Form 10-Q Lumber Liquidators Holdi For: Jun 30

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended June 30, 2016

or

 

¨	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)

 

 

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.     x   Yes     ¨   No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). x Yes    ¨ No

 

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

 

x  Large accelerated filer	¨  Accelerated filer	¨  Non-accelerated filer	¨  Smaller reporting company
	(Do not check if a smaller reporting company)

 

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

 

As of July 25, 2016, there are 27,142,069 shares of the registrant’s common stock, par value of $0.001 per share, outstanding.

 

  

LUMBER LIQUIDATORS HOLDINGS, INC.

Quarterly Report on Form 10-Q

For the quarter ended June 30, 2016 

 

TABLE OF CONTENTS

 

			Page
	PART I – FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27
Item 4.	Controls and Procedures		27
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		29
Item 1A.	Risk Factors		36
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		38

 

 

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

 

Lumber Liquidators Holdings, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

		June 30,				December 31,
		2016				2015
Assets
Current Assets:
Cash and Cash Equivalents		$	12,732			$	26,703
Merchandise Inventories			254,937				244,402
Insurance Receivable			28,500				—
Prepaid Expenses			7,116				5,931
Other Current Assets			56,733				45,752
Total Current Assets			360,018				322,788
Property and Equipment, net			116,949				121,997
Goodwill			9,693				9,693
Other Assets			1,710				1,724
Total Assets		$	488,370			$	456,202
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts Payable		$	72,396			$	55,247
Customer Deposits and Store Credits			30,997				33,771
Accrued Compensation			9,347				6,057
Accrued Securities Class Action			41,420				—
Sales and Income Tax Liabilities			3,641				3,914
Other Current Liabilities			28,989				28,755
Total Current Liabilities			186,790				127,744
Other Long-Term Liabilities			21,847				20,252
Deferred Tax Liability			11,806				10,638
Revolving Credit Facility			32,000				20,000
Total Liabilities			252,443				178,634
Stockholders’ Equity:
Common Stock ($0.001 par value; 35,000,000 shares authorized; 27,142,069 and 27,088,460 shares outstanding, respectively)			30				30
Treasury Stock, at cost (2,832,057 and 2,824,814 shares, respectively)			(139,074	)			(138,987	)
Additional Capital			183,329				180,590
Retained Earnings			192,968				237,600
Accumulated Other Comprehensive Loss			(1,326	)			(1,665	)
Total Stockholders’ Equity			235,927				277,568
Total Liabilities and Stockholders’ Equity		$	488,370			$	456,202

 

See accompanying notes to condensed consolidated financial statements

 

 

Lumber Liquidators Holdings, Inc.

Condensed Consolidated Statements of Operations

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

(unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Net Sales		$	238,092			$	247,944			$	471,605			$	507,905
Cost of Sales			167,508				185,660				324,912				354,009
Gross Profit			70,584				62,284				146,693				153,896
Selling, General and Administrative Expenses			89,900				90,551				207,136				188,231
Operating Income (Loss)			(19,316	)			(28,267	)			(60,443	)			(34,335	)
Other Expense			131				65				282				81
Income (Loss) Before Income Taxes			(19,447	)			(28,332	)			(60,725	)			(34,416	)
Income Tax Expense (Benefit)			(7,217	)			(7,985	)			(16,093	)			(6,289	)
Net Income (Loss)		$	(12,230	)		$	(20,347	)		$	(44,632	)		$	(28,127	)
Net Income (Loss) per Common Share—Basic		$	(0.45	)		$	(0.75	)		$	(1.65	)		$	(1.04	)
Net Income (Loss) per Common Share—Diluted		$	(0.45	)		$	(0.75	)		$	(1.65	)		$	(1.04	)
Weighted Average Common Shares Outstanding:
Basic			27,108,461				27,082,878				27,099,518				27,077,312
Diluted			27,108,461				27,082,878				27,099,518				27,077,312

 

See accompanying notes to condensed consolidated financial statements

 

 

Lumber Liquidators Holdings, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Net Income (Loss)		$	(12,230	)		$	(20,347	)		$	(44,632	)		$	(28,127	)
Other Comprehensive Income (Loss)
Foreign Currency Translation Adjustments			22				163				339				(182	)
Total Other Comprehensive Income (Loss)			22				163				339				(182	)
Comprehensive Income (Loss)		$	(12,208	)		$	(20,184	)		$	(44,293	)		$	(28,309	)

 

See accompanying notes to condensed consolidated financial statements

 

 

Lumber Liquidators Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands) 

(unaudited)

 

		Six Months Ended
		June 30,
		2016				2015
Cash Flows from Operating Activities:
Net Income (Loss)		$	(44,632	)		$	(28,127	)
Adjustments to Reconcile Net Income (Loss) to Net Cash (Used in) Provided by Operating Activities:
Depreciation and Amortization			8,867				8,756
Stock-Based Compensation Expense			3,085				597
Stock-Based Portion of Provision for Securities Class Action			15,420				—
Impairment Charges			—				5,351
Deconsolidation of Variable Interest Entity			—				1,457
Changes in Operating Assets and Liabilities:
Merchandise Inventories			(11,308	)			46,872
Accounts Payable			16,860				(20,562	)
Customer Deposits and Store Credits			(2,692	)			(3,694	)
Prepaid Expenses and Other Current Assets			(40,643	)			(7,324	)
Other Assets and Liabilities			31,318				15,725
Net Cash (Used in) Provided by Operating Activities			(23,725	)			19,051
Cash Flows from Investing Activities:
Purchases of Property and Equipment			(3,834	)			(14,251	)
Other Investing Activities			575				—
Net Cash Used in Investing Activities			(3,259	)			(14,251	)
Cash Flows from Financing Activities:
Borrowings on Revolving Credit Facility			17,000				39,000
Payments on Revolving Credit Facility			(5,000	)			(19,000	)
Other Financing Activities			114				(276	)
Net Cash Provided by Financing Activities			12,114				19,724
Effect of Exchange Rates on Cash and Cash Equivalents			899				455
Net (Decrease) Increase in Cash and Cash Equivalents			(13,971	)			24,979
Cash and Cash Equivalents, Beginning of Period			26,703				20,287
Cash and Cash Equivalents, End of Period		$	12,732			$	45,266

 

See accompanying notes to condensed consolidated financial statements

 

 

Lumber Liquidators Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

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

 

(unaudited)

 

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 hardwood flooring, and hardwood flooring enhancements and accessories, operating as a single business segment. The Company offers an extensive assortment of exotic and domestic hardwood species, engineered hardwood, laminate and resilient vinyl flooring direct to the consumer. The Company also features the renewable flooring products, bamboo and cork, and provides a wide selection of flooring enhancements and accessories, including moldings, noise-reducing underlay, adhesives and flooring tools. These products are primarily sold under the Company’s private label brands, including the premium Bellawood brand floors. The Company also provides in-home delivery and installation services to certain of its customers. The Company sells primarily to homeowners or to contractors on behalf of homeowners through a network of 379 store locations in primary or secondary metropolitan areas. The Company’s stores span 46 states in the United States (“U.S.”) and include eight stores in Canada at June 30, 2016. In addition to the store locations, the Company’s products may be ordered, and customer questions/concerns addressed, through both its call center in Toano, Virginia, and its website, www.lumberliquidators.com. The Company finishes the majority of the Bellawood products on its finishing lines in Toano, Virginia, which along with the call center and corporate offices, represent the “Corporate Headquarters.”

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission. 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 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, 2015.

 

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

 

During the quarter ended June 30, 2015, the Company decided to discontinue certain vertical integration initiatives, which were previously consolidated as a variable interest entity, and terminated its prior arrangement. As a result, during the quarter ended June 30, 2015, the Company recorded a charge of $1,457 in cost of sales in its condensed consolidated statements of operations upon deconsolidation of the variable interest entity. The charge was measured as the difference between the fair value of the assets received upon termination and the carrying value of the related net assets.

 

Results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the full year.

 

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 and the carrying amount of obligations under our revolving credit facility approximate fair value due to the variable rate of interest. Of these financial instruments, the cash equivalents are classified as Level 1 as defined in the Financial Accounting Standards Board (“FASB”) ASC 820 fair value hierarchy.

 

During the quarter ended June 30, 2015, certain non-financial assets, including property and equipment, were written down and measured in the condensed consolidated financial statements at fair value. Fair value was based on expected future cash flows using Level 3 inputs under ASC 820.

 

 

Merchandise Inventories

 

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

 

Due to certain management changes during the quarter ended June 30, 2015, the Company determined that it would refocus on its core business and not pursue an expansion into the tile flooring business in the near term and recorded a lower of cost or market adjustment of $3,663 for certain tile flooring and related accessories in cost of sales on the condensed consolidated statements of operations.

 

Recognition of Net Sales

 

The Company recognizes net sales for products purchased at the time the customer takes possession of the merchandise. Service revenue, primarily installation revenue and freight charges for in-home delivery, is included in net sales and recognized when the service has been rendered. The Company reports sales exclusive of sales taxes collected from customers and remitted to governmental taxing authorities, and net of an allowance for anticipated sales returns based on historical and current sales trends and experience. The sales returns allowance and related charges were not significant for the three and six month periods ended June 30, 2016 and 2015.

 

Cost of Sales

 

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

 

In early March 2015, the Company began voluntarily offering free indoor air quality screening to certain of its flooring customers who purchased laminate flooring sourced from China to address customer questions about the air quality in their homes. During the second quarter of 2016, the Company agreed with the Office of Compliance and Field Operations of the Consumer Product Safety Commission (“CPSC”) to continue its indoor air quality testing program for customers who purchased laminate flooring sourced from China during the period from February 22, 2012 to February 27, 2015. The form of the testing program agreed to with the CPSC is substantially similar to the program the Company has operated since March 2015. In connection with the continuation of the testing program, the Company determined that a probable loss should be recorded related to future costs of the program and recorded a charge to cost of sales of approximately $3,000.

 

Estimating the reserve for costs associated with the Company’s indoor air quality program for certain of its customers who purchased laminate flooring sourced from China requires management to estimate (1) the number of future requests for indoor air quality testing, (2) the results of that testing and (3) the average cost to settle each request, all of which are subject to variables that are inherently uncertain.

 

The Company projects its best estimate of both the expected number of requests to be received and the percentage of requests that will ultimately progress through various phases of its testing program utilizing historic trends since the voluntary program began in March of 2015. Estimates for both of these elements (number and percentage) are quantified using a range of assumptions derived from the Company’s limited indoor air quality test program history and the identification of factors influencing the amount of requests, including the declining trend in received requests due to the passage of time since customer purchase of the material and/or recent media events.

 

Actual liabilities could be higher or lower than those projected due to uncertainty in projecting the number of future requests for tests, future average costs per test and other factors, which could materially affect the Company’s financial condition, results of operations or cash flows. The Company’s estimate is based, in part, on a projection that the annual number of requests received will continue to decline over time and that the average cost per request will remain relatively stable. If the level of requests received or average cost per request differs materially from expectations, it could result in additional increases to the reserve and reduced earnings and cash flows in future periods. At June 30, 2016, the Company’s best estimate of its future indoor air quality testing program reserve is approximately $3.6 million.

 

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

 

		2016				2015
Balance at January 1		$	809			$	-
Provision			6,187				7,231
Payments			(3,407	)			(4,881	)
Balance at June 30		$	3,589			$	2,350

 

 

Recent Accounting Pronouncements

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-09 (“ASU 2016-09”), “Improvements to Employee Share-Based Payment Accounting”.  The new guidance will change how companies account for certain aspects of share-based payments to employees.  Entities will be required to recognize the income tax effects of awards in the income statement when the awards vest or are settled.  ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company is currently assessing the impact of implementing the new guidance on its consolidated financial statements. 

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), which creates ASC Topic 842, Leases, and supersedes the lease accounting requirements in Topic 840, Leases. In summary, Topic 842 requires organizations that lease assets — referred to as “lessees” — to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The amendments in ASU 2016-02 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Therefore, the amendments in ASU 2016-02 will become effective for the Company at the beginning of its 2019 fiscal year. The Company is currently assessing the impact of implementing the new guidance on its consolidated financial statements. When implemented, the standard is expected to have a material impact as its operating leases will be recognized on the consolidated balance sheet.

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (“ASU 2015-17”), which amends ASC Topic 740, Balance Sheet Classification of Deferred Taxes. In summary, the core principle of Topic 740 is that an entity classify both current and noncurrent deferred income tax assets and liabilities in the noncurrent section of the statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by this amendment. The amendments in ASU 2015-17 are effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company is currently assessing the impact of implementing the new guidance on its consolidated financial statements and has not yet selected a method of adoption. When implemented, the standard may have a material impact as its consolidated balance sheet.

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), which creates ASC Topic 606, Revenue from Contracts with Customers, and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, ASU 2014-09 supersedes the cost guidance in Subtopic 605-35, Revenue Recognition — Construction-Type and Production-Type Contracts, and creates new Subtopic 340-40, Other Assets and Deferred Costs — Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early application is not permitted. Therefore, the amendments in ASU 2014-09 will become effective for the Company at the beginning of its 2017 fiscal year. The Company is currently assessing the impact of implementing the new guidance on its consolidated financial statements and has not yet selected a method of adoption.

 

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								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Net Income (Loss)		$	(12,230	)		$	(20,347	)		$	(44,632	)		$	(28,127	)
Weighted Average Common Shares Outstanding—Basic			27,108,461				27,082,878				27,099,518				27,077,312
Effect of Dilutive Securities:
Common Stock Equivalents			—				—				—				—
Weighted Average Common Shares Outstanding—Diluted			27,108,461				27,082,878				27,099,518				27,077,312
Net Income (Loss) per Common Share—Basic		$	(0.45	)		$	(0.75	)		$	(1.65	)		$	(1.04	)
Net Income (Loss) per Common Share—Diluted		$	(0.45	)		$	(0.75	)		$	(1.65	)		$	(1.04	)

 

 

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Stock Options			916,470				679,750				855,975				685,992
Restricted Shares			579,621				120,363				514,745				111,708

 

Stock Repurchase Program

 

The Company’s board of directors has authorized the repurchase of up to $150,000 of the Company’s common stock. At June 30, 2016, the Company had $14,728 remaining under this authorization. The Company did not repurchase any shares of its common stock under this program during the three and six months ended June 30, 2016 and 2015, respectively.

 

Note 4.

Stock-Based Compensation

 

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

 

		Stock Options				Restricted Stock Awards
Options Outstanding/Nonvested RSAs, December 31, 2015			692,776				461,671
Granted			251,586				297,266
Options Exercised/RSAs Released			(30,474	)			(32,520	)
Forfeited			(34,822	)			(46,765	)
Options Outstanding/Nonvested RSAs, June 30, 2016			879,066				679,652

 

For the six months ended June 30, 2016 and 2015, the Company recorded stock-based compensation expense of $3,085 and $597, respectively. During the second quarter of 2015, the Company recorded a benefit for stock-based compensation of $729 as a result of the impact of actual forfeitures in the period, due primarily to the resignation of the Company’s chief executive officer in May 2015.

 

Note 5.

Related Party Transactions

 

As of June 30, 2016, the Company leased 30 of its store locations, a warehouse and the Corporate Headquarters, which includes a store location, representing 8.2% of the total number of store leases in operation, from entities controlled by the Company’s founder (“Controlled Companies”), who is also a member of the board of directors. As of June 30, 2015, the Company leased 30 of its store locations and the Corporate Headquarters, which included a store location, representing 8.5% of the total number of store leases in operation at that time, from Controlled Companies. Rental expense related to Controlled Companies was as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Rental expense related to Controlled Companies		$	866			$	762			$	1,717			$	1,516

 

Note 6.

Income Taxes

 

The effective tax rate of 37.1% for the three months ended June 30, 2016 was driven principally by an increase in a valuation allowance against certain of the Company’s deferred tax assets and revised projected pretax income for the remainder of 2016. The effective tax rate of 28.2% for the three months ended June 30, 2015 was impacted primarily by a decrease in state taxes offset by a reserve for uncertain tax positions related to the deductibility of certain legal accruals and revised projected pretax income for the remainder of 2015. At the end of the second quarter of 2016, refundable income taxes and the deferred tax asset were $41,225 and $12,334, respectively. At December 31, 2015, refundable income taxes and the deferred tax asset were $19,596 and $21,045, respectively. These amounts are reflected within other current assets on the condensed consolidated balance sheets at June 30, 2016 and December 31, 2015.

 

 

Note 7.

Commitments and Contingencies

 

Securities Investigation

 

In March 2015, the Company received a grand jury subpoena issued in connection with a criminal investigation being conducted by the U.S. Attorney’s Office for the Eastern District of Virginia (the “U.S. Attorney”). In addition, on May 19, 2015, July 13, 2015 and March 11, 2016, the Company received subpoenas from the New York Regional Office of the SEC in connection with an inquiry by the SEC staff. Based on the subpoenas, the Company believes the focus of both the U.S. Attorney investigation and SEC investigation primarily relate to compliance with disclosure, financial reporting and trading requirements under the securities laws since 2011. The Company is fully cooperating with the investigations by the U.S. Attorney and SEC staff and continues to produce documents responsive to the subpoenas and pursuant to other requests received from the U.S. Attorney’s Office. Given that the investigation by the U.S. Attorney and SEC staff are still ongoing, the Company cannot estimate the reasonably possible loss or range of loss that may result from this matter.

 

Prop 65 Matter

 

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

 

On April 4, 2016, the court issued a ruling granting the Company’s motion for judgment. The court entered judgment for the Company on June 30, 2016. Although the Company accrued $900 in the fourth quarter of 2015 as its best estimate of the probable loss that may result from this action at such time, given the court’s ruling, the Company has subsequently reversed this accrual during the first quarter of 2016. In light of the court’s entry of judgment, the likelihood of a material loss in connection with this matter is now remote.

 

Securities Class Action and Derivative Litigation Matters

 

As more fully set forth below, in each of the Securities Class Action Litigation (as defined below) and the Consolidated Derivative Litigation Matter (as defined below), the Company has entered into a Stipulation of Settlement. Both the Securities Class Action Stipulation (as defined below) and the Consolidated Derivative Stipulation (as defined below) are dependent on each other and are subject to court approvals and other contingencies. Therefore, there can be no assurance that a settlement will be approved by the courts or as to the ultimate outcome of the Securities Class Action Litigation or the Derivative Litigation Matter.

 

Securities Litigation Matter

 

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

 

 

The lead plaintiffs filed a consolidated amended complaint on April 22, 2015. The consolidated amended complaint alleges that the Defendants made material false and/or misleading statements that caused losses to investors. In particular, the lead plaintiffs allege that the Defendants made material misstatements or omissions related to their compliance with the Lacey Act, the chemical content of certain of their wood products, and their supply chain and inventory position. The lead plaintiffs do not quantify any alleged damages in their consolidated amended complaint but, in addition to attorneys’ fees and costs, they seek to recover damages on behalf of themselves and other persons who purchased or otherwise acquired the Company’s stock during the putative class period at allegedly inflated prices and purportedly suffered financial harm as a result. The Defendants moved to dismiss the consolidated amended complaint but, on December 21, 2015, the court denied this motion.

 

On April 27, 2016, the Defendants entered into an agreement in principle, a Memorandum of Understanding (“Securities Class Action MOU”), with the lead plaintiffs in the consolidated securities class action. On June 15, 2016, the Company entered into a definitive settlement agreement (the “Securities Class Action Stipulation”) and, on July 7, 2016, the court entered an order granting preliminary approval for the Securities Class Action Stipulation. The terms of the Securities Class Action Stipulation were consistent with those of the Securities Class Action MOU. Under the terms of the Securities Class Action Stipulation, the Company, through its insurers, will contribute $26,000 to a settlement fund that will be used to compensate individuals who purchased the Company’s shares during the period from February 22, 2012 to February 27, 2015. In addition, under the terms of the Securities Class Action Stipulation, the Company will issue 1 million shares of its common stock to the settlement fund with a value of approximately $15,420 based on the $15.42 closing price of the Company’s common stock on June 30, 2016. The Company has classified the loss contingency of $41,420 as accrued securities class action and the expected insurance proceeds of $26,000 as insurance receivable on the accompanying condensed consolidated balance sheet. The amount of loss associated with the issuance of shares of common stock as a part of the settlement will be determined based on the trading value of the shares on the date of issuance, which could increase the recognized loss if the trading value increases or result in a gain if the trading value decreases. The Company will record the fair value of the expected number of shares to be issued in its condensed consolidated balance sheet based on the closing price of its common stock as of the reporting date until the liability is settled. The Company recorded a benefit of $600 within selling, general and administrative expense during the second quarter of 2016 to reflect the decrease in the closing price of the Company’s common stock between April 27, 2016, the initial recording of the liability, and June 30, 2016. The settlement is subject to further consideration at the settlement hearing scheduled to be held on November 17, 2016 and to several contingencies including final court approval. There can be no assurance that a settlement will be finalized and approved or as to the ultimate outcome of the litigation. The ultimate resolution of these actions could have a material adverse effect on the Company’s financial condition and results of operations.

 

Derivative Litigation Matter - Consolidated Cases

 

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

 

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

 

 

On May 16, 2016, the Company and the Individual Defendants entered into an agreement in principle, a Memorandum of Understanding (“Consolidated Derivative MOU”), with the lead plaintiff in the Consolidated Derivative Litigation Matter. On July 18, 2016, the Company entered into a definitive settlement agreement (the “Consolidated Derivative Stipulation”). The terms of the Consolidated Derivative Stipulation were consistent with those of the Consolidated Derivative MOU. Under the terms of the Consolidated Derivative Stipulation, the Consolidated Derivative Litigation Matter will be settled for a combination of corporate governance changes, a payment of $26,000 in insurance proceeds to the Company (which the Company will then use to settle the pending Securities Class Action Litigation), and attorneys’ fees. During the first quarter of 2016, the Company determined that a probable loss was incurred related to the Derivative Litigation Matters and recognized a net charge to earnings of $2,500 within selling general and administrative expense in the condensed consolidated statement of operations. The Company also classified the loss contingency of $5,000 within other current liabilities and the expected insurance proceeds of $2,500 within insurance receivable on the balance sheet. The settlement is subject to several contingencies including preliminary and final court approval. There can be no assurance that a settlement will be finalized and approved or as to the ultimate outcome of the litigation. The ultimate resolution of these actions could have a material adverse effect on the Company’s financial condition and results of operations.

 

Derivative Litigation Matters

 

On June 11, 2015, the Special Committee of the Board of Directors (the “Special Committee”) exercised its authority to create a Demand Review Committee, which is comprised of three independent directors and tasked with reviewing, analyzing, investigating and considering the allegations made in the Consolidated Derivative Litigation Matter, other Derivative Matters and the Horton Action, as described below, and to report its recommendations thereon to the board of directors.  Following an extensive review, investigation and analysis, including taking into consideration the report of independent counsel engaged to assist in the investigation of these matters, the Demand Review Committee recommended to the board of directors that bringing the claims articulated in the Consolidated Derivative Litigation Matter, the other Derivative Matters and the Horton Action would not be in the Company’s best interest.

 

Derivative Litigation Matter - Costello Matter

 

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

 

The Company filed a motion to dismiss the amended complaint based on the failure to make a demand upon the Company’s board of directors and the Costello Defendants filed a motion to dismiss based on the failure to state a claim and the exculpatory provision in the Company’s Certificate of Incorporation. On September 14, 2015, the parties entered into a stipulation voluntarily staying the case until the Demand Review Committee had an opportunity to investigate Costello’s allegations and make a recommendation to the Company’s board of directors, and the board of directors has the opportunity to act on that recommendation. The court approved the stipulation. The stay remains in effect.

 

 

Derivative Litigation Matter - McBride Matter

 

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

 

With respect to the Costello Matter and the McBride Matter (collectively, the “Other Derivative Matters”), pursuant to the terms of the Consolidated Derivative Stipulation, the lead plaintiffs in the Consolidated Derivative Litigation Matter will use their best efforts to resolve the Other Derivative Matters. If the lead plaintiffs are unable to resolve the Other Derivative Matters, the lead plaintiffs will cooperate with the Company to seek dismissal of the Other Derivative Matters. While a material loss is reasonably possible, the Company is unable to reasonably estimate the possible or range of possible loss.

 

Derivative Litigation Matter - Horton Matter

 

In May 2015, the Company received a shareholder demand from Timothy Horton (“Horton”), with the allegations and demands overlap substantially with those raised in the Consolidated Derivative Litigation Matter. On June 11, 2015, the Special Committee of the Board of Directors (the “Special Committee”) exercised its authority to create a three-person Demand Review Committee, which is comprised of three independent directors and tasked with investigating the claims made in the consolidated action and the Horton demand letter and making a recommendation to the board of directors as to whether it would be in the best interests of the Company to pursue any of those claims. The members of the Demand Review Committee filed a motion to stay the consolidated action pending completion by the Demand Review Committee of its investigation and recommendation to the board of directors. As part of its determination that pursuit of the derivative claims would not be in the best interests of the Company’s stockholders, the Demand Review Committee determined to recommend to the board of directors to reject Horton’s demand and that the Company not pursue the claims described in his letters to the Company. The board adopted that recommendation on May 6, 2016.

 

On May 16, 2016, Horton filed a verified complaint in the Court of Chancery of the State of Delaware against the Company (the “Horton 220 Action”). In the complaint, Horton alleges that the Company violated environmental laws and regulations, as well as made misstatements regarding its sourcing and inventory. Horton did not quantify any alleged damages in the complaint but, in addition to attorneys’ fees and costs, Horton sought an order compelling the Company and its officers, directors, employees and/or agents to immediately permit Horton, his attorneys and/or agents to inspect and make copies and extracts of the books and records of the Company.

 

On July 7, 2016, Horton and the Company entered into a settlement agreement and release pursuant to which the Company agreed to deliver certain documents to Horton’s attorney in exchange for a release by Horton and dismissal with prejudice of the Horton 220 Action. The Company complied with the terms of the settlement agreement and, on July 20, 2016, the Horton Action was dismissed with prejudice.

 

Litigation Relating to Products Liability

 

Beginning on or about March 3, 2015, numerous purported class action cases were filed in various U.S. federal district courts and state courts involving claims of excessive formaldehyde emissions from the Company’s flooring products (collectively, the “Products Liability Cases”). The plaintiffs in these various actions sought recovery under a variety of theories, which although not identical are generally similar, including negligence, breach of warranty, state consumer protection act violations, state unfair competition act violations, state deceptive trade practices act violations, false advertising, fraudulent concealment, negligent misrepresentation, failure to warn, unjust enrichment and similar claims. The purported classes consisted either or both of all U.S. consumers or state consumers that purchased the subject products in certain time periods. The plaintiffs also sought various forms of declaratory and injunctive relief and various damages, including restitution, actual, compensatory, consequential, and, in certain cases, punitive damages, and interest, costs, and attorneys’ fees incurred by the plaintiffs and other purported class members in connection with the alleged claims, and orders certifying the actions as class actions. Plaintiffs had not quantified damages sought from the Company in these class actions.

 

  

On June 12, 2015, United States Judicial Panel on Multi District Litigation (the “MDL Panel”) issued an order transferring and consolidating ten of the related federal class actions to the United States District Court for the Eastern District of Virginia (the “Virginia Court”). In a series of subsequent conditional transfer orders, the MDL Panel has transferred the other cases to the Virginia Court. The Company continues to seek to have any newly filed cases transferred and consolidated in the Virginia Court and ultimately, the Company expects all federal class actions involving formaldehyde allegations, including any newly filed cases, to be transferred and consolidated in the 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.

 

Pursuant to a court order, plaintiffs filed a Representative Class Action Complaint in the Virginia Court on September 11, 2015. The complaint challenged the Company’s labeling of its flooring products and asserted claims under California, New York, Illinois, Florida and Texas law for fraudulent concealment, violation of consumer protection statutes, negligent misrepresentation and declaratory relief, as well as a claim for breach of implied warranty under California law. Thereafter, on September 18, 2015, plaintiffs filed the First Amended Representative Class Action Complaint (“FARC”) in which they added implied warranty claims under New York, Illinois, Florida and Texas law, as well as a federal warranty claim. The Company filed a motion to dismiss and answered the FARC. The Virginia Court granted the motion as to claims for negligent misrepresentation filed on behalf of certain plaintiffs, deferred as to class action allegations, and otherwise denied the motion. The Company also filed a motion to strike nationwide class allegations, on which the Virginia Court has not yet ruled. The Company also filed a motion to strike all personal injury claims made in class action complaints. Plaintiffs subsequently agreed and the Virginia Court has ordered that no Chinese formaldehyde class action pending in this lawsuit will seek damages for personal injury on a class-wide basis. The order does not affect any claims for personal injury brought solely on an individual basis. Fact discovery has closed and expert discovery is now proceeding in this matter.

 

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

 

While the Company believes that a loss associated with the MDL matters is reasonably possible, the Company is unable to estimate the amount of loss, or range of possible loss, at this time. In the event that a settlement is reached related to these matters, the amount of such settlement may be material to the Company’s results of operations and financial condition and may have a material adverse impact on the Company’s liquidity.

 

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

 

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

 

 

On July 12, 2016, the Company entered into a Mutual Release with Liberty Mutual Fire Insurance Company, Liberty Insurance Company, Employers Insurance Company of Wausau, Wausau Business Insurance Company and Wausau Underwriters Insurance Company, through which the parties released all claims they may have against the other with respect to, inter alia, the Product Liability Cases. Pursuant thereto, in the coming days, those insurers will dismiss claims asserted against the Company in the Virginia Action (except the reformation claim on which judgment has already been entered), and the Company will dismiss claims asserted against those insurers in the Wisconsin Action.

 

In addition, there are a number of state court cases and claims alleging damages from Chinese-made laminate flooring.

 

Litigation Relating to Abrasion Claims

 

On May 20, 2015, a purported class action titled Abad v. Lumber Liquidators, Inc. was filed in the United States District Court for the Central District of California and two amended complaints were subsequently filed. In the Second Amended Complaint (“SAC”), the plaintiffs (collectively, the “Abrasion Plaintiffs”) sought to certify a national class composed of “All Persons in the United States who purchased Defendant’s Dream Home brand laminate flooring products from Defendant for personal use in their homes,” or, in the alternative, 32 statewide classes from California, North Carolina, Texas, New Jersey, Florida, Nevada, Connecticut, Iowa, Minnesota, Nebraska, Georgia, Maryland, Massachusetts, New York, West Virginia, Kansas, Kentucky, Mississippi, Pennsylvania, South Carolina, Tennessee, Virginia, Washington, Maine, Michigan, Missouri, Ohio, Oklahoma, Wisconsin, Indiana, Illinois and Louisiana. The SAC alleges violations of each of these states’ consumer protections statutes and the federal Magnuson-Moss Warranty Act, as well as breach of implied warranty and fraudulent concealment. The Abrasion Plaintiffs did not quantify any alleged damages in the SAC but, in addition to attorneys’ fees and costs, sought an order certifying the action as a class action, an order adopting the Abrasion Plaintiffs’ class definitions and finding that the Abrasion Plaintiffs are their proper representatives, an order appointing their counsel as class counsel, injunctive relief prohibiting the Company from continuing to advertise and/or sell laminate flooring products with false abrasion class ratings, restitution of all monies it received from the Abrasion Plaintiffs and class members, damages (actual, compensatory, and consequential) and punitive damages.

 

The Abrasion Plaintiffs filed a Third Amended Complaint and the Company moved to dismiss the Third Amended Complaint. The court decided that it would decide the motion only as to the California plaintiffs, but ordered all the non-California plaintiffs dropped from the action. The non-California plaintiffs have 60 days to re-file separate complaints in the Central District of California, which will then be transferred to the district court located in the place of residence of each non-California plaintiff whose claim is refiled. The Company disputes the Abrasion Plaintiffs’ claims and intends to defend these matters vigorously. Given the uncertainty of litigation, the preliminary stage of these cases, the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannot estimate the reasonably possible loss or range of loss that may result from these actions.

 

Gold Matter

 

On or about December 8, 2014, Dana Gold (“Gold”) filed a purported class action lawsuit in the United States District Court for the Northern District of California alleging that the Morning Star bamboo flooring (the “Bamboo Product”) that the Company sells is defective. On February 13, 2015, Gold filed an amended complaint that added three additional plaintiffs (collectively with Gold, “Gold Plaintiffs”). The Company moved to dismiss the amended complaint. After holding a hearing and taking the motion under submission, the court dismissed most of Gold Plaintiffs’ claims but allowed certain omission-based claims to proceed. Gold Plaintiffs filed a Second Amended Complaint on December 16, 2015, and then a Third Amended Complaint on January 20, 2016. In the Third Amended Complaint, Gold Plaintiffs allege that the Company has engaged in unfair business practices and unfair competition by falsely representing the quality and characteristics of the Bamboo Product and by concealing the Bamboo Product’s defective nature. Gold Plaintiffs seek the certification of a class of individuals in the United States who purchased the Bamboo Product, as well as seven state subclasses of individuals who are residents of California, New York, Illinois, West Virginia, Minnesota, Pennsylvania, and Florida, respectively, and purchased the Bamboo Product for personal, family, or household use. Gold Plaintiffs did not quantify any alleged damages in their complaint but, in addition to attorneys’ fees and costs, Gold Plaintiffs seek (i) a declaration that the Company’s actions violate the law and that the Company is financially responsible for notifying all purported class members, (ii) injunctive relief requiring the Company to replace and/or repair all of the Bamboo Product installed in structures owned by the purported class members, and (iii) a declaration that the Company must disgorge, for the benefit of the purported classes, all or part of its profits received from the sale of the allegedly defective Bamboo Product and/or to make full restitution to Gold Plaintiffs and the purported class members.

 

 

The Company filed its answer to the Third Amended Complaint on February 3, 2016, and discovery in the matter is now proceeding. The Company disputes the Gold Plaintiffs’ claims and intends to defend the matter vigorously. Given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.

 

Ross Matter

 

On or about February 23, 2016, Joseph Ross and Linda Ross (collectively, “Ross”) filed a purported class action lawsuit in the Second Judicial District Court, State of Nevada, County of Washoe. Ross seeks the certification of a class of individuals in the State of Nevada who purchased certain hardwood flooring products produced in China (the “Ross Products”). Ross alleges that the Ross Products are defective due to the Ross Products being contaminated with certain wood-boring insects. In particular, Ross’s allegations include (i) breach of warranty, (ii) negligence, (iii) strict liability, (iv) negligent misrepresentation, (v) willful misconduct, and (vi) unjust enrichment. In the complaint, Ross seeks (i) general and special damages according to proof in excess of $50,000, (ii) attorneys’ fees and costs according to proof, (iii) prejudgment and post-judgment interest on all sums awarded, according to proof at the maximum legal rate, (iv) costs of the lawsuit incurred, (v) restitution as authorized by law, (vi) punitive damages as authorized by law, and (vii) specific performance under the Company’s express warranties. The Company disputes Ross’s claims and intends to defend the matter vigorously. Given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.

 

Antidumping and Countervailing Duties Investigation

 

In October 2010, a conglomeration of domestic manufacturers of multilayered wood flooring filed a petition seeking the imposition of antidumping (“AD”) and countervailing duties (“CVD”) with the United States Department of Commerce (“DOC”) and the United States International Trade Commission (“ITC”) against imports of multilayered wood flooring from China. This ruling applies to the Company’s engineered hardwood imported from China, which accounted for approximately 10% of its flooring purchases in 2014 and approximately 6% of its flooring purchases in 2015.

 

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

 

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

 

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

 

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

 

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

 

 

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 January 2016, the DOC issued non- binding preliminary results in the third annual review. The preliminary AD rate was 13.34% and the CVD preliminary rate was 1.43%. In May 2016, the DOC issued the final CVD rate in the third review, which was 1.38%. On July 13, 2016, the DOC set the final AD rate at 17.37%. The Company intends to appeal these rates. As these rates are now final, the Company believes its best estimate of the probable loss associated with AD and CVD is approximately $5,500. During the quarter ended June 30, 2016, the Company recorded this amount in other long-term liabilities in its condensed consolidated balance sheet and as a charge to earnings in cost of sales on its condensed consolidated statement of operations. The Company will begin to pay the finalized rates on each applicable future purchase when recognized by U.S. Customs and Border Protection.

 

The total amount recorded in other long-term liabilities related to this matter in the accompanying balance sheet as of June 30, 2016 and December 31, 2015 was $10,400 and $4,900, respectively.

 

Based on the final CVD and AD rates in the third review set in May 2016 and July 2016, respectively the Company would owe an additional $4,600 for all shipments subsequent to November 2014 (AD) and December 2013 (CVD). As no rates have been finalized for these periods, the Company has not recorded an accrual in its condensed consolidated financial statements for the impact of higher rates for the time periods subsequent to the third annual review. Based on the information available, the Company believes there is at least a reasonable possibility that an additional charge may be incurred in the range of $0 to $4,600. A charge greater than this amount may be incurred, but the Company is unable to estimate the amount at this time.

 

In February 2016, the DOC initiated the fourth annual review of AD and CVD rates, which the Company expects will follow a similar schedule as the preceding review. The preliminary results in the fourth annual review are currently expected in September.

 

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 results of operations, financial position or cash flows.

 

Note 8.

Subsequent Events

 

In July 2016, the Company received a refund of $22,082 from the IRS related to the carry back of its 2015 net operating losses to prior periods where it generated taxable income. This amount is reflected in other current assets on the condensed consolidated balance sheet at June 30, 2016.

 

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. Forward-looking statements in this report may include, without limitation, statements regarding legal matters and settlement discussions, compliance with our 2015 plea agreement with the Department of Justice related to the Lacey Act and the associated environmental compliance plan, the ability to source product on a global basis, the Company’s ability to borrow under its asset-backed revolving credit facility, elevated levels of legal and professional fees, elevated levels of payroll and stock-based compensation expense, remediation of certain deficiencies in connection with the Company’s internal controls over financial reporting, sales growth, comparable store net sales, number of stores providing installation services, impact of cannibalization, impact of inflation, price changes, inventory availability and inventory per store, inventory valuation, earnings performance, stock-based compensation expense, margins, return on invested capital, advertising costs, costs to administer the Company’s indoor air quality testing program, intention to conduct additional investigation and reviews in connection with certain consumers’ indoor air quality tests, strategic direction, supply chain, the demand for the Company’s products, benefits from an improving housing market, construction of engineered hardwood as to not be subject to anti-dumping and countervailing duties, ultimate resolution of governmental investigations, and store openings and remodels.

 

The Company’s actual results could differ materially from those projected in or contemplated by the forward-looking statements as a result of potential risks, uncertainties and other factors including, but not limited to, changes in general economic and financial conditions, such as the rate of unemployment, consumer access to credit, and interest rate; the volatility in mortgage rates; the legislative/regulatory climate; political unrest in the countries of the Company’s suppliers; the ability to retain and motivate Company employees; the availability of sufficient suitable hardwood; the impact on our customers of our pricing strategy and our assortment displayed in a good-better-best format; the impact on the Company if the Company is unable to maintain quality control over its products; the cost and effect on the Company’s reputation of, and consumers’ purchasing decisions in connection with, unfavorable allegations surrounding the product quality of the Company’s laminate flooring sourced from China; the Company’s suppliers’ ability to meet its quality assurance requirements; disruption in the Company’s suppliers’ abilities to supply needed inventory; the impact on the Company’s business of its expansion of laminate products sourced from Europe and North America and the flooring industry’s demand for product from these regions; disruptions or delays in the production, shipment, delivery or processing through ports of entry; the strength of the Company’s competitors and their ability to increase their market share; slower growth in personal income; the number of customers requesting and cost associated with addressing the Company’s indoor air quality testing program; the ability to collect necessary additional information from applicable customers in connection with indoor air quality test results; changes in business and consumer spending and the demand for the Company’s products; changes in transportation costs; the rate of growth of residential remodeling and new home construction; the Company’s ability to offset the effects of the rate of inflation, if higher than expected; the demand for and profitability of installation services; changes in the scope or rates of any antidumping or countervailing duty rates applicable to the Company’s products; the duration, costs and outcome of pending or potential litigation or governmental investigations; ability to successfully and timely implement the Environmental Compliance Plan in accordance with the terms of the 2015 plea agreement with the Department of Justice related to the Lacey Act; ability to make timely payments pursuant to the terms of the 2015 plea agreement with the Department of Justice related to the Lacey Act; ability to borrow under its asset-backed revolving credit facility; ability to reach an appropriate resolution in connection with the governmental investigations; and inventory levels. The Company specifically disclaims any obligation to update these statements, which speak only as of the dates on which such statements are made, except as may be required under the federal securities laws.

 

Information regarding these additional risks and uncertainties is contained in the Company’s other reports filed with the Securities and Exchange Commission (“SEC”), including the Item 1A, “Risk Factors,” section of the Form 10-K for the year ended December 31, 2015.

 

This management discussion should be read in conjunction with the financial statements and notes included in Part I, Item 1. “Financial Statements” of this quarterly report and the audited financial statements and notes and management discussion included in the Company’s annual report filed on Form 10-K for the year ended December 31, 2015.

 

Overview

 

Lumber Liquidators is the largest specialty retailer of hardwood flooring in North America, offering a complete purchasing solution across an extensive assortment of exotic and domestic hardwood species, engineered hardwood, laminate, resilient vinyl, bamboo and cork. At June 30, 2016, we sold our products through 379 Lumber Liquidators stores in 46 states in the United States (“U.S.”) and in Canada, a call center, websites and catalogs.

 

We believe we have achieved a reputation for offering great value, superior service and a broad selection of high-quality hardwood flooring products. With a balance of price, selection, quality, availability and service, we believe our value proposition is the most complete within a highly-fragmented hardwood flooring market. 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 expansion of our advertising reach and frequency.

 

Executive Summary

 

Our results for the quarter ended June 30, 2016 were impacted by the following key items:

 

·

We incurred a net loss of $12.2 million, or $(0.45) per diluted share, compared to a net loss of $20.3 million, or $(0.75) per diluted share in the second quarter of 2015.

 

·

We continued to progress in our efforts to resolve outstanding legal and regulatory issues, which are discussed in detail in Part II, Item 1 of this document. In summary:

 

  

o

We have entered into a Stipulation of Settlement in the Securities Class Action Litigation and the Consolidated Derivative Litigation Matter. Both of these stipulations are dependent on each other and are subject to court approvals and other contingencies. In particular:

 

o

On July 18, 2016, we signed the Consolidated Derivative Stipulation related to the Consolidated Derivative Litigation Matter. Among other things, the terms provide for the use of available insurance proceeds of approximately $2.5 million and a net charge to earnings of $2.5 million within selling general and administrative expense in the accompanying condensed consolidated statement of operations, which was recorded during the first quarter of 2016, resulting in a total accrual of $5.0 million, which is classified within other current liabilities on the condensed consolidated balance sheet.

 

o

On July 6, 2016, the court preliminarily approved our Securities Class Action Stipulation entered June 15, 2016, which such the terms are consistent with the Securities Class Action MOU, dated April 27, 2016, with the lead plaintiffs in the Securities Class Action Litigation that sets forth our agreement in principle to settle outstanding claims against us. The terms provide for the use of available insurance proceeds (approximately $26.0 million) and 1 million shares of the Company’s common stock to fund a settlement account established for the benefit of the class. These terms and conditions are subject to further consideration at the scheduled settlement hearing to be held on November 17, 2016.

 

o

On June 16, 2016, the court reaffirmed the April 5, 2016 favorable ruling from the Superior Court of the State of California, County of Alameda regarding the Company’s then outstanding legal matter related to a California law commonly known as Proposition 65.

 

o

On June 15, 2016, we entered into an agreement with the Office of Compliance and Field Operations of the Consumer Product Safety Commission (“CPSC”) with respect to our laminate products sourced from China. This agreement marks the completion of the CPSC’s evaluation of the safety of our laminate flooring sourced from China. In our agreement, we agreed to continue our indoor air quality testing program for the benefit of our customers and not resume the sale of the product.

 

·

We accrued approximately $3.0 million as our best estimate of future indoor air quality testing program reserve, resulting in a total accrual of $3.6 million as of June 30, 2016. This is the result of our agreement with the CPSC to continue our indoor air quality testing program in future periods.

 

·

Our net sales for the second quarter of 2016 decreased $9.8 million, or 4.0%, over the second quarter of 2015 as a decrease in net sales in comparable stores of $17.9 million was partially offset by an increase in net sales in non-comparable stores of $8.1 million. The section below entitled “Current Sales Trends” provides a more detailed discussion on these results.

 

·

We incurred incremental legal and professional fees during our defense of various legal and regulatory matters. Although we have made measurable progress in our efforts to resolve outstanding legal and regulatory issues, we continue to believe that legal and professional fees necessary to defend the Company will remain elevated above historic levels as we work through remaining matters.  Additionally, insurance coverage previously available to address certain legal issues will be exhausted as a result of reaching a settlement pursuant to the terms of the consolidated securities class action.

 

Current Sales Trends

 

Net sales in the second quarter of 2016 were $238.1 million, a decrease of 4.0%, from the second quarter of 2015.  In comparable stores, net sales for the second quarter decreased 7.2% in comparison to the second quarter of 2015, due to a 7.9% decrease in the number of customer invoiced which was partially offset by a 0.7% increase in the average sale.  Consistent with historical trends, our net sales generally decreased during the quarter as we moved through the spring months. Comparable store net sales, however, generally increased during the period. Comparable store sales in April were below the quarter average, while May and June comparable store net sales were above and near the quarter average, respectively.

 

 

We believe the comparability of our sales performance to the prior year period, is impacted by several events which occurred during the current or prior year periods, including:

 

·

Our prior year inventory reduction initiative: In the second half of the prior year quarter, we began a program to aggressively reduce our inventory levels to improve our cash position and drive sales. That inventory reduction initiative focused on reductions in clearance product as well as price reductions across our assortment. In the current year, we have been more strategic in our pricing methodology which has improved our gross margin but pressured our net sales comparisons.

 

·

Changes in the assortment of product we sell: In May of 2015, we suspended the sale of laminate products sourced from China, which we have not sold since that time. Additionally, we suspended the purchase and sale of certain engineered hardwood products sourced from China in the second quarter of 2015. As a result of these prior year assortment changes and the inventory initiative discussed above, we implemented price reductions during the second quarter of 2015 in many of the categories of products we sell to ensure our assortment was attractive to our customers. During the second quarter of 2016, we believe that the demand for certain product categories decreased as our assortment of products did not match changes in customer trends.

 

Strategic Direction

 

We continue to focus on responsible and compliant sourcing activities while driving several key initiatives related to our core business that we believe will strengthen our sales, operating margin and provide an improved shopping experience to our customers. These initiatives include:

 

·

Focusing on store performance:  We believe our store model provides a competitive advantage by allowing our associates to maximize the amount of time devoted to assisting customers throughout the buying process. During the quarter, we continued to build out and enhance our store operations team and held a summit of key store leadership to train, share best practices and emphasize our commitment to hire the best store associates to serve our customers. Additionally, we continued to focus our store activities with key components of our approach to customer service and our value proposition.

 

·

Strengthening our value proposition:  We offer a broad assortment of high quality flooring in varying widths, species, and constructions, as well as moldings and accessories, in addition to focusing on emerging product categories. During the quarter, we worked to improve our store in-stock position related to certain product categories through a heightened focus on merchandise planning. We believe that strategic investments during the second half of 2016 in new, exclusive styles of products will further drive customer demand and build upon our brand image.

 

·

Responsible, compliant sourcing activities:  We continue to enhance our compliance programs, which we believe will allow the Company to confidently source products on a global basis. Additionally, we are beginning to introduce certain industry certifications to our products, which reassure our customers of the value in the products we sell.

 

·

Opportunistically expanding our business to better serve our customers:  We serve both do-it-yourself (“DIY”) customers as well as do-it-for-me (“DIFM”) customers who choose to select their flooring products but prefer to have those products installed for them. We continue to increase the number of stores which offer installation services coordinated by our associates, which provides our customers a better shopping experience, increases our average sale as well as the gross profit generated from those customers.  Additionally, we focused on improving our infrastructure to support our commercial business during the quarter.

 

We believe the selected sales data, the percentage relationship between net sales and major categories in the 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.

 

Results of Operations

 

For an understanding of the significant factors that influenced our performance during the quarter, the following discussion should be read in conjunction with the Company’s annual report filed on Form 10-K for the year ended December 31, 2015.

 

 

 

										% Increase
		% of Net Sales								(Decrease) in
		Three Months Ended June 30,								Dollar Amounts
		2016				2015				2016 vs. 2015
Net Sales			100.0	%			100.0	%			-4.0	%
Gross Profit			29.7	%			25.1	%			13.3	%
Selling, General, and Administrative Expenses			37.8	%			36.5	%			-0.7	%
Operating Income (Loss)			(8.1	)%			(11.4	)%			-31.7	%
Other (Income) Expense			0.1	%			-	%			100.8	%
Income (Loss) Before Income Taxes			(8.2	)%			(11.4	)%			-31.4	%
Provision for Income Taxes			(3.0	)%			(3.2	)%			-9.6	%
Net Income (Loss)			(5.2	)%			(8.2	)%			-39.9	%

 

										% Increase
		% of Net Sales								(Decrease) in
		Six Months Ended June 30,								Dollar Amounts
		2016				2015				2016 vs. 2015
Net Sales			100.0	%			100.0	%			-7.1	%
Gross Profit			31.1	%			30.3	%			-4.7	%
Selling, General, and Administrative Expenses			43.9	%			37.1	%			10.0	%
Operating Income (Loss)			(12.8	)%			(6.8	)%			76.0	%
Other (Income) Expense			0.1	%			-	%			247.8	%
Income (Loss) Before Income Taxes			(12.9	)%			(6.8	)%			76.4	%
Provision for Income Taxes			(3.4	)%			(1.2	)%			155.9	%
Net Income (Loss)			(9.5	)%			(5.6	)%			58.7	%

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
SELECTED SALES DATA		2016				2015				2016				2015
Number of stores open at end of period			379				363				379				363
Number of stores in expanded showroom format			144				124				144				124
Number of stores opened in period			4				7				5				11
Number of stores remodeled in period1			-				1				2				10
			% increase (decrease)								% increase (decrease)
Average sale2			0.7	%			(2.4	)%			0.4	%			(4.4	)%
Average retail price per unit sold3			(3.1	)%			(6.3	)%			(3.2	)%			(6.5	)%
Comparable stores4:
Net sales			(7.2	)%			(10.0	)%			(10.6	)%			(6.0	)%
Customers invoiced5			(7.9	)%			(7.6	)%			(11.0	)%			(1.6	)%
Net sales of stores operating for 13 to 36 months			(4.2	)%			(6.5	)%			(6.5	)%			(2.1	)%
Net sales of stores operating for more than 36 months			(7.7	)%			(10.5	)%			(11.2	)%			(6.6	)%
Net sales in markets with all stores comparable (no cannibalization)			(5.6	)%			(8.3	)%			(8.9	)%			(3.8	)%
Net sales in cannibalized markets6			7.5	%			10.1	%			3.3	%			15.8	%

 

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

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

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

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 to total net sales at comparable stores. 

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

 

 

Net Sales

 

Net sales for second quarter ended June 30, 2016 decreased $9.8 million, or 4.0%, from the comparable period in 2015 as net sales in comparable stores decreased $17.9 million which was partially offset by an increase in non-comparable stores of $8.1 million. Net sales for six months ended June 30, 2016 decreased $36.3 million, or 7.2%, from the comparable period in 2015 as net sales in comparable stores decreased $53.9 million which was partially offset by an increase in non-comparable stores of $17.6 million. Notable items impacting net sales include:

 

·

The number of customers invoiced was impacted by our change in strategy from a very promotional period in the prior year to more strategic pricing initiatives in the current year period.

 

·

Our average sale increased as a result of changes in our sales mix, our more strategic pricing initiatives and slight increases in the volume and attachment of products sold. Although our pricing improved, our average retail price per unit sold decreased. During the second quarter of 2016, the average selling price of our products was 3.1% lower than the comparable period in the prior year, primarily due to increases in the sales mix of laminates and vinyl, which generally have lower retail price points and higher than average gross margins.

 

·

Less than favorable net sales at comparable stores were partially offset by the expansion of the Company’s installation program which increased 80.0% to $12.0 million in second quarter of 2016 as compared to the second quarter of 2015.

 

Gross Profit

 

Gross profit increased 13.3% in the second quarter of 2016 to $70.6 million from $62.3 million in the comparable period in 2015. Gross margin increased to 29.7% in the second quarter of 2016 from 25.1% in the second quarter of 2015. The change in gross margin was primarily attributable to the items highlighted in the table below as well as changes in our promotional pricing strategy and increases in the sales mix of laminates and vinyl, which generally have lower retail price points and above average gross margins.

 

Gross profit decreased 4.7% during the six months ended June 30, 2016 to $146.7 million from $153.9 million in the comparable period in 2015. Gross margin increased to 31.1% in the first half of 2016 from 30.3% in the first half of 2015 primarily driven by similar factors impacting the second quarter.

 

Items impacting gross margin with comparisons to the prior year include: 

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
		(dollars in thousands)
Inventory Impairments 1		$	-			$	6,269			$	-			$	7,332
Antidumping Charges 2		$	5,450			$	4,921			$	5,450			$	4,921
Indoor Air Quality Testing Program 3		$	3,292			$	4,918			$	6,187			$	7,231

 

 

¹ Inventory impairment charges were related to our decision to simplify our business by phasing out a significant portion of tile flooring and related accessories and discontinuing certain vertical integration initiatives. 

² We incurred countervailing and antidumping costs of $5.5 million and $4.9 million associated with applicable shipments of engineered hardwood from China for the three months ended June 30, 2016 and 2015, respectively. 

³ We incurred costs related to our indoor air quality testing program. During the quarter ended June 30, 2016, we held a reserve of $3.6 million in other current liabilities in the condensed consolidated balance sheet representing our best estimate of costs to be incurred in the future periods to service this program.

  

 

Selling, General and Administrative Expenses

 

SG&A expenses decreased 0.7% in the second quarter of 2016 to $89.9 million from $90.6 million in the comparable period in 2015. The change in SG&A was primarily attributable to the items highlighted in the table below as well as slight reductions in our advertising spend in the second quarter of 2016 partially offset by higher payroll related costs in the second quarter of 2015. 

 

SG&A expenses increased 10.0% during the six months ended June 30, 2016 to $207.1 million from $188.2 million in the comparable period in 2015. The change in SG&A was primarily attributable to increases in incremental legal and professional fees and settlement expenses in connection with our defense of various legal and regulatory matters as well as net accruals of approximately $15.4 million primarily related to our consolidated securities class action.

 

Items impacting SG&A with comparisons to the prior year include:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
		(dollars in thousands)
Securities and Derivatives Class Action 1		$	(600	)		$	-			$	15,420			$	-
Legal and Professional Fees 2		$	8,294			$	6,328			$	18,708			$	10,795
All Other 3		$	945			$	3,330			$	2,220			$	13,770

 

¹ Represents the net charge to earnings related to the stock-based element of our proposed settlement in these class action lawsuits. See Part II, Item 1 on Legal Proceedings for a complete discussion of these matters. 

² Represents charges to earnings related to our defense of various significant legal actions during the period. This does not include all legal costs incurred by the Company. 

³ All other primarily relates to settlements accruals related to the completed DOJ-Lacey Act investigation in 2015, various payroll factors, including our retention initiatives and the net impact of the CARB and Prop 65 settlements in 2016.

 

Operating Loss and Operating Margin

 

Operating loss for the three months ended June 30, 2016 was $19.3 million compared to operating loss of $28.3 million in the comparable period in 2015. Operating loss as a percent of net sales was (8.1)% for the three months ended June 30, 2016 compared to (11.4)% for the three months ended June 30, 2015.

 

Provision for Income Taxes

 

The effective tax rate of 37.1% for the three months ended June 30, 2016 was driven principally by an increase in a valuation allowance against certain of the Company’s deferred tax assets and revised projected pretax income for the remainder of 2016. The effective tax rate of 28.2% for the three months ended June 30, 2015 was impacted primarily by a decrease in state taxes offset by a reserve for an uncertain tax position the deductibility of certain legal accruals and revised projected pretax income for the remainder of 2015. At the end of the second quarter of 2016, refundable income taxes and the deferred tax asset were $41.2 million and $12.3 million, respectively. At December 31, 2015, refundable income taxes and the deferred tax asset were $19.6 million and $21.0 million, respectively. These amounts are reflected within other current assets on the condensed consolidated balance sheets at June 30, 2016 and December 31, 2015.

 

 

In July 2016, we received a refund of $22.1 million from the IRS related to the carry back of our 2015 net operating losses to prior periods where we generated taxable income. This amount is reflected in other current assets in the condensed consolidated balance sheet at June 30, 2016.

 

Diluted Earnings per Share

 

Net loss for the three months ended June 30, 2016 was $12.2 million, resulting in a loss of $0.45 per diluted share, compared to a net loss of $20.3 million, or $0.75 per diluted share, for the three months ended June 30, 2015. Net loss for the first six months of 2016 was $44.6 million, resulting in a loss of $1.65 per diluted share, compared to a net loss of $28.1 million, or $1.04 per diluted share, for the first six months of 2015.

 

Seasonality

 

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

 

Liquidity and Capital Resources

 

Our principal liquidity and capital requirements are for capital expenditures to maintain and grow our business, working capital and general corporate purposes. We periodically use excess cash flow to repurchase shares of our common stock under our stock repurchase program, however, we have suspended our share repurchase plan until we are better able to evaluate the long-term customer demand and assess our estimates of operations and cash flow. Our principal sources of liquidity at June 30, 2016 were $12.7 million of cash and cash equivalents, our expected cash flows from operations and $53.7 million of availability under our revolving credit facility, subject to potential limitations. In July 2016, we received a refund of $22.1 million from the IRS related to the carry back of our 2015 net operating losses to prior periods where it generated taxable income. This amount is reflected in other current assets on the condensed consolidated balance sheet at June 30, 2016

 

In 2016, we believe that capital expenditures will total between $10.0 million and $15.0 million, but we will continue to assess and adjust our level of capital expenditures based on changing circumstances. Included in our capital requirements, we will continue to selectively evaluate the opening of new stores and the remodeling and relocating of existing stores while continuing to focus on our current store base.

 

In addition, we continue to address the outstanding legal matters, including MDL, which, if settled, could have a material adverse impact on our liquidity in future periods.

 

Cash and Cash Equivalents

 

During the first six months of 2016, cash and cash equivalents decreased $14.0 million to $12.7 million. The decrease of cash and cash equivalents was primarily due to $23.7 million of net cash used in operating activities and $3.3 million used for capital expenditures, which were partially offset by the $12.0 million borrowed under the revolving credit facility. This decrease was primarily attributable to significant increases in inventory levels during the six months ended June 30, 2016.

 

During the first six months of 2015, cash and cash equivalents increased $25.0 million to $45.3 million. The increase of cash and cash equivalents was primarily due to $19.2 million of net cash provided by operating activities and $20.0 million borrowed under the revolving credit facility, which were partially offset by the use of $14.3 million for capital expenditures. This increase was primarily attributable to significant reductions in inventory levels during the six months ended June 30, 2015.

 

Merchandise Inventories

 

Merchandise inventories at June 30, 2016 increased $10.5 million from December 31, 2015, due to an increase in available for sale inventory of $15.3 million partially offset by a decrease in inbound in-transit inventory of $4.8 million. 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				As of				As of
		June 30, 2016				December 31, 2015				June 30, 2015
		(in thousands)
Inventory – Available for Sale		$	231,229			$	215,903			$	243,060
Inventory – Inbound In-Transit			23,708				28,499				19,683
Total Merchandise Inventories		$	254,937			$	244,402			$	262,743
Available Inventory Per Store		$	610			$	577			$	670

 

Available inventory per store at June 30, 2016 was higher than December 31, 2015 primarily due to the timing of net sales below expectations during the first half of 2016. Available inventory per store was lower than June 30, 2015 primarily as a result of our efforts to simplify our assortment and better manage working capital. Part of our strategic direction to strengthen our value proposition is to ensure that each store location has the right mix of product available to meet customer demand, which we believe will enhance the shopping experience for our customers.

 

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 in operating activities was $23.7 million for the six months ended June 30, 2016 and net cash provided by operating activities was $19.1 million for the six months ended June 30, 2015. Net cash flows from operating activities in the first six months of 2016 decreased as compared to the prior year six-month period primarily due to less profitable operations and an increase in inventory and other working capital changes. Net cash provided by operating activities in the first six months of 2015 decreased as compared to the first six months of 2014 primarily due to less profitable operations and a decrease in accounts payable which were partially offset by a decrease in merchandise inventory and other working capital changes.

 

Investing Activities. Net cash used in investing activities for capital expenditures was $3.3 million and $14.3 million for the six months ended June 30, 2016 and 2015, respectively. Capital expenditures for the first six months of 2016 decreased in comparison to the first six months of the prior year primarily due to fewer new store openings and lower expenditures related to our information technology initiatives. Capital expenditures for the first six months of 2015 included approximately $6.3 million related to store base expansion and remodeling, approximately $2.4 million related to the East Coast distribution center and approximately $1.5 million for the new finishing line.

 

Financing Activities. Net cash provided by financing activities was $12.1 million for the six months ended June 30, 2016, primarily due to $12.0 million of net borrowings on the revolving credit facility. Net cash provided by financing activities was $19.7 million for the six months ended June 30, 2015, primarily due to $20.0 million of net borrowings on the revolving credit facility.

 

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. Since the filing of our last annual report on Form 10-K for the year ended December 31, 2015, we believe the following represents a significant change to our critical accounting policies and estimates used in preparation of our financial statements:

 

Accrual for Air Quality Emissions Screening Test Costs

 

During the second quarter of 2016, we agreed with the Office of Compliance and Field Operations of the Consumer Product Safety Commission (“CPSC”) to continue our indoor air quality testing program for customers who purchased laminate flooring sourced from China during the period from February 22, 2012 to February 27, 2015. The form of the testing program agreed to with the CPSC is substantially similar to the program we have operated since March 2015. In connection with the agreement with the CPSC, we determined that a probable loss should be recognized related to future costs of the program during the interim period ended June 30, 2016 and recorded a charge to cost of sales of approximately $3.0 million.

 

 

Estimating the reserve for costs associated with our indoor air quality program for our customers who purchased laminate flooring sourced from China requires management to estimate (1) the number of future requests for indoor air quality testing for the duration of the program, (2) the results of that testing, and (3) the average cost to settle each request.

 

We project our best estimate of the expected number of requests to be received, and the percentage of requests that will ultimately progress through various phases of our testing program utilizing historic trends since the voluntary program began in March of 2015. Estimates for both of these elements (number and percentage) are quantified using a range of assumptions derived from our limited indoor air quality test program history and the identification of factors influencing the amount of requests, including the declining trend in received requests due to the passage of time since customer purchase of the material and/or recent media events.

 

Actual liabilities could be higher or lower than those estimated due to uncertainty in projecting the number of future requests for tests, future average costs per test and other factors, which could materially affect our financial condition, results of operations or cash flows. Our estimate is based, in part, on a projection that the annual number of requests received will continue to decline over time and that the average cost per request will remain relatively stable. If the level of requests received or average cost per request differs materially from expectations, it could result in additional increases to the reserve and reduced earnings and cash flows in future periods. At June 30, 2016, our best estimate of the future indoor air quality testing program reserve is approximately $3.6 million.

 

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 revolving credit agreement are exposed to interest rate risk due to the variable rate of the facility. As of June 30, 2016, we had $32.0 million outstanding under our revolving credit agreement.

 

We currently do not engage in any interest rate hedging activity and currently have no intention to do so in the foreseeable future. However, in the future, in an effort to mitigate losses associated with these risks, we may at times enter into derivative financial instruments, although we have not historically done so. We do not, and do not intend to, engage in the practice of trading derivative securities for profit.

 

Exchange Rate Risk.

 

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

 

We currently do not engage in any exchange rate hedging activity and currently have no intention to do so in the foreseeable future. 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. The Company's management, with the participation of the Company's Chief Executive Officer and interim Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of June 30, 2016. Based on this evaluation, the Company's Chief Executive Officer and interim Chief Financial Officer concluded that the Company's disclosure controls and procedures were not effective as of June 30, 2016 due to the material weakness at December 31, 2015, described below. As of June 30, 2016, the Company implemented a remediation action plan to address the material weakness referenced below. This remediation plan included both the implementation of new controls over user access to our ERP systems (as defined below), as well as a review of the design of existing IT controls. However, these new and revised processes and controls have not operated or been tested for a sufficient period of time to allow for management to conclude that they are appropriately designed, implemented and operating effectively. For the quarter ended June 30, 2016, the Company performed additional testing, verification and validation of information technology user access controls to assess the reliability of the financial data used to the unaudited quarterly condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP).  Accordingly, management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

 

Changes in internal control over financial reporting. In the course of completing our assessment of internal control over financial reporting as of December 31, 2015, management identified deficiencies related to the design and operating effectiveness of its information technology (“IT”) general controls for the Company’s enterprise resource planning system (referred to hereinafter as the “ERP system”). The ERP system is utilized in the performance of transactional and management review controls that comprise the principal element of the Company’s system of internal control over financial reporting and are relevant to the preparation of its condensed consolidated financial statements. These deficiencies involved user access controls that are intended to ensure that access and revisions to financial applications and data is adequately restricted to appropriate personnel. The ineffective user access controls resulted in ineffective segregation of duties within the Company’s IT environment, whereby certain personnel and contractors had the capability to perform conflicting duties within the ERP system. Finally, the Company did not maintain effective controls over certain periodic reviews of user access for the period. As a result of the aggregate deficiencies identified, there is a reasonable possibility that the effectiveness of business process controls that utilize electronic data and financial reports generated from the affected ERP system could have been adversely affected.

 

Management has now developed and implemented a remediation plan to address the material weakness in the Company’s ERP system noted above. The remediation actions included the following:

 

·

Improved the design, operation and monitoring of existing control activities and procedures associated with user and administrator access to the affected IT system, including enhancement of both preventive and detective control activities;

·

Further standardized the processes for assignment of user access roles and responsibilities within the Company’s ERP system; and

·

Reviewed the responsibilities in the functional areas that support and monitor our IT systems.

 

Management believes that the above efforts will effectively remediate the material weakness. However, the material weakness in our internal control over financial reporting will not be considered remediated until the new controls are fully implemented, in operation for 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. While we believe substantial progress has been made related to the remediation activities noted above, deficiencies in user access controls for our ERP system and reliance on data generated from our ERP system have not yet been sustained and operating for a sufficient period of time to be deemed proven as remediated. Accordingly, the material weakness in our internal controls over financial reporting related to information technology user access controls as reported at December 31, 2015 has not been deemed remediated as of June 30, 2016.

 

During the second half of fiscal year 2016, management will test and evaluate the implementation of the new processes established as a result of the remediation plans, and the related internal controls to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material error in the financial statements. Notwithstanding the identified material weaknesses, management believes the condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows at June 30, 2016 and for the periods presented in accordance with U.S. GAAP.

 

As part of the process of remediating our material weakness discussed above, management continues to evaluate resources, evaluate roles and responsibilities of key personnel and assess the need to make changes to certain processes related to our information technology general controls. Except as noted in the preceding paragraphs, there have been no other changes 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.

 

Securities Investigation

 

In March 2015, we received a grand jury subpoena issued in connection with a criminal investigation being conducted by the U.S. Attorney’s Office for the Eastern District of Virginia (the “U.S. Attorney”). In addition, on May 19, 2015, July 13, 2015 and March 11, 2016, we received subpoenas from the New York Regional Office of the SEC in connection with an inquiry by the SEC staff. Based on the subpoenas, we believe the focus of both the U.S. Attorney investigation and SEC investigation primarily relate to compliance with disclosure, financial reporting and trading requirements under the securities laws since 2011. We are fully cooperating with the investigations by the U.S. Attorney and SEC staff and continue to produce documents responsive to the subpoenas and pursuant to other requests received from the U.S. Attorney’s Office. Given that the investigation by the U.S. Attorney and SEC staff are still ongoing, we cannot estimate the reasonably possible loss or range of loss that may result from this matter.

 

Prop 65 Matter

 

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

 

On April 4, 2016, the court issued a ruling granting our motion for judgment. The court entered judgment for us on June 30, 2016. Although we accrued $0.9 million in the fourth quarter of 2015 as our best estimate of the probable loss that may result from this action at such time, given the court’s ruling, we have subsequently reversed this accrual during the first quarter of 2016. In light of the court’s entry of judgment, the likelihood of a material loss in connection with this matter is now remote.

 

Securities Class Action and Derivative Litigation Matters

 

As more fully set forth below, in each of the Securities Class Action Litigation (as defined below) and the Consolidated Derivative Litigation Matter (as defined below), we have entered into a Stipulation of Settlement. Both the Securities Class Action Stipulation (as defined below) and the Consolidated Derivative Stipulation (as defined below) are dependent on each other and are subject to court approvals and other contingencies. Therefore, there can be no assurance that a settlement will be approved by the courts or as to the ultimate outcome of the Securities Class Action Litigation or the Derivative Litigation Matter.

 

Securities Litigation Matter

 

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

 

The lead plaintiffs filed a consolidated amended complaint on April 22, 2015. The consolidated amended complaint alleges that the Defendants made material false and/or misleading statements that caused losses to investors. In particular, the lead plaintiffs allege that the Defendants made material misstatements or omissions related to their compliance with the Lacey Act, the chemical content of certain of their wood products, and their supply chain and inventory position. The lead plaintiffs do not quantify any alleged damages in their consolidated amended complaint but, in addition to attorneys’ fees and costs, they seek to recover damages on behalf of themselves and other persons who purchased or otherwise acquired our stock during the putative class period at allegedly inflated prices and purportedly suffered financial harm as a result. The Defendants moved to dismiss the consolidated amended complaint but, on December 21, 2015, the court denied this motion.

 

 

On April 27, 2016, the Defendants entered into an agreement in principle, a Memorandum of Understanding (“Securities Class Action MOU”), with the lead plaintiffs in the consolidated securities class action. On June 15, 2016, we entered into a definitive settlement agreement (the “Securities Class Action Stipulation”) and, on July 7, 2016, the court entered an order granting preliminary approval for the Securities Class Action Stipulation. The terms of the Securities Class Action Stipulation were consistent with those of the Securities Class Action MOU. Under the terms of the Securities Class Action Stipulation, we, through our insurers, will contribute $26.0 million to a settlement fund that will be used to compensate individuals who purchased our shares during the period from February 22, 2012 to February 27, 2015. In addition, under the terms of the Securities Class Action Stipulation, we will issue 1 million shares of its common stock to the settlement fund with a value of approximately $15.4 million based on the $15.42 closing price of our common stock on June 30, 2016. We have classified the loss contingency of $41.4 million as accrued securities class action and the expected insurance proceeds of $26.0 million as insurance receivable on the accompanying condensed consolidated balance sheet. The amount of loss associated with the issuance of shares of common stock as a part of the settlement will be determined based on the trading value of the shares on the date of issuance, which could increase the recognized loss if the trading value increases or result in a gain if the trading value decreases. We will record the fair value of the expected number of shares to be issued in our condensed consolidated balance sheet based on the closing price of its common stock as of the reporting date until the liability is settled. We recorded a benefit of $0.6 million within selling, general, and administrative expense during the second quarter of 2016 to reflect the decrease in the closing price of our common stock between April 27, 2016, the initial recording of the liability, and June 30, 2016. The settlement is subject to further consideration at the settlement hearing scheduled to be held on November 17, 2016 and to several contingencies including final court approval. There can be no assurance that a settlement will be finalized and approved or as to the ultimate outcome of the litigation. The ultimate resolution of these actions could have a material adverse effect on our financial condition and results of operations.

 

Derivative Litigation Matter - Consolidated Cases

 

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

 

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

 

  

On May 16, 2016, we and the Individual Defendants entered into an agreement in principle, a Memorandum of Understanding (“Consolidated Derivative MOU”), with the lead plaintiff in the Consolidated Derivative Litigation Matter. On July 18, 2016, we entered into a definitive settlement agreement (the “Consolidated Derivative Stipulation”). The terms of the Consolidated Derivative Stipulation were consistent with those of the Consolidated Derivative MOU. Under the terms of the Consolidated Derivative Stipulation, the Consolidated Derivative Litigation Matter will be settled for a combination of corporate governance changes, a payment of $26.0 million in insurance proceeds to us (which we will then use to settle the pending Securities Class Action Litigation), and attorneys’ fees. During the first quarter of 2016, we determined that a probable loss was incurred related to the Derivative Litigation Matters and recognized a net charge to earnings of $2.5 million within selling general and administrative expense in the condensed consolidated statement of operations. We classified the loss contingency of $5.0 million within other current liabilities and the expected insurance proceeds of $2.5 million within insurance receivable on the balance sheet. The settlement is subject to several contingencies including preliminary and final court approval. There can be no assurance that a settlement will be finalized and approved or as to the ultimate outcome of the litigation. The ultimate resolution of these actions could have a material adverse effect on our financial condition and results of operations.

 

Derivative Litigation Matters

 

On June 11, 2015, the Special Committee of the Board of Directors (the “Special Committee”) exercised its authority to create a Demand Review Committee, which is comprised of three independent directors and tasked with reviewing, analyzing, investigating and considering the allegations made in the Consolidated Derivative Litigation Matter, other Derivative Matters and the Horton Action, as described below, and to report its recommendations thereon to the board of directors.  Following an extensive review, investigation and analysis, including taking into consideration the report of independent counsel engaged to assist in the investigation of these matters, the Demand Review Committee recommended to the board of directors that bringing the claims articulated in the Consolidated Derivative Litigation Matter, the other Derivative Matters and the Horton Action would not be in the Company’s best interest.

 

Derivative Litigation Matter - Costello Matter

 

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

  

We filed a motion to dismiss the amended complaint based on the failure to make a demand upon our board of directors and the Costello Defendants filed a motion to dismiss based on the failure to state a claim and the exculpatory provision in our Certificate of Incorporation. On September 14, 2015, the parties entered into a stipulation voluntarily staying the case until the Demand Review Committee had an opportunity to investigate Costello’s allegations and make a recommendation to our board of directors, and the board of directors has the opportunity to act on that recommendation. The court approved the stipulation. The stay remains in effect.

 

Derivative Litigation Matter - McBride Matter

 

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

 

 

With respect to the Costello Matter and the McBride Matter (collectively, the “Other Derivative Matters”), pursuant to the terms of the Consolidated Derivative Stipulation, the lead plaintiffs in the Consolidated Derivative Litigation Matter will use their best efforts to resolve the Other Derivative Matters. If the lead plaintiffs are unable to resolve the Other Derivative Matters, the lead plaintiffs will cooperate with us to seek dismissal of the Other Derivative Matters. While a material loss is reasonably possible, we are unable to reasonably estimate the possible or range of possible loss.

 

Derivative Litigation Matter - Horton Matter

 

In May 2015, we received a shareholder demand from Timothy Horton (“Horton”), with the allegations and demands overlap substantially with those raised in the Consolidated Derivative Litigation Matter. On June 11, 2015, the Special Committee of the Board of Directors (the “Special Committee”) exercised its authority to create a three-person Demand Review Committee, which is comprised of three independent directors and tasked with investigating the claims made in the consolidated action and the Horton demand letter and making a recommendation to the board of directors as to whether it would be in the best interests of the Company to pursue any of those claims. The members of the Demand Review Committee filed a motion to stay the consolidated action pending completion by the Demand Review Committee of its investigation and recommendation to the board of directors. As part of our determination that pursuit of the derivative claims would not be in the best interests of our stockholders, the Demand Review Committee determined to recommend to the board of directors to reject Horton’s demand and that we not pursue the claims described in his letters to the Company. The board adopted that recommendation on May 6, 2016.

 

On May 16, 2016, Horton filed a verified complaint in the Court of Chancery of the State of Delaware against the Company (the “Horton 220 Action”). In the complaint, Horton alleges that we violated environmental laws and regulations, as well as made misstatements regarding our sourcing and inventory. Horton did not quantify any alleged damages in the complaint but, in addition to attorneys’ fees and costs, Horton sought an order compelling us and our officers, directors, employees and/or agents to immediately permit Horton, his attorneys and/or agents to inspect and make copies and extracts of our books and records.

 

On July 7, 2016, Horton and the Company entered into a settlement agreement and release pursuant to which we agreed to deliver certain documents to Horton’s attorney in exchange for a release by Horton and dismissal with prejudice of the Horton 220 Action. We complied with the terms of the settlement agreement and, on July 20, 2016, the Horton Action was dismissed with prejudice.

 

Litigation Relating to Products Liability

 

Beginning on or about March 3, 2015, numerous purported class action cases were filed in various U.S. federal district courts and state courts involving claims of excessive formaldehyde emissions from our flooring products (collectively, the “Products Liability Cases”). The plaintiffs in these various actions sought recovery under a variety of theories, which although not identical are generally similar, including negligence, breach of warranty, state consumer protection act violations, state unfair competition act violations, state deceptive trade practices act violations, false advertising, fraudulent concealment, negligent misrepresentation, failure to warn, unjust enrichment and similar claims. The purported classes consisted either or both of all U.S. consumers or state consumers that purchased the subject products in certain time periods. The plaintiffs also sought various forms of declaratory and injunctive relief and various damages, including restitution, actual, compensatory, consequential, and, in certain cases, punitive damages, and interest, costs, and attorneys’ fees incurred by the plaintiffs and other purported class members in connection with the alleged claims, and orders certifying the actions as class actions. Plaintiffs had not quantified damages sought from us in these class actions.

 

On June 12, 2015, United States Judicial Panel on Multi District Litigation (the “MDL Panel”) issued an order transferring and consolidating ten of the related federal class actions to the United States District Court for the Eastern District of Virginia (the “Virginia Court”). In a series of subsequent conditional transfer orders, the MDL Panel has transferred the other cases to the Virginia Court. We continue to seek to have any newly filed cases transferred and consolidated in the Virginia Court and ultimately, we expect all federal class actions involving formaldehyde allegations, including any newly filed cases, to be transferred and consolidated in 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.

 

  

Pursuant to a court order, plaintiffs filed a Representative Class Action Complaint in the Virginia Court on September 11, 2015. The complaint challenged our labeling of our flooring products and asserted claims under California, New York, Illinois, Florida and Texas law for fraudulent concealment, violation of consumer protection statutes, negligent misrepresentation and declaratory relief, as well as a claim for breach of implied warranty under California law. Thereafter, on September 18, 2015, plaintiffs filed the First Amended Representative Class Action Complaint (“FARC”) in which they added implied warranty claims under New York, Illinois, Florida and Texas law, as well as a federal warranty claim. We filed a motion to dismiss and answered the FARC. The Virginia Court granted the motion as to claims for negligent misrepresentation filed on behalf of certain plaintiffs, deferred as to class action allegations, and otherwise denied the motion. We also filed a motion to strike nationwide class allegations, on which the Virginia Court has not yet ruled. We also filed a motion to strike all personal injury claims made in class action complaints. Plaintiffs subsequently agreed and the Virginia Court has ordered that no Chinese formaldehyde class action pending in this lawsuit will seek damages for personal injury on a class-wide basis. The order does not affect any claims for personal injury brought solely on an individual basis. Fact discovery has closed and expert discovery is now proceeding in this matter.

 

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

 

While we believe that a loss associated with the MDL matters is reasonably possible, we are unable to estimate the amount of loss, or range of possible loss, at this time. In the event that a settlement is reached related to these matters, the amount of such settlement may be material to our results of operations and financial condition and may have a material adverse impact on our liquidity.

 

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

 

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

 

On July 12, 2016, we entered into a Mutual Release with Liberty Mutual Fire Insurance Company, Liberty Insurance Company, Employers Insurance Company of Wausau, Wausau Business Insurance Company and Wausau Underwriters Insurance Company, through which the parties released all claims they may have against the other with respect to, inter alia, the Product Liability Cases. Pursuant thereto, in the coming days, those insurers will dismiss claims asserted against us in the Virginia Action (except the reformation claim on which judgment has already been entered), and we will dismiss claims asserted against those insurers in the Wisconsin Action.

 

In addition, there are a number of state court cases and claims alleging damages from Chinese-made laminate flooring.

 

  

Litigation Relating to Abrasion Claims

 

On May 20, 2015, a purported class action titled Abad v. Lumber Liquidators, Inc. was filed in the United States District Court for the Central District of California and two amended complaints were subsequently filed. In the Second Amended Complaint (“SAC”), the plaintiffs (collectively, the “Abrasion Plaintiffs”) sought to certify a national class composed of “All Persons in the United States who purchased Defendant’s Dream Home brand laminate flooring products from Defendant for personal use in their homes,” or, in the alternative, 32 statewide classes from California, North Carolina, Texas, New Jersey, Florida, Nevada, Connecticut, Iowa, Minnesota, Nebraska, Georgia, Maryland, Massachusetts, New York, West Virginia, Kansas, Kentucky, Mississippi, Pennsylvania, South Carolina, Tennessee, Virginia, Washington, Maine, Michigan, Missouri, Ohio, Oklahoma, Wisconsin, Indiana, Illinois and Louisiana. The SAC alleges violations of each of these states’ consumer protections statutes and the federal Magnuson-Moss Warranty Act, as well as breach of implied warranty and fraudulent concealment. The Abrasion Plaintiffs did not quantify any alleged damages in the SAC but, in addition to attorneys’ fees and costs, sought an order certifying the action as a class action, an order adopting the Abrasion Plaintiffs’ class definitions and finding that the Abrasion Plaintiffs are their proper representatives, an order appointing their counsel as class counsel, injunctive relief prohibiting us from continuing to advertise and/or sell laminate flooring products with false abrasion class ratings, restitution of all monies it received from the Abrasion Plaintiffs and class members, damages (actual, compensatory, and consequential) and punitive damages.

 

The Abrasion Plaintiffs filed a Third Amended Complaint and we moved to dismiss the Third Amended Complaint. The court decided that it would decide the motion only as to the California plaintiffs, but ordered all the non-California plaintiffs dropped from the action. The non-California plaintiffs have 60 days to re-file separate complaints in the Central District of California, which will then be transferred to the district court located in the place of residence of each non-California plaintiff whose claim is refiled. We dispute the Abrasion Plaintiffs’ claims and intend to defend these matters vigorously. Given the uncertainty of litigation, the preliminary stage of these cases, the legal standards that must be met for, among other things, class certification and success on the merits, we cannot estimate the reasonably possible loss or range of loss that may result from these actions.

 

Gold Matter

 

On or about December 8, 2014, Dana Gold (“Gold”) filed a purported class action lawsuit in the United States District Court for the Northern District of California alleging that the Morning Star bamboo flooring (the “Bamboo Product”) that we sell is defective. On February 13, 2015, Gold filed an amended complaint that added three additional plaintiffs (collectively with Gold, “Gold Plaintiffs”). We moved to dismiss the amended complaint. After holding a hearing and taking the motion under submission, the court dismissed most of Gold Plaintiffs’ claims but allowed certain omission-based claims to proceed. Gold Plaintiffs filed a Second Amended Complaint on December 16, 2015, and then a Third Amended Complaint on January 20, 2016. In the Third Amended Complaint, Gold Plaintiffs allege that we have engaged in unfair business practices and unfair competition by falsely representing the quality and characteristics of the Bamboo Product and by concealing the Bamboo Product’s defective nature. Gold Plaintiffs seek the certification of a class of individuals in the United States who purchased the Bamboo Product, as well as seven state subclasses of individuals who are residents of California, New York, Illinois, West Virginia, Minnesota, Pennsylvania, and Florida, respectively, and purchased the Bamboo Product for personal, family, or household use. Gold Plaintiffs did not quantify any alleged damages in their complaint but, in addition to attorneys’ fees and costs, Gold Plaintiffs seek (i) a declaration that our actions violate the law and that we are financially responsible for notifying all purported class members, (ii) injunctive relief requiring us to replace and/or repair all of the Bamboo Product installed in structures owned by the purported class members, and (iii) a declaration that we must disgorge, for the benefit of the purported classes, all or part of our profits received from the sale of the allegedly defective Bamboo Product and/or to make full restitution to Gold Plaintiffs and the purported class members.

 

We filed our answer to the Third Amended Complaint on February 3, 2016, and discovery in the matter is now proceeding. We dispute the Gold Plaintiffs’ claims and intend 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, we cannot estimate the reasonably possible loss or range of loss that may result from this action.

 

Ross Matter

 

On or about February 23, 2016, Joseph Ross and Linda Ross (collectively, “Ross”) filed a purported class action lawsuit in the Second Judicial District Court, State of Nevada, County of Washoe. Ross seeks the certification of a class of individuals in the State of Nevada who purchased certain hardwood flooring products produced in China (the “Ross Products”). Ross alleges that the Ross Products are defective due to the Ross Products being contaminated with certain wood-boring insects. In particular, Ross’s allegations include (i) breach of warranty, (ii) negligence, (iii) strict liability, (iv) negligent misrepresentation, (v) willful misconduct, and (vi) unjust enrichment. In the complaint, Ross seeks (i) general and special damages according to proof in excess of $50,000, (ii) attorneys’ fees and costs according to proof, (iii) prejudgment and post-judgment interest on all sums awarded, according to proof at the maximum legal rate, (iv) costs of the lawsuit incurred, (v) restitution as authorized by law, (vi) punitive damages as authorized by law, and (vii) specific performance under our express warranties. We dispute Ross’s claims and intend 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, we cannot estimate the reasonably possible loss or range of loss that may result from this action.

 

 

Antidumping and Countervailing Duties Investigation

 

In October 2010, a conglomeration of domestic manufacturers of multilayered wood flooring filed a petition seeking the imposition of antidumping (“AD”) and countervailing duties (“CVD”) with the United States Department of Commerce (“DOC”) and the United States International Trade Commission (“ITC”) against imports of multilayered wood flooring from China. This ruling applies to our engineered hardwood imported from China, which accounted for approximately 10% of our flooring purchases in 2014 and approximately 6% of our flooring purchases in 2015.

 

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

 

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

 

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

 

In the first DOC annual review in this matter, rates were modified for AD rates through November 2012 and for CVD rates through 2011. Specifically, the AD rate was set at 5.92% and the CVD rate was set at 0.83%. These rates are being appealed to the CIT by several parties, including us. Based on what has been paid by us to date for the periods covered by the first annual review, we believe our best estimate of the probable loss was approximately $0.8 million for shipments during the applicable time periods covered by the first annual review, which we recorded as a long-term liability in our accompanying consolidated balance sheet and in cost of sales in our second quarter 2015 condensed consolidated financial statements.

 

In January 2015, pursuant to the second annual review, the DOC issued a non-binding preliminary AD rate of 18.27% for purchases from December 2012 through November 2013 and a preliminary CVD rate of 0.97% for purchases in fiscal year 2012. The rates were finalized in early July 2015 with the AD rate set at 13.74% and the CVD rate set at 0.99%. As these rates are now final, we believe the best estimate of the probable loss was $4.1 million for shipments during the applicable time periods, which we recorded as a long-term liability on our accompanying consolidated balance sheet and included in our cost of sales in our second quarter 2015 condensed consolidated financial statements. Beginning in July 2015, we began paying these rates on each applicable purchase. The rates relating to this second annual review have been appealed to the CIT and that appeal is pending.

 

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 January 2016, the DOC issued non- binding preliminary results in the third annual review. The preliminary AD rate was 13.34% and the CVD preliminary rate was 1.43%. In May 2016, the DOC issued the final CVD rate in the third review, which was 1.38%. On July 13, 2016, the DOC set the final AD rate at 17.37%. We intend to appeal these rates. As these rates are now final, we believe our best estimate of the probable loss associated with AD and CVD is approximately $5.5 million. During the quarter ended June 30, 2016, we recorded this amount in other long-term liabilities in our condensed consolidated balance sheet and as a charge to earnings in cost of sales on our condensed consolidated statement of operations. We will begin to pay the finalized rates on each applicable future purchase when recognized by U.S. Customs and Border Protection.

 

The total amount recorded in other long-term liabilities related to this matter in the accompanying balance sheet as of June 30, 2016 and December 31, 2015 was $10.4 million and $4.9 million, respectively.

 

Based on the final CVD and AD rates in the third review set in May 2016 and July 2016, respectively we would owe an additional $4.6 million for all shipments subsequent to November 2014 (AD) and December 2013 (CVD). As no rates have been finalized for these periods, we have not recorded an accrual in its condensed consolidated financial statements for the impact of higher rates for the time periods subsequent to the third annual review. Based on the information available, we believe there is at least a reasonable possibility that an additional charge may be incurred in the range of $0 to $4.6 million. A charge greater than this amount may be incurred, but we are unable to estimate the amount at this time.

 

  

In February 2016, the DOC initiated the fourth annual review of AD and CVD rates, which we expect will follow a similar schedule as the preceding review. The preliminary results in the fourth annual review are currently expected in September.

 

Other Matters

 

We are 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, our ultimate liability in connection with these matters is not expected to have a material adverse effect on the results of operations, financial position or cash flows.

 

Item 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, 2015, which could materially affect our business, financial condition or future results. There have been no material changes to those risk factors since we filed our fiscal 2015 annual report on Form 10-K. 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 our business, financial condition and/or results of operations.

 

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

 

The following table presents our share repurchase activity for the quarter ended June 30, 2016 (dollars in thousands, except per share amounts):

 

Issuer Purchases of Equity Securities

 

Period		Total Number of Shares Purchased1				Average Price Paid per Share1				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs2				Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs2
April 1, 2016 to April 30, 2016			—				—				—			$	14,728
May 1, 2016 to May 31, 2016			520			$	14.21				—				14,728
June 1, 2016 to June 30, 2016			13			$	11.19				—				14,728
Total			533			$	14.13				—			$	14,728

 

1

We repurchased 533 shares of our common stock in connection with the net settlement of shares issued as a result of the vesting of restricted shares during the quarter ended June 30, 2016.

2

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.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

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

 

 

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: July 27, 2016	By:	/s/ Gregory A. Whirley, Jr.
		Gregory A. Whirley, Jr.
		Interim Chief Financial Officer and Senior Vice President, Finance (Principal Financial and Principal Accounting Officer)

 

 

EXHIBIT INDEX

 

Exhibit Number		Exhibit Description
10.1		Settlement and Release Agreement dated May 18, 2016 by and between Robert M. Lynch and Lumber Liquidators Holdings, Inc.
10.2		Lumber Liquidators Holdings, Inc. Amended and Restated 2011 Equity Compensation Plan (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed May 25, 2016 (File No. 001-33767), and incorporated herein by reference)
10.3		Corrective Action Plan, dated June 15, 2016, by and between Lumber Liquidators Holdings, Inc. and the Office of Compliance and Field Operations of the Consumer Products Safety Commission (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed June 17, 2016 (File No. 001-33767), and incorporated herein by reference)
10.4		Stipulation and Agreement of Settlement dated June 15, 2016 by and between Gregg Kiken, Keith Foster, David Lorenzo and Charles Hickman (collectively “Lead Plaintiffs”), on behalf of themselves and the Settlement Class and Lumber Liquidators Holdings, Inc. and defendants Thomas D. Sullivan, Robert M. Lynch, Daniel E. Terrell and William K. Schlegel. (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed July 12, 2016 (File No. 001-33767), and incorporated herein by reference)
31.01		Certification of Principal Executive Officer of Lumber Liquidators Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02		Certification of Principal Financial Officer of Lumber Liquidators Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01		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 June 30, 2016, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements

 

 

Exhibit 10.1

 

SETTLEMENT and RELEASE AGREEMENT

 

This Settlement and Release Agreement (“Agreement”), dated May 18, 2016, by and between Lumber Liquidators Holdings, Inc. (“LL”) and Robert Martin Lynch (“Employee”), states as follows:

 

RECITALS:

 

WHEREAS, Employee has been employed by the Company pursuant to the terms of an Executive Employment Agreement dated December 17, 2010, and amendments thereto (the “Executive Employment Agreement,” attached hereto as Exhibit A);

 

WHEREAS, the Employee’s employment with the Company has concluded;

 

WHEREAS certain disputes have arisen between LL and Employee concerning certain of the terms and obligations provided for in the Executive Employment Agreement and other matters; and

 

WHEREAS, Employee and Company desire to settle any and all matters arising out of Employee’s employment with the Company, the cessation of Employee’s employment with the Company, and any other disputes between them in a mutually satisfactory manner.

 

NOW, THEREFORE, in consideration of the promises and of the mutual covenants contained in the herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties do hereby covenant and agree as follows:

 

AGREEMENT:

 

1.          Termination of Employment. Employee acknowledges that his employment by LL and/or its affiliated entity(ies) (collectively and, where applicable, individually, the “Company”) concluded on May 21, 2015 (the “Separation Date”).

 

2.          Separation Pay. In consideration of Employee’s acceptance of this Agreement, and expressly subject to the Employee's ongoing compliance with the Agreement, including but not limited to Sections 5 and 7-9 herein, the Company shall:

 

i.            pay to Employee a sum totaling one-million dollars ($1,000,000) (the “Separation Pay”). The Separation Pay shall be paid as follows:

 

- an initial lump sum payment constituting five hundred thousand dollars ($500,000) of the Separation Pay, less applicable taxes and withholdings, shall be paid in the first regular pay period occurring after the Effective Date of this Agreement; and

 

- the remaining half ($500,000) of the Separation Pay shall be paid in twenty-six (26) equal weekly installments, pursuant to the Company’s normal payroll procedures, beginning on the first regular pay period occurring after the payment of the initial lump sum payment.

 

  

ii.         waive and release its right to collect payback or restitution for payments made to Employee pursuant to the Relocation Assistance Agreement between Company and Employee executed on or about February 5, 2014.

 

Employee agrees that, in the event that (a) the Company issues a restatement which restatement is found by a final order of a competent court or governmental agency to have been caused by Employee’s material noncompliance, due to misconduct, with financial reporting requirements under federal securities laws and, as a consequence of such restatement and finding, repayment or clawback of the amounts herein are determined by a final order of a competent court or governmental agency to be mandated pursuant to any law, government regulation or stock exchange listing or (b) Employee breaches this Agreement, expressly including but not limited to Sections 5 and 7-9 herein; then, in each such instance, in addition to compensation for any damages incurred by the Company, and/or any injunctive relief provided for herein or otherwise, Employee shall be liable for the repayment of all amounts paid to Employee pursuant to this Section 2, and Employee agrees to repay all such amounts in full.

 

3.           Consideration/Complete Payment. Employee hereby agrees and acknowledges that the benefits set forth in Section 2 of this Agreement are more than the Company is required to provide under its normal policies and procedures, are more than Employee is entitled to under the Executive Employment Agreement and any other agreement or contract with the Company, and that they are in addition to anything of value to which Employee already is entitled. Employee further agrees that, other than with respect to payments regarding the non-released rights for monetary or other benefits described in Section 4 below (the “Non-Released Rights”), the payments and performances described in this Agreement are all that Employee shall be entitled to receive from the Company, except for vested qualified retirement benefits, if any, to which Employee may be entitled under the Company's ERISA plans. Except as expressly provided herein (including with respect to the Non-Released Rights) or as required by law, the Company shall not be required to make any payments of any kind to Employee. Employee acknowledges that May 21, 2015 was his final date of employment, and that any non-qualified stock options or shares of common stock, whether provided for under Lumber Liquidators Holdings, Inc. Equity Compensation Plan or otherwise, which did not vest as of May 21, 2015 are forever forfeited. Employee further agrees and acknowledges that he shall have no right or claim to any bonus payment from the Company including, but not limited to, any bonus under the LL’s Annual Bonus Plan for Executive Management, nor any right or claim to any additional severance payment under his Executive Employment Agreement or otherwise. Notwithstanding the termination, expiration or nonrenewal of this Agreement, the parties shall be required to carry out any provisions of this Agreement that contemplate performance by them after such termination, expiration or nonrenewal, expressly including Sections 5 and 7-9.

 

 

4.          General Release. Other than with respect to the Non-Released Rights set out below, Employee hereby knowingly and voluntarily releases and forever discharges the Company, any related companies, and the former and current employees, officers, agents, directors, shareholders, investors, attorneys, affiliates, successors and assigns of any of them (the “Released Parties”) from all liabilities, claims, demands, rights of action or causes of action Employee had, has or may have against any of the Released Parties, including but not limited to, any claims or demands based upon or relating to Employee’s employment with the Company, the Executive Employment Agreement, or the cessation of Employee’s employment with the Company. This complete release includes, but is not limited to, a release of any rights or claims Employee may have under the Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act of 1964, the Equal Pay Act, the Americans with Disabilities Act, the Family and Medical Leave Act, or any other federal, state or local laws or regulations prohibiting employment discrimination. This also includes, but is not limited to, a release by Employee of any claims for wrongful discharge, breach of contract, defamation, or any other statutory, common law, tort, contract, or negligence claim that Employee had, has or may have against any of the Released Parties. This release covers both claims that Employee knows about and those claims Employee may not know about. Employee further acknowledges that Employee has received compensation for all hours worked in accordance with applicable state and federal laws.

 

Notwithstanding the above, this release does not include a release of (i) Employee’s right, if any, to payment of vested qualified retirement benefits under the Company’s ERISA plans; (ii) Employee’s right, if any, to benefits under the Company’s health, dental and vision insurance plans that arose or vested on or before the Separation Date; (iii) the right, if any, to continuation in the Company’s medical plans as provided by COBRA; (iv) Employee’s right, if any, to indemnification and/or advancement of expenses (including attorney’s fees) in accordance with any applicable Company Bylaws or the DGLC; (v) Employee’s right, if any, to coverage under directors’ and officers’ liability insurance policy or policies of the Company and its subsidiaries and affiliates; or (vi) Employee’s rights under this Agreement. Nothing in this Section 4, nor any other provision of this Agreement, waives or affects Employee’s right to file a charge of discrimination with the Equal Employment Opportunity Commission (“EEOC”) or to provide information to, or participate as a witness in, an investigation undertaken or a proceeding initiated by the EEOC. However, Employee waives Employee’s right to monetary or other recovery, including attorney’s fees, should Employee or any federal, state or local administrative agency pursue any EEOC claims on Employee’s behalf arising out of Employee’s employment or the conclusion of his employment with the Company.

 

Notwithstanding the foregoing, the parties agree that nothing in this Agreement shall be construed to prohibit the exercise of any rights by either party that such party may not waive as a matter of law.

 

5.          No Future Lawsuits. To the fullest extent allowed by law, Employee promises never to file a lawsuit asserting any claims that are released in Section 4. In the event Employee breaches this Section 5, Employee shall pay to the Company all of its expenses incurred as a result of such breach, including but not limited to, reasonable attorney’s fees and expenses. Notwithstanding the foregoing, this Agreement does not waive or release any rights or claims that Employee may have under the Age Discrimination in Employment Act which arise after the date that Employee signs this Agreement. Further, the parties acknowledge and agree that this Agreement and this Section 5 shall not be construed to prohibit the exercise of any rights by Employee that Employee may not waive or forego as a matter of law.

 

 

6.          Disclaimer of Liability. This Agreement and the payments and performances hereunder are made solely to assist Employee in making the transition from employment with Company, and are not and shall not be construed to be an admission of liability, an admission of the truth of any fact, or a declaration against interest on the part of Company.

 

7.          Confidentiality. Employee shall not disclose or use at any time for a period of ten (10) years after the Separation Date, or as otherwise protected by applicable law including the Virginia Uniform Trade Secrets Act, whichever is longer, any Confidential Information (as defined below) of which Employee is aware, whether or not such information was developed by him, except to the extent that such disclosure or use is directly related to and required by this Agreement or is required to be disclosed by law, court order, or similar compulsion or (ii) as is necessary for Employee to defend himself in any matters, lawsuits, investigation and inquiries arising out of his employment as an officer of the Company or his position as a director on the Company’s Board of Directors (“Relevant Claims”); provided, however, that such disclosure shall be limited to the extent so required or compelled; and provided, further, that Employee shall give the Company notice of such disclosure and cooperate with the Company in seeking suitable protection. Employee shall take reasonable and appropriate steps to safeguard Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. Employee acknowledges and agrees that all Confidential Information, which Employee had access to, received or generated in the course of providing, directly or indirectly, services to the Company, is the sole property of the Company and shall be returned to the Company at the conclusion of all proceedings relating to Relevant Claims. Employee will allow the Company access all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and copies thereof regardless of the form thereof, including electronic and tangible copies) that constitute Confidential Information (as defined below) of the Company which Employee possesses or has under his control and provide copies to the Company of any such Confidential Information as the Company requests; provided that, while Employee will – consistent with Section 9 below – work cooperatively with the Company with respect to Relevant Claims and share materials and information Employee and his counsel have generated as Employee and his counsel deem appropriate, nothing in this Agreement (including in Sections 7 and 9) shall require Employee or his counsel to share any such material or information with the Company to the extent it is covered by attorney-client or other privileges belonging to Employee or is attorney work product of his counsel. Notwithstanding anything herein to the contrary, Employee may retain personal papers relating to his employment, compensation and benefits.

 

As used in this Agreement, the term “Confidential Information” means any data or information related to the Company’s business operations and is not generally known by the public, and that was made known to Employee or acquired by Employee in the course of his employment with the Company or directly or indirectly providing services to the Company, including business and trade secrets and the following: (i) reports, pricing, sales manuals and training manuals, selling, purchasing, and pricing procedures, and financing methods of the Company, together with any proprietary techniques utilized by the Company in designing, developing, testing or marketing its products, product mix and supplier information or in performing services for clients, customers and accounts of the Company; (ii) the business plans and financial statements, reports and projections of the Company; (iii) research or development projects or results; (iv) identities and addresses of consultants, customers or clients and prospective clients, or any other Confidential Information relating to or dealing with the business operations or activities of the Company; (v) trade secrets and other intellectual property of the Company; and (vi) existing or contemplated software, products, databases, services, technology, designs, processes and research or product developments of the Company. Notwithstanding the foregoing or any other provision herein, Confidential Information shall not include any information that (A) is generally known to the public at the time of disclosure or becomes generally known through no wrongful act on the part of Employee, (B) becomes known to Employee through disclosure by independent third-party sources having a legal right to disclose such information, or (C) is independently developed by Employee without reference to Confidential Information.

 

 

Nothing in this Section 7 or in any other provision of this Agreement prohibits Employee or Company from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal or state law or regulation. Employee does not need the prior authorization of the Company to make any such reports or disclosures and Employee is not required to notify the Company that he has made such reports or disclosures.

 

8.          Restrictive Covenants. Employee acknowledges that, in the course of his employment with the Company, he has become familiar with the Company’s trade secrets and other Confidential Information and that his services have been of special, unique and extraordinary value to the Company. Therefore, notwithstanding anything else in this agreement to the contrary, Employee hereby covenants and agrees to abide by the terms and conditions of the restrictive covenants contained in his Executive Employment Agreement, including, without limitation, the restrictions and covenants contained in Article III of the Executive Employment Agreement.

 

Employee understands that these restrictions will not limit his ability to earn a livelihood and that he has received and will receive sufficient consideration and other benefits as an employee of the Company and as otherwise provided hereunder to clearly justify such restrictions (given his education, skills and ability). Employee further understands that (i) the Company would not have consummated this Agreement but for the covenants contained in this Section 8 and (ii) the provisions of Sections 7 and 8 are reasonable and necessary to preserve the business of the Company.

 

Employee shall inform any prospective employer of these restrictions during any period when such restrictions remain effective and provide such employer with a copy of such restrictions prior to the commencement of that employment.

 

  

9.          Cooperation. Subject to the proviso in Section 7 regarding material or information covered by attorney-client or other privileges belonging to Employee or attorney work product of his counsel, Employee agrees that for a period of ten (10) years following the Separation Date, Employee shall have a continuing duty to fully and promptly cooperate with the Company and its legal counsel by providing any and all requested information and assistance concerning any legal or business matters that in any way relate to Employee’s actions or responsibilities as an employee of the Company, or to the period during Employee’s employment with the Company. Such cooperation shall include but not be limited to truthfully and in a timely manner participating and consulting concerning facts, responding to questions, providing pertinent information, providing affidavits and statements, preparing for and attending depositions, and preparing for and attending trials, hearings and other proceedings. Such cooperation shall include meeting with representatives of the Company upon reasonable notice at reasonable times and locations. The Company shall use its reasonable efforts to coordinate with Employee the time and place at which Employee's reasonable cooperation shall be provided with the goal of minimizing the impact of such reasonable cooperation on any other material pre-scheduled business commitment that Employee may have. The coordination and communication from the Company to the Employee regarding Employee’s cooperation shall come through the Company’s chief legal counsel or designee thereof. The Company shall reimburse Employee for reasonable out-of-pocket expenses incurred by Employee in compliance with this Section, including any reasonable travel expenses incurred by Employee in providing such assistance. At no time subsequent to the Separation Date shall Employee be deemed to be a contractor or employee of the Company.

 

The Company agrees to provide Employee and his counsel with electronic copies of documents in the Company’s possession and control that Employee needs to defend himself regarding Relevant Claims, including, but not limited to, all documents produced by the Company to either the Securities and Exchange Commission or the Department of Justice.

 

The Company will provide Employee with a letter in the form attached as Exhibit B.

 

10.         Enforcement. Employee agrees that the Company has a legitimate business interest to protect justifying the covenants set forth in Sections 7-9. Such legitimate business interests include: (i) trade secrets, (ii) valuable Confidential Information that does not otherwise qualify as a trade secret, (iii) substantial relationships with prospective or existing Customers, (iv) Customer goodwill, and (v) preservation of the brands with which Employee has operated. For purposes of the Company obtaining specific performance and/or injunctive relief, Employee acknowledges that irreparable injuries shall be presumed in the event that Employee violates his covenants herein contained. Because the Employee’s services are unique and because the Employee has access to Confidential Information, the parties hereto agree that money damages would be an inadequate remedy for any breach of this Agreement. Therefore, in the event of a breach or threatened breach of Sections 7-9 of this Agreement, the Company and its successors or assigns may, in addition to other rights and remedies existing in their favor under this Agreement, at law or in equity, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions in Sections 7-9 hereof. In addition to the foregoing, if any action should have to be brought by the Company against the Employee to enforce the provisions of this Agreement, the Employee recognizes, acknowledges and agrees that the Company may be entitled (without limitation) to (a) preliminary and permanent injunctive relief restraining the Employee from unauthorized disclosure or use of any trade secret or Confidential Information, in whole or in part, or otherwise violating any of the restrictive covenants set forth herein, and (b) actual damages. Nothing in this Agreement shall be construed as prohibiting the Company from pursuing any other legal or equity remedies available for breach or threatened breach to the provisions of this Agreement, which may otherwise be available. In the event of an alleged breach or violation by the Employee of Sections 7-9 of this Agreement, the parties agree that the court, in its discretion, may toll the Restricted Period during the period of the breach.

 

  

11.         Claim for Reinstatement. Employee agrees to waive and abandon any claim to reinstatement with Company.

 

12.         Period for Review and Consideration of Agreement. Employee understands that Employee has been given a period of twenty one (21) days to review and consider this Agreement before signing it. Employee further understands that Employee may use as much of this 21-day period as Employee wishes prior to signing.

 

13.         Employee’s Right to Revoke Agreement. Employee may revoke this Agreement within seven (7) days of Employee’s signing it. Revocation can be made by delivering a written notice of revocation to Sandra Whitehouse, Senior Vice President, Human Resources, 3000 John Deere Road, Toano, Virginia 23168. For this revocation to be effective, written notice must be received by Ms. Whitehouse no later than the close of business on the seventh day after Employee signs this Agreement. If Employee has not revoked the Agreement, the eighth (8th) day after Employee signs this Agreement shall be the Effective Date for purposes of this Agreement.

 

14.         Encouragement to Consult with Attorney. Employee is encouraged to consult with an attorney before signing this Agreement.

 

15.         Execution of Documents. Each of the parties hereto shall execute any and all further documents and perform any and all further acts reasonably necessary or useful in carrying out the provisions of this Agreement.

 

16.         Invalid Provisions. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the validity or enforceability of any other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted.

 

17.         Acknowledgment. Employee acknowledges that Employee has signed this Agreement freely and voluntarily without duress of any kind. Employee has conferred with an attorney or has knowingly and voluntarily chosen not to confer with an attorney about the Agreement.

 

18.         Entire Agreement. This Agreement contains the entire understanding of the parties concerning the separation benefits being provided to Employee herein. This Agreement may not be modified or supplemented except by a subsequent written agreement signed by all parties.

 

19.         Successorship. It is the intention of the parties that the provisions hereof are binding upon, and inure to the benefit of, the parties, their employees, affiliates, agents, heirs, estates, successors and assigns forever.

 

 

20.         Governing Law. This Agreement shall be governed by the laws of the Commonwealth of Virginia, without regard to its conflict of laws principles.

 

21.         Arbitration of Disputes. Except as to a request for an injunction or similar equitable relief as provided in Section 10, the parties agree that any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be fully and finally settled by arbitration administered by Judge Daniel Weinstein of JAMs, and a judgment on the award rendered by Judge Weinstein may be entered in any court having jurisdiction thereof. The place of arbitration shall be the City of New York, New York. Except as may be required by law, neither a party nor an arbitrator may disclose the existence, content, or results of any arbitration hereunder without the prior written consent of both parties. Provided, however, that prior to initiating arbitration under this section, the Parties agree to provide no fewer than thirty (30) days advance notice to the other party and, during such notice period, the Parties agree to engage in a good faith effort to resolve the applicable dispute(s) between them in good faith negotiations.

 

EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE HAS READ THIS AGREEMENT, UNDERSTANDS IT, AND IS VOLUNTARILY ENTERING INTO IT. PLEASE READ THIS AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.

 

[SIGNATURE PAGE FOLLOWS]

 

  

IN WITNESS WHEREOF, the parties have freely and voluntarily executed this Agreement in a manner so as to be binding on the dates stated below.

 

		EMPLOYEE
May 18, 2016		/s/ Robert Martin Lynch
Date		Robert Martin Lynch
		LUMBER LIQUIDATORS HOLDINGS, INC.
May 18, 2016		By:	/s/ John M. Presley
Date
		Its:	President and CEO

 

EXHIBIT A

 

EXECUTIVE EMPLOYMENT AGREEMENT

This EXECUTIVE EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of this 17th day of December, 2010, by and between Lumber Liquidators Holdings, Inc. and Robert Martin Lynch (“Employee”). Hereinafter, Lumber Liquidators Holdings, Inc. and its subsidiaries shall collectively be referred to as “Lumber Liquidators” or the “Company”, unless the context otherwise requires.

WHEREAS, the Company is primarily engaged in the business of the production and retail sale of hardwood, laminate, engineered, bamboo, cork and resilient flooring and related products;

WHEREAS, the Company maintains its corporate headquarters in Toano, Virginia, and operates retail locations throughout the United States and Canada;

WHEREAS, Employee has certain valuable experience and expertise in matters related to the management of enterprises similar to the Company’s business; and

WHEREAS, the Company desires to employ Employee and Employee desires to be employed by the Company under the terms and conditions set forth below.

NOW, THEREFORE, for and in consideration of the promises and undertakings of the parties as hereinafter set forth, the parties covenant and agree as follows:

ARTICLE I

EMPLOYMENT

1.1. Employment.

(a) The Company will employ Employee in the position of President and Chief Operating Officer and, in that position, Employee will report directly to the Chief Executive Officer. The Company retains the right to make reasonable changes in Employee’s duties and reporting relationships as may be determined by the Company.

(b) This Agreement, and Employee’s employment hereunder, is conditioned upon (i) Employee’s successful completion of a drug screen in compliance with state and federal law and as more fully set forth in the Company’s policies, (ii) Employee’s successful completion of a background screen, to be completed in compliance with applicable state and federal law, and (iii) Employee’s ability to satisfactorily comply with the I-9 requirements set forth by the Immigration Reform and Control Act of 1986.

1.2. Term. Employee’s employment with the Company shall begin on January 17, 2011 (“Commencement Date”) and shall continue for a period of five (5) years from such date, unless it is terminated earlier in accordance with Article II of this Agreement. The term of this Agreement may be extended upon written agreement by Employee and a designated representative of the Company’s Board of Directors. Notwithstanding the termination of this Agreement for whatever reason, the parties shall be required to carry out any provisions of this Agreement which contemplate performance by them subsequent to such termination.

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1.3. Duties. In the position of President and Chief Operating Officer, Employee will be a key employee of the Company and will be involved in the Company’s strategic planning. In his executive capacity with the Company, Employee shall:

(a) Report to the Chief Executive Officer and/or the Board of Directors.

(b) Diligently perform the duties and exercise the powers and functions which from time to time may reasonably be required of, assigned to, or vested in Employee by the Company, the Chief Executive Officer and/or the Board of Directors. The Company shall have the sole authority and discretion to set and establish the reasonable work schedules, duties, and standards applicable to Employee.

(c) Comply with all policies, standards and rules of the Company now or hereafter promulgated.

(d) During working hours, devote the whole of Employee’s time, attention and ability to Employee’s duties hereunder at such place or places as the Company shall from time to time reasonably determine. It is expected that Employee will relocate to the Williamsburg/Richmond, Virginia area

(e) Employee shall not, during the term hereof, directly or indirectly, engage or associate with, or become employed with, as an employee, consultant, or otherwise, any other business without the prior written approval of the Board of Directors of the Company.

(f) Well and faithfully serve the Company to the best of Employee’s abilities, and at all times use Employee’s best efforts to promote, develop, and extend the interests of the Company.

1.4. Compensation.

(a) Base Salary. Employee shall receive an annual base salary of $500,000 payable to Employee in accordance with the Company’s normal payroll schedule. The Company shall withhold state and federal income taxes, social security taxes and shall make such other payroll deductions as may be required by law or mutually agreed upon in writing by Employee and the Company. On or about March 2012, Employee’s base salary will increase to $550,000 per annum subject to Employee’s satisfactory performance as determined by the Company.

(b) Signing Bonus. After Employee begins employment with the Company, the Company shall pay to Employee a gross signing bonus of $60,000 as soon as administratively possible. The Company shall withhold state and federal income taxes, social security taxes and shall make such other payroll deductions as may be required by law or mutually agreed upon in writing by Employee and the Company.

 

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(c) Incentive Bonus Plan. Effective on the Commencement Date, Employee will be eligible to participate in the Company’s Annual Bonus Plan for Executive Management (the “Bonus Plan”). Under the terms of the Bonus Plan as approved by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”), Employee will be eligible to receive a yearly bonus in an amount up to 75% of Employee’s base salary. Of that target bonus amount, 75% will be based upon Lumber Liquidators’ performance as a company and the remaining 25% will be based upon goals and objectives specific to Employee’s position, each as defined by the Compensation Committee. The awarding (or decision not to award) a bonus and the amount thereof is a decision left to the sole discretion of Lumber Liquidators and the Compensation Committee. The Bonus Plan is subject to amendment, modification or termination, with or without notice, in the Company’s sole discretion. All compensation payments, bonus payments, and benefits provided to Employee shall be subject to all applicable withholding and deductions.

(d) Relocation Expenses. Employee’s relocation expenses shall be covered in accordance with the Company’s Relocation Policy, a copy of which has been provided to Employee.

(e) Benefits. Employee shall be entitled to participate in or become a participant in any employee benefit plan and fringe benefits maintained by the Company for which Employee is or will become eligible on such terms as the Company, in its discretion, may uniformly establish, maintain, modify or otherwise change for executive level employees. The uniformly applied benefits plans and fringe benefits contemplated hereby may be amended, enlarged, or diminished by the Company at any time in the Company’s discretion.

(f) Paid Time Off. Employee will be provided twenty (20) days of paid time off (“PTO”) per year beginning on the Commencement Date. PTO includes sick and vacation time but not holidays. Unused PTO will not be carried over to subsequent years.

(g) Holidays. Lumber Liquidators observes six (6) scheduled holidays each year. Those holidays currently are New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The holiday schedule is established in advance of each year and is subject to change.

(h) Severance Payment and Separation Benefits. Should Employee’s employment be involuntarily terminated by Company for any reason other than “for cause” (as defined in Section 2.3(a)), Employee shall be entitled to the following:

 

i.

One (1) year of Employee’s base salary payable in twelve (12) equal monthly installments commencing on the 60th day following termination of employment; and

 

ii.

If, after the date of the termination of Employee’s employment with the Company, Employee elects to continue and maintains health, vision and dental insurance through COBRA continuation coverage, Company agrees to pay to the Employee for a period of twelve (12) months following the date of termination, an amount

 

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equal to the portion of the premium for such insurance that Company would have paid had Employee maintained such insurance prior to the date of his termination. Employee shall be responsible for paying the entire premium.

Employee acknowledges and understands that the amounts set forth in this Section 1.4(h) are taxable income to Employee for which Employee is responsible. To the extent required because Employee is a “specified employee” as determined under Section 409A of the Internal Revenue Code of 1986, as amended, and Treasury Regulations thereunder (“Section 409A”) as of the date of Employee’s termination of employment, any payments or benefits provided under this Section 1.4(h) shall commence on the first day of the month following the six-month anniversary of Employee’s termination of employment, with installments that would have been paid during such six-month delay included in the first payment. The making of any severance payments or the providing of any benefits as set forth in this Section 1.4(h) is strictly conditioned upon (a) the Employee executing a release of the Company, its subsidiaries and affiliates, its officers, directors and employees, and its and their respective successors within the 60 day period commencing on Employee’s termination of employment and (b) Employee’s continued compliance with the provisions of Article III. “Termination of employment” under this Agreement shall be determined in a manner consistent with the definition of separation from service under Section 409A.

1.5. Stock Options, Restricted Stock. In addition to the compensation described in Section 1.4 above, the Board of Directors or a committee thereof shall grant to Employee as of the Commencement Date the following stock options and stock awards pursuant and subject to the terms, limitations and conditions of the Lumber Liquidators Holdings, Inc. 2007 Equity Compensation Plan and agreements that will be substantially similar to the forms of agreement used in connection with prior grants of stock options and restricted stock awards to the Company’s executive officers (except as specifically described below):

(a) A whole number of non-qualified stock options with a cumulative value of approximately $4,400,000, subject to adjustment as set forth below, determined by using the Black-Scholes-Merton method as of the Commencement Date (the “Option Shares”). The Option Shares shall vest in accordance with the following schedule:

 

Percentage of Option Shares Exercisable		Vesting Date
20%		First Anniversary of Commencement Date
20%		Second Anniversary of Commencement Date
20%		Third Anniversary of Commencement Date
20%		Fourth Anniversary of Commencement Date
20%		Fifth Anniversary of Commencement Date

 

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(b) A whole number of shares of common stock with a cumulative value of approximately $330,000 as of the date of the Commencement Date (the “Stock Shares”). The Stock Shares shall vest in accordance with the following schedule:

 

Percentage of Stock Shares Exercisable		Vesting Date
33.3%		Commencement Date
33.3%		Six Months After Commencement Date
33.3%		Twelve Months After Commencement Date

If Employee ceases to be employed by the Company for any reason, any of the Option Shares or Stock Shares that are not yet vested will be forfeited. In addition, the Lumber Liquidators Holdings, Inc. 2007 Equity Compensation Plan limits the aggregate number of awards that may be granted to any one individual during a plan year to awards covering no more than 400,000 shares of common stock. In the event the aggregate number of stock options and stock awards to be granted pursuant to this Section 1.5 would exceed this limitation, the number of stock options granted pursuant to Section 1.5(a) will be reduced to the extent necessary to comply with this limitation. Any such reduction will be made on a pro rata basis such that the percentage of stock options vesting at a given time is consistent with the percentages set forth above.

1.6. Reimbursement of Business Expenses. The Company shall reimburse Employee for all normal and customary business expenses reasonably incurred during the term of this Agreement by Employee in the proper performance of his duties under this Agreement, consistent with written Company policy. With respect to reimbursement, Employee shall comply with the Company’s policies regarding documentation and submittal of expenses incurred.

1.7. Cessation of Compensation. Except as provided by Sections 2.3(b), 2.4(b) and 2.4(c) of this Agreement, all compensation and benefits provided Employee under this Agreement will stop on the date of the cessation of the Employee’s employment hereunder, except where Employee is eligible for continuation of such benefits as specified by federal laws or laws of the Commonwealth of Virginia, including continuation of group health insurance benefits pursuant to the terms of the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”).

ARTICLE II

TERMINATION

2.1. Illness and Incapacity. If, during the term of Employee’s employment, Employee is prevented, in the Company’s reasonable judgment, from effectively performing any essential part of his duties under this Agreement for a period in excess of 90 consecutive days (or more than 120 days during any period of 365 calendar days) by reason of illness, disability, or any other reason, the Company, by written notice to Employee, may terminate Employee’s employment. Upon delivery to Employee of such notice, Employee’s employment and all obligations of the Company

 

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under Article I will terminate, other than with respect to Employee’s entitlement to (a) any earned but unpaid salary and accrued but unused PTO, and (b) any benefits for which he is then eligible. The obligations of Employee under Article III of this Agreement will continue notwithstanding the cessation of Employee’s employment pursuant to this Section.

2.2. Death. The Agreement and the parties’ obligations hereunder shall terminate upon the death of Employee; provided, however, that in such event, the parties shall be required to carry out any provisions of this Agreement which contemplate performance by them subsequent to termination, and the Company shall pay to the estate of the Employee any earned but unpaid salary and accrued but unused PTO as of the date of Employee’s death.

2.3. Termination by the Company. Employee’s employment under this Agreement may be terminated by the Company with or without cause as set forth hereunder.

(a) The Company shall have the right to terminate Employee’s employment under this Agreement at any time for Cause, which termination shall be effective immediately. For purposes of this Agreement, “Cause” shall include:

 

i.

Unauthorized use or disclosure of the Company’s confidential information or trade secrets;

 

ii.

Material breach of any agreement between Employee and the Company, including this Agreement, which such breach is not cured within ten (10) days after Employee’s receipt of prior written notice thereof from the Company;

 

iii.

Material failure to comply with the Company’s policies or rules, which such failure is not cured within ten (10) days after Employee’s receipt of prior written notice thereof from the Company;

 

iv.

Conviction of, or plea of “guilty” or “no contest” to, a felony under the laws of the United States or any state thereof, or any crime of moral turpitude;

 

v.

Intentional failure to perform Employee’s duties or refusal to abide by or comply with the lawful directives of the Company;

 

vi.

Willful dishonesty, fraud, misconduct, or gross negligence with respect to the business or affairs of the Company that, in the reasonable judgment of the Company, materially and adversely affects the operations or reputation of the Company; and

 

vii.

Failure of the Company to meet financial performance measurements set by the Company’s Board of Directors; provided, however, that such failure shall not constitute grounds for termination of Employee’s employment by the Company for “Cause” hereunder if such failure is the

 

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result of (A) events, occurrences or circumstances affecting the economy or financial markets in general, or (B) other events, occurrences or circumstances which Employee cannot control.

(b) Employee’s employment hereunder may also be terminated without Cause by the Company upon thirty (30) days written notice to the Employee. In the event Employee’s employment under this Agreement is terminated by the Company without Cause, Employee shall be entitled to:

 

i.

Any earned but unpaid salary and accrued but unused PTO as of the date of termination; and

 

ii.

The applicable severance payment as set forth in Section 1.4(h), provided Employee complies with Section 1.4(h) and subject to the payment conditions set forth therein.

(c) Any provision to the contrary notwithstanding, with respect to Section 2.3(a), the ten (10) day corrective periods therein referenced shall only apply to matters readily correctable within a ten (10) day period, and such correction period shall be reasonably extended beyond ten (10) days for all other deficiencies so as to allow a reasonable period for corrective action in reference to the specifically-identified deficiency.

2.4. Termination by Employee.

(a) Employee may terminate his employment hereunder by providing the Company with sixty (60) days written notice of his intention to resign. Without converting such termination to a termination by the Company without Cause or reason (as noted in Section 2.3(b), the Company may provide Employee with Employee’s salary in an amount equivalent to that due over the applicable notice period in lieu of allowing the Employee to continue his employment throughout the required notice period. In such case, the effective date of Employee’s termination shall be the date that the Company makes such payment to Employee. If Employee terminates his employment under this Section, he shall have no right to receive any further compensation or benefits (including severance payments or payments under the applicable Bonus Plan), if any, under this Agreement after the effective date of the termination of his employment.

(b) Upon occurrence of a Change of Control and a resulting material reduction in either Employee’s compensation or job responsibilities, Employee may, within sixty (60) days of the Change of Control, elect to terminate his employment. In such instance, provided that Employee declares his intent in writing to the Company to terminate his employment within sixty (60) days of the Change of Control, Employee shall be entitled to the compensation package set forth in Section 2.3(b). For purposes of this Section 2.4(b) the term “Change of Control” shall have the meaning ascribed to such term in the Lumber Liquidators Holdings, Inc. 2007 Equity Compensation Plan.

 

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(c) Employee shall have the right to terminate employment under this Agreement at any time upon thirty (30) days written notice to the Company after a Good Reason Event. For purposes of this Agreement, a “Good Reason Event” shall include (i) failure to pay or provide, or a material reduction in, Employee’s compensation or Employee’s benefits, (ii) a material reduction in Employee’s responsibilities within the Company, or (iii) a material breach of this Agreement by the Company which is not cured within ten (10) days after the Company’s receipt of prior written notice thereof from Employee, or such other period as is reasonable for a curative response. In the event that Employee terminates this Agreement in connection with a Good Reason Event, Employee shall be entitled to the compensation package set forth in Section 2.3(b).

2.5. Continuation of Obligations. Regardless of how Employee’s employment with the Company ends, the obligations of Employee under Article III of this Agreement shall continue notwithstanding the cessation of Employee’s employment. In addition, no cessation of the Employee’s employment with the Company shall affect any liability or other obligation of Employee that shall have accrued prior to such termination, including, but not limited to, any liability, loss or damage on account of breach of this Agreement.

ARTICLE III

EMPLOYEE’S COVENANTS AND AGREEMENTS

3.1. Proprietary Rights. All rights, including without limitation any writing, discoveries, inventions, innovations, and computer programs and related documentation and all intellectual property rights therein, including without limitation copyright (collectively “Intellectual Property”) created, designed or constructed by Employee during the Employee’s term of employment with the Company, that are related in any way to Employee’s work with the Company or to any of the products and/or services provided by the Company, shall be the sole and exclusive property of the Company. Employee agrees to deliver and assign to the Company all such Intellectual Property and all rights which Employee may have therein and Employee agrees to execute all documents, including without limitation patent applications, and make all arrangements necessary to further document such ownership and/or assignment and to take whatever other steps may be needed to give the Company the full benefit thereof. Employee further agrees that if the Company is unable after reasonable effort to secure the signature of Employee on any such documents, the Chief Executive Officer of the Company or a designee thereof shall be entitled to execute any such papers as the agent and attorney-in-fact of Employee and Employee hereby irrevocably designates and appoints each such person as Employee’s agent and attorney-in-fact to execute any such papers on Employee’s behalf and to take any and all actions required or authorized by the Company pursuant to this subsection. Without limitation to the foregoing, Employee specifically agrees that all copyrightable materials generated during the term of Employee’s employment with the Company, including but not limited to, computer programs and related documentation, that are related in any way to Employee’s work with the Company or to any of the services provided by the Company, shall be considered works made for hire under the copyright laws of the United States and shall upon creation be owned exclusively by the Company. To the extent that any such materials, under applicable law, may not be considered works made for hire, Employee hereby assigns to the Company the ownership of all copyrights in such materials, without the necessity of any further consideration, and the Company shall be entitled to register and hold in its own name all copyrights in respect of such materials. The provisions of this section shall apply regardless of whether any activities related to the creation of any Intellectual Property took place inside or outside of the Company’s working hours.

 

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3.2. Confidential Information. Employee understands and agrees that:

(a) in the course of his employment with the Company, he will acquire information that could include, in whole or in part, information concerning Company sales, sales volume, sales methods, sales proposals, customers and prospective customers, identity of customers and prospective customers, identity of key purchasing personnel in the employ of customers and prospective customers, amount or kind of customer purchases from the Company, Company sources of supply, Company computer programs, system documentation, special hardware, product hardware, related software development, Company manuals, formulae, processes, methods, machines, compositions, ideas, improvements, inventions, or other confidential or proprietary information belonging to the Company or relating to the Company’s affairs (collectively referred to as “Confidential Information”);

(b) the Confidential Information is the property of the Company;

(c) the use, misappropriation, or disclosure of the Confidential Information would constitute a breach of trust and could cause irreparable injury to the Company;

(d) it is essential to the protection of the Company’s goodwill and to the maintenance of the Company’s competitive position that the Confidential Information be kept secret; and

(e) that Employee will not disclose the Confidential Information to others or use the Confidential Information for any reason other than on behalf of the Company, either during, or at any time following the cessation of, Employee’s employment with the Company. Notwithstanding anything to the contrary contained herein, Confidential Information shall not be deemed to include any information generally known or readily accessible in the trade or industry in which the Company is involved, provided the same are not in the public domain as a consequence of disclosure by the Employee in violation of this Agreement.

3.3. Return of Materials. Upon the cessation, for any reason, of Employee’s employment with the Company, Employee will promptly deliver to the Company all Company property, including but not limited to, all computers, phones, equipment, correspondence, manuals, letters, notes, notebooks, reports, flow charts, programs, proposals, and any documents concerning the Company’s customers, operations, products or processes (actual or prospective) or concerning any other aspect of the Company’s business (actual or prospective) and, without limiting the foregoing, will promptly deliver to the Company any and all other documents or materials containing or constituting Confidential Information.

3.4. Non-Solicitation. Throughout any period during which Employee is an employee of the Company, and for a period of twenty-four (24) months from and after the date upon which Employee shall cease for any reason whatsoever to be an employee of the Company (the “Employment Cessation Date”) or for a period of twenty-four (24) months from the date of entry by

 

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a court of competent jurisdiction of a final judgment enforcing this Section of the Agreement in the event of a breach thereof by Employee, whichever is later, Employee covenants and agrees that Employee will not directly or indirectly, for himself or for the benefit of another:

(a) Solicit any person or entity who, during the twelve-month period immediately preceding the Employment Cessation Date, paid or engaged the Company for products or services of any type or who received the benefit of the Company’s services (a “Client”) to withdraw, curtail or cancel such Client’s relationship with the Company;

(b) Provide or agree to provide for any Client products or services of the type that the Company renders to its Clients, except for or on behalf of the Company in the exercise of Employee’s duties under this Agreement; or

(c) Induce or influence, or attempt to induce or influence, any person who, during the twelve-month period immediately preceding the Employment Cessation Date, is an employee, agent, independent contractor, partner, officer, supplier, vendor or director of the Company to terminate his, her or its relationship with the Company or cease providing services or products to or on behalf of the Company.

3.5. Non-Competition.

(a) Throughout any period during which Employee is an employee of the Company, and for a period of twenty-four (24) months from and after the Employment Cessation Date or for a period of twenty-four (24) months from the date of entry by a court of competent jurisdiction of a final judgment enforcing this Section of the Agreement in the event of a breach thereof by Employee, whichever is later, Employee covenants and agrees that:

 

i.

Employee will not compete with Company within the Restricted Area by performing for or providing to a Competing Business the same or materially similar duties or services that Employee performed for or provided to Company within the last 12 months of Employee’s employment with the Company;

 

ii.

Employee will not own or acquire, either as a proprietor, partner, member, shareholder, trustee, a greater than five percent (5%) equity or synthetic equity ownership interest, in any Competing Business within the Restricted Area.

(b) For purposes of this Section 3.5, the following definitions will apply:

 

i.

Competing Business. Any business which sells or distributes flooring products (including, but not limited to, hardwood, engineered, resilient, bamboo, cork and/or laminate flooring) or any other products or services substantially similar to those sold or provided by the Company within the twelve-month period immediately preceding the Employment Cessation Date that constituted more than five percent (5%) of the Company’s gross sales.

 

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ii.

Restricted Area. Because of the national and expanding scope of the Company’s business, for purposes of this Agreement, the “Restricted Area” is defined as the United States of America and any city, town, county or metropolitan area in Canada in which the Company operates store locations as of the Employment Cessation Date.

ARTICLE IV

EMPLOYEES REPRESENTATIONS AND WARRANTIES

4.1. No Prior Agreements. Employee represents and warrants that he is not a party to or otherwise subject to or bound by the terms of any contract, agreement, or understanding which in any manner would limit or otherwise affect his ability to perform any of his obligations under this Agreement, including, without limitation, any contract, agreement, or understanding containing terms and provisions similar in any manner to those contained in Article III. The Company shall have no liability under any such agreement between Employee and a third party.

4.2. Employee’s Abilities. Employee represents that his experience and capabilities are such that the provisions of Article III will not prevent him from earning a livelihood in the event his employment with the Company were to cease and Employee acknowledges that it would cause the Company serious and irreparable injury and cost if Employee were to violate any of the provision of Article III to the detriment of the Company or to otherwise breach his obligations under Article III.

4.3. Review by Counsel. Employee represents and warrants that this Agreement is the result of full and otherwise fair bargaining over its terms following a full and otherwise fair opportunity to have legal counsel for Employee review this Agreement and to verify that the terms and provisions of this Agreement are reasonable and enforceable.

ARTICLE V

GENERAL PROVISIONS

5.1. Authorization to Modify Restrictions. The invalidity of any portion of this Agreement shall not be deemed to affect the validity of any other provisions. In the event that any provision of this Agreement is held to be invalid, the parties agree that the remaining provisions shall be deemed in full force and effect as if they had been executed by both parties subsequent to the expungement of the invalid provision. Further, if any part on any provision of this Agreement, including Article III, shall be determined to be invalid or unenforceable by reason of the extent, duration or geographical scope thereof, or otherwise, then the parties agree that the court making such determination may reduce such extent, duration or geographical scope, or other provisions thereof, and in its reduced form such part or provision shall then be enforceable in the manner contemplated hereby.

 

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5.2. No Waiver. The failure of either the Company or Employee to insist upon the performance of any term in this Agreement shall not waive any such term or any other term of this Agreement. Instead, this Agreement shall remain in full force and effect as if no such forbearance had occurred.

5.3. Company Violation Not a Defense. In an action by the Company for specific performance and/or injunctive relief under this Agreement, any claims asserted by Employee against the Company as violations of this Agreement shall not constitute a defense.

5.4. Entire Agreement. This Agreement represents the entire agreement of the parties with respect to the subject matter of this Agreement and may be amended only by a writing signed by each of them.

5.5. Governing Law, Section 409A. This Agreement will be governed by and construed in accordance with the internal substantive laws of the Commonwealth of Virginia without regard to Virginia’s conflict of laws provisions. This Agreement is intended to comply with Section 409A and shall be interpreted and administered accordingly.

5.6. Consent to Jurisdiction. Employee hereby irrevocably submits to the jurisdiction of the appropriate state or federal courts located in the Commonwealth of Virginia in any action or proceeding arising out of or relating to disputes under this Agreement.

5.7. Venue. Employee irrevocably waives any current or future objection to the laying of venue of any action or proceeding arising out of or relating to this Agreement brought in any Virginia state or federal court and any objection on the ground that any such action or proceeding in either court has been brought in an inconvenient forum. However, nothing in this Section 5.7 will affect the right of the Company to bring any action or proceeding against Employee or his property in the courts of other jurisdictions.

5.8. Remedy. Employee understands and acknowledges that the Company has a legitimate business interest in preventing Employee from taking any actions in violation of Article III of this Agreement and that Article III is intended to protect the legitimate business interests and goodwill of the Company. Employee further acknowledges that a breach of Article III of this Agreement will irreparably and continually damage the Company. Employee therefore agrees that in the event Employee violates any provision of this Agreement contained in Article III, the Company will be entitled to seek an injunction stopping Employee from breaching or continuing to breach Employee’s obligations thereunder, other appropriate injunctive relief, specific performance, any other equitable remedies and any and all remedies provided by law. Employee further acknowledges that the Company engages in a highly competitive business throughout the United States as well as countries outside of the United States, and further, that the geographic limitation contained in Section 3.5 is necessary to protect the Company’s business.

5.9. Recovery of Expenses. The prevailing party in any proceeding arising from this Agreement will be entitled to reasonable attorneys’ fees, costs, and the expenses of litigation from the non-prevailing party.

 

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5.10. Agreement Binding. The obligations of Employee under this Agreement will continue as stated in this Agreement after the cessation of his employment with the Company and will inure to the benefit of any successors and assigns of the Company.

5.11. Counterparts, Section Headings. This Agreement may be executed in any number of counterparts. Each will be considered an original, but all will constitute one and the same instrument. The section headings of this Agreement are for convenience of reference only and shall not affect the construction or interpretation of any of its provisions.

5.12. Notices. All notices, demands, requests and other communications required by or in regards to this Agreement shall be in writing or by written telecommunication and given by personal delivery to the addressee, by mail (certified mail, return receipt requested, postage prepaid) or by telecommunication. Either party may from time to time change its address, facsimile number, electronic mail address or designated individual by notice to the other party.

 

To Company:		Lumber Liquidators Holdings, Inc.
		3000 John Deere Road
		Toano, Virginia 23168
		Attention: General Corporate Counsel
To Employee:		Robert M. Lynch
		1143 Rugby Court
		San Jose, California 95120

EMPLOYEE ACKNOWLEDGES THAT HE HAS READ AND UNDERSTANDS THE FOREGOING PROVISIONS AND THAT SUCH PROVISIONS ARE REASONABLE AND ENFORCEABLE.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Executive Employment Agreement or caused it to be executed this 17^th day of December, 2010.

 

EMPLOYEE				LUMBER LIQUIDATORS HOLDINGS, INC.
/s/ Robert Martin Lynch				By:		/s/ Jeffrey W. Griffiths
Robert Martin Lynch				Name:		Jeffrey W. Griffiths
				Title:		Chief Executive Officer

 

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AMENDMENT TO

EXECUTIVE EMPLOYMENT AGREEMENT

THIS AMENDMENT to the Executive Employment Agreement (the “Agreement”) by and between Lumber Liquidators Holdings, Inc. (the “Company”) and Robert Martin Lynch (“Employee”) is made and entered into this 21st day of December, 2011.

WHEREAS, the Compensation Committee of the Board of Directors of the Company has determined that certain changes to Employee’s title, duties and compensation are in the best interest of the Company; and

WHEREAS, the Company and Employee wish to amend the Agreement to reflect such changes.

NOW, THEREFORE, the Agreement is amended as set forth below, effective January 1, 2012:

FIRST: The first sentence of Section 1.1(a) is revised to read as follows: “The Company will employ Employee in the position of President and Chief Executive Officer and, in that position, Employee will report directly to the Board of Directors of the Company.”

SECOND: The term, “Chief Operating Officer,” in the first sentence of Section 1.3 is replaced with the term, “Chief Executive Officer.”

THIRD: The phrase, “the Chief Executive Officer and/or the Board of Directors,” in Section 1.3(a) is replaced with the phrase, “the Board of Directors.”

FOURTH: The phrase, “the Company, the Chief Executive Officer and/or the Board of Directors,” in Section 1.3(b) is replaced with the phrase, “the Company and/or the Board of Directors.”

FIFTH: Section 1.4(a) is replaced with the following:

(a) Base Salary. Employee shall receive an annual base salary of $550,000 payable to Employee in accordance with the Company’s normal payroll schedule. The Company shall withhold state and federal income taxes, social security taxes and shall make such other payroll deductions as may be required by law or mutually agreed upon in writing by Employee and the Company.

SIXTH: The phrase, “up to 75% of Employee’s base salary,” in the second sentence of Section 1.4(c) is replaced with the phrase, “up to 100% of Employee’s base salary.”

SEVENTH: The term, “Chief Executive Officer,” in Section 3.1 is replaced with the term, “Secretary.”

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EIGHTH: The notice address in Section 5.12 for Employee shall be changed to the following:

IN WITNESS WHEREOF, the parties hereto have executed this Amendment to Executive Employment Agreement or caused it to be executed as of the date first written above.

 

EMPLOYEE				LUMBER LIQUIDATORS HOLDINGS, INC.
/s/ Robert Martin Lynch				By:		/s/ Jeffrey W. Griffiths
Robert Martin Lynch				Name:		Jeffrey W. Griffiths
				Title:		President and Chief Executive Officer

 

EXHIBIT 31.01

 

SECTION 302 CERTIFICATION

 

I, John M. Presley, certify that:

 

1.

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

 

2.

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;

 

3.

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;

 

4.

The registrant's other certifying officers 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

 

5.

The registrant's other certifying officers 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: July 27, 2016

 

	/s/ John M. Presley
	John M. Presley
	President and Chief Executive Officer
	(Principal Executive Officer)

 

 

EXHIBIT 31.02

 

SECTION 302 CERTIFICATION

 

I, Gregory A. Whirley, Jr., certify that:

 

1.

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

 

2.

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;

 

3.

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;

 

4.

The registrant's other certifying officers 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

 

5.

The registrant's other certifying officers 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: July 27, 2016

 

	/s/ Gregory A. Whirley, Jr.
	Gregory A. Whirley, Jr.
	Interim Chief Financial Officer and
	Senior Vice President, Finance
	(Principal Financial and Principal Accounting Officer)

 

 

EXHIBIT 32.01

 

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, John M. Presley, President and Chief Executive Officer of Lumber Liquidators Holdings, Inc. (the "Registrant"), and Gregory A. Whirley, Jr., interim Chief Financial Officer and Senior Vice President, Finance of the Registrant, each hereby certifies that, to the best of his knowledge:

 

1.

The Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2016, to which this Certification is attached as Exhibit 32.01 (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

 

2.

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

 

/s/ John M. Presley		/s/ Gregory A. Whirley, Jr.
John M. Presley		Gregory A. Whirley, Jr.
President and Chief Executive Officer		Interim Chief Financial Officer and
(Principal Executive Officer)		Senior Vice President, Finance
		(Principal Financial and Principal Accounting Officer)
Date: July 27, 2016		Date: July 27, 2016

 

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