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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 28, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to
Commission File Number: 001-38950


Grocery Outlet Holding Corp.
(Exact name of registrant as specified in its charter)

Delaware47-1874201
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5650 Hollis Street, Emeryville, California
94608
(Address of principal executive offices)(Zip Code)
(510845-1999
(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.001 per shareGONasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No  ☒
As of May 8, 2020, the registrant had 90,873,610 shares of common stock outstanding.



GROCERY OUTLET HOLDING CORP.
FORM 10-Q
TABLE OF CONTENTS
Page
Item 4.

1

Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q (“Form 10-Q” or “report”) and the documents incorporated by reference herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this report and the documents incorporated by reference herein other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, business trends, and our objectives for future operations, may constitute forward-looking statements. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “project,” “seek,” “will,” and similar expressions, are intended to identify such forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described under the headings “Item 1A. Risk Factors,” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report or as described in the other documents and reports we file with the U.S. Securities and Exchange Commission (the “SEC”). We encourage you to read this report and our other filings with the SEC carefully. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied by the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activities, performance or achievements. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this report. We do not undertake any duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations.
As used in this report, references to “Grocery Outlet,”“the Company,”“registrant,”“we,”“us” and “our,” refer to Grocery Outlet Holding Corp. and its consolidated subsidiaries unless otherwise indicated or the context requires otherwise.
Website Disclosure
We use our website, www.groceryoutlet.com, as a channel of distribution of Company information. Financial and other important information about us is routinely accessible through and posted on our website. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website and information accessible through our website is not, however, a part of this report.

2

Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
March 28,
2020
December 28,
2019
Assets
Current assets:
Cash and cash equivalents$160,936  $28,101  
Independent operator receivables and current portion of independent operator notes, net of allowance $1,377 and $1,283
7,736  7,003  
Other accounts receivable, net of allowance $22 and $19
3,470  2,849  
Merchandise inventories188,346  219,420  
Prepaid expenses and other current assets12,606  13,453  
Total current assets373,094  270,826  
Independent operator notes, net of allowance $9,215 and $9,088
22,137  20,331  
Property and equipment, net366,429  356,614  
Operating lease right-of-use assets754,444  734,327  
Intangible assets, net47,526  47,792  
Goodwill747,943  747,943  
Other assets7,524  7,696  
Total assets$2,319,097  $2,185,529  
Liabilities and Stockholders’ Equity
Current liabilities:
Trade accounts payable$101,066  $119,217  
Accrued expenses29,877  31,363  
Accrued compensation14,724  14,915  
Current portion of long-term debt179  246  
Current lease liabilities41,281  38,245  
Income and other taxes payable5,363  4,641  
Total current liabilities192,490  208,627  
Long-term debt, net537,487  447,743  
Deferred income taxes14,218  16,020  
Long-term lease liabilities790,274  767,755  
Total liabilities1,534,469  1,440,145  
Commitments and contingencies (Note 9)
Stockholders’ equity:
Voting common stock, par value $0.001 per share, 500,000,000 shares authorized; 89,907,194 and 89,005,062 shares issued and outstanding, respectively
90  89  
Series A preferred stock, par value $0.001 per share, 50,000,000 shares authorized; no shares issued and outstanding
    
Additional paid-in capital743,444  717,282  
Retained earnings41,094  28,013  
Total stockholders’ equity784,628  745,384  
Total liabilities and stockholders’ equity$2,319,097  $2,185,529  
See Notes to Condensed Consolidated Financial Statements
3

Table of Contents
GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
13 Weeks Ended
March 28,
2020
March 30,
2019
Net sales $760,308  $606,271  
Cost of sales 523,282  419,254  
Gross profit 237,026  187,017  
Operating expenses:
Selling, general and administrative 186,931  152,854  
Depreciation and amortization 12,945  12,296  
Share-based compensation 20,277  211  
Total operating expenses 220,153  165,361  
Income from operations 16,873  21,656  
Other expenses:
Interest expense, net 5,834  16,438  
Debt extinguishment and modification costs198    
Total other expenses 6,032  16,438  
Income before income taxes 10,841  5,218  
Income tax expense (benefit)(1,801) 1,444  
Net income and comprehensive income $12,642  $3,774  
Basic earnings per share $0.14  $0.06  
Diluted earnings per share $0.13  $0.06  
Weighted average shares outstanding:
Basic 89,481  68,514  
Diluted 94,869  68,553  
See Notes to Condensed Consolidated Financial Statements

4

Table of Contents
GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
(unaudited)
Voting CommonNonvoting CommonPreferredAdditional
Paid-In Capital
Retained EarningsStockholders’ Equity
SharesAmountSharesAmountSharesAmount
Balance at December 28, 201989,005,062  $89    $    $  $717,282  $28,013  $745,384  
Cumulative effect of accounting change439  439  
Exercise and vest of share-based awards902,132  1  6,032  6,033  
Share-based compensation expense20,277  20,277  
Dividends paid(147) (147) 
Net income and comprehensive income12,642  12,642  
Balance at March 28, 202089,907,194  $90    $    $  $743,444  $41,094  $784,628  
See Notes to Condensed Consolidated Financial Statements

5

Table of Contents
GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, continued
(in thousands, except share amounts)
(unaudited)
Voting CommonNonvoting CommonPreferredAdditional
Paid-In Capital
Retained EarningsStockholders’ Equity
SharesAmountSharesAmountSharesAmount
Balance at December 29, 201867,435,288  $67  1,038,413  $1  1  $  $287,457  $12,426  $299,951  
Cumulative effect of accounting change169  169  
Exercise and vest of share-based awards42,438        
Share-based compensation expense211  211  
Dividends paid(254) (254) 
Net income and comprehensive income3,774  3,774  
Balance at March 30, 201967,477,726  $67  1,038,413  $1  1  $  $287,668  $16,115  $303,851  
See Notes to Condensed Consolidated Financial Statements
6

Table of Contents
GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
13 Weeks Ended
March 28,
2020
March 30,
2019
Cash flows from operating activities:
Net income$12,642  $3,774  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment11,788  10,287  
Amortization of intangible and other assets1,782  2,562  
Amortization of debt issuance costs and bond discounts502  762  
Debt extinguishment and modification costs198    
Loss on disposal of assets1,053  182  
Share-based compensation20,277  211  
Provision for accounts receivable848  1,483  
Deferred income taxes(1,801) 1,436  
Other2    
Changes in operating assets and liabilities:
Independent operator and other accounts receivable(3,219) (29) 
Merchandise inventories31,073  (14,216) 
Prepaid expenses and other current assets847  988  
Income and other taxes payable722  (439) 
Trade accounts payable, accrued compensation and other accrued expenses(14,412) 13,760  
Changes in operating lease assets and liabilities, net5,518  1,479  
Net cash provided by operating activities67,820  22,240  
Cash flows from investing activities:
Cash advances to independent operators(1,485) (2,171) 
Repayments of cash advances from independent operators1,136  893  
Purchase of property and equipment(28,173) (18,399) 
Proceeds from sales of assets79  401  
Intangible assets and licenses(1,350) (721) 
Net cash used in investing activities(29,793) (19,997) 
Cash flows from financing activities:
Proceeds from exercise of share-based compensation awards6,033    
Proceeds from loans90,000    
Other direct costs paid related to the initial public offering  (1,442) 
Principal payments on term loans(187) (1,813) 
Principal payments on other borrowings(191) (201) 
Dividends paid(147) (254) 
Debt issuance costs paid(700)   
Net cash provided by (used in) financing activities94,808  (3,710) 
Net increase in cash and cash equivalents132,835  (1,467) 
Cash and cash equivalents at beginning of period28,101  21,063  
Cash and cash equivalents at end of period$160,936  $19,596  
See Notes to Condensed Consolidated Financial Statements
7

Table of Contents
GROCERY OUTLET HOLDING CORP.
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 March 28, 2020, we had 355 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 and 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 and 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. See Note 10 for additional information.
8

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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 first-in, first-out 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. The right-of-use asset is recorded net of lease incentives. 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.
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Fair Value Measurements Fair value is defined as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value of financial instruments is categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Level 3 — Unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions when pricing the financial instruments, such as cash flow modeling assumptions.
The assets’ or liabilities’ fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The fair value framework requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
There were no assets or liabilities measured at fair value on a recurring or nonrecurring basis as of March 28, 2020 or December 28, 2019. There were no transfers of assets or liabilities between levels within the fair value hierarchy as of March 28, 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, IO receivables, other accounts receivable and accounts payable — The carrying value of such financial instruments approximates their fair value due to factors such as their short-term nature or their variable interest rates.
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 fair values of our term loans as of March 28, 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):
March 28,
2020
December 28,
2019
Carrying Amount (1)
Estimated Fair Value (2)
Carrying Amount (1)
Estimated Fair Value (2)
Financial Liabilities:
Term Loans (Level 2)$458,541  $411,125  $458,682  $466,515  
_______________________
(1)The carrying amounts as of March 28, 2020 and December 28, 2019 are net of unamortized debt discounts of approximately $1.5 million for each period presented.
(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.
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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 March 28, 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 $1.6 million as of March 28, 2020 and $2.0 million as of December 28, 2019. Breakage amounts were immaterial for the 13-week periods ended March 28, 2020 and March 30, 2019.
Disaggregated Revenues The following table presents sales revenue by type of product for the periods indicated (in thousands):
13 Weeks Ended
March 28,
2020
March 30,
2019
Perishable (1)
$253,448  $206,956  
Non-perishable (2)
506,860  399,315  
Total sales$760,308  $606,271  
_______________________
(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.
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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 350, 342 and 315 stores operated by independent operators as of March 28, 2020, December 28, 2019 and March 30, 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 $745.5 million and $589.3 million for the 13-week periods ended March 28, 2020 and March 30, 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 $114.4 million and $91.2 million for the 13-week periods ended March 28, 2020 and March 30, 2019, respectively. Independent operator commissions of $8.8 million and $6.1 million were included in accrued expenses as of March 28, 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. To ensure independent operator 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 $40.5 million and $37.7 million as of March 28, 2020 and December 28, 2019, respectively. See Note 2 for additional information.
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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 and are currently evaluating the impact on our consolidated financial statements.
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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 $0.6 million and $0.5 million as of March 28, 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 March 28, 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 March 28, 2020 and December 28, 2019 consisted of the following (in thousands):
AllowanceCurrent PortionLong-term Portion
GrossCurrent PortionLong-term PortionNet
March 28, 2020
Independent operator notes$33,993  $(789) $(9,215) $23,989  $1,852  $22,137  
Independent operator receivables6,472  (588)   5,884  5,884    
Total$40,465  $(1,377) $(9,215) $29,873  $7,736  $22,137  

AllowanceCurrent PortionLong-term Portion
GrossCurrent PortionLong-term PortionNet
December 28, 2019
Independent operator notes$31,952  $(678) $(9,088) $22,186  $1,855  $20,331  
Independent operator receivables5,753  (605)   5,148  5,148    
Total$37,705  $(1,283) $(9,088) $27,334  $7,003  $20,331  

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A summary of activity in the independent operator notes and receivable allowance was as follows (in thousands):
13 Weeks Ended
March 28,
2020
March 30,
2019
Beginning balance$10,371  $9,067  
Provision for independent operator notes and receivables848  1,483  
Cumulative effect of accounting change(439)   
Write-off of provision for independent operator notes and receivables(188) (291) 
Ending Balance$10,592  $10,259  

The following table presents the amortized cost basis of independent operator notes by year of origination and credit quality indicator (in thousands):
Credit Quality Indicator2020 (YTD)2019201820172016PriorTotal
TCAP$988  $1,212  $1,930  $1,582  $  $  $5,712  
Non-TCAP779  5,627  2,409  2,198  320  332  11,665  
New store5,056  9,377  2,183        16,616  
Total$6,823  $16,216  $6,522  $3,780  $320  $332  $33,993  

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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 March 28, 2020, the right-of-use assets and lease liabilities related to these properties were $41.9 million and $46.1 million, respectively. As of March 28, 2020, we had executed leases for 37 store locations that we had not yet taken possession of with total undiscounted future lease payments of $211.4 million over approximately 17 years.
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 March 28, 2020 totaling $4.6 million ending in various years through 2028, and as of December 28, 2019 totaling $4.9 million ending in various years through 2028, which have not been deducted from the future minimum payments.
The balance sheet classification of our right-of-use lease assets and lease liabilities as of March 28, 2020 was as follows (in thousands):
LeasesClassification
Assets:
Operating lease assetsOperating lease right-of-use assets$754,444  
Finance lease assetsOther assets5,789  
Total leased assets$760,233  
Liabilities:
Current
OperatingCurrent lease liabilities$40,507  
FinanceCurrent lease liabilities774  
Noncurrent
OperatingLong-term lease liabilities785,169  
FinanceLong-term lease liabilities5,105  
Total lease liabilities$831,555  
The components of lease expense were as follows (in thousands):
13 Weeks Ended
Lease CostClassificationMarch 28,
2020
March 30,
2019
Operating lease costSelling, general and administrative expenses$26,514  $23,211  
Finance lease cost:
Amortization of right-of-use assetsDepreciation and amortization220  173  
Interest on leased liabilitiesInterest expense, net111  71  
Sublease incomeOther income(294) (353) 
Net lease cost$26,551  $23,102  
Short-term lease expense and variable lease payments recorded in operating expenses for the 13 weeks ended March 28, 2020 and March 30, 2019 were immaterial.
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Maturities of lease liabilities as of March 28, 2020 were as follows (in thousands):
Operating LeasesFinance LeasesTotal
Remainder of fiscal 2020$75,145  $835  $75,980  
Fiscal 2021101,612  1,133  102,745  
Fiscal 2022100,942  1,080  102,022  
Fiscal 2023100,641  978  101,619  
Fiscal 202499,868  913  100,781  
Thereafter785,400  2,436  787,836  
Total lease payments 1,263,608  7,375  $1,270,983  
Less: Imputed interest (437,932) (1,496) (439,428) 
Present value of lease liabilities $825,676  $