Goodwill Southern

July 20, 2017

Board of Directors Goodwill Industries of Southern Nevada, Inc. 1280 W. Cheyenne Ave. North Las Vegas, NV 89030

Dear Board Members,

Nevada

Goodwill Industries of Southern Nevada, Inc. ("GSN") issued $22,145,000 of bonds on December 1, 2015. GSN is subject to certain financial and other covenants under the terms of the Limited Offering Memorandum associated with those bonds, including a requirement to maintain a minimum Fixed Charges Coverage Ratio ("FCCR"). GSN failed to satisfy the FCCR for the year ended December 31, 2016 and was required under the terms of the Offering Memorandum to engage a Management Consultant to make recommendations as to a revision of the rates, fees, and charges of GSN or the methods of operation of GSN to produce the required FCCR for the year ending December 31, 2017.

GSN engaged Jim Martin, President and CEO of Goodwill Industries of Lane and South Coast Counties (Eugene, OR) and Goodwill Industries of Alaska, and Jim's executive team, to perform the Management Consultation. From their initial visit during the week of May 15, 2007, through the issuance of the final Management Consultant report on June 30, 2017, Jim and various members of his executive team made numerous visits to GSN for meetings with the Board of Directors, meetings with the GSN executive team, and for visits to GS N's retail stores, clearance centers, and distribution warehouses. Jim and his team have also made themselves available via email and telephone calls for continued discussions with numerous members of the GSN team.

The Management Consultant's report Jim Martin issued on June 301h contained sixty-eight (68)

individual points, each of which is set forth below, verbatim, in black font. Indented and in blue font are the responses from the GSN executive team, including:

• Actions that have already been taken on specific points;

• Actions that are proposed to be taken on specific points;

• Recommendations that we are still studying; and

• Any recommendations with which we disagree (along with a thorough explanation of the basis for our disagreement).

While Jim expressed skepticism that GSN would be able to meet its bond covenants in the foreseeable future, the GSN team is committed to the long-term financial health of the organization and is diligently working to improve GSN's liquidity condition.

Common acronyms/abbreviations used below include the following:

• ADC =Attended Donation Center • DAS= Daily Assignment Sheet • DM = District Manager • Gii =Goodwill Industries International • GSN =Goodwill Industries of Southern Nevada

• PBTK = Piercy Bowler Taylor & Kern, LLP (GSN's CPA Audit firm)

BOARD GOVERNANCE

1. Ensure the Directors' and Officers' insurance policy is current. o The D&O insurance policy is current. The insurance vendor is RSUI Indemnity Company.

The D&O policy covers up to $1,000,000, with a $50,000 retention amount, and is paid through 2018.

2. Consider engaging Bankruptcy Counsel. o GSN has engaged Larson & Zirzow, a bankruptcy firm in Las Vegas, at the direction of the

Board of Directors. Larson & Zirzow was engaged to assist with renegotiating rental agreements with landlords and to provide general advice, as well as to assist GSN with filing for bankruptcy if the need arises.

3. Consider adjusting the inventory amount on the balance sheet. In addition to my concern that the inventory balance is overstated, Ben Saul and Hanna Redd, Goodwill Industries International finance consultants shared concern for the high inventory calculation and Brian Itzkowitz Gii donated goods consultant also expressed concern and estimated the inventory balance at approximately $2.1 million in 2016.

o GSN's Interim CEO and the CFO discussed the method used to calculate GSN's Inventory for the December 31, 2016 and prior year financia l statements with Ryan Whitman, the audit partner from PBTK, on Thursday, June 29, 2017. Mr. Whitman insisted that GSN's method was consistent with the GAAP guidance for calculating Inventory for a donated goods non-profit and that PBTK was comfortable with the outcome of GSN's application of the method. As part of this discussion, Mr. Whitman explained that he had done extensive research into the proper inventory method as part of explaining it to GSN's bond underwriters back in 2015.

o GSN's Accounting team will reapply GSN's method using more conservative variables and test the sensitivity of the method. If the GSN team determines that the method was improperly applied and the variance was material, the GSN team will look to restate the affected financial statements.

o Under all circumstances, the GSN Accounting team will work closely with t he Board's Audit Committee to discuss Inventory methods with other Goodwills, to identify alternatives to GSN's current method, and to make a recommendation to the Board of Directors to either keep or change GSN's accounting method for Inventory.

4. Ensure transparent communication with your audit firm. There is at least one confirmed instance of intentional misrepresentations of management in the 2016 financial statements. Consider restating the 2016 financial statements, which includes correcting the likely overstated inventory value.

o GS N's CFO has disclosed to PBTK all matters that have been discovered during Jim Martin's consultation and subsequent reviews, including:

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•

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A severance commitment to GSN's former CFO that was not accrued in the general ledger in 2016 when the severance agreement was finalized An advance from developers for Tenant Improvements on the "Cameron Store" that is still under construction Retirement commitments for Q1 2017 under GSN's employment contracts with the former CEO, COO, and Chief Cu lture and Mission Officer

5. Ensure compliance with the Fair Labor Standards Act {FLSA) with an emphasis on verifying hourly staff are not categorized as exempt salary.

o The GSN Executive team is reviewing each sa laried position to ensure that the job description and responsibilities are consistent with the requirements for paying on a salary basis instead of hourly. Of the 50 exempt (i.e. salaried) positions at GSN, only 7 require more detailed review. To the extent that any job descriptions need to be revised and/or any positions that are currently salaried shou ld be hourly, adjustments will be made no later than October 1, 2017.

6. Evaluate the Board's compliance with the Internal Revenue Service {IRS) definition of independence and take appropriate action. The IRS defines an independent director as the following:

a. The member was not compensated as an officer or other employee of the organization or of a related organization.

b. The member did not receive total compensation exceeding $10,000 during the organizations tax years from the organization and related organizations as an independent contractor, other than reasonable compensation for services provided in the capacity as a member of the governing body.

c. Neither the member, nor any family member of the member, was involved in a transaction with the organization that is required to be reported on Schedule L for the organizations tax year.

d. Neither the member, nor any family member of the member, was involved in a transaction with a taxable or tax-exempt related organization of a type and amount that would be reportable on Schedule L if required to be filed by the related organization.

o GSN's Interim CEO and CFO have discussed independence and the required disclosures with the Board of Directors. The CFO created a disclosure form and sent it to the Board of Directors on July 14, 2017, along with a request for each Board member to complete the form and certify that all transactions have been disclosed.

o GSN's Interim CEO and CFO will review the forms and work with Board members on any questions or items for clarification. These disclosures will be used for the 2016 IRS Form 990.

7. With the changes in the current lease standards and the inability of GSN to meet the most recent bond payment and bond covenants, I would recommend working with the lender to see if the bond covenants can be renegotiated.

o GSN's Executive team is currently focused on managing GSN's liquidity situation by cutting costs and adjusting the retail strategy to require less labor. The Executive team will seek guidance from the Board of Directors regarding engaging bond counsel or taking other steps to renegotiate GSN's bond covenants.

8. Contact Goodwill Industries International (Gii) to arrange for a dues repayment schedule.

Without an agreed upon repayment schedule for GSN delinquent dues, GSN is not in compliance

with one of the 10 Membership Standards. Noncompliance with any one of the membership standards subjects GSN to disaffiliation.

o GS N's Interim CEO has spoken with Jim Gibbons, the President & CEO of Gii on multiple

occasions since stepping into the Interim CEO role. The discussions included a verbal

agreement to defer GSN's Gi i dues payments and a re lease GSN from any obligation for

Gii's Ad Council project (see Item #33 below). GSN's Interim CEO mailed a letter to Jim

Gibbons on July 19, 2017, to formalize each of these agr~ements and propose a

repayment schedule for the deferred Gii dues beginning in February 2018 and

continuing for 24 months. A final decision by Gii is pending.

9. Consider formal governance training for the Board. Gii can provide on-site training for all Board members and officers. Gii also partners with BoardSource to provide membership access to a multitude of resources. Additionally, the Board should consider reviewing the "Nevada Office of Attorney General: A Guide to Nonprofits" annually.

o GSN's Executive team will work with Gii to coordinate training for Board members and officers and develop a Governance Policies Manual pertain ing to the Board, with a signed acknowledgment for receipt of training policies from each Board member.

10. Formal training should be offered to the Audit Committee to understand their fiduciary responsibility regarding effective oversight of GSN finances. This includes the annual audit, annual financial statement and the IRS Form 990. The Nevada's Society of Certified Public Accountants may be a resource .

o The Board's Audit Committee is comprised of experienced financial professionals who had a reasonable expectation that the former GSN leadership was maintaining accurate financial statements and communicating openly and honestly with PBTK.

o GSN's Executive team will work to identify a resource for formal training for the members of the Board's Audit Committee to ensure that the members of the Committee have full understanding and command of the Committee's roles and responsibi lities.

11. Create an annual schedule or calendar of documents that require Board review. Some documents to consider reviewing are monthly balance sheet, cash flow and income statements; quarterly budget to actual and on annual basis the Accounting Manual, Whistleblower Policy, and Conflict of Interest Statement, to name a few.

o GSN's Executive team is assembling a comprehensive calendar as described above. The calendar will include not only the materials set forth in the recommendation, but also the scheduled meeting dates for the full Board of Directors and the Executive Committee (and other Committees), the due dates for Board disclosures and the IRS Form 990 filing, etc.

12. The Board of Directors should begin recruiting for a President and CEO with emphasis on an executive with experience in managing a mission-integrated donated goods business. This is a time consuming process when done correctly and I would encourage the Board to take the time to ensure this extremely critical decision is made with appropriate vetting and due diligence. I

would urge the Board to demonstrate full transparency in the process specifically related to the financial position of GSN.

o GSN's Board of Directors has established a CEO Search Committee comprised of four members. The Committee completed on a job description, which was posted to Gii's Executive Database list on July 18, 2017 and will be posted on other relevant websites. GSN will focus on recruiting qualified candidates with Goodwill leadership experience.

o Resumes from interested candidates will be sent to the Search Committee. Terri Conway, Chief Culture and Mission Officer, will faci litate the search process and coordinate with the Board's CEO Search Committee.

13. The Board should review the Accounting Manual and institute spending limits for the Finance Committee, CEO and other officers of the GSN.

o An updated policy regarding check signing and contracting authority has been developed and was approved by the Board on July 6, 2017.

o The new policy provides a degree of latitude for the GSN Executive Team to execute the Board-approved budget each year, but limits the Executive Team's ability to sign checks for non-budget items and enter into new contracts beyond the scope of the budget w ithout prior Board approval.

14. The Board should review and determine who can legally obligate GSN and ensure these individuals do not obligate the organization beyond their defined spending limit.

o The po licy described for Item #13 above also limits who can legally obligate GSN to the CEO, CFO, and (in limited circumstances) the COO.

15. The Board should consider eliminating all unfunded and underfunded mission programs until the GSN can meet its financial obligations.

o The Executive Team is reviewing the Mission programs and determining the amount of non-Mission funding required for each Mission offering.

o The Executive Team will present its findings to the Board of Directors and seek guidance on which programs to eliminate, if any, as soon as the ana lysis is complete.

OPERATIONAL IMPROVEMENTS

Administration 16. Reorganize departments to effectively manage with appropriate segregation of duties. In my

opinion, Loss Prevention should not report to Operations but instead report to either the Human Resources {HR) or Accounting department.

o The Interim CEO is evaluating GSN's departments and working to realign where necessary. Changes already made include:

• Marketing and Community Affairs: realigned to report directly to the CEO (formerly reported to the COO)

• IT & Risk Management (including Loss Prevention): realigned to report directly to the CEO (formerly reported to the COO)

• Forecasting: realigning to be more fully owned by the Finance Department, w ith inputs from other departments

• Liquidation: the CFO is now the final sign-off on the price and policies for each liquidation load GSN sells

o GSN's Retail Director is establishing a schedule to rotate the DMs' responsibilities 2-4 times each year to ensure "fresh eyes" on the stores

17. Review the paid time off (PTO) accrual rates and the total balance employees can retain . The PTO program appears to be excessive and well beyond industry standard.

o The Interim CEO modified GSN's PTO policy on June 12, 2017. Accrual rates were adjusted to be in line with competitive practice and the PTO cap was reduced from 480 to 120 hours. The PTO policy was also adjusted so that PTO is no longer paid out to employees who leave the agency under any circumstance.

18. Consider training for all HR staff on proper employment practices and communications with staff. Employees shared with my team that some staff were discouraged from filing for Unemployment Insurance.

Culture

o GSN has a "d irect bill" unemployment insurance process, wh ich means GSN reimburses the state of Nevada directly for any unemployment that is paid to qualifying ex-GSN employees. Typically, unemployment is paid through a third party processor with a flat monthly fee based on an unemployment experience rating.

o GSN vigorously defends against unemployment claims if the ex-employee resigned or was terminated for cause. Emphasis is placed on management documentation of the performance that led to the termination decision.

o There was a misunderstanding (approximately three years ago) that GSN could prevent prior employees from filing unemployment claims. The confusion was over the "filing" of the claim rather than the "payout" of the claim being prevented. Internal education at that time resolved the misunderstanding.

19. Promote an organizational culture that provides employees with the systems, train ing and tools to be successful and hold trained employees accountable for well-defined performance standards. Excuses and laying blame on others for poor performance are tolerated at every level of GSN and this culture must change to successfu lly implement the recommendations contained in this report.

o The GSN Execut ive team is working to ensure proper tra ining and tools for team members, coupled with increased accountability.

o Examples include: • Improved safety standards and equipment for team members and

accountability for supervisors for safety failures of team members (whether injuries occur or not)

• DAS to ensure cleanliness and other core responsibil ities are covered each day • Detailed production requirements to ensure the proper amount of inventory is

reaching the retail floor each day • Scheduling formulas to limit store labor to the amount supportable by store

revenue • Planned rotat ion of DMs' store responsibilities to ensure "fresh eyes" inspecting

store functionality and appearance • Modernized General Ledger system to improve the efficiency of the

Accounting/Finance team

20. Evaluate all GSN Managers, Directors and Officers to ensure those responsible for the multitude fundamental breakdowns throughout the organization are trained, demoted or terminated.

Finance

o The former CEO of GSN is no longer with GSN o The former COO of GSN is no longer with GSN o The former CFO of GSN was terminated in December 2016 o The Interim CEO is evaluating all Leadership Team members to ensure they are the right

leaders for their areas of responsibility

21. Review all occupancy costs and attempt to reduce these costs to 15% of retail revenue. Cheyenne rent alone is $123,200 per month; I suggest attempting to renegotiate this lease fi rst.

o GSN's Interim CEO and the CFO are evaluating all leases and working with GSN's attorneys at Larson & Zirzow in an effort to improve lease terms or terminate leases for locations that are not expected to be profitable

o Efforts as of July 17, 2017, include: • 50% rent for four months (June - September) for the Cheyenne facility and the

Alta Mira store (with repayment of the deferred amounts over twelve months beginning in October)

• Ongoing negotiations with the landlord of the Tropicana store to defer a portion of the rent for 2-4 months (with repayment of the deferred amounts over twelve months beginning after the deferral period)

• Termination of the Blue Diamond Select Store location and return of the property to the landlord (effective July 18, 2017}

• Letters to the landlords of the Deja Blue South boutique store and the Sunset ADC requesting release from those leases

22. GSN largest expense is labor and in relation to revenue appears to be high throughout the organization and staff reduction should be a priority. In addition to our observations, the Consultation Report from Brian Itzkowitz details the overabundance of labor in the stores. GSN averages $22 of sales per labor hour while the Goodwill average is $33 per hour. GSN staff are scheduled to make staff reductions with a goal of $40 of sales per labor hour in stores greater than $1.7 million in annual sales by July 1, 2017. I would also review any nonessential administrative positions and make changes accordingly.

o GSN enacted a hiring freeze for the stores in mid-June. Due to the high turnover rates among GSN's store personnel, this has resulted in a headcount reduction of approximately 69 personnel since the hiring freeze was put in place (as of July 18, 2017}. GSN expects the combination of hiring freeze and normal turnover to reduce headcount by approximately 20 personnel each week until optimal levels are reached .

o GSN eliminated the "Shift Lead" position across the retail stores. This resulted in a headcount reduction through a layoff of approximately 30 personnel on June 28, 2017.

o GSN laid off 11 corporate employees during the week of June 12, 2017. o GSN has implemented a scheduling strategy at the stores to try to reach $35 of revenue

per hour of store labor in the near future, but this has required significant training of the Store Managers and is still a work in progress. GSN will endeavor to reach $40/revenue hour once the $35/revenue hour target has been achieved.

23. GSN has 23 individuals in risk management and IT and seven individuals in marketing. I would

suggest evaluating these departments and determining what revenue generating activities they

are supporting. If a position is not creating revenue consider eliminating the expense.

o The IT and Risk Management departments were evaluated in late-May and early-June.

As a result of this evaluation, GSN eliminated 8 positions in IT and Risk Management

during the week of June 12, 2017. These eliminations result in an annual savings of

approximately $235,000.

o The Marketing and Community Affairs functions were also evaluated and 3 positions

were eliminated during the week of June 12, 2017. These eliminations result in an

annual savings of approximately $95,000.

o The Human Resources team eliminated 1 position and Retail Management eliminated 2

positions. Of the 3 individuals impacted, 2 were redeployed to fill openings in the

Mission Services area.

o GSN paid two week's severance to all employees who were laid off through this process.

The affected personnel are eligible to file for Unemployment Insurance. Because GSN is

self-insured for Unemployment, GSN will continue to bear some costs for these

personnel until they find new jobs or their Unemployment benefits expire.

24. Review the chart of accounts for proper classification. For example, the VIP Program is charged as a marketing expense instead of a contra revenue account.

o Costs for the VIP Program have been reclassified as Contra Revenue in the P&L and will be presented as such going forward.

o The costs for E-commerce (e.g. shipping costs, packing materials) will be accounted for as Cost of Goods Sold instead of as stand-alone expenses (which was the historical practice) .

25. Ensure all transactions are recorded in the financial statements. In addition to the Chief Financial Officer's severance package not being recorded, the VIP program is an off balance sheet liability.

o The severance agreement for the former CFO has been reviewed and an accrual has been recorded. This transaction has been discussed with the independent auditors as well.

o GSN accrued a liability for the VIP program as part of its June close and will update the VIP liability in the general ledger on a monthly basis going forward.

26. In the audited financial statements the General and Administrative Expenses were relatively low. I believe this is due to incorrectly allocating costs. For example, donation attendants located at the stores appear to be charged to transportation. I suggest reviewing all allocations so management can make decisions based on accurate financia ls.

o GSN is reviewing all allocations and expenditures to assure proper coding and reporting.

27. Consider producing monthly financial statements by the 10th of each month. o GSN is working to improve the speed with which the books are closed each month. The

Interim CEO and the CFO have established a goal of having the monthly books closed by the 10th business day of the following month and expect to have full compliance no later

than the August close (i.e. to occur by the 10th business day of September) .

o GS N's CFO and Controller are currently of reviewing each step of the monthly financial

close to determine changes required to provide the financial statements by the 101h of

each month.

28. Consider cutting all"costs not related to revenue generation. Review expenses by amount and

start with largest expenses and determine if costs are appropriate.

o GSN is cutting costs across Retail Operations, Marketing, IT, Finance, Safety, Security

and all other departments. The aggregate recurring monthly cuts identified to date are

approximately $30,000.

o In addition to the headcount reductions described above, the following are examples of

additional costs that have been cut as a result of the current review:

o Canceled a third-party fundraising contract that cost $8k/month

o Armored car service expense has been cut in half by changing the frequency of

pickups from the stores, saving approximately $5k/month

o Canceling a third-party PR contract that cost $5k/month

o Canceling the in-store scent contract that cost $5k/month

o Canceling various advertising arrangements that cost an aggregate $2k/month

29. Currently GSN has daily armored car services. With GSN's financia l situation, eva luate the risk

and cost savings of changing from daily pickups to every other day.

o GSN has reduced the frequency of armored car services to three times per week, thus

reducing the cost by over 50%. GSN is evaluating whether further reductions can be

made.

30. The hourly employees are paid weekly. Consider transitioning them to a bi-weekly payroll. This

will cut the processing costs for payroll dramatically.

o GSN's current provider, Paychex, charges processing fees based on the number of team

members in a payroll cycle. Under this pricing model, the lower frequency of pay yields

lower fees (hence Jim Martin's recommendation).

o GSN is working to upgrade its payroll system in the coming months to a new, more

robust system called iSolved. iSolved has a Saas monthly subscription based on total

team members. The iSolved pricing structure will result in annual savings of over

$70,000 compared to Paychex. The iSolved pricing model reduces the value of

converting current weekly-paid employees to bi-weekly pay cycle.

o GSN is working to implement iSolved and expects to complete that effort before the end

of 2017. As such, any savings from switching the hourly personnel to a bi-weekly pay

cycle would be short-lived (i.e. only while GSN is with Paychex) and would impose

extreme hardship on GSN's hourly personnel, many of which depend on a weekly

paycheck to survive.

31. Consider eliminating company authorized cellular phones and replace with a policy that

provides employees with a stipend.

o GSN has evaluated a Bring Your Own Device ("BYOD" ) or stipend cellular policy and

determined that the current policy is more cost effective. GSN currently supports over

150 devices with over 80% of those devices being used by Logistics Drivers, ADC

attendants, and Retai l Stores. The fact that most devices are used for Retail Operations

leaves a small number of devices that would be eligible for a BYOD or stipend program.

Additionally, a typical stipend would result in a reimbursement in the range of $30-$50

per month, per device. GSN recently transitioned to a new provider that is charging $25

per device. As such, GSN does not expect to change its current approach to cellular

phones at this time.

32. GSN does not provide vehicles for staff. GSN reimburses employee's utilizing their personal

vehicle. Review the amount of mileage reimbursement and determine if this process is cost

effective.

o GSN will consider providing vehicles to the Retail Director, DMs, and other employees

whose job is to visit the retail stores. However, GSN is not in the cash position to

purchase any non-mandatory vehicles at this time.

33. I wou ld encourage GSN to send a letter to Gii rescinding its $10,000 Ad Council pledge.

Retail

o GS N's Interim CEO mailed a letter to Jim Gibbons, President and CEO of Gil, on July 19,

2017, proposing that GSN's dues owed (or to be owed) to Gii for 2017 be deferred until

February 2018, at which point GSN would begin repayment of the arrearage over a 24-

month period (see item #8 above) . The letter also memorialized Mr. Gibbons' verbal

agreement to release GSN from any obligation for the Ad Council.

34. Phase out or dramatically reduce the VIP promotional program. The VIP discount program cost the agency $200,000 in the first quarter of 2017. The discounts and "cash back" have affected

sa les as evidence by same store sales decline of 14% in 2017.

o GSN is working to determine if the sales decline Jim Martin identified in this item is due

to the VIP program or is simply a secu lar decline. The VIP program allows GSN to collect

the email and/or mobile phone information of its customers. The VIP number and

contact information are then used to market directly to customers, study the customers'

spending habits and locations shopped, etc. As such, the GSN leadership team views the

VIP program to be too valuable to discontinue at this time.

o GSN will dial back the VIP promotions to ensure the VIP points being awarded are

minimized and that outstanding VIP balances expire within a reasonable period of time

(e.g. 90 days, 6 months).

35. Consider suspending all advertising until the GSN is meeting its financia l obligations. Allocate all resources to merchandising your stores.

o GSN is locked into a number of full-year contracts for billboard, rad io, and newspaper advertising. The GSN Marketing team is working with those vendors to try to get out of certain contracts and has had some success (e.g. Lotus Broadcasting). The billboards are a valuable way to communicate with GS N's target market, but the newspaper advertising will be discontinued ASAP.

o GSN also advertises by email, text messaging, and socia l media. The email and text messages are an effective way to reach GSN's VIP customers with messages about specific promotions, etc. and the GSN leadership team believes this advertising channel is too valuable to discontinue. The social media advertising (Facebook, Twitter, etc.) is largely free or coved by an annual Google Grant.

o GSN has traditional worked with a third-party public relations firm to coordinate press coverage of new store openings and other events, but has notified the PR lead (Kathy Topp) that GSN will no longer use her services ($5,000/mo savings).

36. Formulate and implement a Price and Tag Guidelines Manual. o GSN leveraged the Price and Tag Guidelines Manual from Jim Martin's team. The GSN

version of the Manual was implemented on Ju ly 2, 2017.

37. Formulate and implement a Retail Concepts Manual and train regional managers, store managers, and trainers on executing the concepts

o GSN leveraged the Retail Concepts Manual from Jim Martin's team. The GSN version of the Manual was trained to DMs and Store Managers on June 29th and implemented on Ju ly 2, 2017.

38. In a good, better, best pricing strategy be sure to utilize a bell curve approach to ensure the

agency is maximizing its revenue potential.

o GSN's Good, Better, Best pricing structures were updated using the Price and Tag

Manual provided to GSN by Jim Martin and his team and implemented on July 2, 2017.

39. Ensure production goals correspond to the sales floor and are met on a daily basis. There should be a formula for production goals in each category (hard lines, soft lines, books, furniture, and jewelry). In a donated goods business, lost production is lost sales and will not be made up.

o New production goals have been established for each store based on revised category formulas. These goals were reviewed with GSN's DMs and Store Managers on June 29th and went into effect on July 2, 2017.

40. Consider implementing a 50% color rotation sale instead of VIP sales throughout the week. Eliminate all other sales with the exception of military and senior discounts which should not exceed 20%.

o GSN implemented these recommendations effective July 2, 2017. Senior discounts were changed from 50% on Wednesday to 20% every day of the week. Mil itary/Police/Firefighter discounts were changed to 10% every day of the week instead of being on a single day under the prior structure. 50% color rotation is the primary sa le mechanism, but GSN reserves the ability to run additional sales as necessary to boost sa les and move excess inventory.

41. Consider eliminating the $400 daily buyer program and weekly auctions. o GSN discontinued the $400 daily buyer program on July 1, 2017, after the 30-day notice

required in the contracts to the salvage buyers was complete.

42. Consider hiring a third party to broker sales of textiles. o GSN made contact with the third party broker recommended by Jim Martin and his

team, but the broker wanted a 1-year exclusive contract and was offering a price for textiles that was slightly lower than what GSN's liquidation coordinator was finding on her own directly from the liquidation buyers.

o GSN will maintain contact with the third party textiles broker in the event the broker's pricing and/or terms improve.

43. Compare sa lvage prices (shoes, accessories, books, linen etc.) with neighboring Goodwills and begin receiving market rat e for salvage products. Always charge for the pallet and melon box. The sa lvage industry is an unsavory business and controls should be put in place to mitigate the potential for sweet hearting and/or criminal behavior. A common control is that buyers prepay or pay at the time of pick up via credit ca rd prior to taking possession of the sa lvage load .

. o GSN has implemented policies and controls to ensure better results from the liquidation operations, including:

• Better training for the GSN team member coordinating liquidations • Better coordination with the warehouse team • Establishing contacts with other Goodwills to compare pricing • Requiring up-front payment from liquidators • Charging for pallets and gaylords (melon boxes) • Requiring CFO approval for all liquidation agreements before signing

44. Develop a process to ensure quality raw product is not going directly to a clearance center o Quality control checks are implemented during in all production areas to ensure retai l,

boutique, and E-Commerce quality items are sorted properly. o GSN's leadership team has further stressed the importance of maximizing the value of

donated goods by getting them into the right channels of GSN's operations.

45. Evaluate cleara nce center hours based on product flow. In addition, the clearance centers should remove gondola shelving, add blue tubs, and place furniture closer to the processing door.

o GSN's leadership team is currently reviewing costs and will test a "summer hours" program at the clearance centers to be implemented by August 1, 2017.

o Gondola shelving has already been removed from both clearance centers and blue tubs were rearranged to increase space for furniture .

o Furniture in the clearance centers has been moved closer to the processing doors to capture the efficiency that Jim Martin is getting at w ith the recommendation above.

46. Consider selling furniture at the retail stores where it is donated and mark it down on a regular basis to increase sell t hrough.

o GSN strongly prefers to sell furniture in the store location in which it is donated, but will work to further empower the store managers to reduce the price on furniture that has not sold after several days. Moving furniture from location to location is takes up valuable truck space and risks damage to the furniture being moved, so GSN tries to limit the movement of furniture as much as possible.

o GSN is forced to move furniture that is donated at ADCs or through locations other than stores, but seeks to minimize this furniture movement as much as possible.

47. Consider discontinuing home pickup. o GSN has a 2-3 month backlog of home pickup donations. Although these donations

tend to be high-quality goods, home pickups require significant logistical effort and include some liability risk due driving into a residential neighborhood, having GSN personnel in the donor's house/garage, the heavy lifting usually required, etc.

o Until GSN is able to reduce its backlog, GSN has agreed to direct home pickup donors to Habitat for Humanity (Las Vegas), the CEO of which has agreed to send any items

collected through home pickup that Habitat for Humanity does typically not sell (e.g. clothing, toys) to GSN.

o Terri Conway and the GSN's Marketing team will develop a "script" and train the re levant GSN team members to direct home pickup callers to Habitat for Humanity.

48. If a location has multiple dock doors I would suggest having one door remain empty at all times to increase efficiency for the driver. The driver would then have the ability to drop a trailer and go instead of unloading.

o Dock doors are utilized with 2 trai lers: • The first trai ler is genera lly raw donations delivered daily directly from an

outside donation site. Reserving one door for these deliveries increases efficiencies and reduces logistics costs.

• The second dock is utilized for a delivery and return trailer for the stores' daily delivery. Once emptied, the trailer in this door is used as a return trailer for salvage, recycling, and overstock.

49. Review sales and donations per hour to ensure the agency is deploying labor proportionally.

o Sa les per labor hours implemented as of July 2, 2017 and reviewed with DMs and Store

Managers on 6/29/17 based on revised $40 sales per labor hour.

50. Review eliminating the sa les at the Deja Blue Boutique. If it does not sell at a boutique, it could be sent a traditional store.

o All sa les have been discontinued at boutiques effective July 2, 2017, but we expect to reestablish the senior discount at 20% every day (as in the regular stores) and the military/police/fire department discount at 10% every day (as in the regular stores) for the sake of consistency and to improve relations with our senior shoppers.

51. Kaizen the processing rooms to make them more efficient. With future developments, design

stores with a larger back room for more efficient processing. Currently your back rooms are too

small to maximize revenue potential.

o Ka izen events are planned throughout the month of July and will be completed by August 1, 2017 at all retail stores. Kaizens at five stores (Eastern, Boulevard Mall, Centennia l, Alta Mira, and Nellis) were completed during the week of July 10th.

52. Implement a Daily Assignment Sheet (DAS) and housekeeping standards.

o DAS forms were reviewed with DMs and Store Managers on June 29, 2017 and fully

implemented on July 2, 2017. Stores will maintain their DAS on paper in a location

within the store where each team member can understand his/her responsibi lities. The

DAS in the distribution centers wi ll be managed on a mounted white board.

53. Set up all balers in the area adjacent to the flow of salvage goods leaving the Clearance Centers.

Fully utilize all balers to keep up with the flow of product. These are revenue producing pieces

of equipment, and should not sit idle or buried behind product.

o GSN's salvage process has been reevaluated and reo rganized and changes to optimize

the salvage process w ill be implemented by August 1, 2017.

o When GSN is in a better financial situation, the balers referenced above and other heavy

warehouse equipment will be relocated to increase efficiencies and work flow.

54. The South Clearance Center has furniture sa les in the warehouse. Consider eliminating back

room sales areas and only allow customers to shop on the sales floor.

o The furniture for the South Clearance Center was moved into the clearance center's

retail area on June 1, 2017 and customers are no longer allowed into the warehouse

area.

55. Consider improving the appearance of the Clearance Centers. While it is a different shopping

experience than the traditional retail stores, it still needs to reflect the brand. Create cleanliness

standards, and keep them enforced. Mopping and improved signage are a few quick

improvements.

o DAS for housekeeping standards were implemented on July 2, 2017, including at the

Clearance Centers. The DAS will ensure clean liness standards and will allow

management to hold the assigned employees accountable.

56. Consider increasing pricing at the clearance centers. We are unaware of a Goodwill that charges only $0.79 per pound. GSN should stop individually pricing electrical and other hard lines and sell by the pound. Books should also be sold at the Clearance Centers.

o All price points in Clearance Centers were changed based on suggestions from Jim Martin's team on 6/11/17. Clearance pricing is now:

• $1.89 per lb for a purchase of 251bs or less and $1.29 per lb for 251bs or more; • Books are $0.99 for hardback and $0.50 for paperback (magazines are $0.25); • Glassware is $0.49 per lb.; and • Furniture is individually priced.

57. Consider scanning books at retail stores.

o Media is scanned to determine whether it has va lue on E-commerce or shou ld just be

merchandised in the retail stores. GSN does this scanning centrally at the Distribution

Center, where GSN has daily, "no cost" labor from a volunteer workforce. The stores do

not currently have consistent access to volunteer labor and would have to add an

additional paid employee to scan media in stores along with an additional computer,

scanner and software. GSN changed from the store scanning model to a centralized

model to increase efficiencies. Through June 2017, GSN has had an increase in book

(media) sales through E-commerce over the same period in 2016 of $30,424 (6.1%) and

such sales have exceeded 2017 budget by $43,661 (9.0%).

o That said, GSN wi ll analyze the profitability of the sales of books through E-commerce

via the centralized scanning model to ensure the profitability of this approach.

58. Consider utilizing Kaizen in the e-commerce department to reduce unnecessary handling of

merchandise. Ensure that the area is secure and only authorized staff can enter. Ensure all

personal belongings are located outside of the e-commerce department. Consider implementing

a dress code to ensure employees minimize stashing of product.

o GSN's E-commerce department needs to be expanded and plans are to re-Kaize.n and

expand this growing department by October 1, 2017. Additional security measures will

be added as part of the kaizen.

o GSN's E-commerce team members wi ll be required to wear Goodwill-branded vests no

later than August 1, 2017.

59. There is a display in the upper level of the Administration building full of items that should be on

the sa les floor. GSN is in desperate need of income yet staff take the time to merchandise a

hallway on the second floor of the Administration building generating zero revenue.

o The display in question was disassembled on June 1, 2017 and the goods that were

formerly on display were sent into the retail stream to generate revenue for GSN.

60. Loss prevention practices are ignored throughout the retai l stores. The wares gondolas were up front, which blocks the line of sight for staff, and racks are laid out in the wrong direction, also restricting line of sight. Customer service, a loss prevention tool, was poor. Color tags are not locked up yet another loss prevention best practice that is being ignored ..

o Remerchandising of stores will be reviewed and implemented when the agency can afford to move racks and gondolas.

o Co lor tags are being removed from open areas and secured at each store during kaizen events, which are underway and will be completed by August 1, 2017.

61. Consider eliminating production and advertising of red tag items. o GSN has historically used red tags in the retail stores for premium donated goods that

were not suitable to sell through E-commerce or boutique locations, but which were significantly better than most of the products in the retail stores. Examples would include premium brand blue jeans (e.g. Lucky, Seven For All Mankind), kitchen appliances that were new in the box, etc.

o GSN has not traditionally rotated out the red tag items as quickly as the regularly labeled merchandise. Jim Martin's team pointed out that leaving items on GSN's racks/shelves for too long created an opportunity cost because that sales space could not be used for other items.

o GSN stopped using red tags on June 1, 2017 and just marked goods that would formerly have received a red tag with the normal "color of the week" at the highest price point. GSN believes this contributed to a significant decrease in revenue in June as the most attractive items that would formerly have been sold with red tags at premium prices were being sold at a lower price point.

o GSN began labeling qualifying donated goods with red tags again in mid-July, but with new procedures to require red tagged products to be rotated off the sales floor each month (to avoid tying up rack/shelf space with the same item for too long).

62. Consider sending the Retail Leadership Team to the Eugene, Oregon, Portland Oregon, Menasha Wisconsin or Sarasota Florida Goodwill to learn best practices.

o Eric Butwinick, Director of Retail and Operations, attended the Donated Goods 101 training in Eugene, Oregon on 6/12/17 through 6/15/17.

o GSN will look for opportunities to send its DMs and/or other key personnel to the Goodwills listed above in item #62 and will continue to welcome consultants from Gii, etc.

Safety

63. Due to the number of safety concerns recently witnessed by multiple·consultants consider the

Occupational Safety and Health Administration (OSHA) voluntary safety program and have every

location inspected with priority given to both clearance centers.

o GSN is exploring the programs that the Nevada OSHA offers for inspecting GSN facilities

and operations. GSN is also working with its Worker's Compensation insurance provider

for reviews of each facility. Priority will be given to the clearance centers.

o GSN has also created a new memo to document safety issues that are identified by GSN

personnel, outside consultants, and any other party. The memo lists the issue that has

been identified, the action steps that have or will be taken to address the issue, the GSN

employee responsible for the action steps, and whether the resolution of each safety

issue is complete, in progress, or pending. This report will be maintained as a "live"

document. New safety issues will be added as they are identified, issues with a status of

"in progress" or " pending" will be updated each month, and issues marked "complete"

will be revisited each quarter to ensure that the completed action items are still effective. The first iteration of this report was shared with the GSN Board of Directors

and discussed during the July 6, 2017 Board meeting.

64. Review the storage and processing for handling HAZMAT materials. It is unsafe and would likely

result in an OSHA violation and fine.

o An enclosure was created to store HAZMAT materials and Safetly Kleen (a third party

vendor) has been contracted to ensure proper storage and removal of materials. The

Safety Kleen contract was executed on July 7, 2017 and GSN expects Safety Kleen to begin providing HAZMAT containment and removal services by August 1, 2017.

65. The MOD rate for Gil is very low, yet GSN has numerous safety issues and potential violations. This inverse relationship should be researched to ensure all incidents are reported.

o GSN investigates employee injuries and requires drug testing for most injuries. Where GSN learns that an injured employee was under the influence of controlled substances or was otherwise responsible for his/her own injury, GSN works to ensure that GSN is not forced to pay for such injuries.

o GSN's Risk Management leader has reached out to Kristy Langworthy (CFO for Jim Martin's Goodwill territories) to discuss Kristy's worker's comp methodologies and GSN's historic worker's comp calculations and will work to resolve any errors detected in GSN's approach. The Eugene, Oregon Goodwill has a company directive to "Operate a Safety Program that contains a Worker's Compensation claims at less than 2% of payroll." GSN has used this calculation for 2016 to determine that GSN is currently operating its Safety Program at 1% of payroll.

66. Provide safety vests for all warehouse employees and require that they be worn. Provide one

color to supervisors and another to employees. This will help everyone to easily identify the

supervisor in case of a question or emergency.

o Vests have been ordered and all team members will be required to wear which will be

effective 8/1/17. GSN will have 2 different colo rs of reflective vests for the warehouse

staff. Supervisors will wear one co lor to easily identify them.

67. Attended Donation Center (ADC) trailers are extremely hard to monitor for theft and they are

poor working conditions for employees. Once the agency is financial st rong, consider reducing

reliance on trailers for donations.

o GSN wou ld prefer to use structures for donation centers (former gas

stations/convenience stores with drive-through capability, store-fronts in shopping

centers, etc.). Not only are these easier to monitor through surveillance, the

opportunity to have climate control would reduce temperature-related risk to

employees, reduce employee turnover, and increase GSN's ability to rely on a long-term

presence at such locations. The key is to find structural locations with minimal rent but

which would also yield a high quality and quantity of donated goods. This will be a long­

term focus for GSN once its financial position has improved.

68. Consider instituting mystery shops when GSN can afford this expense. o GSN has utilized mystery shops in the past to test policy compliance and identify

customer service, theft, and other issues. GSN expects to reinstitute mystery shops once the financial situation has improved.

In closing I would like to reiterate the Goodwill network can be a tremendous resource for GSN. Listed below are three individuals that can provide technical assistance:

Brian Itzkowitz Goodwill Industries Consultant

Former President and CEO of Goodwill Industries of Arkansas

Expertise: Goodwill Operations

Cel l: (501)951-4942

• The GSN Executive Team has worked extensively with Brain Itzkowitz, who has had helpful

suggestions re: Safety Improvements, Operational improvements (e .g. labor targets, store

merchandising), etc. Brian's most recent visit was July 5-6, 2017 and we expect to continue

working with Brian, subject to his ava ilabi lity.

Beth Perell Goodwill Industries Internat ional (Gii) Vice President of Member Relations Expertise: Identifying resources within Goodwill network Office: (240)333-5367, Cell: (703)282-5534

• The GSN Executive Team will reach out to Beth Pere II to get contacts for discussing

Accounting methods and other aspects of GSN's business where the Executive Team can

benefit from "best practices" that other Goodwill's have identified .

Jim Borowski President and CEO of Goodwill Industries of Northern W isconsin and Michigan, Expertise: Chapter 11 bankruptcy protection Cell : (906)290-2364

• GSN's Interim CEO reached out to Jim Borowski on July 10, 2017 to get Jim's insights on the bankruptcy process, its effect on his Goodwill, the conditions that led him to declare bankruptcy, etc. John and Jim had a robust discussion and Jim committed to visit GSN August 4-7, 2017, to help evaluate GSN's operations and identify areas where GSN can to improve.

Sincerely,