As filed with the Securities and Exchange Commission on November 8, 2021.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

5.11 ABR Corp.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware		2300		81-3489919
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

1360 Reynolds Ave, Suite 101

Irvine, CA 92614

(949) 800-1511

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Francisco J. Morales

5.11 ABR Corp.

1360 Reynolds Ave, Suite 101

Irvine, CA 92614

(949) 800-1511

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Brandon Howald Jeffrey Hartlin R. William Burns Paul Hastings LLP 101 California Street, Forty-Eighth Floor San Francisco, California 94111 (415) 856-7000		James McGinty Chief Financial Officer 5.11 ABR Corp. 1360 Reynolds Ave, Suite 101 Irvine, CA 92614 (949) 800-1511		Michael Benjamin J. Ross McAloon Latham & Watkins LLP 1271 Avenue of the Americas New York, New York 10020 (212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, or Securities Act, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934, as amended.

 

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered		Proposed Maximum Aggregate Offering Price(1)(2)		Amount of Registration Fee
Common stock, par value $0.001 per share		$100,000,000		$9,270

(1)	Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.

(2)	Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting and offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated November 8, 2021

         Shares

 

 

COMMON STOCK		SHARES

 

 

This is the initial public offering of shares of common stock of 5.11 ABR Corp.

 

 

The selling stockholders identified in this prospectus are offering                      shares of our common stock, and we are offering                      shares of common stock. We will not receive any proceeds from the sales of our shares of common stock by the selling stockholders. Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $         and $         .

 

 

We have applied to list our common stock on the Nasdaq Global Market under the symbol “VXI”.

 

 

Upon the completion of this offering, funds controlled by our principal stockholder, Compass Group Diversified Holdings LLC (“Compass” or “CODI”) will control approximately         % of the combined voting power of our outstanding shares of common stock (or         % if the underwriters’ option to purchase additional shares is exercised in full). As a result, we will be a “controlled company” within the meaning of the corporate governance rules of the Nasdaq Stock Market LLC (the “Listing Rules”). See the sections titled “Prospectus Summary—The Offering—Controlled Company” and “Risk Factors—Risks Related to the Ownership of Our Common Stock and this Offering.”

 

 

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, may elect to comply with certain reduced public company reporting requirements in future reports after the completion of this offering.

 

 

See “Risk Factors” beginning on page 23 to read about factors you should consider before buying shares of our common stock. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

		Per Share				Total
Initial Public Offering Price			$				$
Underwriting discount and commissions (1)			$				$
Proceeds, before expenses, to 5.11			$				$
Proceeds, before expenses, to selling stockholders			$				$

 

(1) See “Underwriting” beginning on page 164 for additional information regarding underwriter compensation.

At our request, the underwriters have reserved up to     % of the shares of common stock offered by this prospectus for sale, at the initial public offering price, to certain individuals identified by us. See “Underwriting—Directed Share Program.”

To the extent that the underwriters sell more than shares of common stock, the underwriters have the option to purchase up to an                     additional shares from us at the initial public offering price, less the underwriting discount and commissions.

The underwriters expect to deliver the shares against payment in New York, New York on        , 2021.

 

 

 

MORGAN STANLEY		JEFFERIES		BAIRD

 

WILLIAM BLAIR		RAYMOND JAMES

 

ROTH CAPITAL PARTNERS		CJS SECURITIES		CIBC CAPITAL MARKETS

 

TELSEY ADVISORY GROUP		LOOP CAPITAL MARKETS		ACADEMY SECURITIES

Prospectus dated         , 2021

5.11

5.11

5.11 ALWAYS BE READY. We are innovators who make purpose-built technical apparel, footwear, and gear for life’s most demanding missions.

DEVOTION TO ADVENTURE We stand ready to fan the flames of adventure in those who hear the calling to go beyond the ordinary Lifes most worthwhile pursuits are forged in these flames and require courage, passion, and the right gear 5.11 ALWAYS BE READY

IT’S NOT JUST A TAGLINE.
This is not just a line on a t-shirt. This is how we live our lives. 5.11

No matter what happens, we push

forward, not out of the absence of fear, but in spite of it. Because we trust our instincts, we trust our training, and we trust our gear.
At 5.11, we don’t simply inspire readiness, we are readiness.

IT ALL STARTED WITH A PAIR OF PANTS. The original 5.11 pants introduced cutting-edge design features that were inspired by the needs of demanding professionals. This purpose-driven product innovation strategy has since provided both everyday consumers and professionals with purpose-built technical apparel, footwear, and gear and helped to build a community of customers around the world who seek out the best products without compromise and who identify with our brand heritage and values. 5.11

2MM Social Media Followers As of June 2021 156MM Total U.S. TAM 76 Net Promoter Score June 2021 Survey Date 42% Active DTC Customer CAGR Since 2018 81 U.S. Retail Locations 18% International Sales Mix YTD September 30, 2021 Up to 400 Domestic Retail Unit Whitespace As of September 30, 2021 43% DTC Sales Mix YTD September 30, 2021 As of September 30, 2021

Letter From Our Co-Founder & CEO

My journey began in Venezuela where I grew up learning the family business from my father, a master tailor. From him, I inherited a love for designing exceptional products. This passion brought me to the United States to study textiles, clothing, and business. At the time, I was unaware that the craft I learned would allow me to serve a greater purpose; to serve those who serve by designing and developing mission ready 5.11 apparel, footwear and gear for professionals. I also didn’t know then that these same products would transcend the professional user for whom they are designed and appeal to a massive audience of everyday, lifestyle consumers who desire innovative, functional and quality products. This obsession with products has guided my entire career and is ultimately the reason that innovation is priority number one at 5.11.

We built 5.11 in 2003 around the deep heritage of the original ‘5.11 pant’ made for outdoor enthusiasts. These pants were designed in the 1970s by the Royal Robbins Company specifically to climb the face of El Capitan in Yosemite, the birthplace of American rock climbing. Leveraging the broad applications of our highly functional, versatile and durable products, we successfully transitioned to serving larger and more diverse customer groups, starting with the federal government. Since 1992, our pants have been utilized by the F.B.I. National Academy in Quantico, Virginia where discerning, elite law enforcement professionals from across the world train. This connection to the F.B.I. Academy represents a legacy we are very proud of and a responsibility we take very seriously. Today, these professionals, and many others, rely on our pants as well as a variety of other 5.11 products to accomplish their most demanding missions.

From the very beginning, our commitment and ability to innovate was welcomed by the public safety and military communities. I have personally had the privilege of working closely with many first responders and military personnel in product development to learn and understand first-hand the challenges they face both on and off duty. I can share with you that serving these individuals is a humbling experience like no other.

As we remained relentlessly focused on innovating for first responders and military professionals, we noticed many of these consumers were increasingly wearing our products casually while off duty. We then realized our brand was resonating with an entirely different group: everyday people. This large, diverse customer base encompasses consumers ranging from small business owners to lawyers to teachers to farmers to homemakers, males and females, a broad spectrum of ages, as well as outdoor and fitness enthusiasts and individuals who are passionate about our brand. We witnessed firsthand the immediate emotional connection that developed into a strong brand affinity as these everyday, lifestyle consumers learned about 5.11’s authenticity and heritage and experienced our products. We were humbled by this unexpected demand, and in 2011, we began creating a broader array of products to serve a larger target audience, and a direct-to-consumer channel to better serve everyday, lifestyle consumers. Since then, we haven’t looked back. Through the first nine months of 2021, 43% of our sales have come from our direct to consumer business, which has grown an impressive 140% from 2018 to the trailing twelve months ended September 30, 2021. Remarkably, even with this tremendous growth, we believe we are still in the early stages of achieving our full potential with everyday, lifestyle consumers. Many consumers are still unaware of 5.11, however those who are, are passionate about our brand resulting in an NPS score of 76, which we believe to be among the top-tier of outdoor and lifestyle brands. Accordingly, we believe there is significant opportunity to grow through driving greater brand awareness. Our omnichannel distribution model offers more opportunities to interact with the everyday consumer while methodically building a more diverse product portfolio. Our consumers, whether everyday, lifestyle consumers or professionals, enjoy and appreciate the functionality, comfort, and durability of our products and are inspired by the authenticity of 5.11’s purpose-led brand. Our vision is to inspire the world to “Always Be Ready” (“ABR”) not out of fear, but to be self-confident and self-reliant. When adversity strikes, it does not discriminate on any basis. We are a brand for those share an Always Be Ready mindset, regardless of their walk of life.

What Drives & Motivates Us?

As the co-founder and CEO of this company, I am extremely proud of our accomplishments and even more energized about what the future brings. I am amazed at how our entire global team shows up every day and strives to serve and innovate for our broad consumer base and those who serve our communities and countries. Our purpose is to enable and inspire them to be confident or better said, to Always be Ready.

At 5.11, R&D is mission critical. Understanding how to engineer products with the right balance of durability and comfort is both an art and a science. Our innovative, stylish and feature-rich designs are field-tested by professionals to ensure they are reliable, long-lasting and perform with real-world durability. By engineering products that meet the high standards of professionals, we have attracted an enormous market of everyday consumers who seek out the best products without compromise and who identify with our brand values.

Our Team Moving Forward.

We welcome employees and partners from all backgrounds who embrace our values and focus relentlessly on service and innovation. My “5.11 Family” consists of more than one thousand dedicated men and women across the globe and a rapidly growing consumer base that embraces our brand. I have been fortunate to be surrounded by a world-class team at the Company who shares my passion for serving and for making products for life’s most demanding missions. We are humble, yet confident in our individual abilities and know we are stronger as a team. While the COVID-19 pandemic physically separated us, it taught us how to collaborate better as a global team and enabled us to deliver strong results in 2020. Through economic cycles and the pandemic, our geographic and channel diversity, combined with our broad product line creates a strong and resilient portfolio , which has enabled us to grow every year since our founding.

Our suppliers, wholesale partners, and 5.11 alumni have been critical contributors on our journey. We thank them for believing and supporting the 5.11 mission and vision. We now welcome the investor community to also be part of our journey and to share in our passion in serving those who serve, while inspiring the world to Always Be Ready. Together, we will strive to achieve our shared vision of becoming an iconic global consumer brand with a purpose-driven culture. We will relentlessly endeavor to serve our heroes and people from all walks of life. This formula has led to sustainable long-term growth for 5.11 and this mission will not change.

Always Be Ready,

 

Francisco J. Morales

Co-Founder and CEO

TABLE OF CONTENTS

 

 

Through and including             , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Neither we, the selling stockholders, nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholders, nor any of the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

For investors outside of the United States: Neither we, the selling stockholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully 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 financial statements and the accompanying notes included elsewhere in this prospectus before deciding whether to invest in shares of our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of or that we deem immaterial may also become important factors that adversely affect our business. If any of the following risks occur, our business, financial condition, results of operations and future prospects could be adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

RISKS RELATED TO OUR BUSINESS

If we fail to manage our growth effectively, our business, financial condition and results of operations may be adversely affected.

We have expanded our operations rapidly since our founding in 2003. To manage our growth effectively, we must continue to implement our operational plans and strategies, improve and expand our infrastructure of people, information systems and distribution capabilities, and expand, train and manage our employee base. We have rapidly increased employee headcount since our inception to support the growth in our business. To support our continued growth, we must effectively integrate, develop and motivate a large number of new employees. We face significant competition for personnel, both at our distribution center in Northern California as well as in Southern California, where our headquarters is located. To attract top talent, we may need to increase our employee compensation levels to remain competitive in attracting and retaining talented employees. In addition, we could be required to continue to expand our sales and marketing, product development and distribution functions, to upgrade our management information systems and other processes and technology and to obtain more space for our expanding workforce. Additionally, the growth of our business places significant demands on our existing management and other employees. Failure to manage our employee base and hiring needs effectively, including successfully integrating our new hires, may adversely affect our business, financial condition and results of operations.

In addition, we are required to manage relationships with a growing number of customers, suppliers, manufacturers, distributors and other third parties. If we are unable to expand supply, manufacturing and distribution capabilities when required, or our information technology systems and our other processes are inadequate to support the future growth of these relationships, we could experience delays in customer service and order response and shipping times, which would adversely impact our reputation and brand. If we are unable to manage the growth of our organization effectively, our business, financial condition and results of operations may be adversely affected.

Our recent rapid growth may not be sustainable or indicative of future growth, and we expect our growth rate to ultimately slow over time.

We have experienced significant and rapid growth. Net sales increased from $389 million in 2019 to $401 million in 2020. For the nine months ended September 30, 2020 and 2021, we had net sales of $282 million and $321 million, respectively. Our historical rate of growth may not be sustainable or indicative of our future rate of growth, and in future periods, our net sales could grow more slowly than we expect or decline. We believe that continued growth in net sales, as well as our ability to improve or maintain margins and profitability, will depend upon, among other factors, our ability to address the challenges, risks and difficulties described elsewhere in this “Risk Factors” section. We cannot provide assurance that we will be able to successfully manage any such challenges or risks to our future growth. Any of these factors could cause our net sales growth to slow or decline

 

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and may adversely affect our margins and profitability. Even if our net sales continue to increase, we expect that our growth rate may slow for a number of other reasons, including if there is a slowdown in the growth of demand for our products, increased competition, a decrease in the growth or reduction in the size of our overall market or if we cannot capitalize on growth opportunities. Failure to continue to grow our net sales or improve or maintain margins would adversely affect our business, financial condition and results of operations. You should not rely on our historical rate of growth as an indication of our future performance.

We may not maintain profitability in the future.

As our expenses increase we could have operating losses in the future. We expect our operating expenses to increase in the future as we increase our sales and marketing efforts, continue to invest in developing new products, hire additional personnel, expand our operating infrastructure and expand into new geographies. Further, as a public company, we will incur additional legal, accounting and other expenses that we did not incur as a private company. These efforts and additional expenses may be more costly than we expect, and we cannot guarantee that we will be able to increase our net sales to offset our increased operating expenses. Our net sales growth may slow for a number of other reasons, including if we experience reduced demand for our products, increased competition, a decrease in the growth or reduction in the size of our overall market or if we cannot capitalize on growth opportunities. If our net sales do not grow at a greater rate than our operating expenses, we will not be able to maintain our current level of profitability.

Our success depends on our ability to maintain the value and reputation of our brand.

The 5.11 brand is integral to our business strategy and our ability to attract and engage customers. Maintaining, promoting and positioning our brand will depend largely on the success of our marketing and branding efforts and our ability to provide a consistent, high-quality product and customer experience. In addition, as our brand becomes more widely known globally, we anticipate an increase in counterfeit and knockoffs in the market, which will require us to increase spending on our brand protection efforts.

Our brand may suffer if we fail to achieve these objectives or if our public image were to be tarnished by negative publicity about us, including our products, technology, customer service, personnel, marketing efforts brand ambassadors or suppliers. Our professional customers include first-responders, uniformed public servants, military, law enforcement and public safety personnel. Many of our customers use firearms for professional or recreational purposes, which could create negative publicity. Even isolated incidents involving our company, suppliers, agents or third-parties, or the products we sell, could erode the trust and confidence of our customers and damage the strength of our brand, especially if such incidents result in adverse publicity, governmental investigations, product recalls or litigation.

In addition, the importance of our brand may increase to the extent we experience increased competition, which could require additional expenditures on our brand promotion activities. Maintaining and enhancing our brand image also may require us to make additional investments in areas such as merchandising, marketing and online operations. These investments may be substantial and may not ultimately be successful. Moreover, if we are unsuccessful in protecting our intellectual property rights in our brand, the value of our brand may be harmed. Any harm to our brand and reputation could adversely affect our ability to attract and engage customers and negatively impact our business, financial condition and results of operations.

Our business depends on our ability to maintain a strong community of engaged customers, including through the use of social media. We may not be able to maintain and enhance our brand if we experience negative publicity related to our marketing efforts or use of social media, fail to engage brand ambassadors or otherwise fail to meet our customers’ expectations.

We use third-party social media platforms to raise awareness of our brand and engage with our community. As existing social media platforms evolve and new platforms develop, we and our brand ambassadors must

 

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continue to maintain a presence on these platforms and establish presences on emerging popular social media platforms. If we are unable to cost-effectively use social media platforms as marketing tools, our ability to acquire new customers and our financial condition may suffer. Furthermore, as laws and regulations governing the use of these platforms evolve, any failure by us, our brand ambassadors, our sponsors or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and adversely affect our business, financial condition and results of operations. In addition, an increase in the use of social media for product promotion and marketing may cause an increase in the burden on us to monitor compliance of such materials, and increase the risk that such materials could contain problematic product or marketing claims in violation of applicable regulations. For example, in some cases, the Federal Trade Commission has sought enforcement action where an endorsement has failed to disclose a financial relationship or material connection clearly and conspicuously between an influencer and an advertiser.

We also do not prescribe what our brand ambassadors post, and our brand ambassadors could engage in behavior or use their platforms in a manner that reflects poorly on our brand or is in violation of applicable regulations or platform terms of service, and may be attributed to us. Negative commentary regarding us, our products or brand ambassadors and other third parties who are affiliated with us, whether accurate or not, may be posted on social media platforms at any time and may adversely affect our reputation, brand and business. The harm may be immediate, without affording us an opportunity for redress or correction and could have an adverse effect on our business, financial condition and results of operations.

In addition, customer complaints or negative publicity related to our website, products, product delivery times, customer data handling, marketing efforts, security practices or customer support, especially on blogs and social media websites, could diminish customer loyalty and community engagement.

If we fail to attract new customers, retain existing customers, or fail to maintain or increase sales to those customers, our business, financial condition, results of operations and growth prospects will be harmed.

Our success depends in large part upon widespread adoption of our products by consumers and professionals. In order to attract new customers and continue to expand our customer base, we must appeal to and attract consumers and professionals who identify with our products. If the number of consumers and professionals who are willing to purchase our products does not continue to increase, if we fail to deliver a high-quality shopping experience or eCommerce experience, or if our current or potential future customers are not convinced that our products are superior to alternatives, then our ability to retain existing customers, acquire new customers and grow our business may be harmed. We have made significant investments in enhancing our brand and attracting new customers, and we expect to continue to make significant investments to promote our products. Such campaigns can be expensive and may not result in new customers or increased sales of our products. Further, as our brand becomes more widely known, we may not attract new customers or increase our net sales at the same rates as we have in the past. If we are unable to acquire new customers who purchase products in numbers sufficient to grow our business, we may not be able to generate the scale necessary to drive beneficial network effects with our suppliers, our net sales may decrease, and our business, financial condition and operating results may be materially adversely affected.

In addition, our future success depends in part on our ability to increase sales to our existing customers over time, as a significant portion of our net sales are generated from sales to existing customers, particularly those existing customers who are highly engaged and make frequent and/or large purchases of the products we offer. If existing customers no longer find our products appealing, are not satisfied with our customer service, including shipping times, or if we are unable to timely update our products to meet current trends and customer demands, our existing customers may not make purchases, or if they do, they may make fewer or smaller purchases in the future.

 

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If we are unable to continue to attract new customers or our existing customers decrease their spending on the products we offer or fail to make repeat purchases of our products, our business, financial condition, results of operations and growth prospects will be harmed.

If we fail to continue to innovate and provide consumers with new, innovative and updated products and design features that meet their expectations, we may not be able to generate sufficient consumer interest in our apparel, footwear and gear to maintain or increase our sales and profitability.

We must continue to invest in research and development in connection with the innovation and design of our products in order to attract and retain consumers. If we are unable to anticipate consumer preferences or industry changes, or if we are unable to modify our products on a timely basis, we may lose customers or become subject to greater pricing pressures. Even if we are successful in anticipating customer needs and preferences, our ability to adequately address those needs and preferences will in part depend upon our continued ability to develop and introduce innovative, high-quality products and designs and maintain our distinctive brand identity as we expand the range of products we offer. Our operating results would also suffer if our innovations do not respond to the needs of our customers, are not appropriately timed with market opportunities or are not effectively brought to market. Any failure on our part to innovate and design new products or modify existing products will hurt our brand image and could result in a decrease in our net sales and an increase in our inventory levels. In addition, we may not be able to generate sufficient consumer interest in our apparel, footwear and gear to remain competitive. Any of these factors could harm our business, financial condition and results of operations.

Our ability to attract customers to our stores depends heavily on successfully locating our stores in suitable locations and any impairment of a store location, including any decrease in customer traffic, could cause our sales to be less than expected.

Our approach to identifying destination locations for our retail stores typically favors population density, high visibility, and key demographic criteria. As a result, our stores are typically located near retailers or other locations that we believe are consistent with our customers’ lifestyle choices. Sales at these stores are derived, in part, from the volume of foot and automobile traffic in these locations. Store locations may become unsuitable due to, and our sales volume and customer traffic generally may be harmed by, among other things:

 

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economic downturns in a particular area;

 

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competition from nearby retailers selling competing products;

 

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changing consumer demographics in a particular market;

 

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changing lifestyle choices of consumers in a particular market; and

 

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the closing or decline in popularity of other businesses located near our store.

Changes in areas around our store locations that result in reductions in customer foot and automobile traffic or otherwise render the locations unsuitable could cause our sales to be less than expected.

If our marketing efforts are not successful, our business, financial condition and results of operations could be harmed.

We create differentiated brand marketing content and utilize performance marketing to drive consumers from awareness to consideration to conversion and promoting awareness of our brand and products is important to our ability to grow our business, drive consumer engagement and attract new customers. Our marketing strategy includes brand marketing campaigns across platforms, including email, digital, display, site, direct-mail, commercials, social media and brand ambassadors, as well as performance marketing efforts, including retargeting, paid search and product listing advertisements, paid social media advertisements, search engine optimization, personalized email and text messaging.

 

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We have historically benefited from social media, customer referrals and word of mouth to advertise our brand. Social networks are important as a source of new customers and as a means by which to connect with existing customers, and such importance may be increasing. In addition, we are implementing grassroots marketing efforts such as local store and community events, and engaging with brand ambassadors to assist us by introducing our brand and culture to various communities. Our social media and grassroots efforts must be tailored to each market. This requires substantial efforts as we enter new markets, as well as ongoing attention and resources. We also seek to engage with our customers and build awareness of our brands through sponsoring unique events and experiences. If our marketing efforts and messaging are not appropriately tailored to and accepted by the consumer and professional community, we may fail to attract customers and our brand and reputation may be harmed. In addition, our marketing initiatives may become increasingly expensive as competition increases and generating a meaningful return on those initiatives may be difficult. Our future growth and profitability and the success of our brand will depend in part upon the effectiveness and efficiency of these marketing efforts.

We receive a significant number of visits to our website via social media or other channels used by our existing and prospective consumers. As eCommerce and social media continue to rapidly evolve, we must continue to establish relationships with these channels and may be unable to develop or maintain these relationships on acceptable terms. In addition, we currently receive a significant number of visits to our website via search engine results. Search engines frequently change the algorithms that determine the ranking and display of results of a user’s search, which could reduce the number of visits to our website, in turn reducing new customer acquisition and adversely affecting our results of operations. If we are unable to cost-effectively drive traffic to our websites, our ability to acquire new customers and our financial condition would suffer. Email marketing efforts are also important to our marketing efforts. If we are unable to successfully deliver emails to our customers or if customers do not engage with our emails, whether out of choice, because those emails are marked as low priority or spam or for other reasons, our business could be adversely affected. Our marketing initiatives may become increasingly expensive and generating a meaningful return on those initiatives may be difficult or unpredictable. Even if we successfully increase net sales as a result of our marketing efforts, it may not offset the additional marketing expenses we incur.

The market for apparel, footwear and gear is highly competitive.

We compete in the apparel, footwear and gear industry, principally on the basis of product quality, innovation, style, price and brand image, as well as customer experience and service. The industry is highly competitive and includes established companies as well as new entrants. We compete against Prosumer brands that tend to specialize in a specific product category or produce products at a large scale such as Propper, Bates and Fechheimer Brothers, and Everyday Consumer brands such as Under Armour, Salomon, Arc’teryx, The North Face, Patagonia, Kuhl, Nike, Timberland, Camelbak, YETI and Carhartt. We also compete with specialty retailers such as REI and Dick’s Sporting Goods. In addition, we may face future competition from large, diversified apparel companies with brand recognition and well-established sales, manufacturing and distribution infrastructure that choose to expand into the production and marketing of apparel, footwear and gear. In the professional market, we are one of the largest global head-to-toe apparel, footwear and gear supplier, however there are companies and brands that have been around longer than we have.

Our competitors may be able to achieve and maintain market share more quickly and effectively than we can, and they may have substantially greater financial and other resources than we do. Similarly, if customers perceive the products offered by our competitors to be of higher quality than ours, or our competitors offer similar products at lower prices, our sales may decline, which would adversely affect our results of operations.

Many of our potential competitors promote their brands primarily through other forms of advertising, such as digital advertising and television commercials and have substantial resources to devote to such efforts. Our competitors may also use forms of advertising more quickly in new markets than we can. While we believe that our DTC business model offers us competitive advantages, our competitors may be able to increase their sales in

 

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new and existing markets faster than we do by their emphasis on different distribution channels, such as wholesale and an extensive franchise network of retail stores, and many of our competitors have substantial resources to devote toward increasing sales in such ways. Competition may result in pricing pressures, reduced profit margins or lost market share or a failure to grow our market share, any of which could substantially harm our business, financial condition and results of operations.

If we are unable to attract, integrate and retain new team members, including eCommerce, store, district and regional managers, we may not be able to grow or successfully operate our business.

Our success has largely been the result of significant contributions by our employees, including members of our current senior management and product design teams. However, to be successful in continuing to grow our business, we will need to continue to attract, integrate, retain and motivate highly talented employees with a range of skills and experience, especially in eCommerce and at the store, district and regional management levels. Competition for employees in our industry is intense, especially in Southern California, where our headquarters is located, and we have from time-to-time experienced difficulty in attracting the personnel necessary to support the growth of our business, and we may experience similar difficulties in the future. These problems could be exacerbated as we embark on our strategy of opening a significant number of new stores in the United States and elsewhere over the next few years. If we are unable to attract, integrate and retain additional employees with the necessary skills , we may not be able to grow or successfully operate our business.

If we cannot maintain our culture as we grow, we could lose the innovation, teamwork and passion that we believe contribute to our success and our business may be harmed.

We believe that a critical component of our success has been our corporate culture. We have invested substantial time and resources in building our culture, which is rooted in passion, purpose and innovation. As we continue to grow, including geographically expanding our presence outside of our headquarters in Irvine, California and the United States, and developing the infrastructure associated with being a public company, we will need to maintain our culture among a larger number of employees, dispersed across various countries and geographic regions. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.

We plan to invest in international markets, which will expose us to new and significant risks.

Our future growth depends in part on our continued expansion efforts outside of the United States. Our current operations and customer base are largely located in the United States and several other countries, including, Mexico, Germany, and Australia, with shipping capabilities to multiple additional countries. In connection with our continued expansion efforts outside of the United States, we may encounter novel obstacles, including cultural and linguistic differences, differences in regulatory environments and market practices, difficulties in keeping abreast of market, business and technical developments and foreign customers’ tastes and preferences.

We may also encounter difficulty further expanding into new markets because of limited brand recognition in those markets, leading to delayed acceptance of our products by customers there. In particular, we have no assurance that our marketing efforts will prove successful in new markets. The further expansion into new markets may also present competitive, merchandising, forecasting and distribution challenges that are different from or more severe than those we currently face. There are also other risks and costs inherent in doing business in international markets, including:

 

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the need to adapt and localize products for specific countries to account for, among other things, different cultural tastes, size and fit preferences or regulatory requirements;

 

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difficulty establishing and managing international operations and the increased operations, travel, infrastructure, including establishment of local delivery service and customer service operations, and legal compliance costs associated with locations in different countries or regions;

 

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increased shipping times to and from international markets;

 

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the need to vary pricing and margins to effectively compete in international markets;

 

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increased competition from local providers of similar products;

 

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the ability to acquire, protect and enforce intellectual property rights abroad;

 

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the need to offer customer support in various languages;

 

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difficulties in understanding and complying with local laws, regulations and customs in other jurisdictions;

 

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compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, or FCPA, and the U.K. Bribery Act 2010, or U.K. Bribery Act, by us, our employees and our business partners;

 

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complexity and other risks associated with current and future legal requirements in other countries, including legal requirements related to apparel, footwear and gear, customer advertising protection, customer product safety and data privacy frameworks, such as the EU General Data Protection Regulation 2016/679, or GDPR;

 

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varying business practices and customs related to the sale of apparel, footwear and gear;

 

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varying levels of internet technology adoption and infrastructure, and increased or varying network and hosting service provider costs;

 

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tariffs and other non-tariff barriers, such as quotas and local content rules, as well as tax consequences;

 

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fluctuations in currency exchange rates and the requirements of currency control regulations, which might restrict or prohibit conversion of other currencies into U.S. dollars; and

 

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political or social unrest or economic instability in a specific country or region in which we operate, including, for example, the effects of “Brexit,” which could have an adverse impact on our operations in that location.

Our failure to successfully manage these risks could harm our international operations and have an adverse effect on our business, financial condition and results of operations.

Shipping is a critical part of our business and any changes in, or disruptions to, our shipping arrangements could adversely affect our business, financial condition and results of operations.

We currently rely in part on third-party global providers to deliver the products we offer on our website. If we are not able to negotiate acceptable pricing and other terms with these providers, or if these providers experience performance problems or other difficulties in processing our orders or delivering our products to customers located in the United States or internationally, it could negatively impact our results of operations and our customers’ experience. For example, changes to the terms of our shipping arrangements or the imposition of surcharges or surge pricing may adversely impact our margins and profitability. In addition, our ability to receive inbound inventory efficiently and ship merchandise to customers may be negatively affected by factors beyond our and these providers’ control, including pandemics, weather, fire, flood, power loss, earthquakes, acts of war or terrorism or other events specifically impacting other shipping partners, such as labor disputes, financial difficulties, system failures and other disruptions to the operations of the shipping companies on which we rely. We have in the past experienced, and may in the future experience, shipping delays for reasons outside of our control. We are also subject to risks of damage or loss during delivery by our global shipping vendors. If the products ordered by our customers are not delivered in a timely fashion, including to international customers, or are damaged or lost during the delivery process, our customers could become dissatisfied and cease buying products from us, which would adversely affect our business, financial condition and results of operations.

 

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We face risks related to actual or threatened health epidemics, such as the COVID-19 pandemic, and other outbreaks, which could significantly disrupt our operations.

Our business has been and could continue to be adversely impacted by the effects of a widespread outbreak of contagious disease, including the recent COVID-19 pandemic. Any widespread outbreak of contagious diseases, or other adverse public health developments, has in the past caused and in the future could cause disruption to, among other things, our contract manufacturers located in the United States and elsewhere around the world, which has in the past caused and in the future could cause delays in our supply chain and product shipments and delays in project completion, as well as reductions in customer support trainings and monitoring of our contract manufacturers, which could adversely affect our business, operations and customer relationships.

Since 2020, we have experienced supply chain disruptions that have caused delays in product deliveries due to health-related restrictions, including shelter-in-place orders, high worker absenteeism, and labor shortages, as well as other stresses on apparel infrastructure (including container shortages, port congestion, and overland trucking delays due to either geographic lockdowns or labor shortages). In each case, as a consequence of the COVID-19 pandemic, these dynamics have contributed to increased shipping costs and increased lead times for delivery of our products. We expect these COVID-19-related supply chain challenges to continue through the 1^st quarter of 2022 at the very least, and potentially longer. Global travel restrictions have also hindered our ability to conduct in-person inspections of our contract manufacturers to ensure compliance with approved vendor standards. However, we have been able to either do virtual and recorded inspections with factory employees on site, or contracted with local 3^rd party inspection agencies to conduct our inspections, in order to minimize the risk and maintain low levels of production defects. We will continue with this approach into the future, as long as travel restrictions remain.

The macroeconomic effects of the COVID-19 pandemic and the resulting economic downturn may also have the effect of heightening other risks described in this “Risk Factors” section, including those regarding the ability of our customers to raise capital, customer demand and our dependence on timely performance of our manufacturing partners.

The duration and intensity of the impact of the COVID-19 pandemic and resulting disruption to our operations is uncertain, and continues to evolve as of the date of this registration statement. There are no quantifiable impacts of COVID-19 on financial results and COVID-19 could intensify all other risk factors mentioned in this section. Accordingly, management will continue to monitor the impact of the COVID-19 pandemic on our financial condition, cash flows, operations, contract manufacturers, industry, workforce and customer relationships.

If we experience problems with our distribution and warehouse management system, our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies could be harmed. We rely on our distribution system, which is comprised of our primary distribution center in Manteca, California, a distribution center in Australia, and warehouses in China and Sweden for all of our product distribution. Our distribution system includes computer-controlled and automated equipment and relies on a warehouse management system to manage supply chain fulfillment operations, which means its operations are complicated and may be subject to a number of risks related to cybersecurity, the proper operation of software and hardware, electronic or power interruptions or other system failures. In addition, because all of our products are distributed from our distribution centers, our operations could also be interrupted by labor difficulties, or by floods, fires or other natural disasters near our distribution centers. We maintain business interruption insurance, but it may not adequately protect us from the adverse effects that could result from significant disruptions to our distribution system, such as the long-term loss of customers or an erosion of our brand image. Moreover, if we or our third-party logistics providers are unable to adequately staff our distribution centers to meet demand or if the cost of such staffing is higher than historical or projected costs due to mandated wage increases, regulatory changes, hazard pay, international expansion or other factors, our results of operations could be harmed. In addition, operating distribution centers comes with potential risks, such as workplace safety issues and

 

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employment claims for the failure or alleged failure to comply with labor laws or laws respecting union organizing activities. Our distribution capacity is also dependent on the timely performance of services by third parties, including the shipping of our products to and from our distribution centers. We may need to operate additional distribution centers in the future to keep pace with the growth of our business, and we cannot assure you that we will be able to locate suitable facilities on commercially acceptable terms in accordance with our expansion plans, nor can we assure you that we will be able to recruit qualified managerial and operational personnel to support our expansion plans. If we encounter problems with our distribution and warehouse management systems, our ability to meet customer expectations, manage inventory and fulfillment capacity, complete sales, fulfill orders in a timely manner and achieve objectives for operating efficiencies could be harmed, which could also harm our reputation and our relationship with our customers.

If we do not successfully optimize, operate and manage the expansion of the capacity of our distribution centers, our business, financial condition and results of operations could be harmed.

As our business continues to grow in the United States and internationally, we may need to add additional distribution center capacity and lease new warehouse space to serve as distribution centers. If we continue to add distribution and warehouse capabilities in the United States or internationally, add products categories with different fulfillment requirements or change the mix in products that we sell, our distribution network will become increasingly complex and operating it will become more challenging. The expansion of our distribution center capacity may put pressure on our managerial, financial, operational and other resources. We cannot assure you that we will be able to locate suitable facilities on commercially acceptable terms in accordance with our U.S. and international expansion plans, nor can we assure you that we will be able to recruit qualified managerial and operational personnel to support our expansion plans. In addition, we may be required to expand our capacity sooner than we anticipate. If we are unable to secure new facilities for the expansion of our distribution operations, recruit qualified personnel to support any such facilities or effectively control expansion-related expenses, our order fulfillment and shipping times may be delayed and our business, financial condition and results of operations could be adversely affected.

If we are unable to accurately forecast customer demand, manage our inventory and plan for future expenses, our results of operations could be adversely affected.

We base our current and future inventory needs and expense levels on our operating forecasts and estimates of future demand. To ensure adequate inventory supply, we must be able to forecast inventory needs and expenses and place orders sufficiently in advance with our suppliers and manufacturers, based on our estimates of future demand for particular products. Failure to accurately forecast demand may result in inefficient inventory supply or increased costs. This risk may be exacerbated by the fact that we may not carry a significant amount of inventory and may not be able to satisfy short-term demand increases. Accordingly, if we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products available for sale. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would cause our gross margins to suffer and could impair the strength and premium nature of our brand. Further, lower than forecasted demand could also result in excess manufacturing capacity or reduced manufacturing efficiencies, which could result in lower margins. Conversely, if we underestimate customer demand, our suppliers and manufacturers may not be able to deliver products to meet our requirements, and we may be subject to higher costs in order to secure the necessary production capacity or we may incur increased shipping costs. An inability to meet customer demand and delays in the delivery of our products to our customers could result in reputational harm and damaged customer relationships and have an adverse effect on our business, financial condition and results of operations.

Moreover, while we devote significant attention to forecasting efforts, the volume, timing, value and type of the orders we receive are inherently uncertain. In addition, we cannot be sure the same growth rates, trends and other key performance metrics are meaningful predictors of future growth. Our business, as well as our ability to forecast demand, is also affected by general economic and business conditions in the United States and the

 

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degree of customer confidence in future economic conditions, and we anticipate that our ability to forecast demand due to these types of factors will be increasingly affected by conditions in international markets. A significant portion of our expenses is fixed, and as a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in net sales. Any failure to accurately predict net sales or gross margins could cause our operating results to be lower than expected, which could adversely affect our financial condition.

Merchandise returns could harm our business.

We allow our customers to return our products, subject to our return policy. We generally accept merchandise returns for full refund if returned within 30 days of the original purchase date and for exchange up to 30 days from the original purchase date. Our revenue is reported net of returns and discounts. We estimate our liability for product returns based on historical return trends and an evaluation of current economic and market conditions. We record the expected customer refund liability as a reduction to revenue, and the expected inventory right of recovery as a reduction of cost of goods sold. The introduction of new products, changes in customer confidence or shopping habits or other competitive and general economic conditions could cause actual returns to exceed our estimates. If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur. In addition, from time to time, our products may be damaged in transit, which can also increase return rates. Returned goods may also be damaged in transit as part of the return process which can impede our ability to resell returned goods. Competitive pressures could cause us to alter our return policies or our shipping policies, which could result in an increase in damaged products and an increase in product returns. If the rate of product returns increases significantly or if product return economics become less efficient, our business, financial condition and results of operations could be harmed.

Fluctuations in the cost of raw materials could increase our cost of goods sold and cause our results of operations and financial condition to suffer.

The fabrics used by our suppliers and manufacturers include synthetic fabrics whose raw materials include petroleum-based products. Our products also include natural fibers, including cotton. Significant price fluctuations or shortages in petroleum or other raw materials may increase our cost of goods sold and cause our results of operations and financial condition to suffer.

In the past 6 months, raw materials that are key components of 5.11 products have experienced price increases due to COVID-driven shutdowns, logistics disruptions, or low supply of raw resources. Additionally, cotton prices have surged due to the XJ cotton ban by the US Administration, causing a near-term shortage in non-XJ cotton. Chief Value Cotton (CVC—cotton/poly blend), Cotton and Nylon yarns used in 5.11 apparel have experienced a significant price increase, resulting in an increase in cost of Finished Goods in our Apparel category. Similarly, the price increases in the metal & plastic components market has contributed to an increase in finished goods prices in our Hard Goods Category (e.g. flashlights, tools).

Our reliance on a limited number of third-party suppliers to provide materials for and produce our products could cause problems in our supply chain and subject us to additional risks.

We rely on third-party suppliers to manufacture our raw materials and products. Our products are manufactured by third parties and may be available, in the short-term, from a limited number of sources. We choose not to enter into long-term contracts with any of our suppliers or manufacturers for the production and supply of our raw materials and products, and typically transact business with our suppliers on an order-by-order basis. We also compete with other companies for raw materials and production.

We currently source the vast majority of the fabrics used in our products from just over 20 third-party suppliers in Taiwan, China & Vietnam, and we source the other raw materials used in our products, including

 

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items such as labels, elastics, buttons, clasps, and zippers, from a number of suppliers located predominantly in the Asia Pacific region. We work with a large number of manufacturing partners, most of which produce our products in facilities located in South East Asia, China, Africa and Central America, with the majority of our products currently being produced by our top 15 largest manufacturing suppliers in South East Asia. We are continuously working to diversify our sourcing and manufacturing capabilities.

We may experience a disruption in the supply of fabrics or raw materials from current sources, and we may be unable to locate alternative materials suppliers of comparable quality at an acceptable price, or at all. In addition, if we experience significantly increased demand, or if we need to replace an existing supplier or manufacturer, we may be unable to locate additional supplies of fabrics or raw materials or additional manufacturing capacity on terms that are acceptable to us, or at all, or we may be unable to locate any supplier or manufacturer with sufficient capacity to meet our requirements or to fill our orders in a timely manner. Identifying a suitable supplier is an involved process that requires us to become satisfied with its quality control, responsiveness and service, financial stability and labor and other ethical practices. Even if we are able to expand existing or find new manufacturing or fabric sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products, and quality control standards. Our supply of fabric or the manufacture of our products could be disrupted or delayed by the impact of global health pandemics, including the current COVID-19 coronavirus pandemic, and the related government and private sector responsive actions, such as border closures, restrictions on product shipments and travel restrictions. For example, certain of our manufacturers experienced delays and temporary shut-downs due to the COVID-19 pandemic. In order to manage the impact of these disruptions and meet our customers’ expectations, we increased our use of more expensive air freight during 2020, which increased our cost of goods sold. Any delays, interruption or increased costs in the supply of fabric or the manufacture of our products could have an adverse effect on our ability to meet customer demand for our products and result in lower net sales, increased cost of goods sold and lower income from operations, both in the short and long term.

Moreover, we have occasionally received, and may in the future receive, shipments of products that fail to comply with our technical specifications or that fail to conform to our quality control standards. Under these circumstances, unless we are able to obtain replacement products in a timely manner, we risk the loss of net sales resulting from the inability to sell those products and related increased administrative and shipping costs. Additionally, if the unacceptability of our products is not discovered until after such products are purchased by our customers, our customers could lose confidence in our products, and our business and brand could be harmed.

The operations of many of our suppliers are subject to additional risks that are beyond our control and that could harm our business, financial condition and results of operations.

A substantial majority of our suppliers are located outside of the United States, and as a result, we are subject to risks associated with doing business abroad, including:

 

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the imposition of new laws and regulations, including those relating to labor conditions, quality and safety standards, imports, duties, taxes and other charges on imports, as well as trade restrictions and restrictions on currency exchange or the transfer of funds;

 

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political unrest, terrorism, labor disputes and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured;

 

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reduced protection for intellectual property rights, including trademark protection, in some countries, particularly in China;

 

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disruptions or delays in shipments whether due to port congestion, labor disputes, product regulations and/or inspections or other factors, natural disasters or health pandemics, or other transportation disruptions; and

 

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the impact of health conditions, including the ongoing COVID-19 coronavirus pandemic, and related government and private sector responsive actions, and other changes in local economic conditions in countries where our manufacturers, suppliers or customers are located.

 

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These and other factors beyond our control could interrupt our suppliers’ production in offshore facilities, influence the ability of our suppliers to export our products cost-effectively or at all and inhibit our suppliers’ ability to procure certain materials, any of which could harm our business, financial condition and results of operations.

If we are unable to adequately demonstrate that our independent manufacturers use ethical business practices and comply with applicable laws and regulations, our brand image could be harmed due to negative publicity.

Our core values, which include developing the highest quality products while operating with integrity, are an important component of our brand image, which makes our reputation particularly sensitive to allegations of unethical business practices. While our internal and vendor operating guidelines promote ethical business practices such as environmental responsibility, fair wage practices, and compliance with child labor laws, among others, and we, along with a third party that we retain for this purpose, monitor compliance with those guidelines, we do not control our independent manufacturers or their business practices. Accordingly, we cannot guarantee their compliance with our guidelines. A lack of demonstrated compliance could lead us to seek alternative suppliers, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations.

Violation of labor or other laws by our independent manufacturers or the divergence of an independent manufacturer’s labor or other practices from those generally accepted as ethical the United States or other markets in which we do business could also attract negative publicity for us and our brand. This could diminish the value of our brand image and reduce demand for our merchandise if, as a result of such violation, we were to attract negative publicity. Other apparel manufacturers have encountered significant problems in this regard, and these problems have resulted in organized boycotts of their products and significant adverse publicity. If we, or other manufacturers in our industry, encounter similar problems in the future, it could harm our brand image, stock price and results of operations.

Monitoring compliance by independent manufacturers is complicated by the fact that expectations of ethical business practices continually evolve, may be substantially more demanding than applicable legal requirements and are driven in part by legal developments and by diverse groups active in publicizing and organizing public responses to perceived ethical shortcomings. Accordingly, we cannot predict how such expectations might develop in the future and cannot be certain that our guidelines would satisfy all parties who are active in monitoring and publicizing perceived shortcomings in labor and other business practices worldwide.

Parties active in promoting ethical business practices, in addition to evaluating the substance of companies’ practices, also often scrutinize companies’ transparency as to such practices and the policies and procedures they use to ensure compliance by their suppliers and other business partners. Prior to this offering, we have been a private company, and so do not have extensive experience in assembling and disclosing information on such matters as required for public companies or as may be expected by such parties. Moreover, we do not expect as a general matter to publicly disclose information that we deem competitively sensitive, except as required by law. If we do not meet the transparency standards expected by parties active in promoting ethical business practices, we may attract negative publicity, regardless of whether the actual labor and other business practices adhered to by us and our independent manufacturers satisfy substantive expectations of ethical business practices. Such negative publicity could harm our brand image and results of operations and result in a decline in the price of our common stock.

Increases in labor costs, including wages, could adversely affect our business, financial condition and results of operations.

Labor is a significant portion of our cost structure and is subject to many external factors, including unemployment levels, prevailing wage rates, minimum wage laws, any potential collective bargaining arrangements, health insurance costs and other insurance costs and changes in employment and labor legislation

 

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or other workplace regulation. From time to time, legislative proposals are made to increase the federal minimum wage in the United States, as well as the minimum wage in California and a number of other states and municipalities, and to reform entitlement programs, such as health insurance and paid leave programs. As minimum wage rates increase or related laws and regulations change, we may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to our other hourly or salaried employees. None of our domestic employees is currently covered by a collective bargaining agreement, but any attempt by our employees to organize a labor union could result in increased legal and other associated costs. Any increase in the cost of our labor could have an adverse effect on our business, financial condition and results of operations or if we fail to pay such higher wages we could suffer increased employee turnover. Increases in labor costs could force us to increase prices, which could adversely impact our sales. If competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline and could adversely affect our business, financial condition and results of operations. In particular, the job market in California, where our principal offices and distribution center as well as the majority of our employees are located, is very competitive.

In addition, a significant portion of our products are produced in Asia and Central America. Increases in the costs of labor and other costs of doing business in these regions could increase our costs to produce our products and could have a negative impact on our operations and earnings. Factors that could negatively affect our business include a potential significant revaluation of the currencies used in these countries, which may result in an increase in the cost of producing products, labor shortage and increases in labor costs, and difficulties and additional costs in transporting products manufactured from these countries. Also, the imposition of trade sanctions or other regulations against products imported by us from, or the loss of “normal trade relations” status with, any country in which our products are manufactured, including China, could significantly increase our cost of products and harm our business.

Our sales and profitability may decline if product costs increase or selling prices decrease.

Our business is subject to pressure on costs and pricing caused by many factors, including competition, constrained sourcing capacity and related inflationary pressure, pressure from customers to reduce the prices we charge for our products and changes in customer demand. These factors may cause us to experience increased costs while also causing us to reduce prices. If we were to increase prices in response to increased costs, we may experience reduced sales. Any of the forgoing could cause our operating margin to decline if we are unable to offset these factors with reductions in operating costs and could adversely affect our business, financial condition and results of operations.

Our indebtedness could adversely affect our financial condition.

We have a material amount of indebtedness. As of September 30, 2021, we had $179.1 million of borrowings outstanding under our Credit Agreement, and $17.6 million of unused commitments under our Credit Agreement. Our debt could have important consequences, including:

 

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

 

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

 

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exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our senior secured credit facilities, are at variable rates of interest; and

 

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

Although we plan to use a portion of the proceeds of this offering to repay outstanding debt under our Credit Agreement, we expect to continue to utilize debt, including indebtedness under the New Credit Facility, to

 

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finance our operations as a public company, which will expose us to the typical risks associated with the use of leverage. Significant future borrowings could make it more difficult for us to withstand adverse economic conditions or business plan variances, to take advantage of new business opportunities, or to make necessary capital expenditures. Any portion of our cash flow required for debt service would not be available for our operations, distributions, dividends or other purposes. Any substantial decrease in net operating cash flows or any substantial increase in expenses could make it difficult for us to meet our debt service requirements or force us to modify our operations.

The Credit Agreement and the New Credit Facility contain a number of restrictive covenants that impose operating and financial restrictions on us, including restrictions on our ability to incur certain liens, make investments and acquisitions, incur or guarantee additional indebtedness, pay dividends or make other distributions in respect of, or repurchase or redeem our common or preferred shares, or enter into certain other types of contractual arrangements affecting our domestic and foreign subsidiaries or indebtedness. In addition, the restrictive covenants in the Credit Agreement require us to maintain a minimum fixed charge coverage ratio if excess availability under our Credit Agreement falls below a specified threshold. We expect that the agreements governing any new credit facilities, including the New Credit Facility, will contain similar restrictive covenants and require us to maintain specified financial ratios, subject to certain conditions.

Although the Credit Agreement and the New Credit Facility contain restrictions on the incurrence of additional indebtedness, those restrictions are subject to a number of qualifications and exceptions and the additional indebtedness incurred in compliance with those restrictions could be substantial. We may also seek to amend or refinance one or more of our debt instruments to permit us to finance our growth strategy or improve the terms of our indebtedness.

There is no guarantee that we will be able to generate sufficient cash flow or sales to meet these financial covenants or pay the principal and interest when due under our Credit Agreement or the New Credit Facility. Furthermore, there is no guarantee that future working capital, borrowings or equity financing will be available to repay or refinance any such debt.

Our sales are influenced by economic conditions that impact consumer spending, and a downturn in the economy may adversely affect our business.

Apparel, footwear and gear is a cyclical industry that is dependent upon the overall level of consumer spending as well as the funding for and budgets of federal, state, and local public agencies. Consumer purchases of discretionary items, including our products, generally decline during periods when disposable income is adversely affected or there is economic uncertainty. Our wholesale customers anticipate and respond to adverse changes in economic conditions and uncertainty by closing doors, reducing inventories, canceling orders or increasing promotional activity. Our brand-dedicated stores are also affected by these conditions, which may lead to a decline in consumer traffic and spending in these stores. As a result, factors that diminish consumer spending and confidence in any of the markets in which we compete, particularly deterioration in general economic conditions, volatility in investment returns, fear of unemployment, increases in energy costs or interest rates, housing market downturns, fear about and impact of pandemic illness, and other factors such as acts of war, natural disasters or terrorist or political events that impact consumer confidence, could reduce our sales and adversely affect our business and financial condition through their impact on our wholesale customers as well as their direct impact on us. These outcomes and behaviors have in the past, and may continue to in the future, adversely affect our business and financial condition.

Historically, our professional line of business has been less sensitive to overall economic conditions due to the need to replenish and replace uniforms and other items by our agency and other professional customers, but it nonetheless remains dependent upon the budgets of these agencies. However, we are not be able to predict the effect on our sales and profitability resulting from a future downturn in the economy. It is possible that a downturn in the economy in markets in which we sell our products may harm our business, financial condition and results of operations.

 

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We may not realize the anticipated benefits of future acquisitions and strategic investments, and integration of acquisitions may disrupt our business and management.

We may in the future acquire or make strategic investments in additional companies. We may not realize the anticipated benefits of these or any other acquisitions or strategic investments, which involve numerous risks, including:

 

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problems integrating the purchased operations, technologies, personnel or products over geographically disparate locations;

 

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unanticipated costs, litigation and other liabilities;

 

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diversion of management’s attention from our core business;

 

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adverse effects on existing business relationships with suppliers and customers;

 

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incurrence of acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;

 

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inability to retain key customers, distributors, vendors and other business partners of the acquired business;

 

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risks associated with entering new markets in which we may have limited or no experience;

 

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potential loss of our key employees or the key employees of an acquired organization; and

 

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if we are not be able to successfully integrate businesses, products, technologies or personnel that we acquire, or to realize expected benefits of our acquisitions or strategic investments, our business and financial results may be adversely affected.

Certain of our key operating metrics are subject to inherent challenges in measurement, and any real or perceived inaccuracies in our metrics or the underlying data may cause a loss of investor confidence in such metrics and the market price of our common stock may decline.

We track certain key operating metrics using internal data analytics tools that have certain limitations. In addition, we rely on data received from third parties, including third-party platforms, to track certain performance indicators, and we may be limited in our ability to verify such data. In addition, our methodologies for tracking metrics may change over time, which could result in changes to the metrics we report. If we undercount or overcount performance due to the internal data analytics tools we use or issues with the data received from third parties, or if our internal data analytics tools contain algorithmic or other technical errors, the data we report may not be accurate or comparable with prior periods. In addition, limitations, changes or errors with respect to how we measure data may affect our understanding of certain details of our business, which could affect our longer-term strategies. If our performance metrics are not, or are not perceived to be, accurate representations of our business, if we discover material inaccuracies in our metrics or the data on which such metrics are based, or if we can no longer calculate any of our key performance metrics with a sufficient degree of accuracy, investors could lose confidence in the accuracy and completeness of such metrics, which could cause the price of our common stock to decline.

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, our business could fail to grow at similar rates, or at all.

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate. Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate, including as a result of any of the risks described in this prospectus.

 

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The variables that go into the calculation of our market opportunity are subject to change over time, and there is no guarantee that any particular number or percentage of addressable customers covered by our market opportunity estimates will purchase our products at all or generate any particular level of net sales for us. In addition, our ability to expand in any of our target markets depends on a number of factors, including the cost, performance and perceived value associated with our products and apparel, footwear and gear in general. Even if the markets in which we compete meet the size estimates and growth forecasted in this prospectus, our business could fail to grow 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 forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.

Our growth strategy involves expansion of our DTC channel, including retail stores and eCommerce, which may present risks and challenges that we have not yet experienced.

Our business has only recently evolved from one in which we only distributed products on a wholesale basis for resale by others to one that also includes a multi-channel experience, which includes retail physical and online stores operated by us. Growing our eCommerce platforms and number of physical stores is essential to our growth strategy, as is expanding our product offerings available through these channels. However, we have limited operating experience operating retail stores, which we initially launched in 2012. This strategy has and will continue to require significant investment in cross-functional operations and management focus, along with investment in supporting technologies and retail store spaces. If we are unable to provide a convenient and consistent experience for our customers, our ability to compete and our results of operations could be adversely affected. In addition, if our eCommerce store design does not appeal to our customers, reliably function as designed, or maintain the privacy of customer data, or if we are unable to consistently meet our brand promise to our customers, we may experience a loss of customer confidence or lost sales, or be exposed to fraudulent purchases, which could adversely affect our reputation and results of operations.

We currently operate our online stores in the United States, Sweden (to service our European markets), Brazil and Australia, and we are planning to expand our eCommerce platform to other geographies. These countries may impose different and evolving laws governing the operation and marketing of eCommerce websites, as well as the collection, storage and use of information on consumers interacting with those websites. We may incur additional costs and operational challenges in complying with these laws, and differences in these laws may cause us to operate our businesses differently in different territories. If so, we may incur additional costs and may not fully realize the investment in our international expansion.

Because our business is highly concentrated on apparel, footwear and gear, we are vulnerable to changes in consumer preferences that could harm our sales, profitability and financial condition.

Our business is not currently diversified and consists primarily of designing, manufacturing and distributing apparel, footwear and gear. In fiscal 2020, our main product category across all seasons, pants, was made up of over 30 styles and comprised over one-third of our sales. Our next biggest category is bags, comprising over 10% of our sales and made up of over 25 styles. Consumer preferences often change rapidly. Therefore, our business is substantially dependent on our ability to attract customers who are willing to pay a premium for our products. Any future shifts in consumer preferences away from retail spending for premium outerwear and accessories would also have a material adverse effect on our results of operations.

In addition, we believe that continued increases in sales of apparel, footwear and gear will largely depend on our penetration into the customer consumer market. If the number of consumer customers demanding apparel, footwear and gear does not continue to increase, or if our consumer customers are not convinced that our products are more functional or stylish than other alternatives, we may not achieve the level of sales necessary to support new growth platforms and our ability to grow our business will be severely impaired.

 

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Our operating results are subject to seasonal and quarterly variations in our revenue and operating income, which could cause the price of our common shares to decline.

Our business is seasonal and, historically, we have realized a higher portion of our revenue and earnings for the fiscal year in the third and fourth fiscal quarters, due in part to seasonal holiday demand as well as seasonal demand of wholesale orders. Any factors that harm our third and fourth fiscal quarter operating results, including disruptions in our supply chain, or unfavorable economic conditions, could have a disproportionate effect on our results of operations for the entire fiscal year.

In order to prepare for our peak demand season, we must maintain higher quantities of finished goods. As a result, our working capital requirements also fluctuate during the year, increasing slightly in the 3^rd and 4^th fiscal quarters in alignment with sales trend.

Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the sales contributed by our Wholesale and DTC channels. As a result, historical period-to-period comparisons of our sales and operating results are not necessarily indicative of future period-to-period results. You should not rely on the results of a single fiscal quarter as an indication of our annual results or our future performance.

Our future success is substantially dependent on the continued service of our senior management.

Our future success is substantially dependent on the continued service of our senior management, particularly our Executive Chairman, Matthew Hyde, our Chief Executive Officer, Francisco J. Morales, and our Chief Financial Officer, James McGinty. The loss of the services of our senior management could make it more difficult to successfully operate our business and achieve our business goals.

We also may be unable to retain existing management, technical, sales and client support personnel that are critical to our success, which could result in harm to our customer and employee relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs.

In addition, we have not obtained key man life insurance policies on any of our members of our senior management team. As a result, we would have no way to cover the financial loss if we were to lose the services of members of our senior management team.

Our current and future products may experience quality problems from time to time that can result in negative publicity, litigation, product recalls and warranty claims, which could result in decreased revenue and operating margin, and harm to our brand.

There can be no assurance we will be able to detect, prevent, or fix all defects that may affect our products. We are conducting, and have in the past, conducted voluntary recalls of our products and, going forward, the failure to detect, prevent, or fix defects, or the occurrence of real or perceived quality, health or safety problems or material defects in our current and future products, could result in a variety of consequences, including a greater number of product returns than expected from customers and our retail partners, litigation, product recalls, and credit, warranty or other claims, among others, which could harm our brand, sales, profitability and financial condition. Because of our comprehensive warranty against product defects, quality problems could lead to increased warranty costs, and divert the attention of our manufacturing facilities. Such problems could hurt our premium brand image, which is critical to maintaining and expanding our business. Any negative publicity or lawsuits filed against us related to the perceived quality and safety of our products could harm our brand and decrease demand for our products.

Our business could be adversely affected by protestors or activists.

We have been the target of activists in the past, and may continue to be in the future. Our professional customers include law enforcement personnel, and we may be adversely affected by any protests against law

 

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enforcement agencies and personnel due to a perceived association between us and such customers. In addition, protestors can disrupt sales at our stores, or use social media or other campaigns to sway public opinion against our products. If any such activists are successful at either of these, our sales and results of operations may be adversely affected.

We may face increasing exposure to foreign currency exchange rate fluctuations.

While we transact in U.S. dollars with our customers in the United States, we transact in foreign currencies in connection with our international operations, and our exposure to transactions in foreign currencies will increase as we expand our international offerings and operations. Certain of our foreign operating expenses are denominated in the currencies of the countries and territories in which our third-party vendors are located. Accordingly, changes in the value of foreign currencies relative to the U.S. dollar can affect our net sales and results of operations. As a result of such foreign currency exchange rate fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our common stock could be lowered. We do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place and may introduce additional risks if we are unable to structure effective hedges with such instruments.

We are subject to many hazards and operational risks that can disrupt our business, some of which may not be insured or fully covered by insurance.

Our operations are subject to many hazards and operational risks inherent to our business, including: general business risks, product liability, product recall and damage to third parties, our infrastructure or properties caused by fires, floods and other natural disasters, power losses, telecommunications failures, terrorist attacks, human errors and similar events. Some of the merchandise we sell may expose us to product liability claims and litigation or regulatory actions relating to personal injury.

We believe that we maintain insurance customary for businesses of our size and type. However, our insurance coverage may be inadequate to cover our liabilities related to such hazards or operational risks, and we there are types of losses we may incur that cannot or may not be insured against or that we believe are not economically reasonable to insure. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and commercially justifiable, and insurance may not continue to be available on terms as favorable as our current arrangements. Moreover, any loss incurred could exceed policy limits and policy payments made to us may not be made on a timely basis. In addition, some of our agreements with our suppliers may not indemnify us from product liability for a particular supplier’s merchandise or our suppliers may not have sufficient resources or insurance to satisfy their indemnity and defense obligations. The occurrence of a significant uninsured claim, or a claim in excess of the insurance coverage limits maintained by us could harm our business, results of operations and financial condition.

Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting, which could harm our business and cause a decline in our share price.

Reporting obligations as a public company and our anticipated growth have placed and are likely to continue to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. In addition, following our first year as a public company we will be required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify the effectiveness of our internal controls. As a result, we will be required to continue

 

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to improve our financial and managerial controls, reporting systems and procedures, to incur substantial expenses to test our systems and to make such improvements and to hire additional personnel. If our management is unable to certify the effectiveness of our internal controls or if material weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could harm our business and cause a decline in our share price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our share price and harm our ability to raise capital. Failure to accurately report our financial performance on a timely basis could also jeopardize our continued listing on the Nasdaq Global Market, or any other exchange on which our common shares may be listed.

Delisting of our common shares on any exchange would reduce the liquidity of the market for our common shares, which would reduce the price of our common shares and increase the volatility of our share price.

We do not expect that our disclosure controls and procedures and internal controls over financial reporting will prevent all error or fraud. A control system, no matter how well-designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within an organization are detected. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected in a timely manner or at all. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results could be materially adversely effected, which could also cause investors to lose confidence in our reported financial information, which in turn could result in a reduction in the trading price of the common shares.

We may not be able to successfully open new store locations in a timely manner, if at all, which could harm our results of operations.

Our growth will depend in part on our ability to successfully open and operate new stores. Our ability to successfully open and operate new stores depends on many factors, including, among others, our ability to:

 

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identify suitable store locations, the availability of which is outside of our control;

 

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negotiate acceptable lease terms, including desired tenant improvement allowances;

 

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hire, train and retain store personnel and field management;

 

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integrate new store personnel and field management into our corporate culture;

 

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source sufficient inventory levels; and

 

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successfully integrate new stores into our existing operations and information technology systems.

We may be unsuccessful in identifying new markets where our products and brand image will be accepted or the performance of our stores will be considered successful. Further, we will encounter pre-operating costs and we may encounter initial losses while new stores commence operations.

We plan to open a large number of stores in the near future in comparison to our existing store base and our historical rate of store launches. Of the 85 stores in operation as of September 30, 2021, 12 new stores were opened in 2020. During 2019, 16 new stores were opened. In the first nine months of 2021, we opened 13 new stores in the United States. During the remainder of 2021, we expect to open two additional stores in the United States and no additional stores outside the United States. We estimate that we will incur approximately $0.7 million of capital expenditures to open these additional stores by the end of 2021. In addition, our new stores may not be immediately profitable and we may incur losses until these stores become profitable. There can be no assurance that we will open the planned number of new stores in 2021 or thereafter. Any failure to successfully open and operate new stores would harm our results of operations.

 

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Our limited operating experience and limited brand recognition in new markets may limit our expansion strategy and cause our business and growth to suffer.

Our future growth depends, to a considerable extent, on our expansion efforts outside of United States. As of September 30, 2021, we had one store in Hamburg, Germany, and one store in Bankstown, Australia. Therefore, in comparison to our number of customers and operating experience in the United States, we have a limited number of customers and limited experience in operating outside of United States. We also have limited experience with regulatory environments and market practices in certain countries outside of United States, and cannot guarantee that we will be able to penetrate or successfully operate in any market outside of United States.

In connection with our expansion efforts, we may encounter increased costs of operations resulting from higher payroll expenses and increased rent expense. In connection with our expansion efforts outside of the United States, we may also encounter obstacles we do not face in United States, including cultural and linguistic differences, differences in regulatory environments and market practices and difficulties in keeping abreast of market, business and technical developments. We may also encounter difficulty expanding into new markets because of limited brand recognition leading to delayed acceptance of our products by customers in these new markets. In particular, we have no assurance that our marketing efforts will prove successful outside of the geographic regions in which they have been used in the United States. The expansion into new markets may also present competitive, merchandising, forecasting and distribution challenges that are different from or more severe than those we currently face. Failure to develop new markets outside of United States or disappointing growth outside of United States may harm our business and results of operations.

We plan to primarily use cash from operations to finance our growth strategy, and if we are unable to maintain sufficient levels of cash flow we may not meet our growth expectations.

We intend to finance our growth through the cash flows generated by our existing points of sale, borrowings under our available credit facilities and the net proceeds from this offering. However, if we are not profitable or if our profits decline, we may not have the cash flow necessary in order to pursue or maintain our growth strategy. We may also be unable to obtain any necessary financing on commercially reasonable terms, or at all, to pursue or maintain our growth strategy. If we are unable to pursue or maintain our growth strategy, the market price of our common stock could decline and our results of operations and profitability could suffer.

We are subject to risks associated with leasing retail space subject to long-term non-cancelable leases and are required to make substantial lease payments under our operating leases, and any failure to make these lease payments when due would likely harm our business, profitability and results of operations.

We do not own any of our stores, but instead lease all of our corporate-owned stores under operating leases. Our leases generally have initial terms of between 5 and 10 years, and generally can be extended only in 5 year increments (at increased rates) if at all. All of our leases require a fixed annual rent, and most require the payment of additional rent if store sales exceed a negotiated amount. Generally, our leases are “net” leases, which require us to pay all of the cost of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases at our option. Payments under these operating leases account for a significant portion of our selling, general and administrative expenses. For example, as of December 31, 2020, we were a party to operating leases associated with our corporate-owned stores as well as other corporate facilities requiring future minimum lease payments aggregating $11.2 million through 2021 and approximately $57.3 million thereafter. We expect that any new stores we open will also be leased by us under operating leases, which will further increase our operating lease expenses.

Our substantial operating lease obligations could have significant negative consequences, including:

 

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increasing our vulnerability to general adverse economic and industry conditions;

 

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limiting our ability to obtain additional financing;

 

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•

requiring a substantial portion of our available cash to pay our rental obligations, thus reducing cash available for other purposes;

 

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

 

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placing us at a disadvantage with respect to some of our competitors.

We depend on cash flow from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from borrowings under our available credit facilities or from other sources, we may not be able to service our operating lease expenses, grow our business, respond to competitive challenges or to fund our other liquidity and capital needs, which would harm our business.

Additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. In addition, as our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close stores in desirable locations. Of our 85 stores as of September 30, 2021, 4 leases are due to expire in 2022. If we are unable to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close, our business, profitability and results of operations may be harmed.

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

System interruptions that impair customer access to our website or other performance failures in our technology infrastructure could damage our business, reputation and brand and substantially harm our business, financial condition and results of operations.

We rely on information technology networks and systems and our website to market and sell our products and to manage a variety of business processes and activities and to comply with regulatory, legal and tax requirements. We depend on our information technology infrastructure for digital marketing activities and for electronic communications among our personnel, customers, manufacturers and suppliers around the world. Our website and information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events. Our website serves as an effective extension of our marketing strategies by exposing potential new customers to our brand, product offerings and enhanced content. Due to the importance of our website and internet-related operations, we are vulnerable to website downtime and other technical failures, which may be outside of our control. Further, any slow down or material disruption of our systems, or the systems of our third-party service providers, or our website could disrupt our ability to track, record and analyze the products that we sell and could negatively impact our operations, shipment of goods, ability to process financial information and transactions, and our ability to receive and process customer orders or engage in normal business activities. Our third-party technology providers may also change their policies, terms or offerings from time to time, may fail to introduce new features and offerings that meet our needs as we expand, or may cease to provide services to us on favorable terms, or at all, which could require us to adjust how we use our information technology systems, including our website, or switch to alternative third-party service providers which could be costly, cause interruptions and could ultimately adversely affect our business, financial condition, results of operations and growth prospects.

If our website or information technology systems, including those run by or those of our third-party providers, suffer damage, disruption or shutdown and we or our third-party providers do not effectively resolve the issues in a timely manner, our business, financial condition and results of operations may be adversely affected, and we could experience delays in reporting our financial results.

 

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If our computer or our third-party providers’ and communications hardware fail, or if we suffer an interruption or degradation of services, we could lose customer data and miss order fulfillment deadlines, which could harm our business. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, cyberattacks, data loss, acts of war, break-ins, earthquake and similar events. Any failure or interruption of our website, internal business applications or our technology infrastructure could harm our ability to serve our clients, which could adversely affect our business, financial condition and results of operations.

Our software may contain undetected errors or vulnerabilities, some of which may only be discovered after the software has been implemented in our production environment or released to end users. Though we seek to continually update and improve our software, we may not always be successful in executing these upgrades and improvements, and the operation of our systems may be subject to failure. We may experience slowdowns or interruptions in our website when we are updating it. For example, in the past we have experienced minor slowdowns while updating our website. Moreover, new technologies or infrastructures may not be fully integrated with existing systems on a timely basis, or at all. Any errors or vulnerabilities discovered in our software after commercial implementation or release could result in damage to our reputation, loss of customers, disruption to our eCommerce channels, loss of revenue or liability for damages, any of which could adversely affect our growth prospects and our business.

Our net sales depend on the number of visitors who shop on our website and the volume of orders we can handle. Unavailability of our website or reduced order fulfillment performance would reduce the volume of goods sold and could also adversely affect customer perception of our brand. We may experience periodic system interruptions from time to time. In addition, continued growth in our transaction volume, as well as surges in online traffic and orders associated with promotional activities or seasonal trends in our business, place additional demands on our technology platform and could cause or exacerbate slowdowns or interruptions. If there is a substantial increase in the volume of traffic on our website or the number of orders placed by customers, we will be required to further expand, scale and upgrade our technology, transaction processing systems and network infrastructure. There can be no assurance that we will be able to accurately project the rate or timing of increases, if any, in the use of our website or expand, scale and upgrade our technology, systems and infrastructure to accommodate such increases on a timely basis. In order to remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our website, which is particularly challenging given the rapid rate at which new technologies, customer preferences and expectations and industry standards and practices are evolving in the eCommerce industry. Our or our third-party vendors’ inability to continue to update, improve and scale our website and the underlying technology infrastructure could harm our reputation and our ability to acquire, retain and serve our customers, which could adversely affect our business, financial condition and results of operations.

Further, we endeavor to continually upgrade existing technologies and business applications, and we may be required to implement new technologies or business applications in the future. The implementation of upgrades and changes requires significant investments. Our results of operations may be affected by the timing, effectiveness and costs associated with the successful implementation of any upgrades or changes to our systems and infrastructure. In the event that it is more difficult for our customers to buy products from us on their mobile devices, or if our customers choose not to buy products from us on their mobile devices or to use mobile products that do not offer access to our websites, our customer growth could be harmed and our business, financial condition and results of operations may be adversely affected.

We must continue to expand and scale our information technology systems, and our failure to do so could adversely affect our business, financial condition and results of operations.

We will need to continue to expand and scale our information technology systems and personnel to support recent and expected future growth. As such, we will continue to invest in and implement modifications and upgrades to our information technology systems and procedures, including replacing legacy systems with

 

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successor systems, making changes to legacy systems or acquiring new systems with new functionality, hiring employees with information technology expertise and building new policies, procedures, training programs and monitoring tools. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, capital expenditures, additional administration and operating expenses, acquisition and retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, the introduction of errors or vulnerabilities and other risks and costs of delays or difficulties in transitioning to or integrating new systems into our current systems. These implementations, modifications and upgrades may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. Additionally, difficulties with implementing new technology systems, delays in our timeline for planned improvements, significant system failures or our inability to successfully modify our information systems to respond to changes in our business needs may cause disruptions in our business operations and adversely affect our business, financial condition and results of operations.

Data security breaches and other cyber security events could negatively affect our reputation, credibility and business.

We collect, process, maintain and use sensitive personal information relating to our customers and employees, including certain personally identifiable information, and rely on third parties for the operation of our eCommerce site and for the various social media tools and websites we use as part of our marketing strategy. Any perceived, attempted or actual unauthorized disclosure of personally identifiable information regarding our employees, customers or website visitors could harm our reputation and credibility, reduce our eCommerce sales, impair our ability to attract website visitors, reduce our ability to attract and retain customers and could result in litigation against us or the imposition of significant fines or penalties.

Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting new foreign, federal, provincial and state laws and legislative proposals addressing data privacy and security, as well as increased data protection obligations imposed on merchants by credit card issuers. As a result, we may become subject to more extensive requirements to protect the customer information that we process in connection with the purchase of our products, resulting in increased compliance costs.

Our eCommerce activities, including our eCommerce websites, also may be subject to denial of service or other forms of cyberattacks. While we have taken measures we believe reasonable to protect against those types of attacks, those measures may not adequately protect our eCommerce activities from such attacks. If a denial of service attack or other cyber event were to affect our eCommerce sites or other information technology systems, our business could be disrupted, we may lose sales or valuable data, and our reputation may be adversely affected.

We may incur losses from fraud.

We have occasionally in the past incurred and may in the future incur losses from various types of fraud, including stolen credit card numbers, claims that a customer did not authorize a purchase and merchant fraud. As a general matter, we are liable for fraudulent credit card transactions. Although we have measures in place to detect and reduce the occurrence of fraudulent activity on our digital platform, those measures may not always be effective. In addition to the direct costs of such losses, if the fraud is related to credit card transactions and becomes excessive, it could potentially result in us paying higher fees or affecting our ability to accept credit cards for payment. Our failure to adequately prevent fraudulent transactions could damage our reputation, result in litigation or regulatory action and lead to expenses that could substantially impact our operating results.

Additionally, we may in the future be, subject to fraudulent purchases by individuals purchasing our products in bulk with the intention of unlawfully reselling such products at a premium. While we have

 

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procedures in place to detect and prevent such practices, our failure to identify those activities may adversely affect our brand and reputation.

We rely on payment cards to receive payments, and are subject to payment-related risks.

For our DTC sales, as well as for sales to certain retail partners, we accept a variety of payment methods, including credit cards, debit cards and electronic funds transfers. Accordingly, we are, and will continue to be, subject to significant and evolving regulations and compliance requirements relating to payment card processing. This includes laws governing the collection, processing and storage of sensitive consumer information, as well as industry requirements such as the Payment Card Industry Data Security Standard, or PCI-DSS. These laws and obligations may require us to implement enhanced authentication and payment processes that could result in increased costs and liability, and reduce the ease of use of certain payment methods. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time. We rely on independent service providers for payment processing, including credit and debit cards. If these independent service providers become unwilling or unable to provide these services to us or if the cost of using these providers increases, our business could be harmed. We are also subject to payment card association operating rules and agreements, including PCI-DSS, 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 fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for losses incurred by card issuing banks or consumers, subject to fines and higher transaction fees, lose our ability to accept credit or debit card payments from our consumers, or process electronic fund transfers or facilitate other types of payments. Any failure to comply could significantly harm our brand, reputation, business, and results of operations.

Some of our software and systems contain open source software, which may pose particular risks to our proprietary applications.

We use one software licensed to us by third-party developers under “open source” license in connection with the development or deployment of our proprietary software and expect to continue to use this or other open source software in the future. Some open source licenses contain express requirements, which may be triggered under certain circumstances, that licensees make available source code of modifications or derivative works or prohibit such modifications or derivative works from being licensed for a fee. Although we monitor our use of open source software to avoid subjecting our platform to such requirements, the terms of many open source licenses have not been interpreted by U.S. or foreign courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to develop or use our proprietary software. We may face claims from third parties demanding the release or license of the open source software or derivative works that we developed from such software (which could include our proprietary source code) or otherwise seeking to enforce the terms of applicable open source licenses. These claims could result in litigation and could require us to publicly release portions of our proprietary source code or cease distributing or otherwise using the implicated solutions unless and until we can re-engineer them.

In addition, our use of open source software may present greater risks than use of other third-party commercial software, as open source licensors generally do not provide support, warranties, indemnification or other contractual protections regarding infringement claims or the quality of the code. To the extent that our platform depends upon the successful operation of open source software, any undetected errors or defects in open source software that we use could prevent the deployment or impair the functionality of our systems and injure our reputation. In addition, the public availability of such software may make it easier for others to compromise our platform. Any of these risks could be difficult to eliminate or manage and, if not addressed, could have an adverse effect on our business, financial condition and results of operations.

 

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Our business may be adversely affected if we are unable to provide our customers a cost-effective shopping platform that is able to respond and adapt to rapid changes in technology.

The number of people who access the internet through devices other than personal computers, including smartphones and portable computers, such as laptops and tablets, has increased dramatically in the past few years. The smaller screen size, functionality and memory associated with some alternative devices may make the use of our website and purchasing our products more difficult. The versions of our website developed for such alternative devices may not be compelling to customers. In addition, it is time consuming and costly to keep pace with rapidly changing and continuously evolving technology.

As existing mobile devices and platforms evolve and new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in adjusting and developing applications for changed and alternative devices and platforms, and we may need to devote significant resources to the redevelopment, support and maintenance of our website. The timing, effectiveness and costs associated with the successful implementation of any upgrades or changes to our systems and infrastructure serving website or mobile device users may affect our results of operations. If we are unable to attract customers to our websites through these devices or are slow to develop versions of our website that are more compatible with alternative devices, or if our customers choose not to buy products from us on their mobile devices or use mobile products that do not offer access to our websites, we may fail to capture a significant share of customers in the apparel, footwear and gear market, which could adversely affect our business. In addition, in the event that it is more difficult for our customers to buy products from us on their mobile devices, or if our customers choose not to buy products from us on their mobile devices or to use mobile products that do not offer access to our websites, our customer growth could be harmed and our business, financial condition and results of operations may be adversely affected.

If sensitive information about our customers is disclosed, or if we or our third-party providers are subject to real or perceived cyberattacks, or security breaches, our customers may curtail use of our website, we may be exposed to liability and our reputation could suffer.

We increasingly rely on information technology systems to process, transmit and store electronic information and use information technology systems and networks in our operations and supporting departments. Operating our business and platform involves the collection, storage and transmission of proprietary and confidential information, as well as the personal information of our employees and customers. Some of our third-party service providers, such as identity verification and payment processing providers, also regularly have access to customer data. In an effort to protect sensitive information, we rely on a variety of security measures, including encryption and authentication technology licensed from third parties. However, advances in computer capabilities, increasingly sophisticated tools and methods used by hackers and cyber terrorists, new discoveries in the field of cryptography or other developments may result in our failure or inability to adequately protect sensitive information.

Like other eCommerce companies, we are also vulnerable to hacking, malware, computer viruses, unauthorized access, phishing or social engineering attacks, ransomware attacks, extortion, credential stuffing attacks, denial-of-service attacks, exploitation of software vulnerabilities and other real or perceived cyberattacks. Additionally, as a result of the ongoing COVID-19 pandemic, certain functional areas of our workforce remain in a remote work environment, which has heightened the risk of these potential vulnerabilities. Any of these incidents could lead to interruptions or shutdowns of our platform, loss or corruption of data or unauthorized access to or disclosure of personal data or other sensitive information. Cyberattacks could also result in the theft of our intellectual property, damage to our IT systems or disruption of our ability to make financial reports and other public disclosures required of public companies. We have been subject to attempted cyber, phishing or social engineering attacks in the past and may continue to be subject to such attacks and other cybersecurity incidents in the future. If we gain greater visibility, we may face a higher risk of being targeted by cyberattacks. Advances in computer capabilities, new technological discoveries or other developments may result in cyberattacks becoming more sophisticated and more difficult to detect, and any cyberattacks or security breaches may remain undetected until after they occur. We and our third-party service providers may not have the resources or technical sophistication to anticipate or prevent all such cyberattacks.

 

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The costs of mitigating cybersecurity risks are significant and are also likely to increase in the future. These costs include, but are not limited to, retaining the services of cybersecurity providers; compliance costs arising out of existing and future cybersecurity, data protection and privacy laws and regulations; and costs related to maintaining redundant networks, data backups and other damage-mitigation measures. Security breaches can also occur as a result of non-technical issues, including intentional or inadvertent actions by our employees, our third-party service providers, or their personnel.

We and our third-party service providers may experience cyberattacks aimed at disrupting our and their services. If we or our third-party service providers experience, or are believed to have experienced, security breaches that result in marketplace performance or availability problems or the loss or corruption of, or unauthorized access to or disclosure of, personal data or confidential information, this could damage our reputation and our relationship with future and existing customers. For example, people may become unwilling to provide us the information necessary to make purchases on our website and existing customers may also decrease their purchases or close their accounts altogether, which could have a material adverse effect on our operations. While we maintain cyber errors and omissions insurance coverage that covers certain aspects of cyber risks, these losses may not be adequately covered by insurance or other contractual rights available to us. The successful assertion of one or more large claims against us that exceed or are not covered by our insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have an adverse effect on our business, financial condition and results of operations.

Furthermore, we may be required to disclose personal data pursuant to demands from individuals, privacy advocates, regulators, government agencies and law enforcement agencies in various jurisdictions with conflicting privacy and security laws. This disclosure or refusal to disclose personal data may result in a breach of privacy and data protection policies, notices, laws, rules, court orders and regulations and could result in proceedings or actions against us in the same or other jurisdictions, damage to our reputation and brand and inability to provide our products to customers in certain jurisdictions. Additionally, changes in the laws and regulations that govern our collection, use and disclosure of customer data could impose additional requirements with respect to the retention and security of customer data, could limit our marketing activities and have an adverse effect on our business, financial condition and results of operations.

We rely significantly on information technology systems for our distribution systems and other critical business functions, and are increasing our reliance on these functions as our DTC channel expands. Any failure, inadequacy, or interruption of those systems could harm our ability to operate our business effectively.

We rely on information systems to effectively manage all aspects of our global business, including merchandise planning, manufacturing, allocation, distribution and sales. Our reliance on these systems, and their importance to our business, will increase as we expand our DTC channel and global operations. We rely on a number of third parties to help us effectively manage these systems. If information systems we rely on fail to perform as expected, our business could be disrupted. The failure of us or our vendors to manage and operate our information technology systems as expected could disrupt our business, result in our not providing adequate product, losing sales or market share, and reputational harm, causing our business to suffer. Any such failure or disruption could have a material adverse effect on our business.

Our information technology systems and vendors also may be vulnerable to damage or interruption from circumstances beyond our or their control, including fire, flood, natural disasters, systems failures, network or communications failures, power outages, viruses, security breaches, cyber-attacks and terrorism. We maintain disaster recovery procedures intended to mitigate the risks associated with such events, but there is no guarantee that these procedures will be adequate in any particular circumstance. As a result, such an event could materially disrupt, and have a material adverse effect on, our business.

 

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Failure to comply with federal, state or foreign laws and regulations or our contractual obligations relating to privacy, data protection and customer protection, or the expansion of current or the enactment of new laws and regulations relating to privacy, data protection and customer protection, could adversely affect our business and our financial condition.

We collect and maintain significant amounts of data relating to our customers and employees, and we face risks inherent in both handling large volumes of data and in protecting the security of such data. Our actual or perceived failure to comply with any federal, state or foreign laws and regulations, or applicable industry standards that govern or apply to our collection, use, retention, sharing and security of data, could result in enforcement actions that require us to change our business practices in a manner that may negatively impact our revenue, as well as expose ourselves to litigation, fines, civil and/or criminal penalties and adverse publicity that could cause our customers to lose trust in us, negatively impacting our reputation and business in a manner that harms our financial position. Laws and regulations in the United States and around the world restrict how information about individuals is collected, processed, stored, used and disclosed, as well as set standards for its security, implement notice requirements regarding privacy practices, and provide individuals with certain rights regarding the use, disclosure and sale of their protected personal information. These laws and regulations are still being tested in courts, and they are subject to new and differing interpretations by courts and regulatory officials. We are working to comply with the privacy and data protection laws and regulations that apply to us, and we anticipate needing to devote significant additional resources to complying with these laws and regulations. It is possible that these laws and regulations may be interpreted and applied in a manner that is inconsistent from jurisdiction to jurisdiction or inconsistent with our current policies and practices.

In the United States, both federal and various state governments have adopted, or are considering, laws, guidelines or rules for the collection, distribution, use and storage of information collected from or about consumers or their devices. For example, California enacted the California Consumer Privacy Act, or the CCPA went into effect on January 1, 2020 and gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as statutory damages and a private right of action for data breaches that is expected to increase data breach litigation. Many of the CCPA’s requirements as applied to personal information of a business’s personnel and related individuals are subject to a moratorium set to expire on January 1, 2023. The expiration of the moratorium may increase our compliance costs and our exposure to public and regulatory scrutiny, costly litigation, fines and penalties. Additionally, California voters recently approved a ballot measure adopting the California Privacy Rights Act, or the CPRA, which will substantially expand the requirements of the CCPA effective January 1, 2023. The CPRA will restrict use of certain categories of sensitive personal information that we handle, further restrict the use of cross-context behavioral advertising techniques on which our platform relies, establish restrictions on the retention of personal information, expand the types of data breaches subject to the private right of action, and establish the California Privacy Protection Agency to implement and enforce the new law and impose administrative fines.

Further, on March 2, 2021, the Governor of Virginia signed into law the Virginia Consumer Data Protection Act, or the VCDPA. The VCDPA creates consumer rights, similar to the CCPA, but also imposes security and assessment requirements for businesses. In addition, on July 7, 2021, Colorado enacted the Colorado Privacy Act, or the COCPA, becoming the third comprehensive consumer privacy law to be passed in the United States (after the CCPA and VCDPA). The COCPA closely resembles the VCDPA, and will be enforced by the respective states’ Attorney General and district attorneys, although the two differ in many ways and once they become enforceable in 2023, we must comply with each if our operations fall within the scope of these newly enacted comprehensive mandates. Similar laws have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the United States. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging.

In addition to risks posed by new privacy laws, we could be subject to claims alleging violations of long-established federal and state privacy and consumer protection laws. For example, the Telephone Consumer

 

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Protection Act, or TCPA, is a federal law that imposes significant restrictions on the ability to make telephone calls or send text messages to mobile telephone numbers without the prior consent of the person being contacted. The TCPA provides for substantial statutory damages for violations, which has generated extensive class-action litigation. In addition, class-action plaintiffs in the United States are employing novel legal theories to allege that federal and state eavesdropping/wiretapping laws and state constitutions prohibit the use of analytics technologies widely employed by website operators to understand how their users interact with their services. Despite our compliance efforts, our use of text messaging communications or similar analytics technologies could expose us to costly litigation, government enforcement actions, damages and penalties, which could adversely affect our business, financial condition and results of operations.

Outside of the United States, certain foreign jurisdictions, including the European Economic Area, or EEA, the United Kingdom, Switzerland, and Brazil, have laws and regulations which are more restrictive in certain respects than those in the United States. For example, in the EEA, Switzerland, and the United Kingdom, we are subject to regulations in each case in relation to our collection, control, use, sharing, disclosure and other processing of data relating to an identified or identifiable living individual (personal data). The GDPR, and national implementing legislation in EEA member states, Switzerland, and the United Kingdom (in which we are subject to the United Kingdom regime consisting primarily of the U.K. GDPR and the U.K. Data Protection Act 2018), impose a strict data protection compliance regime including: providing detailed disclosures about how personal data is collected and processed (in a concise, intelligible and easily accessible form); granting new rights for data subjects in regard to their personal data (including the right to be “forgotten” and the right to data portability), as well as enhancing current rights (e.g., data subject access requests); requirements to have data processing agreements in place to govern the processing of personal data on behalf of other organizations; introducing the obligation to notify data protection regulators or supervisory authorities (and in certain cases, affected individuals) of significant data breaches; maintaining a record of data processing; and complying with the principal of accountability and the obligation to demonstrate compliance through policies, procedures, trainings and audits. The Brazilian General Data Protection Law imposes similar requirements on products offered to customers in Brazil.

We are also subject to European Union, Switzerland and United Kingdom rules with respect to cross-border transfers of personal data out of the EEA, Switzerland and United Kingdom, respectively. Recent legal developments in Europe have created complexity and uncertainty regarding transfers of personal data from the EEA to the United States. Most recently, on July 16, 2020, the Court of Justice of the European Union, or CJEU, invalidated the EU-US Privacy Shield Framework, or Privacy Shield, under which personal data could be transferred from the EEA to U.S. entities who had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield), it made clear that reliance on them alone may not necessarily be sufficient in all circumstances. In September 2020, the Federal Data Protection and Information Commissioner of Switzerland (where the law has a similar restriction on the export of personal information) issued an opinion concluding that the Swiss-U.S. Privacy Shield Framework does not provide an adequate level of protection for data transfers from Switzerland to the United States pursuant to Switzerland’s Federal Act on Data Protection. Use of the standard contractual clauses must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals and additional measures and/or contractual provisions may need to be put in place, however, the nature of these additional measures is currently uncertain. The CJEU went on to state that if a competent supervisory authority believes that the standard contractual clauses cannot be complied with in the destination country and the required level of protection cannot be secured by other means, such supervisory authority is under an obligation to suspend or prohibit that transfer. We rely on a variety of legal mechanisms for cross-border personal data transfers to the United States from the EEA, Switzerland, and the United Kingdom and are evaluating guidance from supervisor authorities about personal data export mechanisms. The European Commission has published revised standard contractual clauses for data transfers from the EEA: the revised clauses must be used for relevant new data transfers from September 27, 2021; existing standard contractual clauses arrangements must be migrated to the

 

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revised clauses by December 27, 2022. We will be required to implement the revised standard contractual clauses, in relation to relevant existing contracts and certain additional contracts and vendor arrangements, within the relevant time frames. There is some uncertainty around whether the revised clauses can be used for all types of data transfers, particularly whether they can be relied on for data transfers to non-EEA entities subject to the GDPR.

These recent developments may require us to review and amend the legal mechanisms by which we make and/or receive personal data transfers to/ in the United States. As supervisory authorities issue further guidance on personal data export mechanisms, including circumstances where the standard contractual clauses cannot be used and/or start taking enforcement action, we could suffer additional costs, complaints and/or regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations, and could adversely affect our business, financial condition and results of operations.

The withdrawal of the United Kingdom from the European Union has created uncertainty with regard to the regulation of data protection in the United Kingdom. As of January 2021, we have been required to comply with GDPR and the U.K. GDPR. The European Commission has adopted an adequacy decision in favor of the United Kingdom, enabling data transfers from EU member states to the United Kingdom without additional safeguards. However, the UK adequacy decision will automatically expire in June 2025 unless the European Commission re-assesses and renews/ extends that decision, and remains under review by the Commission during this period. The relationship between the United Kingdom and the European Union in relation to certain aspects of data protection law remains unclear, and it is unclear how UK data protection laws and regulations will develop in the medium to longer term, and how data transfers to and from the United Kingdom will be regulated in the long term. These changes will lead to additional costs and increase our overall risk exposure.

We depend on a number of third parties in relation to the operation of our business, a number of which process personal data on our behalf. Any violation of data or security laws by our third-party processors, or their acts or omissions that cause us to violate our legal obligations, could have an adverse effect on our business and result in the fines and penalties outlined below.

Fines for certain breaches of the GDPR/U.K. GDPR are up to the greater of 20 million Euros / 17.5 million Pounds Sterling or 4% of total global annual turnover. In addition to the foregoing, a breach of the GDPR/U.K. GDPR could result in regulatory investigations, reputational damage, orders to cease/ change our processing of our data, enforcement notices, and/ or assessment notices (for a compulsory audit). We may also face civil claims including representative actions and other class action type litigation (where individuals have suffered harm), potentially amounting to significant compensation or damages liabilities, as well as associated costs, diversion of internal resources and reputational harm.

We are also subject to evolving EU privacy laws on cookies and e-marketing. In the European Union and the United Kingdom, regulators are increasingly focusing on compliance with requirements in the online behavioral advertising ecosystem, and current national laws that implement the ePrivacy Directive will be replaced by an EU regulation known as the ePrivacy Regulation which will significantly increase fines for non-compliance. In the European Union, informed consent is required for the placement of a cookie or similar technologies on a user’s device and for direct electronic marketing. The GDPR also imposes conditions on obtaining valid consent, such as a prohibition on pre-checked consents and a requirement to ensure separate consents are sought for each type of cookie or similar technology. While the text of the ePrivacy Regulation is still under development, a recent European court decision, regulators’ recent guidance and recent campaigns by a non-for-profit organization are driving increased attention to cookies and tracking technologies. If regulators start to enforce the strict approach in recent guidance, this could lead to substantial costs, require significant systems changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, increase costs and subject us to additional liabilities. Regulation of cookies and

 

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similar technologies, and any decline of cookies or similar online tracking technologies as a means to identify and potentially target individuals, may lead to broader restrictions and impairments on our marketing and personalization activities and may negatively impact our efforts to understand users.

Furthermore, compliance with legal and contractual obligations requires us to make public statements about our privacy and data security practices, including the statements we make in our online privacy policy. Although we endeavor to comply with these statements, should they prove to be untrue or be perceived as untrue, even though circumstances beyond our reasonable control, we may face litigation, claims, investigations, inquiries or other proceedings by the U.S. Federal Trade Commission, state attorneys general and other federal, state and foreign regulators and private litigants alleging violations of privacy or consumer protection laws.

We are also subject to the Payment Card Industry, or PCI, Data Security Standard, which is a security standard designed to protect payment card data as mandated by payment card industry entities. We rely on vendors to handle PCI matters and to ensure PCI compliance. Despite our compliance efforts, we may become subject to claims that we have violated the PCI Data Security Standard, which could subject us to substantial fines and penalties. Our actual or perceived failure to comply with the PCI Data Security Standard can subject us to fines, termination of banking relationships, and increased transaction fees. For additional information, see the risk factor entitled “We rely on payment cards to receive payments, and are subject to payment-related risks.”

Despite our efforts, we may not be successful in complying with the rapidly evolving privacy, data protection, and data security requirements discussed above. Any actual or perceived non-compliance with these rapidly changing laws, regulations or standards or our contractual obligations relating to privacy, data protection and consumer protection by us or the third-party companies we work with could result in litigation and proceedings against us by governmental entities, consumers or others, fines and civil or criminal penalties for us or company officials, obligations to cease offerings or to substantially modify our business in a manner that makes it less effective in certain jurisdictions, negative publicity and harm to our brand and reputation, and reduced overall demand for our products, any of which could have an adverse effect on our business, financial condition and results of operations.

Government regulation of the internet and eCommerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business, financial condition and results of operations.

We are subject to general business regulations and laws as well as regulations and laws specifically governing the internet and eCommerce. Existing and future regulations and laws could impede the growth of the internet, eCommerce or mobile commerce, which could in turn adversely affect our growth. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts and communications, customer protection and internet neutrality. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and customer privacy apply to the internet as the vast majority of these laws were adopted prior to the advent of the internet and do not contemplate or address the unique issues raised by the internet or eCommerce. It is possible that general business regulations and laws, or those specifically governing the internet or eCommerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot be sure that our practices have complied, comply with or will fully comply with all such laws and regulations. The enactment of new laws and regulations or the interpretation of existing laws and regulations in an unfavorable way may affect the operation of our business, directly or indirectly, which could result in substantial regulatory compliance costs, civil or criminal penalties, including fines, adverse publicity, decreased revenues and increased expenses. In particular, we actively use anonymous online data for targeting ads online and if ad networks are compelled by regulatory bodies to limit use of this data, it could materially affect our ability to conduct effective marketing. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against us by governmental entities, customers, suppliers or others. Any such proceeding or action could hurt our reputation, force us to spend

 

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significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, decrease the use of our website by customers and suppliers and may result in the imposition of monetary liabilities. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of our own non-compliance with any such laws or regulations. As a result, adverse developments with respect to these laws and regulations could substantially harm our business, financial condition and results of operations.

If we are unable to establish and protect our trademarks and other intellectual property rights, counterfeiters may produce copies of our products and such counterfeit products could damage our brand image.

Given the increased popularity of our brand, we believe there is a high likelihood that counterfeit products or other products infringing on our intellectual property rights will continue to emerge, seeking to benefit from the consumer demand for our products. These counterfeit products do not provide the functionality of our products and we believe they are of substantially lower quality, and if customers are not able to differentiate between our products and counterfeit products, this could damage our brand image. In order to protect our brand, we devote significant resources to the registration and protection of our trademarks and to our anti-counterfeiting efforts worldwide. We actively pursue entities involved in the trafficking and sale of counterfeit merchandise through legal action or other appropriate measures. In spite of our efforts, counterfeiting still occurs and, if we are unsuccessful in challenging a third-party’s rights related to trademark, copyright or other intellectual property rights, this could adversely affect our future sales, financial condition and results of operations. Our efforts are also impacted by the tolerance of “squatters” by certain jurisdiction, including China, which increases the costs and risks associated with protecting our trademarks against third parties. We cannot guarantee that the actions we have taken to curb counterfeiting and protect our intellectual property will be adequate to protect the brand and prevent counterfeiting in the future or that we will be able to identify and pursue all counterfeiters who may seek to benefit from our brand.

Any failure or inability to protect or enforce our intellectual property rights could diminish the value of our brand, weaken our competitive position and harm our business, financial condition and results of operations.

We currently rely on a combination of trademark, trade dress, design patent, copyright and other intellectual property laws as well as confidentiality procedures as well as security measures, confidentiality obligations and a brand enforcement program to establish and protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may not be adequate to prevent infringement of these rights by others. For instance, despite our efforts to protect and enforce our intellectual property rights, unauthorized parties may misappropriate or attempt to copy aspects of our intellectual property, which could harm the reputation of our brand, decrease its value and/or cause a decline in our sales and revenue. Further, we may not be able to detect infringement of our intellectual property rights quickly or at all, and we may not be successful in combating all counterfeit, knockoff, or other infringing products, thereby damaging our competitive position.

Our success depends in large part on our brand image. We believe that our trademarks and other intellectual property rights have significant value and are important to differentiating our products from those of our competitors and creating and sustaining demand for our products. We have applied for and obtained certain U.S. and foreign trademark registrations and will continue to evaluate the registration of additional trademarks as appropriate. However, we cannot guarantee that any of our pending trademark applications will be approved by the applicable governmental authorities. Moreover, even if our applications are approved, third parties may seek to oppose or otherwise challenge trademark registrations or other of our intellectual property rights. Third parties may also knowingly or unknowingly misappropriate, infringe, dilute or otherwise violate our intellectual property rights. In any of these cases, we may be required to expend significant time and expense to defend or enforce our rights.

We also currently hold various domain names relating to our brand. We may be unable to prevent third parties from acquiring and using domain names that are confusingly similar to, or that otherwise have a negative

 

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impact on, the value of our trademarks and other proprietary rights. Any inability or failure to do so could adversely affect our brand and make it more difficult for users to find our website.

Additionally, the expansion of our product lines and the geographic scope of our sales and marketing could pose additional intellectual property challenges. For example, certain foreign countries do not protect intellectual property rights as fully as they are protected in the United States, and accordingly, intellectual property protection may be limited, or in some circumstances unavailable, in some foreign countries where we choose to do business. Thus, it may be more difficult for us to successfully challenge the use of our intellectual property rights by other parties in these countries. If we fail to protect and maintain our intellectual property rights, the value of our brand could be diminished, and our competitive position may suffer.

Competitors have and will likely continue to attempt to imitate our products and technology and divert sales. If we are unable to protect or preserve our intellectual property rights, brand image and proprietary rights, our business may be harmed.

While we actively protect our intellectual property rights, there can be no assurance that we will be adequately protected in all countries in which we hold intellectual property or conduct our business. As of September 30, 2021, we had 9 U.S. design patents, 19 U.S. utility patents and 9 foreign utility patents, as well as a number of pending patent applications, on certain aspects of some of our products. While a presumption of validity exists with respect to U.S. patents issued to us, third parties may still challenge the validity or enforceability of our patents. As a result, the scope of our patents could be reduced, or they could be declared invalid or unenforceable. Further, we do not hold patents outside of the United States and our major markets. For example, several of our popular products feature our patented 5.11 Flex-Tac fabric, but we do not hold patents for this fabric outside of our major markets. In addition, many of our other products are made using what we consider to be our proprietary blends of raw materials, fabrics and fabric treatments, which results in products unique to us; however, we may not own or license the intellectual property rights for the underlying fabric technology, fabrics treatments or fabrics. While we also hold patents on certain other products and features and enforce our trade dress on certain of our products, it is difficult to protect all aspects of the wide range of apparel, footwear and gear that we sell. As a result, our current and future competitors may attempt to imitate our products and do so at lower prices. If our competitors are successful in doing so, our net sales and profitability could suffer.

We believe our trademarks and other intellectual property rights are extremely important to our success and our competitive position. Competitors seeking to imitate our products could divert sales and dilute the value of our brand. Globally enforcing rights to our intellectual property may be difficult and costly, and we may not be successful in stopping infringement of our intellectual property rights, particularly in certain countries, which could make it easier for competitors to capture market share. Intellectual property rights necessary to protect our products and brand may also be unavailable or limited in certain countries. Furthermore, our efforts to enforce our trademarks, copyrights and other intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our trademarks and other intellectual property rights. Continued sales of competing products by our competitors could harm our brand and adversely impact our business, financial condition and results of operations.

We may incur costs to defend against, face liability for or be vulnerable to intellectual property infringement claims brought against us by others.

Although we are not currently aware of any such claims, third parties may assert claims against us alleging that we infringe upon, misappropriate, dilute or otherwise violate their intellectual property rights, particularly as we expand our business and the number of products we offer. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims. Our defense of any claim, regardless of its merit, could be expensive and time consuming and could divert management resources. We cannot predict the outcome of lawsuits and cannot ensure that the results of any such actions will not have an adverse effect on our

 

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business, financial condition or results of operations. Successful infringement claims against us could result in significant monetary liability or prevent us from selling some of our products. In addition, resolution of claims may require us to redesign or rebrand our products, license rights from third parties, cease using certain brand names or other intellectual property rights altogether or make substantial payments for royalty or license fees, legal fees, settlement payments or other costs or damages. Any of these events could harm our business and cause our results of operations, liquidity and financial condition to suffer.

The inability to acquire, use or maintain our marks and domain names for our websites could substantially harm our business, financial condition and results of operations.

While we intend to take reasonable steps to protect our trademark rights, it may not be possible to obtain or maintain legal protection and registrations for all of our trademarks. We currently are the registrant of marks for our products in numerous jurisdictions and are the registrant of the internet domain name for the website, 511tactical.com, as well as various related domain names. Domain names generally are regulated by internet regulatory bodies and may not be generally protectable as trademarks in and of themselves. As our business grows, we may incur material costs in connection with the registration, maintenance and protection of our marks. If we do not have or cannot obtain on reasonable terms the ability to use our marks in a particular country, or to use or register our domain name, we could be forced either to incur significant additional expenses to market our products within that country, including the development of a new brand and the creation of new promotional materials and packaging, or to elect not to sell products in that country. Either result could adversely affect our business, financial condition and results of operations.

Furthermore, the regulations governing domain names and laws protecting marks and similar proprietary rights could change in ways that block or interfere with our ability to use relevant domains or the 5.11 brand. Also, we might not be able to prevent third parties from registering, using or retaining domain names that interfere with our customer communications or infringe or otherwise decrease the value of our marks, domain names and other proprietary rights. Regulatory bodies also may establish additional generic or country-code top-level domains or may allow modifications of the requirements for registering, holding or using domain names. As a result, we may not be able to register, use or maintain the domain names that use the name 5.11 in all of the countries and territories in which we currently or intend to conduct business.

 

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RISKS RELATED TO OTHER LEGAL, REGULATORY AND TAX MATTERS

Any failure to comply with trade, anti-corruption and other regulations could lead to investigations or actions by government regulators and negative publicity.

The labeling, distribution, importation, marketing and sale of our products are subject to extensive regulation by various federal agencies, including the Federal Trade Commission, Customer Product Safety Commission and state attorneys general in the United States, the Competition Bureau and Health United States in United States, as well as by various other federal, state, provincial, local and international regulatory authorities in the countries in which our products are distributed or sold. If we fail to comply with any of these regulations, we could become subject to enforcement actions or the imposition of significant penalties or claims, which could harm our results of operations or our ability to conduct our business. Any investigations or inquiries by governmental agencies related to such matters, could result in significant settlement amounts, damages, fines or other penalties, divert financial and management resources and result in significant legal fees. An unfavorable outcome of any particular proceeding could have an adverse impact on our business, financial condition and results of operations. In addition, the adoption of new regulations or changes in the interpretation of existing regulations may result in significant compliance costs or discontinuation of product sales and could impair the marketing of our products, resulting in significant loss of net sales.

We derive a significant portion of our products from third-party manufacturing and supply partners in foreign countries and territories, including countries and territories perceived to carry an increased risk of corrupt business practices. We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the U.K. Bribery Act, and possibly other anti-bribery and anti-money laundering laws in countries in which we conduct activities. These laws prohibit companies and their employees and third-party intermediaries from corruptly promising, authorizing, offering or providing, directly or indirectly, improper payments or anything of value to foreign government officials, political parties and private-sector recipients for the purpose of obtaining or retaining business, directing business to any person or securing any advantage. In addition, U.S. public companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. In many foreign countries, including countries in which we may conduct business, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. We face significant risks if we or any of our directors, officers, employees, agents or other partners or representatives fail to comply with these laws, and governmental authorities in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties, which could adversely affect our reputation, business, financial condition and results of operations.

If our employees, contractors and agents, and companies to which we outsource certain of our business operations were to take actions in violation of our policies or applicable law, there could be an adverse effect on our reputation, business, financial condition and results of operations.

Any violation of the FCPA, other applicable anti-corruption laws or anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, any of which could have an adverse effect on our business, financial condition and results of operations. In addition, responding to any enforcement action may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees.

We are subject to local laws and regulations in the U.S. and abroad.

We are subject to various foreign and U.S. federal, state and local laws and regulations affecting our business. While we actively identify and monitor our obligations and the applicability of all laws to ensure that we are compliant, our efforts to maintain compliance with laws and regulations may require us to incur

 

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significant expenses, and our failure to comply with such laws may expose us to potential liability. In addition, our ability to operate or compete effectively as well as our financial results could be materially adversely affected by the introduction of new laws, policies or regulations; changes in the interpretation or application of existing laws, policies and regulations, or our failure to obtain or maintain required regulatory approvals.

Our ability to source and distribute our merchandise profitably or at all could be harmed if new trade restrictions are imposed or existing trade restrictions become more burdensome.

Substantially all of our apparel products are currently manufactured outside of the United States. The United States and the countries in which our products are produced or sold internationally have imposed and may impose additional quotas, duties, tariffs or other restrictions or regulations, or may adversely adjust prevailing quota, duty or tariff levels. Countries impose, modify and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national economic and political conditions, which make it impossible for us to predict future developments regarding tariffs and other trade restrictions. Trade restrictions, including tariffs, quotas, export controls, trade sanctions, embargoes, safeguards and customs restrictions, could increase the cost or reduce the supply of products available to us or may require us to modify our supply chain organization or other current business practices, any of which could harm our business, financial condition and results of operations.

We have government clients, which potentially subject us to risks including early termination, audits, investigations, sanctions, or penalties and risks related to the public funding of and public sentiment around law enforcement agencies.

We derive sales from sales to retailers and distributors that, in turn, sell to the U.S. government, state and local governments, and foreign governments and we may enter into further contracts with such governments in the future, or accept grant funds. These government contracts and grants subject us to statutes and regulations applicable to companies doing business with government agencies. Government contracts and grants are generally subject to greater scrutiny by the government, which can unilaterally initiate reviews, audits and investigations regarding our compliance with government contract and grant requirements. In addition, if we fail to comply with government contract laws, regulations and contract or grant requirements, our contracts and grants may be subject to termination or suspension, and we may be subject to financial and/or other liability under our contracts or under criminal or civil provisions including the Federal Civil False Claims Act. The False Claims Act’s “whistleblower” provisions allow private individuals, including present and former employees, to sue on behalf of the U.S. government. The False Claims Act statute provides for treble damages and civil penalties and, if our operations are found to be in violation of the False Claims Act, we could face other adverse action, including suspension or prohibition from doing business with the U.S. government. Any penalties, damages, fines, suspension, or damages could materially adversely affect our ability to operate our business and our financial results and adversely impact our reputation.

Further, a portion of our government contract sales are derived from law enforcement agencies, and we are exposed to demand from and the level of public funding of, and public sentiment around, law enforcement agencies. Any reduction in the budgets of law enforcement agencies to purchase apparel, footwear or gear, as a result of negative public sentiment around the public funding thereof or otherwise, could negatively impact our business, financial condition and results of operations.

Changes in tax laws, including as a result of the 2020 United States presidential and congressional elections, may impact our future financial position and results of operation.

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, or interpreted, changed, modified or applied adversely to us, any of which could adversely affect our business operations and financial performance. In particular, the recent presidential and congressional elections in the United States could result in significant changes in, and uncertainty with respect to, tax legislation,

 

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regulation and government policy directly affecting our business or indirectly affecting us because of impacts on our customers, suppliers and manufacturers. For example, the U.S. government may enact significant changes to the taxation of business entities including, among others, a permanent increase in the corporate income tax rate and the imposition of minimum taxes or surtaxes on certain types of income. The likelihood of these changes being enacted or implemented is unclear. We are currently unable to predict whether such changes will occur and, if so, the ultimate impact on our business. To the extent that such changes have a negative impact on us, our suppliers, manufacturers or our customers, including as a result of related uncertainty, these changes may adversely impact our business, financial condition, results of operations and cash flows.

We could be required to collect additional sales taxes that may increase the costs our customers would have to pay for our products and adversely affect our results of operations.

Following the U.S. Supreme Court’s decision in 2018 in South Dakota v. Wayfair, Inc., a state may impose sales tax collection obligations on certain retailers, including eCommerce companies, that lack any physical presence within such state. The Supreme Court’s Wayfair decision has removed a significant impediment to the enactment of laws imposing sales tax collection obligations on out-of-state eCommerce companies, and an increasing number of states have adopted such laws. Although we believe that we currently collect sales taxes in all states that require us to do so, a successful assertion by one or more states requiring us to collect sales taxes where we currently do not collect sales taxes, or to collect additional sales taxes in a state in which we currently collect sales taxes, could result in substantial tax liabilities (including penalties and interest). In addition, the imposition of additional sales tax collection obligations, whether for prior years or prospectively, could create additional administrative burdens for us, put us at a competitive disadvantage if similar obligations are not imposed on our competitors and decrease our future sales, which could have an adverse impact on our business and results of operations.

Existing and potential tariffs imposed by the U.S. government or a global trade war could increase the cost of our products, which could have an adverse effect on our business, financial condition and results of operations.

The U.S. government has in recent years imposed increased tariffs on imports from certain foreign countries, and any imposition of additional tariffs by the United States could result in the adoption of tariffs by other countries, leading to a global trade war. While the U.S. government’s recent tariffs on certain imports from China only affect a small portion of our production, any such future tariffs by the United States or other countries could have a significant impact on our business. While we may attempt to renegotiate prices with suppliers or diversify our supply chain in response to tariffs, such efforts may not yield immediate results or may be ineffective. We might also consider increasing prices to the end customer; however, this could reduce the competitiveness of our products and adversely affect net sales. If we fail to manage these dynamics successfully, gross margins and profitability could be adversely affected. As of the date of this prospectus, tariffs have not had a material impact on our business, but increased tariffs or trade restrictions implemented by the United States or other countries in connection with a global trade war could have an adverse effect on our business, financial condition and results of operations.

Our ability to use our net operating loss carryforwards may be limited.

As of December 31, 2020, we had U.S. federal and state net operating loss carryforwards of approximately $93.3 million and $51.2 million, respectively. Under legislation enacted in 2017, informally titled, the Tax Cuts and Jobs Act, or the TCJA, as modified in 2020 by the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, unused U.S. federal net operating losses generated in tax years beginning after December 31, 2017, will not expire and may be carried forward indefinitely, but the deductibility of such federal net operating loss carryforwards in taxable years beginning after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to the TCJA or the CARES Act. Our ability to utilize our federal net operating carryforwards may be limited under Section 382 of the Internal Revenue Code of 1986,

 

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as amended, or the Code. The limitations apply if we experience an “ownership change,” which is generally defined as a greater than 50 percentage point change (by value) in the ownership of our equity by certain stockholders over a rolling three-year period. Similar provisions of state tax law may also apply to limit the use of our state net operating loss carryforwards. We have previously experienced ownership changes, and although such prior ownership changes have not materially limited our utilization of affected net operating loss carryforwards, future changes in our stock ownership, which may be outside of our control, may trigger an ownership change that materially impacts our ability to utilize pre-change net operating loss carryforwards. In addition, there may be periods during which the use of net operating loss carryforwards is suspended or otherwise limited. For example, in 2020, California generally suspended the use of California net operating loss carryforwards to offset taxable income in tax years beginning after 2019 and before 2023. Accordingly, our ability to use our net operating loss carryforwards to offset taxable income may be subject to such limitations or special rules that apply at the state level, which could adversely affect our results of operations.

 

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RISKS RELATED TO THE OWNERSHIP OF OUR COMMON STOCK AND THIS OFFERING

There has been no prior public market for our common stock. An active market may not develop or be sustainable, and you may not be able to resell your shares at or above the initial public offering price.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock was determined through negotiations among us, the selling stockholders and the underwriters, and may vary from the market price of our common stock following the completion of this offering. An active or liquid market in our common stock may not develop upon completion of this offering or, if it does develop, it may not be sustainable. In the absence of an active trading market for our common stock, you may not be able to resell any shares you hold at or above the initial public offering price or at all. We cannot predict the prices at which our common stock will trade.

Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for investors purchasing shares in this offering.

The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

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actual or anticipated fluctuations in our financial condition and results of operations;

 

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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

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failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates or ratings by any securities analysts who follow our company or our failure to meet these estimates or the expectations of investors;

 

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announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, results of operations or capital commitments;

 

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changes in stock market valuations and operating performance of other apparel companies generally, or those in our industry in particular;

 

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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

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changes in our board of directors or management;

 

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sales of large blocks of our common stock, including sales by Compass, our chief executive officer or our other executive officers and directors;

 

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lawsuits threatened or filed against us;

 

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anticipated or actual changes in laws, regulations or government policies applicable to our business;

 

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changes in our capital structure, such as future issuances of debt or equity securities;

 

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short sales, hedging and other derivative transactions involving our capital stock;

 

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general economic conditions in the United States;

 

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other events or factors, including those resulting from war, pandemics (including COVID-19), incidents of terrorism or responses to these events; and

 

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the other factors described in the sections of this prospectus titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

The stock market has recently experienced extreme price and volume fluctuations. The market prices of securities of companies have experienced fluctuations that often have been unrelated or disproportionate to their

 

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results of operations. Market fluctuations could result in extreme volatility in the price of shares of our common stock, which could cause a decline in the value of your investment. Price volatility may be greater if the public float and trading volume of shares of our common stock is low. Furthermore, in the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert management’s attention and resources, and harm our business, financial condition and results of operations.

Sales, directly or indirectly, of a substantial amount of our common stock in the public markets by our existing security holders may cause the price of our common stock to decline.

Sales of a substantial number of shares of our common stock into the public market, particularly sales by our directors, executive officers and principal stockholders, or the perception that these sales might occur, could cause the market price of our common stock to decline. Immediately following the completion of this offering, and without giving effect to any purchases that may be made through our directed share program or otherwise in this offering, Compass will own     % of our outstanding shares of common stock (or     % if the underwriters exercise their option to purchase additional shares in full). Future sales of these shares in the public market will be subject to the volume and other restrictions of Rule 144 under the Securities Act, for so long as such party is deemed to be our affiliates, unless the shares to be sold are registered with the SEC. This stockholder is entitled to rights with respect to the registration of its shares following this offering. For a description of these registration rights, see the section titled “Description of Capital Stock—Registration Rights.” We are unable to predict with certainty whether or when such party will sell a substantial number of shares of our common stock. Many of our existing security holders have substantial unrecognized gains on the value of the equity they hold and may take steps to sell their shares or otherwise secure or limit their risk exposure to the value of their unrecognized gains on those shares. We are unable to predict the timing or effect of such sales on the market price of our common stock.

All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act, except that any shares held by our affiliates, as defined in Rule 144 under the Securities Act, would only be able to be sold in compliance with Rule 144 and any applicable lock-up agreements described below.

In connection with this offering, we, all of our directors and executive officers and holders of substantially all of our outstanding securities have entered into market standoff agreements with us or lock-up agreements with the underwriters that restrict our and their ability to sell or transfer shares of our capital stock for a period of 180 days from the date of this prospectus, subject to certain exceptions. In addition, Morgan Stanley may release certain stockholders from the market standoff agreements or lock-up agreements prior to the end of the lock-up period. If not otherwise early released, when the applicable market standoff and lock-up periods expire, we and our security holders subject to a lock-up agreement or market standoff agreement will be able to sell our shares freely in the public market, except that any shares held by our affiliates, as defined in Rule 144 under the Securities Act, would only be able to be sold in compliance with Rule 144. Sales of a substantial number of such shares upon expiration of the lock-up and market standoff agreements, or the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your common stock at a time and price that you deem appropriate.

In addition, as of September 30, 2021, we had stock options outstanding that, if fully exercised, would result in the issuance of              shares of common stock. All of the shares of common stock issuable upon the exercise of stock options, and the              shares of common stock reserved for future issuance under our equity incentive plans, will be registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance subject to existing lock-up or market standoff agreements and applicable vesting requirements.

Further, based on shares outstanding as of September 30, 2021, holders of              shares of our common stock will have rights after the completion of this offering, subject to certain conditions, to require us to file registration statements for the public resale of such shares or to include such shares in registration statements that we may file for us or other stockholders.

 

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Our principal stockholder, Compass, has pledged all of its equity interests in its consolidated subsidiaries, including 5.11, to secure a credit facility, and if Compass cannot repay the credit facility when due, Compass’ lenders may foreclose on Compass’ pledged equity interests in 5.11 and take ownership of the majority of our outstanding shares.

Compass has pledged all of its equity interests in its consolidated subsidiaries, including 45,375,400 shares of our common stock, which corresponds to 97.7% of beneficial ownership of 5.11 prior to this offering, to its lenders as security under the Second Amended and Restated Credit Agreement among Compass, as the borrower, Bank of America, N.A., as administrative agent and in other capacities, and the other parties thereto, dated March 23, 2021 (the “Compass Credit Facility”). If Compass is unable to repay or refinance the Compass Credit Facility on or prior to the applicable maturity dates, the lenders thereunder may foreclose on Compass’ pledged equity interests in 5.11 and take ownership of the majority of our outstanding shares. If the lenders foreclose on Compass’ pledged equity interests in 5.11, Compass would cease to own those shares and such lender, or subsequent transferees of the foreclosed shares of 5.11, would have voting rights in 5.11 instead of Compass. Further, sales, directly or indirectly, of a substantial amount of our common stock in the public markets by such lenders may cause the price of our common stock to decline.

We will be a “controlled company” within the meaning of the Listing Rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Upon completion of this offering, Compass will control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the Listing Rules. Under these rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

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the requirement that a majority of the board of directors consist of independent directors;

 

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the requirement that our nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

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the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

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the requirement for an annual performance evaluation of our governance and compensation committees.

We intend to rely on these exemptions and, as a result, will not have a majority of independent directors on our board of directors or governance and compensation committees consisting entirely of independent directors upon the completion of this offering. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Listing Rules.

Your ability to influence corporate matters may be limited because a small number of stockholders beneficially own a substantial amount of our common stock and will continue to have substantial control over us after the offering.

Upon completion of this offering, our officers, directors, and principal stockholders (greater than 5% stockholders) collectively will beneficially own approximately     % of our issued and outstanding common stock (or     % of our issued and outstanding common stock if the underwriters’ option to purchase additional shares is exercised in full) without giving effect to any purchases that may be made through our directed share program or otherwise in this offering. Upon completion of this offering, Compass will own     % of our outstanding shares of common stock (or     % if the underwriters exercise their option to purchase additional shares in full). As a result, these stockholders will be able to exert significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our Company or its assets, and may have interests that are different from yours and may vote in a way

 

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with which you disagree and which may be adverse to your interests. In addition, this concentration of ownership may have the effect of preventing, discouraging, or deferring a change of control, which could depress the market price of our common stock.

We will incur significant expenses as a result of being a public company, which will negatively impact our financial performance and could cause our results of operations and financial condition to suffer.

We will incur significant legal, accounting, insurance and other expenses as a result of being a public company. The Sarbanes-Oxley Act of 2002, as well as related rules implemented by the SEC and the securities regulators in the United States and by the Nasdaq Stock Market LLC, have required changes in corporate governance practices of public companies. We expect that compliance with these laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act as discussed in the following risk factor, will substantially increase our expenses, including our legal and accounting costs, and make some activities more time-consuming and costly. We also expect these laws, rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as officers. As a result of the foregoing, we expect a substantial increase in legal, accounting, insurance and certain other expenses in the future, which will negatively impact our financial performance and could cause our results of operations and financial condition to suffer.

We are an “emerging growth company” and our compliance with the reduced reporting and disclosure requirements applicable to “emerging growth companies” may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we have elected to take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These provisions include, but are not limited to: being permitted to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosures; being exempt from compliance with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act; being exempt from any rules that could be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements; being subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and not being required to hold nonbinding advisory votes on executive compensation or on any golden parachute payments not previously approved.

In addition, while we are an “emerging growth company,” we will not be required to comply with any new financial accounting standard until such standard is generally applicable to private companies. As a result, our financial statements may not be comparable to companies that are not “emerging growth companies” or elect not to avail themselves of this provision.

We may remain an “emerging growth company” until as late as December 31, 2026, the fiscal year-end following the fifth anniversary of the completion of this initial public offering, though we may cease to be an “emerging growth company” earlier under certain circumstances, including if (1) we have more than $1.07 billion in annual net sales in any fiscal year, (2) we become a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates as of the end of the second quarter of that fiscal year or (3) we issue more than $1.0 billion of non-convertible debt over a three-year period.

The exact implications of the JOBS Act are still subject to interpretations and guidance by the SEC and other regulatory agencies, and we cannot assure you that we will be able to take advantage of all of the benefits

 

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of the JOBS Act. In addition, investors may find our common stock less attractive to the extent we rely on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline or become more volatile.

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our common stock and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, the trading price for our common stock would be negatively affected. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of our common stock of $         per share is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur immediate dilution of $         in the pro forma as adjusted net tangible book value per share from the price you paid assuming that stock price. In addition, following this offering, purchasers who bought shares from us in the offering will have contributed     % of the total consideration paid to us by our stockholders to purchase              shares of common stock to be sold by us in this offering, in exchange for acquiring approximately     % of our total outstanding shares as of September 30, 2021, after giving effect to this offering. If the underwriters exercise their option to purchase additional shares, if we issue any additional stock options or warrants or any outstanding stock options are exercised, if RSUs are settled, or if we issue any other securities or convertible debt in the future, investors will experience further dilution.

We will have broad discretion in the use of the net proceeds we receive in this offering and may not use them in ways that prove to be effective.

We will have broad discretion in the application of the net proceeds we receive in this offering, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use, and it is possible that a substantial portion of the net proceeds will be invested in a way that does not yield a favorable, or any, return for us. If we do not use the net proceeds that we receive in this offering effectively, our business, financial condition and results of operations could be harmed, and the market price for our common stock could decline.

We do not currently intend to pay dividends for the foreseeable future.

Prior to the completion of this offering, we made a one-time special distribution of $55 million to our existing stockholders in August 2021. We currently intend to retain any future earnings to finance the operation and expansion of our business and we do not currently expect to declare or pay any dividends in the foreseeable future. Moreover, the terms of our Existing Credit Agreement restrict our ability to pay dividends, and any additional debt we may incur in the future may include similar restrictions. In addition, Delaware law may

 

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impose requirements that may restrict our ability to pay dividends to holders of our common stock. As a result, stockholders must rely on sales of their common stock after price appreciation, which may never occur as the only way to realize any future gains on their investment. As a result, investors seeking cash dividends should not purchase our common stock. See “Dividend Policy.”

Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest more difficult, limit attempts by our stockholders to replace or remove our current management and depress the market price of our common stock.

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws that will become effective upon the completion of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us or tender offer that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among other things, these provisions:

 

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provide that, from and after the date that Compass first ceases to beneficially own more than 50% in voting power of the outstanding shares of our capital stock entitled to vote generally in the election of directors (the “Trigger Date”), directors may only be removed for cause, and only by the affirmative vote of holders of at least 66 2/3% in voting power of all the then-outstanding shares of our stock entitled to vote thereon, voting together as a single class;

 

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prohibit stockholder action by written consent from and after the Trigger Date;

 

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provide that, at any time after the Trigger Date, special meetings may only be called by or at the direction of the Executive Chairman of our board of directors, our board of directors or our Chief Executive Officer;

 

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provide that, at any time after the Trigger Date, any alteration, amendment or repeal, in whole or in part, of any provision of our bylaws by our stockholders will require the affirmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of our stock entitled to vote thereon, voting together as a single class;

 

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our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered three-year terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;

 

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establish advance notice requirements for nominations for elections to our board of directors and for proposing matters that can be acted upon by stockholders at stockholder meetings;

 

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our board of directors is authorized to issue shares of preferred stock and to determine the terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. For information regarding these and other provisions, see “Description of Capital Stock.”

 

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Our amended and restated certificate of incorporation that will be in effect on the completion of this offering will provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters and the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Pursuant to our amended and restated certificate of incorporation, which we will adopt at or prior to the closing of this offering, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers, employees or stockholders to us or our stockholders, (3) any action asserting a claim against us, or any of our current or former directors, officers, employees or stockholders arising pursuant to any provision of the Delaware General Corporation Law, or DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws, (4) any claim or cause of action seeking to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or our amended and restated bylaws, (5) any action or proceeding asserting a claim against us or any of our current or former directors, officers, employees or stockholders as to which the DGCL confers jurisdiction to the Court of Chancery of the State of Delaware, and (6) any action asserting a claim governed by the internal affairs doctrine of the law of the State of Delaware; provided that, for the avoidance of doubt, the foregoing forum selection provision will not apply to claims arising under the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Our amended and restated certificate of incorporation will also provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Our amended and restated certificate of incorporation will further provide that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the provisions of our amended and restated certificate of incorporation described above. See “Description of Capital Stock—Anti-Takeover Provisions.”

The forum selection provisions in our amended and restated certificate of incorporation may have the effect of discouraging lawsuits against our directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings and there is uncertainty as to whether a court would enforce such provisions. In addition, stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. If the enforceability of our forum selection provisions were to be challenged, we may incur additional costs associated with resolving such challenge. While we currently have no basis to expect any such challenge would be successful, if a court were to find our forum selection provisions to be inapplicable or unenforceable with respect to one or more of these specified types of actions or proceedings, we may incur additional costs associated with having to litigate in other jurisdictions, which could have an adverse effect on our business, financial condition, results of operations, cash flows and prospects and result in a diversion of the time and resources of our employees, management and board of directors.

 

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GENERAL RISK FACTORS

Our quarterly results of operations may fluctuate, and if our operating and financial performance in any given period does not meet the guidance that we have provided to the public or the expectations of our investors and securities analysts, the trading price of our common stock may decline.

Our quarterly results of operations may fluctuate for a variety of reasons, many of which are beyond our control. These reasons include those described in these risk factors as well as the following:

 

•

fluctuations in product mix;

 

•

our ability to effectively launch and manage new products;

 

•

fluctuations in the levels or quality of inventory;

 

•

fluctuations in capacity as we expand our operations;

 

•

our success in engaging existing customers and attracting new customers;

 

•

the amount and timing of our operating expenses;

 

•

the timing and success of new products launches;

 

•

the impact of competitive developments and our response to those developments;

 

•

our ability to manage our existing business and future growth; and

 

•

economic and market conditions, particularly those affecting our industry.

Fluctuations in our quarterly results of operations may cause those results to fall below the guidance that we have provided to the public or the expectations of our investors and securities analysts, which could cause the trading price of our common stock to decline. Fluctuations in our results could also cause a number of other problems. For example, analysts or investors might change their models for valuing our common stock, we could experience short-term liquidity issues, our ability to retain or attract key personnel may diminish and other unanticipated issues may arise.

In addition, we believe that our quarterly results of operations may vary in the future and that period-to-period comparisons of our results of operations may not be meaningful. You should not rely on the results of one quarter as an indication of future performance.

Our results of operations could be adversely affected by natural disasters, public health crises, political crises, or other catastrophic events.

Our principal offices and our distribution center are located in California, an area which has a history of earthquakes, and are thus vulnerable to damage. Natural disasters, such as earthquakes, wildfires, hurricanes, tornadoes, floods and other adverse weather and climate conditions; unforeseen public health crises, such as epidemics and pandemics, including the ongoing COVID-19 pandemic; political crises, such as terrorist attacks, war and other political instability; or other catastrophic events, whether occurring in the United States or internationally, could disrupt our operations in any of our offices and fulfillment center or the operations of one or more of our third-party providers or vendors. In particular, these types of events could impact our merchandise supply chain, including the ability of third parties to manufacture and ship merchandise and our ability to ship products to customers from or to the impacted region. In addition, these types of events could negatively impact customer spending in the impacted regions. To the extent any of these events occur, our business, financial condition and results of operations could be adversely affected.

We are subject to periodic claims and litigation that could result in unexpected expenses and could ultimately be resolved against us.

From time to time, we may be involved in litigation and other proceedings, including matters related to commercial disputes, product liability, intellectual property, trade, customs laws and regulations, employment,

 

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regulatory compliance and other claims related to our business. For example, a Private Attorneys General Act (PAGA) class action lawsuit was filed against us in the Superior Court of California for the County of Orange that alleges, among other things, violations of statutory employee, wage, meal and rest break laws. See “Business—Legal Proceedings” for additional information. Any other proceeding or audit could result in significant settlement amounts, damages, fines, penalties or other relief such as an injunction, divert financial and management resources and result in significant legal fees. An unfavorable outcome of any particular proceeding could exceed the limits of our insurance policies, or our insurance carriers may decline to fund such final settlements or judgments or all or part of the legal costs associated with the proceeding, which could have an adverse impact on our business, financial condition and results of operations. In addition, any such proceeding could negatively impact our brand equity and our reputation.

We may require additional capital to support business growth, and this capital might not be available or may be available only by diluting existing stockholders.

We intend to continue making investments to support our business growth and may require additional funds to support this growth. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of international expansion efforts and other growth initiatives, the expansion of our marketing activities and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our business and prospects could fail or be adversely affected.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “potential,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan”, “target,” and similar expressions are intended to identify forward-looking statements.

Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

•

our future financial performance, including our expectations regarding our net sales, cost of goods sold, gross profit, operating expenses and other operating results, as well as our ability to achieve and maintain future profitability;

 

•

our business plan, beliefs and objectives for future operations;

 

•

our ability to continue to experience and effectively manage our rapid growth;

 

•

our market opportunity, including our estimated domestic retail white space;

 

•

our international expansion plans;

 

•

our ability to promote our brand;

 

•

our ability to attract new customers and to retain and drive repeat purchases from our existing customers;

 

•

our ability to develop new products and bring them to market in a timely manner;

 

•

our expectations concerning relationships with third parties;

 

•

our ability to maintain, protect and enhance our intellectual property;

 

•

the effects of increased competition in our markets and our ability to compete effectively; and

 

•

economic and industry trends, projected growth or trend analysis.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy and short-term and long-term business operations and objectives. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section titled “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. For example, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all

 

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potentially available relevant information. These statements are inherently uncertain, and we cannot guarantee future results, performance or achievements. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this prospectus or to conform these statements to actual results or revised expectations, except as required by law.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, performance and events and circumstances may be materially different from what we expect. See “Where You Can Find Additional Information.”

 

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INDUSTRY, MARKET, AND OTHER DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations, market position, market opportunity and market size, is based on information from various sources, including our own estimates, as well as assumptions that we have made that are based on such data and other similar sources, and on our knowledge of the market for our products and services. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, information of this sort is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

Certain monetary amounts, percentages and other figures included elsewhere in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

This prospectus also contains our Net Promoter Score, or NPS. NPS is a widely known survey methodology that measures consumers’ overall satisfaction with a company’s products and services and their loyalty to the brand. We measure NPS using a scale of zero to 10 based on a consumer’s response to the following survey question: “How likely are you to recommend 5.11?” Responses of nine or 10 are considered “promoters,” responses of seven or eight are considered passive, and responses of six or less are considered “detractors.” NPS is a percentage expressed as a numerical value, which we calculate by subtracting the percentage of total respondents who are detractors from the percentage of total respondents who are promoters. The NPS calculation gives no weight to consumers who decline to answer the survey question or respondents who are considered passive. Our NPS score of 76 was calculated on a rolling average using data from a survey of our consumers that we conducted over the nine month period ended September 30, 2021.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares of our common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $         million, or $         million if the underwriters’ option to purchase additional shares is exercised in full. We will not receive any of the proceeds from the sale of common stock in this offering by the selling stockholders.

A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease, as applicable, the net proceeds that we receive from this offering by approximately $         million, assuming the number of shares of our common stock offered by us remains the same, and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of our common stock offered by us would increase or decrease, as applicable, the net proceeds that we receive from this offering by approximately $         million, assuming that the assumed initial public offering price of $         remains the same, and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.

The principal purposes of this offering are to repay our existing indebtedness, increase our capitalization and financial flexibility and facilitate access to the public equity markets for us and our stockholders.

We currently intend to use the net proceeds from this offering to repay all of the indebtedness under the Credit Agreement, which has an outstanding balance of $        as of            , 2021 ($179.1 million as of September 30, 2021). The interest rates related to the Term A Loan and our Revolving Loan can be elected as either the Base Rate, which is set to the Prime Rate or London InterBank Offered Rate (LIBOR) plus the applicable margin as specified in the Credit Agreement. The interest rate related to the Term B Loan is 10.0% per annum. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources.” To the extent the net proceeds from this offering are insufficient to allow us to fully repay the indebtedness then outstanding under our Credit Agreement, we intend to use borrowings under our New Credit Facility to repay any remaining balance outstanding under the Credit Agreement. Assuming we receive $             of net proceeds from this offering and the amount of our indebtedness which is outstanding under our Existing Credit Agreement at the consummation of this offering is the same as the outstanding indebtedness at September 30, 2021, then we would expect to borrow $             million from the revolver under our New Credit Facility in order to repay the full amount of the indebtedness of our Credit Agreement. Our Existing Credit Agreement is with Compass who will therefore receive all such repayments. We intend to terminate the Existing Credit Agreement upon the consummation of this offering. In connection with the termination of the Credit Agreement, we expect to incur a non-cash charge of approximately $             million related to our unamortized loan origination costs. Amounts borrowed under the New Credit Facility will bear interest at a rate based on the Secured Overnight Financing Rate, or SOFR, plus a margin of 2.37%. We intend to use the remaining net proceeds that we receive from this offering, if any, for working capital and other general corporate purposes, which may include research and development and marketing activities, general and administrative matters, and capital expenditures. We may also use a portion of the proceeds for the acquisition of, or investment in, technologies, solutions, or businesses that complement our business. However, we do not have binding agreements or commitments for any acquisitions or investments outside the ordinary course of business at this time.

We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application and specific allocations of the net proceeds of this offering. Pending the uses described above, we intend to invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments or other securities.

 

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DIVIDEND POLICY

We made a one-time special distribution of $55 million to our existing stockholders in August 2021. We currently do not intend to declare any dividends on our common stock in foreseeable future and we currently intend to retain available funds and any future earnings for use in the operation of our business and do not anticipate paying any other dividends on our capital stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. In addition, our Existing Credit Agreement and the New Credit Facility contain restrictions on our ability to pay cash dividends on our capital stock and our ability to pay dividends may be limited by the terms of any future debt or preferred securities we may issue or any future credit facility we may enter into. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for additional information.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2021 on:

 

•

an actual basis;

 

•

a pro forma basis to give effect to the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws; and

 

•

a pro forma as adjusted basis to give effect to (i) the pro forma adjustments described above; (ii) the sale and issuance by us of shares of our common stock offered in this offering at an assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us; and (iii) the estimated impact of reduced interest expense resulting from the lower effective interest rate of the New Credit Facility as compared to the Existing Credit Agreement, the application of the net proceeds from this offering as described in “Use of Proceeds,” the non-cash charge of $         million related to our unamortized loan origination costs in connection with the termination of the Existing Credit Facility and the reduced aggregate principal amount to be outstanding as a result of the repayment of the indebtedness then outstanding under our Existing Credit Agreement with the borrowings under the New Credit Facility. The estimated impact of reduced interest expense described above is based on our expectations regarding the terms of our New Credit Facility, including an expected interest rate reduction of          basis points.

The pro forma as adjusted information below is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering. You should read this table together with our financial statements and related notes, and the sections titled “Prospectus Summary,” “Use of Proceeds,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each included elsewhere in this prospectus.

 

		As of September 30, 2021
		Actual				Pro      Forma				Pro Forma As     Adjusted(1)
		(in thousands, except share and per share data)
Cash and cash equivalents		$	13,959			$				$
Long-term debt (excludes debt issuance costs)			—
Credit Facility			—
Revolving Loan Facility			20,402
Term Loan A, due 2026			109,530
Term Loan B, due 2027			50,000
Total long-term debt (excludes debt issuance costs)			179,932
Stockholders’ equity:
common stock, $0.001 par value per share: shares authorized, issued, and outstanding, actual; shares authorized, shares issued and outstanding, pro forma; shares authorized, shares issued and outstanding, pro forma as adjusted			47
Additional paid-in capital			245,236
Treasury Stock			(2,063	)
Accumulated Other Comprehensive Income (Loss)			(49	)
Accumulated Deficit			(58,192	)
Total stockholders’ equity			184,979
Total capitalization		$	364,911			$				$

 

(1)	A $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease, as

 

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applicable, each of the amount of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease, as applicable, each of the amount of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million, assuming that the assumed initial public offering price, which is the midpoint of the price range set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

The number of shares of our common stock to be outstanding after this offering is based upon            shares of our common stock as of September 30, 2021, and does not include:

 

•

4,895,563 shares of our common stock issuable upon the exercise of outstanding stock options under our 2016 Plan as of September 30, 2021, with a weighted-average exercise price of $5.00 per share;

 

•

restricted stock unit awards with respect to approximately              shares of our common stock (based on the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus) that we will grant under our 2021 Equity Incentive Plan, or the 2021 Plan, to our directors and employees. Such grants will be effective upon the filing of our registration statement on Form S-8 covering such awards; and

 

•

shares of our common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with the completion of this offering (which number includes the equity awards to be granted pursuant to the 2021 Plan that will become effective in connection with this offering).

In addition, on the date immediately prior to the date of this prospectus, any remaining shares of common stock available for issuance under our 2016 Plan will be added to the shares of our common stock reserved for issuance under our 2021 Plan, and we will cease granting awards under the 2016 Plan. Our 2021 Plan provides for automatic annual increases in the number of shares reserved thereunder, which are not reflected in the numbers above. See the section titled “Executive and Director Compensation—Executive Compensation Arrangements” for additional information.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of common stock in this initial public offering and the pro forma as adjusted net tangible book value per share of common stock immediately after this offering.

As of September 30, 2021, our historical net tangible book value (deficit) was $(47.5) million, or $(1.02) per share. Our historical net tangible book value per share represents our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding as of September 30, 2021.

As of September 30, 2021, our pro forma net tangible book value was approximately $         million, or $         per share. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of September 30, 2021 after giving effect to the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws.

After giving effect to our sale in this offering of shares of our common stock, at an assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of such proceeds to repay all of the outstanding indebtedness under our Credit Agreement concurrently with the close of this offering, our pro forma as adjusted net tangible book value as of September 30, 2021 would have been approximately $        million, or $        per share. This represents an immediate increase in pro forma net tangible book value of $        per share to our existing stockholders and an immediate dilution of $        per share to investors purchasing common stock in this offering at the assumed initial public offering price. We determine dilution by subtracting our pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of common stock in this offering. The following table illustrates this dilution:

 

Assumed initial public offering price per share						$
Net tangible book value per share as of September 30, 2021		$	(1.02	)
Pro forma increase in net tangible book value per share
Pro forma net tangible book value per share as of September 30, 2021
Increase in pro forma net tangible book value per share attributable to new investors participating in this offering
Pro forma as adjusted net tangible book value per share after this offering						$
Dilution in pro forma net tangible book value per share to new investors in this offering						$

A $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the price range reflected on the cover of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share after this offering by $        per share and would increase or decrease, as applicable, the dilution per share to new investors in this offering by $        per share, assuming the number of shares of common stock offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of common stock offered by us would increase or decrease, as applicable, the pro forma as adjusted net tangible book value per share after this offering by $        per share and would increase or decrease, as applicable, the dilution to new investors by $        per share, assuming the assumed initial public offering price, which is the midpoint of the price range set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.

 

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Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced by          shares, or         % of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to shares, or % of the total number of shares of our common stock outstanding after this offering. Additionally, if the underwriters exercise their option to purchase additional shares of our common stock in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $        per share and the dilution in pro forma net tangible book value per share to investors in this offering would be $        per share.

The following table summarizes, on a pro forma as adjusted basis as of September 30, 2021, after giving effect to the pro forma adjustments described above, the difference between existing stockholders and new investors purchasing shares of common stock in this offering with respect to the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by our existing stockholders or to be paid by investors purchasing shares in this offering at an assumed offering price of $        per share, which is the midpoint of the price range set forth on the cover of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

		Shares Purchased								Total Consideration								Average Price Per Share
		Number				Percent				Amount				Percent
Existing stockholders								%		$						%		$
New investors
Total							100	%		$					100	%

A $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease, as applicable, total consideration paid by new investors and total consideration paid by all stockholders by $        million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus remains the same.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our common stock. If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own        % and our new investors would own        % of the total number of shares of our common stock outstanding after this offering.

The dilution information discussed above is illustrative only and may change based on the actual initial public offering price and other terms of this offering. To the extent we issue any additional stock options or any outstanding stock options or warrant are exercised, or we issue any other securities or convertible debt in the future, investors will experience further dilution.

The number of shares of our common stock to be outstanding after this offering is based upon shares of our common stock as of September 30, 2021, and does not include:

 

•

4,895,563 shares of our common stock issuable upon the exercise of outstanding stock options under our 2016 Plan as of September 30, 2021, with a weighted-average exercise price of $5.00 per share;

 

•

restricted stock unit awards with respect to approximately             shares of our common stock (based on the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus) that we will grant under our 2021 Plan, to our directors and employees. Such grants will be effective upon the filing of our registration statement on Form S-8 covering such awards; and

 

•

shares of our common stock reserved for future issuance under our 2021 Equity Incentive Plan, or the 2021 Plan, which will become effective in connection with the completion of this offering (which number includes the equity awards to be granted pursuant to the 2021 Plan that will become effective in connection with this offering).

 

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In addition, on the date immediately prior to the date of this prospectus, any remaining shares of common stock available for issuance under our 2016 Plan will be added to the shares of our common stock reserved for issuance under our 2021 Plan, and we will cease granting awards under the 2016 Plan. Our 2021 Plan provides for automatic annual increases in the number of shares reserved thereunder, which are not reflected in the numbers above. See the section titled “Executive and Director Compensation—Executive Compensation Arrangements” for additional information.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Prospectus Summary” and the financial statements and related notes included elsewhere in this prospectus. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are innovators who make purpose-built technical apparel, footwear and gear for life’s most demanding missions. Everything we do is centered on serving those who serve others and enabling them to live an “Always Be Ready” (“ABR”) lifestyle.

5.11 is a category-defining, global lifestyle brand and innovator of purpose-built technical apparel, footwear and gear for a passionate community of professional and everyday consumers. Our global brand is championed by a growing community of professional consumers (“Prosumers”), such as military personnel, law enforcement, first responders, and frontline workers, and functionally focused recreationalists (“Everyday Consumers”), who purchase our products for everyday use as they engage in a range of activities from fitness and training, to outdoor experiences such as hunting, hiking and overlanding. Since 2018, we added approximately 1.5 million new consumers to our owned retail and eCommerce channels and active DTC consumers reached 821,000 as of September 30, 2021, representing a 41% CAGR since 2018, evidencing our growing and broad crossover appeal.

Since our inception, we have continuously developed and introduced innovative apparel, footwear and gear that are highly functional, technically-advanced and expertly designed setting the industry standard in each product category. Our head-to-toe offering serves Prosumers and Everyday Consumers across a range of activities, including fitness and training, outdoor adventures, workwear, uniform integration, and everyday use, among others. Our in-house innovation team developed industry-leading technology and designs with a growing portfolio of over 41 U.S. patents, issued or pending. We continuously leverage our capabilities to diversify our product mix.

Our global omnichannel platform is comprised of a rapidly growing DTC channel, which includes our owned retail locations, proprietary website, and third-party marketplace partners like Amazon, and a recurring Wholesale channel, which encompasses our Professional Wholesale, Consumer Wholesale, and International business. Our DTC business includes 85 5.11-operated U.S. retail stores as of September 30, 2021, our U.S. eCommerce digital platform, and U.S. marketplace sales through our third-party marketplace partners including Amazon. For the nine months ended September 30, 2021, DTC sales were 43% of our net sales. Our Professional Wholesale and International channels sell directly to dealers who in turn manage their own contracts with government agencies as well as maintain digital and physical storefronts. Our Consumer Wholesale channel is comprised of dealers, outdoor specialty retailers, and military exchanges and predominantly serves Everyday Consumers. Our International business includes retail locations and our International eCommerce sites. For the nine months ended September 30, 2021, Wholesale sales were 57% of our net sales.

Over the prior five years, we have invested over $70 million in capex to improve operating and fulfillment performance and support continued future growth. Since 2017, we have invested over $35 million in capabilities to further our eCommerce infrastructure, including a scalable, enterprise resource planning (“ERP”) system and distribution center in Manteca, California that enable more cost effective and timely delivery for our eCommerce orders. Our current infrastructure allows us to fulfill our orders accurately and effectively across all channels,

 

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including making certain shipments direct from the source to bypass our distribution centers, while still providing buffer capacity capabilities to support future expansion. Following the implementation of our Buy Online Ship From Store functions in late 2020, we shipped 29% of our eCommerce orders in late 2020 from our store locations. Internationally, we have established a network of over 3,200 dealers in over 120 countries who are an extension of our global sales infrastructure.

Our superior product offering and strong brand affinity has enabled us to deliver exceptional financial performance:

 

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Net Sales. In 2020, we had a total net sales of $401 million up from $389 million in 2019 and $348 million in 2018. We believe this strong performance demonstrates our resiliency through a global pandemic. Prior to the pandemic, we had a net sales CAGR of 12% from 2017 to 2019. For the nine months ended September 30, 2021, our net sales have accelerated, growing 14% over the same period in 2020.

 

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DTC. Our proprietary eCommerce channel has seen rapid growth, growing at a 41% CAGR from 2018 to September 30, 2021, while we have also grown our number of retail locations to 85, at a 26% CAGR from 2018 to September 30, 2021. Our DTC channel has grown from 22% of total net sales in 2018 to 43% of total net sales for the nine months ended September 30, 2021.

 

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Profitability. In 2020, our net income was $10.3 million and our Adjusted EBITDA was $54.5 million, up from $4.1 million and $47.3 million in 2019, respectively. We have seen continued margin expansion driven by the accelerated and increased penetration of our DTC business combined with the continued growth of our Wholesale business. In 2020, our gross margin and Adjusted EBITDA margin were 50% and 14%, respectively. This represents a margin improvement of 420 bps for gross margin and 350 bps for Adjusted EBITDA since 2018.

For a reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin to the most directly comparable GAAP financial measure, information about why we consider Adjusted EBITDA and Adjusted EBITDA margin useful and a discussion of the material risks and limitations of these measures, please see “Prospectus Summary—Summary Consolidated Financial Data.”

Factors Affecting our Results of Operations

Brand Awareness

Our ability to promote and maintain brand awareness and loyalty is critical to our success. We have a significant opportunity to continue to grow our brand awareness and loyalty through word of mouth, brand marketing and performance marketing. We have made significant investments to strengthen our brand through our marketing strategy, which includes brand marketing campaigns across platforms, including email, digital, display, onsite, direct-mail, social media and brand ambassadors, as well as performance marketing efforts, including retargeting, paid search and product listing advertisements, paid social media advertisements, search engine optimization, SMS text messaging and affiliate marketing. We plan to continue to invest in our brand and performance marketing to help drive our future growth.

Customer Acquisition, Retention and Engagement

Our continued success depends in part on our ability to attract, retain, and drive repeat purchases from, our existing consumers. We monitor retention across our entire customer base. Our goal is to attract and convert retail store and website visitors into active DTC consumers and foster relationships that drive repeat purchases. As of September 30, 2021, we had approximately 821,000 active DTC consumers, up from 595,000 active DTC consumers as of December 31, 2020. Over the last two years, we have consistently increased the percentage of net sales from repeat customers while also continuing to increase the number of new DTC consumers acquired, which equates to approximately 2.1 million consumers since 2014. These newly acquired consumers are supplemented by the embedded growth from prior-year cohorts’ consumers who continue to purchase from us.

 

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Execution of our DTC Strategy

Expansion and Relevance of Digital Platform

Our digital platform consists of website, www.511tactical.com and our International eCommerce sites. Our website features our product catalog, detailed product information, consumer reviews, and enables us to maintain direct relationships with our consumers, elevate the brand experience and better understand shopping preferences and behavior. Our website had approximately 26 million total visits in 2020 and in the twelve months ended September 30, 2021, and drives a significant portion of our online sales. As we expand our digital platform, we are able to generate additional net sales through our website and enhance the brand experience.

Store Expansion and Economics

Our store count reflects all retail stores open at the end of a reporting period. Prior to opening a new store, we evaluate its potential productivity and returns, including such new store’s upfront investment, and the likelihood of it achieving a targeted payback period of 18 months and attractive 4-Wall EBITDA Margins. We calculate 4-Wall EBITDA as net operating income from our retail stores adjusted to exclude depreciation and amortization expense. Four-wall Adjusted EBITDA means, for any period, a particular store’s Adjusted EBITDA, excluding any corporate selling, general and administrative expenses associated with each store. Four-wall Adjusted EBITDA margin means, for any period, a store’s four-wall Adjusted EBITDA divided by that store’s net sales. 4-Wall EBITDA Margin is calculated by dividing 4-Wall EBITDA by net retail sales. In connection with opening new stores, we incur pre-opening costs, which primarily consist of payroll, travel, training, marketing, initial opening supplies, costs of transporting initial inventory and fixtures to store locations, and occupancy costs incurred from the time of possession of a store site to the opening of that store.

New Product Development and Innovation

The evolution of our lines of technical apparel, footwear and gear, and the expansion of our product assortment across new product categories has contributed meaningfully to our performance and we intend to continue investing in the development and introduction of new products. As we introduce additional products, we expect that they will help expand our addressable market. We expect new products to be accretive to revenue. In connection with developing new products, we incur product costs which primarily consist of design, development, testing, sampling, and costs associated with tooling or molds for footwear and gear.

Government Agency Budgets and Contracting

A portion of our sales are derived from sales to international public agencies and third-party contractors and wholesalers, who sell our products to U.S. and international public agencies, including, but not limited to, law enforcement, fire and emergency response agencies. As such, we are exposed to the level of public funding of such public agencies. Any reduction in the budgets of such U.S. or international public agencies to purchase apparel, footwear or gear could negatively impact our sales.

Impact of the COVID-19 Pandemic

In March 2020, the World Health Organization categorized COVID-19 as a pandemic and, during the second through fourth quarter of 2020, the COVID-19 pandemic continued to impact us. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration, severity and ultimate impact on our business are currently unknown. The COVID-19 pandemic led to governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter-in-place” and “stay-at-home” orders, travel restrictions, business curtailments, particularly retail operations and non-essential businesses, school closures, and other measures. In addition, governments and central banks in several parts of the world enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. The public health situation, global response measures and corresponding impacts on various markets remain fluid and uncertain.

 

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We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it is impacting our customers, employees, supply chains, and distribution networks. The COVID-19 pandemic had a material impact on sales in our retail stores in 2020 but we are unable to quantify such impact at this time. The full extent to date of the COVID-19 pandemic cannot be accurately predicted at this time; however, we have experienced and expect to continue to experience reductions in customer demand in certain of our channels. The health of our team and various stakeholders is our highest priority, and we have taken multiple steps to provide support and a safe work environment. With the experienced reduction in demand, we reduced our controllable costs, including short-term actions to reduce labor costs, eliminating non-essential travel and reducing discretionary spending. Additionally, we proactively managed working capital and we reduced our capital spending plan for the year, without deferring many key strategic ongoing initiatives. Certain of our manufacturers experienced delays and shut-downs due to the COVID-19 pandemic. In order to manage the impact of these disruptions and meet our customers’ expectations, we increased our use of more expensive air freight during 2020 and 2021, which increased our cost of sales.

To address the financial impact of COVID-19, we have reduced variable operating expenses including travel and entertainment, sales and marketing, and payroll. The full extent of the ongoing impact of COVID-19 on our longer-term operational and financial performance will depend on future developments, including the duration and spread of the outbreak and any variants, the availability and efficacy of vaccines and the overall economic impact of the outbreak on the general economy. If the pandemic and its effects are more protracted than expected, the impact on our business, financial condition and results of operations could be incrementally worse and require more time for us to recover. However, there can be no assurance that these trends will continue and the ultimate impact of the COVID-19 pandemic remains uncertain.

For additional information regarding the impact of the COVID-19 pandemic on us, see “Risk Factors.”

How We Assess the Performance of Our Business

In addition to the measures presented in our financial statements, we use the following key operational and business metrics and non-GAAP financial measures to evaluate our business to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions.

 

		Year Ended December 31, 2020				Year Ended December 31, 2019				Nine Months Ended September 30, 2021				Nine Months Ended September 30, 2020
		($ in millions, unless noted)
Comparable Sales Growth(1)			16%				13%				20%				13%
Store Count (at period end)			73				61				85				71
Channel Sales:
DTC		$	156			$	126			$	136			$	108
Wholesale		$	245			$	263			$	185			$	174
Channel Sales(2):
DTC			39%				32%				43%				38%
Wholesale			61%				68%				57%				62%
Category Sales(3):
Apparel		$	258			$	261			$	213			$	181
Gear		$	102			$	88			$	76			$	69
Footwear		$	41			$	40			$	32			$	32
Adjusted EBITDA(4)		$	55			$	47			$	47			$	36
Adjusted EBITDA Margin(4)			14%				12%				15%				13%

 

(1)	Comparable sales growth includes U.S. retail store sales and eCommerce.

(2)	Based on total net sales.

 

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(3)	Category sales details are not available for the entirety of the business. For the metrics presented above the Company obtained category sales for the majority of the business (more than 90% of net sales) and applied the allocation to the consolidated revenues.

(4)	See the section titled “Prospectus Summary—Summary Consolidated Financial Data” for information regarding Adjusted EBITDA and Adjusted EBITDA Margin, including a reconciliation to the most directly comparable financial measure prepared in accordance with U.S. GAAP.

Comparable Sales Growth

Comparable Sales Growth allows us to evaluate how our store base and sites are performing on a comparable basis. We calculate comparable sales as follows: aggregate sales from our directly operated U.S. retail stores, own U.S. eCommerce digital platform and 511tactical.com; stores are added to the calculation in their 16th full fiscal month of operation.

Sales from partial months of operation are ignored when stores do not open or close on the first day of the month are exclusions from or adjustments to Comparable Sales Growth. Our calculation of Comparable Sales Growth may not be comparable to similar data made available by other retailers. We measure Comparable Sales Growth as the increase or (decrease) in comparable sales for a reporting period, compared to the prior reporting period.

Store Count

The total number of stores that sell our products directly to consumers, as well as the timing of store openings and closings, have, and will continue to have, an impact on our performance. Store count at the end of 2020 includes domestic stores owned and operated by us.

Channel Sales

DTC

Our DTC business includes 85 5.11-operated U.S. retail stores as of September 30, 2021, our U.S. eCommerce digital platform, 511tactical.com, and U.S. marketplace sales through our third-party marketplace partners including Amazon. In 2020, DTC sales were 39% of our net sales.

Wholesale

Our Wholesale channel includes the 5.11 Professional Wholesale, Consumer Wholesale, and International business. Our Professional Wholesale and International channels sell directly to dealers who in turn manage their own contracts with government agencies as well as maintain digital and physical storefronts. Our Consumer Wholesale channel is comprised of dealers, outdoor specialty retailers, and military exchanges and predominantly serves Everyday Consumers. Our International business includes retail locations and our International eCommerce sites. In 2020, Wholesale sales were 61% of our net sales.

Category Sales

Apparel

We design, source, market and distribute technical pants, shirts, shorts and outerwear. In 2020, Apparel sales accounted for 65% of our net sales.

Gear

We design, source, market and distribute functional technical products and complementary accessories including, multi-use bags and backpacks, tools, belts, flashlights, hats, plate carriers, knee and elbow protection, gloves and patches. In 2020, Gear sales accounted for 25% of our net sales.

 

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Footwear

We design, source, market and distribute technical boots and shoes. In 2020, Footwear sales accounted for 10% of our net sales.

Adjusted EBITDA

We use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. We define Adjusted EBITDA as net income, as adjusted to exclude interest expense, net; income tax (benefit) expense; depreciation and amortization, net; (gain) loss on disposals of property and equipment; other (income), net (which includes management fees paid to CODI, a related party); stock-based compensation expense; and non-ordinary course business expenses, such as senior leadership severance, non-recurring inventory write-down adjustments, non-recurring accounts receivable provision adjustments, and certain IPO costs. Our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. For a discussion of Adjusted EBITDA and the limitation on its use, and the reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure, see “Prospectus Summary—Summary Consolidated Financial Data.”

Adjusted EBITDA Margin

We define Adjusted EBITDA Margin as Adjusted EBITDA as a percent of Net Sales.

Components of Results of Operations

Net sales

Net sales consist of sales of purpose-built, high performance technical apparel, gear and footwear to Prosumers and Everyday Consumers through our DTC and Wholesale channels. We recognize product sales at the time control is transferred to the customer, which is when the product is sold, shipped to the customer, or received by the customer. Net sales represent the sale of these items and shipping revenue, (including shipping and handling fees billed to customers) net of estimated returns and discounts. Net sales are primarily driven by the growth in the number of active DTC consumers, the frequency with which active DTC consumers purchase and the average order value.

Cost of sales

Cost of sales consists principally of the cost of purchased merchandise and includes the expenses incurred to acquire and produce inventory for sale, including product costs, inbound freight costs, import costs, outbound freight costs, sourcing costs, third-party royalties, as well as provisions for excess and slow-moving merchandise and inventory shrinkage. Our cost of sales has and may continue to fluctuate with the cost of the raw materials used in our products as well as the costs to acquire inventory, such as inbound freight costs. As we continue to grow our DTC business, we expect cost of sales to decrease as a percentage of net sales.

Gross profit

We define gross profit as net sales less cost of sales. Our gross profit has increased historically and may fluctuate from period to period based on a number of factors, including the timing and mix of the product offerings we sell, the sales mix between our Wholesale and DTC channels, as well as our ability to reduce costs, in any given period.

 

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Operating expenses

Our operating expenses consist of selling, general and administrative expenses and depreciation and amortization.

Selling, general and administrative expenses

Selling, general, and administrative (“SG&A”) expenses consist primarily of marketing costs, employee compensation and benefits costs, costs of our warehousing and logistics operations, costs of operating on third-party marketplaces, costs to operate our Company-owned retail stores (including lease costs), non-cash stock-based compensation, and general corporate infrastructure expenses, including certain facilities costs, software expenses, and legal expenses. We expect our selling, general, and administrative expenses to increase in absolute terms as we continue to grow our business. We also anticipate that we will incur significant additional legal, accounting, insurance, investor relations and other expenses to support our transition to and operations as a public company, including costs associated with our compliance with the Sarbanes-Oxley Act.

Depreciation and amortization

Depreciation and amortization expense consists primarily of depreciation and amortization associated with the leases for our stores, leasehold improvements and capitalized software related to our ERP system. Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or term of the lease, which is generally 5 to 10 years.

Interest expense—net

Interest expense—net consists of interest from our Credit Agreement (as defined below); the interest rates related to the Term A Loan (as defined below) and our Revolving Loan (as defined below) can be elected as either the Base Rate, which is set to the Prime Rate or London InterBank Offered Rate (LIBOR) plus the applicable margin as specified in the Credit Agreement. The interest rate related to the Term B Loan is 10.0% per annum.

Other expense—net

Other expense—net consists of gain or loss on the disposal of assets, foreign exchange gain or loss, gain or loss on extinguishment of debt, and management fees paid to CODI (which will terminate upon the completion of this offering).

Income tax expense/(benefit)

Our income tax expense/(benefit) consists of an estimate of federal, state and foreign income taxes based on enacted federal, state and foreign tax rates, as adjusted for allowable credits, deductions and uncertain tax positions.

Foreign currency translation adjustments

Certain of our subsidiaries have operations outside of the United States, and the local currency is typically the functional currency. The financial statements are translated into U.S. dollars using exchange rates in effect at year-end for assets and liabilities and average exchange rates during the year for results of operations. Foreign currency transaction gains or losses are included in the consolidated statements of operations and comprehensive income; however, such amounts historically have not been material.

 

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Results of Operations

The following table sets forth our consolidated statements of income for the periods presented:

 

		Fiscal Year Ended December 31,								Nine Months Ended September 30,
		2020				2019				2021				2020
		(in thousands)
Net sales		$	401,106			$	388,645			$	321,009			$	281,822
Cost of sales			198,861				197,051				150,961				138,980
Gross profit			202,245				191,594				170,048				142,842
Operating expenses:
Selling, general and administrative			150,750				147,060				124,894				109,066
Depreciation and amortization			21,085				21,125				16,493				15,733
Total operating expenses			171,835				168,185				141,387				124,799
Income from operations			30,410				23,409				28,661				18,043
Interest expense—net			14,502				17,952				9,039				11,113
Other expense—net			1,743				878				448				1,470
Income before income tax expense			14,165				4,579				19,174				5,460
Income tax expense/(benefit)			3,847				481				4,857				1,984
Net income (loss)			10,318				4,098				14,317				3,476
Foreign currency translation adjustments			(125	)			(1	)			50				2
Comprehensive income/(loss)		$	10,193			$	4,097			$	14,367			$	3,478

The following table sets forth our results of operations as a percentage of net sales for the periods presented:

 

		Fiscal Year Ended December 31,								Nine Months Ended September 30,
		2020				2019				2021				2020
		(as percentage of net sales)
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales			49.6	%			50.7	%			47.0	%			49.3	%
Gross profit			50.4	%			49.3	%			53.0	%			50.7	%
Operating expenses:
Selling, general and administrative			37.6	%			37.8	%			38.9	%			38.7	%
Depreciation and amortization			5.3	%			5.4	%			5.1	%			5.6	%
Total operating expenses			42.8	%			43.3	%			44.0	%			44.3	%
Income from operations			7.6	%			6.0	%			8.9	%			6.4	%
Interest expense—net			3.6	%			4.6	%			2.8	%			3.9	%
Other expense—net			0.4	%			0.2	%			0.0	%			0.0	%
Income before income tax expense			3.5	%			1.2	%			6.0	%			1.9	%
Income tax expense/(benefit)			1.0	%			0.1	%			1.5	%			0.7	%
Net income (loss)			2.6	%			1.1	%			4.5	%			1.2	%
Foreign currency translation adjustments			0.0	%			0.0	%			0.0	%			0.0	%
Comprehensive income/(loss)			2.5	%			1.1	%			4.5	%			1.2	%

 

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