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 ) 63 Consolidated Balance Sheets 65 Consolidated Statements of Operations and Comprehensive Income 66 Consolidated Statements of Stockholders' Equity 67 Consolidated Statements of Cash Flows 68 Notes to Consolidated Financial Statements 69 62 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 December 31, 2022 and January 1, 2022, the related consolidated statements of operations and comprehensive income, stockholders' equity, and cash flows, for each of the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, 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 December 31, 2022 and January 1, 2022, and the results of its operations and its cash flows for each of the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, 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 December 31, 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 1, 2023 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 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 Note 1, 3, and 4 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 December 31, 2022 are $560.7 million and $902.2 million, respectively. The Company's impairment analysis consists of (1) identifying stores with 63 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 December 31, 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 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 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 determining undiscounted cash flows. /s/ DELOITTE & TOUCHE LLP San Francisco, California March 1, 2023 We have served as the Company's auditor since 2007. 64 Table of Contents GROCERY OUTLET HOLDING CORP. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) December 31, 2022 January 1, 2022 Assets Current assets: Cash and cash equivalents $ 102,728 $ 140,085 Independent operator receivables and current portion of independent operator notes, net of allowance $ 2,238 and $ 1,406 10,805 7,219 Other accounts receivable, net of allowance $ 7 and $ 57 4,368 3,159 Merchandise inventories 334,319 275,502 Prepaid expenses and other current assets 15,137 16,780 Total current assets 467,357 442,745 Independent operator notes, net of allowance $ 12,509 and $ 10,506 22,535 21,516 Property and equipment, net 560,746 499,387 Operating lease right-of-use assets 902,163 898,152 Intangible assets, net 63,993 51,921 Goodwill 747,943 747,943 Other assets 7,667 8,144 Total assets $ 2,772,404 $ 2,669,808 Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable $ 137,631 $ 122,110 Accrued and other current liabilities 53,213 49,025 Accrued compensation 27,194 8,450 Current lease liabilities 54,586 51,136 Income and other taxes payable 7,890 7,185 Total current liabilities 280,514 237,906 Long-term debt, net 379,650 451,468 Deferred income tax liabilities, net 19,782 9,416 Long-term lease liabilities 980,759 961,746 Other long-term liabilities 1,485 — Total liabilities 1,662,190 1,660,536 Commitments and contingencies (NOTE 12) Stockholders' equity: Common stock, par value $ 0.001 per share, 500,000,000 shares authorized; 97,674,356 and 96,144,433 shares issued and outstanding, respectively 98 96 Series A Preferred stock, par value $ 0.001 per share, 50,000,000 shares authorized; no shares issued and outstanding — — Additional paid-in capital 847,589 811,701 Retained earnings 262,527 197,475 Total stockholders' equity 1,110,214 1,009,272 Total liabilities and stockholders' equity $ 2,772,404 $ 2,669,808 See Notes to Consolidated Financial Statements 65 Table of Contents GROCERY OUTLET HOLDING CORP. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in thousands, except per share data) Fiscal Year Ended December 31, 2022 January 1, 2022 January 2, 2021 Net sales $ 3,578,101 $ 3,079,582 $ 3,134,640 Cost of sales 2,486,002 2,130,796 2,161,293 Gross profit 1,092,099 948,786 973,347 Operating expenses: Selling, general and administrative 889,347 773,718 772,409 Depreciation and amortization 75,206 68,358 55,479 Share-based compensation 32,556 17,615 38,084 Total operating expenses 997,109 859,691 865,972 Income from operations 94,990 89,095 107,375 Other expenses (income): Interest expense, net 17,967 15,564 20,043 Gain on insurance recoveries — ( 3,970 ) — Loss on debt extinguishment and modification 1,274 — 198 Total other expenses (income) 19,241 11,594 20,241 Income before income taxes 75,749 77,501 87,134 Income tax expense (benefit) 10,697 15,191 ( 19,579 ) Net income and comprehensive income $ 65,052 $ 62,310 $ 106,713 Basic earnings per share $ 0.67 $ 0.65 $ 1.16 Diluted earnings per share $ 0.65 $ 0.63 $ 1.08 Weighted average shares outstanding: Basic 96,812 95,725 91,818 Diluted 100,162 99,418 98,452 See Notes to Consolidated Financial Statements 66 Table of Contents GROCERY OUTLET HOLDING CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share amounts) Common Stock Additional Paid-In Capital Retained Earnings Stockholders' Equity Shares Amount 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 Exercise and vesting of share-based awards 1,669,641 2 6,888 — 6,890 Share-based compensation expense — — 32,556 — 32,556 Repurchase of common stock ( 139,718 ) — ( 3,451 ) — ( 3,451 ) Dividends paid — — ( 105 ) — ( 105 ) Net income and comprehensive income — — — 65,052 65,052 Balance at December 31, 2022 97,674,356 $ 98 $ 847,589 $ 262,527 $ 1,110,214 See Notes to Consolidated Financial Statements 67 Table of Contents GROCERY OUTLET HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Fiscal Year Ended December 31, 2022 January 1, 2022 January 2, 2021 Cash flows from operating activities: Net income $ 65,052 $ 62,310 $ 106,713 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 70,451 63,442 50,749 Amortization of intangible and other assets 7,800 7,682 7,302 Amortization of debt issuance costs and debt discounts 2,264 2,511 2,452 Non-cash rent 6,932 10,753 10,673 Gain on insurance recoveries — ( 3,970 ) — Loss on debt extinguishment and modification 1,274 — 198 Share-based compensation 32,556 17,615 38,084 Provision for (write-off of) accounts receivable reserves 4,318 4,813 ( 456 ) Proceeds from insurance recoveries - business interruption and inventory — 2,103 479 Deferred income taxes 10,367 12,944 ( 19,578 ) Other 1,176 1,251 1,954 Changes in operating assets and liabilities: Independent operator and other accounts receivable ( 7,230 ) ( 21 ) ( 4,943 ) Merchandise inventories ( 58,817 ) ( 30,345 ) ( 25,737 ) Prepaid expenses and other assets 841 3,301 ( 6,628 ) Income and other taxes payable 705 ( 362 ) 2,906 Trade accounts payable, accrued compensation and other liabilities 35,094 3,179 4,778 Operating lease liabilities 12,728 8,381 12,291 Net cash provided by operating activities 185,511 165,587 181,237 Cash flows from investing activities: Advances to independent operators ( 9,819 ) ( 10,024 ) ( 10,372 ) Repayments of advances from independent operators 6,917 4,563 6,793 Purchases of property and equipment ( 130,482 ) ( 123,384 ) ( 124,920 ) Proceeds from sales of assets 39 37 269 Investments in intangible assets and licenses ( 16,586 ) ( 9,772 ) ( 5,861 ) Proceeds from insurance recoveries - property and equipment — 1,867 305 Net cash used in investing activities ( 149,931 ) ( 136,713 ) ( 133,786 ) Cash flows from financing activities: Proceeds from exercise of stock options 6,890 7,226 32,604 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 ) Principal payments on senior term loan ( 75,000 ) — ( 188 ) Principal payments on other borrowings ( 1,271 ) ( 1,155 ) ( 1,024 ) Repurchase of common stock ( 3,451 ) — — Dividends paid ( 105 ) ( 186 ) ( 434 ) Debt issuance costs paid — — ( 701 ) Net cash provided by (used in) financing activities ( 72,937 ) 5,885 29,774 Net increase (decrease) in cash and cash equivalents ( 37,357 ) 34,759 77,225 Cash and cash equivalents at beginning of period 140,085 105,326 28,101 Cash and cash equivalents at end of period $ 102,728 $ 140,085 $ 105,326 Supplemental disclosure of cash flow information: Cash paid for interest $ 19,142 $ 14,604 $ 20,311 Income taxes paid (refunded) in cash $ ( 1,721 ) $ 477 $ 5,186 Property and equipment accrued at end of period $ 18,536 $ 14,986 $ 15,604 Intangible assets accrued at end of period $ 3,736 $ 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 68 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 December 31, 2022, we had 441 stores throughout California, Washington, Oregon, Pennsylvania, Idaho, Nevada, Maryland 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 December 31, 2022 ("fiscal 2022") and January 1, 2022 ("fiscal 2021") 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 United States ("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. Beginning in the fourth quarter of fiscal 2022, non-cash rent previously included within changes in operating lease assets and liabilities, net is now separately presented in our consolidated statements of cash flows. Prior period amounts have been reclassified to conform to the current period presentation. The reclassification of this item had no impact on net income, earnings per share, or retained earnings in the current or prior periods. 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. We consider our accounting policy relating to long-lived asset impairment to be a significant accounting policy that involves management estimate and judgment. Segment Reporting — We manage our business as one operating segment. In addition, all of our sales were made to customers located in the U.S. and all property and equipment is located in the U.S. 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 that 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 December 31, 2022, January 1, 2022 and January 2, 2021. No single customer or IO represented more than 10% of accounts receivable or notes receivable as of December 31, 2022 and January 1, 2022. 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. 69 Table of Contents 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 19 years. 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 December 31, 2022 were $ 560.7 million and $ 902.2 million, respectively, and 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 2022, 2021 and 2020 . See NOTE 3—Property and Equipment and NOTE 4—Leases 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 in our consolidated balance sheets. Finance leases are included in other assets, current lease liabilities, and long-term lease liabilities in 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 December 31, 2022, January 1, 2022 and January 2, 2021. There were no changes in the carrying amount of goodwill for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021. 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 70 Table of Contents 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 December 31, 2022, January 1, 2022 and January 2, 2021. 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 or non-recurring basis as of December 31, 2022 or January 1, 2022. Generally, assets are recorded at fair value on a non-recurring 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 December 31, 2022 or January 1, 2022. 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): December 31, 2022 January 1, 2022 Carrying Amount (1) Estimated Fair Value (2) Carrying Amount (1) Estimated Fair Value (2) Financial Liabilities: Senior term loan (Level 2) $ 379,650 $ 383,075 $ 451,468 $ 457,700 _______________________ (1) The carrying amounts as of December 31, 2022 and January 1, 2022 are net of unamortized debt discounts of $ 0.6 million and $ 1.0 million, respectively, and debt issuance costs of $ 4.7 million and $ 7.5 million, respectively. (2) The estimated fair value of our senior term loan was determined based on the average quoted bid-ask prices for the senior term loan in an over-the-counter market on the last trading day of fiscal 2022 and 2021. 71 Table of Contents 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 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 net sales as the products are sold. Discounts provided by IOs are not recognized as a reduction in net 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 material performance obligations other than our gift card deferred revenue liability, or any material costs to obtain or fulfill a contract as of December 31, 2022 and January 1, 2022. 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 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 December 31, 2022 and January 1, 2022. Breakage amounts were $ 0.3 million, $ 0.3 million and $ 0.2 million for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively. Disaggregated Revenues — The following table presents net sales revenue by type of product for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 (amounts in thousands): December 31, 2022 January 1, 2022 January 2, 2021 Perishable (1) $ 1,272,200 $ 1,067,198 $ 1,054,506 Non-perishable (2) 2,305,901 2,012,384 2,080,134 Total net sales (3) $ 3,578,101 $ 3,079,582 $ 3,134,640 _______________________ (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 December 31, 2022 and January 1, 2022 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, 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 $ 34.6 million, $ 32.6 million and $ 25.9 million, respectively, in the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021. Share-based Awards — 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. 72 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 (for stock options) or vested (for RSUs or PSUs). Until such award is exercised or vested 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 $ 14.0 million as of December 31, 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 during our fiscal year ended December 31, 2022, the difference between the grant date fair value and the exercise or vest date intrinsic value totaled $ 33.3 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 December 31, 2022 and January 1, 2022. Significant items comprising our future tax benefits and liabilities (deferred tax assets and liabilities) include lease liability obligations, right-of-use assets, depreciation and amortization, net operating losses and other carryforwards, goodwill and share-based compensation expense. 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 Accounting Standards Codification ("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 438 , 411 and 375 stores operated by IOs as of December 31, 2022, January 1, 2022 and January 2, 2021, 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 selects 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. The IO is 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 $ 3.5 billion, $ 3.0 billion, and $ 3.1 billion for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively. We, in turn, pay each IO 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 are expensed and included in SG&A. IO commissions were $ 533.1 million, $ 463.8 million, and $ 469.3 million for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively. IO commissions of $ 6.2 million and $ 9.1 million were included in accrued and other current liabilities as of December 31, 2022 and January 1, 2022, respectively. 73 Table of Contents An IO may fund its 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 Agreement grants us the security interests in the assets owned by each IO 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, each IO is a VIE that we have a variable interest in. To determine if we are the primary beneficiary of a VIE, 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 the IO's 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 its 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 Agreement illustrate the lack of ultimate control over the IO. Therefore, the Company is not the primary beneficiary of these VIEs. Our maximum exposure, in accordance with ASC Topic 810, to the IOs is generally limited to the IO notes and IO receivables due from these entities, which was $ 48.1 million and $ 40.6 million as of December 31, 2022 and January 1, 2022, 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, as well as dilutive PSUs, and is determined using the treasury stock method. Recently Adopted Accounting Standards No recently adopted accounting pronouncements had a material effect on our consolidated financial statements. Recently Issued Accounting Pronouncements Accounting Standards Update ("ASU") No. 2022-02 — In March 2022, the Financial Accounting Standards Board issued ASU No. 2022-02, Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"). ASU 2022-02 eliminates the accounting guidance on troubled debt restructurings for creditors in ASC Topic 310 and amends the guidance on "vintage disclosures" to require disclosure of current-period gross write-offs by year of origination. ASU 2022-02 also updates the requirements related to accounting for credit losses under ASC Topic 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We will adopt ASU 2022-02 beginning in the first quarter of fiscal 2023. We do not expect the adoption of ASU 2022-02 to have a material impact 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, which are payable on demand and have no maturity date, 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 consolidated balance sheets and was $ 0.9 million and $ 0.5 million as of December 31, 2022 and January 1, 2022, respectively. There were no IO notes that were past due or on a non-accrual status due to delinquency as of December 31, 2022 or January 1, 2022. Notes and receivables from our IOs 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 IO 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 74 Table of Contents 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 December 31, 2022 and January 1, 2022 consisted of the following (amounts in thousands) : Allowance Current Portion Long-term Portion Gross Current Portion Long-term Portion Net December 31, 2022 Independent operator notes $ 37,522 $ ( 700 ) $ ( 12,509 ) $ 24,313 $ 1,778 $ 22,535 Independent operator receivables 10,565 ( 1,538 ) — 9,027 9,027 — Total $ 48,087 $ ( 2,238 ) $ ( 12,509 ) $ 33,340 $ 10,805 $ 22,535 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 75 Table of Contents A summary of activity in the IO notes and IO receivables allowance was as follows (amounts in thousands): Fiscal Year Ended December 31, 2022 January 1, 2022 January 2, 2021 Beginning balance $ 11,912 $ 8,109 $ 10,371 Provision for (write-off of) IO notes and IO receivables reserves 4,160 4,790 ( 473 ) Cumulative effect of accounting change — — ( 439 ) Write-off of uncollectible IO notes and IO receivables ( 1,325 ) ( 987 ) ( 1,350 ) Ending balance $ 14,747 $ 11,912 $ 8,109 The following table presents the amortized cost basis of IO notes by year of origination and credit quality indicator as of December 31, 2022 (amounts in thousands): Credit Quality Indicator 2022 2021 2020 2019 2018 Prior Total TCAP $ 4,881 $ 4,254 $ 2,768 $ 580 $ 594 $ 492 $ 13,569 Non-TCAP 5,081 3,455 3,100 2,183 1,194 970 15,983 New store 5,715 2,114 141 — — — 7,970 Total $ 15,677 $ 9,823 $ 6,009 $ 2,763 $ 1,788 $ 1,462 $ 37,522 NOTE 3— Property and Equipment Property and equipment as of December 31, 2022 and January 1, 2022 consisted of the following (amounts in thousands): Property and Equipment, At Cost Accumulated Depreciation and Amortization Property and Equipment, Net December 31, 2022 Leasehold improvements $ 392,448 $ ( 117,745 ) $ 274,703 Fixtures and equipment 457,383 ( 206,932 ) 250,451 Other 376 ( 309 ) 67 Construction in progress 35,525 — 35,525 Totals $ 885,732 $ ( 324,986 ) $ 560,746 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 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. 76 Table of Contents Depreciation expense on property and equipment for fiscal 2022, 2021 and 2020 was as follows (amounts in thousands): Fiscal Year Ended Consolidated Statements of Operations and Comprehensive Income Location December 31, 2022 January 1, 2022 January 2, 2021 Cost of sales $ 1,711 $ 1,486 $ 1,299 Operating expenses 68,740 61,956 49,450 Total depreciation expense on property and equipment $ 70,451 $ 63,442 $ 50,749 NOTE 4— Leases Leases for 15 of our store locations and one warehouse location were controlled by related parties as of December 31, 2022 and January 1, 2022. See NOTE 11—Related Party Transactions, for additional information. As of December 31, 2022, we had executed leases for 43 store locations that we had not yet taken possession of with total undiscounted future lease payments of $ 224.7 million and lease terms through 2041. 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 December 31, 2022 totaling $ 4.2 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 December 31, 2022 January 1, 2022 Assets: Operating lease assets Operating right-of-use assets $ 902,163 $ 898,152 Finance lease assets Other assets 5,771 6,896 Total lease assets $ 907,934 $ 905,048 Liabilities: Current Operating Current lease liabilities $ 53,316 $ 49,861 Finance Current lease liabilities 1,270 1,275 Noncurrent Operating Long-term lease liabilities 976,345 956,104 Finance Long-term lease liabilities 4,414 5,642 Total lease liabilities $ 1,035,345 $ 1,012,882 77 Table of Contents The components of lease expense were as follows (amounts in thousands): Fiscal Year Ended Lease Cost Classification (1) December 31, 2022 January 1, 2022 January 2, 2021 Operating lease cost Selling, general and administrative expenses $ 132,065 $ 123,799 $ 112,096 Finance lease cost: Amortization of right-of-use assets Depreciation and amortization 1,316 1,249 964 Interest on leased liabilities Interest expense, net 341 378 376 Variable lease cost Selling, general and administrative expenses 740 547 700 Sublease income Selling, general and administrative expenses ( 868 ) ( 1,114 ) ( 972 ) Net lease cost $ 133,594 $ 124,859 $ 113,164 _______________________ (1) Certain supply chain related lease costs herein are included in cost of sales. Maturities of lease liabilities as of December 31, 2022 were as follows (amounts in thousands): Operating Leases Finance Leases Total Fiscal 2023 $ 117,218 $ 1,533 $ 118,751 Fiscal 2024 135,185 1,451 136,636 Fiscal 2025 133,819 1,207 135,026 Fiscal 2026 133,233 839 134,072 Fiscal 2027 128,754 545 129,299 Thereafter 800,091 941 801,032 Total lease payments 1,448,300 6,516 $ 1,454,816 Less: Imputed interest ( 418,639 ) ( 832 ) Present value of lease liabilities $ 1,029,661 $ 5,684 The weighted-average lease terms and discount rates of operating and finance leases were as follows: December 31, 2022 January 1, 2022 Weighted-average remaining lease term: Operating leases 11.0 years 11.6 years Finance leases 5.1 years 5.8 years Weighted-average discount rate: Operating leases 6.36 % 6.46 % Finance leases 5.31 % 5.36 % 78 Table of Contents Supplemental cash flow information related to leases was as follows (amounts in thousands): Fiscal Year Ended December 31, 2022 January 1, 2022 January 2, 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 125,221 $ 113,886 $ 101,245 Operating cash flows from finance leases $ 332 $ 378 $ 378 Finance cash flows from finance leases $ 1,279 $ 1,155 $ 821 Leased assets obtained in exchange for new operating lease liabilities $ 88,681 $ 139,663 $ 166,018 Leased assets obtained in exchange for new finance lease liabilities $ 39 $ 2,019 $ 883 NOTE 5— Goodwill and Intangible Assets Information regarding our goodwill and intangible assets as of December 31, 2022 was as follows (amounts in thousands): Gross Carrying Amount Accumulated Amortization Net Carrying Amount Trademarks $ 58,400 $ ( 32,004 ) $ 26,396 Computer software 51,964 ( 23,191 ) 28,773 Total finite-lived intangible assets 110,364 ( 55,195 ) 55,169 Liquor licenses 8,824 — 8,824 Total intangible assets 119,188 ( 55,195 ) 63,993 Goodwill 747,943 — 747,943 Total goodwill and intangible assets $ 867,131 $ ( 55,195 ) $ 811,936 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 Amortization expense for finite-lived intangible assets was $ 6.6 million, $ 6.6 million, and $ 6.5 million for t he fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively. 79 Table of Contents The estimated future amortization expense related to finite-lived intangible assets as of December 31, 2022 is as follows (amounts in thousands): Fiscal 2023 $ 9,836 Fiscal 2024 9,324 Fiscal 2025 8,649 Fiscal 2026 5,835 Fiscal 2027 5,791 Thereafter 15,734 Total $ 55,169 NOTE 6— Long-term Debt Long-term debt consisted of the following (amounts in thousands): December 31, 2022 January 1, 2022 Prior First Lien Credit Agreement: Senior term loan $ 385,000 $ 460,000 Long-term debt, gross 385,000 460,000 Less: Unamortized debt issuance costs and debt discounts ( 5,350 ) ( 8,532 ) Long-term debt, net $ 379,650 $ 451,468 Prior First Lien Credit Agreement GOBP Holdings, our wholly owned subsidiary, was the borrower under a first lien credit agreement (the "Prior First Lien Credit Agreement") with a syndicate of lenders that consisted of a $ 385.0 million senior term loan and a revolving credit facility for an amount up to $ 100.0 million, with sub-commitments for $ 35.0 million of letters of credit and $ 20.0 million of swingline loans, as of December 31, 2022. The Prior First Lien Credit Agreement permitted voluntary prepayment on borrowings without premium or penalty. Borrowings under the Prior First Lien Credit Agreement were secured by substantially all the assets of the borrower subsidiary and its guarantors. On February 21, 2023, we repaid all of the outstanding indebtedness under the Prior First Lien Credit Agreement of $ 387.2 million as well as fees and expenses in connection therewith. All obligations of the Company’s subsidiaries under the Prior First Lien Credit Agreement were discharged as of such date. See NOTE 14—Subsequent Event, for additional information. Senior Term Loan On April 29, 2022, we prepaid $ 75.0 million of principal on the senior term loan outstanding under our Prior First Lien Credit Agreement. In connection with the payment, we wrote off $ 1.3 million of previously unamortized debt issuance costs and debt discounts. Our $ 385.0 million senior term loan under our Prior First Lien Credit Agreement had a maturity date of October 22, 2025, had an applicable margin of 2.75 % for Eurodollar loans and 1.75 % for base rate loans, and had an effective interest rate of 7.13 % as of December 31, 2022. Due to previous prepayments on the senior term loan, no further principal payment on the term loan was due until the maturity date. Revolving Credit Facility As of December 31, 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 under our Prior First Lien Credit Agreement, which had a maturity date of October 23, 2023 . No amounts were outstanding under the revolving credit facility as of December 31, 2022 and January 1, 2022 and no amounts were borrowed under the revolving credit facility during the fiscal years ended December 31, 2022 and January 1, 2022. We were 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 were also required to pay fronting fees and other customary fees for letters of credit 80 Table of Contents issued under the revolving credit facility. The interest rate for the revolving credit facility was determined based on a formula using certain market rates. Debt Covenants The Prior First Lien Credit Agreement contained certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The Prior First Lien Credit Agreement restricted us from entering into certain types of transactions, such as incurring additional debt or issuing certain preferred shares, and making certain types of payments including dividends and stock repurchases and other similar distributions, with certain exceptions. Additionally, the revolving credit facility under our Prior First Lien Credit Agreement was subject to compliance with a first lien secured leverage ratio (as specified in the Prior 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 exceeded 35 % of the total amount of the revolving credit facility commitments. As of December 31, 2022, we were in compliance with all applicable financial covenant requirements for our Prior First Lien Credit Agreement. Schedule of Principal Maturities Principal maturities of debt as of December 31, 2022 were as follows (amounts in thousands): Fiscal 2023 $ — Fiscal 2024 — Fiscal 2025 385,000 Fiscal 2026 — Fiscal 2027 — Thereafter — Total $ 385,000 Interest Expense, Net Interest expense, net, consisted of the following (amounts in thousands): Fiscal Year Ended December 31, 2022 January 1, 2022 January 2, 2021 Interest on loans $ 18,743 $ 13,930 $ 18,950 Amortization of debt issuance costs and debt discounts 2,264 2,511 2,452 Interest on finance leases 341 378 376 Other 8 66 32 Interest income ( 3,389 ) ( 1,321 ) ( 1,767 ) Interest expense, net $ 17,967 $ 15,564 $ 20,043 Loss on debt extinguishment and modification Loss on debt extinguishment and modification consisted of the following (amounts in thousands): Fiscal Year Ended December 31, 2022 January 1, 2022 January 2, 2021 Write-off of debt issuance costs $ 1,127 $ — $ 74 Write-off of debt discounts 147 — — Debt modification costs — — 124 Debt extinguishment and modification costs $ 1,274 $ — $ 198 81 Table of Contents NOTE 7— Stockholders' Equity As of December 31, 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 December 31, 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. Secondary Offerings On February 3, 2020, certain 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 offering costs of $ 1.1 million, which were recognized in SG&A expenses 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 expenses 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, 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). Any repurchased shares are constructively retired and returned to an unissued status. During the fiscal year ended December 31, 2022, we repurchased 139,718 shares of common stock totaling $ 3.5 million at an average price of $ 24.70 per share in open-market transactions pursuant to a Rule 10b5-1 plan. During the fiscal year ended January 1, 2022, we did not repurchase any shares of our common stock. As of December 31, 2022, we had $ 96.6 million of repurchase authority remaining under the share repurchase program. 82 Table of Contents 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 December 31, 2022, there were a total of 6,812,723 shares of common stock reserved for issuance under the 2019 Plan, which includes 764,471 shares added effective January 2, 2022 per the above noted annual automatic increase. As of December 31, 2022, there were 3,675,604 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 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 RSUs and PSUs granted during fiscal 2022, 2021 and 2020 as follows: Fiscal Year Ended December 31, 2022 January 1, 2022 January 2, 2021 RSUs $ 29.70 $ 28.70 $ 37.07 PSUs $ 29.16 $ 35.45 $ 36.90 We did not award any time-based or performance-based stock options during fiscal 2022, 2021 and 2020. 83 Table of Contents Share-based Award Activity The following table summarizes stock option activity under all equity incentive plans during fiscal 2022, 2021 and 2020: 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 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 Granted — — — — Exercised ( 276,022 ) 9.63 ( 894,559 ) 4.50 Forfeitures ( 296,345 ) 21.25 — — Options outstanding as of December 31, 2022 2,562,774 $ 12.13 801,635 $ 4.68 Options vested and exercisable as of December 31, 2022 1,707,031 $ 7.46 801,635 $ 4.68 The total intrinsic value of time-based stock options exercised w as $ 7.1 million, $ 15.5 million and $ 68.7 million for fiscal 2022, 2021 and 2020, 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 2022, 2021 and 2020: Number of Shares Weighted-Average Grant Date Fair Value 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 Granted 449,438 29.70 Vested ( 499,696 ) 27.38 Forfeitures ( 95,884 ) 30.61 Unvested balance as of December 31, 2022 690,354 $ 31.79 84 Table of Contents The following table summarizes PSU activity under the 2019 Plan during fiscal 2022, 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 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 Forfeitures ( 59,011 ) 36.52 Unvested balance as of January 1, 2022 576,725 $ 36.36 Granted (1) 404,382 29.16 Adjustment for expected performance achievement (2) 423,347 31.86 Forfeitures ( 72,651 ) 33.79 Unvested balance as of December 31, 2022 (3) 1,331,803 $ 32.89 _______________________ (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 428,750 PSUs could potentially be included if the maximum performance level of 200 % is reached for all PSUs outstanding as of December 31, 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 and the related tax benefit consisted of the following (amounts in thousands): Fiscal Year Ended December 31, 2022 January 1, 2022 January 2, 2021 Time-based stock options $ 471 $ 2,030 $ 2,941 Performance-based stock options — — 26,079 RSUs 14,855 8,488 4,978 PSUs 17,125 6,911 3,652 Dividends (1) 105 186 434 Share-based compensation expense (2) $ 32,556 $ 17,615 $ 38,084 _______________________ (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. (2) Total recognized income tax benefit related to share-based compensation expense was $ 8.7 million, $ 4.7 million and $ 10.1 million for fiscal 2022, 2021 and 2020, respectively. Share-based compensation expense qualifying for capitalization was insignificant for each of the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021. Accordingly, no share-based compensation expense was capitalized during these years. 85 Table of Contents Time-Based Stock Options Unamortized compensation cost related to unvested time-based options was $ 0.8 million as of December 31, 2022, $ 0.7 million of which related to time-based stock options granted at the time of our IPO. The $ 0.8 million of unamortized compensation cost is expected to be amortized over a weighted average period of approximately 0.6 years. Performance-Based Stock Options 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 years ended December 31, 2022 and January 1, 2022. Time-Based RSUs Unamortized compensation expense for RSUs was $ 12.5 million as of December 31, 2022, which is expected to be amortized over a weighted average period of approximately 1.9 years. Performance-Based RSUs Unamortized compensation cost related to the expected level of achievement of unvested PSUs was $ 16.1 million as of December 31, 2022, which is expected to be amortized over a weighted average period of approximately 1.8 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 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 payment. As such, our dividends are not considered declared and payable and are not accrued as a liability in our consolidated balance sheet as of December 31, 2022. We paid $ 0.1 million, $ 0.2 million and $ 0.4 million of d ividends during the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, 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 immaterial as of December 31, 2022. 86 Table of Contents NOTE 9— Retirement Plans We make contributions to the UFCW—Northern California Employers Joint Pension Trust Fund (the "Pension Fund") and the UFCW—Benefits Trust Fund ("Benefits Fund"), each a multiemployer plan, 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 expired on September 6, 2022 and which is in the process of being renegotiated as of the filing date of this Annual Report on Form 10-K. Minimum contributions outside of the agreed upon contractual rates are not required for the Pension Fund. Payments into the Pens ion Fun d were $ 0.5 million, $ 0.6 million, and $ 0.6 million for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively. We paid no surcharges to the Pension Fund. The risks of participating in a multiemployer pension plan such as the Pension Fund 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 our proportionate share of the underfunded status of such plan, referred to as a withdrawal liability. The following information represents our participation in the Pension Fund for the annual period ended December 31, 2021, the latest available information from the Pension Fund. All such information is based on information we received from the Pension Fund. The Pension Fund's Employer Identification Number is 946313554 and the Plan Number is -001. Our 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 Pension 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 Pension Fund's funding situation, the trustees adopted a rehabilitation plan on July 8, 2010 and most recently updated it on May 3, 2022. 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 Benefits Fund from contribution amounts paid to the active employee part of the Benefits Fund. Payments into the Benefits Fund were $ 1.2 million, $ 1.4 million, and $ 1.4 million for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively. For our nonunion employees, we offered the following plans during fiscal 2022, 2021 or 2020: a. A defined contribution retirement plan for warehouse employees, which required an annual contribution of 15 % of eligible salaries. This defined contribution retirement plan was available to nonunion employees who met 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 $ 6.9 million, $ 1.5 million and $ 6.1 million for contributions to the two plans described above in (a) and (b) for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, 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 87 Table of Contents 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 December 31, 2022, January 1, 2022, and January 2, 2021, respectively. NOTE 10— Income Taxes Components of income tax expense (benefit) Income before income taxes consisted entirely of income from domestic operations of $ 75.7 million, $ 77.5 million, and $ 87.1 million for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively. The components of income tax expense (benefit) consisted of the following (amounts in thousands): Fiscal Year Ended December 31, 2022 January 1, 2022 January 2, 2021 Current: Federal $ — $ — $ ( 285 ) State 330 2,247 284 Total current 330 2,247 ( 1 ) Deferred: Federal 7,308 10,838 ( 14,682 ) State 3,059 2,106 ( 4,896 ) Total deferred 10,367 12,944 ( 19,578 ) Income tax expense (benefit) $ 10,697 $ 15,191 $ ( 19,579 ) 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 December 31, 2022 January 1, 2022 January 2, 2021 Taxes at federal statutory rates 21.0 % 21.0 % 21.0 % State income taxes net of federal benefit 2.7 % 4.7 % ( 4.2 ) % Excess federal tax benefits from exercise and vest of share-based awards ( 9.2 ) % ( 8.2 ) % ( 40.3 ) % Return to provision ( 1.1 ) % 1.9 % — % Other 0.7 % 0.2 % 1.0 % Effective income tax rate 14.1 % 19.6 % ( 22.5 ) % 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): December 31, 2022 January 1, 2022 Deferred tax assets: Accrued compensation $ 6,459 $ 1,274 Share-based compensation expense 14,040 10,903 Inventory 6,482 5,135 Transaction costs 782 964 Lease liability obligation 289,539 279,541 Net operating loss and other carryforwards 48,409 52,951 Reserves and allowances 4,648 4,446 Other — 4,510 Total deferred tax assets 370,359 359,724 Deferred tax liabilities: Prepaid expenses ( 1,249 ) ( 1,391 ) Depreciation and amortization ( 81,167 ) ( 71,114 ) Intangible assets ( 6,522 ) ( 7,142 ) Right-of-use assets ( 255,256 ) ( 249,545 ) Goodwill ( 43,488 ) ( 37,976 ) Debt transaction costs ( 1,231 ) ( 1,972 ) Other ( 1,228 ) — Total deferred tax liabilities ( 390,141 ) ( 369,140 ) Net deferred tax assets (liabilities) $ ( 19,782 ) $ ( 9,416 ) We have net operating loss carryforwards of $ 215.7 million for federal income tax purposes, of which $ 54.0 million expires beginning in 2032 and $ 161.7 million carries forward indefinitely. There are also net operating loss carryforwards of $ 32.3 million for state income tax purposes, which begin to expire in 2025. 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 December 31, 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 December 31, 2022. Our policy is to recognize interest and penalties associated with uncertain tax positions as part of the income tax provision in our consolidated statements of operations and comprehensive income 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, nor have we accrued for or made payments for interest and penalties. We had no uncertain tax positions as of December 31, 2022 and January 1, 2022, 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 December 31, 2022, our tax returns remain open to examination by the tax authorities for tax years 2010 to 2022 for U.S. federal and for various state jurisdictions. 89 Table of Contents NOTE 11— Related Party Transactions Related Party Lease s As of December 31, 2022 and January 1, 2022, we leased 15 store locations and one warehouse location from entities in which Eric Lindberg, Jr., Chairman of our Board of Directors (and Chief Executive Officer until December 31, 2022), and MacGregor Read, Jr., who served as Vice Chairman of our Board of Directors until September 1, 2022, or their respective families, had a direct or indirect financial interest . As of December 31, 2022, the right-of-use assets and lease liabilities related to these properties was $ 40.5 million and $ 45.5 million, respectively. 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. These related parties received aggregate lease payments from us of $ 6.8 million, $ 6.1 million, and $ 6.0 million for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, 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 $ 48.1 million and $ 40.6 million as of December 31, 2022 and January 1, 2022, 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. We establish an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. We monitor those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjust the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, we do not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. If it is at least a reasonable possibility that a material loss will occur, the Company will provide disclosure regarding the contingency. 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 December 31, 2022 January 1, 2022 January 2, 2021 Numerator Net income and comprehensive income $ 65,052 $ 62,310 $ 106,713 Denominator Weighted-average shares outstanding - basic 96,812 95,725 91,818 Effect of dilutive options 2,813 3,564 6,538 Effect of dilutive RSUs and PSUs 537 129 96 Weighted-average shares outstanding - diluted (1) (2) 100,162 99,418 98,452 Earnings per share: Basic $ 0.67 $ 0.65 $ 1.16 Diluted $ 0.65 $ 0.63 $ 1.08 _______________________ (1) 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 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- 90 Table of Contents based stock options are included in the diluted weighted-average shares outstanding for fiscal 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 2021 and 2020. 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 December 31, 2022 January 1, 2022 January 2, 2021 RSUs 98 11 3,239 NOTE 14— Subsequent Event On February 21, 2023, the Company entered into a credit agreement with Bank of America, N.A., as administrative agent and collateral agent, and the other parties party thereto (the "Credit Agreement"). The Credit Agreement provides for senior secured credit facilities consisting of (i) a senior secured term loan facility (the "term loan facility") in an aggregate principal amount of $ 300.0 million and (ii) a senior secured revolving credit facility (the "revolving credit facility" and, together with the term loan facility, the "credit facilities") in an aggregate principal amount of $ 400.0 million. The term loan facility was borrowed in full at closing, and $ 25.0 million of the revolving credit facility was borrowed at closing. On February 21, 2023, the Company repaid all of the outstanding indebtedness under the Prior First Lien Credit Agreement of $ 387.2 million as well as fees and expenses in connection therewith. All obligations of the Company’s subsidiaries under the Prior First Lien Credit Agreement were discharged as of such date. The revolving credit facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the swingline loans. The credit facilities permit the Company to add one or more incremental term loan facilities, increase any existing term loan facility, increase revolving commitments, and/or add incremental replacement revolving credit facility tranches. The aggregate principal amount of such incremental facilities are limited to (a) an amount not in excess of the sum of the greater of $ 200.0 million and 100 % of Consolidated EBITDA (as defined in the Credit Agreement), subject to certain limitations, plus (b) voluntary prepayments of the term loan facility, voluntary permanent reductions of the commitments for the revolving credit facility and voluntary prepayments of indebtedness secured by liens on the collateral securing the credit facilities, subject to certain exceptions, plus (c) an amount such that (assuming that the full amount of any such incremental revolving increase and/or incremental replacement revolving credit facility was drawn, and after giving effect to any appropriate pro forma adjustment events) the Company would be in compliance, on a pro forma basis (but excluding the cash proceeds of such incurrence), with a total net leverage ratio of 3.00 to 1.00. The lenders under the credit facilities are not under any obligation to provide any such incremental commitments or loans under incremental facilities and any such incremental commitments or loans under incremental facilities are subject to certain customary conditions. Borrowings under the Credit Agreement in dollars bear interest at a rate equal to, at our option, either (a) the base rate, which is defined as a fluctuating rate per annum equal to the greatest of (i) the federal funds rate then in effect, plus 0.50 %, (ii) the prime rate then in effect and (iii) a specified Term SOFR (as defined in the Credit Agreement) rate plus 1.00 %, subject to the interest rate floors set forth therein, plus an applicable margin ranging from 0.75 % to 1.75 % based on the Company's total net leverage ratio; and (b) an adjusted Term SOFR rate determined on the basis of a one, three or six month interest period, plus 0.10 %, subject to the interest rate floors set forth therein, plus an applicable margin ranging from 1.75 % to 2.75 % based on the Company's total net leverage ratio. As of the closing date, interest on the initial borrowings under the new credit facility were based on one-month Term SOFR with an applicable margin of 2.25 %. The credit facilities mature on February 21, 2028. The Company’s obligations under the Credit Agreement are unconditionally guaranteed by all of the Company’s wholly owned restricted subsidiaries, subject to certain exceptions. All obligations under the Credit Agreement, and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by substantially all of the Company’s assets and those of each subsidiary guarantor. 91 Table of Contents The Credit Agreement requires the Company to make scheduled amortization payments of the outstanding term loans. The Company may voluntarily prepay the senior secured credit facilities, in whole or in part, at any time without premium or penalty, subject to reimbursement of the lenders’ breakage and redeployment costs in applicable cases. The Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The Credit Agreement contains certain covenants that, among other things, limit the Company’s ability and the ability of the Company’s restricted subsidiaries to: pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments; incur additional debt or issue certain disqualified stock and preferred stock; incur liens on assets; merge or consolidate with another company or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets; enter into transactions with affiliates; and allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments to the borrower. The Credit Agreement also contains financial performance covenants requiring the Company to satisfy a maximum total net leverage ratio test and a minimum interest coverage ratio test as of the last day of each fiscal quarter ending on or after April 1, 2023, as specified therein. 92 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 93 Table of Contents