Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 our 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 September 26, 2020, we had 372 stores in California, Washington, Oregon, Pennsylvania, Idaho and Nevada.
Initial Public Offering — In June 2019, we completed an initial public offering (“IPO”) of 19,765,625 shares of our common stock at a public offering price of $22.00 per share for net proceeds of $407.7 million, after deducting underwriting discounts and commissions of $27.1 million and offering costs of $7.2 million. The shares of common stock sold in the IPO and the net proceeds from the IPO included the full exercise of the underwriters’ option to purchase additional shares.
Our Amended and Restated Certificate of Incorporation (the “Charter”) became effective in connection with the completion of the IPO on June 24, 2019. The Charter, among other things, provided that all of our outstanding shares of nonvoting common stock were automatically converted into shares of voting common stock on a one-for-one basis and that our authorized capital stock consisted of 500,000,000 shares of common stock, and 50,000,000 shares of preferred stock, par value $0.001 per share. Our bylaws were also amended and restated as of June 24, 2019. Additionally, upon the closing of the IPO, we redeemed all of our outstanding preferred stock for a total of $1.00.
On June 24, 2019, we used the net proceeds from the IPO to repay $150.0 million in principal on the outstanding term loan under our second lien credit agreement, dated as of October 22, 2018 (as amended, the “Second Lien Credit Agreement”), as well as accrued and unpaid interest as of that date of $3.6 million, and terminated the Second Lien Credit Agreement. In addition, using the remainder of net proceeds, together with excess cash on hand, we prepaid a portion of our outstanding senior secured term loan under our First Lien Credit Agreement totaling $248.0 million plus accrued interest of $3.8 million. See Note 4 for additional information.
Secondary Public Offerings — On October 8, 2019, certain of our selling stockholders completed a secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of $1.1 million and received $3.2 million in cash (excluding withholding taxes) in connection with the exercise of 451,470 options by certain stockholders participating in this secondary public offering.
On February 3, 2020, certain of our selling stockholders completed an additional secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred related offering costs of $1.1 million which we recognized in selling, general and administrative expenses during the first quarter of fiscal 2020. We received $1.4 million in cash (excluding withholding taxes) in connection with the exercise of 191,470 options 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 selling, general and administrative expenses during the second quarter of 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.
Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim reporting. Certain information and note disclosures included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019 filed with the SEC on March 25, 2020. The condensed consolidated balance sheet as of December 28, 2019 included herein has been derived from those audited consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements include the accounts of Grocery Outlet Holding Corp. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. In the opinion of our management, these condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position, results of operations, cash flows and stockholders' equity for the interim periods presented. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows expected for any future interim or annual period. Certain prior period amounts in the condensed consolidated statements of cash flows have been reclassified to conform to the current period presentation. The reclassification of these items had no impact on net income, earnings per share, or retained earnings in the current or prior period.
Use of Estimates — The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results can differ from these estimates depending upon certain risks and uncertainties, and changes in these estimates are recorded when known.
Segment Reporting — We manage our business as one operating segment. All of our sales were made to customers located in the United States and all property and equipment is located in the United States.
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.
Leases — We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, current lease liabilities, and long-term lease liabilities on the condensed consolidated balance sheets. Finance leases are included in other assets, current lease liabilities, and long-term lease liabilities on our condensed 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. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Amortization of finance lease right-of-use assets, interest expense on finance lease liabilities and operating and financing cash flows for finance leases is immaterial.
We have lease agreements with retail facilities for store locations, distribution centers, office space and equipment with lease and non-lease components, which are accounted for separately. Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense for these leases is recognized on a straight-line basis over the lease term. The short-term lease expense is reflective of the short-term lease commitments on a go forward basis. We sublease certain real estate to unrelated third parties under non-cancelable leases and the sublease portfolio consists of operating leases for retail stores.
Fair Value Measurements — Fair value is defined as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value of financial instruments is categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Level 3 — Unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions when pricing the financial instruments, such as cash flow modeling assumptions.
The assets’ or liabilities’ fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The fair value framework requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
There were no assets or liabilities measured at fair value on a recurring basis as of September 26, 2020 or December 28, 2019. There were no transfers of assets or liabilities between levels within the fair value hierarchy as of September 26, 2020 or December 28, 2019.
Our financial assets and liabilities are carried at cost, which generally approximates their fair value, as described below:
Cash and cash equivalents, independent operator 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.
Independent operator notes receivable (net) — The carrying value of such financial instruments approximates their fair value.
Notes payable and term loans — The carrying value of such financial instruments generally approximates their fair value since the stated interest rates approximates market rates for loans with similar terms for borrowers with similar credit profiles. However, in accordance with Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments, the estimated fair values of our term loans as of September 26, 2020 and December 28, 2019 are set forth below.
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 condensed consolidated balance sheets (in thousands):
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September 26,
2020
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December 28,
2019
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|
Carrying Amount (1)
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Estimated Fair Value (2)
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Carrying Amount (1)
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Estimated Fair Value (2)
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Financial Liabilities:
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Term Loans (Level 2)
|
$
|
458,688
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|
|
$
|
448,500
|
|
|
$
|
458,682
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|
|
$
|
466,515
|
|
_______________________
(1)The carrying amounts as of September 26, 2020 and December 28, 2019 are net of unamortized debt discounts of $1.3 million and $1.5 million, respectively.
(2)The estimated fair value of our term loans was determined based on the average quoted bid-ask prices for the term loans in an over-the-counter market on the last trading day of the periods presented.
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. Our performance obligations are satisfied upon the transfer of goods to the customer, at the point of sale, and payment from customers is also due at the time of sale. Discounts provided to customers by us are recognized at the time of sale as a reduction in sales as the products are sold. Discounts provided by independent operators are not recognized as a reduction in sales as these are provided solely by the independent operator who bears the incremental costs arising from the discount. We do not accept manufacturer coupons.
We do not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current year from performance obligations satisfied in previous periods, any performance obligations, or any material costs to obtain or fulfill a contract as of September 26, 2020 and December 28, 2019.
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 $2.0 million as of September 26, 2020 and December 28, 2019. Breakage amounts were immaterial for the 13 and 39 weeks ended September 26, 2020 and September 28, 2019.
Disaggregated Revenues — The following table presents sales revenue by type of product for the periods indicated (in thousands):
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13 Weeks Ended
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39 Weeks Ended
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September 26,
2020
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September 28,
2019
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September 26,
2020
|
|
September 28,
2019
|
Perishable (1)
|
$
|
258,923
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|
|
$
|
223,329
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|
|
$
|
788,190
|
|
|
$
|
651,758
|
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Non-perishable (2)
|
505,159
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|
|
429,211
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|
|
1,539,629
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|
|
1,252,342
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Total sales
|
$
|
764,082
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|
|
$
|
652,540
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|
|
$
|
2,327,819
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|
|
$
|
1,904,100
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|
_______________________
(1) Perishable departments include dairy and deli; produce and floral; and fresh meat and seafood.
(2) Non-perishable departments include grocery; general merchandise; health and beauty care; frozen foods; and beer and wine.
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 it. 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 367, 342 and 332 stores operated by independent operators as of September 26, 2020, December 28, 2019 and September 28, 2019, respectively. We had agreements in place with each independent operator. The independent operator orders its merchandise exclusively from us which is provided to the independent operator on consignment. Under the independent operator agreement, the independent operator may select a majority of merchandise that we consign to the independent operator, which the independent operator chooses from our merchandise order guide according to the independent operator’s knowledge and experience with local customer purchasing trends, preferences, historical sales and similar factors. The independent operator agreement gives the independent operator 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. Independent operators are required to furnish initial working capital and to acquire certain store and safety assets. The independent operator is required to hire, train and employ a properly trained workforce sufficient in number to enable the independent operator to fulfill its obligations under the independent operator agreement. The independent operator 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 independent operator agreement without cause upon 75 days’ notice.
As consignor of all merchandise to each independent operator, the aggregate net sales proceeds from merchandise sales belongs to us. Sales related to independent operator stores were $750.5 million and $638.8 million for the 13 weeks ended September 26, 2020 and September 28, 2019, respectively, and $2.28 billion and $1.86 billion for the 39 weeks ended September 26, 2020 and September 28, 2019, respectively. We, in turn, pay independent operators a commission based on a share of the gross profit of the store. Inventories and related sales proceeds are our property, and we are responsible for store rent and related occupancy costs. Independent operator commissions were expensed and included in selling, general and administrative expenses. Independent operator commissions were $114.2 million and $98.2 million for the 13 weeks ended September 26, 2020 and September 28, 2019, respectively, and $351.1 million and $285.2 million for the 39 weeks ended September 26, 2020 and September 28, 2019, respectively. Independent operator commissions of $7.9 million and $6.1 million were included in accrued expenses as of September 26, 2020 and December 28, 2019, respectively.
Independent operators may fund their initial store investment from existing capital, a third-party loan or most commonly through a loan from us, as further discussed in Note 2. As collateral for independent operator obligations and performance, the operator agreements grant us the security interests in the assets owned by the independent operator. The total investment at risk associated with each independent operator is not sufficient to permit each independent operator to finance its activities without additional subordinated financial support and, as a result, the independent operators are VIEs which we have variable interests in. To determine if we are the primary beneficiary of these VIEs, we evaluate whether we have (i) the power to direct the activities that most significantly impact the independent operator’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the independent operator that could potentially be significant to the independent operator. Our evaluation includes identification of significant activities and an assessment of its ability to direct those activities.
Activities that most significantly impact the independent operator economic performance relate to sales and labor. Sales activities that significantly impact the independent operators’ economic performance include determining what merchandise the independent operator will order and sell and the price of such merchandise, both of which the independent operator controls. The independent operator is also responsible for all of their own labor. Labor activities that significantly impact the independent operator’s economic performance include hiring, training, supervising, directing, compensating (including wages, salaries and employee benefits) and terminating all of the employees of the independent operator, activities which the independent operator controls. Accordingly, the independent operator has the power to direct the activities that most significantly impact the independent operator’s economic performance. Furthermore, the mutual termination rights associated with the operator agreements do not give the Company power over the independent operator.
Our maximum exposure to the independent operators is generally limited to the gross operator notes and receivables due from these entities, which was $41.4 million and $37.7 million as of September 26, 2020 and December 28, 2019, respectively. See Note 2 for additional information.
Recently Adopted Accounting Standards
ASU No. 2016-13 — In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13, which was further updated and clarified by the FASB through issuance of additional related ASUs, amends the guidance surrounding measurement and recognition of credit losses on financial assets measured at amortized cost, including trade receivables and debt securities, by requiring recognition of an allowance for credit losses expected to be incurred over an asset’s lifetime based on relevant information about past events, current conditions, and reasonable and supportable forecasts impacting the financial asset's ultimate collectability. This “expected loss” model will likely result in earlier recognition of credit losses than the previous “as incurred” model, under which losses were recognized only upon an occurrence of an event that gave rise to the incurrence of a probable loss. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is to be adopted on a modified retrospective basis. We adopted ASU 2016-13 on December 29, 2019. The adoption of ASU 2016-13 resulted in a $0.4 million cumulative-effect adjustment to the opening balance of retained earnings. The adoption of the new standard did not have a material impact on our condensed consolidated statements of operations and comprehensive income or condensed consolidated statements of cash flows. See Note 2 for additional information.
ASU No. 2018-15 — In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2019. We adopted ASU 2018-15 on December 29, 2019. The adoption of ASU 2018-15 did not have a material impact on our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
ASU No. 2019-12 — In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies accounting guidance for certain tax matters including franchise taxes, certain transactions that result in a step-up in tax basis of goodwill, and enacted changes in tax laws in interim periods. In addition, it eliminates a company’s need to evaluate certain exceptions relating to the incremental approach for intra-period tax allocation, accounting for basis differences when there are ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We will adopt ASU 2019-12 beginning in the first quarter of fiscal 2021. We do not expect the adoption of ASU 2019-12 to have a material impact on our consolidated financial statements.
Note 2. Independent Operator Notes and Receivables
The amounts included in independent operator notes and accounts receivable consist primarily of funds we loaned to independent operators, net of estimated uncollectible amounts. Independent operator notes are payable on demand and typically bear interest at rates between 3.00% and 9.95%. Accrued interest receivable on independent operator notes is included within the “independent operator receivables and current portion of independent operator notes, net of allowance” line item on the condensed consolidated balance sheets and was $0.3 million and $0.5 million as of September 26, 2020 and December 28, 2019, respectively. There were no independent operator notes that were past due or on a non-accrual status due to delinquency as of September 26, 2020 or December 28, 2019. TCAP notes and receivables, 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.
Independent operator notes and receivables are financial assets which are measured and carried at amortized cost. An allowance for expected credit losses is deducted from (for expected losses) or added to (for expected recoveries) the amortized cost basis of these assets to arrive at the net carrying amount expected to be collected for such assets.
The allowance is estimated using an expected loss framework which includes information about past events, current conditions, and reasonable and supportable forecasts that impact the collectibility of the reported amounts of the assets over their lifetime. The allowance is evaluated on a collective basis for assets with shared risk characteristics and credit quality indicators. The primary shared risk characteristic and credit quality indicator pools that we use as a basis for collective evaluation include:
•TCAP — Includes the notes and receivables of independent operators 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 independent operators who require assistance in meeting their working capital needs for various reasons, such as new or increased competition or differences in independent operator skills and experience. For independent operators participating in TCAP, we lower the interest rate and delay repayment obligations on their outstanding notes.
•Non-TCAP — Includes the notes and receivables of independent operators 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 of independent operators 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 independent operators and the related allowances as of September 26, 2020 and December 28, 2019 consisted of the following (in thousands):
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Allowance
|
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Current Portion
|
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Long-term Portion
|
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Gross
|
|
Current Portion
|
|
Long-term Portion
|
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Net
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|
September 26, 2020
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|
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Independent operator notes
|
$
|
36,994
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|
|
$
|
(629)
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|
|
$
|
(8,360)
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|
|
$
|
28,005
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|
|
$
|
2,242
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|
|
$
|
25,763
|
|
Independent operator receivables
|
4,407
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|
|
(527)
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|
|
—
|
|
|
3,880
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|
|
3,880
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|
|
—
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Total
|
$
|
41,401
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|
|
$
|
(1,156)
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|
|
$
|
(8,360)
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|
|
$
|
31,885
|
|
|
$
|
6,122
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|
|
$
|
25,763
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Allowance
|
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Current Portion
|
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Long-term Portion
|
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Gross
|
|
Current Portion
|
|
Long-term Portion
|
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Net
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|
December 28, 2019
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Independent operator notes
|
$
|
31,952
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|
|
$
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(678)
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|
|
$
|
(9,088)
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|
|
$
|
22,186
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|
|
$
|
1,855
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|
|
$
|
20,331
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|
Independent operator receivables
|
5,753
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|
|
(605)
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|
|
—
|
|
|
5,148
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|
|
5,148
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|
|
—
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Total
|
$
|
37,705
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|
|
$
|
(1,283)
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|
|
$
|
(9,088)
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|
|
$
|
27,334
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|
|
$
|
7,003
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|
|
$
|
20,331
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|
A summary of activity in the independent operator notes and receivable allowance was as follows (in thousands):
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13 Weeks Ended
|
|
39 Weeks Ended
|
|
September 26,
2020
|
|
September 28,
2019
|
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September 26,
2020
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September 28,
2019
|
Beginning balance
|
$
|
9,178
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|
|
$
|
10,655
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|
|
$
|
10,371
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|
|
$
|
9,067
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Provision for independent operator notes and receivables
|
384
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|
|
311
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|
|
311
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|
|
2,519
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Cumulative effect of accounting change
|
—
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|
—
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|
|
(439)
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|
—
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|
Write-off of provision for independent operator notes and receivables
|
(46)
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|
|
(497)
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|
|
(727)
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|
|
(1,117)
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Ending Balance
|
$
|
9,516
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|
|
$
|
10,469
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|
|
$
|
9,516
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|
|
$
|
10,469
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|
The following table presents the amortized cost basis of independent operator notes by year of origination and credit quality indicator as of September 26, 2020 (in thousands):
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Credit Quality Indicator
|
2020 (YTD)
|
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2019
|
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2018
|
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2017
|
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2016
|
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Prior
|
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Total
|
TCAP
|
$
|
1,246
|
|
|
$
|
1,065
|
|
|
$
|
926
|
|
|
$
|
105
|
|
|
$
|
194
|
|
|
$
|
—
|
|
|
$
|
3,536
|
|
Non-TCAP
|
3,097
|
|
|
6,269
|
|
|
6,686
|
|
|
2,652
|
|
|
1,044
|
|
|
291
|
|
|
20,039
|
|
New store
|
7,649
|
|
|
5,770
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,419
|
|
Total
|
$
|
11,992
|
|
|
$
|
13,104
|
|
|
$
|
7,612
|
|
|
$
|
2,757
|
|
|
$
|
1,238
|
|
|
$
|
291
|
|
|
$
|
36,994
|
|
Note 3. Leases
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 right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on information available at the lease commencement date to determine the present value of lease payments. 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.
Leases for 15 of our store locations and one warehouse location are controlled by related parties. As of September 26, 2020, the right-of-use assets and lease liabilities related to these properties were $40.5 million and $44.9 million, respectively. As of September 26, 2020, we had executed leases for 32 store locations that we had not yet taken possession of with total undiscounted future lease payments of $176.9 million with lease terms through 2037.
Our lease terms may include options to extend the lease when we are reasonably certain that we will exercise such options. 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 September 26, 2020 totaling $4.5 million ending in various years through 2028 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 as of September 26, 2020 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
Classification
|
|
|
Assets:
|
|
|
|
|
Operating lease assets
|
|
Operating lease right-of-use assets
|
|
$
|
819,227
|
|
Finance lease assets
|
|
Other assets
|
|
6,189
|
|
Total leased assets
|
|
|
|
$
|
825,416
|
|
Liabilities:
|
|
|
|
|
Current
|
|
|
|
|
Operating
|
|
Current lease liabilities
|
|
$
|
44,863
|
|
Finance
|
|
Current lease liabilities
|
|
930
|
|
Noncurrent
|
|
|
|
|
Operating
|
|
Long-term lease liabilities
|
|
855,498
|
|
Finance
|
|
Long-term lease liabilities
|
|
5,351
|
|
Total lease liabilities
|
|
|
|
$
|
906,642
|
|
The components of lease expense were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
Lease Cost
|
|
Classification
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Operating lease cost
|
|
Selling, general and administrative expenses
|
|
$
|
28,470
|
|
|
$
|
24,211
|
|
|
$
|
82,553
|
|
|
$
|
71,085
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
Depreciation and amortization
|
|
263
|
|
|
173
|
|
|
710
|
|
|
520
|
|
Interest on leased liabilities
|
|
Interest expense, net
|
|
98
|
|
|
68
|
|
|
285
|
|
|
192
|
|
Sublease income
|
|
Other income
|
|
(186)
|
|
|
(299)
|
|
|
(742)
|
|
|
(949)
|
|
Net lease cost
|
|
|
|
$
|
28,645
|
|
|
$
|
24,153
|
|
|
$
|
82,806
|
|
|
$
|
70,848
|
|
Short-term lease expense and variable lease payments recorded in operating expenses for the 13 and 39 weeks ended September 26, 2020 and September 28, 2019 were immaterial.
Maturities of lease liabilities as of September 26, 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
Remainder of fiscal 2020
|
$
|
26,476
|
|
|
$
|
318
|
|
|
$
|
26,794
|
|
Fiscal 2021
|
109,137
|
|
|
1,279
|
|
|
110,416
|
|
Fiscal 2022
|
109,837
|
|
|
1,226
|
|
|
111,063
|
|
Fiscal 2023
|
109,681
|
|
|
1,124
|
|
|
110,805
|
|
Fiscal 2024
|
108,911
|
|
|
1,058
|
|
|
109,969
|
|
Thereafter
|
894,505
|
|
|
2,690
|
|
|
897,195
|
|
Total lease payments
|
1,358,547
|
|
|
7,695
|
|
|
1,366,242
|
|
Less: Imputed interest
|
(458,187)
|
|
|
(1,413)
|
|
|
(459,600)
|
|
Present value of lease liabilities
|
$
|
900,360
|
|
|
$
|
6,282
|
|
|
$
|
906,642
|
|
The weighted-average lease term and discount rate as of September 26, 2020 were as follows:
|
|
|
|
|
|
Weighted-average remaining lease term:
|
|
Operating leases
|
12.2 years
|
Finance leases
|
6.9 years
|
Weighted-average discount rate:
|
|
Operating leases
|
7.03
|
%
|
Finance leases
|
5.82
|
%
|
Note 4. Long-term Debt
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2020
|
|
December 28,
2019
|
First Lien Credit Agreement:
|
|
|
|
Term loan
|
$
|
460,000
|
|
|
$
|
460,188
|
|
|
|
|
|
Notes payable
|
68
|
|
|
246
|
|
Long-term debt, gross
|
460,068
|
|
|
460,434
|
|
Less: Unamortized debt discounts and debt issuance costs
|
(11,387)
|
|
|
(12,445)
|
|
Long-term debt, less unamortized debt discounts and debt issuance costs
|
448,681
|
|
|
447,989
|
|
Less: Current portion
|
(68)
|
|
|
(246)
|
|
Long-term debt, net
|
$
|
448,613
|
|
|
$
|
447,743
|
|
First Lien Credit Agreement
On October 22, 2018, GOBP Holdings, Inc (“GOBP Holdings”), our wholly owned subsidiary, together with another of our wholly owned subsidiaries, entered into a first lien credit agreement (the “First Lien Credit Agreement”) with a syndicate of lenders for a $725.0 million senior term loan and a revolving credit facility for an amount up to $100.0 million, with a sub-commitment for a $35.0 million letter of credit and a sub-commitment for $20.0 million of swingline loans. Borrowings under the First Lien Credit Agreement are secured by substantially all the assets of the borrower subsidiary and its guarantors. The term loan proceeds were primarily used for retiring our prior first lien credit agreement and paying cash dividends related to our 2018 recapitalization. As of September 26, 2020, we had standby letters of credit outstanding totaling $3.5 million under the First Lien Credit Agreement.
Term Loans
The First Lien Credit Agreement permits voluntary prepayment on borrowings without premium or penalty. In connection with the closing of our IPO, we prepaid $248.0 million of principal and $3.8 million of interest on the outstanding term loan under the First Lien Credit Agreement on June 24, 2019 and elected to apply the prepayment against the remaining principal installments in the direct order of maturity. No further principal payment on the term loan will be due until the maturity date of this term loan. The terms of the First Lien Credit Agreement include mandatory prepayment requirements on the term loan if certain conditions are met (as described in the First Lien Credit Agreement).
First Incremental Agreement — On July 23, 2019, GOBP Holdings together with another of our wholly owned subsidiaries entered into an incremental agreement (the “First Incremental Agreement”) to amend the First Lien Credit Agreement. The First Incremental Agreement refinanced the term loan outstanding under the First Lien Credit Agreement with a replacement $475.2 million senior secured term loan (the “First Replacement Term Loan”) with an applicable margin of 3.50% or 3.25% for Eurodollar loans and 2.50% or 2.25% for base rate loans, in each case depending on the public corporate family rating of GOBP Holdings. The First Replacement Term Loan matured on October 22, 2025, which was the same maturity date as the prior term loan under the First Lien Credit Agreement. We wrote off debt issuance costs of $0.3 million and incurred debt modification costs of $0.2 million during the third quarter of fiscal 2019 in connection with this refinance. On October 23, 2019, we prepaid $15.0 million of principal on the First Replacement Term Loan.
Second Incremental Agreement — On January 24, 2020, GOBP Holdings together with another of our wholly owned subsidiaries, entered into a second incremental agreement (the “Second Incremental Agreement”) which amended the First Incremental Agreement. The Second Incremental Agreement refinanced the First Replacement Term loan under the First Incremental Agreement with a replacement $460.0 million senior secured term loan (the “Second Replacement Term Loan”) with an applicable margin of 2.75% for Eurodollar loans and 1.75% for base rate loans, in each case depending on the public corporate family rating of GOBP Holdings, and made certain other corresponding technical changes and updates to the First Incremental Agreement. The interest rate on the Second Replacement Term Loan was 2.90% as of September 26, 2020. The Second Replacement Term Loan matures on October 22, 2025, which is the same maturity date as prior term loans under the First Lien Credit Agreement and First Incremental Agreement. We wrote off debt issuance costs of $0.1 million and incurred debt modification costs of $0.1 million during the first quarter of fiscal 2020 in connection with this refinance.
Other than as described above, the Second Replacement Term Loan has the same terms as provided under the original First Lien Credit Agreement and the First Incremental Agreement. Additionally, the parties to the Second Incremental Agreement continue to have the same obligations set forth in the original First Lien Credit Agreement and the First Incremental Agreement (collectively, the “First Lien Credit Agreement”).
Revolving Credit Facility
We are required to pay a quarterly commitment fee ranging from 0.25% to 0.50% on the daily unused amount of the commitment under the revolving credit facility based upon the leverage ratio defined in the agreement and certain criteria specified in the agreement. We are also required to pay fronting fees and other customary fees for letters of credit issued under the revolving credit facility. On March 19, 2020, we borrowed $90.0 million under the revolving credit facility of our First Lien Credit Agreement (the “Revolving Credit Facility Loan”), the proceeds of which were to be used as reserve funding for working capital needs as a precautionary measure in light of the economic uncertainty surrounding the COVID-19 pandemic. On May 26, 2020, we repaid the Revolving Credit Facility Loan in full. As of September 26, 2020, we had $96.5 million of borrowing capacity available under the revolving credit facility.
Debt Covenants
The First Lien Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The First Lien Credit Agreement has the ability to restrict us from entering into certain types of transactions and making certain types of payments including dividends and stock repurchase and other similar distributions, with certain exceptions. Additionally, the revolving credit facility under our First Lien Credit Agreement is subject to a first lien secured leverage ratio (as defined in the First Lien Credit Agreement) of 7.00 to 1.00.
As of September 26, 2020, we were in compliance with all applicable financial covenant requirements for our First Lien Credit Agreement.
Schedule of Principal Maturities
Principal maturities of debt as of September 26, 2020 were as follows (in thousands):
|
|
|
|
|
|
Remainder of fiscal 2020
|
$
|
68
|
|
Fiscal 2021
|
—
|
|
Fiscal 2022
|
—
|
|
Fiscal 2023
|
—
|
|
Fiscal 2024
|
—
|
|
Thereafter
|
460,000
|
|
Total
|
$
|
460,068
|
|
Interest Expense
Interest expense, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Interest on loans
|
$
|
4,533
|
|
|
$
|
7,220
|
|
|
$
|
15,321
|
|
|
$
|
38,476
|
|
Amortization of debt issuance costs
|
564
|
|
|
533
|
|
|
1,684
|
|
|
1,828
|
|
Interest on finance leases
|
98
|
|
|
68
|
|
|
285
|
|
|
192
|
|
Other
|
12
|
|
|
—
|
|
|
25
|
|
|
7
|
|
Interest income
|
(374)
|
|
|
(479)
|
|
|
(1,378)
|
|
|
(1,271)
|
|
Interest expense, net
|
$
|
4,833
|
|
|
$
|
7,342
|
|
|
$
|
15,937
|
|
|
$
|
39,232
|
|
Debt Extinguishment and Modification Costs
Debt extinguishment and modification costs consisted of following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Write off of debt issuance costs
|
$
|
—
|
|
|
$
|
322
|
|
|
$
|
74
|
|
|
$
|
4,110
|
|
Debt modification costs
|
—
|
|
|
150
|
|
|
124
|
|
|
150
|
|
Write off of loan discounts
|
—
|
|
|
—
|
|
|
—
|
|
|
1,374
|
|
Debt extinguishment and modification costs
|
$
|
—
|
|
|
$
|
472
|
|
|
$
|
198
|
|
|
$
|
5,634
|
|
Note 5. 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 restricted stock units (“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 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 September 26, 2020, there were a total of 5,057,940 shares of common stock reserved for issuance under the 2019 Plan, which includes 460,078 shares added effective December 29, 2019 per the above noted automatic increase. As of September 26, 2020, there were 3,074,684 shares available for issuance under the 2019 Plan.
On April 28, 2020, the Compensation Committee approved a long-term incentive program (the “LTIP”) under the 2019 Plan consisting of time-based restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”). RSUs granted under the LTIP generally vest over three years. Half of the total PSUs granted under the LTIP 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 the three-year performance period from December 29, 2019 to December 31, 2022. 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 based on the following performance levels and percentages: below minimum (0%); minimum (50%); target (100%); maximum (200%); above maximum (200%). Actual performance achievement percentages that fall between the minimum and target performance levels and the target and maximum performance levels will be determined using linear interpolation.
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.
We determine the input assumptions for the Black-Scholes stock option valuation model as follows:
•Expected term — The expected term represents the period that a stock option award is expected to be outstanding. We have limited historical exercise data from which to derive expected term input assumptions. Consequently, we calculate expected term using the SEC simplified method whereby the expected term of a stock option award is equal to the average of the award's contractual term and vesting term.
•Volatility — We have limited historical data from which to derive stock price volatility input assumptions. Consequently, we estimate stock price volatility for our common stock by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option award. Industry peers consist of several public companies in our industry which are of similar size, complexity and stage of development.
•Risk-free interest rate — The risk-free interest rate is based on the U.S. Treasury yield curve in effective on a stock option award's grant date for U.S Treasury securities with maturities that approximate the expected term of the stock option award.
•Dividend yield — Dividend yield is assumed to be zero as we have not paid and do not expect to pay cash dividends on our common shares issued subsequent to our IPO.
Grant Activity
The following table summarizes our stock option activity under all equity incentive plans during the 39 weeks ended September 26, 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
|
(1,837,303)
|
|
7.32
|
|
(2,977,972)
|
|
4.59
|
Forfeitures
|
(51,624)
|
|
20.60
|
|
(13,071)
|
|
16.47
|
Options outstanding as of September 26, 2020
|
4,354,740
|
|
$
|
11.83
|
|
2,786,078
|
|
$
|
4.50
|
Options vested and expected to vest as of September 26, 2020
|
4,354,740
|
|
$
|
11.83
|
|
2,786,078
|
|
$
|
4.50
|
Options exercisable as of September 26, 2020
|
2,736,211
|
|
$
|
7.34
|
|
2,786,078
|
|
$
|
4.50
|
The following table summarizes our RSU activity under all equity incentive plans during the 39 weeks ended September 26, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average
Grant Date Fair Value
|
Unvested balance as of December 28, 2019
|
190,872
|
|
|
$
|
22.89
|
|
Granted
|
276,654
|
|
|
37.05
|
|
Vested
|
(92,986)
|
|
|
21.80
|
|
Forfeitures
|
(10,551)
|
|
|
31.60
|
|
Unvested balance as of September 26, 2020
|
363,989
|
|
|
$
|
33.68
|
|
The following table summarizes our PSU activity under the 2019 Plan during the 39 weeks ended September 26, 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)
|
135,909
|
|
|
36.90
|
|
Vested
|
—
|
|
|
—
|
|
Forfeitures
|
(823)
|
|
|
36.88
|
|
Unvested balance as of September 26, 2020
|
407,726
|
|
|
$
|
36.90
|
|
_______________________
(1)Represents initial grant of PSUs based on performance target level achievement of 100%.
(2)Represents the adjustment to previously granted PSUs based on current performance expectations. An additional 135,909 PSUs could potentially be included if the maximum performance level is reached.
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. We recognize share-based award forfeitures in the period such forfeitures occur.
Time-Based Stock Options
We did not record compensation expense for time-based stock option grants prior to the closing of our IPO because such time-based options were subject to a post-termination repurchase right by us until certain contingent events such as involuntary termination, a change in control, or an initial public offering occurred, and such contingent events were not deemed probable during any interim or fiscal period prior to our IPO. As a result of this repurchase right feature, other than in limited circumstances, stock issued upon the exercise of these options could be repurchased at our discretion at the lower of fair value or the applicable exercise price. The repurchase right feature lapsed upon the closing of our IPO on June 24, 2019 (the “IPO closing date”). Subsequent to the IPO closing date, we recognized share-based compensation expense for prior service completed as of the IPO closing date and began recognizing the remaining unamortized share-based compensation expense related to these outstanding time-based stock options over the remaining service period.
During the 13 weeks ended September 26, 2020 and September 28, 2019, we recognized $0.7 million and $1.9 million, respectively, of share-based compensation expense for time-based stock options. During the 39 weeks ended September 26, 2020 and September 28, 2019, we recognized $2.2 million and $24.4 million, respectively, of share-based compensation expense for time-based stock options. Unamortized compensation cost related to unvested time-based stock options was $7.5 million as of September 26, 2020, $6.5 million of which relates to time-based stock options granted at the time of our IPO. The $7.5 million of unamortized compensation cost is expected to be amortized over a weighted average period of approximately 2.74 years.
Performance-Based Stock Options
We did not record compensation expense for performance-based stock options during the 13 and 39 weeks ended September 28, 2019 because the performance criteria of such awards had not been achieved and the ultimate vesting of the awards was not considered probable as of September 28, 2019. 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 September 26, 2020, all outstanding performance-based stock options are fully vested and fully expensed.
Time-Based Restricted Stock Units
During the 13 weeks ended September 26, 2020 and September 28, 2019, we recognized $1.3 million and $0.9 million, respectively, of share-based compensation expense for RSUs held by employees and non-employee directors. During the 39 weeks ended September 26, 2020 and September 28, 2019, we recognized $3.5 million and $1.2 million, respectively, of share-based compensation expense for RSUs held by employees and non-employee directors. Unamortized compensation cost related to unvested RSUs was $9.8 million as of September 26, 2020, which is expected to be amortized over a weighted average period of approximately 2.45 years.
Performance-Based Restricted Stock Units
During the 13 and 39 weeks ended September 26, 2020 we recognized $1.7 million and $2.1 million, respectively, of share-based compensation expense for PSUs, which represents the expense associated with the expected level of performance achievement as of September 26, 2020. There were no such amounts recognized in the comparable prior year periods as PSUs only began being granted during fiscal 2020. Unamortized compensation cost related to the expected level of achievement of unvested PSUs was $12.9 million as of September 26, 2020, which is expected to be amortized over a weighted average period of approximately 2.25 years.
Dividends
For time-based stock options and RSUs that were outstanding on the dividend dates of June 23, 2016 and October 22, 2018 and that are expected to vest during fiscal 2020 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 condensed consolidated balance sheets as of September 26, 2020. We paid an immaterial amount of cash dividends on vested time-based stock options and RSUs during the 13 and 39 weeks ended September 26, 2020 and September 28, 2019, respectively, which was included in share-based compensation expense for those respective periods. Unamortized compensation cost related to future dividend payments on unvested time-based stock options and RSU share-based awards was approximately $0.5 million as of September 26, 2020.
Note 6. Income Taxes
Our income tax expense (benefit) and effective income tax rate were as follows (dollars in thousands):
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13 Weeks Ended
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39 Weeks Ended
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September 26,
2020
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September 28,
2019
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September 26,
2020
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September 28,
2019
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Income tax expense (benefit)
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$
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(14,992)
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$
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3,689
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$
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(19,037)
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$
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886
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Effective income tax rate
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(58.8)
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%
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22.9
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%
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(30.0)
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%
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13.7
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%
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The decrease in our effective income tax rate for the 13 and 39 weeks ended September 26, 2020 compared to the corresponding periods in fiscal 2019 was primarily due to excess tax benefits related to the exercise of stock options and vesting of employee restricted stock units. Our effective income tax rate for the 13 and 39 weeks ended September 26, 2020 and 39 weeks ended September 28, 2019 is lower than the U.S. statutory income tax rate of 21% primarily due to excess tax benefits related to the exercise of stock options and the vesting of employee restricted stock units. Our effective income tax rate for the 13 weeks ended September 28, 2019 is higher than the U.S. statutory income tax rate of 21% primarily due to state income taxes and permanently nondeductible expenses.
Based on our current assessment of future taxable income, including available tax planning opportunities, we anticipate that 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 September 26, 2020 and December 29, 2019.
Our policy is to include interest and penalties associated with uncertain tax positions within income tax expense and include accrued interest and penalties with the related income tax liability on our condensed consolidated balance sheets. To date, we have not recognized any interest and penalties in our condensed consolidated statements of operations and comprehensive income, nor have we accrued for or made payments for interest and penalties. As of September 26, 2020 and December 28, 2019, we had no uncertain tax positions and do not anticipate any changes to our uncertain tax positions within the next 12 months.
Note 7. Related Party Transactions
Related Party Leases
We leased property from entities affiliated with certain of our non-controlling stockholders for 15 store locations and one warehouse location as of September 26, 2020 and for 16 store locations and one warehouse location as of September 28, 2019. These entities received aggregate lease payments from us of $1.5 million for each of the 13 weeks ended September 26, 2020 and September 28, 2019, and $4.5 million and $4.6 million for the 39 weeks ended September 26, 2020 and September 28, 2019, respectively.
During April 2020, we entered into an aircraft dry lease agreement (the “aircraft lease”) with an entity controlled by our Chief Executive Officer, Mr. Lindberg, to lease a Pilatus PC-12 aircraft. We believe that this agreement provides us better access to visit our stores, many of which are in remote areas or are not easily accessible by car or regular commercial airline service, and to visit prospective real estate sites. The aircraft lease gives us the ability to use the aircraft in the course of our operations on an as-needed, non-exclusive basis. The aircraft lease provides that we pay an hourly lease rate and we bear all direct operating costs associated with our use of the aircraft, and the lessor bears all fixed costs (e.g. maintenance, hangar, insurance). Mr. Lindberg, to the extent that he operates the aircraft for his personal use, will bear all costs associated with his operation of the aircraft. We believe that the terms of the aircraft lease are no less favorable than could be obtained from an unrelated third party and we believe that the foregoing arrangement, including related direct operating costs, insurance and crew costs, will reduce our average hourly cost for use of private aircraft, which previously had been primarily conducted through charter arrangements. Operating lease costs related to the aircraft lease are included in selling, general and administrative expenses, and were immaterial for the 13 and 39 weeks ended September 26, 2020 and September 28, 2019.
Independent Operator Notes and Receivables
We offer interest-bearing notes to independent operators and the gross operating notes and receivables due from these entities was $41.4 million and $37.7 million as of September 26, 2020 and December 28, 2019, respectively. See Note 2 for additional information.
Note 8. Commitments and Contingencies
We are involved from time to time in claims, proceedings and litigation arising in the normal course of business. We do not believe the impact of such litigation will have a material adverse effect on our condensed consolidated financial statements taken as a whole.
Note 9. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share (in thousands, except per share data):
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13 Weeks Ended
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39 Weeks Ended
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September 26,
2020
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September 28,
2019
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September 26,
2020
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September 28,
2019
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Numerator
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Net income and comprehensive income
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$
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40,474
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$
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12,445
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$
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82,449
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$
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5,587
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Denominator
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Weighted-average shares outstanding — basic
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92,489
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88,345
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90,929
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|
75,778
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Effect of dilutive stock options
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6,666
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4,737
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7,022
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2,788
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Effect of dilutive RSUs
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111
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101
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82
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36
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Weighted-average shares outstanding — diluted (1)
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99,266
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93,183
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98,033
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78,602
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Earnings per share :
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Basic
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$
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0.44
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$
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0.14
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$
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0.91
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$
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0.07
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Diluted
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$
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0.41
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$
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0.13
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$
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0.84
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$
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0.07
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_______________________
(1)The diluted weighted-average shares outstanding for the 13 and 39 weeks ended September 28, 2019 did not include performance-based stock options because the requisite performance criteria of such stock options had not been achieved as of that date.
On February 3, 2020, in conjunction with a secondary offering, certain performance criteria were achieved resulting in the vesting of 4.1 million performance-based stock options, and accordingly, these vested performance-based stock options are included in the diluted weighted-average shares outstanding for the 13 and 39 weeks ended September 26, 2020.
On April 27, 2020 in conjunction with an additional secondary offering, certain performance criteria were achieved resulting in the vesting of the remaining 1.7 million unvested performance-based stock options, and accordingly, these vested performance-based stock options are included in the diluted weighted-average shares outstanding for the 13 and 39 weeks ended September 26, 2020. See Note 5 for additional information.
The following weighted-average common stock equivalents were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive (in thousands):
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13 Weeks Ended
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39 Weeks Ended
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September 26,
2020
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September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Stock options
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—
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|
—
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—
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|
200
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RSUs
|
—
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—
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1
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17
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Total
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—
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—
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1
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217
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