Jose, CA 95113.2303

Telephone:408.998.4150

Fax No.:408.288.5686

Attorneys for Defendant

LUMBER LIQUIDATORS, INC.

SUPERIOR COURT OF CALIFORNIA
COUNTY OF SANTA SACRAMENTO

ROBERT J. KRAMER, on behalf of himself and all others similarly situated,

Plaintiffs,

LUMBER LIQUIDATORS, INC., a Delaware Corporation; and DOES 1 through 100, inclusive,

Defendants.

Case No. 34-2017-00222434-CU-OE-GDS

CLASS ACTION SETTLEMENT AGREEMENT

Complaint Filed: November 17, 2017


		Case No. 34-2017-00222434-CU-OE-GDS
CLASS ACTION SETTLEMENT AGREEMENT

IT IS HEREBY STIPULATED, by Plaintiff ROBERT J. KRAMER (“Plaintiff”), on behalf of himself, each of the Putative Class Members, and as a representative of the LWDA, and Defendant LUMBER LIQUIDATORS, Inc., a Delaware Corporation (“Defendant”) (collectively “the Parties”), that subject to the approval of the Court, the above-captioned Action is hereby compromised and settled pursuant to the terms and conditions set forth below:

RECITALS

1.1. On November 17, 2017, Plaintiff filed a putative class action in the Superior Court of California, County of Sacramento entitled, Robert J. Kramer, behalf of himself, all others similarly situated v. Lumber Liquidators, Inc., a Delaware corporation; and Does 1 through 100, inclusive, Case No. 34-2017-00222434.

1.2. On or about February 20, 2019, Plaintiff filed a First Amended Complaint asserting the following causes of action: (1) Failure to Pay All Wages Earned (Labor Code § 204); (2) Failure to Pay Overtime Wages (Labor Code §§ 510, 1194(a), and 1198); (3) Failure to Provide Accurate, Itemized Wage Statements (Labor Code § 226(a)); (4) Failure to Provide Meal Periods (Labor Code §§ 226.7 and 512(a)); (5) Failure to Provide Rest Breaks (Labor Code § 226.7); (6) Failure to Maintain Records (Labor Code § 1174(d)); (7) Failure to Reimburse Business Expenses (Labor Code § 2802); (8) Failure to Pay All Wages Upon Termination (Labor Code §§ 201-203); (9) Unfair Business Practice (Business & Professions Code §§ 17200 et seq.); and (10) Private Attorneys General Act (Labor Code §§ 2699 et seq.).

1.3. The First Amended Complaint seeks wages, general damages, special damages, injunctive relief, statutory and civil penalties, premiums under Labor Code section 226.7, reimbursement for business expenses, restitution, interest, and attorneys’ fees and costs.

1.4. Prior to mediation, the Parties engaged in both formal and informal discovery. Defendant provided information and documentation about, inter alia: the number of current and former putative class members who worked during the relevant time period; the number of weeks worked by the putative class members; the total earnings of each putative class member; termination dates (if applicable). Additionally, Defendant produced documentation related to the job duties and


	2.	Case No. 34-2017-00222434-CU-OE-GDS
CLASS ACTION SETTLEMENT AGREEMENT

expectations of the putative class, Defendant’s operational structure, including Defendant’s California operations; and other relevant information, including Plaintiff’s personnel and payroll files.

1.5. On May 6, 2019, the Parties participated in an all-day mediation with mediator Joel M. Grossman in Los Angeles, California. Following the mediation, the Parties accepted a mediator’s proposal, and subsequently formalized the terms in a Memorandum of Understanding (“MOU”).

1.6. Defendant has represented that there are approximately 10,522 workweeks at issue between November 17, 2013 and March 1, 2019 with regard to Store Managers and another approximately 451 workweeks at issue between November 17, 2013 and April 1, 2018 with respect to the Store Managers in Training. To the extent the total number of workweeks at issue during the applicable time period for this representation increases by more than 5% for any reason, the Total Settlement Amount shall be increased on a pro rata basis to account for the additional workweeks during the representative time period.

1.7. The Parties believe this Settlement is a fair, adequate and reasonable settlement of this Action and have arrived at this Settlement after lengthy, extensive arms-length negotiations, facilitated by an experienced wage and hour class action mediator, considering all relevant factors related to liability and damages. Neither the MOU nor this Settlement Agreement shall be construed in favor of or against any of the Parties by reason of their participation in the drafting of the MOU or this Settlement Agreement.

1.8. Defendant denies that it has engaged in any unlawful activity, has failed to comply with the law in any respect, has any liability to anyone under the claims asserted in this matter, or that but for the Settlement a class should be certified. This Settlement is entered into solely for the purpose of compromising highly disputed claims. Nothing in this Agreement is intended or will be construed as an admission of liability or wrongdoing by Defendant, or an admission by Plaintiff that any of his claims were non-meritorious, or any defense asserted by Defendant was meritorious. This Settlement and the fact that Plaintiff and Defendant are willing to settle the Action will have no bearing on, and will not be admissible in connection with, any litigation (other than solely in connection with approval and enforcement of the Settlement).

1.9. Plaintiff, on behalf of himself and the Putative Class, and as a representative of the


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LWDA, along with Defendant, and subject to the approval of the Court, stipulate that the case will be compromised and settled pursuant to the terms and conditions set forth in this Settlement Agreement and that after the date of the Court’s final approval of this Settlement Agreement, judgment shall be entered, subject to the continuing jurisdiction of the Court as set forth below, subject to the recitals set forth above which by this reference become an integral part of this Settlement Agreement, and subject to the following definitions, terms and conditions:

II.

DEFINITIONS

Unless otherwise defined, capitalized terms used in this Settlement Agreement shall have the meanings set forth below:

2.1 “Action” means the putative class action titled Robert J. Kramer, on behalf of himself, and all others similarly situated v. Lumber Liquidators, Inc., a Delaware corporation; and Does 1 through 100, inclusive, Case No. 34-2017-00222434 and all pleadings and amended Complaints filed therein.

2.2“Claims” means all claims which were plead in the operative First Amended Complaint (titled Class Action and Private Attorneys’ General Act Complaint) or which could have been pled based on the facts alleged in the operative First Amended Complaint, including without limitations claims for unpaid wages and overtime, itemized wage statements, meal and rest period wages and premiums, record keeping violations, unpaid business expenses, untimely final paychecks, and unfair competition.

2.3“Putative Class” or “Putative Class Members” means all current and/or former Store Managers and Store Managers in Training employed in the state of California by Defendant at any time between November 17, 2013 until the time of preliminary approval of the Settlement by the court.

2.4“Class Counsel” means the Law Office of Dominic J. Messiha, PC, 11601 Wilshire Boulevard, Suite 500, Los Angeles, California 90025 and Stevenson Marino LLP, 75 Maiden Lane, Suite 402, New York, NY 10038.

2.5“Class Counsel Costs Award” means the actual expenses and costs incurred by Class Counsel for Class Counsel’s litigation and resolution of this Action, as awarded by the Court, which may not exceed Thirty Thousand Dollars ($30,000.00).


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2.6“Class Counsel Fees Award” means the attorneys’ fees for Class Counsel’s litigation and resolution of this Action, as awarded by the Court. Defendant agrees not to oppose a request for attorneys’ fees by Class Counsel in an amount up to and including one-third of the Total Settlement Amount, which may not exceed One Million, Five Hundred and Eighty-Three Thousand, Three Hundred and Thirty-Three Dollars and Thirty-Three Cents ($1,583,333.33), which is one-third of the Total Settlement Amount, or one third of the Total Settlement Amount if the Settlement Amount is increased per the terms of this Agreement, whichever is greater.

2.7“Putative Class Information” means information regarding Putative Class Members that Defendant will compile in good faith from its records and provide to the Settlement Administrator as a confidential document. Putative Class Information shall be provided in a confidential Microsoft Excel spreadsheet and shall include, for each Putative Class Member: full name, last known address, social security number, date of termination (if any), weeks worked during the Putative Class Period as a Putative Class Member, and any other information needed to calculate settlement payments. If Defendant has a readily accessible last known personal phone number and last known personal email address, Defendant will provide the same to the Settlement Administrator as part of the Putative Class Information. Because Putative Class Members’ sensitive personal information is included in the Putative Class Information, the Settlement Administrator shall maintain the Putative Class Information securely and in confidence. Access to such Putative Class Information shall be limited to employees of the Settlement Administrator with a need to use the Putative Class Information for administration of the Settlement. The Settlement Administrator will take all necessary measures to adequately secure the information. The Settlement Administrator shall not disclose the Putative Class Information to Class Counsel without the written consent of Defense Counsel.

2.8“Putative Class Period” means the period from November 17, 2013, through and including the Preliminary Approval Date.

2.9“Complete and General Release” means in addition to the Claims as defined in Paragraph 2.2, the unconditional general release given by the named Plaintiff for himself only, releasing the Released Parties from any and all charges, complaints, causes of action, damages and liabilities of any kind or nature whatsoever, both at law and equity, known or unknown, suspected or


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unsuspected, arising from conduct occurring on or before the date Plaintiff signs this Settlement Agreement. This provision is intended by the Parties to be all encompassing and to act as a full and total release of any individual claim of Plaintiff for himself only, whether specifically enumerated herein or not, that Plaintiff might have or have had individually, that exists or ever has existed individually on or prior to the date this Settlement Agreement is signed. This release includes a waiver pursuant to California Civil Code 1542 for Plaintiff only.

2.10“Court” means the Superior Court of California, County of Sacramento.

2.11“Defendant” means Lumber Liquidators, Inc., a Delaware Corporation.

2.12“Defense Counsel” or “Counsel for Defendants” means Karin M. Cogbill and Angela E. Meakin of Littler Mendelson, P.C.

2.13“Effective Date” means the date by which this Settlement is finally approved as provided herein and the Court’s Final Approval Order becomes binding. For purposes of this Settlement Agreement, the Final Approval Order becomes binding upon the later of: (1) the day after the last day by which a notice of appeal to the California Court of Appeal of the Final Approval Order and/or of an order rejecting any motion to intervene may be timely filed, and none is timely filed; (2) if such an appeal is timely filed, and the final approval order is affirmed, the day after the last date for timely filing a request for further review of the California Court of Appeal’s decision passes and no further review is timely requested; (3) if an appeal is filed and further review of the California Court of Appeal’s decision is timely requested, the day after the request for review is denied with prejudice and/or no further review of the decision can be timely requested, or (4) if review is accepted, the day after the California Supreme Court affirms the Settlement. The Effective Date cannot occur, and Defendant will not be obligated to fund this Settlement, until and unless there is no possibility of a valid and timely appeal or further valid and timely appeal that could potentially prevent this Settlement Agreement from becoming final and binding.

2.14“Final Approval Hearing” means the hearing held to determine whether the Court will enter a Final Approval Order finally approving this Settlement.

2.15“Final Approval Order” means the Court’s entry of an Order finally approving and granting final judgment of this Settlement substantially in the form attached hereto as Exhibit C.


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2.16“Individual Settlement Payment” means the amount payable from the Net Distribution Fund to each Putative Class Member, as calculated pursuant to Paragraph 3.10.3 herein.

2.17“Released Claims” means the Claims, as defined in Paragraph 2.2, that Putative Class Members are fully releasing by this Settlement Agreement through the date of Preliminary Approval. All Released Claims are released for all Putative Class Members regardless of whether they receive any payment under the Settlement unless they exclude themselves from the Settlement.

2.18“Net Distribution Fund” means the Total Settlement Amount, less the amount that the Court awards for (1) the LWDA’s portion of the PAGA award (i.e. 75% of the total PAGA Award), not to exceed $60,000.00; (2) class counsels’ fees, which shall not exceed One Million, Five Hundred and Eighty-Three Thousand, Three Hundred and Thirty-Three Dollars and Thirty-Three Cents ($1,583,333.33); (3) class counsels’ costs, which shall not exceed Thirty Thousand Dollars ($30,000.00); (4) settlement administration costs; (5) a service payment to the named Plaintiff, which shall not exceed $10,000; and (6) the employer-share of payroll taxes for any wage payment made to the Putative Class.

2.19“Notice of Objection” means a written request by a Putative Class Member to object to this Settlement.

2.20“Notice of Settlement” means the Notice of Class Action Settlement that will be mailed to Putative Class Members to apprise them of this Settlement substantially in the form attached hereto as Exhibit A.

2.21 “Notice Period” is the time period of 45 days provided to Settlement Class Members to opt out or object to the Settlement.

2.22“PAGA Award” means the portion of the Total Settlement Amount that is allocated to PAGA penalties, pursuant to California Labor Code section 2698 et seq., and as awarded by the Court. The PAGA Award may not exceed Eighty Thousand dollars ($80,000), of which seventy-five percent (75%) will be distributed to the California Labor & Workforce Development Agency and twenty-five percent (25%) will be distributed to Putative Class Members as part of the Net Distribution Fund.

2.23“Parties” means Plaintiff and Defendant, and “Party” shall mean either Plaintiff or Defendant.


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2.24“Plaintiff” means Robert J. Kramer.

2.25“Preliminary Approval” or “Preliminary Approval Date” means the date the Court enters the Preliminary Approval Order.

2.26“Preliminary Approval Order” means the Court’s entry of an order preliminarily approving this Settlement (substantially in the form attached hereto as Exhibit B).

2.27“Released Parties” means Defendant Lumber Liquidators, Inc., a Delaware Corporation, their subsidiaries and affiliates, employee benefit plans sponsored or maintained by any of the foregoing, their attorneys, and their respective successors and predecessors in interest; all of their respective officers, directors, employees, administrators, fiduciaries, trustees, beneficiaries and agents; and each of their past, present and future officers, directors, shareholders, members, employees, agents, principals, heirs, representatives, accountants, auditors, consultants, insurers and reinsurers.

2.28“Request for Exclusion” means a written request by a Putative Class Member to exclude himself/herself from Settlement, which must be completed and mailed in the manner set forth in this Settlement Agreement and the Notice of Settlement. Putative Class Members who exclude themselves shall not have the right to object to the Settlement.

2.29“Response Deadline” means the date forty-five (45) calendar days after the Settlement Administrator mails the Notice of Settlement to Putative Class Members and the last date on which Putative Class Members may postmark and/or file, as applicable, Requests for Exclusion, and/or Notices of Objection to the Settlement.

2.30“Service Award” means the amount that the Court awards to Plaintiff for his efforts in assisting with the prosecution of the Action and as consideration for executing this Settlement Agreement and releasing his claims against Defendant. The Service Award will not exceed Ten Thousand Dollars ($10,000).

2.31“Settlement Administration Costs” means the costs incurred by the Settlement Administrator and awarded by the Court from the Total Settlement Amount, which is expected to total ________________________________.

2.32“Settlement Administrator” means Angeion Group.


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2.33“Settlement Fund Account” means the bank account established pursuant to the terms of this Settlement Agreement, from which all monies payable under the terms of this Settlement shall be paid, as set forth herein.

2.34 “Total Settlement Amount” means the non-reversionary amount of Four Million Seven Hundred and Fifty Thousand Dollars ($4,750,000.00), subject to the terms and conditions herein. The Total Settlement Amount includes (a) class counsels’ fees, which shall not exceed One Million, Five Hundred and Eighty-Three Thousand, Three Hundred and Thirty-Three Dollars and Thirty-Three Cents ($1,583,333.33) or one third of the Total Settlement Amount, whichever is greater; (b) class counsels’ costs, exceed Thirty Thousand Dollars ($30,000.00); (c) settlement administration costs; (d) the PAGA Award, which shall not exceed $80,000; (e) a service payment to the named Plaintiff, which shall not exceed $10,000; (f) employee and employer payroll taxes for any wage payment made to the Settlement Class; and (g) all individual payments made from the Net Distribution Amount. Each Putative Class Member shall be responsible for paying any additional taxes due on his or her Individual Settlement Payment. The Total Settlement Amount is the maximum amount that Defendant is obligated to pay under this Settlement Agreement in order to settle this Action, subject to the Court’s approval.

2.35“Void Date” means the date by which any checks issued to Putative Class Members shall become void, i.e., on the one hundred and twenty-first (121st) calendar day after mailing.

III.

TERMS OF SETTLEMENT AGREEMENT

The Parties agree as follows:

3.1Class Certification. Solely for the purposes of this Settlement, the Parties stipulate and agree that in order for this Settlement to occur, the Court must certify a class consisting of Putative Class Members.

3.2Appointment of Class Representative. Solely for the purposes of this Settlement, the Parties stipulate and agree Plaintiff Robert J. Kramer shall be appointed as a representative for the


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Putative Class.

3.3Appointment Of Class Counsel. Solely for the purposes of this Settlement, the Parties stipulate and agree that Dominic J. Messiha and Justin Marino shall be appointed as Class Counsel for the Putative Class.

3.4Appointment Of Settlement Administrator. Solely for the purposes of this Settlement, the Parties stipulate and agree Angeion Group shall be retained to serve as Settlement Administrator. The Settlement Administrator shall be responsible for establishing a toll-free telephone number through which Class Members may make inquiries about the Settlement and a website, which will have links to the Notice of Settlement, the Settlement Agreement, motions for approval and for attorneys’ fees, and a Post Office Box for receipt of Class Member communications; preparing, printing and mailing the Notice of Settlement to Class Members; receiving and reviewing Objections and Requests for Exclusion, if any, submitted by Class Members; calculating Individual Settlement Payments; calculating and paying any and all payroll tax or other required withholdings from the wage portion of the Individual Settlement Payments as required under this Settlement Agreement and applicable law; providing weekly status reports to Defense and Class Counsel; providing a due diligence declaration for submission to the Court prior to the Final Approval Hearing; mailing Individual Settlement Payments to Class Members; paying the Service Award, Class Counsel Fees Award and Class Counsel Costs Award; mailing the PAGA Award to the California Labor & Workforce Development Agency; printing and providing Class Members, Plaintiff and Class Counsel with IRS Forms W-2 and/or 1099 as required under this Settlement Agreement and applicable law; providing a due diligence declaration for submission to the Court upon the completion of the Settlement; providing Defense Counsel with an accounting of all checks issued and cashed, and for such other tasks as the Parties mutually agree. The Settlement Administrator shall keep the Parties timely apprised of the performance of all Settlement Administrator responsibilities. Any legally mandated tax reports, tax forms, tax filings, or other tax documents required by administration of this Settlement Agreement shall be prepared by the Settlement Administrator. Any expenses incurred in connection with such preparation shall be a Settlement Administration Cost. The Parties agree to cooperate in the settlement administration process and to make all reasonable efforts to control and


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minimize Settlement Administration Costs. The Parties each represent they do not have any financial interest in the Settlement Administrator or otherwise have a relationship with the Settlement Administrator that could create a conflict of interest.

3.5Conditional Nature Of Stipulation For Certification. Solely for the purposes of this Settlement, the Parties stipulate and agree to the certification of this Action on behalf of Class Members. Should for whatever reason the Settlement not become effective, the fact that the Parties were willing to stipulate to certification of the Action as part of the Settlement, or to resolve the PAGA claim on a representative basis, shall have no bearing on, and shall not be admissible in connection with, the issue of whether the Action, or any claim or class, should be certified or proceed on a representative basis in in this Action or in any other lawsuit. Defendant expressly reserves their right to oppose class certification and any representative claim in this or any other action should this Settlement not become effective.

3.6Class Members’ Release. As of the Effective Date, any Class Member who does not submit a timely and valid Request for Exclusion will be deemed to have released the Released Parties from the Released Claims. Class Members may discover facts in addition to or different from those they now know or believe to be true with respect to the subject matter of the Released Claims, but upon the Effective Date, shall be deemed to have, and by operation of the Final Approval Order shall have, fully, finally, and forever settled and released any and all of the Released Claims, whether known or unknown, suspected or unsuspected, contingent or non-contingent, which now exist or have existed, upon any theory of law or equity now existing, including but not limited to, conduct that is negligent, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery or existence of such different or additional facts. Class Members agree not to sue or otherwise make a claim against any of the Released Parties for the Released Claims. It is the intent of the Parties that the Final Approval Order entered by the Court shall have full res judicata effect and be final and binding upon Class Members as to the Released Claims.

3.7Plaintiff’s Complete and General Release. In consideration for the promises and payments set forth in this Settlement Agreement, to which Plaintiff is otherwise not entitled, Plaintiff agrees to provide a Complete and General Release to the Released Parties for himself only, which


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releases all claims and damages of every kind and nature, actual or potential, known and unknown, which exist or could arise out of Plaintiff’s employment, through and including the date of his execution of this Settlement Agreement. Plaintiff may discover facts in addition to or different from those he now knows or believes to be true with respect to the subject matter of the Complete and General Release, but upon the Effective Date, shall be deemed to have, and by operation of the Final Approval Order shall have, fully, finally, and forever settled and released any and all of the claims covered by the Complete and General Release, whether known or unknown, suspected or unsuspected, contingent or non-contingent, which now exist, or have existed, upon any theory of law or equity now existing, including, but not limited to, conduct that is negligent, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery or existence of such different or additional facts. This General Release applies to named Plaintiff for himself only. Plaintiff understands that he is releasing all rights under section 1542 of the California Civil Code, which provides:

A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party.

3.7.1No Pending Or Future Lawsuits By Plaintiff. Other than this Action, Plaintiff represents that he does not have any pending lawsuits, administrative complaints or charges against Defendant or the Released Parties in any local, state or federal court or administrative agency. Plaintiff further acknowledges that all claims raised therein, if any, shall be fully and finally extinguished by virtue of this Settlement Agreement and the Court’s Final Approval Order. Plaintiff further represents that he will not bring or join any action in the future in which he seeks to recover any damages from Defendant or the Released Parties relating to or arising from Plaintiff’s employment, other than an action to enforce his rights under this Settlement Agreement.

3.8PAGA Release. Upon the approval by the Court of this Settlement, Plaintiff, individually and as the representative acting as a proxy or agent of the LWDA, a State of California Executive Branch Agency, in this Action, agrees to release the Released Parties for penalties under the California Private Attorneys’ General Act predicated on, or contained within, Labor Code §§ 201-


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204, 210, 226, 226.3, 226.7, 510, 512, 558, 1174, 1194, 1198 and 2802 as alleged in the First Amended Complaint during the Putative Class Period.

3.9Settlement Approval And Implementation Procedures. As part of this Settlement, the Parties agree to the following procedures for obtaining the Court’s Preliminary Approval of the Settlement, notifying Class Members of the Settlement, obtaining the Court’s Final Approval of the Settlement and processing Individual Settlement Payments.

3.9.1Preliminary Approval and Certification. As soon as practicable after execution of this Settlement Agreement, Plaintiff will submit this Settlement Agreement to the Court for Preliminary Approval. Plaintiff’s submission will include this Settlement Agreement, including Exhibits A-C, and any motions, memoranda and evidence as may be necessary for the Court to determine that this Settlement Agreement is fair, adequate and reasonable. Defense Counsel shall be provided with an opportunity of no less than seven (7) calendar days to review Plaintiff’s motion for preliminary approval before submission to the Court. The Parties shall work in good faith to resolve any disputes related to the content of Plaintiff’s motion for preliminary approval.

3.9.2Class Information. No more than fifteen (15) calendar days after entry of the Preliminary Approval Order, Defendant shall provide the Settlement Administrator with the Class Information for purposes of mailing the Notice of Settlement to Class Members.

3.9.3Notice By First Class U.S. Mail. Upon receipt of the Class Information, the Settlement Administrator will conduct a national change of address search and a skip trace for the most current address of all former employee Class Members and will update such Class Members’ addresses as necessary. Twenty-One (21) calendar days after receipt of the Class Information, the Settlement Administrator shall mail the Notice of Settlement to all Class Members by First Class U.S. Mail, exercising its best judgment to determine the most current mailing address for each Class Member including but not limited to the use of skip tracing. The address identified by the Settlement Administrator as the current mailing address shall be presumed to be the best mailing address for each Class Member.

3.9.4Undeliverable Notices. Any Notice of Settlement returned to the Settlement


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Administrator as non-deliverable on or before a date twenty-one (21) calendar days before the Response Deadline shall be re-mailed to the forwarding address affixed thereto. If no forwarding address is provided, the Settlement Administrator shall make reasonable efforts to obtain an updated mailing address. If an updated address is identified, the Settlement Administrator shall resend the Notice of Settlement to the Class Member within five (5) calendar days of the date of the return of the Notice of Settlement. Class Members to whom the Notice of Settlement is resent, after having been returned as non-deliverable to the Settlement Administrator, shall have until the Response Deadline to post-mark their Request for Exclusion or mail and/or file any objections. If a Class Member’s Notice of Settlement is returned to the Settlement Administrator more than once as non-deliverable, then an additional Notice of Settlement shall not be re-mailed.

3.9.5Notice Satisfies Due Process. Compliance with the notice procedures specified in this Settlement Agreement shall constitute due and sufficient notice to Class Members of this Settlement and shall satisfy the requirements of due process. Nothing else shall be required of, or done by, the Parties, Class Counsel or Defense Counsel to provide notice of the proposed Settlement. In the event the procedures in this Settlement Agreement are followed and the intended recipient of a Notice of Settlement still does not receive the Notice, the intended recipient shall remain a Class Member and will be bound by all terms of the Settlement and any Final Approval Order entered by the Court if the Settlement becomes effective. Notice provided by a means in addition to that specified in Sections 3.9.3 and 3.9.4 is done only as a courtesy to a Class Member and does not negate the binding effect of this Settlement on a Class Member where Sections 3.9.3 and 3.9.4 are satisfied.

3.9.6Requests For Exclusion (Opt-Outs). The Notice of Settlement shall state that Class Members who wish to exclude themselves from the Settlement must submit a written Request for Exclusion to the Settlement Administrator, postmarked on or before the Response Deadline. To be valid, the Request for Exclusion: (1) must contain the full name, address and last four digits of the social security number of the person requesting exclusion; (2) must be signed by the person requesting exclusion; and (3) must state in substance: “I want to exclude


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myself from the Settlement in Robert J. Kramer v. Lumber Liquidators, Inc., pending in the Superior Court of California, County of Sacramento, Case No. 34-2017-00222434. I understand that by requesting to be excluded from the Settlement, I will receive no money from the Settlement.” If the Request for Exclusion does not contain the information listed in (1)-(3) or is not postmarked by the Response Deadline and returned to the Settlement Administrator at the specified address, it will not be deemed a timely and valid Request for Exclusion from the Class. In the event of a dispute regarding the validity of an opt-out by a Class Member prior to the Court’s decision on Final Approval, the parties will meet and confer in an effort to reach a resolution. If the parties fail to agree, the decision regarding validity of the opt-out will be made by the Claims Administrator. Any challenges regarding the validity of an opt-out post Final Approval will be decided by the Court. Any Class Members who submit a timely and valid Request for Exclusion from the Settlement will not be entitled to any monetary recovery under the Settlement and will not be bound by the terms of the Settlement. Any Class Member who submits a timely and valid Request for Exclusion will not have any right to object, appeal or comment on the Settlement. Class Members who fail to submit a timely and valid Request for Exclusion, postmarked on or before the Response Deadline shall be members of the Class and will be bound by all terms of the Settlement and the Final Approval Order entered in this Action. No later than fourteen (14) calendar days after the Response Deadline, the Settlement Administrator shall provide Defense Counsel with a complete list of all Class Members who have submitted timely and valid Requests for Exclusion. The Settlement Administrator shall provide Class Counsel with a summary report that includes only the number of Requests for Exclusion received by the Settlement Administrator. If more than ten (10) Class Members submit a request for exclusion of the settlement, Defendant may at their own election void this Agreement.

3.9.7Notices of Objections. The Notice of Settlement shall state that Class Members who wish to object to the Settlement must submit a written Notice of Objection to the Court by the Response Deadline. To be valid, the Notice of Objection: (1) must contain the full name, address and last four digits of the social security number of the Class Member; and (2)


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must be signed by the Class Member. The Notice of Objection should also state the case name and number, Robert J. Kramer v. Lumber Liquidators, Inc., a Delaware Corporation, pending in the Superior Court of California, County of Sacramento, Case No. 34-2017-00222434, the basis for the objection and if the Class Member intends to appear at the Final Approval Hearing. If the Notice of Objection does not contain the information listed in (1)-(2) or is not filed or postmarked by the Response Deadline and returned to the Court at the specified address, it will not be deemed a timely and valid Notice of Objection to this Settlement. As applicable, the date of the filing or the date of the postmark on the return mailing envelope shall be the exclusive means used to determine whether a Notice of Objection has been timely submitted. Unless otherwise required by the Court, Class Members who fail to submit a timely and valid Notice of Objection shall be deemed to have waived any objections and shall be foreclosed from making any objections to the Settlement. Class Members who submit a timely and valid Notice of Objection will have a right to appear at the Final Approval Hearing to have their objections heard by the Court.

3.9.8In the event that a Class Member submits a Notice of Objection and a Request for Exclusion, the Notice of Objection shall control.

3.9.9No Solicitation Of Exclusions Or Objections. The Parties agree to use their best efforts to carry out the terms of this Settlement. At no time shall any of the Parties or their counsel seek to solicit or otherwise encourage Class Members to submit a Notice of Objection to or Request for Exclusion from the Settlement or to appeal from the Court’s Final Approval Order. Class Counsel shall not represent Class Members with respect to any objections or appeals to this Settlement.

3.9.10Settlement Administrator Declaration In Support Of Final Approval. Within twenty-one (21) days of the Response Deadline, the Settlement Administrator shall provide the Parties with a statement detailing the actions taken by the Settlement Administrator to administer the Settlement to date, along with all incurred and anticipated Settlement Administration Costs.

3.9.11Final Approval Hearing. No earlier than thirty (30) calendar days after the


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Response Deadline, the Court shall hold the Final Approval Hearing, where objections, if any, may be heard and the Court shall determine whether the Settlement should be finally approved, and if so, the amounts payable for: (1) Individual Settlement Payments; (2) the PAGA Award; (3) Plaintiff’s Service Award; (4) the Class Counsel Fees Award; (5) the Class Counsel Costs Award; and (6) Settlement Administration Costs.

3.9.12Entry Of Final Approval Order. If the Court approves this Settlement at the Final Approval Hearing, the Parties shall request that the Court enter a Final Approval Order, substantially in the form of Exhibit C. After thus granting final approval of the Settlement and entering judgment, the Court shall retain jurisdiction over the Parties to enforce and implement the terms of the judgment.

3.10Funding And Allocation of Settlement.

3.10.1Settlement Accounting. No more than five (5) calendar days after the Effective Date, the Settlement Administrator will provide the Parties with an accounting of all anticipated payments from the Settlement Fund Account, including: (1) Individual Settlement Payments and employer-side taxes thereon; (2) the PAGA Award; (3) Plaintiff’s Service Award; (4) the Class Counsel Fees Award; (5) the Class Counsel Costs Award; and (6) Settlement Administration Costs, all as specified in this Settlement Agreement and approved by the Court.

3.10.2Funding the Settlement. Within fourteen (14) calendar days after the Effective Date, Defendant shall fund the Settlement by providing the Total Settlement Amount to the Settlement Administrator. The Settlement Administrator shall deposit the funds in the Settlement Fund Account and will disburse the funds in the manner and at the times set forth in this Settlement Agreement.

3.10.3Individual Settlement Payments. Individual Settlement Payments will be paid from the Net Distribution Fund and mailed by First Class U.S. Mail to Class Members’ last known mailing address within fourteen (14) calendar days following the funding of the Settlement. Any checks issued to Class Members shall remain valid and negotiable for one hundred and twenty (120) calendar days from the date of their issuance and then shall become


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void on the one hundred and twenty-first (121st) calendar day after mailing, i.e., the Void Date. The Parties agree that any funds that remain from uncashed Settlement Payment checks after the expiration of one hundred and twenty (120) calendar days from the date of issuance shall be distributed to the Cy Pres beneficiary as specified below.

3.10.4Calculation Of Individual Settlement Payments. All Class Members who do not submit a timely and valid Request for Exclusion will receive an Individual Settlement Payment. Each Class Member’s Individual Settlement Amount will be calculated as follows:

(i)Each Putative Class Member will receive 1 point for week worked in California during the Putative Class Period.

(ii)Any Class Member who separated his or her employment with Defendant from November 17, 2014, through and including the Preliminary Approval Date, will receive 5 additional points to compensate the Class Member for his or her waiting time penalty claim. The Parties acknowledge that this additional amount provides sufficient consideration for a complete release of claims under Labor Code section 203, regardless of the underlying facts or basis for the alleged untimely, non-payment of wages.

(iii)The value of a point shall be determined by dividing the Net Distribution Fund by the total number of points available to each Class Member as set forth in subsections (i) and (ii) above. Each Class Member shall receive a gross payment equal to his or her points multiplied by the value of a point. To the extent that any Putative Class Member excludes him or herself from the Settlement and there are unclaimed funds remaining of the Net Distribution Fund, each Class Member shall be entitled to receive a pro-rated increase based on their total number of points as compared to the total number of points for all Class Members.

3.10.5 Tax Treatment Of Individual Settlement Payments. Each Individual Settlement Payment shall be allocated between taxable and non-taxable consideration as follows: one half (1/2) will be allocated to wages for which an IRS Form W-2 will issue, one quarter (1/4) will be allocated to interest for which an IRS Form 1099 will issue, and one quarter (1/4) will be allocated to penalties pursuant to the California Labor Code for which an IRS Form 1099 will issue. The Settlement Administrator will be responsible for calculating


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the employer- and employee-side taxes owed on the wage portion of each Class Member’s Individual Settlement Payment and paying these amounts to the appropriate state and federal agencies, within the timing required by applicable state and/or federal law. The Parties make no representations as to the tax treatment or legal effect of the payments called for in this Settlement Agreement and Class Members are not relying on any statement or representation by the Parties in this regard. Class Members will be solely responsible for the payment of any taxes and penalties assessed on the payments described herein except for the employer’s share of payroll taxes on the wage portion of the Individual Settlement Payments.

3.10.6PAGA Award. The PAGA Award shall be distributed within fourteen (14) calendar days after the Settlement is funded. Specifically, the Settlement Administrator shall prepare and mail a check payable to the California Labor & Workforce Development Agency for an amount not to exceed eighty percent (75%) of the PAGA Award. The remaining twenty-five percent (25%) of the PAGA Award shall be included within the Net Distribution Fund for distribution to Class Members as part of the 1/4 penalties component of the Individual Settlement Payment. In the event that the Court awards less than the full amount requested for the PAGA Award, the un-awarded amount will be made available for distribution to Class Members as part of the Net Distribution Fund.

3.10.7 Plaintiff’s Service Award. Defendant agrees not to oppose any application by Plaintiff for a Service Award not to exceed Ten Thousand Dollars ($10,000), as consideration for his Complete and General Release of Claims and for his time and effort in prosecuting this matter. The Service Award shall be paid to Plaintiff within fourteen (14) calendar days following funding of the Settlement. Plaintiff agrees to provide the Settlement Administrator with an executed IRS Form W-9 before the Service Award is issued. The Settlement Administrator shall issue an IRS Form 1099 to Plaintiff for his payment. Plaintiff shall be solely and legally responsible for paying any and all applicable taxes on his Service Award and shall hold Defendant harmless from any claim or liability for taxes, penalties, or interest arising as a result of the Service Award. The Service Award shall be in addition to Plaintiff’s Individual Settlement Payment, which he shall receive as a Participating Class Member. In


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the event that the Court awards less than the full amount requested for the Service Award, the un-awarded amount will be made available for distribution to Class Members as part of the Net Distribution Fund.

3.10.8Class Counsel Fees Award And Class Counsel Costs Award. Defendant agrees not to oppose a request for a Class Counsel Fees Award not to exceed One Million, Five Hundred and Eighty-Three Thousand, Three Hundred and Thirty-Three Dollars and Thirty-Three Cents ($1,583,333.33), or one third of the Total Settlement Amount, whichever is greater. Defendant further agrees not to oppose any application by Class Counsel for a Class Counsel Costs Award not to exceed Thirty Thousand Dollars ($30,000.00). The Settlement Administrator shall pay the Court-approved Class Counsel Fees Award and Class Counsel Costs Award within fourteen (14) calendar days following the funding of the Settlement. Class Counsel agrees to provide the Settlement Administrator with an executed IRS Form W-9 before the Class Counsel Fees Award and Class Counsel Costs Award are issued. The Settlement Administrator shall issue an IRS Form 1099 to Class Counsel for the payments made pursuant to this Paragraph. In the event that the Court awards less than the full amount requested for the Class Counsel Fees Award and Class Counsel Costs Award, the un-awarded amount will be made available for distribution to Class Members as part of the Net Distribution Fund. This Settlement is not contingent upon the Court awarding Class Counsel any particular amount in attorneys’ fees and costs.

3.10.9 Settlement Administration Costs. The Settlement Administrator shall be paid Settlement Administration Costs from the Total Settlement Amount, in an amount expected to total $15,000. The Settlement Administrator shall be paid Settlement Administration Costs within forty-five (45) calendar days following the funding of the Settlement. In the event that the Court awards less than the full amount set aside for Settlement Administration Costs, the un-awarded amount will be made available for distribution to Monetary Payment Class Members as part of the Net Distribution Fund.

3.11No Effect On Employee Benefits. Amounts paid to Plaintiff or Class Members pursuant to this Settlement Agreement do not count as earnings or compensation for purposes of any


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benefits (e.g., 401(k) plans or retirement plans) sponsored by Defendant.

3.12Nullification Of Settlement Agreement. In the event: (1) the Court does not enter the Preliminary Approval Order as provided herein; (2) the Court does not enter a Final Approval Order as provided herein; (3) the Settlement does not become final for any other reason; or (4) Judgment is not entered by the Court dismissing the lawsuit as to all Claims as to all Class Members with prejudice, this Settlement Agreement shall be null and void and any order entered by the Court in furtherance of this Settlement shall be treated as void from the beginning. In such case, the Parties shall be returned to their respective statuses as of the date and time immediately prior to the execution of this Settlement Agreement and the Parties shall proceed in all respects as if this Settlement Agreement had not been executed. In the event an appeal is filed from the Court’s Final Approval Order or from an order rejecting any motion to intervene, or any other appellate review is sought, Settlement administration shall be stayed pending final resolution of the appeal and Defendant will not be required to fund this Settlement until and unless the Effective Date is reached. In the event that this Settlement is not Finally Approved for any reason, including if Defendant voids the Settlement per the terms of this agreement, Defendant will be solely responsible for costs incurred by the Settlement Administrator.

3.13Exhibits And Headings. The terms of this Settlement Agreement include the terms set forth in the Exhibits A-C attached, which are incorporated by this reference as though fully set forth herein. All Exhibits A-C to this Settlement Agreement are an integral part of the Settlement. The descriptive headings of any paragraphs or sections of this Settlement Agreement are inserted for convenience only and do not constitute a part of this Settlement Agreement.

3.14Interim Stay Of Proceedings. The Parties agree to stay all proceedings in the Action, except such proceedings necessary to implement and complete the Settlement, pending the Final Approval Hearing to be conducted by the Court.

3.15Amendment Or Modification. This Settlement Agreement may be amended or modified only by a written instrument signed by Defense and Class Counsel or their successors-in-interest.

3.16Entire Agreement. This Settlement Agreement and the attached Exhibits A-C constitute the entire agreement among the Parties, and no oral or written representations, warranties


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or inducements have been made to any Party concerning this Settlement Agreement or its Exhibits A-C other than the representations, warranties and covenants contained and memorialized in the Settlement Agreement and its Exhibits A-C.

3.17Authorization To Enter Into Settlement Agreement. The person signing this Settlement Agreement on behalf of Defendant represents and warrants that he/she is authorized to sign this Settlement Agreement on behalf of Defendant. Plaintiff represents and warrants that he is authorized to sign this Settlement Agreement and that he has not assigned any claim covered by this Settlement to a third-party. Plaintiff, by signing this Settlement Agreement, is bound by the terms herein and further agrees not to submit any Request for Exclusion from or Notice of Objection to the Settlement. Any such Request for Exclusion or Notice of Objection shall therefore be void and of no force or effect.

3.18Signature of all Class Members Unnecessary to be Binding. The Parties agree that because the Class Members are numerous, it is impossible or impractical to have each Class Member execute this Agreement. The Notice will advise all Class Members of the binding nature of the release provided herein and shall have the same force and effect as if the Agreement were executed by each Class Member. The only Class Members who will not be bound by the terms of this Agreement are those who submit a timely and valid Request for Exclusion.

3.19Binding On Successors And Assigns. This Settlement Agreement shall be binding upon, and inure to the benefit of, the successors or assigns of the Parties hereto, as previously defined.

3.20California Law Governs. All terms of this Settlement Agreement shall be governed by and interpreted according to the laws of the State of California.

3.21Mutual Cooperation. The Parties agree to fully cooperate with each other to accomplish the terms of this Agreement, including but not limited to, execution of such documents and to take such other action as may be necessary to implement the terms of this Agreement. The Parties to this Agreement shall use their best efforts, including all reasonable efforts contemplated by this Agreement and any other reasonable efforts that may become necessary by order of the Court, or otherwise, to effectuate this Agreement and the terms set forth herein.

3.22Counterparts. This Settlement Agreement shall become effective upon its execution


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by all of the undersigned. Plaintiff, Class Counsel, and Defendant may execute this Settlement Agreement in counterparts, which shall have the same force and effect as if each had signed the same instrument. Copies of the executed Settlement Agreement shall be effective for all purposes as though the signatures contained therein were original signatures.

3.23Residue or Reversion. This is a non-reversionary settlement and no amount of the Gross Settlement Amount shall revert back to Defendant. Should there remain any residual from the Net Settlement Amount after all payments are made under this Agreement, such residual shall be handled in the following manner: All amounts contained in settlement checks that were not cashed within 90 calendar days, and all interest that has accrued, shall be paid to a Court-approved cy pres beneficiary. Subject to Court approval, the Katherine and George Alexander Community Law Center, is designated as the cy pres beneficiary. No later than ten (10) calendar days after the expiration of the Void Date, the Settlement Administrator shall pay the amounts contained in settlement checks that were not cashed, and all interest that has accrued, to the cy pres beneficiary. The Settlement Administrator shall provide a declaration of payment to the cy pres beneficiary, which will be served on Class Counsel and Defendant’s Counsel within ten (10) calendar days of payment of the residual to such beneficiary. Any costs associated with administering the remaining funds under this section (e.g., bank stop-payment charges, settlement administration costs associated with any reserve amount) or payments to the cy pres beneficiary will be deducted before donation of any cy pres funds.

IT IS SO STIPULATED AND AGREED.


Dated:September 9, 2019_
	/s/ Robert J. Kramer
	ROBERT J. KRAMER


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CLASS ACTION SETTLEMENT AGREEMENT


Dated:September 5, 2019_
	/s/ M. Lee Reeves
	LUMBER LIQUIDATORS, INC.


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CLASS ACTION SETTLEMENT AGREEMENT

Exhibit 10.2

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

DANA GOLD, TAMMY EMERY, MARY LOUISE FERENCE, LAURA NORRIS, DONALD FURSMAN, and JOHN TRIANA, on behalf of themselves and all others similarly situated,

Plaintiffs,

LUMBER LIQUIDATORS, INC., a Delaware corporation; and DOES 1 through 200, inclusive,

Defendants.

No. 3:14-cv-05373-RS

AGREEMENT OF COMPROMISE AND SETTLEMENT

IT IS HEREBY AGREED by, between, and among Representative Plaintiffs Dana Gold, Tammy Emery, Mary Louise Ference, Laura Norris, Donald Fursman, and John Triana, in their individual and representative capacities on behalf of themselves and a putative Settlement Class (as defined herein) (“Plaintiffs”), and Defendant Lumber Liquidators, Inc. (hereinafter “Lumber Liquidators”) (collectively “Parties”), by and through their duly authorized counsel, that, in consideration of the promises and covenants set forth in this Agreement of Compromise and Settlement (hereinafter “Agreement” or “Settlement Agreement”) and upon entry by the United States District Court for the Northern District of California (the “Court”) of a Final Order and Judgment approving the settlement as set forth in this Agreement, the claims asserted against Lumber Liquidators shall be settled, dismissed, and compromised on a nationwide basis upon the terms and conditions set forth in this Agreement.

RECITALS

A. WHEREAS, on December 8, 2014, Plaintiff Dana Gold filed a nationwide class action lawsuit against Lumber Liquidators, in the United States District Court for the Northern District of California, Gold, et al. v. Lumber Liquidators, Inc., et al., 3:14-cv-05373, seeking to recover damages on behalf of herself and a class of individuals who had purchased allegedly defective Morning Star Bamboo sold by Lumber Liquidators. On February 13, 2015, Plaintiffs filed a nationwide First Amended Class Action Complaint, adding Tammy Emery, Edwin Mendez, and Christopher Massaro as plaintiffs, and asserting a nationwide class action as well as four state sub-classes for California, Illinois, New York, and West Virginia.

B. WHEREAS, on August 3, 2015, Lumber Liquidators filed motions to dismiss Plaintiffs’ First Amended Class Action Complaint and to strike the class allegations. On September 11, 2015, Plaintiffs filed responses to Lumber Liquidators’ motions to dismiss and strike. On September 25, 2015, Lumber Liquidators filed replies in support of its motions to dismiss and strike. On October 26, 2015, the Court heard arguments on Lumber Liquidator’s motions. On November 30, 2015, the Court entered an order granting in part and denying in part Lumber Liquidators’ motions.

C. WHEREAS, on December 16, 2015, Plaintiffs filed a nationwide Second Amended Class Action Complaint, adding Russel Dornon, Laura Norris, John Foster, Donald Fursman, and John Triana as plaintiffs and asserting eight state sub-classes for California, Florida, Illinois, Minnesota, New York, Ohio, Pennsylvania, and West Virginia.

D. WHEREAS, on January 20, 2016, Plaintiffs filed a nationwide Third Amended Class Action Complaint, removing Russel Dornon and John Foster as plaintiffs and asserting seven state sub-classes for California, Florida, Illinois, Minnesota, New York, Pennsylvania, and West

Virginia. On February 3, 2016, Lumber Liquidators filed an answer to Plaintiffs’ Third Amended Class Action Complaint.

E. WHEREAS, the Parties engaged in extensive discovery.

F. WHEREAS, approximately fourteen (14) fact depositions and seven (7) expert depositions were conducted.

G. WHEREAS, Lumber Liquidators produced pursuant to discovery requests approximately 855,000 pages of documents.

H. WHEREAS Plaintiffs responded to multiple sets of discovery including document production requests and interrogatories.

I. WHEREAS, on February 17, 2017, Plaintiffs filed a motion and memorandum in support of class certification. On April 14, 2017, Lumber Liquidators filed an opposition to Plaintiffs’ motion for class certification and a motion to exclude Plaintiffs’ expert witnesses. On April 28, 2017, Plaintiffs filed an opposition to Lumber Liquidators’ motion to exclude. On May 5, 2017, Lumber Liquidators filed its brief in support of its motion to exclude. On May 8, 2017, Plaintiffs filed a reply in support of its motion for class certification. On May 19, 2017, Lumber Liquidators filed a sur-reply in opposition to Plaintiffs’ motion for class certification.

J. WHEREAS, on May 23, 2017, Plaintiffs filed a Motion for Leave to file their Fourth Amended Class Action complaint, requesting leave to narrow the class definition to no longer include the nationwide class and to make other revisions to the class definition. On June 6, 2017, Lumber Liquidators filed its opposition to Plaintiffs’ motion for leave. On June 9, 2017, Plaintiffs filed their reply in support of their motion for leave. On June 19, 2017, the Court heard arguments on Plaintiffs’ motion for leave. On June 22, 2017, the Court granted in part and denied in part Plaintiffs’ motion for leave. On June 26, 2017, Plaintiffs filed a Fourth Amended Class

Action Complaint, removing the nationwide class allegations and limiting the alleged defective product to Morning Star Strand Bamboo Flooring. This Fourth Amended Class Action Complaint asserted a six- state class action for California, Florida, Illinois, Minnesota, Pennsylvania, and West Virginia.

K. WHEREAS, on July 10, 2017, Lumber Liquidators filed a motion to dismiss the Fourth Amended Class Action Complaint for lack of personal jurisdiction. On July 24, 2017, Plaintiffs filed an opposition to Lumber Liquidators’ motion to dismiss. On July 31, 2017, Lumber Liquidators filed a reply in support of its motion to dismiss Plaintiffs’ Fourth Amended Class Action Complaint for lack of personal jurisdiction.

L. WHEREAS, on July 10, 2017, Plaintiffs filed a supplemental brief in support of class certification and in opposition to Lumber Liquidators’ motion to exclude Plaintiffs’ expert witnesses. On July 10, 2017, Lumber Liquidators filed a supplemental brief in opposition to Plaintiffs’ motion for class certification and in support of its motion to exclude Plaintiffs’ expert witnesses.

M. WHEREAS, on August 8, 2017, Lumber Liquidators filed a motion to transfer the case under FRCP 1404. On August 23, 2017, Plaintiffs filed an opposition to motion to transfer the case under FRCP 1404. WHEREAS, on September 19, 2017, the Court denied Lumber Liquidators’ motion to dismiss Plaintiffs’ Fourth Amended Class Action Complaint for lack of jurisdiction and transfer the case.

N. WHEREAS, on October 3, 2017, Lumber Liquidators filed an answer to Plaintiffs’ Fourth Amended Class Action Complaint.

O. WHEREAS, on November 13, 2017, the Court heard arguments on the Plaintiffs’ motion for class certification and Lumber Liquidators’ motion to exclude Plaintiffs’ expert

witnesses. On November 15, 2017, the Court granted Plaintiffs’ motion for class certification and granted in part and denied in part Lumber Liquidators’ motion to exclude Plaintiffs’ expert witnesses.

P. WHEREAS, on December 1, 2017, Lumber Liquidators filed a petition for permission to appeal the Court’s order granting class certification with the United States Court of Appeals for the Ninth Circuit. On December 11, 2017, Plaintiffs filed an answer to Lumber Liquidators’ petition for permission to appeal. On March 19, 2018, the United States Court of Appeals for the Ninth Circuit denied Lumber Liquidator’s petition.

Q. WHEREAS, on February 2, 2018, Plaintiffs filed a Fifth Amended Class Action Complaint asserting a six-state class action for California, Florida, Illinois, Minnesota, Pennsylvania, and West Virginia. On February 16, 2018, Lumber Liquidators filed an answer to Plaintiffs’ Fifth Amended Class Action Complaint.

R. WHEREAS, on August 15, 2018, Lumber Liquidators filed a motion for summary judgment. On September 26, 2018, Plaintiffs filed a stipulation to modify the class period from 2008-present to 2012-present. On September 27, 2018, the Court granted Plaintiffs’ stipulation to modify the class period. On September 28, 2018, Plaintiffs filed an opposition to Lumber Liquidators’ motion for summary judgment. On November 2, 2018, Lumber Liquidators filed a reply in support of its motion for summary judgment. On November 5, 2018, the Court heard arguments on the motion for summary judgment. On January 2, 2019, the Court denied Lumber Liquidators’ motion for summary judgment.

S. WHEREAS, throughout this litigation, the Parties have engaged in extensive, arms-length negotiations regarding the settlement of claims involving the Flooring.

T. WHEREAS, the Parties participated in mediations on December 13, 2017 and

January 26, 2018 with the Honorable Edward A. Infante (Ret.) (JAMS); and May 17, 2018 and October 4, 2018 with Bruce A. Friedman (JAMS).

U. WHEREAS, Plaintiffs and Class Counsel have evaluated the time and expense that will be necessary to prosecute this case to final judgment, the delays that are likely before any judgment may be entered, and the uncertainty inherent in predicting the outcome of any complex litigation such as this and, based upon such evaluation, have concluded that further proceedings in this action are likely to be further protracted, complex, and expensive, and that the outcome is uncertain.

V. WHEREAS, without conceding any lack of merit of any of their claims, Plaintiffs and Class Counsel have concluded that it is in the best interests of the putative class to settle these actions on the terms set forth herein, and that the settlement with Lumber Liquidators embodied in this Agreement is fair, reasonable, and adequate to Plaintiffs and the Class.

W. WHEREAS, while denying any fault, wrongdoing, or liability, and relying on the provisions of this Agreement that the settlement embodied herein shall in no event be construed as or deemed to be evidence of an admission or a concession on the part of Lumber Liquidators (or any of its predecessors, successors, parent or subsidiary companies, affiliates, officers, directors, agents, attorneys, representatives, insurers, suppliers, distributors or vendors) of any fault, wrongdoing, or liability whatsoever, or that any of the allegations in the Complaint are true, and without conceding any infirmity in its defenses, Lumber Liquidators considers it desirable to enter into this Agreement in order to avoid further expense, to dispose of burdensome and protracted litigation, and to avoid the uncertain outcome of proceeding with this litigation.

DEFINITIONS

As used in this Settlement Agreement, the following terms shall have the following meanings:

a. “Approved Claim” means a Claim submitted by a Claimant that the Settlement

Administrator determines to be accurate, timely, and eligible.

b. “Approved Claimant” means a Settlement Class Member whose Claim has been approved by the Settlement Administrator pursuant to the terms of this Settlement Agreement.

c. “CAFA Notice” means the notice to be sent by the Settlement Administrator to appropriate federal and state officials pursuant to the requirements of the Class Action Fairness Act of 2005 (“CAFA”), 28 U.S.C. § 1715(b).

d. “Claim” means the form provided for Settlement Class Members to submit

to obtain a Settlement Award under this Settlement Agreement.

e. “Claimant” means a Settlement Class Member who has submitted a Claim by the Claim Deadline.

f. “Claim Deadline” means the date by which all Claim Forms must be postmarked,

or received by the Settlement Administrator, to be considered timely. The Claim Deadline shall be 180 days after the Notice Date

g. “Claim Form” means the form provided for Settlement Class Members to submit

to obtain a Settlement Award under this Settlement Agreement, as set forth in Exhibit C to this Settlement Agreement.

h. “Class Counsel” for this case are Charles LaDuca and Brendan Thompson from Cuneo Gilbert & LaDuca, LLP; Michael Ram of Robins Kaplan; and Jeffrey Cereghino of the Cereghino Law Group.

i. “Class Notice” means the Notice of Proposed Class Action Settlement to be sent to the Settlement Class, pursuant to the terms of the Court’s Preliminary Approval Order and any other Notices as may be ordered by the Court. The initial Class Notice shall be substantially in the form attached as Exhibit A to this Settlement Agreement.

j. “Class Period” means January 1, 2012 through March 15, 2019.

k. “Complaint” means Plaintiffs’ operative class action lawsuit filed against Lumber

Liquidators in the United States District Court for the Northern District of California, Gold, et al. v. Lumber Liquidators, Inc., et al., 3:14-cv-05373.

l. “Court” means the United States District Court for the Northern District of California.

m. “Damages” shall refer to claims of cupping, warping, buckling, splintering, scratching, cracking, shrinking, delaminating, deteriorating, gapping, and/or other damages to the Flooring, baseboards, moldings and/or subfloor as alleged in the Operative Complaint.

n. “Days” mean calendar days, excluding federal holidays.

o. “Defendant” means Lumber Liquidators, Inc.

p. “Effective Date” means the first date by which all of the following events shall have occurred:

(1) The Court has entered the Preliminary Approval Order.

(2) The Court has entered the Final Approval Order and Judgment approving the Settlement Agreement in all respects, dismissing the Gold litigation with prejudice.

(3) The time for appeal from the Final Approval Order and Judgment shall have expired, or if any appeal of the Final Approval Order and Judgment as to the Settlement Agreement is taken, that appeal shall have been finally determined by the

highest court, including any motions for reconsideration and/or petitions for writ of certiorari, and which Final Approval Order and Judgment is not subject to further adjudication or appeal.

q. “Eligible Claimant” means all Settlement Class Members who either: (i) purchased the Flooring for personal, family or household use and own the residence with the Flooring when the Settlement Class Member submits a Claim; (ii) previously owned such a residence and, prior to making the Claim, sold or transferred the residence and at the time of the sale or transfer retained the right to make a claim for the Flooring pursuant to a valid documented assignment; or (iii) prior owner of such a residence who paid for repairs to the Flooring directly arising from the types of damage alleged in the operative complaint and seeks reimbursement. Eligible Claimants must timely submit a completed and accurate Claim Form by the Claim Deadline to be considered for any award payment pursuant to Section B of Consideration to Plaintiffs and Available Benefits, below.

r. “Final Approval and Fairness Hearing” means the hearing at which the Court will:

(1) determine whether to grant Final Approval of this Settlement Agreement; (2) consider any timely objections to this Settlement Agreement; and (3) consider Class Counsel’s request for an award of attorneys’ fees, costs and expenses.

s. “Final Approval Order and Judgment” shall mean the order finally approving this

Settlement Agreement and dismissing the Complaint.

t. “Flooring” shall mean Morning Star Strand Bamboo flooring sold by

Lumber Liquidators at any time during the Class Period including but not limited to the list of product names and SKU numbers attached as Exhibit D.

u. “Notice” means, collectively, the communications by which purchasers of

Flooring are to be notified of this Settlement Agreement and the Court’s Preliminary Approval of this Settlement Agreement as required by Fed. R. Civ. P. 23(e) and any subsequent communications to purchasers of Flooring as ordered by the Court.

v. “Notice Date” shall be thirty (30) days after entry of the Preliminary Approval Order, or as soon as possible thereafter.

w. “Notice Plan” means the notice program used by Parties and the Settlement Administrator to inform Settlement Class Members about the Settlement Agreement.

x. “Operative Complaint” shall mean the last amended complaint filed with the Court.

y. “Party” and “Parties” means Plaintiffs and Lumber Liquidators.

z. “Person(s)” shall mean any natural person, individual, corporation, association,

partnership, trust, or any other type of legal entity.

aa. “Preliminary Approval” or “Preliminary Approval Order” means the Court’s

entry of an order of initial approval of this Settlement Agreement pursuant to Fed. R. Civ. P. 23.

bb. “Proof of Damages” means submission of 1) Verified responses to the Claim Form; 2) Photographs depicting Damages to the Flooring; 3) Paperwork from a Certified Flooring Inspector or Installer detailing the labor and materials necessary to repair the Damages; 4) an averment from the Settlement Class Member that he/she followed all installation instructions to the best of his/her ability and/or hired a certified flooring installer to perform the installation according to Lumber Liquidators’ installation instructions; and 5) an averment that the Damages are not due to any sudden or accidental water damage, including but not limited to wet mopping, leakage from a refrigerator, dishwasher, ice maker or water heater, and/or flooding. The Settlement Administrator, at its sole discretion, may request additional proof not listed above, if

necessary, to assess the validity of a claim.

cc. “Released Claims” shall have the meaning set forth in this Settlement Agreement.

dd. “Released Parties” shall have the meaning set forth in this Settlement Agreement.

ee. “Releasing Parties” shall have the meaning set forth in this Settlement Agreement.

ff. “Representative Plaintiff(s)” means Dana Gold, Tammy Emery, Mary Louise Ference, Laura Norris, Donald Fursman, and John Triana.

gg. “Request for Exclusion” means a request to opt-out or be excluded from the Class which is timely submitted upon receiving and complying with instructions contained in the Notice.

hh. “Service Awards” means cash awards paid to the Representative Plaintiffs for their service in this case.

ii. “Settlement Administrator” means CPT Group.

jj. “Settlement Agreement” or “Agreement” or “Settlement” refers to this document, and supersedes any prior agreements or discussions.

kk. "Settlement Award" means the award that each Settlement Class Member shall be entitled to receive pursuant to the terms of the Settlement Agreement if he or she timely submits an Approved Claim.

ll. “Settlement Class Member” means persons in the United States who purchased, for personal, family, or household use, the Flooring during the Class Period, including but not limited to those persons that are part of the litigation class certified by this Court on November 15, 2017 as subsequently amended by Orders of December 22, 2017 and September 27, 2018. Excluded from the Class are (1) Defendant, (2) all present and former affiliates and/or officers or directors of Defendant, (3) the Judge to whom this case is assigned and any member of the

Judge’s immediate family and judicial staff, (4) all individuals who have already entered into a release or prior settlement with Lumber Liquidators related to the Flooring during the Class Period, (5) contractors, persons, or other entities who purchased the Flooring for resale, and (6) all persons who timely request to be excluded from this Settlement pursuant to the Notice.

mm. “Settlement Fund” means $14 million in cash and $14 million in Store-credit Vouchers, with a potential additional $2 million in Store-credit Vouchers based on obtaining a claims percentage of more than 7%, for an aggregate settlement of up to $30 million.

nn “Store-credit Vouchers” or “Vouchers” means product vouchers which may be used for any product Defendant sells or labor costs through Defendant’s flooring installation network and distributed by the Claims Administrator as part of this Settlement Agreement.

CONSIDERATION TO PLAINTIFFS AND AVAILABLE BENEFITS

A. Consideration to Plaintiffs:

In exchange for the terms and conditions set forth herein, Defendant will provide the following consideration:

1. A common fund will be established whereby Lumber Liquidators will pay $14 million dollars in cash and $14 million dollars in Store-credit Vouchers. An additional $2 million dollars in Store-credit Vouchers will be provided upon a 7% claims rate being reached. The Settlement Fund shall be paid in the following manner:

a. Within 5 days of the Court’s preliminary approval of settlement, Lumber Liquidators will transfer $1,000,000.00 to the settlement fund escrow account to be used to pay for Notice and the Settlement Administrator’s fees.

b. Within 30 days of the Final Approval Order, Lumber Liquidators will

transfer $13,000,000.00 in cash (Cash) to the settlement fund escrow account.

c. Lumber Liquidators will work with Plaintiffs’ Counsel and the Settlement Administrator to prepare up to $16,000,000.00 worth of Store-credit Vouchers (Vouchers) for distribution to Approved Claimants.

d. The payments described above constitute the entire payment due from Defendant or any of the Released Parties under the Settlement Agreement. The Parties agree and acknowledge that none of the settlement funds paid by Defendant under the Settlement Agreement shall be deemed to be, in any way, a penalty or a fine of any kind.

2. An escrow account shall be established and administered by Class Counsel under the Court’s continuing supervision and control. No disbursements of funds from the escrow account will occur without order of the Court. The escrow account is intended by the Parties to be treated as a “qualified settlement fund” for federal income tax purposes pursuant to Treasury Reg. 1.468B-1, and to that end, the Parties shall cooperate with each other and shall not take a position in any filing or before any tax authority that is inconsistent with such treatment.

3. Lumber Liquidators shall have no responsibility or liability relating to the administration, investment, or distribution of the Settlement Fund, which shall be the sole responsibility of Class Counsel and the Settlement Administrator.

4. Following the Effective Date, Lumber Liquidators shall not be entitled to any reverter or return of common fund benefits.

B. Benefits under this Settlement Agreement:

1. To be entitled to participate in the Settlement Fund, a Settlement Class Member, who has not requested exclusion pursuant to the Notice, must submit a valid Claim Form on or before the deadline established by the Court. Any Settlement Class Member who does not submit a timely and valid Claim shall not be entitled to participate in this Settlement, but nonetheless shall be barred and enjoined from asserting any of the Released Claims described herein.

2. Settlement Class members with an Approved Claim will be issued Cash and/or Vouchers. Claimants will be limited to one recovery per household, but if multiple purchases were made, the total purchase price of all purchases will be used to calculate the award.

Benefits to Eligible Claimants will be issued in accordance with the criteria below subject to participation, eligibility and, Damages, if any:

Compensation Level One: All Approved Claimants will be eligible to receive benefits from the Compensation Fund. Level One benefits will be calculated on a pro-rata basis based on the total purchase price of the Flooring. The exact pro-rata percentage will be determined by taking the total value of all claims submitted and allocating the available Cash/Vouchers from the Compensation Fund on an equal percentage basis to each claimant.

Compensation Level Two: Any Approved Claimant with Flooring that is manifesting warping, cupping, buckling, scratching, cracking, delaminating, splintering, deteriorating or gapping (Manifested Conditions) may submit, in the Claim Form, proof of Manifested Conditions to be eligible for Level Two Benefits. Level Two Benefits will be determined based on the value of the repair cost pursuant to a Contractors Bid, photographs and other requirements as part of the Settlement Class member’s proof of Manifested Conditions. Both Level One and Level Two Benefits shall be allocated equally on a pro-rata basis within each Level, however Class Counsel reserves the right to allocate the percentages of Vouchers and Cash paid to Level One and Level Two Approved Claimants dependent upon claims rate and value of respective claims. It is anticipated that Level One benefits will consist of more value in Vouchers than in Cash.

The amount of Funds allocated to both Compensation Levels shall be all the available Compensation Fund, net of administrative and attorney fees, costs and Service Awards. Class Members may submit both Compensation Level One and Level Two claims, however Class

Members who submitted both Level One and Level Two claims will have approved Level Two claims deducted from their total Flooring Claims.

Both Compensation Level One and Compensation Level Two Benefits shall be allocated equally on a pro-rata basis within each level however Class Counsel reserves the right to allocate the percentages of Vouchers and Cash paid to Compensation Level One and Compensation Level Two Approved Claimants dependent upon claims rate, value of respective claims and potential claimant weighted election of benefits in Compensation Level Two between more Cash and less Vouchers or more Vouchers and less Cash

3. At the time of making a settlement claim, or within 10 days of receiving notice that their claim is approved, Settlement Class members may designate a family member, a nationally recognized charity or a third party to be the recipient of the Vouchers.

The Settlement Administrator will determine whether a charity is a nationally recognized charity for purposes of this Settlement. If a third party is designated to be the recipient of the Vouchers, the Settlement Class member must notify the settlement administrator within 10 days after designation as to the identity of the third party including all contact information. The third party may not transfer or sell any of the Vouchers.

4. Settlement Class Members may use their Vouchers to purchase any product Defendant sells or for labor to install any Lumber Liquidators’ product and may have the product shipped to a third party within the United States. Except as described above, Vouchers will not be transferrable, nor may they be sold or redeemed for cash.

5. Defendant will provide the Vouchers, good for one per household,

(a) Vouchers are good for 3 years from date of issuance, one per household, with the

following exceptions based on state escheat laws:

(b) Vouchers issued to Approved Claimants in the following states shall have no expiration date: California, Connecticut, Florida, Maine, Minnesota, New Jersey, Rhode Island, and Washington.

(i) Colorado – 5 year expiration

(ii) D.C. – 5 year expiration

(iii) Georgia – 5 year expiration

(iv) Hawaii – 5 year expiration

(v) Illinois – 5 year expiration

(vi) Louisiana – 5 year expiration

(vii) Maryland – 4 year expiration

(viii) Mississippi – 5 year expiration

(ix) New York – 5 year expiration

(x) New Mexico – 5 year expiration

(xi) North Dakota – 6 year expiration

(xii) South Dakota – 5 year expiration

(xiii) Virginia – 5 year expiration

6. The Parties agree that the total amount of Cash shall not exceed the amount set forth in the Settlement Fund described above.

(i) In the event that the Cash portion of the Settlement Fund is not exhausted and after all claims, attorneys’ fees, costs, service awards, and administration costs been paid, Approved Claimants will receive a proportional additional cash payment.

(ii) If after having paid all attorneys’ fees, costs, service awards, and administrative costs, the Cash portion of the Settlement Fund is reduced such that it cannot pay claimants the anticipated amount, the Cash payments will be proportionally reduced across all the Approved Claimants.

(iii) If any amounts remain in the Cash portion of the Settlement Fund (for example because of uncashed checks), Plaintiffs’ counsel may seek a cy pres award.

PRELIMINARY APPROVAL OF SETTLEMENT

Class Counsel shall prepare the motion seeking Preliminary Approval of the Settlement Class and the Parties shall work in good faith to support the motion. The Court shall be asked to approve the terms and conditions of the Settlement Agreement, the Notice to the Class, the method of Notice, the Claim Form, and the procedure for submitting claims. As part of this Settlement, Plaintiffs will file a Sixth Amended Complaint to facilitate resolving all issues on a nationwide basis. This motion seeking preliminary approval must comply with the United States District Court for the Northern District of California’s Class Action Settlement Guidance.

SETTLEMENT CLAIMS ADMINISTRATOR

The Settlement Administrator, CPT Group, has been selected based on cost, experience and reputation. The Settlement Administrator will work to:

1. Send Notice to members of the Class;

2. Maintain and monitor a Settlement website;

3. Review, evaluate, and pay where eligible, claims;

4. Monitor and maintain any Requests for Exclusion, Claim Forms, and any and all other written communications from Class Members in response to the Notice for a period of one (1) year following the end of the Claim Period, or pursuant to further order of the Court. All

written communications received by the Settlement Administrator from Class Members relating to the Settlement Agreement shall be available and provided upon request to Class Counsel and Counsel for Lumber Liquidators.

5. Distribute the proceeds of the Settlement Fund pursuant to the Settlement Agreement;

6. Confirm the issuance of payment to the Approved Claimants;

7. Provide any necessary certifications to the Court concerning the administration and processing of the claims; and

8. Timely respond to inquiries from Class Counsel, their co-counsel, Counsel for Lumber Liquidators, the Court, and Settlement Class Members.

NOTICE OF PROPOSED SETTLEMENT

A. Notice Program

Class Counsel shall work with the Settlement Administrator to prepare the Notice Plan. Class Members shall receive constitutionally adequate Notice of the Settlement. Class Counsel shall submit to the Court for approval the Notice Plan. The Notice Plan will provide the best Notice practicable under the circumstances of the foregoing actions, conform to all aspects of Federal Rule of Civil Procedure 23, satisfy the Due Process Clause of the United States Constitution, and comply with the terms and conditions of the Agreement. Class Counsel shall work with the Settlement Administrator and/or other class notice specialists, as necessary, to prepare drafts of the proposed Class Notice. Lumber Liquidators shall have the right to review and approve the proposed Class Notice, including the content of the Settlement website. If any objections to the proposed Class Notice cannot be resolved by the Parties, they shall be submitted to the Court for resolution.

B. Class Member Contact Information

Lumber Liquidators shall provide Class Counsel and the Settlement Administrator with the contact information within its possession (included the name, e-mail address, telephone number, physical mailing address, and total value of Flooring purchased) of each reasonably identifiable person who falls within the definition of the Settlement Class by the time this Settlement Agreement is executed (“Class Member Information”). Lumber Liquidators warrants and represents that the Class Member Information provided to Class Counsel accurately reflects the information retained by Lumber Liquidators in the ordinary course of business.

C. Settlement Website

Prior to the Notice Date, the Settlement Administrator shall establish an Internet website, www.bamboosettlement.com that will inform Settlement Class members of the terms of this Settlement, their rights, dates and deadlines and related information. The website shall include, in .pdf format and available for download, the following: (i) the Long Form Notice; (ii) the Claim Form; (iii) the Preliminary Approval Order; (iv) this Settlement Agreement (including all of its Exhibits), (v) the Operative Complaint filed in this case; and (vi) any other materials agreed upon by the Parties and/or required by the Court. The Internet website shall provide Settlement Class Members with the ability to complete and submit the Claim Form electronically. The Internet website shall also make the Claim Form available for download.

D. Toll-Free Telephone Number

Commencing by the Notice Date, the Settlement Administrator shall establish a toll-free telephone number, through which Settlement Class members may obtain information about the Settlement, and request an electronic copy of the Long Form Notice and/or the Claim Form,

pursuant to the terms and conditions of this Settlement. The Claim Form will be mailed to all persons who request one via the toll-free phone number maintained by the Settlement Administrator.

E. Direct Notice – United States Mail

By the Notice Date, the Settlement Administrator will send the Long Form Notice (Notice) United States Postal Service (“USPS”) first class mail to all Settlement Class Members for whom a physical mailing address can be identified from the Class Member Information. Each Notice will include a claim number and to the extent available purchase information for each individual class member. Prior to the initial mailing of the Notice, postal mailing addresses will be checked against the National Change of Address (“NCOA”) database maintained by the USPS. Notices that are returned as undeliverable by the USPS and have a forwarding address will be re-mailed to that forwarding address, and Notices that are returned as undeliverable by the USPS without a forwarding address will be subject to address verification (“skip tracing”), utilizing a wide variety of data sources, including public records, real estate records, electronic directory assistance listings, etc. to locate updated addresses. Notices will then be re-mailed to updated addresses located through skip tracing.

F. Direct Notice – E-mail Notice

By the Notice Date, the Settlement Administrator shall e-mail each Settlement Class Member included in the Class Member Information provided by Defendant (“Email Notice”). The content of the Email Notice shall substantially conform to the information provided in the Claim Form and will contain a link that the Settlement Class members can click to take them directly to the claim filing page on the settlement agreement website where they can enter their individualized claim number and confirmation code.

G. Publication

By the Notice Date, and subject to the requirements of this Agreement and the Preliminary Approval Order, the Settlement Administrator will provide Notice to the Settlement Class as follows: Publishing the publication notice and digital notice pursuant to the Preliminary Approval Order and as set forth in the Notice Plan described in the Declaration of the Settlement Administrator attached hereto as Exhibit B; Publishing, on or before the Notice Date, the Long Form Notice on the settlement website (www.bamboosettlement.com), as specified in the Preliminary Approval Order and as set forth in the Notice Plan described in the Declaration of the Settlement Administrator attached hereto as Exhibit B; and Providing the Internet address, in the Long Form Notice, to the settlement website (www.bamboosettlement.com).

H. Notice to Appropriate Federal and State Officials

Not later than 10 days after for the Court enters the Preliminary Approval Order, the Settlement Administrator shall comply with 28 U.S.C. § 1715.

SETTLEMENT CLASS MEMBERS’ RIGHT OF EXCLUSION

A Settlement Class Member may opt out of the Settlement Class. To exercise this exclusion right, the Settlement Class Member must send written notification of the decision to request exclusion via first class mail to Class Counsel. The request for exclusion must bear the signature of the Settlement Class Member (even if represented by counsel), state the Settlement Class Member’s name, email address, address of the property(ies) that has Flooring installed and specify the number of units of residential property or other structures at each address containing Flooring. The request should also include substantially the following statement “I want to opt out of the Settlement Class in the Lumber Liquidators bamboo flooring litigation.” If the Settlement Class Member has entered into a written or oral agreement to be represented by counsel, the request

for exclusion shall also be signed by the attorney who represents the Settlement Class Member. Such request must be postmarked or personally delivered on such schedule as the Court may direct. In seeking Preliminary Approval of this Settlement, the Parties will request that the deadline for submission of requests for exclusion shall be set on a date no less than 45 days after the publication of the Notice. Exclusions sent by any Settlement Class Member to incorrect locations shall not be valid. Any Settlement Class Member who submits a timely request for exclusion shall not be permitted to object to the Settlement.

Except for those Settlement Class Members who have properly and timely opted out of the Class, all Settlement Class Members will be deemed Settlement Class Members for all purposes under this Settlement and shall be bound by all the terms and provisions of the Settlement Agreement, and any order related to the Settlement, whether or not such Settlement Class Members received actual notice or have objected to the Settlement, and whether or not such Settlement Class Member makes a Claim or participates in the Settlement.

Any Settlement Class Member who has not timely and properly filed a written request for exclusion from the Settlement Class shall be bound by this Settlement and by all subsequent proceedings, orders, and judgments. Any Settlement Class Member who elects to opt out of the Settlement Class pursuant to this Agreement shall not be entitled to relief under or be affected by this Agreement.

Settlement Class Members who have elected to opt out of the Settlement Class may

withdraw their opt out requests prior to the Effective Date, but only if they accept the benefits and terms of this Settlement and dismiss with prejudice any other pending action against Lumber Liquidators arising from damage to their homes or other structures because of any alleged defects in any Flooring.

Class Counsel shall have the right to contact persons who file exclusion requests and to challenge the timeliness and validity of any exclusion request, as well as the right to effect the withdrawal of any exclusion filed in error and any exclusion request which a Settlement Class Member wishes to withdraw for purposes of participating in the Settlement as set forth in this Agreement. The Court shall determine whether any of the contested opt outs is valid.

Within five (5) days of the closing of the opt out period, Class Counsel shall provide

counsel for Lumber Liquidators, by electronic mail, facsimile, and/or hand delivery, with a list identifying each person who has requested exclusion from the Settlement Class and attaching copies of all such requests for exclusion.

If the number of Requests for Exclusion exceeds 1% of the total class size, Lumber Liquidators has the option to terminate the Settlement Agreement.

Plaintiffs and Plaintiffs’ Counsel in the Gold Litigation covenant and agree to take no actions, directly or indirectly, designed or intended to influence any putative member of the Settlement Class to opt out of the settlement, file a claim, or to assist others in doing so. The parties acknowledge, however, that if and when Plaintiffs’ Counsel in the Gold Litigation answer Settlement Class Member questions pertaining to their respective matters, the Parties’ settlement, or the Settlement Agreement or related matters, answering these questions shall not constitute taking action to influence any putative member of the Settlement Class to opt out of the settlement or to assist others in doing so.

SETTLEMENT CLASS MEMBERS’ RIGHT OF OBJECTION

A. Settlement Class Members who do not request exclusion from the Class may object to the Settlement Agreement. Settlement Class Members who choose to object to the Settlement must file written notices of intent to object with the Court and serve copies of any

such objection on Class Counsel and Counsel for Lumber Liquidators. Any Settlement Class Member may appear at the Final Approval and Fairness Hearing, in person or by counsel, and be heard to the extent permitted under applicable law and allowed by the Court. The right to object to the Settlement Agreement must be exercised individually by an individual Settlement Class Member and, except in the case of a deceased, minor, or incapacitated Person or where represented by counsel, not by the act of another Person acting or purporting to act in a representative capacity.

To be effective, an objection to the Settlement Agreement that is filed with the Court must:

1. Contain a caption that includes the case name and the case number as follows: Gold, et al. v. Lumber Liquidators, Inc., et al., 3:14-cv-05373 (N.D. of Cal.).

2. Provide the name, mailing address, e-mail address, telephone number and signature of the Settlement Class Member filing the intent to object, and identify his or her individual counsel, if any;

3. Provide a valid proof of membership in the Settlement Class;

4. File a written letter or brief detailing the specific basis for each objection, including any legal and factual support the objector wishes to bring to the Court’s attention and any evidence the objector wishes to introduce in support of the objection with the Court not later than thirty (30) days prior to the Final Approval and Fairness Hearing;

5. Be served contemporaneously on Class Counsel and Counsel for Lumber Liquidators (unless filed via the Court’s ECF system, such that copies will be transmitted electronically to these counsel);

6. Contain the number of class action settlements objected to by the

Settlement Class Member in the last three (3) years;

7. List prior representations of objectors in class action cases by the objector’s counsel and all sanctions or discipline ordered by any court, bar association or governmental agency against that counsel.

8. State whether the objecting Settlement Class Member intends to appear at the Final Approval and Fairness Hearing, either in person or through counsel.

9. State that the objecting Settlement Class Member is financially capable and prepared to post a bond in an amount to be determined by the Court to adequately compensate class members for the loss of value to Settlement Class Member compensation occasioned by any delay in payment due to an objection, or notice of appeal.

Any Settlement Class Member who does not file a timely and adequate notice of intent to object in accordance with this Settlement Agreement waives the right to object or to be heard at the Final Approval and Fairness Hearing, unless the Court permits otherwise, and shall be forever barred from making any objection to the Settlement. To the extent any Settlement Class Member objects to the Settlement Agreement, and such objection is overruled in whole or in part, such Settlement Class Member will be forever bound by this Settlement Agreement, the Final Approval Order, and Judgment of the Court.

B. The filing of an objection allows Class Counsel and Counsel for Lumber Liquidators to request the Court to notice such objecting Settlement Class Member for and take his or her deposition consistent with the Federal Rules of Civil Procedure at an agreed-upon location, and to seek any documentary evidence or other tangible things that are relevant to the objection. Failure by an objecting Settlement Class Member to make himself or herself available for a deposition or to comply with expedited discovery requests may result in the Court striking

the Settlement Class Member’s objection and otherwise denying that Settlement Class Member the opportunity to make an objection or be further heard. The Parties reserve the right to ask the Court to tax the costs of any such discovery to the objecting Settlement Class Member’s separate counsel should the Court determine that the objection is frivolous or is made for an improper purpose.

C. If the objection is made through an attorney, the written objection must also include: (1) the identity and number of the Settlement Class Members represented by objector’s counsel; and (2) the number of such represented Settlement Class Members who have opted out of the Settlement Class.

REPORT BY SETTLEMENT ADMINISTRATOR

A. No later than thirty (30) days before the Final Approval and Fairness Hearing, the Settlement Administrator shall provide to Class Counsel and Counsel for Lumber Liquidators the following information:

i. The number of Notices mailed or sent to Settlement Class Members;

ii. The number of claims submitted

iii. The number of Settlement Class Members to date who have submitted Approved Claims;

iv. The number of Settlement Class Members who have submitted Requests for Exclusion from the Settlement Classes and the names of such persons;

v. Any information about any objections to the Settlement Agreement that the Settlement Administrator has not previously forwarded; and

vi. Any other tracking information reasonably requested by Class Counsel or Counsel for Lumber Liquidators.

B. A report stating the total number of Settlement Class Members who have submitted timely and valid Requests for Exclusions and the names of such Settlement Class Members shall be filed by Class Counsel not later than ten (10) days before the Final Approval and Fairness Hearing.

FINAL APPROVAL

A. If the Court preliminarily approves the Settlement Agreement, Class Counsel, with the cooperation of counsel for Lumber Liquidators, shall submit a motion for final approval of the Settlement Agreement by the Court at a date set by the Court, but no later than one hundred twenty (120) days from the date of Notice. The parties may submit supplemental memoranda in support of the motions for final settlement approval or the awarding of costs and fees at a date set by the Court, but no later than ten (10) days before the Final Approval and Fairness Hearing. The motion seeking final approval shall take into consideration the United States District Court for the Northern District of California’s Class Action Settlement Guidance.

B. The Notice to the Settlement Class shall contain a date, time and location for the Final Approval and Fairness Hearing to be conducted by the Court. The Parties shall jointly request the Court to set a hearing on Final Approval of the Settlement Agreement approximately forty-five (45) days from the end of the claims period or such later date as the Court may determine.

C. The Parties shall request the Court upon final approval of this Settlement Agreement, to enter the Final Approved Order and Judgment, which shall include:

i. Grant final approval to the Settlement and Settlement Agreement as fair, reasonable, adequate, in good faith and in the best interests of the Settlement Class, and order the Parties to carry out the provisions of this Settlement Agreement;

ii. Dismiss with prejudice and without costs the Complaint and litigation against Lumber Liquidators and the Released Parties;

iii. Adjudge that Releasing Parties are conclusively deemed to have released Lumber Liquidators and the Released Parties of the Released Claims;

iv. Bar and permanently enjoin each Settlement Class Member who has not timely submitted a Request for Exclusion from prosecuting against the Released Persons any and all of the Released Claims;

v. Reserve continuing and exclusive jurisdiction by the Court to preside over any ongoing proceedings relating to the Claims or this Settlement Agreement; and

vi. Determine under Fed. R. Civ. P. 54(b) that there is no just reason for delay and direct that the Final Judgment as to the Released Parties to be final and appealable and entered forthwith.

CLASS COUNSEL FEES AND ADMINISTRATIVE COST

A. Plaintiffs’ Counsel will apply to the Court by motion for an award to Plaintiffs’ Counsel for attorneys’ fees of up to 33.33% of the Settlement Fund, and for actual costs and expenses, together with the cost of notice and administrative costs to be paid from the Settlement Fund.

B. Within forty-five (45) days of Effective Date of the Final Approval Order and Judgment and entry by the Court of an order awarding attorneys’ fees, costs, and expenses (“Fee, Cost, and Expense Order”), any awarded attorneys’ fees, costs, and expenses shall be paid to Class Counsel from the Escrow Account by the Escrow Agent, notwithstanding the existence of or pendency of any appeal or collateral attack on the Settlement or any part thereof or the Fee, Cost, and Expense Order. In the event that the Effective Date does not occur or the Settlement

Agreement is terminated pursuant to its terms, or if, as the result of any appeal or further proceedings on remand, or successful collateral attack, the Fee, Cost, and Expense Order is reversed or modified pursuant to a final court order and attorneys’ fees, costs, and expenses have been paid out of the Escrow Account to any extent, then Class Counsel shall be obligated and does hereby agree, within ten (10) business days after receiving notice of the foregoing from Lumber Liquidator’s Counsel or from a court of appropriate jurisdiction, to refund to the Escrow Account such attorneys’ fees, costs, and expenses that have been paid, plus interest thereon at the same rate as would have been earned had those sums remained in the Escrow Account.

SERVICE AWARDS

Subject to approval by the Court, each of the named Representative Plaintiffs in the Sixth Amended Complaint will receive $7,500 for their participation in this litigation. If a husband and wife, or other co-purchasers were both Plaintiffs, they are entitled to a single Service Award. This amount is to be paid from the Settlement Fund.

CLAIM PROCESSING AND DISTRIBUTION OF SETTLEMENT

A. Class Members may electronically complete and sign the appropriate Claim Form and submit it to the Settlement Administrator via an electronic Claim Form submission process to be established by the Settlement Administrator. Alternatively, Settlement Class Members may submit such Claim Form via U.S. mail. A Claim Form shall be considered defective if the Claimant fails to timely submit the Claim Form, provide the required information on the Claim Form, or fails to electronically or physically sign certifying that the Claimant is entitled to the benefit sought.

B. Within thirty (30) days of the entry of the Final Approval Order and Judgment, the Settlement Administrator will notify Class Counsel of any Settlement Class Member who has

submitted a deficient Claim Form, and those Settlement Class Members will be given ten (10) calendar days from the date of the deficiency notice to cure the deficiency.

C. Within sixty (60) days of the Effective Date, the Settlement Administrator will distribute the checks and the vouchers.

D. Cash payments made pursuant to this Settlement Agreement will be made to Approved Claimants via physical checks mailed to the address provided on the Claim Form. Store-credit Vouchers will be mailed to the address of the Approved Claimant (or appropriate assignee), provided on the Claim Form. Class Counsel and Counsel for Lumber Liquidators shall confer before the Settlement Administrator begins to distribute the checks or Store-credit Vouchers to the Approved Claimants. If an appeal is filed, distribution of Settlement Fund to Approved Claimants will be stayed until further order by the Court.

E. The Class Members acknowledge that the Claims process may take longer than described above due to the number of potential Settlement Class Members. The Settlement Administrator will employ all due commercially reasonable speed to distribute claimed cash payments and Store-credit Vouchers to Approved Claimants as set forth herein.

F. The Settlement Class Members shall be entitled solely to the Settlement Funds and Store- Credit Vouchers for settlement and satisfaction against Defendant and the Released Parties for the Released Claims and shall not be entitled to any other payment or relief from Defendant or the Released Parties. The Representative Plaintiffs, Settlement Class Members and their counsel, Class Counsel, as well as the Settlement Administrator will be reimbursed and indemnified solely out of the Settlement Funds. Defendant and the other Released Parties shall not be liable for any costs, fees, or expenses of any description, including any costs, fees or expenses of the Representative Plaintiffs or their attorneys, experts, advisors, or other

representatives of the Settlement Class.

RELEASE BY ALL SETTLEMENT CLASS MEMBERS

A. Effective upon Final Approval, Plaintiffs, for and on behalf of themselves, and every member of the Settlement Class, every purchaser of Flooring during the Class Period, and each of their respective heirs and assigns, except for those who have requested to be excluded from the Classes, (hereafter the “Releasing Parties”) jointly and severally, hereby RELEASE, HOLD HARMLESS, FOREVER DISCHARGE, AND SHALL FOREVER BE ENJOINED FROM PROSECUTION against Defendant and the Released Parties of any and all claims, causes of action, lawsuits, proceedings, damages, judgments, losses, penalties, liabilities, rights, obligations, duties, demands, liens, actions, administrative proceedings, remedies, costs, fees of any kind, expenses, and claims of any kind whatsoever, including based on fraud, whether known or unknown, contingent or unsuspected, disclosed or undisclosed, liquidated or unliquidated, asserted or unasserted, accrued or un-accrued, in law, in equity or otherwise, in contract, tort, warranty, strict liability or otherwise, that have been, could have been, or in the future can or might be asserted in any court, tribunal or proceeding (including but not limited to any claims arising under federal, state, foreign or common law, including any federal or state consumer protection law), by or on behalf of Plaintiffs or any member of the Settlement Class, whether individual, direct, class, representative, legal, equitable, or other type or in any other capacity against Defendant and the Released Parties, which the Releasing Parties ever had, now have, or may have had, from the beginning of time to the Effective Date, by reason of, arising out of, relating to, or in connection with the acts, events, facts, matters, transactions, occurrences, statements, representations, misrepresentations, omissions, or any other matter whatsoever related directly or indirectly to: (1) the Plaintiffs’ and Settlement Class Members’ purchase

and/or use of Morning Star Strand Bamboo Flooring sold by Lumber Liquidators between January 1, 2012 and March 15, 2019; (2) the manufacture, sale, distribution, labeling, marketing or advertising of Flooring during the Class Period; (3) Defendant’s warranty related to the Flooring purchased during Class Period for any claim that the product is subject to premature cracking, splitting, buckling, warping, cupping, and shrinking or moisture-related issue and/or (4) any claim by Plaintiffs or Settlement Class Members of any nature related to Flooring sold by Defendant between January 1, 2012 to March 15, 2019, except as specified below (hereafter the “Released Claims”).

The Released Claims, however, shall not include any claims to enforce the Settlement Agreement, personal injury claims, or the request of Class Counsel for fees, costs, and expenses as set forth in, or as related to, this Settlement Agreement.

B. The “Released Parties” shall include Lumber Liquidators, Inc., its parent, subsidiaries, and affiliates, including but not limited to, Lumber Liquidators Holdings, Inc.; Lumber Liquidators Services, LLC; Lumber Liquidators Leasing, LLC; individual Lumber

Liquidators retail stores located throughout the United States; the China Regional Office; and the seven suppliers of Flooring1. All of these entities shall be released including but not limited to any controlling persons, associates, affiliates, or subsidiaries and each and all of their respective past or present officers, members, managers, directors, stockholders, principals, representatives, employees, attorneys, financial or investment advisors, insurers, consultants, experts, accountants, bankers, testing laboratories, advisors or agents, heirs, executors, trustees, general

1 The seven suppliers are: (1) Maisoon International; (2) Zhejiang Chanxiang Senda Bamboo & Wood; (3) Zhejiang Tianzhen Bamboo & Wood; (4) Changxing Jingwei Bamboo Products; (5) Wuxi Boda Bamboo & Wood Industrial; (6) Fujian Jianou Huayu Bamboo Industry; and (7) Yixing New Senda.

or limited partners or partnerships, limited liability companies, members, joint ventures, personal or legal representatives, estates, administrators, predecessors, successors, and assigns.

C. In agreeing to the foregoing waiver, the Releasing Parties expressly acknowledge and understand that they may hereafter discover facts in addition to or different from those which they now believe to be true with respect to the subject matter of the claims released herein, but expressly agree that they have taken these possibilities into account in electing to participate in this release, and that the release given herein shall be and remain in effect as a full and complete release notwithstanding the discovery or existence of any such additional or different facts, as to which the Releasing Parties expressly assume the risk.

D. As of the Effective Date, by operation of the entry of the Final Approval Order and Judgment, each Class Member who does not file a valid Request for Exclusion, automatically, upon entry of the Final Approval Order and Judgment, shall be held to have fully released, waived, relinquished, and discharged the Released Parties from the Released Claims, to the fullest extent permitted by law, and shall be enjoined from continuing, instituting, or prosecuting any legal proceeding against the Released Parties relating in any way whatsoever to the Released Claims.

E. The Releasing Parties, on behalf of themselves and their respective assigns, agree not to sue or otherwise make a claim against any of the Released Parties that is in any way related to the Released Claims.

F. With respect to the Released Claims, the Releasing Parties shall expressly waive any and all provisions, rights, and benefits conferred by any law of any state or territory of the United States which is similar, comparable or equivalent to California Civil Code Section 1543, which provides:

A general release does not extend to claims which the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor or released party.

DISMISSAL

The Releasing Parties stipulate and agree that upon the Court’s entry of the Final Approval Order and Judgment, and after expiration of any appeals of that Order, Gold, et al. v. Lumber Liquidators, Inc., et al., 3:14-cv-05373 (N.D. Cal.) shall be DISMISSED WITH PREJUDICE.

CONFIDENTIALITY

This Agreement of Compromise and Settlement and its terms shall remain confidential from the public until a jointly approved press release can be prepared. Lumber Liquidators, however, may disclose this proposed settlement to regulators, such as the Department of Justice, Securities and Exchange Commission (“SEC”), and the Attorneys General of certain states, as well as to certain financial, auditing, or other business consultants and may make public disclosures in its filings with the SEC. The Parties also agree that they will cooperate in drafting a joint press release regarding the settlement to be issued upon the issuance of the Final Approval Order.

Otherwise, the Parties and their counsel agree that they will not affirmatively seek media coverage in print, Internet, or other media regarding this Settlement Agreement, but may naturally respond to press or media inquiries by describing the settlement as a good result for the class, or other substantially similar words. Nothing in this paragraph, however, restricts the Parties from:

a. Publishing the Settlement Agreement and the result on their websites;

b. Utilizing media as set forth in the Court-approved Notice plan;

c. Issuing a press release with language to be agreed upon between the Parties;

d. Truthfully responding privately to inquiries concerning the Settlement Agreement from their clients, including Settlement Class Members; or

e. Truthfully responding to any press or media inquiries regarding details of the Settlement Agreement.

Plaintiffs and Plaintiffs’ Counsel also agree that they will not make any statements or engage in any conduct which disparages Defendant’s or Release Parties’ conduct, character, or business reputation or the conduct, character, or reputation of any agent of such entity.

AMENDMENT

This Agreement may be modified, amended or supplemented only by written agreement signed by or on behalf of all Parties, and if such modification, amendment or supplement is to be executed and become effective subsequent to the entry of the Preliminary Approval Order, only with the approval of the Court.

AUTOMATIC TERMINATION OF SETTLEMENT AGREEMENT AND TERMINATION RIGHTS

In the event that this Settlement Agreement does not become a final, enforceable contract that is approved by the Court and upheld on appeal for any reason:

A. Except as expressly stated herein, this Settlement Agreement shall automatically become null and void and have no further force or effect, and all proceedings that have taken place with regard to this Settlement shall be without prejudice to the rights and contentions of the Parties;

B. If the Settlement Agreement is not preliminarily or finally approved by the Court, the Parties will resume the litigation of Gold, et al. v. Lumber Liquidators, Inc., et al., 3:14-cv-05373

(N.D. Cal.) at the procedural juncture as of January 26, 2019, including the Fifth Amended Complaint remaining the operative complaint;

C. If this Settlement Agreement; the order preliminarily approving the Settlement Agreement and/or Final Order and Judgment approving this Settlement Agreement is vacated, materially modified or reversed, in whole or part, this Settlement Agreement will be deemed terminated, unless the Parties, in their sole discretion within thirty (30) days of receipt of such ruling, agree to proceed with the Settlement Agreement as modified by the Court or on appeal.

D. If the Settlement Agreement is terminated, any Settlement Funds in the Settlement Fund Escrow Account or that have come into possession of the Plaintiffs or Class Counsel, except for any funds paid or owed to the Settlement Administrator or to any other Notice consultant or provider, or any funds otherwise paid or owed for any Settlement administration or Notice-related purpose, shall be returned to Defendant within ten (10) Days of termination.

E. This Section and the Section on Confidentiality shall survive any termination of this Settlement Agreement.

SETTLEMENT ADMISSIBILITY

This Settlement Agreement, any provision of this Settlement Agreement and the fact of this Settlement Agreement having been made, shall not be admissible or entered into evidence for any purpose except by the Parties to enforce the terms of the Settlement Agreement; nor will any information produced solely in connection with any of the Parties’ mediations be admissible.

SEVERABILITY

With the exception to provisions contained herein, in the event any covenant, term or other provision contained in this Settlement Agreement is held to be invalid, void or illegal, the same shall be deemed severed from the remainder of this Settlement Agreement and shall in no

way affect, impair or invalidate any other covenant, condition or other provision herein. If any covenant, condition or other provision herein is held to be invalid due to its scope or breadth, such covenant, condition or other provision shall be deemed valid to the extent of the scope or breadth permitted by law.

INCORPORATION OF EXHIBITS

All attached exhibits are hereby incorporated by reference as though set forth fully herein and are a material part of the Settlement Agreement.

GOVERNING LAW AND COMPLIANCE WITH TERMS

OF SETTLEMENT AGREEMENT

All questions with respect to the construction of this Settlement Agreement and the rights and liabilities of the Parties shall be governed by the laws of California, without giving effect to its law of conflict of laws.

The Court shall have continuing and exclusive jurisdiction to resolve any dispute that may arise with regard to the terms and conditions of this Settlement Agreement, and the Parties hereby consent to such jurisdiction.

PREPARATION OF SETTLEMENT AGREEMENT, SEPARATE COUNSEL AND AUTHORITY TO ENTER SETTLEMENT AGREEMENT

A. The Parties and their counsel have each participated and cooperated in the drafting and preparation of this Settlement Agreement. Hence, in any construction to be made of this Settlement Agreement, the same shall not be construed against any Party as drafter of the Settlement Agreement.

B. In entering this Settlement Agreement, each Party has relied upon the advice of the Party’s own attorneys of choice and has not relied upon any representation of law or fact by any other Party hereto.

C. This Settlement Agreement, including exhibits attached hereto, supersedes any and all prior agreements, including, without limitation, the Memorandum of Understanding, and it constitutes the entire understanding between and among the Parties with regard to the matters herein. There are no representations, warranties, agreements, or undertakings, written or oral, between the Parties hereto, relating to the subject matter of this Settlement Agreement which are not fully expressed herein, with the exception of the Stipulated Undertaking re Attorney Fees and Costs in connection with the proposed Class Action Settlement.

D. The Parties each represent and warrant that each of the Persons executing this Settlement Agreement is duly empowered and authorized to do so.

COUNTERPARTS

This Settlement Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

BINDING EFFECT

This Settlement Agreement shall be binding upon and inure to the benefit of the Parties and to their respective heirs, assigns, and successors-in-interest.

ENTIRE AGREEMENT

This Settlement Agreement represents the entire agreement between the Parties and supersedes all other oral and written agreements and discussions. Each of the Parties covenants that he, she or it has not entered into this Settlement Agreement as a result of any representation, agreement, inducement, or coercion, except to the extent specifically provided herein. Each Party further covenants that the consideration recited herein is the only consideration for entering into this Settlement Agreement and that no promises or representations of another or further

consideration have been made by any Person,

NOTICE

All notices, requests, demands and other communications to the Parties or their counsel required or permitted to be given pursuant to this Settlement Agreement shall be in writing and shall be delivered personally or mailed postage-prepaid by First Class U.S. Mail to the following persons at their addresses set forth as follows:

Class Counsel for Plaintiffs:

Charles LaDuca

Brendan Thompson

CUNEO GILBERT & LADUCA LLP

4725 Wisconsin Avenue, NW, Suite 200

Washington, DC 20016

Michael F. Ram

Robins Kaplan

2440 West El Camino Real, Suite 100

Mountain View, CA 94040

Jeffrey B. Cereghino

Cereghino Law Group

101 Montgomery Street, Suite 1800

San Francisco, CA 94104

Counsel for Defendant Lumber Liquidators, Inc.

Diane P. Flannery

McGuireWoodsLLP

800 East Canal Street

Richmond, VA 23219

Bethany Lukitsch

McGuire WoodsLLP

Wells Fargo Center, South Tower

355 South Grand Street, Suite 4200

Los Angeles, CA. 90071

WHEREFORE, the undersigned, being duly authorized, have caused this Settlement Agreement to be executed on the dates shown below and agreed that it shall take effect on the last date of execution by all undersigned representatives of the Parties.

Dated this 30th day of September 2019.

Class Counsel for Plaintiffs:

/s/ Brendan Thompson
Charles LaDuca
Brendan Thompson
CUNEO GILBERT & LADUCA LLP
4725 Wisconsin Avenue, NW, Suite 200
Washington, DC 20016


/s/ Michael F. Ram
Michael F. Ram
Robins Kaplan LLP
2440 West El Camino Real, Suite 100
Mountain View, CA 94040


/s/ Jeffrey B. Cereghino
Jeffrey B. Cereghino
Cereghino Law Group
101 Montgomery Street, Suite 1800
San Francisco, CA 94104

Defendant, Lumber Liquidators, Inc.


/s/ Lee Reeves
Lee Reeves
Sr. Vice President, Chief Legal Officer & Corporate Secretary
Lumber Liquidators, Inc.
3000 John Deere Road
Toano, VA 23168

Counsel for Defendant Lumber Liquidators, Inc.


/s/ Bethany Lukitsch
Bethany Lukitsch
McGuireWoodsLLP
Wells Fargo Center, South Tower
355 S. Grand Ave., Suite 4200
Los Angeles, CA 90071

EXHIBIT 31.1

SECTION 302 CERTIFICATION

I, Dennis R. Knowles, certify that:

I have reviewed this quarterly report on Form 10-Q of Lumber Liquidators Holdings, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 5, 2019

	/s/ Dennis R. Knowles
	Dennis R. Knowles
	President and Chief Executive Officer
	(Principal Executive Officer)

EXHIBIT 31.2

SECTION 302 CERTIFICATION

I, Nancy A. Walsh, certify that:

I have reviewed this quarterly report on Form 10-Q of Lumber Liquidators Holdings, Inc.;

(a)

(b)

(c)

(d)

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 5, 2019

	/s/ Nancy A. Walsh
	Nancy A. Walsh
	Chief Financial Officer and Senior Vice President
	(Principal Financial Officer)

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Dennis R. Knowles, President and Chief Executive Officer of Lumber Liquidators Holdings, Inc. (the "Registrant"), and Nancy A. Walsh, Chief Financial Officer and Senior Vice President, Chief Accounting Officer of the Registrant, each hereby certifies that, to the best of his knowledge:

The Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 2019, to which this Certification is attached as Exhibit 32.1 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.


/s/ Dennis R. Knowles		/s/ Nancy A. Walsh
Dennis R. Knowles		Nancy A. Walsh
President and Chief Executive Officer		Chief Financial Officer and Senior Vice President
(Principal Executive Officer)		(Principal Financial Officer)


Date: November 5, 2019		Date: November 5, 2019