Grocery Outlet Holding Corp. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA GROCERY OUTLET HOLDING CORP. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 62 Consolidated Balance Sheets 64 Consolidated Statements of Operations and Comprehensive Income 65 Consolidated Statements of Stockholders' Equity 66 Consolidated Statements of Cash Flows 67 Notes to Consolidated Financial Statements 68 61 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Grocery Outlet Holding Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Grocery Outlet Holding Corp. and subsidiaries (the "Company") as of January 1, 2022 and January 2, 2021, the related consolidated statements of operations and comprehensive income, stockholders' equity, and cash flows, for each of the fiscal years ended January 1, 2022, January 2, 2021 and December 28, 2019, and the related notes and Schedule I listed in the Index at Item 15 (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, 2022 and January 2, 2021, and the results of its operations and its cash flows for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, in conformity with accounting principles generally accepted in the United States of America. We have also 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, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2022 expressed an unqualified opinion on the Company's internal control over financial reporting. 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 Public Company Accounting Oversight Board (United States) (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 Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Long-Lived Store Asset Impairment – Refer to Notes 1 and 3 to the financial statements Critical Audit Matter Description The Company performs an analysis of the carrying value of all long-lived store assets for impairment at an individual store level whenever events or changes in circumstances indicate that the carrying value of individual store assets may not be recoverable. The Company's impairment analysis determines whether projected undiscounted future cash flows from operations are sufficient to recover the carrying value of these store assets. Impairment may result when the carrying value of these store assets exceeds the estimated undiscounted future cash flows over the remaining useful life. The total amount of property and equipment, including store assets, and operating lease right-of-use assets as of January 1, 2022 are $499.4 million and $898.2 million, respectively. The Company's impairment analysis consists of (1) identifying stores with 62 Table of Contents indicators of impairment, (2) testing the identified store assets for recoverability and (3) measuring the impairment loss, if any. During the year ended January 1, 2022, the Company recorded no impairment of long-lived assets. The principal considerations for our determination that performing procedures relating to the impairment of store-level long-lived assets is a critical audit matter relates to the significant judgment by management in developing the estimated future discounted cash flows expected to be generated by the asset. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the discounted cash flows, including the significant assumptions for sales growth rate and gross margin. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to management's judgments regarding the forecasts of future cash flows included the following, among others: • We tested the operating effectiveness of controls over management's long-lived store asset impairment evaluation, including those over future sales growth and gross margin projections • We evaluated management's ability to accurately forecast future sales growth and gross margin by comparing actual results to management's historical forecasts • We evaluated the reasonableness of management's sales growth and gross margin forecasts by comparing the forecasts to: ◦ Current and past sales and gross margins of the overall Company and individual store level asset groups ◦ Consistency with external market and industry data ◦ Internal communications to management and the Board of Directors • We tested the completeness, accuracy, and relevance of underlying data used in the valuations /s/ DELOITTE & TOUCHE LLP San Francisco, California March 2, 2022 We have served as the Company's auditor since 2007. 63 Table of Contents GROCERY OUTLET HOLDING CORP. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) January 1, 2022 January 2, 2021 Assets Current assets: Cash and cash equivalents $ 140,085 $ 105,326 Independent operator receivables and current portion of independent operator notes, net of allowance $ 1,406 and $ 985 7,219 5,443 Other accounts receivable, net of allowance $ 57 and $ 39 3,159 5,950 Merchandise inventories 275,502 245,157 Prepaid expenses and other current assets 16,780 20,081 Total current assets 442,745 381,957 Independent operator notes, net of allowance $ 10,506 and $ 7,124 21,516 27,440 Property and equipment, net 499,387 433,652 Operating lease right-of-use assets 898,152 835,397 Intangible assets, net 51,921 48,226 Goodwill 747,943 747,943 Deferred income tax assets, net — 3,529 Other assets 8,144 7,480 Total assets $ 2,669,808 $ 2,485,624 Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable $ 122,110 $ 114,278 Accrued expenses 49,025 35,699 Accrued compensation 8,450 26,447 Current lease liabilities 51,136 48,675 Income and other taxes payable 7,185 7,547 Total current liabilities 237,906 232,646 Long-term debt, net 451,468 449,233 Deferred income tax liabilities, net 9,416 — Long-term lease liabilities 961,746 881,438 Total liabilities 1,660,536 1,563,317 Commitments and contingencies (NOTE 12) Stockholders' equity: Voting common stock, par value $ 0.001 per share, 500,000,000 shares authorized; 96,144,433 and 94,854,336 shares issued and outstanding, respectively 96 95 Series A Preferred stock, par value $ 0.001 per share, 50,000,000 shares authorized; no shares issued and outstanding — — Additional paid-in capital 811,701 787,047 Retained earnings 197,475 135,165 Total stockholders' equity 1,009,272 922,307 Total liabilities and stockholders' equity $ 2,669,808 $ 2,485,624 See Notes to Consolidated Financial Statements 64 Table of Contents GROCERY OUTLET HOLDING CORP. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in thousands, except per share data) Fiscal Year Ended January 1, 2022 January 2, 2021 December 28, 2019 Net sales $ 3,079,582 $ 3,134,640 $ 2,559,617 Cost of sales 2,130,796 2,161,293 1,772,515 Gross profit 948,786 973,347 787,102 Operating expenses: Selling, general and administrative 773,718 772,409 639,437 Depreciation and amortization 68,358 55,479 47,883 Share-based compensation 17,615 38,084 31,439 Total operating expenses 859,691 865,972 718,759 Income from operations 89,095 107,375 68,343 Other expenses (income): Interest expense, net 15,564 20,043 45,927 Gain on insurance recoveries ( 3,970 ) — — Debt extinguishment and modification costs — 198 5,634 Total other expenses (income) 11,594 20,241 51,561 Income before income taxes 77,501 87,134 16,782 Income tax expense (benefit) 15,191 ( 19,579 ) 1,363 Net income and comprehensive income $ 62,310 $ 106,713 $ 15,419 Basic earnings per share $ 0.65 $ 1.16 $ 0.20 Diluted earnings per share $ 0.63 $ 1.08 $ 0.19 Weighted average shares outstanding: Basic 95,725 91,818 79,044 Diluted 99,418 98,452 81,863 See Notes to Consolidated Financial Statements 65 Table of Contents GROCERY OUTLET HOLDING CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share amounts) Voting Common Nonvoting Common Preferred Additional Paid-In Capital Retained Earnings Stockholders' Equity Shares Amount Shares Amount Shares Amount Balance at December 29, 2018 67,435,288 $ 67 1,038,413 $ 1 1 $ — $ 287,457 $ 12,426 $ 299,951 Cumulative effect of accounting change 168 168 Issuance of common shares upon initial public offering, net of underwriting discounts 19,765,625 20 407,646 407,666 Other direct initial public offering costs ( 7,245 ) ( 7,245 ) Conversion of nonvoting to voting common shares 1,068,413 1 ( 1,068,413 ) ( 1 ) — Redemption of preferred shares ( 1 ) — — Exercise and vesting of share-based awards 735,736 1 30,000 4,443 4,444 Tax paid on behalf of employees related to net settlement of share-based awards ( 2,813 ) ( 2,813 ) Share-based compensation expense 31,439 31,439 Dividends paid ( 3,645 ) ( 3,645 ) Net income and comprehensive income 15,419 15,419 Balance at December 28, 2019 89,005,062 $ 89 — $ — — $ — $ 717,282 $ 28,013 $ 745,384 Cumulative effect of accounting change 439 439 Exercise and vesting of share-based awards 5,849,274 6 32,598 32,604 Tax paid on behalf of employees related to net settlement of share-based awards ( 483 ) ( 483 ) Share-based compensation expense 38,084 38,084 Dividends paid ( 434 ) ( 434 ) Net income and comprehensive income 106,713 106,713 Balance at January 2, 2021 94,854,336 $ 95 — $ — — $ — $ 787,047 $ 135,165 $ 922,307 Exercise and vesting of share-based awards 1,290,097 1 7,225 7,226 Share-based compensation expense 17,615 17,615 Dividends paid ( 186 ) ( 186 ) Net income and comprehensive income 62,310 62,310 Balance at January 1, 2022 96,144,433 $ 96 — $ — — $ — $ 811,701 $ 197,475 $ 1,009,272 See Notes to Consolidated Financial Statements 66 Table of Contents GROCERY OUTLET HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Fiscal Year Ended January 1, 2022 January 2, 2021 December 28, 2019 Cash flows from operating activities: Net income $ 62,310 $ 106,713 $ 15,419 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 63,442 50,749 42,906 Amortization of intangible and other assets 7,682 7,302 7,237 Amortization of debt issuance costs and debt discounts 2,511 2,452 2,542 Gain on insurance recoveries ( 3,970 ) — — Debt extinguishment and modification costs — 198 5,634 Share-based compensation 17,615 38,084 31,439 Provision for independent operator notes, independent operator receivables and other accounts receivable 4,813 ( 456 ) 2,575 Proceeds from insurance recoveries - business interruption and inventory 2,103 479 — Deferred income taxes 12,944 ( 19,578 ) 872 Other 1,251 1,954 1,955 Changes in operating assets and liabilities: Independent operator and other accounts receivable ( 21 ) ( 4,943 ) ( 3,649 ) Merchandise inventories ( 30,345 ) ( 25,737 ) ( 21,115 ) Prepaid expenses and other current assets 3,301 ( 6,628 ) 498 Income and other taxes payable ( 362 ) 2,906 1,191 Trade accounts payable, accrued compensation and other accrued expenses 3,179 4,778 22,599 Changes in operating lease assets and liabilities, net 19,134 22,964 22,732 Net cash provided by operating activities 165,587 181,237 132,835 Cash flows from investing activities: Advances to independent operators ( 10,024 ) ( 10,372 ) ( 12,811 ) Repayments of advances from independent operators 4,563 6,793 4,473 Purchases of property and equipment ( 123,384 ) ( 124,920 ) ( 97,194 ) Proceeds from sales of assets 37 269 586 Investments in intangible assets and licenses ( 9,772 ) ( 5,861 ) ( 3,073 ) Proceeds from insurance recoveries - property and equipment 1,867 305 — Net cash used in investing activities ( 136,713 ) ( 133,786 ) ( 108,019 ) Cash flows from financing activities: Proceeds from initial public offering, net of underwriting discounts paid — — 407,666 Proceeds from exercise of stock options 7,226 32,604 4,444 Proceeds from revolving credit facility loan — 90,000 — Principal payments on revolving credit facility loan — ( 90,000 ) — Payments made for net settlement of employee share-based compensation awards — ( 483 ) ( 2,813 ) Other direct costs paid related to the initial public offering — — ( 7,062 ) Principal payments on term loans — ( 188 ) ( 414,813 ) Principal payments on other borrowings ( 1,155 ) ( 1,024 ) ( 865 ) Dividends paid ( 186 ) ( 434 ) ( 3,645 ) Debt issuance costs paid — ( 701 ) ( 690 ) Net cash provided by (used in) financing activities 5,885 29,774 ( 17,778 ) Net increase in cash and cash equivalents 34,759 77,225 7,038 Cash and cash equivalents at beginning of period 105,326 28,101 21,063 Cash and cash equivalents at end of period $ 140,085 $ 105,326 $ 28,101 Supplemental disclosure of cash flow information: Cash paid for interest $ 14,604 $ 20,311 $ 49,372 Income taxes paid (refunded) in cash $ 477 $ 5,186 $ ( 65 ) Property and equipment accrued at end of period $ 14,986 $ 15,604 $ 10,498 Intangible assets accrued at end of period $ 1,613 $ 1,050 $ — Acquisition of equipment in exchange for reduction of independent operator notes and independent operator receivables $ 7,609 $ — $ — See Notes to Consolidated Financial Statements 67 Table of Contents GROCERY OUTLET HOLDING CORP. Notes to Consolidated Financial Statements NOTE 1— Organization and Summary of Significant Accounting Policies Description of Business — Based in Emeryville, California, and incorporated in Delaware in 2014, Grocery Outlet Holding Corp. (together with its wholly owned subsidiaries, collectively, "Grocery Outlet," "we," or the "Company") is a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores. As of January 1, 2022, we had 415 stores throughout California, Washington, Oregon, Pennsylvania, Idaho, Nevada and New Jersey. Grocery Outlet Holding Corp. (the "Parent Company") owns 100 % of Globe Intermediate Corp. ("Intermediate"), which owns 100 % of GOBP Holdings, Inc. ("GOBP Holdings"), which owns 100 % of GOBP Midco, Inc. ("Midco"), which owns 100 % of Grocery Outlet Inc. ("GOI"). Fiscal Year — We operate on a fiscal year that ends on the Saturday closest to December 31st each year. The fiscal years ended January 1, 2022 ("fiscal 2021") and December 28, 2019 ("fiscal 2019") consisted of 52 weeks while the fiscal year ended January 2, 2021 ("fiscal 2020") consisted of 53 weeks. Basis of Presentation — The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). Our consolidated financial statements include the accounts of Grocery Outlet Holding Corp. and its wholly owned subsidiaries. All intercompany balances and transactions were eliminated. In the opinion of management, these consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. Certain prior period amounts in the notes to the consolidated financial statements have been reclassified to conform to the current period presentation. The reclassification of these items had no impact on net income, earnings per share, or retained earnings in the current or prior period. Use of Estimates — The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results can differ from these estimates depending upon certain risks and uncertainties. Changes in these estimates are recorded when known. Segment Reporting — We manage our business as one operating segment. All of our sales were made to customers located in the United States and all property and equipment is located in the United States. Cash and Cash Equivalents — We consider all highly liquid investments, purchased with original maturities of three months or less, to be cash equivalents. All cash equivalents are unrestricted and available for immediate use. Allowance for Independent Operator ("IO") Receivables and IO Notes and Other Accounts Receivable — We maintain allowances and accruals for estimated losses of amounts advanced to IOs and other third parties determined to be uncollectible. See NOTE 2 — Independent Operator Notes and Independent Operator Receivables, for additional information. Concentrations of Credit Risk — Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts and notes receivable. Although we deposit our cash with creditworthy financial institutions, our deposits typically exceed federally insured limits. To date, we have not experienced any losses on our cash deposits. No single customer or store represented more than 10% of net sales for the fiscal years ended January 1, 2022, January 2, 2021 and December 28, 2019. No single customer or IO represented more than 10% of accounts receivable or notes receivable as of January 1, 2022 and January 2, 2021. Merchandise Inventories — Merchandise inventories are valued at the lower of cost or net realizable value. Cost is determined by the weighted-average cost method for warehouse inventories and the retail inventory method for store inventories. We provide for estimated inventory losses between physical inventory counts based on historical averages. This provision is adjusted periodically to reflect the actual shrink results of the physical inventory counts. Property and Equipment — Property and equipment is stated at cost less accumulated depreciation and includes expenditures for significant improvements to leased premises. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, generally ranging from three to 15 years. Amortization of leasehold improvements is calculated based on the shorter of their estimated useful life or the remaining terms of the lease. Remaining lease terms currently range from one to 17 years. 68 Table of Contents We evaluate events and changes in circumstances that could indicate carrying amounts of long-lived assets, including property and equipment, may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether or not the carrying value of such assets will be recovered through undiscounted future cash flows derived from their use and eventual disposition. For purposes of this assessment, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, primarily at an individual store level. If the sum of the undiscounted future cash flows is less than the carrying amount of an asset, we record an impairment loss for the amount by which the carrying amount of the asset exceeds its fair value. The total amount of property and equipment, including store assets, and operating lease right-of-use assets as of January 1, 2022 were $ 499.4 million and $ 898.2 million, respectively. The estimated fair value of the asset or asset group is based on the estimated discounted future cash flows of the asset or asset group using a discount rate commensurate with the related risk. There were no adjustments to the carrying value of long-lived assets due to impairment charges during fiscal 2021 and 2020. We recorded impairment charges of $ 0.5 million during fiscal 2019 . See NOTE 3—Property and Equipment, for additional information. Leases — We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, current lease liabilities, and long-term lease liabilities on our consolidated balance sheets. Finance leases are included in other assets, current lease liabilities, and long-term lease liabilities on our consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease over the same term. Right-of-use assets and liabilities are recognized at commencement date based on the present value of the lease payments over the lease term, reduced by landlord incentives. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is estimated to approximate the interest rate on a collateralized basis with similar terms and payments based on the information available at the commencement date to determine the present value of our lease payments. Lease term is defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that we will exercise the option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term while finance lease payments are charged to interest expense and depreciation and amortization expense over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense for these short-term leases is recognized on a straight-line basis over the lease term. We generally lease retail facilities for store locations, distribution centers, office space and equipment and account for these leases as operating leases. We account for one retail store lease and certain equipment leases as finance leases. Lease and non-lease components are accounted for separately. We sublease certain real estate to unrelated third parties under non-cancelable leases and the sublease portfolio consists of operating leases for retail stores. Goodwill and Other Intangible Assets — We have both goodwill and intangible assets recorded on our consolidated balance sheets. Goodwill represents the difference between the purchase price and the fair value of assets and liabilities acquired in a business combination. Goodwill is not amortized, but rather is subject to an annual impairment evaluation which is performed during our fourth quarter or when events or changes in circumstances indicate that the value of goodwill may be impaired. Our impairment evaluation of goodwill consists of an initial qualitative assessment of our reporting unit to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value. If it is concluded that this is the case, a quantitative evaluation, based on discounted cash flows, is performed which requires us to estimate future cash flows, growth rates and economic and market conditions. If the quantitative evaluation indicates that goodwill is not recoverable, an impairment loss is calculated and recognized during that period. Measurement of such an impairment loss would be based on the excess of the carrying amount over fair value. There were no goodwill impairment charges recorded during the fiscal years ended January 1, 2022, January 2, 2021 and December 28, 2019. There were no changes in the carrying amount of goodwill for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019. Intangible assets include trademarks, computer software, and liquor licenses. Trademarks represent the value of all our trademarks and trade names in the marketplace. We are amortizing the value assigned to the trade names on a straight-line basis over 15 years. Computer software includes both acquired software and eligible costs to develop internal-use software that are incurred during the application development stage. These assets are amortized over their estimated useful lives of three to 10 years. Liquor license assets have been classified as indefinite-lived intangible assets and accordingly, are not subject to amortization. We review our intangible assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying amount of the intangible assets are not recoverable, the impairment is measured as the amount by which the carrying value of the intangible asset exceeds its fair value. There were no impairments of intangible assets recognized during the fiscal years ended January 1, 2022, January 2, 2021 and December 28, 2019. 69 Table of Contents Fair Value Measurements — Fair value is defined as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value of financial instruments is categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows: Level 1 — Quoted prices in active markets for identical assets or liabilities Level 2 — Quoted prices for similar assets and liabilities in active markets or inputs that are observable Level 3 — Unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions when pricing the financial instruments, such as cash flow modeling assumptions. The assets' or liabilities' fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The fair value framework requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There were no assets or liabilities measured at fair value on a recurring basis as of January 1, 2022 or January 2, 2021. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. See NOTE 3—Property and Equipment and NOTE 5—Goodwill and Intangible Assets, for additional information. There were no transfers of assets or liabilities between levels within the fair value hierarchy during the fiscal years ended January 1, 2022 or January 2, 2021. Our financial assets and liabilities are carried at cost, which generally approximates their fair value, as described below: Cash and cash equivalents, IO receivables, other accounts receivable and accounts payable — The carrying value of such financial instruments approximates their fair value due to factors such as their short-term nature or their variable interest rates. IO notes receivable (net) — The carrying value of such financial instruments approximates their fair value due to the effect of the related allowance for expected credit losses. The following table sets forth by level within the fair value hierarchy the carrying amounts and estimated fair values of our significant financial liabilities that are not recorded at fair value on the consolidated balance sheets (amounts in thousands): January 1, 2022 January 2, 2021 Carrying Amount (1) Estimated Fair Value (2) Carrying Amount (1) Estimated Fair Value (2) Financial Liabilities: Term loan (Level 2) $ 451,468 $ 457,700 $ 449,233 $ 460,000 _______________________ (1) The carrying amounts as of January 1, 2022 and January 2, 2021 are net of unamortized debt discounts of $ 1.0 million and $ 1.2 million, respectively, and debt issuance costs of $ 7.5 million and $ 9.5 million, respectively. (2) The estimated fair value of our term loan was determined based on the average quoted bid-ask prices for the term loan in an over-the-counter market on the last trading day of fiscal 2021 and 2020. Revenue Recognition Net Sales — We recognize revenue from the sale of products at the point of sale, net of any taxes or deposits collected and remitted to governmental authorities. For e-commerce related sales in which a third-party company provides home delivery service, revenue is recognized upon delivery to the customer. Our performance obligations are satisfied upon the transfer of goods to the customer, at the point of sale, and payment from customers is also due at the time of sale. Discounts provided to customers by us are recognized at the time of sale as a reduction in sales as the products are sold. Discounts provided by IOs are not recognized as a reduction in sales as these are provided solely by the IO who bears the incremental costs arising from the discount. We do not accept manufacturer coupons. We do not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current year from performance obligations satisfied in previous periods, any performance obligations, or any material costs to obtain or fulfill a contract as of January 1, 2022 and January 2, 2021. Gift Cards — We record a deferred revenue liability when a Grocery Outlet gift card is sold. Revenue related to gift cards is recognized as the gift cards are redeemed, which is when we have satisfied our performance obligation. While gift cards are generally redeemed within 12 months, some are never fully redeemed. We reduce the liability and recognize 70 Table of Contents revenue for the unused portion of the gift cards ("breakage") under the proportional method, where recognition of breakage income is based upon the historical run-off rate of unredeemed gift cards. Our gift card deferred revenue liability was $ 3.6 million as of January 1, 2022 and $ 3.2 million as of January 2, 2021. Breakage amounts were $ 0.3 million and $ 0.2 million for the fiscal years ended January 1, 2022 and January 2, 2021, respectively, and less than $ 0.1 million for the fiscal year ended December 28, 2019. Disaggregated Revenues — The following table presents net sales revenue by type of product for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019 (amounts in thousands); e-commerce sales have been allocated to their respective product type: January 1, 2022 January 2, 2021 December 28, 2019 Perishable (1) $ 1,067,198 $ 1,054,506 $ 868,109 Non-perishable (2) 2,012,384 2,080,134 1,691,508 Total sales (3) $ 3,079,582 $ 3,134,640 $ 2,559,617 _______________________ (1) Perishable departments include dairy and deli; produce and floral; and fresh meat and seafood. (2) Non-perishable departments include non-perishable grocery; general merchandise; health and beauty care; frozen foods; and beer and wine. (3) The fiscal years ended January 1, 2022 and December 28, 2019 consisted of 52 weeks while the fiscal year ended January 2, 2021 consisted of 53 weeks. Cost of Sales — Cost of sales includes, among other things, merchandise costs, inventory markdowns, shrink and transportation, third-party delivery fees and distribution and warehousing costs, including depreciation. Marketing and Advertising Expenses — Costs for store promotions, newspaper, television, radio and other media advertising are expensed at the time the promotion or advertising takes place. Advertising costs are included in SG&A in the accompanying consolidated statements of operations and comprehensive income and amounted to approximately $ 32.6 million, $ 25.9 million and $ 26.2 million, respectively, in the fiscal years ended January 1, 2022, January 2, 2021 and December 28, 2019. Share-based Awards — We estimate the fair value of time-based stock option awards subject to only a service condition on the date of grant using the Black-Scholes valuation model. The Black-Scholes model requires the use of certain input assumptions. Because we completed our IPO during fiscal 2019, for awards granted in fiscal 2019 we had limited historical exercise data from which to derive such input assumptions, including an option's expected term and the price volatility of the underlying stock. Consequently, we determined the expected term using an accepted, simplified formula which derives an expected term by taking the sum of the contractual term and adding the length of the vesting period and dividing by two. We estimated stock price volatility for our common stock by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in our industry which are of similar size, complexity and stage of development. The risk-free interest rate for the expected term of the option was based on the U.S. Treasury implied yield at the date of grant. We did not award any time-based or performance-based stock options during fiscal 2021 and 2020. We estimate the fair value of performance-based stock option awards subject to both a market condition and a performance condition on the date of grant using a Monte Carlo simulation approach implemented in a risk-neutral framework. We estimate the fair value of restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") based upon the closing price of our common stock as reported on the Nasdaq Global Select Market on the date of grant. The PSUs vest in one installment after a three year performance period based on the achievement of cumulative operating goals. We recognize compensation expense for share-based payment awards with only a service condition on a straight-line basis over the requisite service period, which is generally the award's vesting period. Vesting of these awards would be accelerated for certain employees in the event of a change in control as well as certain termination events. Compensation expense for share-based payment awards subject to vesting based upon the achievement of a performance condition is recognized on a graded-vesting basis at the time the achievement of the performance condition becomes probable. We recognize share-based award forfeitures as they occur rather than estimating by applying a forfeiture rate. 71 Table of Contents While we recognize share-based compensation expense over the performance period and/or requisite service period based on the fair market value of the award as of the grant date, we will not know the actual amount of tax benefit an award will generate until such award is exercised (or vested for RSUs or PSUs)). Until such award is exercised (or vested for RSUs or PSUs) we assume that the amount ultimately recognized for tax purposes is the same amount we are currently recognizing in our operating results, that is for "book" purposes. Consequently, our deferred tax asset related to share-based compensation expense, which totaled $ 10.9 million as of January 1, 2022, is based on each qualifying award's grant date fair value rather than the award's to-be-determined exercise date intrinsic value (or vesting date fair value). For awards exercised (or vested for RSUs) during our fiscal year ended January 1, 2022, the difference between the grant date fair value and the exercise or vest date intrinsic value totaled $ 30.3 million. If the share price for our common stock were to depreciate for a sustained period of time, we could be required to recognize a tax shortfall. Such shortfalls could have a material effect on our cash flows and financial results. See NOTE 8—Share-based Awards and NOTE 10—Income Taxes, for additional information. Income Taxes — Income taxes are accounted for using an asset and liability approach that requires recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. In estimating future tax consequences, all expected future events are considered, other than changes in the tax law. A valuation allowance is established, when necessary, to reduce net deferred income tax assets to the amount expected to be realized. We have not recorded any valuation allowances against our deferred income tax balances for the fiscal years ended January 1, 2022 and January 2, 2021. Significant items comprising our future tax benefits and liabilities (deferred tax assets and liabilities) include net operating losses, depreciation and amortization, goodwill, intangible assets, lease liability obligations and right-of-use assets. We recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We record uncertain tax positions in accordance with ASC Topic 740, Income Taxes, on the basis of a two-step process in which (i) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Variable Interest Entities — In accordance with the variable interest entities sub-section of ASC Topic 810, Consolidation, we assess at each reporting period whether we, or any consolidated entity, are considered the primary beneficiary of a variable interest entity ("VIE") and therefore required to consolidate the financial results of the VIE in our consolidated financial statements. Determining whether to consolidate a VIE may require judgment in assessing (i) whether an entity is a VIE, and (ii) if a reporting entity is a VIE's primary beneficiary. A reporting entity is determined to be a VIE's primary beneficiary if it has the power to direct the activities that most significantly impact a VIE's economic performance and the obligation to absorb losses or rights to receive benefits that could potentially be significant to a VIE. We had 411 , 375 and 342 stores operated by IOs as of January 1, 2022, January 2, 2021 and December 28, 2019, respectively. We have agreements in place with each IO. The IO orders merchandise exclusively from us which is provided to the IO on consignment. Under the Independent Operator Agreement (the "Operator Agreement"), the IO may select a majority of merchandise that we consign to the IO, which the IO chooses from our merchandise order guide according to the IO's knowledge and experience with local customer purchasing trends, preferences, historical sales and similar factors. The Operator Agreement gives the IO discretion to adjust our initial prices if the overall effect of all price changes at any time comports with the reputation of our Grocery Outlet retail stores for selling quality, name-brand consumables and fresh products and other merchandise at extreme discounts. IOs are required to furnish initial working capital and to acquire certain store and safety ass ets. The IO is also required to hire, train and employ a properly trained workforce sufficient in number to enable the IO to fulfill its obligations under the Operator Agreement. Additionally, the IO is responsible for expenses required for business operations, including all labor costs, utilities, credit card processing fees, supplies, taxes, fines, levies and other expenses. Either party may terminate the Operator Agreement without cause upon 75 days' notice. As consignor of all merchandise to each IO, the aggregate net sales proceeds from merchandise sales belongs to us. Net sales related to IO store s were $ 3.0 billion, $ 3.1 billion, and $ 2.5 billion for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively. We, in turn, pay IOs a commission based on a share of the gross profit of the store. Inventories and related net sales proceeds are our property, and we are responsible for store rent and related occupancy costs. IO commissions were expensed and included in SG&A. IO commissions were $ 463.8 million, $ 469.3 million, and $ 382.8 million for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively. IO commissions of $ 9.1 million and $ 6.0 million were included in accrued expenses as of January 1, 2022 and January 2, 2021, respectively. 72 Table of Contents IOs may fund their initial store investment from existing capital, a third-party loan or most commonly through a loan from us, as further discussed in NOTE 2—Independent Operator Notes and Independent Operator Receivables. As collateral for IO obligations and performance, the Operator Agreements grant us the security interests in the assets owned by the IOs related to the respective store. Since the total investment at risk associated with each IO is not sufficient to permit each IO to finance its activities without additional subordinated financial support, the IOs are VIEs which we have variable interests in. To determine if we are the primary beneficiary of these VIEs, we evaluate whether we have (i) the power to direct the activities that most significantly impact the IO's economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the IO that could potentially be significant to the IO. Our evaluation includes identification of significant activities and an assessment of its ability to direct those activities. Activities that most significantly impact the IO's economic performance relate to sales and labor. Sales activities that significantly impact the IO's economic performance include determining what merchandise the IO will order and sell and the price of such merchandise, both of which the IO controls. The IO is also responsible for all of their own labor. Labor activities that significantly impact the IO's economic performance include hiring, training, supervising, directing, compensating (including wages, salaries and employee benefits) and terminating all of the employees of the IO, activities which the IO controls. Accordingly, the IO has the power to direct the activities that most significantly impact the IO's economic performance. Furthermore, the mutual termination rights associated with the Operator Agreements illustrate the lack of ultimate control over the IO. Therefore, the Company is not the primary beneficiary of these VIEs. Our maximum exposure to the IOs is generally limited to the IO notes and IO receivables due from these entities, which was $ 40.6 million and $ 41.0 million as of January 1, 2022 and January 2, 2021, respectively. See NOTE 2—Independent Operator Notes and Independent Operator Receivables, for additional information. Net Income Per Share — Basic net income per share is calculated using net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted net income per share reflects the dilutive effects of stock options and RSUs outstanding during the period, to the extent such securities would not be anti-dilutive, and is determined using the treasury stock method. Recently Adopted Accounting Standards ASU No. 2019-12 —In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies accounting guidance for certain tax matters including franchise taxes, certain transactions that result in a step-up in tax basis of goodwill, and enacted changes in tax laws in interim periods. In addition, it eliminates a company's need to evaluate certain exceptions relating to the incremental approach for intra-period tax allocation, accounting for basis differences when there are ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We adopted ASU 2019-12 beginning in the first quarter of fiscal 2021. The adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements. Recently Issued Accounting Pronouncements No recently issued accounting pronouncements are expected to have a material effect on our consolidated financial statements. NOTE 2— Independent Operator Notes and Independent Operator Receivables The amounts included in IO notes and IO receivables consist primarily of funds we loaned to IOs, net of estimated uncollectible amounts. IO notes are payable on demand and typically bear interest at rates between 3.00 % and 9.95 %. Accrued interest receivable on IO notes is included within the "independent operator receivables and current portion of independent operator notes, net of allowance" line item on the condensed consolidated balance sheets and was $ 0.5 million and $ 0.4 million as of January 1, 2022 and January 2, 2021, respectively. There were no IO notes that were past due or on a non-accrual status due to delinquency as of January 1, 2022 or January 2, 2021. Notes and receivables from our IOs 73 Table of Contents participating in our TCAP, as defined below, are not considered to be past due or on a non-accrual status due to delinquency and are excluded from such measures. IO notes and receivables are financial assets which are measured and carried at amortized cost. An allowance for expected credit losses is deducted from (for expected losses) or added to (for expected recoveries) the amortized cost basis of these assets to arrive at the net carrying amount expected to be collected for such assets. The allowance is estimated using an expected loss framework, which includes information about past events, current conditions, and reasonable and supportable forecasts that impact the collectibility of the reported amounts of the assets over their lifetime. The allowance is evaluated on a collective basis for assets with shared risk characteristics and credit quality indicators. The primary shared risk characteristic and credit quality indicator pools that we use as a basis for collective evaluation include: • TCAP — Includes the notes and receivables from IOs with stores that have been open for more than 18 months that are participating in our Temporary Commission Adjustment Program ("TCAP") as of the end of each reporting period. TCAP allows us to provide a greater commission to participating IOs who require assistance in meeting their working capital needs for various reasons, such as new or increased competition or differences in IO skills and experience. • Non-TCAP — Includes the notes and receivables from IOs with stores that have been open for more than 18 months that are not participating in TCAP as of the end of each reporting period. • New store — Includes the notes and receivables from IOs with stores that have been open for less than 18 months as of the end of each reporting period. Assets without such shared risk characteristics or credit quality indicators, such as assets with unique circumstances or with delinquencies and historical losses in excess of their TCAP, non-TCAP or new store peers are evaluated on an individual basis. Amounts due from IOs and the related allowances as of January 1, 2022 and January 2, 2021 consisted of the following (amounts in thousands) : Allowance Current Portion Long-term Portion Gross Current Portion Long-term Portion Net January 1, 2022 Independent operator notes $ 34,221 $ ( 811 ) $ ( 10,506 ) $ 22,904 $ 1,388 $ 21,516 Independent operator receivables 6,426 ( 595 ) — 5,831 5,831 — Total $ 40,647 $ ( 1,406 ) $ ( 10,506 ) $ 28,735 $ 7,219 $ 21,516 Allowance Current Portion Long-term Portion Gross Current Portion Long-term Portion Net January 2, 2021 Independent operator notes $ 37,238 $ ( 514 ) $ ( 7,124 ) $ 29,600 $ 2,160 $ 27,440 Independent operator receivables 3,754 ( 471 ) — 3,283 3,283 — Total $ 40,992 $ ( 985 ) $ ( 7,124 ) $ 32,883 $ 5,443 $ 27,440 74 Table of Contents A summary of activity in the IO notes and IO receivables allowance was as follows (amounts in thousands): Fiscal Year Ended January 1, 2022 January 2, 2021 December 28, 2019 Beginning balance $ 8,109 $ 10,371 $ 9,067 Provision for IO notes and IO receivables 4,790 ( 473 ) 2,741 Cumulative effect of accounting change — ( 439 ) — Write-off of provision for IO notes and IO receivables ( 987 ) ( 1,350 ) ( 1,437 ) Ending balance $ 11,912 $ 8,109 $ 10,371 The following table presents the amortized cost basis of IO notes by year of origination and credit quality indicator as of January 1, 2022 (amounts in thousands): Credit Quality Indicator 2021 2020 2019 2018 2017 Prior Total TCAP $ 3,182 $ 2,331 $ 1,791 $ 1,058 $ 463 $ 257 $ 9,082 Non-TCAP 5,157 3,709 3,673 2,085 881 371 15,876 New store 6,615 2,648 — — — — 9,263 Total $ 14,954 $ 8,688 $ 5,464 $ 3,143 $ 1,344 $ 628 $ 34,221 NOTE 3— Property and Equipment Property and equipment as of January 1, 2022 and January 2, 2021 consisted of the following (amounts in thousands): Property and Equipment, At Cost Accumulated Depreciation and Amortization Property and Equipment, Net January 1, 2022 Leasehold improvements $ 333,053 $ ( 92,815 ) $ 240,238 Fixtures and equipment 396,500 ( 170,487 ) 226,013 Other 376 ( 295 ) 81 Construction in progress 33,055 — 33,055 Totals $ 762,984 $ ( 263,597 ) $ 499,387 January 2, 2021 Leasehold improvements $ 275,586 $ ( 70,999 ) $ 204,587 Fixtures and equipment 330,338 ( 134,820 ) 195,518 Other 376 ( 282 ) 94 Construction in progress 33,453 — 33,453 Totals $ 639,753 $ ( 206,101 ) $ 433,652 Construction in progress is primarily composed of leasehold improvements and fixtures and equipment related to new or remodeled stores where construction had not been completed at year-end. 75 Table of Contents Depreciation expense on property and equipment for fiscal 2021, 2020 and 2019 was as follows (amounts in thousands): Fiscal Year Ended Consolidated Statements of Operations and Comprehensive Income Location January 1, 2022 January 2, 2021 December 28, 2019 Cost of sales $ 1,486 $ 1,299 $ 1,210 Operating expenses 61,956 49,450 41,696 Total depreciation expense on property and equipment $ 63,442 $ 50,749 $ 42,906 NOTE 4— Leases Leases for 15 of our store locations and one warehouse location are controlled by related parties as of January 1, 2022 and January 2, 2021. See NOTE 11—Related Party Transactions, for additional information. As of January 1, 2022, we had executed leases for 25 store locations that we had not yet taken possession of with total undiscounted future lease payments of $ 141.9 million and lease terms through 2039. Based upon our initial investment in store leasehold improvements, we utilize an initial, reasonably-certain lease life of 15 years. Most leases include one or more options to renew, with renewal terms that can extend the lease term from five to 15 years or more. Our leases do not include any material residual value guarantees or material restrictive covenants. We also have non-cancelable subleases with unrelated third parties with future minimum rental receipts as of January 1, 2022 totaling $ 5.3 million ending in various years through 2036, which have not been deducted from the future minimum lease payments. The balance sheet classification of our right-of-use lease assets and lease liabilities was as follows (amounts in thousands): Leases Classification January 1, 2022 January 2, 2021 Assets: Operating lease assets Operating right-of-use assets $ 898,152 $ 835,397 Finance lease assets Other assets 6,896 5,973 Total lease assets $ 905,048 $ 841,370 Liabilities: Current Operating Current lease liabilities $ 49,861 $ 47,730 Finance Current lease liabilities 1,275 945 Noncurrent Operating Long-term lease liabilities 956,104 876,329 Finance Long-term lease liabilities 5,642 5,109 Total lease liabilities $ 1,012,882 $ 930,113 76 Table of Contents The components of lease expense were as follows (amounts in thousands): Fiscal Year Ended Lease Cost Classification (1) January 1, 2022 January 2, 2021 December 28, 2019 Operating lease cost Selling, general and administrative expenses $ 123,799 $ 112,096 $ 99,237 Finance lease cost: Amortization of right-of-use assets Depreciation and amortization 1,249 964 817 Interest on leased liabilities Interest expense, net 378 376 263 Variable lease cost Selling, general and administrative expenses 547 700 668 Sublease income Selling, general and administrative expenses ( 1,114 ) ( 972 ) ( 1,248 ) Net lease cost $ 124,859 $ 113,164 $ 99,737 _______________________ (1) Certain supply chain related lease costs herein are included in cost of sales. Maturities of lease liabilities as of January 1, 2022 were as follows (amounts in thousands): Operating Leases Finance Leases Total Fiscal 2022 $ 113,191 $ 1,605 $ 114,796 Fiscal 2023 126,143 1,503 127,646 Fiscal 2024 125,713 1,438 127,151 Fiscal 2025 124,371 1,207 125,578 Fiscal 2026 123,687 839 124,526 Thereafter 832,129 1,486 833,615 Total lease payments 1,445,234 8,078 $ 1,453,312 Less: Imputed interest ( 439,269 ) ( 1,161 ) Present value of lease liabilities $ 1,005,965 $ 6,917 The weighted-average lease terms and discount rates of operating and finance leases were as follows: January 1, 2022 January 2, 2021 Weighted-average remaining lease term: Operating leases 11.6 years 12.0 years Finance leases 5.8 years 6.7 years Weighted-average discount rate: Operating leases 6.46 % 6.91 % Finance leases 5.36 % 6.08 % 77 Table of Contents Supplemental cash flow information related to leases was as follows (amounts in thousands): Fiscal Year Ended January 1, 2022 January 2, 2021 December 28, 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 113,886 $ 101,245 $ 88,362 Operating cash flows from finance leases $ 378 $ 378 $ 337 Finance cash flows from finance leases $ 1,155 $ 821 $ 675 Leased assets obtained in exchange for new lease liabilities — adoption $ — $ — $ 664,882 Leased assets obtained in exchange for new operating lease liabilities $ 139,663 $ 166,018 $ 155,986 Leased assets obtained in exchange for new finance lease liabilities $ 2,019 $ 883 $ — NOTE 5— Goodwill and Intangible Assets Information regarding our goodwill and intangible assets as of January 1, 2022 was as follows (amounts in thousands): Gross Carrying Amount Accumulated Amortization Net Carrying Amount Trademarks $ 58,400 $ ( 28,111 ) $ 30,289 Computer software 34,108 ( 20,758 ) 13,350 Total finite-lived intangible assets 92,508 ( 48,869 ) 43,639 Liquor licenses 8,282 — 8,282 Total intangible assets 100,790 ( 48,869 ) 51,921 Goodwill 747,943 — 747,943 Total goodwill and intangible assets $ 848,733 $ ( 48,869 ) $ 799,864 Information regarding our goodwill and intangible assets as of January 2, 2021 was as follows (amounts in thousands): Gross Carrying Amount Accumulated Amortization Net Carrying Amount Trademarks $ 58,400 $ ( 24,218 ) $ 34,182 Computer software 24,868 ( 18,368 ) 6,500 Total finite-lived intangible assets 83,268 ( 42,586 ) 40,682 Liquor licenses 7,544 — 7,544 Total intangible assets 90,812 ( 42,586 ) 48,226 Goodwill 747,943 — 747,943 Total goodwill and intangible assets $ 838,755 $ ( 42,586 ) $ 796,169 Amortization expense for finite-lived intangible assets was $ 6.6 million, $ 6.5 million, and $ 6.7 million for t he fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively. 78 Table of Contents The estimated future amortization expense related to finite-lived intangible assets as of January 1, 2022 is as follows (amounts in thousands): Fiscal 2022 $ 7,085 Fiscal 2023 6,771 Fiscal 2024 5,802 Fiscal 2025 4,653 Fiscal 2026 4,653 Thereafter 14,675 Total $ 43,639 NOTE 6— Long-term Debt Long-term debt consisted of the following (amounts in thousands): January 1, 2022 January 2, 2021 First Lien Credit Agreement: Term loan $ 460,000 $ 460,000 Long-term debt, gross 460,000 460,000 Less: Unamortized debt discounts and debt issuance costs ( 8,532 ) ( 10,767 ) Long-term debt, net $ 451,468 $ 449,233 First Lien Credit Agreement GOBP Holdings, our wholly owned subsidiary, together with another of our wholly owned subsidiaries, has a first lien credit agreement (the "First Lien Credit Agreement") with a syndicate of lenders that consists of a $ 460.0 million senior term loan and a revolving credit facility for an amount up to $ 100.0 million, with sub-commitments for a $ 35.0 million letter of credit and $ 20.0 million of swingline loans as of January 1, 2022. The First Lien Credit Agreement permits voluntary prepayment on borrowings without premium or penalty. Borrowings under the First Lien Credit Agreement are secured by substantially all the assets of the borrower subsidiary and its guarantors. Term Loan Our $ 460.0 million senior term loan matures on October 22, 2025 and had an interest rate of 2.85 % as of January 1, 2022. Due to previous prepayments on the term loan, no further principal payment on the term loan will be due until the maturity date. The terms of the First Lien Credit Agreement include mandatory prepayment requirements on the term loan if certain conditions are met (as described in the First Lien Credit Agreement). On January 24, 2020, GO BP Holdings together with another of our wholly owned subsidiaries, entered into a second incremental agreement (the "Second Incremental Agreement") which amended a previous incremental agreement (the "First Incremental Agreement"). The Second Incremental Agreement refinanced a previous replacement term loan under the First Incremental Agreement with a replacement $ 460.0 million senior secured term loan (the "Second Replacement Term Loan") with an applicable margin of 2.75 % for Eurodollar loans and 1.75 % for base rate loans, in each case depending on the public corporate family rating of GOBP Holdings, and made certain other corresponding technical changes and updates to the First Incremental Agreement. We wrote off debt issuance costs of $ 0.1 million and incurred debt modification costs of $ 0.1 million during the first quarter of fiscal 2020 in connection with this refinance. Other than as described above, the Second Replacement Term Loan has the same terms as provided under the original First Lien Credit Agreement and the First Incremental Agreement. Additionally, the parties to the Second Incremental Agreement continue to have the same obligations set forth in the original First Lien Credit Agreement and the First Incremental Agreement. 79 Table of Contents Revolving Credit Facility As of January 1, 2022, we had $ 3.5 million of outstanding standby letters of credit and $ 96.5 million of r emaining borrowing capacity available under the revolving credit facility . No amounts were outstanding under the revolving credit facility as of January 1, 2022 and January 2, 2021. We are required to pay a quarterly commitment fee ranging from 0.25 % to 0.50 % on the daily unused amount of the commitment under the revolving credit facility based upon the leverage ratio defined in the agreement and certain criteria specified in the agreement. We are also required to pay fronting fees and other customary fees for letters of credit issued under the revolving credit facility. The interest rate for the revolving credit facility is determined based on a formula using certain market rates. On March 19, 2020, we borrowed $ 90.0 million under the revolving credit facility of our First Lien Credit Agreement (the "Revolving Credit Facility Loan"), the proceeds of which were to be used as reserve funding for working capital needs as a precautionary measure in light of the economic uncertainty surrounding the COVID-19 pandemic. On May 26, 2020, we repaid the Revolving Credit Facility Loan in full. No amounts were borrowed under the Revolving Credit Facility Loan during the fiscal year ended January 1, 2022 . Debt Covenants The First Lien Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The First Lien Credit Agreement restricts us from entering into certain types of transactions and making certain types of payments including dividends and stock repurchase and other similar distributions, with certain exceptions. Additionally, borrowing availability under the revolving credit facility under our First Lien Credit Agreement is subject to a first lien secured leverage ratio (as defined in the First Lien Credit Agreement) of 7.00 to 1.00, tested quarterly if, and only if, the aggregate principal amount outstanding and/or issued, as applicable, from the revolving facility, letters of credit (to the extent not cash collateralized or backstopped or, in the aggregate, not in excess of the greater of $ 10.0 million and the stated face amount of letters of credit outstanding on the closing date) and swingline loans exceeds 35 % of the total amount of the revolving credit facility commitments (as defined in the First Lien Credit Agreement). As of January 1, 2022, we were in compliance with all applicable financial covenant requirements for our First Lien Credit Agreement. Schedule of Principal Maturities Principal maturities of debt as of January 1, 2022 are as follows (amounts in thousands): Fiscal 2022 $ — Fiscal 2023 — Fiscal 2024 — Fiscal 2025 460,000 Fiscal 2026 — Thereafter — Total $ 460,000 Interest Expense, Net Interest expense, net, consisted of the following (amounts in thousands): Fiscal Year Ended January 1, 2022 January 2, 2021 December 28, 2019 Interest on loans $ 13,930 $ 18,950 $ 45,084 Amortization of debt issuance costs and debt discounts 2,511 2,452 2,542 Interest on finance leases 378 376 263 Other 66 32 51 Interest income ( 1,321 ) ( 1,767 ) ( 2,013 ) Interest expense, net $ 15,564 $ 20,043 $ 45,927 80 Table of Contents Debt Extinguishment and Modification Costs Debt extinguishment and modification costs consisted of the following (amounts in thousands): Fiscal Year Ended January 1, 2022 January 2, 2021 December 28, 2019 Write-off of debt issuance costs $ — $ 74 $ 4,110 Debt modification costs — 124 150 Write off of debt discounts — — 1,374 Debt extinguishment and modification costs $ — $ 198 $ 5,634 NOTE 7— Stockholders' Equity As of January 1, 2022, the total amount of the Company’s authorized capital stock consisted of 500,000,000 shares of common stock, par value $ 0.001 per share, and 50,000,000 shares of undesignated preferred stock, par value of $ 0.001 per share. Common Stock Holders of our common stock are entitled to one vote for each share held of record on all matters on which stockholders are entitled to vote generally, including the election or removal of directors. The holders of our common stock do not have cumulative voting rights in the election of directors. Preferred Stock We did not have any shares of preferred stock issued or outstanding as of January 1, 2022. Our Board of Directors has the authority to issue shares of preferred stock from time to time on terms it may determine, with respect to any series of preferred stock, the powers (including voting powers), preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions thereof as the board of directors may from time to time determine, which could affect the relative voting power or other rights of the holders of our common stock. The issuance of preferred stock could have the effect of decreasing the trading price of our common stock, restricting dividends on the common stock, diluting the voting power of our common stock, or subordinating the liquidation rights of the common stock. Dividend Rights Holders of our common stock are entitled to receive dividends when, as and if declared by our board of directors out of funds legally available therefor, subject to any statutory or contractual restrictions on the payment of dividends and to the rights of the holders or one or more outstanding series of our preferred stock. Initial Public Offering In June 2019, we completed an initial public offering ("IPO") of 19,765,625 shares of our common stock at a public offering price of $ 22.00 per share for net proceeds of $ 407.7 million, after deducting underwriting discounts and commissions of $ 27.1 million. We also incurred offering costs payable by us of $ 7.2 million. The shares of common stock sold in the IPO and the net proceeds from the IPO included the full exercise of the underwriters' option to purchase additional shares. Our Amended and Restated Certificate of Incorporation (the "Charter") became effective in connection with the completion of the IPO on June 24, 2019. The Charter, among other things, provided that all of our outstanding shares of nonvoting common stock were automatically converted into shares of voting common stock on a one-for-one basis and that our authorized capital stock consisted of 500,000,000 shares of common stock, and 50,000,000 shares of preferred stock, par value $ 0.001 per share. Our bylaws were also amended and restated as of June 24, 2019. Additionally, upon the closing of the IPO, we redeemed all of our outstanding preferred stock for an aggregate of $ 1.00 . On June 24, 2019, we used the net proceeds from the IPO to repay $ 150.0 million in principal on the outstanding term loan under our second lien credit agreement, dated as of October 22, 2018 (as amended, the "Second Lien Credit Agreement"), as well as accrued and unpaid interest as of that date of $ 3.6 million, and terminated the Second Lien Credit Agreement. In addition, using the remainder of net proceeds, together with excess cash on hand, we prepaid a portion of our outstanding senior secured term loan under our First Lien Credit Agreement (as defined below) totaling $ 248.0 million 81 Table of Contents plus accrued interest of $ 3.8 million. On October 23, 2019, we prepaid an additional $ 15.0 million of principal on the senior secured term loan under the First Lien Credit Agreement. Secondary Public Offerings On October 8, 2019, certain of our selling stockholders completed a secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of $ 1.1 million, which we recognized in selling, general and administrative expenses ("SG&A") for fiscal 2019, and received $ 3.2 million in cash (excluding withholding taxes) in connection with the exercise of 451,470 options by certain stockholders participating in this secondary public offering. On February 3, 2020, certain selling stockholders completed an additional secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred offering costs of $ 1.1 million, which we recognized in SG&A during fiscal 2020. We received $ 1.4 million in cash (excluding withholding taxes) in connection with the exercis e of 191,470 opti ons by certain stockholders participating in this secondary public offering. On April 27, 2020, certain of our selling stockholders completed another secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of $ 1.0 million which we recognized in SG&A during fiscal 2020. We received $ 1.6 million in cash (excluding withholding taxes) in connection with the exercise of 269,000 options by certain stockholders participating in this secondary public offering. On May 28, 2020, the stockholder affiliated with our former private equity sponsor, Hellman and Friedman LLC (the "H&F Investor"), distributed the remainder of its holdings representing 9.6 million shares of our common stock to its equity holders. We did not receive any proceeds or incur any material costs related to this distribution. Share Repurchase Program In November 2021, our Board of Directors approved a share repurchase program. This program, effective November 5, 2021 and without an expiration date, authorized us to repurchase up to $ 100.0 million of our outstanding common stock utilizing a variety of methods including open market purchases, accelerated share repurchase programs, privately negotiated transactions, structured repurchase transactions and under a Rule 10b5-1 plan (which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under securities laws). During the fiscal year ended January 1, 2022, we did not purchase any of our equity securities. As of January 1, 2022, we had $ 100.0 million of repurchase authority remaining under the share repurchase program. NOTE 8— Share-based Awards Share-based Incentive Plans The Globe Holding Corp. 2014 Stock Incentive Plan (the "2014 Plan") became effective on October 21, 2014. Under the 2014 Plan, we granted stock options and RSUs to purchase shares of our common stock. Effective as of June 19, 2019, we terminated the 2014 Plan and as a result no further equity awards may be issued under the 2014 Plan. Any outstanding awards granted under the 2014 Plan will remain subject to the terms of the 2014 Plan and the applicable equity award agreements. On June 4, 2019, our Board of Directors and stockholders approved the Grocery Outlet Holding Corp. 2019 Incentive Plan (the "2019 Plan"). A total of 4,597,862 shares of common stock were reserved for issuance under the 2019 Plan at that time. In addition, on the first day of each fiscal year beginning in fiscal 2020 and ending in fiscal 2029, the 2019 Plan provides for an annual automatic increase of the shares reserved for issuance in an amount equal to the positive difference between (i) 4 % of the "outstanding common stock" (as defined in the 2019 Plan) on the last day of the immediately preceding fiscal year and (ii) the plan share reserve on the last day of the immediately preceding fiscal year, or a lesser number as determined by our Board of Directors. As of January 1, 2022, there were a total of 6,048,252 shares of common stock reserved for issuance under the 2019 Plan, which includes 501,845 shares added effective January 3, 2021 per the above noted annual automatic increase. As of January 1, 2022, there were 3,330,247 remaining shares available for issuance of new equity awards under the 2019 Plan. Long-term incentive programs ("LTIPs") under the 2019 Plan consist of time-based RSUs and PSUs. RSUs granted under the LTIPs generally vest over one to three years . Half of the total PSUs granted under the LTIPs will vest upon the achievement of certain revenue-based performance targets ("Tranche I PSUs") and half will vest upon the achievement of certain adjusted EBITDA-based performance targets ("Tranche II PSUs") as determined by the Compensation Committee following the last day of a three-year performance period. The number of PSUs ultimately earned will equal the number of 82 Table of Contents Tranche I and Tranche II PSUs granted multiplied by the applicable percentage of actual revenue and adjusted-EBITDA performance target levels achieved, and can range from 0 % to 200 % of the number of PSUs granted. Fair Value Determination The fair value of stock option, RSU and PSU awards is determined as of the grant date. For time-based stock options, a Black-Scholes valuation model is utilized to estimate the fair value of the awards. For performance-based stock options, a Monte Carlo simulation approach implemented in a risk-neutral framework is utilized to estimate the fair value of the awards. For RSUs and PSUs, the closing price of our common stock as reported on the grant date is utilized to estimate the fair value of the awards. The respective valuation methods resulted in weighted-average grant date fair values for time-based stock options, performance-based stock options, RSUs, and PSUs granted during fiscal 2021, 2020 and 2019 as follows: Fiscal Year Ended January 1, 2022 January 2, 2021 December 28, 2019 Time-based stock options N/A N/A $ 7.61 Performance-based stock options N/A N/A $ 5.78 RSUs $ 28.70 $ 37.07 $ 27.13 PSUs $ 35.45 $ 36.90 N/A We did not award any time-based or performance-based stock options during fiscal 2021 and 2020. The grant date fair value of time-based stock options awarded during fiscal 2019 was estimated using the Black-Scholes valuation model with the following weighted-average assumptions: Exercise price $ 21.66 Volatility 30.2 % Risk-free interest rate 1.9 % Dividend yield — % Expected term (in years) 6.8 83 Table of Contents Grant Activity The following table summarizes stock option activity under all equity incentive plans during fiscal 2021, 2020 and 2019: Time-Based Stock Options Performance-Based Stock Options Number of Options Weighted-Average Exercise Price Number of Options Weighted-Average Exercise Price Options outstanding as of December 29, 2018 5,798,375 $ 7.53 5,795,330 $ 4.40 Granted 1,363,822 21.66 99,788 17.29 Exercised ( 817,051 ) 7.21 — — Forfeitures ( 101,479 ) 12.72 ( 117,997 ) 7.15 Options outstanding as of December 28, 2019 6,243,667 $ 10.57 5,777,121 $ 4.57 Granted — — — — Exercised ( 2,326,219 ) 7.29 ( 3,438,470 ) 4.55 Forfeitures ( 52,676 ) 20.63 ( 13,071 ) 16.47 Options outstanding as of January 2, 2021 3,864,772 $ 12.42 2,325,580 $ 4.54 Granted — — — — Exercised ( 538,307 ) 7.77 ( 629,386 ) 4.41 Forfeitures ( 191,324 ) 19.77 — — Options outstanding as of January 1, 2022 3,135,141 $ 12.77 1,696,194 $ 4.58 Options vested and exercisable as of January 1, 2022 1,896,260 $ 7.59 1,696,194 $ 4.58 The total intrinsic value of time-based stock options exercised w as $ 15.5 million, $ 68.7 million and $ 20.8 million for fiscal 2021, 2020 and 2019, respectively . Intrin sic value represents the difference between the current fair value of the underlying stock and the exercise price of the stock option. The following table summarizes RSU activity under all equity incentive plans during fiscal 2021, 2020 and 2019: Number of Shares Weighted-Average Grant Date Fair Value Unvested balance as of December 29, 2018 80,820 $ 8.80 Granted 195,135 27.13 Vested ( 76,841 ) 18.06 Forfeitures ( 8,242 ) 30.03 Unvested balance as of December 28, 2019 190,872 $ 22.89 Granted 277,496 37.07 Vested ( 115,030 ) 19.74 Forfeitures ( 11,496 ) 31.78 Unvested balance as of January 2, 2021 341,842 $ 35.16 Granted 669,546 28.70 Vested ( 110,956 ) 34.64 Forfeitures ( 63,936 ) 34.05 Unvested balance as of January 1, 2022 836,496 $ 30.14 84 Table of Contents The following table summarizes PSU activity under the 2019 Plan during fiscal 2021 and 2020: Number of Shares Weighted-Average Grant Date Fair Value Unvested balance as of December 28, 2019 — $ — Granted (1) 272,640 36.90 Adjustment for expected performance achievement (2) 135,821 36.90 Vested — — Forfeitures ( 999 ) 36.88 Unvested balance as of January 2, 2021 407,462 $ 36.90 Granted (1) 319,606 35.45 Adjustment for expected performance achievement (2) ( 91,332 ) 35.45 Vested — — Forfeitures ( 59,011 ) 36.52 Unvested balance as of January 1, 2022 (3) 576,725 $ 36.36 _______________________ (1) Represents initial grant of PSUs based on performance target level achievement of 100 %. (2) Represents the adjustment to previously granted PSUs based on performance expectations as of the end of each respective reporting period. (3) An additional 516,976 PSUs could potentially be included if the maximum performance level of 200 % is reached for all PSUs outstanding as of January 1, 2022. Share-Based Compensation Expense We recognize compensation expense for stock options, RSUs, and PSUs by amortizing the grant date fair value on a straight-line basis over the expected vesting period to the extent we determine the vesting of the grant is probable. Share-based compensation expense consisted of the following (amounts in thousands): Fiscal Year Ended January 1, 2022 January 2, 2021 December 28, 2019 Time-based stock options $ 2,030 $ 2,941 $ 25,740 Performance-based stock options — 26,079 — RSUs 8,488 4,978 2,054 PSUs 6,911 3,652 — Dividends (1) 186 434 3,645 Share-based compensation expense $ 17,615 $ 38,084 $ 31,439 _______________________ (1) Represents cash dividends paid upon vesting of share-based awards as a result of dividends declared in connection with recapitalizations that occurred in fiscal 2018 and 2016. Share-based compensation expense qualifying for capitalization was insignificant for each of the fiscal years ended January 1, 2022, January 2, 2021 and December 28, 2019. Accordingly, no share-based compensation expense was capitalized during these years. 85 Table of Contents Time-Based Stock Options We did not record compensation expense for time-based stock option grants prior to the closing of our IPO in June of fiscal 2019 because such time-based options were subject to a post-termination repurchase right by us until certain contingent events such as involuntary termination, a change in control, or an initial public offering occurred, and such contingent events were not deemed probable during fiscal 2018 or any other fiscal period prior to our IPO. As a result of this repurchase right feature, other than in limited circumstances, stock issued upon the exercise of these options could be repurchased at our discretion at the lower of fair value or the applicable exercise price. The repurchase right feature lapsed upon the closing of our IPO on June 24, 2019 (the "IPO closing date"). Subsequent to the IPO closing date, we recognized share-based compensation expense for prior service completed as of the IPO closing date and began recognizing the remaining unamortized share-based compensation expense related to these outstanding time-based stock options over the remaining service period. Unamortized compensation cost related to unvested time-based options was $ 3.4 million as of January 1, 2022, $ 3.1 million of which related to time-based stock options granted at the time of our IPO. The $ 3.4 million of unamortized compensation cost is expected to be amortized over a weighted average period of approximately 1.5 years. Performance-Based Stock Options We did not record compensation expense for performance-based stock options during the fiscal year ended December 28, 2019 because the performance criteria of such awards had not been achieved and the ultimate vesting of the awards was not considered probable as of such dates. On February 3, 2020 and April 27, 2020, certain selling stockholders completed secondary public offerings of shares of our common stock. In conjunction with these secondary offerings, certain performance criteria were achieved resulting in the vesting of 4.1 million and 1.7 million performance-based stock options, respectively, and the recognition of $ 18.5 million and $ 7.6 million, respectively, of share-based compensation expense associated with the vesting of these performance-based stock options. As of January 2, 2021, all outstanding performance-based stock options were fully vested and fully expensed and, as such, we did not record compensation expense for performance-based stock options during the fiscal year ended January 1, 2022. Time-Based RSUs Unamortized compensation expense for RSUs was $ 16.9 million as of January 1, 2022, which is expected to be amortized over a weighted average period of approximately 1.6 years. Performance-Based RSUs There was no share-based compensation expense for PSUs held by employees recognized for the fiscal year ended December 28, 2019 as PSUs only began being granted during fiscal 2020. Unamortized compensation cost related to the expected level of achievement of unvested PSUs was $ 10.4 million as of January 1, 2022, which is expected to be amortized over a weighted average period of approximately 1.5 years. Dividends For time-based stock options and RSUs that were outstanding on the dividend date of October 22, 2018 and that are expected to vest in fiscal year 2022 and beyond, we intend to make dividend payments as these time-based stock options and RSUs vest. Pursuant to the 2014 Plan, if we are unable to make those payments, we may instead elect to reduce the per share exercise price of each such time-based stock option by an amount equal to the dividend amount in lieu of making the applicable dividend payme nt. As such, our dividends are not considered declared and payable and are not accrued as a liability in our consolidated balance sheet as of January 1, 2022. We paid $ 0.2 million, $ 0.4 million and $ 3.6 million of d ividends during the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively, which were included in share-based compensation expense. Unamortized compensation cost related to future dividend payments on unvested time-based stock options and RSU share-based awards was approximately $ 0.2 million as of January 1, 2022. 86 Table of Contents NOTE 9— Retirement Plans We make payments into the UFCW—Northern California Employers Joint Pension Trust Fund (the "Pension Fund") and the UFCW—Benefits Trust Fund ("Benefits Fund"), multiemployer pension and welfare trusts, established for the benefit of union employees at two company operated stores under the terms of a collective bargaining agreement. We currently operate under a collective bargaining agreement that expires on September 6, 2022. Minimum contributions outside of the agreed upon contractual rates are not required for the Pension Fund. Payments into the Pens ion Fund we re $ 0.6 million, $ 0.6 million, and $ 0.4 million for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively. We paid no surcharges to the Pension Fund. The risks of participating in a multiemployer pension plan are different from single-employer pension plans in the following aspects: a. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. b. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. c. If we stop participating in its multiemployer pension plan, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. The following information represents our participation in the plan for the annual period ended December 31, 2020, the latest available information from the Pension Fund. All such information is based on information we received from the plan. The Pension Fund's Employer Identification Number and Plan Number is 946313554-001. Contributions represented less than 5 % of the total contributions to the Pension Fund. Under the provisions of the Pension Protection Act (PPA) zone status, the Fund was in critical status during the plan year. Among other factors, generally, plans in critical status are less than 65 percent funded. In an effort to improve the Plan's funding situation, the trustees adopted a rehabilitation plan on July 8, 2010. The rehabilitation plan changes the benefits for participants who retire and commence a pension on or after January 1, 2012, and changes future benefit accruals earned on or after January 1, 2012. Except in limited circumstances, the pensions of participants and beneficiaries whose pension effective date is before January 1, 2012, are not affected. The Benefits Fund provides medical, dental, pharmacy, vision, and other ancillary benefits to active employees and retirees. The majority of our contributions cover active employees and as such, may not constitute contributions to a postretirement benefit plan. However, we are unable to separate contribution amounts to the postretirement benefit part of the plan from contribution amounts paid to the active employee part of the plan. Payments into the Benefits Fund were $ 1.4 million, $ 1.4 million, and $ 1.2 million for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively. For our nonunion employees, we offer the following plans: a. A defined contribution retirement plan for warehouse employees, which requires an annual contribution of 15 % of eligible salaries. This defined contribution retirement plan is available to nonunion employees who meet certain service criteria. b. A noncontributory profit-sharing plan for administrative personnel under which the Board of Directors may authorize an annual contribution of up to 15 % of eligible salaries. This profit-sharing plan is available to nonunion employees who meet certain service criteria. We expensed $ 1.5 million, $ 6.1 million and $ 4.4 million for contributions to the two plans described above in (a) and (b) for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively. c. A 401(k) retirement plan for warehouse employees, which is available to those employees who meet certain service criteria d. A 401(k) retirement plan for administrative personnel, which is available to those employees who meet certain service criteria. e. We are not obligated to match any employee contributions for the 401(k) retirement plans. However, for certain employees who meet certain service criteria, we have a 401(k) retirement plan under which we will match employee contributions at a rate of 35 % of each participating employee's contributions, not to exceed 6 % of wages. We expensed an insignificant amount for contributions to this plan for each of the fiscal years ending January 1, 2022, January 2, 2021, and December 28, 2019, respectively. 87 Table of Contents NOTE 10— Income Taxes Components of income tax expense (benefit) Income before income taxes consisted entirely of income from domestic operations of $ 77.5 million, $ 87.1 million, and $ 16.8 million for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively. The components of income tax expense (benefit) consisted of the following (amounts in thousands): Fiscal Year Ended January 1, 2022 January 2, 2021 December 28, 2019 Current: Federal $ — $ ( 285 ) $ 52 State 2,247 284 439 Total current 2,247 ( 1 ) 491 Deferred: Federal 10,838 ( 14,682 ) 247 State 2,106 ( 4,896 ) 625 Total deferred 12,944 ( 19,578 ) 872 Income tax expense (benefit) $ 15,191 $ ( 19,579 ) $ 1,363 Statutory rate reconciliation A reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate is as follows: Fiscal Year Ended January 1, 2022 January 2, 2021 December 28, 2019 Taxes at federal statutory rates 21.0 % 21.0 % 21.0 % State income taxes net of federal benefit 4.7 % ( 4.2 ) % 5.2 % Excess federal tax benefits from exercise and vest of share-based awards ( 8.2 ) % ( 40.3 ) % ( 21.4 ) % Return to provision 1.9 % — % — % Other 0.2 % 1.0 % 3.3 % Effective income tax rate 19.6 % ( 22.5 ) % 8.1 % 88 Table of Contents Deferred income taxes Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities were as follows (amounts in thousands): January 1, 2022 January 2, 2021 Deferred tax assets: Accrued compensation $ 1,274 $ 6,362 Share-based compensation expense 10,903 8,891 Inventory 5,135 4,594 Transaction costs 964 1,152 Lease liability obligation 279,541 258,093 Net operating loss and other carryforwards 52,951 58,596 Reserves and allowances 4,446 3,092 Other 4,510 4,194 Total deferred tax assets 359,724 344,974 Deferred tax liabilities: Prepaid expenses ( 1,391 ) ( 1,096 ) Depreciation and amortization ( 71,114 ) ( 64,814 ) Intangible assets ( 7,142 ) ( 7,802 ) Right-of-use assets ( 249,545 ) ( 234,022 ) Goodwill ( 37,976 ) ( 32,691 ) Debt transaction costs ( 1,972 ) ( 1,020 ) Total deferred tax liabilities ( 369,140 ) ( 341,445 ) Net deferred tax assets (liabilities) $ ( 9,416 ) $ 3,529 We have net operating loss carryforwards of $ 220.2 million for federal income tax purposes, of which $ 77.0 million expires beginning in 2032 and $ 143.2 million carries forward indefinitely. There are also net operating loss carryforwards of $ 72.4 million for state income tax purposes, which begin to expire in 2029. Certain tax attributes, which begin to expire in 2031, are subject to an annual limitation as a result of our acquisition of GOBP Holdings, our wholly owned subsidiary, which constitutes a change in ownership as defined under Internal Revenue Code Section 382. Based on our analysis, our projected net operating losses to be utilized in future years will not be affected by this annual limitation. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of the existing deferred tax assets. A significant piece of objective positive evidence was the cumulative income incurred over the three-year period ended January 1, 2022. Based on our current assessment, we anticipate it is more likely than not that we will generate sufficient taxable income to realize all of our material deferred tax assets. As such we did not record a valuation allowance against these material deferred tax assets as of January 1, 2022. Our policy is to recognize interest and penalties associated with uncertain tax positions as part of the income tax provision and include accrued interest and penalties with the related income tax liability on our consolidated balance sheets. To date, we have not recognized any interest and penalties in our condensed consolidated statements of operations and comprehensive income, nor have we accrued for or made payments for interest and penalties. We had no uncertain tax positions as of January 1, 2022 and January 2, 2021, respectively, and do not anticipate any changes to our uncertain tax positions within the next 12 months. We are subject to taxation in the United States and various state jurisdictions. As of January 1, 2022, our tax returns remain open to examination by the tax authorities for tax years 2011 to 2021 for U.S. federal and for various state jurisdictions. 89 Table of Contents NOTE 11— Related Party Transactions Related Party Lease s As of January 1, 2022 and January 2, 2021, we leased 15 store locations and one warehouse location from entities in which Eric Lindberg, Jr., Chief Executive Officer, and MacGregor Read, Jr., Vice Chairman of our Board of Directors, or their respective families, had a direct or indirect material interest . As of January 1, 2022, the right-of-use assets and lease liabilities related to these properties was $ 36.9 million and $ 41.6 million, respectively. As of January 2, 2021, the right-of-use assets and lease liabilities related to these properties was $ 39.8 million and $ 44.3 million, respectively. Affiliated entities received aggregate lease payments from us of $ 6.1 million, $ 6.0 million, and $ 6.1 million for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively. Independent Operator Notes and Independent Operator Receivables We offer interest-bearing notes to IOs and the gross amount of IO operating notes and IO receivables due was $ 40.6 million and $ 41.0 million as of January 1, 2022 and January 2, 2021, respectively. See NOTE 2—Independent Operator Notes and Independent Operator Receivables, for additional information. NOTE 12— Commitments and Contingencies We are involved from time to time in claims, proceedings, and litigation arising in the normal course of business. Management believes that we do not have any pending litigation that, separately or in the aggregate, would have a material adverse effect on our results of operations, financial condition or cash flows . NOTE 13— Earnings Per Share The following table sets forth the calculation of basic and diluted earnings per share (amounts in thousands, except per share data): Fiscal Year Ended January 1, 2022 January 2, 2021 December 28, 2019 Numerator Net income and comprehensive income $ 62,310 $ 106,713 $ 15,419 Denominator Weighted-average shares outstanding - basic 95,725 91,818 79,044 Effect of dilutive options 3,564 6,538 2,777 Effect of dilutive RSUs 129 96 42 Weighted-average shares outstanding - diluted (1) (2) 99,418 98,452 81,863 Earnings per share: Basic $ 0.65 $ 1.16 $ 0.20 Diluted $ 0.63 $ 1.08 $ 0.19 _______________________ (1) The diluted weighted-average shares outstanding for the fiscal year ended December 28, 2019 did not include performance-based stock options because the requisite performance criteria of such stock options had not been achieved as of that date. On February 3, 2020, in conjunction with a secondary offering, certain performance criteria were achieved resulting in the vesting of 4.1 million performance-based stock options, and accordingly, these vested performance-based stock options are included in the diluted weighted-average shares outstanding for fiscal year 2020. On April 27, 2020 in conjunction with an additional secondary offering, certain performance criteria were achieved resulting in the vesting of the remaining 1.7 million unvested performance-based stock options, and accordingly, these vested performance-based stock options are included in the diluted weighted-average shares outstanding for fiscal year 2020. See NOTE 8—Share-based Awards, for additional information. (2) We are required to include in diluted weighted-average shares outstanding contingently issuable shares that would be issued assuming the end of our reporting period was the end of the relevant PSU award contingency period. No PSUs were included in diluted weighted-average shares outstanding for fiscal years 2021 and 2020. 90 Table of Contents The following weighted-average common share equivalents were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive (amounts in thousands): Fiscal Year Ended January 1, 2022 January 2, 2021 December 28, 2019 RSUs 11 3,239 50 Time-based stock options — — 682 Total 11 3,239 732 91 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 92 Table of Contents