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RISK FACTORS

A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our common stock. Our business, results of operations, financial condition, and prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe to be material. If any of the risks actually occur, our business, results of operations, financial condition and prospects could be harmed. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

Risks Relating to Our Business and Industry

If we fail to obtain a sufficient quantity of new and recurring quality secondhand items at attractive prices, our business, results of operations and financial condition could be harmed.

The quality and quantity of the supply of our secondhand items are critically important drivers of our sales generated per pound of goods processed, which we internally refer to as “sales yield.” If we are unable to achieve a favorable sales yield with a sufficient quantity of goods obtained at attractive prices, our profitability will suffer. Our business model is based on sourcing from and selling to the local community, so our business is dependent on our ability to obtain quality secondhand items at attractive prices from sources in each community we operate in.

To the extent we are required to pay higher prices to our NPPs for secondhand items, our profitability will be directly negatively affected. The pricing of secondhand items may be dependent on factors such as the volume of items donated to our NPPs (which may fluctuate due to factors outside of our control), our ability to negotiate, maintain and grow our relationships with our NPPs and competition for secondhand items from other potential purchasers of secondhand items. As a result, if we are required to pay higher prices for secondhand items, our profitability will be reduced.

Furthermore, the quality of items we receive (either directly from our NPPs or through OSDs) is critical to our sales yield and profitability. To the extent the items supplied to us are lower in quality or are worse in condition, fewer of those items may be graded in our processing centers as saleable at retail; the price points they will be able to obtain may be lower; and fewer of those items may be seen as desirable by our customers and actually be sold at retail. Lower item quality could result in markdowns and other promotions in our retail stores and a greater proportion of items sold at wholesale. The sales prices we receive for items sold to our wholesale customers for reuse and repurposing are lower than those we receive for items sold at retail. As a result, lower item quality could have a material and adverse effect on our ability to generate revenue from retail sales.

Finally, to the extent we do not obtain a sufficient quantity of quality secondhand items, we will not be able to provide our customers with a sufficient quantity of items they perceive as desirable. Because many of our customers desire a treasure hunt experience at our stores, a decline in the amount of desirable items could have a negative effect on their shopping experience and could have a negative impact on the number of store visits and purchase volumes of our existing customers as well as on our ability to attract new customers.

As a result, the failure to obtain a sufficient quantity of quality items at attractive prices could negatively impact our sales yield, revenues and profitability and could have a material, adverse effect on our business, financial condition and results of operations.

 

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Our ability to obtain a sufficient quantity of quality secondhand items at attractive prices is dependent on maintaining our strong relationships with existing NPPs, maintaining and growing OSDs and developing new relationships in the areas in which we operate.

Our ability to cost-effectively obtain quality secondhand items is dependent on maintaining strong relationships with our existing NPPs, maintaining and growing OSDs and developing relationships with new NPPs and their donors. Numerous factors, however, may impede our ability to maintain and develop relationships with NPPs and their donors with quality secondhand items. Additionally, we generally do not have long term supply agreements with our NPPs. To expand our base of secondhand items for sale and our base of NPPs, we must appeal to and engage NPPs new to selling secondhand items and individuals new to donating secondhand items to our NPPs through OSDs. We cannot be certain that these efforts will result in more supply of quality secondhand items or that these efforts will be cost-effective.

In addition, as we expand our operations, because our business model is focused locally, we will be required to expand or develop relationships with NPPs and donors who make OSDs in and around those locations. If we are unable to develop and maintain those new relationships, our ability to grow our business will be negatively impacted.

Our efforts to appeal to NPPs and donors may not result in more supply of quality secondhand items, and these efforts may not be cost-effective. Our ability to obtain new and recurring quality secondhand items from new and existing NPPs and their donors depends on a number of factors, such as our ability to enhance and improve our Community Donation Centers, NPPs’ perceptions of whether payouts they are receiving are adequate, timely compensation for their items, and our reputation. Our ability to increase OSDs is dependent in large part on the convenience to donors of making a donation at one of our stores (which can be driven in large part by store location) and the quality of the donors’ donation experience, including the quality and selection of the NPPs to which they can donate their items. If we are unable to meet the expectations of our NPPs and their donors and drive repeat supply, the quality and volume of the secondhand items we receive could be adversely affected.

In addition, due to economic uncertainties, governmental orders, the ongoing COVID-19 pandemic, other similar events or other challenges, our NPPs may be unable to obtain donated items for delivered supply or may be unable or unwilling to continue supplying secondhand items on terms or in quantities desirable to us. Furthermore, such uncertainties, restrictions or events could have a negative impact on donors’ ability or willingness to make OSDs.

If we are unable to obtain a sufficient volume of quality secondhand items, our sales revenue from secondhand items would be materially and adversely affected, which would have a material, adverse effect on our business, growth prospects, results of operations and financial condition.

We are subject to risks associated with sourcing and processing of secondhand items, including processing costs and capacity, risks due to damage, loss or contamination of items, increased costs to maintain and/or develop sources of supply, and risks associated with itemizing, grading, storage, transportation and other logistics.

The secondhand items we offer at retail through our stores and at wholesale in domestic and global resale markets are initially sourced through our NPPs either directly or through OSDs at our stores. As a result, we are subject to fluctuations in the price we pay for secondhand items. In addition, the cost of merchandise sold may increase due to increases in labor costs, transportation costs and costs of storage, which may be driven by market forces outside our control, such as rising inflation. Furthermore, to the extent that the volume of secondhand items we obtain in a particular locality exceeds our capacity to process or store them, our ability to generate revenue in that locality will be limited by that capacity constraint. Our business, financial condition and results of operations could be negatively impacted by these cost and capacity issues.

 

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Furthermore, the secondhand items we receive may not be of sufficient quality or free from damage, and such secondhand items may be damaged during shipping or processing. While we conduct inspections of secondhand items in our inventory, we cannot control items while they are out of our possession or prevent all damage while in our processing facilities. For example, we may experience contamination from various sources, such as mold, bacteria, insects and other pests, in certain secondhand items provided to us. If we are unable to detect, quarantine and properly deal with such contaminants at the time such secondhand items are initially received in our stores or in our processing facilities, some or all of the other secondhand items in such facilities could be contaminated. We may incur additional expenses and our reputation could be harmed if the secondhand items we offer are damaged or contain contaminants.

We may also experience increased costs to attract, retain and grow relationships with our NPPs. If we are unsuccessful in establishing or maintaining our relationships with our NPPs, or if they partner with our competitors and devote greater resources to implement and support the platforms or retail items of our competitors, our ability to compete in the marketplace, or to grow our revenue, could be impaired, and our results of operations may suffer.

Our business depends on our ability to attract and retain suitable workers for our stores and processing facilities and to manage labor costs, particularly given recent disruptions in the supply and cost of labor.

Our future growth and performance, positive customer experience and legal and regulatory compliance depends on our ability to attract, develop, retain and motivate a large number of highly qualified store management personnel, processing employees and team members. Our team members in our processing facilities must efficiently and accurately sort and price many of our secondhand items for sale in our stores.

Our ability to meet our labor needs, while controlling labor costs in a labor market challenged by historically high rates of employee turnover, labor shortages and rising wage rates, is subject to many external factors, including competition for and availability of qualified personnel particularly during the ongoing COVID-19 pandemic, unemployment levels, governmental regulatory bodies such as the Equal Employment Opportunity Commission and the National Labor Relations Board, prevailing wage rates in the jurisdictions in which we operate (including the heightened possibility of increased applicable minimum wage rules and regulations), the impact of wage inflation, health and other insurance costs, changes in employment and labor laws or other workplace regulations (including those relating to employee benefit programs such as health insurance and paid leave programs), our ability to maintain good relations with our team members, employee activism, and our reputation and relevance within the labor market. Inflation has risen worldwide and the United States has recently experienced historically high levels of inflation. If the inflation rate continues to increase, it could also push up the costs of labor and our employee compensation expenses. Continued wage inflation could increase our operating costs, and there can be no assurance that our revenues will increase at the same rate to maintain the same level of profitability. In addition, to the extent unemployment assistance and other similar benefits are enhanced or extended by governmental agencies in the jurisdictions in which we operate (including in connection with the COVID-19 pandemic), such enhancements or extensions could have a negative effect on the supply of qualified workers.

Recently, we have incurred higher wage rates for our employees. We expect that our labor costs, including wages and employee benefits, will continue to increase. We have taken certain price increases to, among other things, address labor costs. Unless we are able to pass on these increased labor costs and other increased costs to our customers by increasing prices for our products, our profitability and results of operations may be materially and adversely affected.

 

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We compete with other retail businesses for many of our store management personnel and sales team members in hourly and part-time positions. These positions have had historically high turnover rates, which can lead to increased training and retention costs. In addition, we compete with retail business and warehouse operations for employees in our processing facilities, which are growing quickly and competing aggressively for additional labor. If we are unable to attract and retain quality employees and other management personnel, or fail to comply with the regulations and laws impacting personnel, our operations, processing efficiency, customer service levels, legal and regulatory compliance, and support functions could suffer, resulting in a material adverse effect on our business, financial condition and results of operations.

In addition, to the extent a significant portion of our employee base unionizes, or attempts to unionize, our labor and other related costs could increase. Our ability to pass along labor and other related costs to our customers is constrained by our everyday low-price model, and we may not be able to offset such increased costs elsewhere in our business.

Our continued growth depends on attracting new, and retaining existing, customers, including by increasing the acceptance of thrift among new and growing customer demographics.

To expand our customer base, we must appeal to and attract customers who do not typically purchase secondhand items, who have historically purchased only new retail items or who used other means to purchase secondhand items, such as other consignment and thrift stores or the websites of secondary marketplaces. We reach new customers through paid search, social media, influencers, advertising, other paid marketing, press coverage, retail locations, referral programs, organic word of mouth and other methods of discovery, such as converting our NPPs’ donors to customers. We expect to continue investing in these and other marketing channels in the future and cannot be certain that these efforts will enable us to attract and retain more customers, result in increased purchase frequency or increased basket sizes from our customers or be cost-effective. In addition, successful growth requires us to find appropriate store locations tailored to consumer demographics in our targeted market areas. Our ability to attract and retain customers also depends on our ability to offer a broad selection of desirable and quality secondhand items in our stores, our ability to consistently provide high-quality customer experiences and our ability to promote and position our brands and stores. Our investments in marketing may not effectively reach potential customers and existing customers, potential customers or existing customers may decide not to buy through us or the spend of customers that purchase from us may not yield the intended return on investment, any of which could negatively affect our results of operations. Moreover, consumer preferences may change, and customers may not purchase through our stores as frequently or spend as much with us as historically has been the case. As a result, the revenue generated from customer transactions in the future may not be as high as the revenue generated from transactions historically. Consequently, failure to attract new customers and to retain existing customers could harm our business, results of operations and financial condition.

Both supply of and demand for our products is influenced by general economic conditions, including trends in consumer spending.

Our business and results of operations are subject to global economic conditions, conditions in the markets in which we operate and their impact on consumer discretionary spending, particularly in the retail market. Some of the factors that may negatively influence consumer spending on retail items include high levels of unemployment, high consumer debt levels, a prolonged economic downturn or acute recession, fluctuating interest rates and credit availability, fluctuating fuel and other energy costs, fluctuating commodity prices, other inflationary pressures and general uncertainty regarding the overall future political and economic environment. Economic conditions in particular regions may also be affected by natural disasters, such as earthquakes, hurricanes and wildfires; unforeseen public health

 

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crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; political crises, such as terrorist attacks, war and other incidents of political or social instability or other catastrophic events, whether occurring in the United States, Canada or internationally, such as the ongoing conflict between Russia and Ukraine. The presence or absence of government stimulus funding programs has had and may continue to have an impact on consumer discretionary spending and, consequently, purchases at our stores.

Traditionally, consumer purchases of new retail items have declined and secondhand markets have grown during periods of economic uncertainty, when disposable income is reduced or when there is a reduction in consumer confidence. Nevertheless, we cannot guarantee that our customers will continue to visit our stores and buy our items if economic conditions worsen. On the other hand, economic upswings could increase the rate of new retail purchases in the primary market and slow the rate at which individuals choose to shop in the secondhand market, thereby decreasing our revenue.

Furthermore, fluctuations in economic and other conditions could also negatively impact the rate at which individuals choose to donate their secondhand items to our NPPs. To the extent that donors have lower actual or perceived wealth or economic security, donors may be less willing or able to donate items to our NPPs (either directly or through OSDs). The constriction of supply of secondhand items could increase the price we must pay for items and could also reduce the quality and quantity of items we are able to purchase for sale in our stores, which would adversely affect our revenues, profitability and sales yields.

As a result, general economic and other conditions could have a material and adverse effect on our business, results of operation and financial condition.

We have experienced rapid growth, and those growth rates may not be indicative of our future growth. If we fail to manage our growth effectively, we may be unable to execute our business plan and our business, results of operations and financial condition could be harmed.

We have experienced rapid growth in certain recent periods, and may continue to experience rapid growth in future periods, which has placed, and may continue to place, significant demands on our management and our operational and financial resources. We have also experienced significant growth in the number of customers using our stores in certain periods, despite a reduction in total days our stores were open during 2020 and growth rates that were impacted by the COVID-19 pandemic. Additionally, our organizational structure is becoming more complex as we scale our operational, financial and management controls as well as our reporting systems and procedures.

To manage growth in our operations and the growth in our number of customers, we will need to continue to grow and improve our operational, financial and management controls and our reporting systems and procedures. We will also need to actively and carefully manage the expansion of our store footprint through a targeted real estate strategy. We will need to maintain or increase the automation of our processing facilities (including our CPCs) and continue to improve how we apply data science to our operations. Our expansion has placed, and our expected future growth will continue to place, a significant strain on our management, marketing, operations, administrative, legal, financial, customer support, engineering and other resources. If we fail to manage our anticipated growth and change in a manner that preserves the key aspects of our corporate culture, our employee morale, productivity and retention could suffer, which could negatively affect our brands and reputation and harm our ability to attract new customers and to grow our business. In addition, future growth, such as the potential further expansion of our operations internationally or expansion into new categories of offerings, either organically or through acquisitions, would require significant capital expenditures, which could adversely affect our results of operations, and the allocation of valuable management resources to grow and change in these areas.

 

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In future periods, we may not be able to sustain or increase revenue growth rates consistent with recent history, or at all. We believe our success and revenue growth depends on a number of factors, including, but not limited to, our ability to:

 

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generate a sufficient amount of new and recurring quality secondhand items at an attractive price by maintaining our strong relationships with existing NPPs, maintaining and growing OSDs and developing new relationships in the areas in which we operate;

 

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attract and retain suitable workers for our stores and processing facilities and manage labor costs;

 

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attract new, and retain existing, customers, including by increasing the acceptance of thrift among new and growing customer demographics;

 

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increase awareness of our brands;

 

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maintain a high level of customer service and satisfaction;

 

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anticipate and respond to changing market preferences;

 

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anticipate and respond to macroeconomic changes generally, including changes in the markets for both new and secondhand retail items;

 

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identify and obtain suitable locations for new stores and facilities;

 

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adapt to changing conditions in our industry and related to the COVID-19 pandemic and measures implemented to contain its spread;

 

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improve, expand and further automate our CPC operations, information systems and stores;

 

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effectively scale our operations while maintaining high-quality service and customer satisfaction;

 

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successfully compete against established companies and new market entrants, including national retailers and brands, other consignment and thrift stores and online resale platforms;

 

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avoid or manage interruptions in our business from information technology downtime, cybersecurity breaches and other factors that could affect our physical and digital infrastructure; and

 

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comply with regulations applicable to our business.

If we are unable to accomplish any of these tasks, our revenue growth may be harmed. We also expect our operating expenses to increase in future periods, and if our revenue growth does not increase to offset these anticipated increases in our operating expenses, our business, results of operations and financial condition will be harmed, and we may not be able to maintain profitability.

We may not be able to identify and obtain suitable locations for new stores as we grow our business. The success of each store location is dependent on a number of factors, including site suitability, our ability to negotiate appropriate store leases, customer traffic and convenience and proximity to NPPs and their donors, customers, suitable workers and our processing facilities.

Our business strategy requires us to find appropriate store and processing facility sites in our targeted market areas. We compete with other retailers and businesses for acceptable locations for our stores and other facilities. For the purpose of identifying suitable locations we rely, in part, on information regarding the demographics of the local areas, both with respect to potential customers and potential donors. While we believe demographics are helpful indicators of favorable locations, we recognize that this information cannot predict future consumer preferences and buying trends with

 

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complete accuracy. We also rely on other factors such as proximity to potential and existing NPPs and their donors, our CPCs and suitable workers. Time frames for negotiations and store development vary from location to location and can be subject to unforeseen delays or unexpected cancellations.

We lease all of our locations. While locations that source product through a CPC do not require on-site production facilities, currently, most of our locations have processing facilities on-site. To the extent a location requires an on-site processing facility, the location will have specific requirements as to size, layout and physical facilities that may not be available widely in the local area. To the extent suitable store and other locations are unavailable, whether due to large scale redevelopment of shopping centers or otherwise, we may experience difficulties entering into new leases on favorable terms. The failure to secure new locations for our stores and other facilities could have a material and adverse effect on our ability to grow and maintain our business.

Our store leases are generally for extended terms with a typical initial term of 10 years, and we had an average remaining term of obligation of 62 months as of January 1, 2022. The majority of our leases contain provisions for base rent and a small number of our leases contain provisions for base rent plus percentage rent based on sales in excess of an agreed upon minimum annual sales level. We may not be able to terminate a particular lease if or when we would like to do so, which could prevent us from closing or relocating certain underperforming locations. If we decide to close locations, we generally are required to continue paying rent and operating expenses for the balance of the lease term, and the performance of any of these obligations may be expensive. When we assign or sublease vacated locations, we may remain liable on the lease obligations for the rent differential or if the assignee or sub-lessee does not perform. Accordingly, we are subject to the risks associated with leasing locations, which can have a material and adverse effect on us.

If we are unable to renew, renegotiate or replace our leases or enter into leases for new locations on favorable terms, our growth and profitability could be harmed, which could have a material and adverse effect on our business, financial condition and results of operations.

We are also required to make significant lease payments for our existing leases, which may strain our cash flow. We depend on net cash provided by operating activities to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash provided by operating activities, and sufficient funds are not otherwise available to us from borrowings under our credit facilities or from other sources, we may not be able to service our lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which would harm our business.

Some of our stores may have challenges achieving period-to-period comparable store sales growth targets due to various factors outside our control, including availability of quality secondhand items, availability of suitable workers, site suitability, lease terms and conditions, operational risks and regional growth and development patterns.

Because each store seeks to sell secondhand goods that are sourced locally to customers in its local area, each store’s results may fluctuate from one period to the next. While we seek to grow comparable store sales, various factors (many of which are outside our control) may negatively impact each store’s ability to meet our comparable store sales targets. These factors include (among others):

 

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COVID-related or other government-imposed operational restrictions;

 

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changes in the availability of quality secondhand items;

 

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changes in the availability of suitable workers;

 

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changes in or termination of store and facility leases;

 

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changes in the economy or demographics of the local area or region;

 

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changes in weather or climate;

 

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the impact of natural disasters, cyber-attacks, social unrest or terrorist incidents;

 

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changes in our relationships with local NPPs and the local community of donors;

 

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changes in the timing and extent of promotional and advertising efforts; and

 

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holidays or seasonal periods.

If our future year to year store sales growth fails to meet expectations, then our cash flow and profitability could decline substantially, which could have a material adverse effect on our business, financial condition and results of operations.

We have significant foreign operations, particularly in Canada, so we are subject to risks specific to operating in these jurisdictions and are also exposed to exchange rate risks, which we may not be able to fully hedge.

As of October 1, 2022, we operated 150 stores in Canada and 10 stores in Australia. Our operations in these non-U.S. jurisdictions require us to understand the retail climate and trends, customs and cultures, seasonal differences, business practices and competitive conditions in those jurisdictions. We are also required to familiarize ourselves with the laws, rules, regulations and government of each of those jurisdictions. Operations in each jurisdiction also require us to develop the appropriate in-country infrastructure, identify suitable partners for local operations and successfully integrate operations in that jurisdiction with our overall operations while effectively communicating and implementing company policies and practices. There are also financial, regulatory and other risks associated with international operations, including currency exchange fluctuations, potentially adverse tax and transfer pricing considerations, limitations on the repatriation and investment of funds outside of the country where earned, trade regulations, the risk of sudden policy or regulatory changes, the risk of political, economic and civil instability and labor unrest and uncertainties regarding interpretation, application and enforceability of laws and agreements. Any of these risks could adversely impact our operations, profitability or liquidity.

With respect to our Canadian operations, among other data privacy requirements, the Personal Information Protection and Electronic Documents Act (“PIPEDA”) and various provincial laws require that companies give detailed privacy notices to consumers, obtain consent to collect, use and disclose personal information, with limited exceptions, allow individuals to access and correct their personal information and report certain data breaches. In addition, Canada’s Anti-Spam Legislation (“CASL”) or provincial privacy or data protection laws could result in significant fines and penalties or possible damage awards.

In addition our Canadian and Australian operations use a functional currency other than the U.S. dollar. In fiscal year 2021, 44.3% of our net sales were derived from markets outside the United States. We are exposed to currency translation risk because the results of our international businesses in some countries are generally reported in local currency, which we then translate to U.S. dollars we record for our foreign assets, liabilities, revenues and expenses, and could have a negative effect on our financial results.

The global COVID-19 pandemic and the government’s responses in the jurisdictions in which we operate has had and may continue to have an unpredictable and adverse impact on our business, results of operations and financial condition, and similar events may have such effects in the future.

Some of our operations and financial performance since early 2020 have been negatively impacted by the COVID-19 pandemic that has caused, and may continue to cause, a slowdown of

 

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economic activity, disruptions in global supply chains, and significant volatility in financial markets. As the COVID-19 pandemic continues to affect economic activity globally or in various regions, the extent to which this will adversely impact our future operations and financial performance is uncertain. We have experienced, and may continue to experience, operational challenges from personnel absences, temporary closures of our stores, offices and processing facilities, further or ongoing reduced capacity at those locations, decreased foot traffic at and/or closure of our stores and a decrease or volatile patterns in spending on retail in general. Furthermore, developing various responses to the challenges caused by COVID-19 and its effects has and may continue to divert the attention of our management team. For example, in March 2020, due to the progression of COVID-19 in areas where we operate and have corporate offices, we temporarily closed our corporate offices and all of our locations in the United States and Canada for a period of time to slow the spread of COVID-19, protect our team members and comply with certain local regulations. Later in 2020, all of our stores in Australia and stores elsewhere in our network were closed for similar reasons.

The continued impact of COVID-19 on the global slowdown in economic activity may heighten other risks disclosed in this prospectus. Public health concerns, such as COVID-19, could also result in social, economic and labor instability in the localities in which we or our customers and NPPs and their donors reside. Such instability and concerns could negatively impact the amount and quality of donations to our NPPs (whether directly provided to us by NPPs or through OSDs) and could also negatively impact our customers’ willingness to shop at our stores, which would negatively impact our revenues and sales yields.

The effects of COVID-19 pandemic and related public health restrictions had a significant negative impact on our net sales and pounds processed during fiscal year 2021 and fiscal year 2020, respectively. Our retail stores were closed for a substantial portion of 2020 due to public health restrictions enacted during the pandemic, which resulted in lower store traffic and retail sales volume. In addition, due to the closure of our retail locations during the pandemic, we accepted fewer donations made to our NPPs at our Community Donation Centers.

The ultimate impact of the COVID-19 pandemic on our operations and financial performance depends on many factors that are not within our control. Any of these uncertainties and actions we take to mitigate the effects of COVID-19 and uncertainties related to COVID-19 could harm our business, results of operations and financial condition. We face similar risks with respect to any worsening of the COVID-19 pandemic, the spread of any variants of COVID-19, and any future outbreaks of disease. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Update” for additional information about the impact of COVID-19 on our business.

We may not be able to expand our CPC operations in geographic regions that enable us to effectively scale our operations.

To grow our business, we must continue to improve and expand our CPC operations, proprietary systems, equipment and related technology. We must also staff our CPCs with suitable workers in each of the localities we wish to service. Our CPC operations are complex and require the coordination of multiple functions that are highly dependent on numerous qualified employees and personnel working as a team. Each item that we process requires multiple touch points, including categorization, inspection, grading, pricing and delivery to our store locations. This process is complex and, from time to time, we may have more secondhand items arriving from our NPPs and their donors than we can timely process.

As we grow our CPC operations, we expect that the number of employees in our CPCs will increase significantly in the near term, particularly as and when concerns and restrictions due to

 

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COVID-19 abate. The market for these employees is increasingly competitive and is highly dependent on geographic location. We could be required to raise wages or introduce other compensation incentives to remain competitive, which could increase our costs and harm our results of operations. If we fail to effectively locate, hire and retain such personnel, our ability to continue to implement our CPC strategy could be negatively impacted, which could harm our growth prospects and our business, results of operations and financial condition.

Further, the success of our business depends on our ability to secure additional locations for our CPCs that are able to serve our stores. Space meeting our physical requirements in well-positioned geographic locations is becoming increasingly scarce, and where it is available, the lease terms offered by landlords are increasingly competitive, particularly in geographic locations with access to the large, qualified talent pools required for us to run our logistics infrastructure. Companies who have more financial resources and negotiating leverage than us may be more attractive tenants and, as a result, may outbid us for the facilities we seek. Due to the competitive nature of the real estate market in the locations where we currently operate, we may be unable to renew our existing leases or renew them on satisfactory terms. Failure to identify and secure suitable new CPCs or to maintain our current CPCs could harm our business, results of operations and financial condition.

If we are unable to successfully leverage technology to automate and drive efficiencies in our operations, our business, results of operations and financial condition could be harmed.

We are continuing to build automation, machine learning and other capabilities to drive efficiencies in our stores, our CPC operations, our ABP capabilities and other automated processing functions. As we continue to enhance automation and add capabilities, our operations may become increasingly complex. While we expect these technologies to improve productivity in many of our merchandising operations, including processing, itemizing and selling, any flaws, bugs or failures of such technologies could cause interruptions in and delays to our operations, which may harm our business. We are increasing our investment in technology, software and systems to support these efforts, but such investments may not increase productivity, maintain or improve the experience for customers or result in more efficient operations. While we have created our own proprietary technology to operate our business, we also rely on technology from third parties, particularly in our CPCs. If we are no longer able to rely on such third parties, we would be required to either seek licenses to technologies or services from other third parties and redesign aspects of business and operations to function with such technologies or services or develop such technologies ourselves, either of which would result in increased costs and could result in operational delays until equivalent technologies can be licensed or developed and integrated into our business and operations.

We are subject to various risks to our physical store and processing facility locations, which may adversely affect our business, results of operations and financial condition.

Our business model is predicated on sourcing from local NPPs and their donors and selling to local customers. As a result, our stores and processing facilities are critical to our operations, and disruptions to those facilities (as well as to our headquarters) could disrupt our business and overall operations.

Our various facilities including our CPCs, may be affected by natural disasters, disease outbreaks, severe weather events or man-made events such as terrorism, labor unrest, social unrest, riots, looting and arson. Our facilities may also be affected by construction defects, damage to the physical structure that requires repair or disruptions in utility service. Any of the above events could severely disrupt our operations, cause harm to our team members and result in damage to or loss of inventory (in a location or regionally).

 

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Additionally, given the nature of the unique selection of secondhand items we offer in our stores, our ability to restore such secondhand items in our stores would take time, and to the extent any events affecting our stores or other facilities also affect our NPPs or their donors, the supply of goods to our stores may also suffer. As a result, any of these events could result in a limitation and delay of available supply for customers, which would negatively impact our revenue and results of operations. For example, in March 2020 due to the progression of COVID-19 in areas where we operate and have corporate offices, we temporarily closed our corporate offices and all of our locations in the United States and Canada for a period of time to slow the spread of COVID-19, protect our team members and comply with certain local regulations. Later in 2020, all of our stores in Australia and stores elsewhere in our network were closed for similar reasons. In 2021, closures and reductions in operations due to COVID-19 continued in discrete geographical regions where we operate, including, for example, Ontario, Canada. Such reductions in operations and closures have slowed and may in the future slow or temporarily halt our operations and adversely affect our business, results of operations and financial condition.

We are also subject to shrinkage of inventory at our stores and facilities, and if we are unable to control such shrinkage, our sales yields will be negatively affected.

Further, while our property insurance covers certain of our inventory and losses, insurance coverage has become more expensive, which has resulted in increased premiums and deductibles. The insurance we do carry may not continue to be available on commercially reasonable terms and, in any event, may not be adequate to cover all possible losses that our business could suffer. In the event that we suffer a catastrophic loss of any or all of our facilities or the secondhand items in such facilities, our liabilities may exceed the maximum insurance coverage amount, which could adversely affect our business and results of operations.

A failure to retain key store and processing center management personnel could materially and adversely affect our business.

Our performance also depends on recruiting, hiring, developing, training, and retaining talented key management personnel for our stores and processing facilities. Similar to other retailers, we face challenges in securing and retaining sufficient talent in key management for many reasons, including competition for talent in the retail industry and in various geographic markets. In addition, because of the distinctive nature of our business model, which emphasizes promotion from within, we must provide significant internal training and development for key management personnel across the company and must effectively manage succession planning. If we do not effectively attract qualified individuals, train them in our business model and operating procedures, support their development, engage them in our business, and retain them in sufficient numbers and at appropriate levels of the organization, our growth could be limited, and the successful execution of our business model could be adversely affected.

Labor-related matters, including labor disputes, may adversely affect our operations.

None of our employees are currently represented by a union. If our employees decide to form or affiliate with a union, we cannot predict the effects such future organizational activities will have on our business and operations. If we were to become subject to work stoppages, we could experience disruption in our operations, including increases in our labor costs, which could harm our business, results of operations and financial condition.

In addition, we have in the past and could face in the future a variety of employee claims against us, including but not limited to general discrimination, privacy, wage and hour, labor and employment, Employee Retirement Income Security Act (“ERISA”) and disability claims. Any claims could also result

 

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in litigation against us or regulatory proceedings being brought against us by various federal and state agencies that regulate our business, including the U.S. Equal Employment Opportunity Commission. Often these cases raise complex factual and legal issues and create risks and uncertainties.

Acquisitions could be difficult to identify, pose integration challenges, divert the attention of management, disrupt our business, dilute stockholder value, and adversely affect our results of operations and expansion prospects.

We have in the past and may in the future make acquisitions of other companies or technologies. Competition within our industry for acquisitions of businesses (such as the 2nd Ave. Acquisition) may become intense, and we have limited experience in acquisitions. As such, even if we are able to identify a target for acquisition, we may not be able to complete the acquisition on commercially reasonable terms, or such target may be acquired by another company including, potentially, one of our competitors. Negotiations for such potential acquisitions may result in diversion of management time and significant out-of-pocket costs. If we do complete acquisitions, we may not ultimately strengthen our competitive position, realize the benefits from the acquired business or otherwise achieve our goals, and any acquisitions we complete could be viewed negatively by customers, team members, or investors or result in the incurrence of significant other liabilities. We may also not be able to successfully integrate the acquired operations, systems (including financial, inventory, customer and other systems), team members and facilities into our company, and the time and resources spent on such integration could be greater than expected. We may expend significant cash or incur substantial debt to finance such acquisitions, which indebtedness may restrict our business or require the use of available cash to make interest and principal payments. In addition, we may finance or otherwise complete acquisitions by issuing equity or convertible debt securities, which may result in further dilution of our existing stockholders. For example, we spent significant time and resources and incurred a significant amount of debt to finance the 2nd Ave. Acquisition, and expect to spend significant additional resources on integrating the 2nd Ave. operations, including 12 new stores, into our business. Doing so may take more time or use more resources than we expect, and we may not be successful at all in realizing our goals in the transaction. Additionally, the time and resources we spend toward integrating 2nd Ave. operations, systems (including financial, inventory, customer and other systems), team members and facilities may be a significant distraction to successfully growing the rest of our business. If we fail to evaluate and execute acquisitions successfully or fail to successfully address any of these risks, our results of operations and expansion prospects may be harmed.

We face risks related to acquisitions or joint ventures we may pursue.

We may in the future seek to acquire businesses, products or technologies that we believe could complement our business, extend our store footprint into new localities, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. Any acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In addition, we have limited experience in acquiring other businesses. If we acquire additional businesses, we may not be able to successfully integrate the acquired personnel, operations, systems and technologies, or effectively manage the combined business following the acquisition. Specifically, we may not successfully evaluate or utilize the acquired business, operations, systems, technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown risks or liabilities.

We may not be able to find and identify desirable acquisition targets or we may not be successful in entering into an agreement with any one target. Acquisitions could also result in dilutive issuances of

 

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equity securities or the incurrence of debt, which could harm our results of operations. In addition, if an acquired business fails to meet our expectations, our business, results of operations and financial condition may suffer.

Actions by wholesale customers could harm our brands and reputation, influence donor behavior and adversely affect our relationships with our NPPs and our customers.

We believe that our brands and reputation have significantly contributed to the success of our business. Our reputation, brands and ability to build trust with existing and new customers, donors and NPPs may be adversely affected by complaints and negative publicity about us and our merchandise, even if factually incorrect or based on isolated incidents. Our ability to attract and retain customers and maintain or enhance our relationships with NPPs and their donors is highly dependent upon external perceptions of our company, and damage to our brands and reputation may be caused by wholesale customers that improperly use or dispose of the items we sell to them. These and other events that may harm our brands and reputation could diminish the confidence of our customers in our products and shopping experience and could negatively impact the acceptance by our NPPs and their donors of our company and our business model. These risks could have an adverse effect on our business, financial condition and results of operations. Such events could also cause our stockholders to sell or otherwise dispose of a significant number of shares of our common stock, which may have a significant adverse effect on the trading price of our common stock.

Disruptions in the wholesale markets due to market conditions, conditions in the countries where our wholesale goods are sold or other factors may adversely affect our business.

Much of the merchandise we purchase from our NPPs is not sold in our stores, but instead is sold into the global wholesale secondhand goods market. We have in the past, and may in the future, experience fluctuations and disruptions in this market. These fluctuations and disruptions could be caused by an influx of inexpensive textiles or other replacement goods that could compete with the secondhand goods we offer. In addition, a change in the end markets in which these goods are sold could affect demand for secondhand goods in the wholesale market. These end markets may be affected negatively by natural disasters, civil unrest, economic conditions or other localized or regional events. Further, changes in laws, rules and regulations in the end markets could also negatively affect demand for or price of secondhand items. If we are unable to sell a sufficient amount of secondhand goods into the wholesale market, our business, our reputation and our revenues, profitability, results of operations and financial condition could be materially and adversely affected.

Our business could be negatively impacted by a failure to live up to our commitments to, or our failure to appropriately address existing and emerging matters relating to, sustainability and good corporate citizenship and diversity.

Our company is premised on a focus on sustainability and the reduction of waste in our local communities and in the textile and other industries through thrift, reuse and repurposing. We also seek to maintain good corporate citizenship and continuously strive for a more inclusive and diverse workplace. Our mission is to promote a more sustainable future by making secondhand second nature and positively impacting the communities we operate in. Our company is committed to a focus on sustainability and the reduction of waste in our local communities through thrift, reuse and repurposing. We also seek to maintain good corporate citizenship and continuously strive for a more inclusive and diverse workplace. Our commitment to such matters may require us to devote additional resources in our review of prospective investments and our operations and could increase the amount of expenses we are required to bear, which could lead to reduced profitability. In addition, if incidents occur in which we fail, or are perceived to have failed, to live up to our commitments to sustainability, good corporate citizenship or diversity, or if we fail to accurately report our progress toward such commitments,

 

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negative publicity with respect to any such incident could discourage our customers from shopping at our stores, causing our net sales to decrease, and could negatively impact our relationships with our NPPs and their donors, causing the quantity and quality of secondhand goods we receive to decrease (and thus negatively impacting our revenues and sales yields). We could also be criticized for the scope of our sustainability, good corporate citizenship or diversity commitments and engagement; or for a perceived lack of sustainability, good corporate citizenship or diversity commitments and engagement; or for any perceived lack of transparency about such matters, which in turn could have a negative impact on stakeholder perception and stakeholder engagement with our business. This may also impact our ability to attract and retain talent to compete in the marketplace. These risks could therefore have a material and adverse effect on our business, results of operations and financial condition.

The market in which we participate is competitive and rapidly changing, and if we do not compete effectively with established companies as well as new market entrants or maintain and develop strategic relationships with NPPs, our business, results of operations and financial condition could be harmed.

The markets for resale and secondhand items are highly competitive. We compete with vendors of new and secondhand items, including branded goods stores, local, national and global department stores, consignment and thrift stores (including non-profit operators), specialty retailers, direct-to-consumer, retailers, discount chains, independent retail stores, the offerings of other retail competitors, resale players focused on niche or single categories, as well as internet-based secondhand retailers and other technology-enabled marketplaces. We believe our ability to compete depends on many factors, many of which are beyond our control, including:

 

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maintaining favorable brand recognition;

 

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identifying and delivering quality secondhand items;

 

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maintaining and increasing the amount, diversity and quality of secondhand items that we offer;

 

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our ability to expand the means through which we acquire and offer secondhand items for resale;

 

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attracting and retaining suitable workers for our stores and processing facilities and managing labor costs;

 

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attracting donors and retaining relationships with NPPs;

 

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the ease with which our customers and NPPs and their donors can supply, purchase and return secondhand items;

 

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the price at which secondhand items are offered;

 

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the speed and cost at which we can process and make available secondhand items to our customers; and

 

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attracting and retaining customers and increasing the volume of secondhand items they buy.

As our market evolves and we begin to compete with new market entrants, we expect competition to intensify in the future. Established companies may not only develop their own platforms and competing lines of business, but also acquire or establish cooperative relationships with our current competitors or provide meaningful incentives to third parties to favor their offerings over our stores. The performance of our competitors as well as changes in their pricing and promotional policies, marketing activities, new location openings, merchandising and operational strategies could negatively impact our sales and profitability.

Many of our existing competitors have, and some of our potential competitors or potential alliances among competitors could have, substantial competitive advantages such as greater brand name

 

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recognition and longer operating histories; larger fulfillment infrastructures; greater technical capabilities; internet-based marketplaces; broader supply; established relationships with a larger existing customer and/or NPP and donor base; better access to merchandise; superior or more desirable secondhand items for sale or resale; greater customer service resources; greater financial, marketing, institutional and other resources; greater resources to make acquisitions; lower labor and development costs; larger and more mature intellectual property portfolios; and better access to capital markets than we do. Such competitors with greater financial and operating resources may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements and derive greater revenue and profits from their existing customer bases, adopt more aggressive pricing policies to build larger customer or NPP bases, or respond more quickly than we can to new or emerging technologies and changes in consumer shopping behavior.

If we are unsuccessful in establishing or maintaining our relationships with our NPPs, or if they partner with our competitors and devote greater resources to implement and support the platforms or retail items of our competitors, our ability to compete in the marketplace, or to grow our revenue, could be impaired, and the results of our operations may suffer. Even if these partnerships and any future partnerships we undertake are successful, these relationships may not result in increased buying and selling through our stores or increased revenue.

Conditions in our market could also change rapidly and significantly as a result of technological advancements, partnering by our competitors or continuing market consolidation or strategic changes we or our competitors make in response to the COVID-19 pandemic, and it is uncertain how our market will evolve. These competitive pressures in our market or our failure to compete effectively may result in price reductions, fewer customers and NPPs, reduced revenue, reduced profitability, increased net losses, and loss of market share. Any failure to meet and address these factors could harm our business, results of operations and financial condition.

National retailers and brands set their own retail prices and promotional discounts on new items, which could adversely affect our value proposition to customers and harm our business, results of operations and financial condition.

National retailers and brands set pricing for their own new retail items, which can include promotional discounts. For example, there may be reductions in the price of new retail items in light of the economic downturn caused by the COVID-19 pandemic. Promotional pricing by these parties may adversely affect the relative value of secondhand items offered for resale with us. In order to attract customers to our stores, the prices for the secondhand items sold through our stores may need to be lowered in order to compete with pricing strategies employed by national retailers and brands for their own new retail items. These pricing changes and promotional discounts could, as a result, adversely affect our business, revenue, growth, results of operations and financial condition.

Natural disasters, pandemics, geo-political events and other highly disruptive events could materially and adversely affect our business, financial condition and results of operations.

The occurrence of one or more natural disasters, such as fires, hurricanes, tornados, tsunamis, floods and earthquakes, geo-political events or terrorist or military activities disrupting transportation, communication or utility systems (such as the ongoing military conflict between Russia and Ukraine) or other highly disruptive events, such as nuclear accidents, public health epidemics or pandemics (such as the ongoing COVID-19 outbreak), unusual weather conditions, widespread supply chain disruptions or cyberattacks, could adversely affect our business operations and financial performance. Such events could result in physical damage to or destruction or disruption of one or more of our properties (including our corporate offices, Centralized Processing Centers, other processing facilities and stores) or properties used by NPPs in connection with the supply of secondhand items to us, negative impacts

 

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on our team members in parts or all of our operations, supply chain disruptions, data, utility and communications disruptions, fewer customers visiting our stores, including due to quarantines or public health crises and the inability of our customers to reach or have transportation to our stores directly affected by such events. Such events could cause us to incur significant costs to relocate or re-establish these functions and negatively impact our operating results. These events could also negatively impact the willingness of donors to donate items to our NPPs (either directly to our NPPs or through OSDs), which would adversely affect the price, quantity and quality of secondhand items we are able to purchase. In addition, these events could cause a temporary reduction in consumer sales or the ability to sell our items or could indirectly result in increases in the costs of our insurance if they result in significant loss of property or other insurable damage. These factors could also cause reputational harm, decreased consumer confidence and spending and/or increased volatility in the United States, Canada and global financial markets and economies. Any of these developments could have a material and adverse effect on our business, financial condition and results of operations.

Our advertising activity may fail to efficiently drive growth in customers, which could harm our business, results of operations and financial condition.

Our future growth and potential profitability will depend in large part upon the effectiveness and efficiency of our advertising, promotion, public relations and marketing programs, and we are investing in these activities. Our advertising activities may not yield increased revenue and the efficacy of these activities will depend on a number of factors, including our ability to:

 

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determine the effective creative message and media mix for advertising, marketing and promotional expenditures;

 

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select the right markets, media and specific media vehicles in which to advertise;

 

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identify the most effective and efficient level of spending in each market, media and specific media vehicle; and

 

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effectively manage marketing costs, including creative and media expenses, to maintain acceptable customer acquisition costs.

We closely monitor the effectiveness of our advertising campaigns and changes in the advertising market, and adjust or re-allocate our advertising spend across channels, customer segments and geographic markets in real-time to optimize the effectiveness of these activities. We expect to increase advertising spend in future periods to continue driving our growth. Increases in the pricing of one or more of our marketing and advertising channels could increase our marketing and advertising expenses or cause us to choose less expensive but possibly less effective marketing and advertising channels. If we implement new marketing and advertising strategies, we may incur significantly higher costs than our current channels, which, in turn, could adversely affect our results of operations.

Implementing new marketing and advertising strategies also could increase the risk of devoting significant capital and other resources to endeavors that do not prove to be cost effective. We also may incur marketing and advertising expenses significantly in advance of the time we anticipate recognizing revenue associated with such expenses and our marketing and advertising expenditures may not generate sufficient levels of brand awareness or result in increased revenue. Even if our marketing and advertising expenses result in increased sales (or donations made to our NPPs), the increase might not offset our related expenditures. If we are unable to maintain our marketing and advertising channels on cost-effective terms or replace or supplement existing marketing and advertising channels with similarly or more effective channels, our marketing and advertising expenses could increase substantially, our customer base could be adversely affected, our brands could suffer and our business, results of operations and financial condition could be harmed.

 

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We may not succeed in promoting and maintaining our reputation, which could harm our business and future growth.

We believe that maintaining our reputation is critical to driving customer and NPP and donor engagement. An important goal of our brand promotion strategy is establishing trust with our customers and NPPs and their donors.

For customers, maintaining our reputation requires that we foster trust through responsive and effective customer service and a broad supply of desirable brands and secondhand items. For NPPs and their donors, maintaining our brands and reputation requires that we foster convenience with service that is convenient, consistent and timely. We must also maintain trust through consistent receiving and payment processes for secondhand items supplied to us. Our payments must also be perceived by our NPPs to be adequate compensation for the items they collect.

If we fail to maintain our reputation with our customers, our revenues could be materially and adversely affected. If we fail to maintain our reputation with our NPPs and their donors, the quantity and quality of goods supplied to us could be materially and adversely affected. As a result, a failure to maintain our reputation could have a material, adverse effect on our business, growth, results of operations and financial condition.

Certain estimates of market opportunity and our customer and NPP and donor metrics included in this prospectus may prove to be inaccurate, and any real or perceived inaccuracies may harm our reputation and negatively affect our business.

This prospectus includes our estimates, based on research, surveys and internally generated data, of the addressable market for our company and metrics related to our customers and NPPs and their donors. Market opportunity estimates, whether obtained from third-party sources or developed internally, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts in this prospectus relating to the size of our target market, market demand, capacity to address this demand, and pricing may prove to be inaccurate. The addressable market we estimate may not materialize for many years, if ever.

We may not be able to address fully the markets that we believe we can address, and we cannot be sure that these markets will grow at historical rates or the rates we expect for the future. Even if we are able to address the markets that we believe represent our market opportunity and even if these markets experience the growth we expect, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the estimates and forecasts of market size and opportunity and of market growth included in this prospectus may not be indicative of our future growth.

Certain metrics presented in this prospectus, including the numbers of customers and NPPs and their donors, are based on market research, internally generated data, assumptions and estimates, and we use these numbers in managing our business. To the extent the metrics are inaccurate, our business decisions based on such metrics may prove to be incorrect. If investors or analysts do not perceive our metrics to be accurate representations of our business, or if we discover material inaccuracies in our metrics or the underlying information, our reputation, business, results of operations and financial condition would be harmed.

 

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Risks Relating to Information Technology, Intellectual Property, Data Security and Privacy

Compromises of our data security could cause us to incur unexpected expenses and may materially harm our reputation and results of operations.

In the ordinary course of our business, we collect, process and store certain personal information and other data relating to individuals, such as our customers and employees. We also maintain other information, such as financial information, operating statistics and metrics, trade secrets and confidential business information and certain confidential information of third parties, that is sensitive and that we seek to protect.

We rely substantially on commercially available systems, software, tools and monitoring to provide security for our processing, transmission and storage of personal information and other confidential information. We have been in the past and could be in the future the subject of hacking, phishing attacks, data breaches, ransomware attacks or other attacks. For example, in July 2020, we suffered a ransomware attack that caused the loss of some of our data and caused some temporary operational disruptions. These incidents have allowed, and may in the future continue to allow, hackers or other unauthorized parties to gain access to personal information or other data, including payment card data or confidential business information, and we might not discover such issues for an extended period. The techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not identified until they are launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, our employees, NPPs or other third parties with whom we do business may attempt to circumvent security measures in order to misappropriate such personal information, confidential information or other data, or may inadvertently release or compromise such data. We are also affected by the security practices of our third-party service providers, which may be outside of our direct control. If these third parties fail to adhere to adequate security practices, or experience a breach of their networks, our users’ data may be improperly accessed, used or disclosed, and our business operations may be disrupted. We expect to incur ongoing costs associated with the detection and prevention of security breaches and other security-related incidents. In addition, we provide the audit committee of our board of directors regular reports on such breaches or incidents, including the July 2020 incident, and on our efforts to implement more robust security measures. We may incur additional costs in the event of a security breach or other security-related incident. Any actual or perceived compromise of our systems or data security measures or those of third parties with whom we do business, or any failure to prevent or mitigate the loss of personal or other confidential information and delays in detecting or providing notice of any such compromise or loss could disrupt our operations, harm the perception of our security measures, damage our reputation, cause some participants to decrease or stop their visiting of our stores and subject us to litigation, government action, increased transaction fees, regulatory fines or penalties or other additional costs and liabilities that could adversely affect our business, results of operations and financial condition.

Our insurance coverage may not be adequate for data handling or data security liabilities, and that insurance may not continue to be available to us on economically reasonable terms, or at all. An insurer may also deny coverage as to a future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could harm our business, results of operations, financial condition and reputation.

In addition, the changes in our work environment as a result of the COVID-19 pandemic could impact the security of our systems, as well as our ability to protect against attacks and detect and respond to them quickly. Any rapid adoption by us of third-party services designed to enable the transition to a remote workforce also may introduce security risk that is not fully mitigated prior to the

 

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use of these services. We may also be subject to increased cyber-attacks, such as phishing attacks by threat actors using the attention placed on the COVID-19 pandemic as a method for targeting our personnel.

Our use and other processing of personal information and other data is subject to laws and regulations relating to privacy, data protection and information security. Changes in such laws or regulations, or any actual or perceived failure by us to comply with such laws and regulations, our privacy policies and/or contractual obligations, could adversely affect our business, results of operations and financial condition.

We collect, maintain and otherwise process significant amounts of personal information and other data relating to our customers, employees and other individuals. Numerous state, federal and international laws, rules and regulations govern the collection, use and protection of personal information and other types of data we collect, use, disclose and otherwise process. Such requirements are constantly evolving, and we expect that there will continue to be new proposed requirements relating to privacy, data protection and information security in the United States, Canada and other jurisdictions, or changes in the interpretation of existing privacy requirements. For example, the California Consumer Privacy Act (“CCPA”) took effect on January 1, 2020 and broadly defines personal information, imposes stringent consumer data protection requirements, gives California residents expanded privacy rights, provides for civil penalties for violations and introduces a private right of action for data breaches. Additionally, on November 3, 2020, Proposition 24 was approved in California which creates a new privacy law, the California Privacy Rights Act (“CPRA”). The CPRA creates additional obligations relating to personal information that will take effect on January 1, 2023 (with certain provisions having retroactive effect to January 1, 2022). We will continue to monitor developments related to the CPRA and anticipate additional costs and expenses associated with CPRA compliance. Additionally, the CCPA has prompted other states to propose and enact similar laws and regulations relating to privacy. For example, in March 2021, Virginia enacted the Virginia Consumer Data Protection Act (“CDPA”) which becomes effective on January 1, 2023, and on June 8, 2021, Colorado enacted the Colorado Privacy Act (“CPA”) which takes effect on July 1, 2023. The CDPA and CPA share similarities with the CCPA, the CPRA, and legislation proposed in other states. Aspects of the CCPA, CPRA, CDPA, and CPA, and their interpretation, remain unclear, and we cannot yet fully predict the impact of these laws or regulations on our business or operations.

We have significant operations in Canada and Australia, and must comply with data privacy laws in both jurisdictions. In Canada, our collection, use, disclosure, and management of personal information must comply with both federal and provincial privacy laws, which impose separate requirements, but may overlap in some instances. The Personal Information Protection and Electronic Documents Act (“PIPEDA”) applies in all Canadian provinces except, in certain contexts, Alberta, British Columbia and Québec, as well as to the transfer of personal information across provincial or international borders. PIPEDA imposes stringent personal information protection obligations, requires privacy breach reporting, and limits the purposes for which organizations may collect, use, and disclose personal information, which includes consumer data. The provinces of Alberta, British Columbia, and Québec have enacted separate data privacy laws that are substantially similar to PIPEDA, but, among other differences, all three additionally apply to our handling of our own employees’ personal data within their respective provinces. We may incur additional costs and expenses related to compliance with these laws. We are also subject to Canada’s anti-spam legislation (“CASL”) which includes rules governing commercial electronic messages, which include marketing emails, text messages, and social media messages. Under these rules, we must follow certain standards when sending marketing messages, and, among other requirements, are prohibited from sending them without the recipient’s consent (or there is a statutory exception to the requirement for consent), and can be held liable for violations. In Australia, the Privacy Act 1988 and the Australian Privacy Principles (“APPs”) regulate the handling of personal information, which is defined in similar

 

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terms to the CCPA. The Privacy Act and the APPs set out data protection principles for how personal information should be collected, used, stored and disclosed, and when an entity must provide notice if personal information has been lost or accessed without authorization. The Privacy Act also gives the Australian Information Commissioner the power to conduct investigations, and contains civil penalties for breach. The Privacy Act is currently under review and may be amended to include more stringent requirements, including mandating the destruction or de-identification of personal information in certain circumstances. We may also be subject to the Spam Act 2003 and the Do Not Call Register Act 2006 which regulate the sending of commercial electronic messages and telemarketing activities. To the extent our operations further expand internationally, we may become subject to additional laws and regulations relating to privacy and data protection.

Future requirements, or changes in the interpretation of existing requirements relating to privacy, data protection and information security may, among other requirements, require us to implement privacy and security policies, provide certain types of notices, grant certain rights to individuals, inform individuals of security breaches and, in some cases, obtain individuals’ consent to use personal data for certain purposes. For example, in Canada, major amendments to the privacy law in Quebec are coming into force between September 2022 and September 2024, and a bill for a replacement to PIPEDA has been tabled and is currently working its way through the Canadian federal legislative process. These requirements may be inconsistent from one jurisdiction to another, subject to differing interpretations and may be interpreted to conflict with our practices. We cannot yet fully determine the impact that such future requirements may have on our business or operations. Additionally, we are subject to the terms of our privacy policies and notices and may be bound by contractual requirements applicable to our collection, use, processing, security and disclosure of personal information, and may be bound by or alleged to be subject to, or voluntarily comply with, self-regulatory or other industry standards relating to these matters.

Any failure or perceived failure by us or any third parties with which we do business to comply with these privacy requirements, with our posted privacy policies or with other obligations to which we or such third parties are or may become subject relating to privacy, data protection or information security, may result in investigations or enforcement actions against us by governmental entities, private claims, public statements against us by consumer advocacy groups or others and fines, penalties or other liabilities. For example, California consumers whose information has been subject to a security incident may bring civil suits under the CCPA for statutory damages between $100 and $750 per consumer. In Canada, we may be subject to regulatory investigations, fines, or class action suits stemming from violations of PIPEDA, provincial data privacy laws or CASL. Any such action would be expensive to defend, likely would damage our reputation and market position, could result in substantial liability and could adversely affect our business and results of operations.

We may be unable to protect our intellectual property rights.

We rely on a combination of intellectual property rights, contractual protections and other practices to protect our brands, proprietary information, technologies and processes. We primarily rely on copyright and trade secret laws and exclusive licenses-in to protect our proprietary technologies and processes, including the automated operations systems and machine learning technology we use throughout our business. Others may independently develop the same or similar technologies and processes or may improperly acquire and use information about our technologies and processes, which may allow them to provide a service similar to ours, which could harm our competitive position. Our principal trademark assets include the registered and common law trademarks “Savers Value Village,” “Savers,” “Value Village,” “Village des Valeurs,” “Unique,” “2nd Ave.,” “GreenDrop,” “Super Savers Club,” “Community Donation Center” and “Thrift Proud” and our logos and taglines. Our trademarks are valuable assets that support our brands and customers’ perception of our services and merchandise. We have registered trademarks in Australia, Canada and the United States. We also

 

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hold the rights to the “savers.com” Internet domain name and various related domain names, which are subject to Internet regulatory bodies and trademark and other related laws of each applicable jurisdiction. If we are unable to protect our trademarks or domain names, our brand recognition and reputation would suffer, we would incur significant expense establishing new brands and our results of operations would be adversely impacted. Further, to the extent we pursue patent protection for our innovations, patents we may apply for may not issue, and patents that do issue or that we acquire may not provide us with any competitive advantages or may be challenged by third parties. There can be no assurance that any patents we obtain will adequately protect our inventions or survive a legal challenge, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain. We may be required to spend significant resources to monitor and protect our intellectual property rights, and the efforts we take to protect our proprietary rights may not be sufficient.

We rely in part on trade secrets, proprietary know-how and other confidential information to maintain our competitive position. Although we enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships, partnerships and business alliances, no assurance can be given that these agreements will be effective in controlling access to and distribution of our proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our automation technologies or technologies related to our operations or services.

To protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights, and we may or may not be able to detect infringement by third parties. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Such litigation could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay the implementation of our platform, impair the functionality of our platform, delay introductions of new capabilities, result in our substituting inferior or more costly technologies into our business, or injure our reputation. In addition, we may be required to license additional technology from third parties to develop and market new capabilities, and we cannot assure you that we could license that technology on commercially reasonable terms or at all, and our inability to license this technology could harm our ability to compete.

We may be accused of infringing intellectual property or other proprietary rights of third parties.

We have been in the past and may be accused in the future of infringing intellectual property or other proprietary rights of third parties. We are also at risk of claims by others that we have infringed their copyrights, trademarks or patents, or improperly used or disclosed their trade secrets or otherwise infringed or violated their proprietary rights, such as the right of publicity. For example, although we require our employees to not use the proprietary information or know-how of others in their work for us, we may become subject to claims that these employees have divulged, or we have used, proprietary information of these employees’ former employers. The costs of supporting any litigation or disputes related to these claims can be considerable, and we cannot assure you that we will achieve a favorable outcome of any such claim. If any such claim is valid, we may be compelled to cease our use of such intellectual property or other proprietary rights and pay damages, which could adversely affect our business. In addition, if such claims are valid, we may lose valuable intellectual property rights or

 

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personnel, which could harm our business. Even if such claims were not valid, defending them could be expensive and distracting, adversely affecting our results of operations.

We rely on software, technology and services from other parties. Defects in or the loss of access to software or services from third parties could increase our costs and adversely affect the quality of our products.

We rely on software, technologies and services sourced or licensed from third parties to operate critical functions of our business, including payment processing services, certain aspects of CPC automation and customer relationship management services. We also use Microsoft services for our business emails, file storage and communications. Our business would be disrupted if any of the third-party software or services we utilize, or functional equivalents thereof, were unavailable due to extended outages or interruptions or because they are no longer available on commercially reasonable terms or prices. In each case, we would be required to either seek licenses to software or services from other parties and redesign our business and operations to function with such software or services or develop these components ourselves, which would result in increased costs.

Risks Relating to Legal, Regulatory, Accounting and Tax Matters

Risks arising from the material weaknesses we have identified in our internal control over financial reporting and any failure to remediate these material weaknesses.

As a public company, we will be required to maintain internal control over financial reporting in accordance with applicable rules and guidance and to report any material weaknesses in such internal control over financial reporting. Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. In connection with this filing, we identified deficiencies in our internal control over financial reporting, which in the aggregate, constitute material weaknesses related to (i) the sufficiency of technical accounting and SEC reporting expertise within our accounting and financial reporting function, (ii) the establishment and documentation of clearly defined roles within our finance and accounting functions and (iii) our ability to evidence the design and implementation of effective information technology general controls (“ITGCs”) for information systems and applications that are relevant to the preparation of our financial statements.

If our steps are insufficient to successfully remediate the material weaknesses and otherwise establish and maintain an effective system of internal control over financial reporting, the reliability of our financial reporting, investor confidence in us, and the value of our common stock could be materially and adversely affected. We may not be able to remediate the identified material weaknesses, and additional material weaknesses or significant deficiencies in our internal control over financial reporting may be identified in the future. Effective internal control over financial reporting is necessary for us to provide reliable and timely financial reports and, together with adequate disclosure controls and procedures, are designed to reasonably detect and prevent fraud. Our failure to implement and maintain effective internal control over financial reporting, to remedy identified material weaknesses or significant deficiencies or to implement required new or improved controls could result in errors in our financial statements that could result in a restatement of our financial statements or cause us to fail to timely meet our financial and other reporting obligations.

 

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We may be unable to maintain an effective system of disclosure controls and procedures or internal control over financial reporting and produce timely and accurate financial statements or comply with applicable regulations.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) the Sarbanes-Oxley Act, and, if approved for listing, the rules and regulations and the listing standards of the New York Stock Exchange (the “NYSE”).

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight.

In addition to the material weaknesses in our internal control over financial reporting that we have identified, we may discover weaknesses in our disclosure controls and procedures and internal control over financial reporting in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could cause delays in our ability to comply with public company reporting requirements (including under the Exchange Act or stock exchange rules) and could also cause investors to lose confidence in our reported financial and other information, which could have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE. We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material adverse effect on our business and operating results and could cause a decline in the price of our common stock.

 

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We will incur increased expenses associated with being a public company.

As a public company, we will incur significant legal, accounting, investor relations and other expenses that we did not incur as a private company, and we may not be eligible to use the scaled disclosure standards applicable to “emerging growth companies” under the JOBS Act. For example, we will be subject to the reporting requirements of the Exchange Act, and will be required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC and the NYSE, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that the requirements of operating as a public company will increase our legal and financial compliance and investor relations costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company, as defined by the JOBS Act. We will also need to establish an investor relations function. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of those costs.

Public company reporting and disclosure obligations and a broader shareholder base as a result of our status as a public company may expose us to a greater risk of claims by shareholders, and we may experience threatened or actual litigation from time to time. If claims asserted in such litigation are successful, our business and operating results could be adversely affected, and, even if claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them and the diversion of management resources, could adversely affect our business and operating results.

Changes in Canadian, Australian or U.S. national or local regulations, including those relating to the sale of secondhand items and advertising practices, or our actual or alleged failure to comply with such regulations may have a material adverse effect on our reputation, business, financial condition and results of operations.

Our business and financial condition could be adversely affected by unfavorable changes in or interpretations of existing laws, rules and regulations or the promulgation of new laws, rules and regulations applicable to us and our business, including those relating to consumer protection, anti-corruption, antitrust and competition, economic and trade sanctions, tax, banking, environmental protection, waste management, sustainability, data security, network and information systems security, data protection and privacy. As a result, regulatory authorities could prevent or temporarily suspend us from conducting some or all of our activities or otherwise penalize us if our practices were found not to comply with applicable regulatory or licensing requirements or any binding interpretation of such requirements. Unfavorable changes or interpretations could decrease demand for our merchandise, limit marketing methods and capabilities, affect our growth, increase costs or subject us to additional liabilities. In addition, if we were to further expand internationally, we could be subject to additional regulation.

The resale of secondhand items is subject to regulation, including by regulatory bodies such as the U.S. Consumer Product Safety Commission, the U.S. Federal Trade Commission (the “FTC”), the U.S. Fish and Wildlife Service and other international, federal, state and local governments and regulatory authorities. These laws and regulations are complex, vary from jurisdiction to jurisdiction and change often. We monitor these laws and regulations and adjust our business practices as warranted to comply. We receive our supply of secondhand items from numerous NPPs and their donors located in approximately 27 U.S. states, and the items we receive from our NPPs and their donors may contain

 

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materials such as ivory, fur, snakeskin and other exotic animal product components, that are subject to regulation in the United States and overseas. In Canada, we follow the Wild Animal and Plant Protection and Regulation of International and Interprovincial Trade Act, which, among other things, restricts the sale of ivory and other protected species. In Australia, we are prohibited from trading in certain animal products because Australia is a signatory to the Convention on International Trade in Endangered Species of Wild Fauna and Flora. Failure of our employees to identify prohibited items and remove them from the sale process could lead to violations of regulations or other claims against us, resulting in increased legal expenses and costs. Moreover, in connection with our marketing and advertisement practices, we have been in the past, are currently and may in the future be, the target of claims relating to false or deceptive advertising, including under the auspices of the FTC and the consumer protection statutes of some states. Failure by us to prevail on existing claims relating to false or deceptive advertising, effectively monitor the application of these laws and regulations to our business, and to comply with such laws and regulations, may negatively affect our brands, adversely impact our relationships with our NPPs and subject us to penalties and fines.

Numerous jurisdictions, including the States of California and New York, Canada, and Australia, have regulations regarding the handling of secondhand items and licensing requirements of secondhand dealers. In Canada, we follow the Canada Consumer Product Safety Act Health Canada’s “Industry Guide to Second-Hand Products (Including Children’s Products), which guides businesses selling second-hand products ensure all appropriate steps are taken to ensure consumer product safety, including with regard to product recalls. In Australia, product safety regulation is a shared responsibility between the Australian Competition and Consumer Commission and the product regulators in each of the Australian States and Territories. In Australia, all consumer products, regardless of whether they are secondhand or new, must be safe and meet the consumer guarantees under the Australian Consumer Law which include that products are of acceptable quality, match their description and are fit for purpose, and that any express warranties will be met. We must ensure that we meet mandatory reporting requirements if there is a risk that a product is not safe, and that we do not sell banned or recalled products. In addition, some products such as aquatic toys and certain goods designed for use by babies and children are regulated by mandatory product safety standards. There are serious penalties for selling non-compliant products. We must also be registered with the regulatory bodies in each of the Australian States and Territories to sell secondhand goods. Such government regulations could require us to change the way we conduct business in the applicable jurisdictions, such as prohibiting or otherwise restricting the sale or shipment of certain items in some locations. These regulations could result in increased costs or reduced revenue. We could also be subject to fines or other penalties that could harm our business.

Additionally, supplied secondhand items could be subject to recalls and other remedial actions and product safety, labeling and licensing concerns may require us to voluntarily remove certain secondhand items from our stores. Such recalls or voluntary removal of items can result in, among other things, lost sales, diverted resources, potential harm to our reputation and increased customer service costs and legal expenses, which could have an adverse effect on our results of operations. Some of the secondhand items sold at our stores may expose us to product liability claims and litigation or regulatory action relating to personal injury, environmental or property damage. We cannot be certain that our insurance coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms or at all.

Our failure to address risks associated with payment methods, credit card fraud and other consumer fraud, or our failure to control any such fraud, could damage our reputation and brands and could harm our business, results of operations and financial condition.

We have in the past incurred and may in the future incur losses from various types of fraudulent transactions, including the use of stolen credit card numbers, and claims that a customer did not

 

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authorize a purchase. In addition, as part of the payment processing process, our customers’ credit and debit card information is transmitted to our third-party payment processors, and we may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our customers’ credit or debit card information if the security of our third-party credit card payment processors are breached.

We and our third-party credit card payment processors are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we or our third-party credit card payment processors fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers. Further, we could violate or be alleged to have violated applicable laws, regulations, contractual obligations or other obligations, including those regulating to privacy, data protection and data security as outlined above, and including harm to our reputation and market position. Any of these could have an adverse impact on our business, results of operations, financial condition and prospects. Our failure to adequately prevent fraudulent transactions could damage our reputation and market position, result in claims, litigation or regulatory investigations and proceedings or lead to expenses that could harm our business, results of operations and financial condition.

We and our directors and executive officers may be subject to litigation for a variety of claims, which could harm our reputation and adversely affect our business, results of operations and financial condition.

In the ordinary course of business, we have in the past and may in the future be involved in and subject to litigation for a variety of claims or disputes and receive regulatory inquiries. These claims, lawsuits and proceedings could include labor and employment, wage and hour, commercial, consumer protection, regulatory, antitrust, alleged securities law violations or other investor claims, claims that our employees have wrongfully disclosed or we have wrongfully used proprietary information of our employees’ former employers and other matters. The number and significance of these potential claims and disputes may increase as our business expands. Further, our general liability insurance may not cover all potential claims made against us or be sufficient to indemnify us for all liability that may be imposed. Any claim against us, regardless of its merit, could be costly, divert management’s attention and operational resources, and harm our reputation.

Our directors and executive officers may also be subject to litigation. The limitation of liability and indemnification provisions that are included in our amended and restated certificate of incorporation, our amended and restated bylaws and indemnification agreements that we entered into with our directors and executive officers provide that we will indemnify our directors and officers to the fullest extent permitted by Delaware law and may discourage stockholders from bringing a lawsuit against our directors and executive officers for breach of their fiduciary duties. Such provisions may also reduce the likelihood of derivative litigation against our directors and executive officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholder’s investment may be harmed to the extent that we pay the costs of settlement and damage awards against our directors and executive officers as required by these indemnification provisions. We have obtained insurance policies under which, subject to the limitations of the policies, coverage is provided to our directors and executive officers against loss arising from claims made by reason of breach of fiduciary duty or other wrongful acts as a director or executive officer, including claims relating to public securities matters, and to us with respect to payments that may be made by us to these directors and executive officers pursuant to our indemnification obligations or otherwise as a matter of law. These insurance policies may not cover all potential claims made against our directors and executive officers, may not be available to us in the future at a reasonable rate and may not be adequate to indemnify us for all liability that may be imposed. See the section titled “Certain Relationships and Related Party Transactions—Indemnification of officers and directors.”

 

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As litigation is inherently unpredictable, we cannot assure you that any potential claims or disputes will not harm our business, results of operations and financial condition.

Subjective estimates and judgments used by management in the preparation of our financial statements, including estimates and judgments that may be required by new or changed accounting standards, may impact our financial condition and results of operations.

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Due to the inherent uncertainty in making estimates, results reported in future periods may be affected by changes in estimates reflected in our financial statements for earlier periods. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. From time to time, there may be changes in the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some instances, we could be required to apply a new or revised standard retrospectively. If the estimates and judgments we use in preparing our financial statements are subsequently found to be incorrect or if we are required to restate prior financial statements, our financial condition or results of operations could be significantly affected.

Tax legislation could adversely affect our business, financial condition and results of operations.

The Tax Cuts and Jobs Act, (the “Tax Act”), among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of “adjusted earnings” (roughly defined as earnings before interest, taxes, depreciation and amortization in the case of taxable years beginning before January 1, 2022 and earnings before interest and taxes thereafter), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. The most significant impacts of the Tax Act on our financial results to date have included lowering of the U.S. federal corporate income tax rate and remeasurement of our net deferred tax liabilities. We continue to examine the impact that the Tax Act may have on our business in the longer term. The U.S. government may enact significant new changes to the taxation of business entities, including, among others, an increase in the U.S. taxation of international business operations. Accordingly, the impact of the Tax Act and any future tax legislation on us is uncertain.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes to offset taxable income or taxes may be limited.

As of January 1, 2022 and January 2, 2021, we had $0.0 million and $70.6 million, respectively, of U.S. federal net operating loss carryforwards. As of January 1, 2022 and January 2, 2021, we had $50.8 million and $99.0 million, respectively, of U.S. state net operating loss carryforwards. These net operating loss carryforwards expire between 2022 and 2040. As of January 1, 2022, we had a federal foreign tax credit of $2.5 million, which will expire in 2026, federal R&D credits of $1.0 million, which will expire between 2039 and 2041, and other federal credits of $5.3 million, which will expire between 2031 and 2041. Portions of these net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities.

 

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Under the Tax Act, as modified by the Coronavirus Aid, Relief, and Economic Security (the “CARES Act”), U.S. federal net operating losses incurred in taxable years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal net operating losses in taxable years beginning after December 31, 2020, is limited. It is uncertain how various states will respond to the Tax Act and the CARES Act. For state income tax purposes, there may be periods during which the use of net operating loss carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its postchange income or taxes may be limited. We have experienced such ownership changes in the past, and may experience such ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our future results of operations by effectively increasing our future tax obligations.

We are subject to various anti-corruption laws and regulations and laws and regulations relating to export controls and economic sanctions. Violations of these laws and regulations could have a material adverse effect on our business, financial condition and results of operations.

We are subject to various anti-corruption laws, including the U.S. Foreign Corrupt Practices Act. These laws generally prohibit companies and their intermediaries from engaging in bribery or making other improper payments of cash (or anything else of value) to government officials and other persons in order to obtain or retain business. Our business operations also must be conducted in compliance with applicable export control and economic sanctions laws and regulations, including rules administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control, the U.S. Department of State, the U.S. Department of Commerce, the United Nations Security Council, and other relevant authorities.

We strive to conduct our business activities in compliance with relevant anti-corruption and trade control laws and regulations, and we are not aware of issues of historical noncompliance. However, full compliance cannot be guaranteed. Further expansion of our retail or wholesale footprint outside the United States would likely increase our future legal exposure. Violations of anti-corruption or trade control laws and regulations, or even allegations of such violations, could result in civil or criminal penalties, as well as disrupt our business, operations, financial condition and results of operations. Further, changes to the applicable laws and regulations, and/or significant business growth, may result in the need for increased compliance-related resources and costs.

Risks Relating to Our Indebtedness and Liquidity

Our indebtedness could materially adversely affect our financial condition.

We have, and after this offering will continue to have, a significant amount of indebtedness. As of October 1, 2022, on a pro forma basis, our total indebtedness would have been $             million, including $             million aggregate principal amount outstanding under our Secured Credit Agreement and $             million aggregate principal amount of Notes. Under the Secured Credit Agreement, we

 

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have the Term Loan Facility and the Revolving Credit Facility. As of October 1, 2022, on a pro forma basis, we had $             million of letters of credit outstanding under the Revolving Credit Facility, leaving $             million available for borrowing out of a total committed amount of $75.0 million.

Our substantial indebtedness could have important consequences to the holders of our common stock, including the following:

 

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making it more difficult for us to satisfy our obligations with respect to our other debt;

 

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limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

 

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requiring us to dedicate a substantial portion of our cash flows to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;

 

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increasing our vulnerability to general adverse economic and industry conditions;

 

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exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under the Secured Credit Agreement, are at variable rates of interest;

 

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limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

 

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placing us at a disadvantage compared to other, less leveraged competitors; and

 

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increasing our cost of borrowing.

In addition, the Secured Credit Agreement and the indenture governing the Notes (the “Indenture”) contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Senior Secured Credit Facilities.”

The Term Loan Facility and the Notes will mature on April 26, 2028. The Revolving Credit Facility will mature on April 26, 2026. We may need to refinance all or a portion of our indebtedness on or before the maturity thereof. We may not be able to obtain such financing on commercially reasonable terms or at all. Failure to refinance our indebtedness could have a material adverse effect on us.

We may not be able to generate sufficient cash to service all of our indebtedness or repay such indebtedness when due and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to financial, business, legislative, regulatory and other factors, some of which are beyond our control. We cannot be sure that our business will generate sufficient cash flows from operating activities, or that future borrowings will be available, to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and

 

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capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to implement any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The Secured Credit Agreement and the Indenture restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would have a material adverse effect on our financial condition and results of operations.

If we cannot make scheduled payments on our debt, we will be in default, and the lenders under the Secured Credit Agreement could terminate their commitments to loan money, the lenders and the holders of the Notes could foreclose against the assets securing their debt, and we could be forced into bankruptcy or liquidation. Any of these events could result in you losing all or a portion of your investment in the common stock.

Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks to our financial condition described herein.

We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the Secured Credit Agreement and the Indenture contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. As of October 1, 2022, on a pro forma basis, we would have had $             million of borrowings outstanding under the Revolving Credit Facility, with $             million of outstanding letters of credit, leaving $             million available for borrowing out of a total committed amount (which was increased in November 2022) of $75.0 million. The Secured Credit Agreement provides for additional uncommitted incremental loans of up to the greater of $136 million and 100% of EBITDA for the most recent four fiscal quarters, plus certain other amounts, with additional incremental loans available if certain leverage ratios are maintained. Of the incremental loans, $15.0 million was permitted to be (and was utilized as) incremental commitments under the Revolving Credit Facility. All of those borrowings would be secured by first-priority liens on our property.

The terms of the Secured Credit Agreement and the Indenture restrict our current and future operations, including our ability to respond to changes or to take certain actions.

The Secured Credit Agreement and the Indenture contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Senior Secured Credit Facilities.” The Notes and the indebtedness under the Secured Credit Agreement will continue to be outstanding following completion of this offering. The restrictive covenants under the Secured Credit Agreement include restrictions on our ability to:

 

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incur additional indebtedness and guarantee indebtedness;

 

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pay dividends or make other distributions or repurchase or redeem our capital stock;

 

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prepay, redeem or repurchase junior debt;

 

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issue certain preferred stock or similar equity securities;

 

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make loans and investments;

 

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sell assets or property, except in certain circumstances;

 

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create or incur liens;

 

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enter into transactions with affiliates;

 

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modify or waive certain material agreements in a manner that is adverse in any material respect to the lenders;

 

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enter into agreements restricting our subsidiaries’ ability to pay dividends; and

 

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make fundamental changes in our business, corporate structure or capital structure, including, among other things, entering into mergers, acquisitions, consolidations and other business combinations.

As a result of these restrictions, we may be:

 

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limited in how we conduct our business;

 

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unable to raise additional debt or equity financing to operate during general economic or business downturns; or

 

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unable to compete effectively or to take advantage of new business opportunities.

These restrictions may affect our ability to grow in accordance with our strategy.

A breach of the covenants or restrictions under the Secured Credit Agreement or the Indenture could result in a default or an event of default. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the Secured Credit Agreement would permit the lenders under the Revolving Credit Facility to terminate all commitments to extend further credit under such facility. Furthermore, if we were unable to repay the amounts due and payable under the Secured Credit Agreement and the Notes, the lenders under the Secured Credit Agreement and the holders of the Notes could proceed against the collateral granted to them to secure that indebtedness. In exacerbated or prolonged circumstances, one or more of these events could result in our bankruptcy or liquidation.

We rely on available borrowings under the Revolving Credit Facility for liquidity, and the availability of credit under the Revolving Credit Facility may be subject to significant fluctuation.

In addition to cash we generate from our business, our principal existing source of liquidity is borrowings available under the Revolving Credit Facility. As of October 1, 2022, on a pro forma basis, we had no borrowings under the Revolving Credit Facility, with $11.4 million of letters of credit outstanding, leaving $63.6 million available for borrowing. The inability to borrow under the Revolving Credit Facility may adversely affect our liquidity, financial position and results of operations.

We are subject to risks associated with our indebtedness and debt service, including risks related to changes in interest rates.

Borrowings under the Secured Credit Agreement are at variable rates of interest and expose us to interest rate risk. As interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed has remained the same, and our net

 

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