FOX FACTORY HOLDING CORP 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, under the direction and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of January 1, 2021. Based on the evaluation of our disclosure controls and procedures as of January 1, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Management’s Report on Internal Control Over Financial Reporting The Management’s Report on Internal Control Over Financial Reporting is contained in Part IV. " Management's Report on Internal Control Over Financial Reporting " of this Annual Report on Form 10-K and is incorporated herein by reference. Attestation Report of Independent Registered Public Accounting Firm Grant Thornton, LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements, has issued an attestation report on the Company’s internal control over financial reporting. A report of independent registered public accounting firm is contained in Part IV. " Report of Independent Registered Public Accounting Firm " of this Annual Report on Form 10-K. 56 Table of Contents Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended January 1, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are 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. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. ITEM 9B. OTHER INFORMATION On February 23, 2021, the Compensation Committee of the Board of Directors of Fox Factory Holding Corp. adopted a form of performance share unit award agreement (the “Form of PSU Agreement”) for use in connection with the 2013 Omnibus Plan. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information required by this Item regarding our directors and executive officers is incorporated by reference to the sections of our proxy statement to be filed with the SEC in connection with our 2021 Annual Meeting of Stockholders (the "Proxy Statement") entitled "Election of Class II Directors" and "Corporate Governance." Information required by this Item regarding our corporate governance, including our audit committee and code of ethics, is incorporated by reference to the sections of the Proxy Statement entitled "Corporate Governance" and "The Board of Directors." Information required by this Item regarding compliance with Section 16(a) of the Exchange Act required by this Item is incorporated by reference to the section of the Proxy Statement entitled "Delinquent Section 16(a) Reports." ITEM 11. EXECUTIVE COMPENSATION Information required by this item regarding executive compensation is incorporated by reference to the information set forth under the captions "Executive Compensation," "Director Compensation" and "Corporate Governance" in our Proxy Statement. 57 Table of Contents ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the section of the Proxy Statement entitled "Security Ownership of Certain Beneficial Owners and Management." Information required by this item regarding securities authorized for issuance under our equity compensation plans is incorporated by reference to the information set forth under the caption "Executive Compensation" in our Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information required by this Item is incorporated by reference to the section of the Proxy Statement entitled "Certain Relationships and Related Transactions and Director Independence." ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information required by this Item is incorporated by reference to the section of the Proxy Statement entitled "Ratification of Appointment of Independent Registered Public Accounting Firm." 58 Table of Contents PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Financial Statements Management’s Report on Internal Control Over Financial Reporting 65 Reports of Independent Registered Public Accounting Firm 66 Consolidated Balance Sheets as of January 1, 2021 and January 3, 2020 70 Consolidated Statements of Income for the years ended January 1, 2021, January 3, 2020 and December 28, 2018 71 Consolidated Statements of Comprehensive Income for the years ended January 1, 2021, January 3, 2020 and December 28, 2018 72 Consolidated Statements of Stockholders' Equity for the years ended January 1, 2021, January 3, 2020 and December 28, 2018 73 Consolidated Statements of Cash Flows for the years ended January 1, 2021, January 3, 2020 and December 28, 2018 74 Notes to Consolidated Financial Statements 76 (b) Exhibits See " Index to Exhibits " 60 ITEM 16. FORM 10-K SUMMARY None. 59 Table of Contents Index to Exhibits Incorporated by Reference Exhibit Number Exhibit Description Form File No. Filing Date Filed or Furnished Herewith 3.1 Amended and Restated Certificate of Incorporation 10-Q 001-36040 September 19, 2013 3.2 Amended and Restated Bylaws 10-Q 001-36040 September 19, 2013 4.1 Form of Common Stock Certificate S-1 333-189841 July 8, 2013 4.2 Form of Indenture S-3 333-203146 March 31, 2015 4.3 Description of Securities 10-K 001-36040 March 3, 2020 10.1† Employment Agreement, dated July 22, 2013, by and between Fox Factory Holding Corp. and Larry L. Enterline S-1/A 333-189841 July 25, 2013 10. 2 † Employment Agreement, dated August 29, 2013, by and between Fox Factory Holding Corp. and Wes Allinger 10-Q 001-36040 May 4, 2016 10. 3 † Amendment, dated May 2, 2016, to the Employment Agreement, dated July 22, 2013, by and between Fox Factory Holding Corp. and Larry Enterline 10-Q 001-36040 August 3, 2016 10. 4 † Employment Agreement, dated May 1, 2018, by and between Fox Factory Holding Corp. and Wes Allinger 10-Q 001-36040 May 2, 2018 10. 5 † Employment Agreement, dated May 1, 2018, by and between Fox Factory Holding Corp. and Chris Tutton 10-K 001-36040 February 26, 2019 10. 6 † Employment Agreement, dated August 29, 2018, by and between Fox Factory Holding Corp. and Michael C. Dennison 10-K 001-36040 February 26, 2019 10. 7 † Amended and Restated Employment Agreement, dated June 26, 2019, by and between Fox Factory Holding Corp. and Larry L. Enterline 8-K 001-36040 July 1, 2019 10. 8 † Amended and Restated Employment Agreement, dated June 26, 2019, by and between Fox Factory Holding Corp. and Michael C. Dennison 8-K 001-36040 July 1, 2019 10. 9 † Employment Agreement, dated December 2, 2019, by and between Fox Factory Holding Corp. and John E. Blocher 8-K/A 001-36040 December 3, 2019 10.1 0 † Employment Agreement, by and between Fox Factory Holding Corp. and Scott Humphrey, dated August 4, 2020. 8-K 001-36040 August 5, 2020 10.1 1 † Employment Agreement by and between Fox Factory, Inc. and Richard T. Winters, dated June 29, 2019. 8-K 001-36040 August 10, 2020 10.1 2 † Amendment to the Amended and Restated Employment Agreement, by and between Fox Factory Holding Corp. and Michael C. Dennison, dated August 5, 2020. 8-K 001-36040 August 10, 2020 10.1 3 † Amendment to the Amended and Restated Employment Agreement, by and between Fox Factory, Inc. and Richard T. Winters, dated August 5, 2020. 8-K 001-36040 August 10, 2020 10.1 4 † Amendment to the Amended and Restated Employment Agreement, by and between Fox Factory, Inc. and Christopher J. Tutton, dated August 5, 2020. 8-K 001-36040 August 10, 2020 10.1 5 † Fourth Amended and Restated Non-Employee Director Compensation Policy, effective March 2, 2020. X 10.1 6 † Fifth Amended and Restated Non-Employee Director Compensation Policy, effective January 2, 2021. X 10.1 7 † Form of Indemnification Agreement, by and between Fox Factory Holding Corp. and certain of its officers, directors and/or advisors 10-Q 001-36040 October 31, 2018 10. 18 † 2008 Stock Option Plan, as amended S-1 333-189841 July 8, 2013 10. 19 † 2008 Non-Statutory Stock Option Plan, as amended S-1/A 333-189841 August 2, 2013 60 Table of Contents 10.2 0 † 2013 Omnibus Plan S-1/A 333-189841 July 29, 2013 10.2 1 † 2013 Omnibus Plan, as amended by the First Amendment, approved by stockholders on May 4, 2017 8-K 001-36040 May 8, 2017 10.2 2 † Form of Restricted Stock Unit Award Agreement under 2013 Omnibus Plan (U.S.) X 10.2 3 † Form of Restricted Stock Unit Award Agreement under 2013 Omnibus Plan (Canada) X 10.2 4 † Form of Restricted Stock Unit Award Agreement under 2013 Omnibus Plan (Taiwan) X 10.2 5 † Form of Performance Stock Unit Award Agreement under 2013 Omnibus Plan X 10.2 6 Air Commercial Real Estate Association Standard Industrial / Commercial Single-Tenant Lease – Gross, dated October 31, 2011, by and between Fox Factory, Inc. and Sammie Rae Abitbol, LLC, and related addendum S-1 333-189841 July 8, 2013 10.2 7 Air Commercial Real Estate Association Standard Industrial / Commercial Single-Tenant Lease-Gross, dated March 24, 2010, by and between Fox Factory, Inc. and Scarborough Gilbert Partners, and related addenda S-1 333-189841 July 8, 2013 10. 28 Air Commercial Real Estate Association Standard Industrial / Commercial Multi-Tenant Lease – Net, dated April 19, 2012, by and between Fox Factory, Inc. and North Johnson Vernon Property, LLC, and related addendum S-1 333-189841 July 8, 2013 10. 29 Asset Purchase and Contribution Agreement, by and among FF US Acquisition Corp., FF US Holding Corp., Flagship, Inc. d/b/a Tuscany, and Michael Graber and Jeff Burttschell, dated November 30, 2017 8-K 001-36040 December 4, 2017 10. 30 Credit Agreement, among Fox Factory Holding Corp., Bank of America, N.A. and the other financial institutions party thereto, dated June 3, 2019 8-K 001-36040 June 4, 2019 10. 3 1 Standard Form of Agreement between Owner and Design-Builder, dated July 24, 2019 (the “Standard Form of Agreement”), by and between Fox Factory, Inc. and Carroll Daniel Construction Company 8-K 001-36040 December 30, 2019 10. 3 2 Amendment No. 1 to the Standard Form of Agreement, dated December 23, 2019 8-K 001-36040 December 30, 2019 10. 3 3 Amendment No. 2 to the Standard Form of Agreement between Owner and Design-Builder, dated December 21, 2020. 8-K 001-36040 December 23, 2020 10.3 4 Stock Purchase Agreement, by and among Fox Factory, Inc., Southern Rocky Holdings, LLC, and SCA Performance Holdings, Inc., dated February 11, 2019 10-K 001-36040 March 3, 2020 10.3 5 Commitment Letter, among Fox Factory Holding Corp., Bank of America, N.A. and BofA Securities, Inc., dated February 11, 2019 10-K 001-36040 March 3, 2020 10.3 6 Amended and Restated Credit Agreement, among Fox Factory Holding Corp., Bank of America, N.A. and other financial institutions party thereto, dated March 11, 2020 8-K 001-36040 March 16, 2020 10.3 7 Pilot Agreement, between the Gainesville and Hall County Development Authority and Fox Factory, Inc., effective June 12, 2020. 8-K 001-36040 June 16, 2020 10. 38 Bond Purchase Agreement, between the Gainesville and Hall County Development Authority and Fox Factory, Inc., effective June 12, 2020. 8-K 001-36040 June 16, 2020 10. 39 Financing Agreement, between the Gainesville and Hall County Development Authority and Fox Factory, Inc., effective June 12, 2020. 8-K 001-36040 June 16, 2020 10. 4 0 Lease Agreement, between the Gainesville and Hall County Development Authority and Fox Factory, Inc., effective June 12, 2020. 8-K 001-36040 June 16, 2020 61 Table of Contents 10. 4 1 Deed to Secure Debt and Security Agreement, between the Gainesville and Hall County Development Authority and Fox Factory, Inc., effective June 12, 2020. 8-K 001-36040 June 16, 2020 10. 4 2 Assignment of Lease Agreement, between the Gainesville and Hall County Development Authority and Fox Factory, Inc., effective June 12, 2020. 8-K 001-36040 June 16, 2020 10.4 3 Direct Payment Agreement, between the Gainesville and Hall County Development Authority and Fox Factory, Inc., effective June 12, 2020. 8-K 001-36040 June 16, 2020 10.4 4 First Amendment to the Amended and Restated Credit Agreement, among Fox Factory Holding Corp., Bank of America, N.A. and other financial institutions party thereto, dated June 19, 2020. 8-K 001-36040 June 17, 2020 21.1 List of Subsidiaries X 2 3 .1 Consent of Independent Registered Public Accounting Firm X 2 4 .1 Power of Attorney (contained in signature page to this Annual Report on Form 10-K) X 31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended X 31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended X 32.1* Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended X 32.2* Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended X 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document X 101.SCH Inline XBRL Taxonomy Extension Schema Document X 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document X 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document X 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document X 104 Cover page formatted as Inline XBRL and contained in Exhibit 101 X † Management contract or compensatory plan. * In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed "filed" for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. 62 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FOX FACTORY HOLDING CORP. By: /s/ Scott R. Humphrey February 25, 2021 Scott R. Humphrey, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer & Duly Authorized Signatory) 63 Table of Contents POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Scott R. Humphrey and Michael C. Dennison, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his or her name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and either of them, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Michael C. Dennison Chief Executive Officer and Director February 25, 2021 Michael C. Dennison ( Principal Executive Officer ) /s/ Scott R. Humphrey Chief Financial Officer and Treasurer February 25, 2021 Scott R. Humphrey (Principal Financial and Accounting Officer) /s/ Larry L. Enterline Executive Chairman of the Board February 25, 2021 Larry L. Enterline /s/ Dudley Mendenhall Lead Independent Director February 25, 2021 Dudley Mendenhall /s/ Tom Duncan Director February 25, 2021 Tom Duncan /s/ Elizabeth A. Fetter Director February 25, 2021 Elizabeth A. Fetter /s/ Jean Hlay Director February 25, 2021 Jean Hlay /s/ Ted Waitman Director February 25, 2021 Ted Waitman /s/ Sidney Johnson Director February 25, 2021 Sidney Johnson 64 Table of Contents Management’s Report on Internal Control Over Financial Reporting The management of Fox is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Fox’s internal control over financial reporting is a process designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation and fair presentation of financial statements issued for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). Under the supervision of our management, including our Chief Executive Officer and Chief Financial Officer, Fox conducted an evaluation of the effectiveness of our internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In making its assessment of internal control over financial reporting as of January 1, 2021, management has excluded SCA which was acquired in March 2020. The Company is currently assessing the control environment of the acquired business. The acquired business represented approximately 28% of the Company's consolidated total assets as of January 1, 2021 and approximately 9% of the Company's consolidated net sales for the year ended January 1, 2021. In making its assessment of internal control over financial reporting, management used criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on the evaluation, our management concluded that its internal control over financial reporting was effective as of January 1, 2021. Grant Thornton LLP, the independent registered public accounting firm that audited the Company's consolidated financial statements, has issued an attestation report on the Company's internal control over financial reporting, which is included elsewhere in this Annual Report on Form 10-K. February 25, 2021 /s/ Michael C. Dennison Michael C. Dennison Chief Executive Officer /s/ Scott R. Humphrey Scott R. Humphrey Chief Financial Officer and Treasurer 65 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Fox Factory Holding Corp. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Fox Factory Holding Corp. (a Delaware corporation) and subsidiaries (the “Company”) as of January 1, 2021 and January 3, 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity and redeemable non-controlling interest, and cash flows for each of the three years in the period ended January 1, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 1, 2021 and January 3, 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 1, 2021, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of January 1, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 25, 2021 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Net realizable value of inventory As discussed in Note 1 to the consolidated financial statements, adjustments are made to reduce the cost of inventory to its net realizable value, if required, for estimated excess, obsolete or impaired balances. Management monitors inventory quantities on hand and on order and records write-downs for estimated excess or obsolescence based on estimated demand for products, obsolescence of technology, product life cycles, and when pricing trends or forecasts indicate that the carrying value of inventory exceeds estimated selling price. We identified the net realizable value of inventory for certain product categories as a critical audit matter. The principal considerations for our determination that the net realizable value of inventory represents a critical audit matter are that the assessment of the valuation of inventory is complex and includes an estimate of forecast demand. The demand estimate is subjective and requires the Company to consider significant assumptions such as economic conditions, consumer and pricing trends, product acceptance and competition, all of which are subject to significant uncertainty and therefore require significant auditor judgement. 66 Table of Contents Our audit procedures related to the net realizable value of inventory included the following, among others: • We obtained management’s analysis of parts in inventory and expected customer demand, recalculated inputs into the analysis and tested for completeness. This included, among other inputs, forecast demand, and general ledger balances. • We tested selected inventory items by making inquiries of management and evaluating the appropriateness of judgments, assumptions and documentation supporting adjustments to the net realizable value of inventory. • We compared selected 2021 estimated demand to actual sales orders as provided by customers and forecasted demand information as provided by the sales and operations team in order to test the accuracy of demand information included in the calculation. • We performed a retrospective review by comparing previous demand forecasts to actual usage during the year for a sample of items. • We inquired with management and various staff members outside of the finance team to obtain support for selected forecast demand inputs as well as to understand macroeconomic and customer specific trends. • We tested the design and operating effectiveness of controls related to the forecast demand for the Company’s products as well as management’s review of the net realizable value of inventory. Realizability of Deferred Tax Assets As discussed in Note 1 to the consolidated financial statements, deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized. We identified the realizability of deferred tax assets as a critical audit matter. The principal considerations for our determination that the realizability of deferred tax assets represent a critical audit matter are the significance of the Company’s foreign tax credits and the use of forecasted profitability by jurisdiction and source. The forecasts, including future sales and expenses by jurisdiction, are subject to a high level of estimation uncertainty and subjectivity. Additionally, realizability depends on continued implementation of a tax planning strategy. As a result, significant auditor judgment is necessary to audit management’s judgments and assumptions. Our audit procedures related to the realizability of deferred tax assets included the following, among others: • We considered the applicability of the Company’s international transfer pricing arrangements as it relates to the Company’s ability to utilize foreign tax credits. • We tested the accuracy of the underlying data used in the forecasts by agreeing the baseline 2020 results for selected jurisdictions to general ledger balances. • We compared the previous year’s forecast of future taxable income with the 2020 actual results to assess management’s ability to accurately estimate future growth. • We evaluated the appropriateness of the assumptions supporting the future revenue growth rate by jurisdiction. • We evaluated management’s assumptions with respect to anticipated relief from withholding on intercompany charges paid by selected jurisdictions for consistency and credibility. • We tested the design and operating effectiveness of controls related to the generation of the forecasts and assumptions that underpin the assessment of the realizability of deferred tax assets. Valuation of acquired intangible assets from the acquisition of SCA Performance Holdings, Inc. As described further in Note 1 and Note 18 to the consolidated financial statements, the Company completed the acquisition of SCA Performance Holdings, Inc. for a total cash consideration of approximately $331.9 million, net of cash acquired and exclusive of vehicle floorplan inventory. Management disclosed that assessing the fair value of identifiable definite-lived and indefinite-lived intangible assets acquired involved the use of significant estimates and assumptions, including projected future cash flows, associated discount rates used to calculate present value, asset life cycles, customer retention rates and royalty rates. We identified the Company’s assessment of the fair value of acquired intangible assets as a critical audit matter. The principal considerations for our determination that the Company’s assessment of the fair value of acquired intangible assets represents a critical audit matter is that the judgements and assumptions made in assessing the fair value of the intangible assets are complex and subjective. Assumptions utilized to determine the fair value, including projected future cash flows, associated discount rates used to calculate present value, customer attrition rates, and royalty rates, are subject 67 Table of Contents to high levels of estimation uncertainty. Assessing these assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve professionals with specialized skills. Our audit procedures related to the valuation of acquired intangible assets from the acquisition of SCA Performance Holdings, Inc. included the following, among others: • We inspected the purchase agreement and tested management’s process for identifying and estimating the fair value of intangible assets acquired. • Our testing of management’s process involved evaluating the reasonableness of key assumptions including the projected future cash flows, customer attrition rates, royalty rates, and others, comparing to industry trends, historical data, strategic business plans and the past performance of a similar acquired business. • Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the Company’s selection of valuation methodology and certain significant assumptions. • We tested the design and operating effectiveness of internal controls over management’s valuation of the acquired identifiable intangible assets, including controls over the development of the significant assumptions described above. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2008. San Francisco, California February 25, 2021 68 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Fox Factory Holding Corp. Opinion on internal control over financial reporting We have audited the internal control over financial reporting of Fox Factory Holding Corp. (a Delaware corporation) and subsidiaries (the “Company”) as of January 1, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended January 1, 2021, and our report dated February 25, 2021 expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report on Internal Control Over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of SCA Performance Holdings, Inc., a wholly-owned subsidiary, whose financial statements reflect total assets and net sales constituting 28 and 9 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended January 1, 2021. As indicated in Management’s Report, SCA Performance Holdings, Inc. was acquired during 2020. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of SCA Performance Holdings, Inc. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP San Francisco, California February 25, 2021 69 Table of Contents FOX FACTORY HOLDING CORP. Consolidated Balance Sheets (in thousands, except par value) January 1, January 3, 2021 2020 Assets Current assets: Cash and cash equivalents $ 245,764 $ 43,736 Accounts receivable (net of allowances of $ 663 and $ 810 at January 1, 2021 and January 3, 2020, respectively) 121,194 91,632 Inventory 127,091 128,505 Prepaids and other current assets 87,920 17,940 Total current assets 581,969 281,813 Property, plant and equipment, net 163,288 108,379 Lease right-of-use assets 26,148 17,472 Deferred tax assets 19,362 25,725 Goodwill 289,349 93,527 Intangibles, net 204,491 81,949 Other assets 1,954 451 Total assets $ 1,286,561 $ 609,316 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 92,403 $ 55,144 Accrued expenses 59,391 35,744 Reserve for uncertain tax positions 1,095 925 Current portion of long-term debt 12,500 — Total current liabilities 165,389 91,813 Line of credit — 68,000 Long-term debt, less current portion 377,088 — Other liabilities 24,913 11,584 Total liabilities 567,390 171,397 Commitments and contingencies (Refer to Note 1 2 - Commitments and Contingencies ) Redeemable non-controlling interest — 15,719 Stockholders’ equity Preferred stock, $ 0.001 par value — 10,000 authorized and no shares issued or outstanding as of January 1, 2021 and January 3, 2020 — — Common stock, $ 0.001 par value — 90,000 authorized; 42,692 shares issued and 41,802 outstanding as of January 1, 2021; 39,448 shares issued and 38,559 outstanding as of January 3, 2020 42 39 Additional paid-in capital 336,834 123,274 Treasury stock, at cost; 890 common shares as of January 1, 2021 and January 3, 2020 ( 13,754 ) ( 13,754 ) Accumulated other comprehensive income 1,068 150 Retained earnings 394,981 312,491 Total stockholders’ equity 719,171 422,200 Total liabilities, redeemable non-controlling interest and stockholders’ equity $ 1,286,561 $ 609,316 The accompanying notes are an integral part of these consolidated financial statements. 70 Table of Contents FOX FACTORY HOLDING CORP. Consolidated Statements of Income (in thousands, except per share data) For the fiscal years ended January 1 January 3 December 28 2021 2020 2018 Sales $ 890,554 $ 751,020 $ 619,225 Cost of sales 601,007 508,285 413,729 Gross profit 289,547 242,735 205,496 Operating expenses: Sales and marketing 52,214 42,794 37,296 Research and development 34,292 31,789 25,847 General and administrative 71,309 48,999 41,756 Amortization of purchased intangibles 17,583 6,344 6,065 Total operating expenses 175,398 129,926 110,964 Income from operations 114,149 112,809 94,532 Interest and other expense, net: Interest expense 9,294 3,173 3,059 Other expense 325 1,067 583 Interest and other expense, net 9,619 4,240 3,642 Income before income taxes 104,530 108,569 90,890 Provision for income taxes 12,784 14,099 5,523 Net income 91,746 94,470 85,367 Less: net income attributable to non-controlling interest 1,072 1,437 1,327 Net income attributable to Fox stockholders $ 90,674 $ 93,033 $ 84,040 Earnings per share: Basic $ 2.25 $ 2.43 $ 2.22 Diluted $ 2.22 $ 2.38 $ 2.16 Weighted-average shares used to compute earnings per share: Basic 40,229 38,333 37,805 Diluted 40,801 39,155 38,956 The accompanying notes are an integral part of these consolidated financial statements. 71 Table of Contents FOX FACTORY HOLDING CORP. Consolidated Statements of Comprehensive Income (in thousands) For the fiscal years ended January 1, January 3, December 28, 2021 2020 2018 Net income $ 91,746 $ 94,470 $ 85,367 Other comprehensive (loss) income Interest rate swap, net of tax effects ( 699 ) — — Foreign currency translation adjustments, net of tax effects 1,617 934 ( 616 ) Other comprehensive (loss) income 918 934 ( 616 ) Comprehensive income 92,664 95,404 84,751 Less: comprehensive income attributable to non-controlling interest 1,072 1,437 1,327 Comprehensive income attributable to Fox stockholders $ 91,592 $ 93,967 $ 83,424 The accompanying notes are an integral part of these consolidated financial statements. 72 Table of Contents FOX FACTORY HOLDING CORP. Consolidated Statements of Stockholders' Equity and Redeemable Non-controlling Interest (in thousands, except per share amounts) Common Stock Treasury Additional paid-in capital Accumulated other comprehensive (loss) income Retained earnings Total stockholders' equity Redeemable non-controlling interest Shares Amount Shares Amount Balance - December 29, 2017 38,497 $ 38 890 $ ( 13,754 ) $ 112,793 $ ( 168 ) $ 135,926 $ 234,835 $ 12,955 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 384 — — — ( 4,096 ) — — ( 4,096 ) — Stock-based compensation expense — — — — 7,322 — — 7,322 — Other comprehensive income — — — — — ( 616 ) — ( 616 ) — Adoption of new accounting standard, net of taxes — — — — — — ( 280 ) ( 280 ) — Net income — — — — — — 84,040 84,040 1,327 Balance - December 28, 2018 38,881 38 890 ( 13,754 ) 116,019 ( 784 ) 219,686 321,205 14,282 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 469 $ 1 — $ — $ ( 6,776 ) $ — $ — $ ( 6,775 ) $ — Issuance of stock for business acquisition 98 — — — 7,167 — — 7,167 — Stock-based compensation expense — — — — 6,864 — — 6,864 — Other comprehensive income — — — — — 934 — 934 — Adoption of new accounting standard, net of taxes — — — — — — ( 228 ) ( 228 ) — Net income — — — — — — 93,033 93,033 1,437 Balance - January 3, 2020 39,448 $ 39 890 $ ( 13,754 ) $ 123,274 $ 150 $ 312,491 $ 422,200 $ 15,719 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 348 1 — — ( 4,342 ) — — ( 4,341 ) — Issuance of common stock, net 2,760 2 — — 198,233 — — 198,235 — Issuance of stock for business acquisition — — — — 322 — — 322 — Adjustment to the fair value of non-controlling interest — — — — — — ( 8,184 ) ( 8,184 ) 8,184 Redeemable non-controlling interest 136 — — — 11,169 — — 11,169 ( 24,975 ) Stock-based compensation expense — — — — 8,178 — — 8,178 — Other comprehensive income — — — — — 918 — 918 — Net income — — — — — — 90,674 90,674 1,072 Balance - January 1, 2021 42,692 $ 42 890 $ ( 13,754 ) $ 336,834 $ 1,068 $ 394,981 $ 719,171 $ — The accompanying notes are an integral part of these consolidated statements. 73 Table of Contents FOX FACTORY HOLDING CORP. Consolidated Statements of Cash Flows (in thousands) For the fiscal years ended January 1, January 3, December 28, 2021 2020 2018 OPERATING ACTIVITIES: Net income $ 91,746 $ 94,470 $ 85,367 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 33,927 17,565 14,454 Stock-based compensation 8,618 6,864 7,322 Deferred taxes and uncertain tax positions ( 14,075 ) ( 10,615 ) ( 19,286 ) Amortization of loan fees 1,543 171 275 Loss on extinguishment of debt — 516 — Changes in operating assets and liabilities: Accounts receivable ( 18,771 ) ( 12,061 ) ( 19,034 ) Inventory 7,877 ( 17,009 ) ( 22,998 ) Income taxes 1,192 ( 3,586 ) 281 Prepaids and other assets ( 66,400 ) 1,709 ( 377 ) Accounts payable 25,892 ( 869 ) 15,193 Accrued expenses and other liabilities 11,166 ( 2,325 ) 4,195 Net cash provided by operating activities 82,715 74,830 65,392 INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired ( 331,531 ) ( 6,804 ) — Acquisition of other assets ( 250 ) — — Purchases of property and equipment ( 56,744 ) ( 53,526 ) ( 30,203 ) Net cash used in investing activities ( 388,525 ) ( 60,330 ) ( 30,203 ) FINANCING ACTIVITIES: Proceeds from line of credit 225,125 67,500 25,000 Payments on line of credit ( 293,125 ) ( 57,053 ) ( 60,585 ) Proceeds from issuance of debt, net of origination fees 392,385 — — Repayment of debt ( 5,000 ) ( 2,813 ) ( 3,750 ) Cash from stock compensation program, net ( 4,343 ) ( 6,775 ) ( 4,096 ) Installment on purchase of non-controlling interest ( 6,556 ) — — Proceeds from sale of common stock, net 198,236 — — Net cash provided by (used in) financing activities 506,722 859 ( 43,431 ) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 1,116 419 253 CHANGE IN CASH AND CASH EQUIVALENTS 202,028 15,778 ( 7,989 ) CASH AND CASH EQUIVALENTS—Beginning of year 43,736 27,958 35,947 CASH AND CASH EQUIVALENTS—End of year $ 245,764 $ 43,736 $ 27,958 74 FOX FACTORY HOLDING CORP. Consolidated Statements of Cash Flows (in thousands) For the fiscal years ended January 1, January 3, December 28, SUPPLEMENTAL CASH FLOW INFORMATION: 2021 2020 2018 Cash paid during the period for: Income taxes $ 26,228 $ 28,293 $ 24,610 Cash paid for interest, net of capitalized interest $ 7,171 $ 2,762 $ 2,756 Cash paid for amounts included in the measurement of lease liabilities $ 7,095 $ 5,630 $ — Non-cash operating activities: Right-of-use assets obtained in exchange for lease obligations $ 14,178 $ 8,691 $ — Non-cash investing and financing activities: Acquisition of business in exchange for equity $ — $ 7,167 $ — Acquisition of non-controlling interest in exchange for equity and installment payments $ 18,419 $ — $ — Capital expenditures included in accounts payable $ 6,997 $ 1,718 $ 1,557 Refinancing of the Second Amended and Restated Credit Facility $ — $ 88,875 $ — The accompanying notes are an integral part of these consolidated financial statements. 75 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements January 3, 2020 (in thousands, except per share amounts) 1. Description of the Business, Basis of Presentation and Summary of Significant Accounting Policies Fox Factory Holding Corp. (the "Company") designs and manufactures performance-defining products primarily for bicycles ("bikes"), side-by-side vehicles ("Side-by-Sides"), on-road and off-road vehicles and trucks, all-terrain vehicles, or ATVs, snowmobiles, specialty vehicles and applications, motorcycles and commercial trucks. The Company is a direct supplier to leading power vehicle original equipment manufacturers ("OEMs") and provides aftermarket products to retailers, dealerships, and distributors. Additionally, the Company supplies top bicycle OEMs and their current contract manufacturers, and provides aftermarket products to retailers and distributors. Throughout this Annual Report on Form 10-K, unless stated otherwise or as the context otherwise requires, the "Company," "FOX," "Fox Factory," "we," "us," "our," and "ours" refer to Fox Factory Holding Corp. and its operating subsidiaries on a consolidated basis. Basis of Presentation - The accompanying consolidated financial statements have been prepared in accordance with United States of America ("U.S.") generally accepted accounting principles ("GAAP"). Fiscal Year Calendar - The Company operates using a 52-53 week fiscal year calendar ending on the Friday nearest to December 31. Therefore, the financial results of certain fiscal years and quarters, which will contain 53 and 14 weeks, respectively, will not be exactly comparable to the prior and subsequent fiscal years and quarters, which contain 52 and 13 weeks, respectively. For the fiscal years 2020, 2019 and 2018, the Company's fiscal year ended on January 1, 2021, January 3, 2020 and December 28, 2018 and had 52, 53 and 52 weeks, respectively. Principles of Consolidation - The consolidated financial statements include the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Use of Estimates - The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from management’s estimates. Foreign Currency Translation and Transaction - The functional currency of the Company’s non-U.S. entities is the local currency of the respective operations. The Company translates the financial statements of its non-U.S. entities into U.S. Dollars each reporting period for purposes of consolidation. Assets and liabilities of the Company’s foreign subsidiaries are translated at the period-end currency exchange rates while sales and expenses are translated at the average currency exchange rates in effect for the period. The effects of these translation adjustments are a component of other comprehensive income. Foreign currency transaction losses of $ 396 , $ 881 , and $ 420 for the years ended January 1, 2021, January 3, 2020 and December 28, 2018, respectively, are included as a component of other income or expense. Cash and Cash Equivalents - Cash consists of cash maintained in checking or money market accounts. All highly liquid investments purchased with an original maturity date of 90 days or less at the date of purchase are considered to be cash equivalents. Accounts Receivable - Accounts receivable are unsecured customer obligations which generally require payment within various terms from the invoice date. The receivables are stated at the invoice amount. Financing terms vary by customer. Invoices are considered past due when payment is not received within the terms stated within the contract. Payments of accounts receivable are applied to the specific invoices identified on the customer’s remittance advice or if unspecified, generally to the earliest unpaid invoices. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of amounts that may not be collected. All accounts or portions thereof deemed to be uncollectible or that may require an excessive collection cost are written off to the allowance for doubtful accounts. 76 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) Concentration of Credit Risk - Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and accounts receivable. As of January 1, 2021 the Company held $ 223,321 in cash at U.S. subsidiaries and $ 22,443 at subsidiaries outside the U.S. The account balances may significantly exceed the insurance coverage provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company has not experienced any losses in its uninsured accounts. The Company mitigates its credit risk with respect to accounts receivable by performing ongoing credit evaluations and monitoring of its customers’ accounts receivable balances. The following customers accounted for 10% or more of the Company's accounts receivable balance: January 1, January 3, 2021 2020 Customer A 12 % 6 % Customer B 11 % 11 % Customer C 4 % 11 % During the year ended January 1, 2021, no customer from the table above represented more than 10% of sales. For the year ended January 3, 2020, Customer C from the table above represented 11 % of sales. No other customers were individually significant in any of these periods. The Company depends on a limited number of vendors to supply component parts for its products. The Company purchased 28 %, 35 %, and 30 % of its product components for the years ended January 1, 2021, January 3, 2020 and December 28, 2018, respectively, from ten vendors. As of January 1, 2021 and January 3, 2020, amounts due to these vendors represented 17 % and 29 % of accounts payable, respectively. Allowance for Doubtful Accounts - The Company records a provision for doubtful accounts based on historical experience and a detailed assessment of the collectability of its accounts receivable. The provision is based on how long a receivable has been outstanding, taking into account the historical credit loss rate and adjusting for both current conditions and forecasts of economic conditions into that expected credit loss rate. If circumstances change, such as higher-than-expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations, the Company’s estimate of the recoverability of the amounts due could be reduced by a material amount. The following table presents the activity in the allowance for doubtful accounts: For the fiscal years ended Allowance for doubtful accounts: 2020 2019 2018 Balance, beginning of year $ 810 $ 600 $ 676 Add: bad debt expense 103 335 189 Less: write-offs, net of recoveries ( 250 ) ( 125 ) ( 265 ) Balance, end of year $ 663 $ 810 $ 600 Inventories - Inventories are stated at the lower of actual cost (or standard cost which generally approximates actual costs on a first-in first-out basis) or net realizable value. Cost includes raw materials, as well as direct labor and manufacturing overhead for products we manufacture. Net realizable value is based on current replacement cost for raw materials and on a net realizable value for finished goods. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolescence or impaired balances. 77 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) Property and Equipment - Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized. Leasehold improvements are amortized on a straight-line basis over the terms of the lease, or the useful lives of the assets, whichever is shorter. The value assigned to land associated with buildings we own is not amortized. Depreciation and amortization periods for the Company’s property and equipment are as follows: Asset Classification Estimated useful life Building and building improvements 10 - 39 years Information systems, office equipment and furniture 3 - 5 years Internal-use computer software 10 years Machinery and equipment 10 - 15 years Manufacturing equipment 5 - 10 years Transportation equipment 5 years Internal-use Computer Software Costs - Costs incurred to purchase and develop computer software for internal use are capitalized during the application development and implementation stages. These software costs have been for enterprise-level business and finance software that is customized to meet the Company’s operational needs. Capitalized costs are included in property and equipment and are amortized on a straight-line basis over the estimated useful life of the software beginning when the software project is substantially complete and placed in service. The Company capitalized $ 2,994 in internal use computer software costs during the year ended January 1, 2021. Costs incurred during the preliminary project stage and costs for training, data conversion, and maintenance are expensed as incurred. Impairment of Long-lived Assets -The Company periodically reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is impaired or the estimated useful lives are no longer appropriate. If indicators of impairment exist and the undiscounted projected cash flows associated with such assets are less than the carrying amount of the assets, an impairment loss is recorded to write the assets down to their estimated fair values. Fair value is estimated based on discounted future cash flows. No impairment charges were recorded during the years ended January 1, 2021, January 3, 2020 and December 28, 2018. Business Combinations - The Company accounts for acquisitions of entities that include inputs and processes and have the ability to create outputs as business combinations. The Company allocates the purchase price of the acquisition to the tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are expensed as incurred. During the measurement period, the Company records adjustments to provisional amounts recorded for assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, which could be up to one year after the transaction date, subsequent adjustments are recorded to the Company’s consolidated statements of income. 78 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) Goodwill and Intangible Assets - Goodwill represents the excess of purchase price over the fair value of the net assets of businesses acquired. On an annual basis, the Company makes a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If the Company determines that the fair value of the reporting unit is less than its carrying amount, it will perform a quantitative analysis; otherwise, no further evaluation is necessary. For the quantitative impairment assessment, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. The Company determines the fair value of the reporting unit based on a weighting of income and market approaches. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company will recognize a loss equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. Impairments, if any, are charged directly to earnings. We completed our most recent annual impairment test in the third quarter of 2020 at which time we had a single reporting unit for purposes of assessing goodwill impairment. No impairment charges have been incurred to date. Intangible assets include customer relationships and the Company’s core technology, are subject to amortization over their respective useful lives, and are classified in intangibles, net in the accompanying consolidated balance sheet. These intangibles are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. If facts and circumstances indicate that the carrying value might not be recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful lives is compared against their respective carrying amounts. If an asset is found to be impaired, the impairment charge will be measured as the amount by which the carrying amount of an entity exceeds its fair value. Trademarks and brands are considered to be indefinite life intangibles, and are not amortized but are subject to testing for impairment annually. No impairments of intangible assets were identified in the years ended January 1, 2021, January 3, 2020 and December 28, 2018. Self-Insurance - The Company is partially self-insured for its U.S. employee health and welfare benefits. The Company’s liability for self-insurance is based on claims filed and an estimate of claims incurred but not yet reported. The Company considers a number of factors, including historical claims information, when determining the amount of the accrual. Costs related to the administration of the plan and related claims are expensed as incurred. The Company has third-party insurance coverage to limit exposure for individually significant claims. The estimates for unpaid claims incurred as of January 1, 2021 and January 3, 2020 are $ 1,472 and $ 842 respectively, and are recorded within accrued expenses on the consolidated balance sheets. Revenue Recognition - Revenues are generated from the sale of performance-defining products and systems to customers worldwide. The Company’s performance-defining products and systems are solutions that improve performance of powered vehicles and bikes. Powered vehicles include Side-by-Sides, on-road vehicles with off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications, and motorcycles. Revenue is measured based on the consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control of a product to a customer, generally at the time of shipment. Contracts are generally in the form of purchase orders and are governed by standard terms and conditions. For larger OEMs, the Company may also enter into master agreements. Provisions for discounts, rebates, sales incentives, returns, and other adjustments are generally provided for in the period the related sales are recorded, based on management’s assessment of historical trends and projection of future results. Certain pricing provisions that provide the customer with future discounts are considered a material right. Such material rights result in the deferral of revenue that are recognized when the rights are exercised by the customer. Measuring the material rights requires judgments including forecasts of future sales and product mix. Cost of Sales - Cost of sales primarily consists of materials and labor expense in the manufacturing of the Company’s products sold to customers. Cost of sales also includes provisions for excess and obsolete inventory, warranty costs, certain allocated costs for facilities, depreciation and other manufacturing overhead. Additionally, it includes stock-based compensation for personnel directly involved with manufacturing the Company’s product offerings. Shipping and Handling Fees and Costs - The Company includes shipping and handling fees billed to customers in sales. Shipping costs associated with inbound freight are capitalized as part of inventory and included in cost of sales as products are sold. 79 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) Sales and Marketing - Sales and marketing expenses include costs related to sales, customer service and marketing personnel, including their wages, employee benefits and related stock-based compensation, and occupancy related expenses. Other significant sales and marketing expenses include race support and sponsorships of events and athletes, advertising and promotions related to trade shows, travel and entertainment, and promotional materials, products and sales offices costs. Research and Development - Research and development expenses consist primarily of salaries and personnel costs, including wages, employee benefits and related stock-based compensation for the Company’s engineering, research and development teams, occupancy related expenses, fees for third party consultants, service fees, and expenses for prototype tooling and materials, travel, and supplies. The Company expenses research and development costs as incurred. General and Administrative - General and administrative expenses include costs related to executive, finance, information technology, human resources and administrative personnel, including wages, employee benefits and related stock-based compensation expenses. The Company records professional and contract service expenses, occupancy related expenses associated with corporate locations and equipment, and legal expenses in general and administrative expenses. Stock-Based Compensation - The Company measures stock-based compensation for all stock-based awards, including stock options and restricted stock units (“RSUs”), based on their estimated fair values on the date of the grant and recognizes the stock-based compensation cost for time-vested awards on a straight-line basis over the requisite service period. For performance-based RSUs, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. To the extent shares are expected to vest, the stock-based compensation cost is recognized on a straight-line basis over the requisite service period. The fair value of each stock option granted is estimated using the Black-Scholes option-pricing model. The Company does not estimate forfeitures in recognizing stock-based compensation expense. The fair value of the RSUs is equal to the fair value of the Company’s common stock on the grant date of the award. Income Taxes - Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Operating loss and tax credit carryforwards are measured by applying currently enacted tax laws. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized. The Company has elected to account for global intangible low-taxed income ("GILTI") in the year the tax is incurred, rather than recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years. The net GILTI inclusion for the year ended January 1, 2021 was fully offset by foreign tax credits associated with the income. The Company recognizes the tax effects of an uncertain tax position only if it is more likely than not to be sustained based solely on its technical merits as of the reporting date and then only in an amount more likely than not to be sustained upon review by the tax authorities. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Advertising - Advertising costs are expensed as incurred and recorded as sales and marketing expenses on our Consolidated Statements of Income. Costs incurred for advertising totaled $ 2,188 , $ 1,413 , and $ 902 for the years ended January 1, 2021, January 3, 2020 and December 28, 2018, respectively. Warranties - The Company offers limited warranties on its products generally for one to two years . The Company recognizes estimated costs related to warranty activities as a component of cost of sales upon product shipment. The estimates are based upon historical product failure rates and historical costs incurred in correcting product failures. The recorded amount is adjusted from time to time for specifically identified warranty exposures. Actual warranty expenses are charged against the Company’s estimated warranty liability when incurred. Factors that affect the Company’s liability include the number of units, historical and anticipated rates of warranty claims, and the cost per claim. 80 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) Segments - The Company has determined that it has a single operating and reportable segment; manufacturing, sale and service of performance-defining products. The Company considers operating segments to be components of the Company in which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Fair Value Measurements and Financial Instruments - The Financial Accounting Standards Board ("FASB") has issued Accounting Standards Codification 820, Fair Value Measurements and Disclosures , that requires the valuation of assets and liabilities required or permitted to be either recorded or disclosed at fair value based on hierarchy of available inputs as follows: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). The carrying amounts of the Company’s financial instruments, including cash, receivables, accounts payable, and accrued liabilities approximate their fair values due to their short-term nature. Amounts owed under the Company's credit facility approximate fair value due to the variable interest rate features embedded in both the line of credit and term debt. Certain Significant Risks and Uncertainties - The Company is subject to those risks common in manufacturing-driven markets, including, but not limited to, competitive forces, dependence on key personnel, customer demand for its products, the successful protection of its proprietary technologies, compliance with government regulations, and the possibility of not being able to obtain additional financing when needed. Additionally, the Company has been impacted by the recent coronavirus (“COVID-19”) outbreak. The global outbreak of COVID-19 has negatively affected the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets. Despite the Company’s efforts to manage and remedy these impacts to the Company, the ultimate impact and the extent to which the COVID-19 pandemic will continue to affect the business, results of operation and financial condition is difficult to predict and depends on numerous evolving factors outside of the Company’s control including: the duration and scope of the pandemic; government, social, business and other actions that have been and will be taken in response to the pandemic; and the effect of the pandemic on short and long-term general economic conditions. Recent Accounting Pronouncements - In May 2014, the FASB and International Accounting Standards Board issued their converged standard on revenue recognition, ASU 2014-09, updated December 2016 with the release of ASU 2016-20. This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods and services in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this guidance as of the beginning of the first quarter of fiscal year 2018 using the modified retrospective implementation method. The Company applied the guidance to all open contracts at the date of initial application. Additionally, the Company used the practical expedient to omit the disclosure of remaining performance obligations for contracts with an original expected duration of one year or less. The primary impact of adopting the standard resulted from certain pricing provisions within contracts that provide the customer with a material right. Under the new standard, revenue attributed to such pricing provisions is deferred and recognized when the right is exercised by the customer. The Company recorded a cumulative effect adjustment of $ 368 gross and $ 281 net of taxes to the fiscal year 2018 opening balance of retained earnings as to reflect the cumulative effect of the adoption of the standard. 81 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) In February 2016, the FASB issued ASU 2016-02, Leases, which supersedes the existing guidance for lease accounting. To meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases, this ASU requires lessees to recognize most leases on the balance sheet as right-of-use assets and lease liabilities. The Company adopted this guidance as of the beginning of the first quarter of fiscal year 2019, with a cumulative effect adjustment to the opening balance of retained earnings at December 29, 2018 with no restatement of comparative periods’ financial information ("current-period adjustment method"). Additionally, the Company adopted this guidance using practical expedients with respect to the assessment of embedded leases, lease classification, and initial indirect costs for expired and existing leases. The Company also elected the practical expedient related to treating lease and non-lease components as a single lease component for all of its leases and elected a policy exclusion permitting leases with an original lease term of less than one year to be excluded from the right-of-use assets and lease liabilities. The Company did not use the hindsight practical expedient to adopt this guidance. The Company recorded a cumulative effect adjustment of $ 13,637 to operating lease right-of-use assets, $ 13,937 to operating lease liabilities, and $ 300 gross ($ 228 net of taxes) to the fiscal year 2019 opening balance of the Company's retained earnings to reflect the cumulative effect of the adoption of the standard. This standard did not have a material impact on our consolidated income statements. In June 2016, the FASB issue ASU 2016-13, Financial Instruments: Credit Losses, which adds an impairment model that is based on expected losses rather than incurred losses. Under this standard, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The Company adopted ASU 2016-13 effective in the first quarter of fiscal year 2020 using the aging method, which calculates the allowance based on how long a receivable has been outstanding, taking into account the historical credit loss rate and adjusting for both current conditions and forecasts of economic conditions into that expected credit loss rate. The adoption of ASU 2016-13 did not have a material impact on the Company's consolidated financial statements. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, which modifies the disclosure requirements of fair value measurements in Topic 820. This standard is effective for fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-13 effective in the first quarter of fiscal year 2020. The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements. In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other: Internal-Use Software, which helps simplify how entities evaluate the accounting for costs paid by a customer in a cloud computing arrangement that is a service contract. This standard is effective for fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-15 effective in the first quarter of fiscal year 2020. The adoption of ASU 2018-15 did not have a material impact on the Company's consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which helps simplify how entities account for income taxes by removing various exceptions related to the recognition of deferred tax liabilities and updating other tax computation requirements. This standard is effective for fiscal years beginning after December 15, 2020. The Company is currently assessing the impact this guidance will have on its consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, Facilitation of Effects of Reference Rate Reform on Financial Reporting, which was created in response to concerns about structural risks of interbank offered rates ("IBORs") and the risk of cessation of the London Interbank Offered Rate ("LIBOR"). This standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. This standard is effective for all entities as of March 12, 2020 through December 31, 2022. The Company adopted ASU 2020-04 effective in the first quarter of fiscal year 2020. The adoption of ASU 2020-04 did not have a material impact on the Company's consolidated financial statements. In October 2020, the FASB issued ASU 2020-10, Codification Improvements ("ASU 2020-10"). The amendments in ASU 2020-10 contain improvements to the Codification by including disclosure guidance in appropriate disclosure and ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the Disclosure Section of the Codification. The ASU also provides clarification to various codification topics to improve consistency in guidance application. The amendments are effective for interim and annual reporting periods in fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating ASU 2020-10 and expects no material impact to our consolidated financial statements and related disclosures as a result of adoption. 82 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) 2. Revenues The following table summarizes total sales by product category: For the fiscal years ended 2020 2019 2018 Powered Vehicles $ 523,694 $ 451,253 $ 337,284 Specialty Sports 366,860 299,767 281,941 Total sales $ 890,554 $ 751,020 $ 619,225 The following table summarizes total sales by sales channel: For the fiscal years ended 2020 2019 2018 OEM $ 494,068 $ 473,969 $ 368,580 Aftermarket 396,486 277,051 250,645 Total sales $ 890,554 $ 751,020 $ 619,225 The following table summarizes total sales generated by geographic location of the customer: For the fiscal years ended 2020 2019 2018 North America $ 593,267 $ 502,263 $ 388,702 Asia 144,836 120,839 119,142 Europe 143,817 120,272 101,217 Rest of the World 8,634 7,646 10,164 Total sales $ 890,554 $ 751,020 $ 619,225 3. Inventory Inventory consisted of the following: January 1, January 3, 2021 2020 Raw materials $ 87,503 $ 87,779 Work-in-process 5,306 7,075 Finished goods 34,282 33,651 Total inventory $ 127,091 $ 128,505 83 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) 4. Prepaids and Other Current Assets Prepaids and other current assets consisted of the following: January 1, January 3 2021 2020 Prepaid chassis deposits $ 66,812 $ 6,701 Advanced payments and prepaid contracts 8,683 5,774 Current portion of acquisition-related compensation held in escrow 4,518 — Other current assets 7,907 5,465 Total $ 87,920 $ 17,940 5. Property, Plant and Equipment, net Property, plant and equipment consisted of the following: January 1, January 3, 2021 2020 Building and building improvements $ 75,753 $ 42,343 Information systems, office equipment and furniture 14,176 10,102 Internal-use computer software 19,853 16,860 Land 9,698 5,414 Leasehold improvements 15,075 13,841 Machinery and manufacturing equipment 81,281 57,331 Transportation equipment 6,187 5,006 Total 222,023 150,897 Less: accumulated depreciation and amortization ( 58,735 ) ( 42,518 ) Property, plant and equipment, net $ 163,288 $ 108,379 Depreciation expense was $ 16,341 , $ 11,261 , and $ 8,143 for the years ended January 1, 2021, January 3, 2020 and December 28, 2018, respectively, including $ 2,250 , $ 1,861 , and $ 869 of internal-use software amortization for the years ended January 1, 2021, January 3, 2020 and December 28, 2018, respectively. The Company capitalized $ 2,994 in internal use computer software costs during the year ended January 1, 2021. The following table summarizes the allocation of depreciation expense in the accompanying consolidated statements of income: For the fiscal years ended 2020 2019 2018 Cost of sales $ 9,266 $ 6,263 $ 4,519 Sales and marketing $ 163 $ 154 $ 235 Research and development $ 2,044 $ 1,176 $ 822 General and administrative $ 4,868 $ 3,668 $ 2,567 Total $ 16,341 $ 11,261 $ 8,143 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) The Company’s long-lived assets by geographic location are as follows: January 1, January 3, 2021 2020 United States $ 144,529 $ 100,508 International 18,759 7,871 Total long-lived assets $ 163,288 $ 108,379 6. Leases The Company has operating lease agreements for administrative, research and development, manufacturing, and sales and marketing facilities. These leases have remaining lease terms ranging from one to seven years , some of which include options to extend the lease term for up to five years , and some of which include options to terminate the leases within one year . Certain leases are subject to annual escalations as specified in the lease agreements. The Company considered these options in determining the lease term used to establish its right-of-use assets and lease liabilities. These lease agreements do not contain any material residual value guarantees or material restrictive covenants. As most of the Company's leases do not provide an interest rate, the Company used the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The weighted-average remaining lease term for the Company's operating leases was 4.62 years and the weighted-average incremental borrowing rate was 3.21 % as of January 1, 2021. Operating lease costs consisted of the following: For the fiscal year ended 2020 Operating lease cost $ 7,201 Other lease costs (1) 937 Total $ 8,138 (1) Includes short-term leases and variable lease costs. The Company elected a policy exclusion permitting leases with an original lease term of less than one year to be excluded from the right-of-use assets and lease liabilities. Lease costs for the twelve months ended January 3, 2020 and December 28, 2018 were $ 7,195 and $ 6,445 , respectively. Supplemental balance sheet information related to the Company's operating leases is as follows: Balance Sheet Classification January 1, 2021 Operating lease right-of-use assets Lease right-of-use assets $ 26,148 Current lease liabilities Accrued expenses $ 6,754 Non-current lease liabilities Other liabilities $ 19,115 Supplemental cash flow information related to the Company's operating leases is as follows: For the fiscal year ended 2020 Right-of-use assets obtained in exchange for lease obligations $ 14,178 Cash paid for amounts included in the measurement of lease liabilities $ 7,095 85 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) Maturities of lease liabilities by fiscal year for the Company's operating leases are as follows: For fiscal year Total future payments 2021 $ 7,482 2022 6,180 2023 5,184 2024 3,519 2025 2,793 Thereafter 2,729 Total lease payments 27,887 Less: imputed interest ( 2,018 ) Present value of lease liabilities 25,869 Less: current portion ( 6,754 ) Lease liabilities less current portion $ 19,115 In December 2020, the Company signed a lease contract which has not commenced as of January 1, 2021. Based on the present value of the lease payments, the estimated right-of -use-asset and lease liability related to this contract is approximately $ 3,878 and $ 3,545 , respectively. In addition, subsequent to January 1, 2021, the Company entered into a lease amendment that extended the lease term of an existing lease and is expected to result in an additional right-of -use-asset and lease liability of approximately $ 1,160 . 7. Goodwill and Intangible Assets Intangible assets, excluding goodwill, are comprised of the following: Gross carrying amount Accumulated amortization Net carrying amount Weighted average life (years) January 01, 2021 Customer relationships $ 194,950 $ ( 46,800 ) $ 148,150 10 Core technology 34,625 ( 33,679 ) 947 8 Patents 1,859 ( 1,535 ) 324 4 Total $ 231,434 $ ( 82,014 ) 149,421 Trademarks and brands, not subject to amortization 55,070 Total $ 204,491 January 3, 2020 Customer relationships $ 70,473 $ ( 30,114 ) $ 40,359 11 Core technology 34,400 ( 33,309 ) 1,091 8 Patents 1,859 ( 1,430 ) 429 4 Total $ 106,732 $ ( 64,853 ) 41,879 Trademarks and brands, not subject to amortization 40,070 Total $ 81,949 For the fiscal years ended 2020 2019 2018 Amortization of intangibles $ 17,583 $ 6,344 $ 6,065 86 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) Goodwill activity consisted of the following: Balance as of January 3, 2020 $ 93,527 Acquisitions (Refer to Note 1 8 - Acquisitions ) 195,754 Currency translation and other adjustments 68 Balance as of January 1, 2021 $ 289,349 Future amortization expense for finite-lived intangibles as of January 1, 2021 is as follows: For fiscal year: Amortization Expense 2021 $ 19,860 2022 19,736 2023 19,063 2024 18,849 2025 16,214 Thereafter 55,699 Total expected future amortization $ 149,421 8. Accrued Expenses Accrued expenses consisted of the following: January 1, January 3, 2021 2020 Payroll and related expenses $ 22,407 $ 14,595 Current portion of lease liabilities 6,754 6,242 Warranty 9,835 5,649 Income tax payable 7,595 4,295 NCI buyout liability 4,550 — Other accrued expenses 8,250 4,963 Total $ 59,391 $ 35,744 87 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) Activity related to warranties is as follows: For the fiscal years ended 2020 2019 2018 Beginning warranty liability $ 5,649 $ 6,433 $ 6,481 Charge to cost of sales 6,887 4,064 4,621 Fair value of warranty assumed in acquisition 3,158 100 200 Costs incurred ( 5,859 ) ( 4,948 ) ( 4,869 ) Ending warranty liability $ 9,835 $ 5,649 $ 6,433 9. Related Party Transactions On May 3, 2019, the Company acquired substantially all the assets of Air Ride Technologies, Inc., d/b/a Ridetech. Ridetech has a building lease for its manufacturing and office facilities in Jasper, Indiana. The buildings are owned by the former owner of Ridetech, who is now an employee of the Company. The lease is effective from May 3, 2019 through April 1, 2024, with monthly rent payments of $ 16 . Rent expense under this lease was $ 192 and $ 125 for the years ended January 1, 2021 and January 3, 2020, respectively. On March 11, 2020, the Company acquired 100% of the issued and outstanding stock of SCA Performance Holdings, Inc. ("SCA"). Refer to Note 18 - Acquisitions for further details of this acquisition. The Company has transactions with an automotive dealership owned by a former owner of SCA, who is now an employee of the Company. The Company purchased approximately $ 1,172 of parts and vehicles and sold approximately $ 404 of upfit packages to the dealership during the year ended January 1, 2021. As of January 1, 2021, the Company had $ 1,014 and $ 404 in accounts payable and accounts receivable, respectively, related to this dealership. On July 22, 2020 the Company, pursuant to a stock purchase agreement with Flagship, Inc., purchased the remaining 20 % interest of FF US Holding Corp. for $ 24,975 payable in a combination of stock and cash. The cash portion will be settled in quarterly installment payments through July 2022. Refer to Note 1 2 - Commitments and Contingencies for additional details of this agreement. 10. Debt Former Second Amended and Restated Credit Facility In August 2013, the Company entered into a credit facility with SunTrust Bank, N.A. and other named lenders, which was periodically amended and restated (the "Second Amended and Restated Credit Facility"). The Company paid off the Second Amended and Restated Credit Facility in June 2019 upon entering into the new credit facility with Bank of America, N.A. ("Bank of America"). First Amended and Restated Credit Facility In June 2019, the Company entered into a credit facility with Bank of America and other named lenders, which was amended and restated on March 11, 2020 and June 19, 2020 (as most recently amended and restated as the "First Amended and Restated Credit Facility"). The First Amended and Restated Credit Facility, which matures on March 11, 2025, provides a senior secured revolving line of credit with a borrowing capacity of $ 250,000 and a term loan of $ 400,000 . The term loan is subject to quarterly amortization payments. The Company paid $ 7,615 in debt issuance costs, of which $ 6,458 were allocated to the term debt and $ 1,157 were allocated to the line of credit. Additionally, the Company had $ 434 of remaining unamortized debt issuance costs. The Company expensed $ 277 of the remaining unamortized debt issuance costs, which are included in interest and other expense, net in the condensed consolidated statements of income for the year ended January 1, 2021 and the remaining $ 157 were allocated to the line of credit. Loan fees allocated to the term debt will be amortized using the interest method and loan fees allocated to the line of credit will be amortized on a straight-line basis over the term of the First Amended and Restated Credit Facility. 88 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) The First Amended and Restated Credit Facility provides for interest at a rate either based on the London Interbank Offered Rate, or LIBOR, plus a margin ranging from 1.00 % to 2.25 %, with a floor rate of 0.5%, or based on the base rate offered by Bank of America plus a margin ranging from 0.00 % to 1.25 %. At January 1, 2021, the one-month LIBOR and prime rates were 0.14 % and 3.25 %, respectively. At January 1, 2021, our weighted average interest rate on outstanding borrowing was 1.62 %. The First Amended and Restated Credit Facility is secured by substantially all of the Company’s assets, restricts the Company's ability to make certain payments and engage in certain transactions, and requires that the Company satisfy customary financial ratios. The Company was in compliance with the covenants as of January 1, 2021. In August 2020, the Company entered into an interest rate swap agreement to hedge the variability of cash flows in interest payments associated with $ 200,000 of its variable rate term debt. Refer to Note 1 1 - Derivatives and Hedging for further details of this agreement. The First Amended and Restated Credit Facility permits up to $ 25,000 of the aggregate revolving commitment to be used by the Company for issuance of letters of credit, of which $ 15,000 was outstanding at January 1, 2021. The following table summarizes the line of credit under the First Amended and Restated Credit Facility: January 1, January 3, 2021 2020 Amount outstanding $ — $ 68,000 Standby letter of credit $ 15,000 $ 5,000 Available borrowing capacity $ 235,000 $ 177,000 Maximum borrowing capacity $ 250,000 $ 250,000 Maturity date March 11, 2025 As of January 1, 2021, future principal payments for long-term debt, including the current portion, as summarized as follows: January 1, 2021 For fiscal year 2021 $ 12,500 2022 17,500 2023 20,000 2024 20,000 2025 325,000 Total 395,000 Debt issuance cost ( 5,412 ) Long-term debt, net of issuance cost 389,588 Less: current portion ( 12,500 ) Long-term debt less current portion $ 377,088 89 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) 11. Derivatives and Hedging On August 17, 2020 the Company entered into a Swap to mitigate the cash flow risk associated with changes in interest rates on $ 200,000 of its variable rate debt. Refer to Note 10 - Debt for further details of the Company's variable rate debt. The Swap matures on March 11, 2025. The Company pays a base fixed rate of 0.73 % and in return receives the greater of (1) 1-month LIBOR, or (2) 0.50 %. The Company accounts for interest rate swap contracts in accordance with ASC 815, Derivatives and Hedging, which requires all derivatives, including derivatives designated as accounting hedges, to be recorded on the balance sheet at fair value. The swap has been designated and accounted for as a cash flow hedge of the forecasted interest payments on the Company’s debt. As long as the swap continues to be a highly effective hedge of the designated interest rate risk, changes in the fair value of the swap are recorded in accumulated other comprehensive income (loss), a component of equity. Any ineffective portion of a change in the fair value of a hedge is recorded in earnings. The fair value of the Swap on January 1, 2021 was a liability of $ 915 . Refer to Note 1 6 - Fair Value Measurements and Financial Instruments for information on determining the fair value. The liability is included in other liabilities in the consolidated balance sheets. At both the inception of the Swap and at January 1, 2021, the interest rate swap was considered highly effective and accordingly, the $ 915 change in fair value incurred from inception was deferred and recorded in other comprehensive income (loss), net of taxes. As required under ASC 815, the Swap’s effectiveness will be assessed on a quarterly basis. The Company’s derivative counterparty is an investment grade financial institution. The Company does not have any collateral arrangements with its derivative counterparty and the derivative contract does not contain credit risk related contingent features. 12. Commitments and Contingencies Indemnification Agreements - In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company or intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. While the outcome of these matters cannot be predicted with certainty, the Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on the Company’s results of operations, financial position or liquidity. Legal Proceedings - A lawsuit was filed on December 17, 2015 by SRAM Corporation (“SRAM”) in the U.S. District Court, Northern District of Illinois, against the Company’s wholly-owned subsidiary, RFE Canada Holding Corp. (“RFE Canada”). The lawsuit alleges patent infringement of U.S. Patent number 9,182,027 ("027 Patent") and violation of the Lanham Act. SRAM filed a second lawsuit in the same court against RFE Canada on May 16, 2016, alleging patent infringement of U.S Patent number 9,291,250 ("'250 Patent"). The Company believes that the lawsuits are without merit and intends vigorously to defend itself. As such, the Company has filed, before the U. S. Patent and Trademark Appeals Board ("PTAB"), for Interparties Reviews ("IPR") of the '027 Patent and separately the same for the '250 Patent. In April 2018, the PTAB issued opinions in the ‘027 Patent petition cases stating that the Company has not shown the claims of the ‘027 Patent to be obvious. Regarding the PTAB ‘027 opinions, the Company has filed an Appeal to the Court of Appeals for the Federal Circuit ("CAFC"). The CAFC found in favor of the Company and has vacated and remanded all of the PTAB findings with the exception of their finding that the ‘027 patent met the prima facia test for obviousness, which was affirmed. The CAFC has declined to rehear the case and has issued the final remand order sending the case back to the PTAB. SRAM filed ‘027 appeal cert before the Supreme Court of the United States, cert was denied and that case is before the PTAB on remand. The PTAB has issued an opinion in the ‘250 Patent case stating that the Company has not shown the claims of the ‘250 Patent to be obvious. The Company has appealed that PTAB opinion to the CAFC and the CAFC has affirmed the PTAB opinion. The U.S. District Court, Northern District of Illinois, has again stayed the SRAM lawsuits against the Company pending outcome of the remanded ‘027 PTAB issue. 90 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) In a separate action, the Company filed a lawsuit on January 29, 2016 in the U.S. District Court, Northern District of California against SRAM. That lawsuit alleges SRAM’s infringement of two separate Company owned patents, specifically U.S. Patent numbers 6,135,434 and 6,557,674. The Company filed a second lawsuit on July 1, 2016 in the U.S. District Court, Northern District of California against SRAM alleging infringement of the Company’s U.S. Patent numbers 8,226,172 and 8,974,009. These lawsuits have been moved to U.S. District Court, District of Colorado and are otherwise proceeding. Due to the inherent uncertainties of litigation, the Company is not able to predict either the outcome or a range of reasonably possible losses, if any, at this time. Accordingly, no amounts have been recorded in the consolidated financial statements for the settlement of these matters. Were an unfavorable ruling to occur, or if factors indicate that a loss is probable and reasonably estimable, the Company's business, financial condition or results of operations could be materially and adversely affected. The Company is involved in other legal matters that arise in the ordinary course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's financial condition, results of operations or cash flows. Other Commitments - On November 30, 2017, the Company through FF US Holding Corp., acquired the assets of Flagship, Inc. d/b/a Tuscany and issued a 20% interest in FF US Holding Corp. to Flagship, Inc. A stockholders' agreement with Flagship, Inc. provided the Company with a call option (the "Call Option") to acquire the remaining 20 % of FF US Holding Corp. at any time from November 30, 2019 through November 30, 2024 at a value that approximates fair market value. On July 22, 2020, the Company exercised the Call Option and, pursuant to a stock purchase agreement with Flagship, Inc., the Company purchased the remaining 20 % interest for $ 24,975 payable in a combination of stock and cash. The cash portion will be settled in quarterly installment payments through July 2022, which amount to $ 6,556 , $ 4,550 and $ 2,700 in 2020, 2021 and 2022, respectively. The Company paid $ 6,556 during the year ended January 1, 2021. The stock portion of 136 shares held in escrow will be released quarterly starting January 2021 through July 2022. The exercise of the Call Option effectively canceled the put option held by Flagship, Inc. Other Contingencies - On June 21, 2018, the U.S. Supreme Court (the “Court”) decided South Dakota v. Wayfair, Inc., et al., holding that internet retailers do not have to maintain a physical presence in a state in order to be required to collect the state’s sales and use tax. As a result of the Court’s decision, most states enacted legislation to require sellers who meet economic nexus thresholds to register, collect and remit sales and use taxes on transactions with out-of-state customers. The Company believes that it is possible that it will incur a liability for uncollected sales tax on some portion of its e-commerce sales through January 1, 2021. Based on information currently available, any retroactively imposed liability is not expected to be material to the Company’s results of operations or financial position because direct end-user sales in states where the Company is not registered comprise a small portion of total revenues. 91 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) 13. Stockholders' Equity Secondary Stock Offering In June 2020, the Company completed a secondary offering whereby it sold 2,760 shares of its common stock at a price of $ 76.00 per share for gross proceeds of $ 209,760 . The net proceeds to the Company after underwriters' discounts and commissions of $ 11,015 and $ 511 of offering costs was $ 198,233 . The total shares sold included 360 shares that were sold in connection with the underwriters' option to purchase additional shares. This offering was made pursuant to the Company's registration statement on Form S-3. The Company did not incur any expenses related to secondary offerings during the fiscal years ended January 3, 2020 and December 28, 2018. Equity Incentive Plans The Company has outstanding awards under the following equity incentive plans: the 2008 Stock Option Plan (the "2008 Plan"), the 2008 Non-Statutory Stock Option Plan (the "2008 Non-Statutory Plan") and the 2013 Omnibus Plan (the "2013 Plan"). No further awards will be granted pursuant to the 2008 Plan or the 2008 Non-Statutory Plan. Under the 2013 Plan, the Company has the ability to issue incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSUs, performance units and/or performance shares. The equity incentive plans are administered by the Compensation Committee of the Board of Directors of the Company, which has the authority to determine the type of incentive award, as well as the terms and conditions of the awards. Options granted under the plans have vesting periods ranging from one to five years and expire no later than 10 years from the date of grant. RSUs generally vest over a four -year period with 25 % vesting at the end of one year and the remaining vesting annually thereafter. In addition to time-based vesting criteria, certain of our RSUs include performance-based vesting criteria. As of January 1, 2021, there were 2,067 shares reserved for issuance under the Company's equity incentive plans and 1,422 shares available for grant under the 2013 Plan. The Company generally issues new shares in connection with awards under its equity incentive plans. Stock-Based Compensation Compensation expense related to the Company's share-based awards for the fiscal years ended January 1, 2021, January 3, 2020, and December 28, 2018 was $ 8,618 , $ 6,864 , and $ 7,322 , respectively, all of which related to RSUs. No compensation expense related to stock options was incurred during the fiscal years ended January 1, 2021, January 3, 2020, and December 28, 2018. The following table summarizes the allocation of stock-based compensation in the accompanying consolidated statements of income: For the fiscal years ended 2020 2019 2018 Cost of sales $ 625 $ 802 $ 482 Sales and marketing 635 506 556 Research and development 788 721 640 General and administrative 6,570 4,835 5,644 Total $ 8,618 $ 6,864 $ 7,322 As of January 1, 2021, $ 440 of stock-based compensation expense related to our executive bonus plan is included in Accrued Expenses on the Consolidated Balance Sheets. Stock-based compensation expense capitalized to inventory was not material for the years ended January 1, 2021, January 3, 2020 and December 28, 2018. 92 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) Restricted Stock Units The Company grants both time-based and performance-based stock awards, which also include a time-based vesting feature. Compensation expense for time-based stock awards is measured at the grant date based on the closing market price of the Company's common stock, and recognized ratably over the vesting period. For performance-based stock awards, compensation expense is measured based on estimates of the number of shares ultimately expected to vest at each reporting date based on management’s expectations regarding the relevant performance criteria. The recognition of compensation expense associated with performance-based stock awards requires defined criteria for assessing achievement and judgment in assessing the probability of meeting the performance goals. The following table summarizes RSU activity: Unvested RSUs Number of shares outstanding Weighted-average grant date fair value Unvested at December 29, 2017 800 $ 23.91 Granted 223 37.07 Canceled ( 30 ) 25.16 Vested ( 338 ) 21.98 Unvested at December 28, 2018 655 29.34 Granted 131 74.70 Canceled ( 67 ) 32.29 Vested ( 292 ) 26.06 Unvested at January 3, 2020 427 44.98 Granted 260 47.46 Canceled ( 13 ) 48.51 Vested ( 224 ) 37.34 Unvested at January 1, 2021 450 $ 50.12 The fair value of vested RSUs was $ 15,625 , $ 21,793 and $ 13,874 for the years ended January 1, 2021, January 3, 2020 and December 28, 2018, respectively. As of January 1, 2021, the Company had approximately $ 17,398 of unrecognized stock-based compensation expense related to RSUs, which will be recognized over the remaining weighted-average vesting period of approximately 2.57 years. 93 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) Stock Options The following table summarizes stock option activity: Number of shares outstanding Weighted-average exercise price Weighted-average remaining contractual life (years) Aggregate intrinsic value Balance at December 29, 2017 886 $ 5.19 4 $ 29,840 Options exercised ( 166 ) 5.25 9,384 Balance at December 28, 2018 720 5.17 3 39,403 Options exercised ( 289 ) 5.03 17,422 Balance at January 3, 2020 431 5.27 2 27,814 Options exercised ( 206 ) 5.16 19,724 Balance at January 1, 2021 225 5.37 2 22,593 Options vested and expected to vest - January 1, 2021 225 5.37 2 22,593 Options exercisable - January 1, 2021 225 5.37 2 22,593 Aggregate intrinsic value represents the difference between the closing price of the Company's common stock on NASDAQ and the exercise price of outstanding, in-the-money options. No options vested during the year ended January 1, 2021. As of January 1, 2021, stock-based compensation expense related to stock options has been fully recognized. During the years ended January 1, 2021, January 3, 2020 and December 28, 2018, 206 , 289 , and 166 shares of common stock, respectively, were issued due to the exercise of stock options, resulting in proceeds to the Company of approximately $ 1,063 , $ 1,451 , and $ 875 , respectively. 14. Earnings Per Share Basic earnings per share ("EPS") amounts are computed by dividing net income attributable to Fox Factory Holding Corp. stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted EPS amounts are computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. Potentially dilutive common shares include shares issuable upon the exercise of outstanding stock options and vesting of restricted stock units, which are reflected in diluted earnings per share by application of the treasury stock method. The following table presents the calculation of basic and diluted earnings per share: For the fiscal years ended 2020 2019 2018 Net income attributable to FOX stockholders $ 90,674 $ 93,033 $ 84,040 Weighted average shares used to compute basic earnings per share 40,229 38,333 37,805 Dilutive effect of employee stock plans 572 822 1,151 Weighted average shares used to compute diluted earnings per share 40,801 39,155 38,956 Earnings per share: Basic $ 2.25 $ 2.43 $ 2.22 Diluted $ 2.22 $ 2.38 $ 2.16 The Company did not exclude any potentially dilutive shares from the calculation of diluted earnings per share for the years ended January 1, 2021, January 3, 2020 and December 28, 2018, as none of these shares would have been antidilutive. 94 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) 15. Income Taxes Provision for Income Taxes The components of income tax expense are as follows: For the fiscal years ended 2020 2019 2018 Current: Federal $ 18,061 $ 16,670 $ 10,330 State 1,590 256 604 Foreign 8,043 7,567 7,248 Total 27,694 24,493 18,182 Deferred: Federal ( 14,589 ) ( 11,158 ) ( 11,462 ) State 373 586 ( 671 ) Foreign ( 694 ) 178 ( 526 ) Total ( 14,910 ) ( 10,394 ) ( 12,659 ) Provision for income taxes $ 12,784 $ 14,099 $ 5,523 The Company's income before provision for income taxes was subject to taxes in the following jurisdictions for the following periods: For the fiscal years ended 2020 2019 2018 United States $ 74,777 $ 77,810 $ 63,138 Foreign 29,753 30,759 27,752 $ 104,530 $ 108,569 $ 90,890 The following table presents a reconciliation of the statutory federal rate and the Company’s effective tax rate for the periods presented: For the fiscal years ended 2020 2019 2018 Tax at federal statutory rate 21.0 % 21.0 % 21.0 % State taxes, net of federal benefit 1.8 1.8 1.8 Stock-based compensation ( 5.9 ) ( 6.3 ) ( 3.8 ) Foreign derived income benefit ( 5.0 ) ( 3.0 ) ( 1.6 ) Research and development tax credit ( 0.9 ) ( 0.8 ) ( 1.2 ) Executive compensation deduction limitation 0.8 1.2 2.2 Change in liability for unrecognized tax benefits 0.6 0.2 ( 10.8 ) Other ( 0.2 ) ( 1.1 ) ( 1.5 ) Total provision 12.2 % 13.0 % 6.1 % 95 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) Deferred Income Taxes January 1, January 3, 2021 2020 Deferred tax assets: Foreign tax credits, including amounts associated with accrued charges $ 41,187 $ 33,320 Lease liability 5,966 4,304 Accrued liabilities 4,973 2,862 Inventory 4,386 3,542 Capitalized research and development 3,360 — Research and development tax credits 1,851 4,369 Other 2,587 1,936 Total deferred tax asset 64,310 50,333 Valuation allowance ( 7,172 ) ( 6,548 ) Net deferred tax asset 57,138 43,785 Deferred tax liabilities: Intangible assets ( 24,262 ) ( 4,283 ) Depreciation ( 6,912 ) ( 6,924 ) Lease right-of-use asset ( 6,024 ) ( 4,215 ) Accrued withholding tax on unremitted foreign dividends ( 213 ) ( 2,318 ) Other ( 365 ) ( 320 ) Total deferred tax liability ( 37,776 ) ( 18,060 ) Net deferred tax asset $ 19,362 $ 25,725 As of January 1, 2021, the Company had foreign tax credits of $ 41,187 that begin to expire in 2025, unless previously utilized, and foreign net operating loss carryforwards of $ 1,370 , of which $ 1,370 begin to expire in 2037 if not utilized. The Company also had federal and state research and development credit carryforwards of approximately $ 1,334 and $ 2,321 respectively. The federal research and development credits begin to expire in 2036 unless previously utilized, and the state research credits do not expire. As of January 1, 2021, the Company assessed the realizability of deferred tax assets and evaluated the need for a valuation allowance for deferred tax assets for each jurisdiction based on the framework of ASC 740. As a result of the TCJA, the Company believes that it is more likely than not that a portion of its foreign tax credits will not be realizable, and as such, provided an allowance of $ 6,466 as of January 3, 2020. For the year ended January 1, 2021, the valuation allowance increased by $ 624 , due to a generation of additional foreign tax credits from the foreign derived earnings. The valuation allowance for foreign tax credits was $ 7,161 as of January 1, 2021. Other components of the valuation allowance were not significant. It is reasonably possible that the Company could record a material adjustment to the valuation allowance in the next twelve months as management assesses the progress and outcome of its plans to alter the generation and utilization of foreign tax credits. 96 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) Unrecognized Tax Benefits For the fiscal years ended 2020 2019 2018 Balance - beginning of period $ 2,300 $ 1,996 $ 8,154 Increase related to current year tax positions 664 557 457 Increase related to prior year tax positions 187 313 36 Decrease related to prior year tax positions — — ( 6,480 ) Decrease due to expiration of statute of limitations ( 1 ) ( 566 ) ( 171 ) Balance - end of period $ 3,150 $ 2,300 $ 1,996 As of January 1, 2021, the Company had $ 3,150 of unrecognized tax benefits, of which approximately $ 2,479 , if recognized, would favorably impact the effective tax rate. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. In 2018, the Company received a no change letter from the Internal Revenue Service ("IRS") related to the audit of the Company's 2015 federal tax return. Additionally, the IRS and the Company entered into a closing agreement that resolved the uncertainty about the deductibility of amortization and depreciation arising from the acquisition of the Company in 2008 for all open tax years. The favorable conclusion resulted in a decrease in the unrecognized tax benefits of $ 6,198 , of which $ 5,648 favorably impacted the effective tax rate. Including the reversal of the amounts presented net of deferred tax assets and accrued interest and penalties, the favorable conclusion resulted in a benefit of $ 9,838 to the provision for income tax for the year ended December 28, 2018. The deductibility of acquisition-related amortization and depreciation for state tax purposes remains uncertain. As of January 1, 2021 and January 3, 2020, the Company had approximately $ 57 and $ 36 , respectively, of cumulative interest and penalties related to the uncertain tax positions, and has elected to treat interest and penalties as a component of income tax expense. The Company's 2018 forward federal tax returns, state tax returns from 2016 and forward, and foreign tax returns from 2018 and forward are subject to examination by tax authorities. Due to a favorable conclusion of a state audit in the first quarter of 2021, the company expects to release $ 2,718 of uncertain tax positions, of which $ 2,243 favorably impacts the effective tax rate. 16. Fair Value Measurement and Financial Instruments The FASB's Accounting Standards Codification 820, "Fair Value Measurements and Disclosures" requires the valuation of assets and liabilities required or permitted to be either recorded or disclosed at fair value based on hierarchy of available inputs as follows: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). 97 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) The following table presents the Company's hierarchy for its assets, liabilities and redeemable non-controlling interest measured at fair value on a recurring basis as of the following periods: January 1, 2021 January 3, 2020 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Liabilities: Credit Facility $ — $ 389,588 $ — $ 389,588 $ — $ 68,000 $ — $ 68,000 Interest Rate Swap — 915 — 915 — — — — Non-controlling interest subject to put provisions — — — — — — 15,719 15,719 Total liabilities measured at fair value $ — $ 390,503 $ — $ 390,503 $ — $ 68,000 $ 15,719 $ 83,719 There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 categories of the fair value hierarchy during the years ended January 1, 2021, and January 3, 2020. The Company used Level 2 inputs to determine the fair value of the Company’s First Amended and Restated Credit Facility. The Company believes the carrying amount of its First Amended and Restated Credit Facility approximates the fair value at January 1, 2021 because, while subject to a minimum LIBOR floor rate, the interest rate approximates current market rates of debt with similar terms and comparable credit risk. On August 17, 2020 the Company entered into an interest rate swap agreement to mitigate the cash flow risk associated with changes in interest rates on its variable rate debt. Refer to N ote 1 1 - Derivatives and Hedging for additional details of the agreement. In accordance with ASC 815, Derivatives and Hedging Interest rate swap contract is recognized as an asset or liability on the consolidated balance sheets and is measured at fair value. The fair value was calculated utilizing Level 2 inputs. On July 22, 2020, the Company, pursuant to a stock purchase agreement with Flagship, Inc., dated as of the same date, purchased the remaining 20% interest of FF US Holding Corp. for $ 24,975 payable in a combination of stock and cash. Refer to Note 1 2 - Commitments and Contingencies for additional details of this agreement. Prior to the consummation of the stock purchase, the non-controlling interest was measured at fair value using Level 3 inputs. The following table provides a reconciliation of the beginning and ending balances for the Company's obligations measured at fair value using Level 3 inputs: Obligations (measured with level 3 inputs) Balance at January 3, 2020 $ 15,719 Net income ascribed to non-controlling interest 1,072 Change in fair value 8,184 Purchase of non-controlling interest ( 24,975 ) Balance at January 1, 2021 $ — 17. Retirement Plan The Company established a 401(k) plan to provide tax deferred salary deductions for all eligible employees. Participants may make voluntary contributions to the 401(k) plan, limited by certain IRS restrictions. The Company made matching contributions of $ 2,078 , $ 1,153 , and $ 850 for each of the years ended January 1, 2021, January 3, 2020 and December 28, 2018, respectively. 98 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) 18. Acquisitions On March 11, 2020, the Company, through Fox Factory, Inc., acquired 100 % of the issued and outstanding stock of SCA Performance Holdings, Inc. ("SCA") from Southern Rocky Holdings, LLC for $ 331,853 , net of cash acquired and exclusive of vehicle inventory. SCA is a leading OEM authorized specialty vehicle manufacturer for light duty trucks and SUVs with headquarters in Trussville, Alabama. SCA operates under three aftermarket brands: SCA Performance, Rocky Ridge Trucks, and Rocky Mountain Truckworks. The Company believes the acquisition will be complementary to FOX’s Tuscany business, expanding its North American geographic manufacturing footprint and broadening its product offering in a growing segment of the automotive industry. This transaction was accounted for as a business combination. The Company also agreed to an additional $ 10,589 of contingent retention incentives for key SCA management, of which $ 9,283 is cash and $ 1,306 is stock, to be held in escrow and payable over the next two years. The Company recognized $ 4,211 in costs associated with such retention incentives during the year ended January 1, 2021. Additionally, the Company paid $ 1,750 in transaction compensation to key SCA management concurrently with the closing. The purchase price of SCA is allocated to the assets acquired and liabilities assumed based on their estimated respective fair values as of March 11, 2020 with the excess purchase price allocated to goodwill. During the year ended January 1, 2021, the Company finalized the allocation of purchase price and recorded adjustments to Goodwill of $ 3,539 related to the completion of valuation of working capital, real estate, intangible assets and related deferred tax liabilities. The Company’s allocation of the purchase price to the net tangible and intangible assets acquired and liabilities assumed is as follows: Acquisition consideration Cash consideration $ 331,531 Non-cash consideration 322 Total consideration at closing $ 331,853 Fair market values Other current assets $ 16,350 Property, plant and equipment 8,300 Lease right-of-use assets 4,027 Customer relationships 124,400 Trademarks and brand 15,500 Goodwill 195,754 Total assets acquired $ 364,331 Accounts payable and accrued expenses 7,678 Lease liabilities 4,027 Deferred taxes 20,773 Total liabilities assumed 32,478 Purchase price allocation $ 331,853 The Company incurred $ 10,582 of acquisition costs in conjunction with the SCA acquisition, including $ 1,750 of transaction compensation during the year ended January 1, 2021 and $ 602 of transaction costs during the year ended January 3, 2020. These costs are classified as general and administrative expenses in the accompanying condensed consolidated statements of income. Additional debt issuance costs of $ 6,622 were incurred in association with financing the transaction and will be amortized over the term of the First Amended and Restated Credit Facility. Refer to Note 10 - Debt for further details. The values assigned to the identifiable intangible assets were determined by discounting the estimated future cash flows associated with these assets to their present value. The goodwill of $ 195,754 reflects the strategic fit of SCA with the Company’s operations. The Company will amortize the acquired customer relationships assets over their expected useful lives of 5 - 10 years. Trademarks, brand names and goodwill are expected to have an indefinite life, and will be subject to impairment testing. The goodwill is not deductible for income tax purposes. SCA previously purchased intangibles in asset acquisitions with a remaining net tax basis approximating $ 77,989 , which the Company may deduct for income tax purposes. 99 Table of Contents FOX FACTORY HOLDING CORP. Notes to Consolidated Financial Statements - Continued January 1, 2021 (in thousands, except per share amounts) The following unaudited pro forma financial information shows the combined results of operations of the Company and SCA, as if the acquisition had occurred as of the beginning of the periods presented. The pro forma results include the effects of the amortization of purchased intangible assets and acquired inventory valuation step-up, interest expense on the term debt secured to finance the acquisition, and the net tax benefit of the above adjustments calculated at the statutory federal tax rate of 21%. SCA was operated as a C Corporation for federal taxation purposes. A pro forma adjustment has been made to reflect the income taxes that would have been recorded at the federal statutory rate based on SCA’s net income. The pro forma results for the year ended January 1, 2021 exclude transaction costs associated with the acquisition and the results for the year ended January 3, 2020 have been adjusted to include these charges. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisition taken place in the periods noted below. For the years ended January 1, 2021 January 3, 2020 Pro forma sales $ 909,903 $ 842,701 Pro forma net income attributable to FOX stockholders $ 89,480 $ 78,577 Pro forma basic earnings per share $ 2.45 $ 2.05 Pro forma diluted earnings per share $ 2.41 $ 2.01 Total SCA revenues included in the consolidated statements of income $ 76,648 Total SCA pre-tax income included in the consolidated statements of income $ 7,555 19. Selected Quarterly Financial Data (Unaudited) Selected summarized quarterly financial information for 2020 and 2019 is as follows: Quarter Ended Jan 1, Oct 2 Jul 3 April 3, Jan 3, Sep 27, Jun 28, Mar 29, 2021 2020 2020 2020 2020 2019 2019 2019 Sales $ 262,391 $ 260,700 $ 183,102 $ 184,361 $ 185,881 $ 211,317 $ 192,122 $ 161,700 Gross profit 83,472 89,474 59,986 56,615 59,641 69,817 62,220 51,057 Income from operations 37,670 45,553 19,359 11,567 26,159 35,360 29,471 21,819 Net income attributable to Fox Stockholders 31,796 38,020 12,608 8,250 22,522 29,487 22,921 18,103 Earnings per share: Basic $ 0.76 $ 0.91 $ 0.32 $ 0.21 $ 0.58 $ 0.77 $ 0.60 $ 0.48 Diluted $ 0.75 $ 0.90 $ 0.32 $ 0.21 $ 0.58 $ 0.75 $ 0.59 $ 0.46 20. Subsequent Events None. 100