Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report. Our disclosure controls are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as a result of the material weakness in our internal control over financial reporting, described below, as of December 30, 2023. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement in annual or interim financial statements will not be prevented or detected on a timely basis.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined by Rule 13a-15(f) of the Exchange Act. The Company's management conducted an assessment of the Company's internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). In connection with this assessment, the Company’s management identified deficiencies in the design and operating effectiveness of controls in its internal control over financial reporting related to certain information technology general computer controls ("ITGC’s"). The replacement of components of our enterprise resource planning system in late August 2023 led to a significant increase in the volume of transactions across user access, program change management, and IT operations for which our existing controls were not designed to address. As a result, certain of the Company’s related business controls that are dependent upon the affected ITGC’s were also deemed ineffective. We did not identify any misstatements to the consolidated financial statements as of and for the year ended December 30, 2023 because of these control deficiencies. However, the pervasive impact of these control deficiencies to the Company's internal control over financial reporting created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis. Therefore, we concluded that the deficiencies represent a material weakness in our internal control over financial reporting and, as such, our internal control over financial reporting was not effective as of December 30, 2023.
Deloitte & Touche LLP, an independent registered public accounting firm, who audited the fiscal 2023 consolidated financial statements included in this Annual Report on Form 10-K, issued an adverse report on the Company’s internal control over financial reporting reflecting this material weakness as of December 30, 2023 as stated in its report which is set forth below.
Remediation Plan
Management is in the process of establishing a remediation plan and expects its remediation efforts will involve implementing additional controls or a redesign of controls to ensure that user access, program change management and IT operations controls are designed and operating effectively. These remediation efforts began during the fiscal quarter ended December 30, 2023 and are expected to be completed during the fiscal year ending December 28, 2024.
Changes in Internal Control over Financial Reporting
Other than the material weakness described above, which was identified by management as part of the Company annual assessment of internal control over financial reporting, during the fiscal quarter ended December 30, 2023, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
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reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Grocery Outlet Holding Corp.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Grocery Outlet Holding Corp. and subsidiaries (the "Company") as of December 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weakness identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 30, 2023, of the Company and our report dated February 28, 2024, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment:
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General Information Technology Controls (GITCs)
The Company identified deficiencies in the design and operating effectiveness of controls in its internal control over financial reporting related to certain information technology general computer controls ("ITGC's"). The replacement of components of the Company's enterprise resource planning system in late August 2023 led to a significant increase in the volume of transactions across user access, program change management, and IT operations for which their existing controls were not designed to address. As a result, certain of the Company's related business controls that are dependent upon the affected ITGC's were also deemed ineffective. The Company concluded that the pervasive impact of these control deficiencies to the Company's internal control over financial reporting created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis.
The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 30, 2023, of the Company, and this report does not affect our report on such financial statements.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 28, 2024
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ITEM 9B. OTHER INFORMATION
Rule 10b5-1 Trading Plans - Directors and Section 16 Officers
During the 13 weeks ended December 30, 2023, none of our directors or Officers (as such term is defined under Section 16 of the Exchange Act) adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any "non-Rule 10b5-1 trading arrangement."
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ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference from sections entitled "Corporate Governance and Board Matters," "Executive Officers," "Proposals for Consideration at Annual Meeting – Proposal 1 – Election of Class II Directors" and "Additional Information" in our definitive Proxy Statement related to the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of our fiscal year ended December 30, 2023 (the "2024 Proxy Statement").
There were no material changes to the procedures by which stockholders may recommend nominees to our board of directors.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from sections entitled "Compensation Discussion and Analysis," "Named Executive Officer Compensation Tables" (excluding the information under the subheading "Pay Versus Performance"), "Corporate Governance and Board Matters – Director Compensation," "Corporate Governance and Board Matters – Board of Directors – Compensation Committee Interlocks and Insider Participation," and "Compensation Committee Report" in our 2024 Proxy Statement. However, the Compensation Committee Report included in such 2024 Proxy Statement shall not be deemed "filed" with the SEC for the purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing made by us with the SEC, regardless of any general incorporation language in such filing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference from sections entitled "Security Ownership of Certain Beneficial Owners and Management," and "Securities Authorized for Issuance Under Equity Compensation Plans" in our 2024 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference from sections entitled "Certain Relationships and Related Party Transactions," and "Corporate Governance and Board Matters – Board of Directors – Director Independence" in our 2024 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference from the section entitled "Other Audit and Risk Committee Matters" in our 2024 Proxy Statement.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements
See Index to Consolidated Financial Statements at "Item 8. Financial Statements and Supplementary Data."
2. Financial Statement Schedules
All schedules have been omitted because they are either not required, not applicable, not present in amounts sufficient to require submission of the schedule, or the required information is included elsewhere in this Annual Report on Form 10-K.
3. Exhibits
Incorporated by Reference
Exhibit
No. Exhibit Form File
No. Filing
Date Exhibit
No.
3.1 Restated Certificate of Incorporation of Grocery Outlet Holding Corp.
8-K 001-38950 6/10/2022 3.1
3.2 Amended and Restated Bylaws of Grocery Outlet Holding Corp.
8-K 001-38950 4/8/2022 3.1
4.1 Form of Stock Certificate for Common Stock
S-1/A 333-231428 6/10/2019 4.1
4.2 Amended and Restated Stockholders Agreement by and among Grocery Outlet Holding Corp. and the other parties named therein
10-K 001-38950 3/25/2020 4.2
4.3 Description of Grocery Outlet Holding Corp.'s Securities
10-K 001-38950 3/1/2023 4.3
10.1† Globe Holding Corp. 2014 Stock Incentive Plan
S-1/A 333-231428 5/22/2019 10.13
10.2† Amended and Restated Time Vesting Stock Option Grant Notice and Agreement (Globe Holding Corp. 2014 Stock Incentive Plan) (Eric J. Lindberg, Jr.), dated October 21, 2014
S-1/A 333-231428 5/22/2019 10.15
10.3† Form of Performance Vesting Stock Option Grant Notice and Agreement (Globe Holding Corp. 2014 Stock Incentive Plan) (Charles C. Bracher, Robert J. Sheedy, Jr., Steven K. Wilson)
S-1/A 333-231428 5/22/2019 10.16
10.4† Form of Time Vesting Stock Option Grant Notice and Agreement (Globe Holding Corp. 2014 Stock Incentive Plan) (Charles C. Bracher, Robert J. Sheedy, Jr., Steven K. Wilson)
S-1/A 333-231428 5/22/2019 10.17
10.5† Grocery Outlet Holding Corp. 2019 Incentive Plan
S-1/A 333-231428 6/10/2019 10.18
10.6† Form of Nonqualified Option Grant and Award Agreement (Grocery Outlet Holding Corp. 2019 Incentive Plan)
S-1/A 333-231428 6/10/2019 10.19
10.7† 2021 Form of Restricted Stock Unit Grant and Agreement (Grocery Outlet Holding Corp. 2019 Stock Incentive Plan)
10-K 001-38950 3/2/2021 10.32
10.8† 2021 Form of Performance Stock Unit Grant and Agreement (Grocery Outlet Holding Corp. 2019 Stock Incentive Plan)
10-K 001-38950 3/2/2021 10.33
10.9† Form of Performance Stock Unit Grant and Agreement (Grocery Outlet Holding Corp. 2019 Stock Incentive Plan) (effective October 2021)
10-K 001-38950 3/2/2022 10.29
10.10† Form of Restricted Stock Unit Grant and Agreement (Grocery Outlet Holding Corp. 2019 Stock Incentive Plan) (effective October 2021)
10-K 001-38950 3/2/2022 10.30
10.11† 2023 Form of Performance Stock Unit Grant and Agreement (Grocery Outlet Holding Corp. 2019 Stock Incentive Plan)
10-Q 001-38950 5/10/2023 10.8
10.12† Restricted Stock Unit Grant and Agreement (Grocery Outlet Holding Corp. 2019 Stock Incentive Plan) (CEO Form)
10-K 001-38950 3/1/2023 10.34
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10.13† Form of Restricted Stock Unit Grant and Agreement for Non-Employee Directors (Grocery Outlet Holding Corp. 2019 Stock Incentive Plan) (effective June 2023)
10-Q 001-38950 8/9/2023 10.1
10.14† Non-Employee Director Compensation Policy (as amended November 2, 2022 and as effective January 1, 2023)
8-K 001-38950 11/8/2022 10.2
10.15† Grocery Outlet Holding Corp. Directors Deferral Plan
10-Q 001-38950 11/10/2020 10.1
10.16† Grocery Outlet Holding Corp. Executive Severance Plan
10-Q 001-38950 11/10/2020 10.2
10.17† Grocery Outlet Inc. 2019 Annual Incentive Plan (Amended and Restated Effective August 24, 2023)
10-Q 001-38950 11/8/2023 10.1
10.18† Employment Agreement, effective January 1, 2023, by and among Robert J. Sheedy, Jr., Grocery Outlet Inc. and Grocery Outlet Holding Corp.
8-K 001-38950 11/8/2022 10.1
10.19† Form of Indemnification Agreement between Grocery Outlet Holding Corp. and directors and executive officers of Grocery Outlet Holding Corp.
S-1/A 333-231428 6/10/2019 10.31
10.20 Credit Agreement, dated as of February 21, 2023, by and among Grocery Outlet Holding Corp., the Lenders and Letter of Credit Issuers from time to time party thereto, and Bank of America, N.A., as the Administrative Agent, Collateral Agent and Swingline Lender., the Lenders and Letter of Credit Issuers from time to time party thereto, and Bank of America, N.A., as the Administrative Agent, Collateral Agent and Swingline Lender.
8-K 001-38950 2/23/2023 10.1
10.21 Pledge and Security Agreement, dated as of February 21, 2023, among Grocery Outlet Holding Corp., the subsidiaries of Grocery Outlet Holding Corp. from time to time party thereto and Bank of America, N.A., as Collateral Agent
10-Q 001-38950 5/10/2023 10.2
10.22 Copyright Security Agreement, dated as of February 21, 2023, among Grocery Outlet Inc. and Bank of America, N.A., as Collateral Agent
10-Q 001-38950 5/10/2023 10.3
10.23 Trademark Security Agreement, dated as of February 21, 2023, among Grocery Outlet Inc. and Bank of America, N.A., as Collateral Agent
10-Q 001-38950 5/10/2023 10.4
10.24 Guarantee, dated as of February 21, 2023, among Grocery Outlet Holding Corp., the subsidiaries of Grocery Outlet Holding Corp. from time to time party thereto and Bank of America, N.A., as Administrative Agent and Collateral Agent
10-Q 001-38950 5/10/2023 10.5
21.1* Subsidiary of the Registrant
23.1* Consent of Deloitte and Touche LLP
24.1* Power of Attorney (incorporated by reference to the signature page to this Annual Report on Form 10-K)
31.1* Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1** Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2** Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
97.1†* Grocery Outlet Holding Corp. Incentive Compensation Clawback Policy
101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Extension Calculation Linkbase Document
101.DEF Inline XBRL Extension Definition Linkbase Document
101.LAB Inline XBRL Extension Label Linkbase Document
101.PRE Inline XBRL Extension Presentation Linkbase Document
104 Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document and included as Exhibit 101.
____________________________________
† Management contract or compensatory plan or arrangement.
* Filed herewith.
**
Furnished herewith. The certifications attached as Exhibit 32.1 and 32.2 that accompany this Annual Report on Form 10-K are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Grocery Outlet Holding Corp. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.
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ITEM 16. FORM 10-K SUMMARY
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Grocery Outlet Holding Corp.
Date: February 28, 2024 By: /s/ Robert J. Sheedy, Jr.
Robert J. Sheedy, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitute and appoint Robert J. Sheedy, Jr., Lindsay E. Gray and Luke D. Thompson, or any of them, his or her attorneys-in-fact, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Robert J. Sheedy, Jr. President and Chief Executive Officer; Director
(Principal Executive Officer) February 28, 2024
Robert J. Sheedy, Jr.
/s/ Charles C. Bracher Chief Financial Officer
(Principal Financial Officer) February 28, 2024
Charles C. Bracher
/s/ Lindsay E. Gray Senior Vice President, Accounting
(Principal Accounting Officer) February 28, 2024
Lindsay E. Gray
/s/ Eric J. Lindberg, Jr. Director, Chairman of the Board February 28, 2024
Eric J. Lindberg, Jr.
/s/ Erik D. Ragatz Lead Independent Director February 28, 2024
Erik D. Ragatz
/s/ Kenneth W. Alterman Director February 28, 2024
Kenneth W. Alterman
/s/ John E. Bachman Director February 28, 2024
John E. Bachman
/s/ Mary Kay Haben Director February 28, 2024
Mary Kay Haben
/s/ Thomas F. Herman Director February 28, 2024
Thomas F. Herman
/s/ Carey F. Jaros Director February 28, 2024
Carey F. Jaros
/s/ Gail Moody-Byrd Director February 28, 2024
Gail Moody-Byrd
/s/ Jeffrey R. York Director February 28, 2024
Jeffrey R. York
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