PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

99 CENTS ONLY STORES LLC

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	July 28, 2017			January 27, 2017
	(Unaudited)
ASSETS
Current Assets:
Cash	$	2,485		$	2,448
Accounts receivable, net of allowance for doubtful accounts of $17 and $122 at July 28, 2017 and January 27, 2017, respectively	2,927			3,510
Income taxes receivable	2,739			3,876
Inventories, net	188,846			175,892
Assets held for sale	4,903			4,903
Other	17,383			10,307
Total current assets	219,283			200,936
Property and equipment, net	466,157			507,620
Deferred financing costs, net	2,480			3,488
Intangible assets, net	444,192			447,027
Goodwill	380,643			380,643
Deposits and other assets	8,883			8,592
Total assets	$	1,521,638		$	1,548,306

LIABILITIES AND MEMBER’S EQUITY
Current Liabilities:
Accounts payable	$	101,860		$	86,588
Payroll and payroll-related	30,348			24,110
Sales tax	15,305			19,389
Other accrued expenses	54,749			46,082
Workers’ compensation	68,941			69,169
Current portion of long-term debt	5,669			6,138
Current portion of capital and financing lease obligations	1,214			31,330
Total current liabilities	278,086			282,806
Long-term debt, net of current portion	876,658			865,375
Unfavorable lease commitments, net	3,371			3,988
Deferred rent	30,632			30,360
Deferred compensation liability	912			816
Capital and financing lease obligation, net of current portions	52,820			47,195
Deferred income taxes	161,450			161,450
Other liabilities	15,813			12,297
Total liabilities	1,419,742			1,404,287
Commitments and contingencies (Note 11)
Member’s Equity:
Member units — 100 units issued and outstanding at July 28, 2017 and January 27, 2017	551,172			550,918
Investment in Number Holdings, Inc. preferred stock	(19,200		)	(19,200		)
Accumulated deficit	(430,076		)	(387,699		)
Total equity	101,896			144,019
Total liabilities and equity	$	1,521,638		$	1,548,306

The accompanying notes are an integral part of these consolidated financial statements.

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99 CENTS ONLY STORES LLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

	For the Second Quarter Ended						For the First Half Ended
	July 28, 2017			July 29, 2016			July 28, 2017			July 29, 2016

Net Sales:
99¢ Only Stores	$	531,288		$	487,460		$	1,069,280		$	989,226
Bargain Wholesale	9,162			8,998			18,682			20,161
Total sales	540,450			496,458			1,087,962			1,009,387
Cost of sales	384,587			355,258			769,746			719,220
Gross profit	155,863			141,200			318,216			290,167
Selling, general and administrative expenses	172,259			159,485			326,010			316,714
Operating loss	(16,396		)	(18,285		)	(7,794		)	(26,547		)
Other (income) expense:
Interest income	(5		)	(36		)	(7		)	(38		)
Interest expense	17,161			16,784			34,503			33,310
Loss on extinguishment	—			—			—			335
Total other expense, net	17,156			16,748			34,496			33,607
Loss before provision for income taxes	(33,552		)	(35,033		)	(42,290		)	(60,154		)
Provision for income taxes	72			52			87			125
Net loss	$	(33,624	)	$	(35,085	)	$	(42,377	)	$	(60,279	)
Other comprehensive (loss) income, net of tax:
Unrealized gains (losses) on interest rate cash flow hedge	—			46			—			(168		)
Less: reclassification adjustment included in net income	—			(49		)	—			330
Other comprehensive (loss) income, net of tax	—			(3		)	—			162
Comprehensive loss	$	(33,624	)	$	(35,088	)	$	(42,377	)	$	(60,117	)

The accompanying notes are an integral part of these consolidated financial statements.

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99 CENTS ONLY STORES LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For the First Half Ended
	July 28, 2017			July 29, 2016

Cash flows from operating activities:
Net loss	$	(42,377	)	$	(60,279	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation	33,748			33,520
Amortization of deferred financing costs and accretion of OID	3,360			2,941
Amortization of intangible assets	875			875
Amortization of favorable/unfavorable leases, net	1,358			1,193
Loss on extinguishment of debt	—			335
(Gain) loss on disposal of fixed assets	(17,575		)	293
Long-lived assets impairment	1,515			—
Loss on interest rate hedge	—			514
Stock-based compensation	254			388
Changes in assets and liabilities associated with operating activities:
Accounts receivable	583			193
Inventories	(12,954		)	21,076
Deposits and other assets	(7,652		)	(1,548		)
Accounts payable	15,594			26,591
Accrued expenses	10,821			1,328
Accrued workers’ compensation	(228		)	(1,757		)
Income taxes	1,137			1,278
Deferred rent	272			367
Other long-term liabilities	(2,366		)	(272		)
Net cash (used in) provided by operating activities	(13,635		)	27,036
Cash flows from investing activities:
Purchases of property and equipment	(18,918		)	(23,960		)
Proceeds from sale of property and fixed assets	9,396			612
Net cash used in investing activities	(9,522		)	(23,348		)

Cash flows from financing activities:
Payment of long-term debt	(3,538		)	(3,069		)
Proceeds under revolving credit facility	115,400			92,200
Payments under revolving credit facility	(103,400		)	(119,100		)
Payments of debt issuance costs	—			(4,725		)
Proceeds from financing lease obligations	15,317			31,503
Payments of capital and financing lease obligations	(585		)	(500		)
Net cash provided by (used in) financing activities	23,194			(3,691		)
Net increase (decrease) in cash	37			(3		)
Cash - beginning of period	2,448			2,312
Cash - end of period	$	2,485		$	2,309
Supplemental cash flow information:
Income taxes refunded	$	(1,124	)	$	(1,152	)
Interest paid	$	30,447		$	30,667
Non-cash investing activities for purchases of property and equipment	$	322		$	949

The accompanying notes are an integral part of these consolidated financial statements.

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99 CENTS ONLY STORES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Summary of Significant Accounting Policies

Nature of Business

The Company is organized under the laws of the State of California. Effective October 18, 2013, 99¢ Only Stores converted from a California corporation to a California limited liability company, 99 Cents Only Stores LLC, that is managed by its sole member, Number Holdings, Inc., a Delaware corporation (“Parent”). The term “Company” refers to 99¢ Only Stores and its consolidated subsidiaries prior to the Conversion (as described in Note 1 to the Annual Report on Form 10-K for the fiscal year ended January 27, 2017) and to 99 Cents Only Stores LLC and its consolidated subsidiaries at the time of or after the Conversion. The Company is an extreme value retailer of consumable and general merchandise and seasonal products. As of July 28, 2017, the Company operated 390 retail stores with 283 in California, 48 in Texas, 38 in Arizona, and 21 in Nevada. The Company is also a wholesale distributor of various products.

Merger

On January 13, 2012, the Company was acquired through a merger (the “Merger”) with a subsidiary of Parent with the Company surviving. In connection with the Merger, the Company became a subsidiary of Parent, which is controlled by affiliates of Ares Management, L.P. (“Ares”) and Canada Pension Plan Investment Board (“CPPIB” and, together with Ares, the “Sponsors”). As a result of the Merger, the Company’s common stock was delisted from the New York Stock Exchange and the Company ceased to be a publicly held and traded equity company.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). However, certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchange Commission. These statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 27, 2017. In the opinion of the Company’s management, these interim unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the consolidated financial position and results of operations for each of the periods presented. The results of operations and cash flows for such periods are not necessarily indicative of results to be expected for the full fiscal year ending February 2, 2018 (“fiscal 2018”).

Fiscal Year

The Company follows a fiscal calendar consisting of four quarters with 91 days, each ending on the Friday closest to the last day of April, July, October or January, as applicable, and a 52-week fiscal year with 364 days, with a 53-week year every five to six years. Unless otherwise stated, references to years in this Report relate to fiscal years rather than calendar years. The Company’s fiscal 2018 began on January 28, 2017, will end on February 2, 2018 and will consist of 53 weeks. The Company’s fiscal year 2017 (“fiscal 2017”) began on January 30, 2016, ended on January 27, 2017 and consisted of 52 weeks. The second quarter ended July 28, 2017 (the “second quarter of fiscal 2018”) and the second quarter ended July 29, 2016 (the “second quarter of fiscal 2017”) were each comprised of 91 days. Each of the six-month period ended July 28, 2017 (the “first half of fiscal 2018”) and the six-month period ended July 29, 2016 (the “first half of fiscal 2017”) was comprised of 182 days.

Use of Estimates

The preparation of the unaudited consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash

For purposes of reporting cash flows, cash includes cash on hand, cash at the stores and cash in financial institutions. The majority of payments due from financial institutions for the settlement of debit card and credit card transactions are processed within three business days and therefore are also classified as cash. Cash balances held at financial institutions are generally in excess of federally insured limits. These accounts are only insured by the Federal Deposit Insurance Corporation up to $250,000. The Company historically has not experienced any losses in such accounts. The Company places its temporary cash investments with

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what it believes to be high credit, quality financial institutions. Under the Company’s cash management system, checks issued but not presented to the bank may result in book cash overdraft balances for accounting purposes. The Company reclassifies book overdrafts to accounts payable, which are reflected as an operating activity in its unaudited consolidated statements of cash flows. Book overdrafts included in accounts payable were $7.9 million and $7.0 million as of July 28, 2017 and January 27, 2017, respectively.

Allowance for Doubtful Accounts

In connection with its wholesale business, the Company evaluates the collectability of accounts receivable based on a combination of factors. In cases where the Company is aware of circumstances that may impair a specific customer’s or tenant’s ability to meet its financial obligations subsequent to the original sale, the Company will record an allowance against amounts due and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers and tenants, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are past due, industry and geographic concentrations, the current business environment and the Company’s historical experiences.

Inventories

Inventories are valued at the lower of cost or net realizable value. Inventory costs are established using a methodology that approximates first in, first out, which for store inventories is based on a retail inventory method. Valuation allowances for shrinkage as well as excess and obsolete inventory are also recorded. The Company includes spoilage, scrap and shrink in its definition of shrinkage. Shrinkage is estimated as a percentage of sales for the period from the last physical inventory date to the end of the applicable period. Such estimates are based on experience and the most recent physical inventory results. Physical inventory counts are completed at each of the Company’s retail stores at least once a year by an outside inventory service company. The Company performs inventory cycle counts at its warehouses throughout the year. The Company also performs inventory reviews and analysis on a quarterly basis for both warehouse and store inventory to determine inventory valuation allowances for excess and obsolete inventory. The valuation allowances for excess and obsolete inventory are based on the age of the inventory, sales trends and future merchandising plans. The valuation allowances for excess and obsolete inventory require management judgment and estimates that may impact the ending inventory valuation and valuation allowances that may have a material effect on the reported gross margin for the period. These estimates are subject to change based on management’s evaluation of, and response to, a variety of factors and trends, including, but not limited to, consumer preferences and buying patterns, age of inventory, increased competition, inventory management, merchandising strategies and historical sell through trends. The Company’s ability to adequately evaluate the impact of inventory management and merchandising strategies executed in response to such factors and trends in future periods could have a material impact on such estimates.

In order to obtain inventory at attractive prices, the Company takes advantage of large volume purchases, closeouts and other similar purchase opportunities. Consequently, the Company’s inventory fluctuates from period to period and the inventory balances vary based on the timing and availability of such opportunities.

Property and Equipment

Property and equipment are carried at cost and are depreciated or amortized on a straight-line basis over the following useful lives:

Owned buildings and improvements		Lesser of 30 years or the estimated useful life of the improvement
Leasehold improvements		Lesser of the estimated useful life of the improvement or remaining lease term
Fixtures and equipment		3-5 years
Transportation equipment		3-5 years
Information technology systems		For major corporate systems, estimated useful life up to 7 years; for functional standalone systems, estimated useful life up to 5 years

The Company’s policy is to capitalize expenditures that materially increase asset lives and expense ordinary repairs and maintenance as incurred.

Long-Lived Assets

The Company assesses the impairment of depreciable long-lived assets when events or changes in circumstances indicate that the carrying value may not be recoverable. The Company groups and evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual identifiable cash flows are available. Recoverability is measured by comparing the carrying amount of an asset to expected future net cash flows generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, the carrying amount is compared to its fair value and an impairment charge is recognized to the extent of the difference. Factors that the Company considers important that could individually or in combination trigger an impairment review include the following: (1) significant underperformance relative to expected historical or projected future

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operating results; (2) significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business; and (3) significant changes in the Company’s business strategies and/or negative industry or economic trends. On a quarterly basis, the Company assesses whether events or changes in circumstances occur that potentially indicate that the carrying value of long-lived assets may not be recoverable (Level 3 measurement, see Note 7, “Fair Value of Financial Instruments”). Considerable management judgment is necessary to estimate projected future operating cash flows. Accordingly, if actual results fall short of such estimates, significant future impairments could result.

During the second quarter of fiscal 2018, the Company decided to close three stores by the end of fiscal 2018 or early fiscal 2019. Of these three stores, one will close upon lease expiration and two will close through exercise by the Company of its early lease termination rights. As a result of this decision, the Company recognized an impairment charge of approximately $1.5 million as part of selling, general and administrative expenses in the second quarter of fiscal 2018 related to the planned closure of these stores. During the first half of fiscal 2017, the Company did not record any long-lived asset impairment charges.

Goodwill and Other Intangible Assets

In connection with the Merger purchase price allocation, the fair values of long-lived and intangible assets were determined based upon assumptions related to the future cash flows, discount rates and asset lives using then available information, and in some cases were obtained from independent professional valuation experts. The Company amortizes intangible assets over their estimated useful lives unless such lives are deemed indefinite.

Amortizable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable based on undiscounted cash flows, and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Significant judgment is required in determining whether a potential indicator of impairment of long-lived assets exists and in estimating future cash flows used in the impairment tests (Level 3 measurement, see Note 7, “Fair Value of Financial Instruments”).

Goodwill and indefinite-lived intangible assets are not amortized but instead tested annually for impairment or more frequently when events or changes in circumstances indicate that the assets might be impaired. Goodwill is tested for impairment by comparing the carrying amount of the reporting unit to the fair value of the reporting unit to which the goodwill is assigned. The Company has the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step zero of the goodwill impairment test). If the Company does not perform a qualitative assessment, or determines, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, goodwill is impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of goodwill. Management has determined that the Company has two reporting units, the retail reporting unit and the wholesale reporting unit.

The Company, assisted by an independent third party valuation firm, performs the annual test for impairment in January of the fiscal year and determines fair value based on a combination of the income approach and the market approach. The income approach is based on discounted cash flows to determine fair value. The market approach uses a selection of comparable companies and transactions in determining fair value. The fair value of the trade name is also tested for impairment in the fourth quarter by comparing the carrying value to the fair value. Fair value of a trade name is determined using a relief from royalty method under the income approach, which uses projected revenue allocable to the trade name and an assumed royalty rate (Level 3 measurement, see Note 7, “Fair Value of Financial Instruments”). These approaches involve making key assumptions about future cash flows, discount rates and asset lives using then best available information. These assumptions are subject to a high degree of complexity and judgment and are subject to change.

During the third quarter of fiscal 2016, the Company determined that indicators of impairment existed to require an interim impairment analysis of goodwill and trade name. The first step evaluation concluded that the fair value of the retail reporting unit was below its carrying value. The Company performed step two of the goodwill impairment test. As a result of the preliminary analysis and based on best estimate, the Company recorded a $120.0 million non-cash goodwill impairment charge in the third quarter of fiscal 2016, which was reflected as goodwill impairment in the consolidated statements of comprehensive income (loss). The finalization of the preliminary goodwill impairment test was completed in the fourth quarter of fiscal 2016 and resulted in a $20.9 million adjustment in goodwill, lowering the estimated third quarter of fiscal 2016 goodwill impairment charge from $120.0 million to $99.1 million.

The remaining amount of goodwill allocated to the retail reporting unit and wholesale reporting unit was $368.1 million and $12.5 million, respectively, as of January 29, 2016.

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During the fourth quarter of fiscal 2017, the Company completed step one of its annual goodwill impairment test for the two reporting units and determined that there was no impairment of goodwill since the fair value of the Company’s reporting units exceeded their carrying amounts. The results of this test showed that the fair value of our retail reporting unit exceeded its carrying value by a substantial amount. The results of this test showed that the fair value of wholesale reporting unit exceeded carrying value by approximately 18%. As discussed above, considerable management judgment is necessary in estimating future cash flows, market interest rates, discount rates and other factors affecting the valuation of goodwill. The Company’s forecasts used in its fiscal 2017 annual impairment test include growth in net sales, new store openings and same-store sales, positive trends in cost of sales and selling, general and administrative expense. In each case, these estimates and assumptions could be materially affected by factors such as unforeseen events or changes in general economic conditions, a decline in comparable company market multiples, changes to discount rates, increased competitive forces, inability to maintain pricing structure, deterioration of vendor relationships, failure to adequately manage and improve inventory processes and procedures and changes in customer behavior which could result in changes to management’s strategies. If operating results continue to change versus the Company’s expectations, additional impairment charges may be recorded in the future.

Additionally, during the fourth quarter of fiscal 2017, the Company completed its annual indefinite-lived intangible asset impairment test and determined there was no impairment to the trade name since the fair value of the trade name exceeded its carrying amount. The results of this test showed that the fair value of trade name exceeded carrying value by approximately 18%. The relief from royalty method estimates our theoretical royalty savings from ownership of the intangible asset. Key assumptions used in this model included sales projections, discount rates and royalty rates, and considerable management judgment is necessary in developing and evaluating such assumptions. If future results are not consistent with current estimates and assumptions, impairment charges maybe recorded in future.

During the first half of fiscal 2018, the Company did not record any impairment charges related to goodwill or other intangible assets.

Derivatives

The Company accounts for derivative financial instruments in accordance with authoritative guidance for derivative instrument and hedging activities. Financial instrument positions taken by the Company are primarily intended to be used to manage risks associated with interest rate exposures.

The Company’s derivative financial instruments are recorded on the balance sheet at fair value, and are recorded in either current or noncurrent assets or liabilities based on their maturity. Changes in the fair values of derivatives are recorded in net earnings or other comprehensive income (“OCI”), based on whether the instrument is designated and effective as a hedge transaction and, if so, the type of hedge transaction. Gains or losses on derivative instruments reported in accumulated other comprehensive income (“AOCI”) are reclassified to earnings in the period the hedged item affects earnings. Any ineffectiveness is recognized in earnings in the period incurred.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company’s ability to realize deferred tax assets is assessed throughout the year and a valuation allowance is established accordingly. The Company recognizes the impact of a tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The Company recognizes potential interest and penalties related to uncertain tax positions in income tax expense. Refer to Note 10, “Income Taxes,” for further discussion of income taxes.

Stock-Based Compensation

The Company accounts for stock-based payment awards based on their fair value. The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods. For awards classified as equity, the Company estimates the fair value for each option award as of the date of grant using the Black-Scholes option pricing model or other appropriate valuation models. The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of the stock price. Stock options are generally granted to employees at exercise prices equal to or greater than the fair market value of the stock at the dates of grant. The fair value of options that vest based on the Company’s and Parent’s achievement of certain performance hurdles were valued using a Monte Carlo simulation method. The fair value of options granted to the current Chief Executive Officer were valued using a binomial model and the Monte Carlo simulation method. Refer to Note 8, “Stock-Based Compensation” for further discussion of the Company’s stock-based compensation.

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Revenue Recognition

The Company recognizes retail sales in its retail stores at the time the customer takes possession of merchandise. All sales are net of discounts and returns and exclude sales tax. Wholesale sales are recognized in accordance with the shipping terms agreed upon on the purchase order. Wholesale sales are typically recognized free on board origin, where title and risk of loss pass to the buyer when the merchandise leaves the Company’s distribution facility.

The Company has a gift card program. The Company does not charge administrative fees on gift cards and the Company’s gift cards do not have expiration dates. The Company records the sale of gift cards as a current liability and recognizes a sale when a customer redeems a gift card. The liability for outstanding gift cards is recorded in accrued expenses.

Cost of Sales

Cost of sales includes the cost of inventory, freight in, obsolescence, spoilage, scrap and inventory shrink, and is net of discounts and allowances. Cost of sales also includes receiving, warehouse costs and distribution costs (which include payroll and associated costs, occupancy, transportation to and from stores and depreciation expense). Cash discounts for satisfying early payment terms are recognized when payment is made, and allowances and rebates based upon milestone achievements such as reaching a certain volume of purchases of a vendor’s products are included as a reduction of cost of sales when such contractual milestones are reached or based on other systematic and rational approaches where possible.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include the costs of selling merchandise in stores (which include payroll and associated costs, occupancy and other store-level costs) and corporate costs (which include payroll and associated costs, occupancy, advertising, professional fees and other corporate administrative costs). Selling, general and administrative expenses also include depreciation and amortization expense relating to these costs.

Leases

The Company follows the policy of capitalizing allowable expenditures that relate to the acquisition and signing of its retail store leases. These costs are amortized on a straight-line basis over the applicable lease term.

The Company recognizes rent expense for operating leases on a straight-line basis (including the effect of reduced or free rent and rent escalations) over the applicable lease term. The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight-line basis is included in deferred rent. Cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords as lease incentives are recorded as deferred rent. Deferred rent related to landlord incentives is amortized as an offset to rent expense using the straight-line method over the applicable lease term.

In certain lease arrangements, the Company can be involved with the construction of the building. If it is determined that the Company has substantially all of the risks of ownership during construction of the leased property and therefore is deemed to be the owner of the construction project, the Company records an asset for the amount of the total project costs and an amount related to the value attributed to the pre-existing leased building in property and equipment, net and the related financing obligation as part of current and non-current liabilities. Once construction is complete, if it is determined that the asset does not qualify for sale-leaseback accounting treatment, the Company amortizes the obligation over the lease term and depreciates the asset over the life of the lease. The Company does not report rent expense for the portion of the rent payment determined to be related to the assets which are owned for accounting purposes. Rather, this portion of the rent payment under the lease is recognized as a reduction of the financing obligation and interest expense.

For store closures where a lease obligation still exists, the Company records the estimated future liability associated with the rental obligation on the cease use date (when the store is closed). Liabilities are established at the cease use date for the present value of any remaining operating lease obligations, net of estimated sublease income, and at the communication date for severance and other exit costs. Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations, and estimates of other related exit costs. If actual timing and potential termination costs or realization of sublease income differ from the Company’s estimates, the resulting liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.

During the first quarter of fiscal 2018, the Company sold and concurrently leased back a future store site with an aggregate carrying value of $1.4 million and received net proceeds from this transaction of $6.8 million, which will be applied towards the construction of the future store. The Company was deemed to have “continuing involvement,” which precluded the de-recognition of the assets from the consolidated balance sheet when the transaction closed. The Company has concluded that it is the “deemed owner” of the construction project (for accounting purposes) during the construction period. Upon completion of construction, the

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Company will evaluate the de-recognition of the asset and liability under sale-leaseback accounting guidance. As of July 28, 2017, the Company has recorded a financing lease obligation of $7.0 million (as a component of current and non-current liabilities). During the first quarter of fiscal 2018, the Company sold and concurrently leased back a store with a carrying value of $2.2 million and received net proceeds from this transaction of $4.0 million. The resulting lease qualifies as and is accounted for as an operating lease. The Company will amortize the deferred gain of $1.8 million relating to the sale-leaseback transaction over the lease term.

During the second quarter of fiscal 2018, the Company sold and concurrently leased back a store with a carrying value of $3.7 million and received net proceeds from this transaction of $7.9 million. The Company was deemed to have “continuing involvement,” which precluded the de-recognition of the assets from the consolidated balance sheet when the transaction closed. The resulting lease is accounted for as a financing lease and the Company has recorded a financing lease obligation of $7.9 million (as a component of current and non-current liabilities). Also during the second quarter of fiscal 2018, the Company sold and concurrently leased back a store with a carrying value of $1.1 million and received net proceeds from this transaction of $5.3 million. The resulting lease qualifies as and is accounted for as an operating lease. The Company recorded a gain on the sale of $1.7 million as part of selling, general and administrative expenses and will amortize the deferred gain of $2.5 million relating to the sale-leaseback transaction over the lease term.

During the second quarter of fiscal 2016, the Company sold and concurrently leased back two retail stores with a carrying value of $7.9 million and received net proceeds from these transactions of $8.7 million. The Company was deemed to have “continuing involvement,” which precluded the de-recognition of the assets from the consolidated balance sheet when the transactions closed. The resulting leases were accounted for as financing leases and the Company had recorded a corresponding financing lease obligation of $8.7 million (as a component of current and non-current liabilities). The Company amortized the financing lease obligation over the lease terms and depreciated the assets over their remaining useful lives. During the second quarter of fiscal 2018, the Company was no longer deemed to have “continuing involvement” and the leases now qualify and are accounted for as operating leases. The-Company de-recognized the assets and financing lease obligation and recorded a net loss of $0.8 million as part of selling, general and administrative expenses in the second quarter of fiscal 2018 and will amortize deferred gain of $2.1 million relating to the sale-leaseback transaction over the lease term.

Self-Insured Workers’ Compensation Liability

The Company self-insures for workers’ compensation claims in California and Texas. The Company establishes a liability for losses from both estimated known and incurred but not reported insurance claims based on reported claims and actuarial valuations of estimated future costs of known and incurred but not yet reported claims. Should an amount of claims greater than anticipated occur, the liability recorded may not be sufficient and additional workers’ compensation costs, which may be significant, could be incurred. The Company has not discounted the projected future cash outlays for the time value of money for claims and claim-related costs when establishing its workers’ compensation liability in its financial reports for each of July 28, 2017 and January 27, 2017.

Self-Insured Health Insurance Liability

The Company self-insures for a portion of its employee medical benefit claims. The liability for the self-funded portion of the Company health insurance program is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. The Company maintains stop loss insurance coverage to limit its exposure for the self-funded portion of its health insurance program.

Pre-Opening Costs

The Company expenses, as incurred, pre-opening costs such as payroll, rent and marketing related to the opening of new retail stores.

Advertising

The Company expenses advertising costs as incurred.

Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash, accounts receivable, interest rate and other derivatives, accounts payable, accruals, debt, and other liabilities. Cash and derivatives are measured and recorded at fair value. Accounts receivable and other receivables are financial assets with carrying values that approximate fair value. Accounts payable and other accrued expenses are financial liabilities with carrying values that approximate fair value. Refer to Note 7, “Fair Value of Financial Instruments” for further discussion of the fair value of debt.

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The Company uses the authoritative guidance for fair value, which includes the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.

Comprehensive Income

OCI includes unrealized gains or losses on interest rate derivatives designated as cash flow hedges.

2. Goodwill and Other Intangibles

The following tables set forth the value of the goodwill and other intangible assets and unfavorable leases (in thousands):

	July 28, 2017										January 27, 2017
	Gross Carrying Amount		Impairment Losses			Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Impairment Losses			Accumulated Amortization			Net Carrying Amount
Indefinite lived intangible assets:
Goodwill	$	479,745	$	(99,102	)	$	—		$	380,643	$	479,745	$	(99,102	)	$	—		$	380,643
Trade name	410,000		—			—			410,000		410,000		—			—			410,000

Total indefinite lived intangible assets	$	889,745	$	(99,102	)	$	—		$	790,643	$	889,745	$	(99,102	)	$	—		$	790,643

Finite lived intangible assets:
Trademarks	$	2,000	$	(570	)	$	(501	)	$	929	$	2,000	$	(570	)	$	(470	)	$	960
Bargain Wholesale customer relationships	20,000		—			(9,236		)	10,764		20,000		—			(8,408		)	11,592
Favorable leases	45,871		(566		)	(22,806		)	22,499		45,871		(566		)	(20,830		)	24,475

Total finite lived intangible assets	67,871		(1,136		)	(32,543		)	34,192		67,871		(1,136		)	(29,708		)	37,027

Total goodwill and other intangible assets	$	957,616	$	(100,238	)	$	(32,543	)	$	824,835	$	957,616	$	(100,238	)	$	(29,708	)	$	827,670

	July 28, 2017							January 27, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Unfavorable leases	$	19,835	$	(16,464	)	$	3,371	$	19,835	$	(15,847	)	$	3,988

3. Property and Equipment, net

The following table provides details of property and equipment (in thousands):

	July 28, 2017			January 27, 2017
Land	$	151,035		$	167,544
Buildings	106,947			110,327
Buildings improvements	71,493			77,246
Leasehold improvements	207,208			205,336
Fixtures and equipment	214,834			209,397
Transportation equipment	11,883			11,893
Construction in progress	20,712			16,724

Total property and equipment	784,112			798,467
Less: accumulated depreciation and amortization	(317,955		)	(290,847		)

Property and equipment, net	$	466,157		$	507,620

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4. Comprehensive Loss

The following table sets forth the calculation of comprehensive loss, net of tax effects (in thousands):

	For the Second Quarter Ended						For the First Half Ended
	July 28, 2017			July 29, 2016			July 28, 2017			July 29, 2016

Net loss	$	(33,624	)	$	(35,085	)	$	(42,377	)	$	(60,279	)
Unrealized gain (loss) on interest rate cash flow hedge, net of tax effects of $0, $(112), $0 and $(112) for the second quarter and first half of each of fiscal 2018 and fiscal 2017, respectively	—			46			—			(168		)
Reclassification adjustment, net of tax effects of $0, $220, $0 and $220 for the second quarter and first half of each of fiscal 2018 and fiscal 2017, respectively	—			(49		)	—			330

Total (losses) gains, net	—			(3		)	—			162

Total comprehensive loss	$	(33,624	)	$	(35,088	)	$	(42,377	)	$	(60,117	)

Amounts in accumulated other comprehensive loss as of January 29, 2016 consisted of unrealized losses on interest rate cash flow hedges. Reclassifications out of accumulated other comprehensive loss in each of the second quarter and first half of fiscal 2018 and fiscal 2017 are presented in Note 6, “Derivative Financial Instruments.”

5. Debt

Short and long-term debt consists of the following (in thousands):

	July 28, 2017			January 27, 2017

ABL Facility	$	51,300		$	39,300
First Lien Term Loan Facility, maturing on January 13, 2019, payable in quarterly installments of $1,535, plus interest through December 31, 2018, with unpaid principal and accrued interest due on January 13, 2019, net of unamortized OID of $2,178 and $2,888 as of July 28, 2017 and January 27, 2017, respectively	588,147			590,974
Senior Notes (unsecured) maturing on December 15, 2019, unpaid principal and accrued interest due on December 15, 2019	250,000			250,000
Deferred financing costs	(7,120		)	(8,761		)

Total debt	882,327			871,513
Less: current portion	5,669			6,138

Long-term debt, net of current portion	$	876,658		$	865,375

As of July 28, 2017 and January 27, 2017, the net deferred financing costs are as follows (in thousands):

Deferred financing costs	July 28, 2017		January 27, 2017

ABL Facility (included in non-current deferred financing costs)	$	2,480	$	3,488
First Lien Term Loan Facility (included in long-term debt, net of current portion)	2,235		2,964
Senior Notes (included in long-term debt, net of current portion)	4,885		5,797

Total deferred financing costs, net	$	9,600	$	12,249

On January 13, 2012 (the “Original Closing Date”), in connection with the Merger, the Company obtained Credit Facilities (as defined below) provided by a syndicate of lenders arranged by Royal Bank of Canada as administrative agent, as well as other agents and lenders that are parties to the agreements governing these Credit Facilities. The Credit Facilities include (a) a first lien asset based revolving credit facility (as amended, the “ABL Facility”), and (b) a first lien term loan facility (as amended, the “First Lien Term Loan Facility” and together with the ABL Facility, the “Credit Facilities”).

First Lien Term Loan Facility

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on October 8, 2013 (the “Second Amendment”) (all such term loans, collectively, the “Term Loans”). The First Lien Term Loan Facility has a maturity date of January 13, 2019. All obligations under the First Lien Term Loan Facility are guaranteed by Parent and the Company’s direct or indirect 100% owned domestic subsidiaries (with customary exceptions, including immaterial subsidiaries) (collectively, the “Credit Facilities Guarantors”). In addition, the First Lien Term Loan Facility is secured by substantially all of the Company’s assets and the assets of the Credit Facilities Guarantors, including a first priority pledge of all of the Company’s equity interests and the equity interests of the Credit Facilities Guarantors and a first priority security interest in certain other fixed assets, and a second priority security interest in certain current assets.

The Company is required to make scheduled quarterly payments each equal to 0.25% of the principal amount of the Term Loans, with the balance due on the maturity date. Borrowings under the First Lien Term Loan Facility bear interest at an annual rate equal to an applicable margin plus, at the Company’s option, either (i) a base rate (the “Base Rate”) determined by reference to the highest of (a) the interest rate in effect determined by the administrative agent as the “Prime Rate” (4.25% as of July 28, 2017), (b) the federal funds effective rate plus 0.50% and (c) an adjusted Eurocurrency rate for one month (determined by reference to the greater of the Eurocurrency rate for the interest period subject to certain adjustments) plus 1.00%, or (ii) a Eurocurrency rate determined by reference to the London Interbank Offered Rate (“LIBOR”), adjusted for statutory reserve requirements, for the interest period relevant to such borrowing.

On April 4, 2012, the Company amended the terms of the First Lien Term Loan Facility (the “First Amendment”) and incurred related refinancing costs of $11.2 million. The First Amendment, among other things, (i) decreased the applicable margin from LIBOR plus 5.50% (or Base Rate plus 4.50%) to LIBOR plus 4.00% (or Base Rate plus 3.00%) and (ii) decreased the LIBOR floor from 1.50% to 1.25%.

On October 8, 2013, the Company entered into the Second Amendment, which among other things, (i) provided $100.0 million of additional term loans as described above, (ii) decreased the applicable margin from LIBOR plus 4.00% (or Base Rate plus 3.00%) to LIBOR plus 3.50% (or Base Rate plus 2.50%) and (iii) decreased the LIBOR floor from 1.25% to 1.00%. Upon the occurrence of the Second Amendment, the Company’s obligation to make scheduled quarterly payments on the Term Loans was increased to require the Company to make scheduled quarterly payments each equal to 0.25% of the amended principal amount of the Term Loans (approximately $1.5 million).

In addition, the Second Amendment (i) amended certain restricted payment provisions, (ii) removed the maximum capital expenditures covenant from the agreement governing the First Lien Term Loan Facility, (iii) modified the existing provision restricting the Company’s ability to make dividend and other payments so that from and after March 31, 2013, the permitted payment amount represents the sum of (a) a calculation based on 50% of Consolidated Net Income (as defined in the First Lien Term Loan Facility agreement), if positive, or a deficit of 100% of Consolidated Net Income, if negative, and (b) $20.0 million, and (iv) permitted proceeds of any sale leasebacks of any assets acquired after January 13, 2012, to be reinvested in the Company’s business without restriction.

As of July 28, 2017, the interest rate charged on the First Lien Term Loan Facility was 4.75% (1.25% Eurocurrency rate, plus the Eurocurrency loan margin of 3.50%). As of July 28, 2017, the gross amount outstanding under the First Lien Term Loan Facility was $590.3 million.

Following the end of each fiscal year, the Company is required to make prepayments on the First Lien Term Loan Facility in an amount equal to (i) 50% of Excess Cash Flow (as defined in the agreement governing the First Lien Term Loan Facility), with the ability to step down to 25% and 0% upon achievement of specified total leverage ratios, minus (ii) the amount of certain voluntary prepayments made on the First Lien Term Loan Facility and/or the ABL Facility during such fiscal year. There was no Excess Cash Flow payment required for fiscal 2017.

Additionally, the First Lien Term Facility requires the Company to make mandatory prepayments equal to 50% of the net cash proceeds from sale-leasebacks of any assets acquired before January 13, 2012 for consideration above a certain threshold. In May 2017, the Company made a mandatory term loan prepayment of $2.0 million from sale-leaseback proceeds.

The First Lien Term Loan Facility includes certain customary restrictions, among other things, on the Company’s ability and the ability of Parent, the Credit Facilities Guarantors (including the Company’s subsidiary 99 Cents Only Stores Texas Inc.) and certain future subsidiaries of the Company to incur or guarantee additional indebtedness, make certain restricted payments, acquisitions or investments, materially change the Company’s business, incur or permit to exist certain liens, enter into transactions with affiliates, sell assets, make capital expenditures or merge or consolidate with or into, another company. As of July 28, 2017, the Company was in compliance with the terms of the First Lien Term Loan Facility.

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ABL Facility

The ABL Facility initially was to mature on January 13, 2017 and provided for up to $175.0 million of borrowings, subject to certain borrowing base limitations. Subject to certain conditions, the Company could increase the commitments under the ABL Facility by up to $50.0 million. All obligations under the ABL Facility are guaranteed by Parent and the other Credit Facilities Guarantors. The ABL Facility is secured by substantially all of the Company’s assets and the assets of the Credit Facilities Guarantors, including a first priority security interest in certain current assets, and a second priority pledge of all of the Company’s equity interests and the equity interest of the Credit Facilities Guarantors and a second priority security interest in certain other fixed assets.

Borrowings under the ABL Facility bear interest at a rate based, at the Company’s option, on (i) LIBOR plus an applicable margin to be determined (3.25% as of July 28, 2017) or (ii) the determined base rate (Prime Rate) plus an applicable margin to be determined (2.25% at July 28, 2017), in each case based on a pricing grid depending on average daily excess availability for the most recently ended quarter.

In addition to paying interest on outstanding principal under the Credit Facilities, the Company is required to pay a commitment fee to the lenders under the ABL Facility on unused commitments. The commitment fee is adjusted at the beginning of each quarter based upon the average historical excess availability of the prior quarter (0.50% for the quarter ended July 28, 2017). The Company must also pay customary letter of credit fees and agency fees.

As of July 28, 2017, borrowings under the ABL Facility were $51.3 million, outstanding letters of credit were $29.3 million and availability under the ABL Facility subject to the borrowing base, was $37.1 million. As of January 27, 2017, borrowings under the ABL Facility were $39.3 million, outstanding letters of credit were $31.6 million and availability under the ABL Facility subject to the borrowing base was $37.2 million.

The ABL Facility includes restrictions on the Company’s ability and the ability of Parent and certain of the Company’s restricted subsidiaries to incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase, its capital stock, make certain acquisitions or investments, materially change its business, incur or permit to exist certain liens, enter into transactions with affiliates, sell assets or merge or consolidate with or into another company.

On October 8, 2013, the ABL Facility was amended to among other things, modify the provision restricting the Company’s ability to make dividend and other payments. Such payments are subject to achievement of Excess Availability (as defined in the agreement governing the ABL Facility) and a ratio of EBITDA (as defined in the agreement governing the ABL Facility) to fixed charges.

On August 24, 2015, the Company amended its ABL Facility to increase commitments available under the ABL Facility by $10.0 million, resulting in an aggregate ABL Facility size of $185.0 million. The additional commitments implemented pursuant to the amendment have terms identical to the existing commitments under the ABL Facility, including as to interest rate and other pricing terms. The Company paid amendment fees of $0.5 million to lenders under the ABL Facility.

In addition, the amendment to the ABL Facility (i) modified certain springing covenants triggered by reference to excess availability under the ABL Facility agreement so that, from August 24, 2015 to April 30, 2016, the occurrence of any such excess availability trigger is determined solely by reference to the available borrowing base under the ABL Facility rather than by reference to the lesser of the available borrowing base and the available aggregate commitments under the ABL Facility, (ii) increased the inventory advance rate during such period for purposes of calculating the borrowing base from 90% to 92.5%, (iii) provided for certain additional inspection rights by the administrative agent if there is a material increase in the amount of inventory that is not eligible inventory for purposes of the borrowing base and (iv) provided for certain additional technical waivers and amendments in order to effect the foregoing.

On April 8, 2016, the Company amended its ABL Facility to, among other things, decrease the commitments available under the ABL Facility by $25.0 million, resulting in an aggregate facility size of $160.0 million, and extend the maturity date of the ABL Facility to April 8, 2021; provided however, the ABL Facility will mature on the earlier of (i) the date that is 90 days prior to the stated maturity date in respect of the First Lien Term Loan Facility and (ii) the date that is 90 days prior to the stated maturity date in respect of the Senior Notes (as defined below), unless the First Lien Term Loan Facility and Senior Notes have been repaid or refinanced in full or amended to extend the final maturity dates thereof to a date that is at least 180 days after April 8, 2021 (the date of such repayment or refinancing, the “Term/Notes Refinancing Date”) (such amendment, the “Fourth Amendment”). The Fourth Amendment also modified the interest rate margins payable under the ABL Facility. The initial applicable margin for borrowings under the ABL Facility is 2.0% with respect to base rate borrowings and 3.0% with respect to Eurocurrency rate borrowings. Commencing with the first day of the first fiscal quarter commencing after the closing of the Fourth Amendment, the applicable margin for borrowings thereunder is subject to adjustment each fiscal quarter, based on average historical excess availability during the preceding fiscal quarter. Furthermore, the applicable margin will be reduced by 0.50% after the Term/Notes Refinancing Date.

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In addition, the Fourth Amendment (i) reduced the incremental revolving commitment capacity from $50.0 million to $25.0 million, but provides that any such incremental revolving commitment may take the form of a “last-out” term loan, (ii) added restrictions on certain negative covenants in respect of investments, restricted payments and prepayments of indebtedness, including the First Lien Term Loan Facility and the Senior Notes, in each case, until the occurrence of Term/Notes Refinancing Date, (iii) reduced the letter of credit sublimit from $50.0 million to $45.0 million and (iv) provided for certain additional technical waivers and amendments in order to effect the foregoing.

In connection with the Fourth Amendment and in the first quarter of fiscal 2017, the Company recognized a loss on debt extinguishment of approximately $0.3 million related to a portion of the unamortized debt issuance costs. The Company recorded $4.7 million of debt issuance costs in connection with the Fourth Amendment in the first quarter of fiscal 2017 as part of non-current deferred financing costs.

As of July 28, 2017, the Company was in compliance with the terms of the ABL Facility.

See Note 16, “Subsequent Events” for a description of the Fifth Amendment (as defined below) to our ABL Facility.

Senior Notes

On December 29, 2011, the Company issued $250.0 million aggregate principal amount of 11% Senior Notes that mature on December 15, 2019 (the “Senior Notes”). The Senior Notes are guaranteed by the same subsidiaries that guarantee the Credit Facilities (the “Subsidiary Guarantors”).

Pursuant to the terms of the indenture governing the Senior Notes (the “Indenture”), the Company may redeem all or a part of the Senior Notes at certain redemption prices that vary based on the date of redemption. The Company is not required to make any mandatory redemptions or sinking fund payments, and may at any time or from time to time purchase notes in the open market.

The Indenture contains covenants that, among other things, limit the Company’s ability and the ability of certain of its subsidiaries to incur or guarantee additional indebtedness, create or incur certain liens, pay dividends or make other restricted payments and investments, incur restrictions on the payment of dividends or other distributions from restricted subsidiaries, sell assets, engage in transactions with affiliates, or merge or consolidate with other companies. As of July 28, 2017, the Company was in compliance with the terms of the Indenture.

The significant components of interest expense are as follows (in thousands):

	For the Second Quarter Ended				For the First Half Ended
	July 28, 2017		July 29, 2016		July 28, 2017		July 29, 2016

First Lien Term Loan Facility	$	6,978	$	6,907	$	13,789	$	14,136
ABL Facility	862		569		1,643		1,124
Senior Notes	6,875		6,875		13,826		13,750
Amortization of deferred financing costs and OID	1,647		1,638		3,361		2,940
Other interest expense	799		795		1,884		1,360
Interest expense	$	17,161	$	16,784	$	34,503	$	33,310

6. Derivative Financial Instruments

The Company entered into derivative instruments for risk management purposes and uses these derivatives to manage exposure to fluctuation in interest rates.

Interest Rate Swap

In May 2012, the Company entered into a floating-to-fixed interest rate swap agreement for an initial aggregate notional amount of $261.8 million to limit exposure to interest rate increases related to a portion of the Company’s floating rate indebtedness once the Company’s interest rate cap agreement expires. The swap agreement, effective November 2013, hedged a portion of contractual floating rate interest commitments through the expiration of the swap agreement in May 2016. As a result of the agreement, the Company’s effective fixed interest rate on the notional amount of floating rate indebtedness was 1.36% plus an applicable margin of 3.50%.

The Company designated the interest rate swap agreement as a cash flow hedge. The interest rate swap agreement was highly correlated to the changes in interest rates to which the Company is exposed. Unrealized gains and losses on the interest rate swap were designated as effective or ineffective. The effective portion of such gains or losses was recorded as a component of AOCI or loss, while the ineffective portion of such gains or losses was recorded as a component of interest expense. Realized gains and losses in connection with each required interest payment were reclassified from AOCI or loss to interest expense.

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Payments

In September 2015, the Company entered into an employment agreement with Geoffrey J. Covert as the President and Chief Executive Officer of each of the Company and Parent. In connection with this agreement, Mr. Covert is entitled to receive amounts under a transition program based on the value of certain equity awards from his former employer that he forfeited in connection with his previous employment. The maximum amount of payments due under this agreement is approximately $5.0 million, payable over a period of four years. The Company accounts for these transition payments as derivatives that are not designated as hedging instruments and has measured the obligation at fair value at July 28, 2017 and January 27, 2017. The Company recognizes the expense associated with these payments over the requisite service period.

Fair Value

The fair value of the transition payments is estimated using a valuation model that includes unobservable inputs (Level 3, as defined in Note 7, “Fair Value of Financial Instruments”).

A summary of the recorded amounts included in the consolidated balance sheets is as follows (in thousands):

	July 28, 2017		January 27, 2017

Derivatives not designated as hedging instruments
Transition payments (included in other current liabilities)	$	213	$	831
Transition payments (included in other long-term liabilities)	$	39	$	217

A summary of recorded amounts included in the unaudited consolidated statements of comprehensive loss is as follows (in thousands):

	For the Second Quarter Ended						For the First Half Ended
	July 28, 2017			July 29, 2016			July 28, 2017		July 29, 2016

Derivatives designated as cash flow hedging instruments:
(Gain) loss related to effective portion of derivative recognized in OCI	$	—		$	(46	)	$	—	$	168
(Gain) loss related to effective portion of derivatives reclassified from AOCI to interest expense	$	—		$	(49	)	$	—	$	330
Gain related to ineffective portion of derivative recognized in interest expense	$	—		$	65		$	—	$	36
Derivatives not designated as hedging instruments:
(Gain) loss recognized in selling, general and administrative expenses	$	(98	)	$	665		$	38	$	1,534

7. Fair Value of Financial Instruments

The Company complies with authoritative guidance for fair value measurement and disclosures which establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level 2: Defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

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The Company uses the best available information in measuring fair value. The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis (in thousands) as of July 28, 2017:

	July 28, 2017
	Total		Level 1		Level 2		Level 3
ASSETS
Other assets — assets that fund deferred compensation	$	912	$	912	$	—	$	—
LIABILITIES
Other current liabilities — transition payments	$	213	$	—	$	—	$	213
Other long-term liabilities — transition payments	$	39	$	—	$	—	$	39
Other long-term liabilities — deferred compensation	$	912	$	912	$	—	$	—

Level 1 measurements include $0.9 million of deferred compensation assets that fund the liabilities related to the Company’s deferred compensation plan, including investments in trust funds. The fair values of these funds are based on quoted market prices in an active market.

There were no Level 2 assets or liabilities as of July 28, 2017.

Level 3 measurements include transition payments to Mr. Covert (See Note 6, “Derivative Financial Instruments”) estimated using a valuation model that includes Level 3 unobservable inputs. Significant assumptions used in the analysis include projected stock prices, stock volatility and the Company’s credit spread.

The Company did not have any transfers in and out of Levels 1 and 2 during the first half of fiscal 2018.

The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis (in thousands) as of January 27, 2017:

	January 27, 2017
	Total		Level 1		Level 2		Level 3
ASSETS
Other assets — assets that fund deferred compensation	$	816	$	816	$	—	$	—
LIABILITIES
Other current liabilities — transition payments	$	831	$	—	$	—	$	831
Other long-term liabilities — transition payments interest rate swap	$	217	$	—	$	—	$	217
Other long-term liabilities — deferred compensation	$	816	$	816	$	—	$	—

Level 1 measurements include $0.8 million of deferred compensation assets that fund the liabilities related to the Company’s deferred compensation plan, including investments in trust funds. The fair values of these funds are based on quoted market prices in an active market.

There were no Level 2 assets or liabilities as of January 27, 2017.

Level 3 measurements include transition payments to Mr. Covert estimated using a valuation model that includes Level 3 unobservable inputs. Significant assumptions used in the analysis include projected stock prices, stock volatility and the Company’s credit spread.

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The following table summarizes the activity for the period of changes in fair value of the Company’s Level 3 instruments (in thousands):

	For the Second Quarter Ended						For the First Half Ended
Transition Payments	July 28, 2017			July 29, 2016			July 28, 2017			July 29, 2016
Description
Beginning balance	$	(759	)	$	(1,222	)	$	(1,048	)	$	(1,205	)
Transfers in and/or out of Level 3	—			—			—			—
Total realized/unrealized gains (loss):
Included in earnings (1)	98			(665		)	(38		)	(1,534		)
Included in other comprehensive loss	—			—			—			—
Purchases, redemptions and settlements:
Settlements	409			1,060			834			1,912
Ending balance	$	(252	)	$	(827	)	$	(252	)	$	(827	)

Total amount of unrealized gains (losses) for the period included in earnings relating to liabilities held at the reporting period	$	18		$	(314	)	$	(35	)	$	(564	)

(1) Gains (losses) are included in selling, general and administrative expenses.

The outstanding debt under the Credit Facilities and the Senior Notes is recorded in the financial statements at historical cost, net of applicable unamortized discounts and deferred financing costs.

The ABL Facility is tied directly to market rates and fluctuates as market rates change; as a result, the carrying value of the ABL Facility approximates fair value as of July 28, 2017 and January 27, 2017.

The fair value of the First Lien Term Loan Facility was estimated at $584.4 million, or $5.9 million lower than its carrying value, as of July 28, 2017, based on quoted market prices of the debt (Level 1 inputs). The fair value of the First Lien Term Loan Facility was estimated at $516.7 million, or $77.2 million lower than its carrying value, as of January 27, 2017, based on quoted market prices of the debt (Level 1 inputs).

The fair value of the Senior Notes was estimated at $207.5 million, or $42.5 million lower than the carrying value, as of July 28, 2017, based on quoted market prices of the debt (Level 1 inputs). The fair value of the Senior Notes was estimated at $166.9 million, or $83.1 million lower than the carrying value, as of January 27, 2017, based on quoted market prices of the debt (Level 1 inputs).

See Note 5, “Debt” for more information on the Company’s debt.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

During the second quarter of fiscal 2018, the Company recognized an impairment charge of approximately $1.5 million relating to the anticipated closure of three stores by the end of fiscal 2018 or early fiscal 2019. The remaining net book value of assets measured at fair value was $0.1 million. The fair value measurements used in these impairment evaluations were based on discounted cash flow estimates using unobservable inputs (Level 3).

8. Stock-Based Compensation

Number Holdings, Inc. 2012 Equity Incentive Plan

On February 27, 2012, the board of directors of Parent (the “Board”) adopted the Number Holdings, Inc. 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan authorizes equity awards to be granted for up to 87,500 shares of Class A Common Stock of Parent and 87,500 shares of Class B Common Stock of Parent. As of July 28, 2017, options for 81,755 shares of each of Class A Common Stock and Class B Common Stock were outstanding and held by employees, members of management and directors. Options upon vesting may be exercised only for units consisting of an equal number of Class A Common Stock and Class B Common Stock. Class B Common Stock has de minimis economic rights and the right to vote solely for election of directors.

Employee Option Grants

Options subject to time-vesting conditions granted to employees generally become exercisable over a four or five year service period and have terms of ten years from the date of grant. Options with performance-vesting conditions granted to employees generally become exercisable based on the achievement of certain performance targets and have terms of ten years from the date of grant.

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Under the standard form of option award agreement for the 2012 Plan, Parent has a right to repurchase from the participant all or a portion of (i) Class A and Class B Common Stock of Parent issued upon the exercise of the options awarded to a participant and still held by such participant or his or her transferee and (ii) vested but unexercised options. The repurchase price for the shares of Class A and Class B Common Stock of Parent received from option exercises prior to termination of employment is the fair market value of such shares as of the date of such termination, and, for the vested but unexercised options, the repurchase price is the difference between the fair market value of the Class A and Class B Common Stock of Parent as of the date of termination of employment and the exercise price of the option. However, upon (i) a termination of employment for cause, (ii) a voluntary resignation without good reason, or (iii) upon discovery that the participant engaged in detrimental activity, the repurchase price is the lesser of the exercise price paid by the participant to exercise the option or the fair market value of the Class A and Class B Common Stock of Parent. If Parent elects to exercise its repurchase right for any shares acquired pursuant to the exercise of an option, it must do so no later than (i) 180 days after the date of participant’s termination of employment if the option is exercised prior to the date of termination, or (ii) no later than 90 days from the latest date that such option can be exercised if the option is exercised after the date of termination. If Parent elects to exercise its repurchase right for any vested and unexercised option, it must do so for no longer than the latest date that such option can be exercised. The options also contain transfer restrictions that lapse upon registration of an offering of Parent common stock under the Securities Act of 1933 (a “liquidity event”).

The Company defers recognition of substantially all of the stock-based compensation expense related to these stock options. The nature of repurchase rights and transfer restrictions create a performance condition that is not considered probable of being achieved until a liquidity event or certain employment termination events are probable of occurrence. Additionally, the Company has deferred recognition of the stock-based compensation expense for performance-based options until it is probable that the performance targets will be achieved. These options are accounted for as equity-based awards. The fair value of these stock options was estimated at the date of grant using the Black-Scholes pricing model. There were 21,688 time-based and 17,817 performance-based employee options outstanding (for individuals other than board members, Mr. Covert and Ms. Thornton) as of July 28, 2017.

Director Option Grants

Options granted to board members generally become exercisable over a three, four or five year service period and have terms of ten years from the date of grant. Options granted to board members do not contain repurchase rights that would allow the Parent to repurchase these options at less than fair value. The Company recognizes stock-based compensation expense for these option grants over the service period. These options are accounted for as equity awards. The fair value of these stock options was estimated at the date of grant using the Black-Scholes pricing model. On July 26, 2016, the Compensation Committee of Parent amended 1,000 previously granted board member options with exercise prices in excess of $757 per share to lower the exercise price to $757 per share. The reduction in the exercise price was treated as a modification of stock options for accounting purposes. The modification, based on the fair value of the options both immediately before and after such modification, resulted in a total incremental compensation expense of less than $0.1 million in the second quarter of fiscal 2017.

Chief Financial Officer Equity Awards

In October 2015, the Company entered into an employment agreement with Felicia Thornton as the Chief Financial Officer and Treasurer of each of the Company and Parent. In connection with this agreement, Ms. Thornton was granted options to purchase 10,000 shares of Class A and Class B Common Stock of Parent. One-half of the options vest on each of the first four anniversaries of Ms. Thornton’s start date, and the other half of the options vest based on the achievement of certain performance targets. Options granted to Ms. Thornton contain repurchase rights as described above that would allow the Parent to repurchase these options at less than fair value, except that repurchase rights at less than fair value in the case of voluntary resignation without good reason lapse after November 2, 2017.

The Company records stock-based compensation for the time-based options in accordance with the four year vesting period. The Company has deferred recognition of the stock-based compensation expense for the performance-based options until it is probable that the performance targets will be achieved. The time-based and performance-based options are accounted for as equity awards. The fair value of these time-based and performance-based options was estimated at the date of grant using the Black-Scholes pricing model.

On July 26, 2016, the Compensation Committee of Parent amended Ms. Thornton’s performance-based options to conform the vesting conditions for the performance-vested options with those granted to other employees. The amendment of the performance targets was treated as a modification of stock options for accounting purposes and had no impact on compensation expense. The Company has continued to defer recognition of the stock-based compensation expense for the amended performance-based options. The fair value of these amended performance-based options was estimated at the date of modification using the Black-Scholes pricing model.

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Chief Executive Officer Equity Awards

In September 2015, the Company entered into an employment agreement with Geoffrey J. Covert as the President and Chief Executive Officer of each of the Company and Parent. In connection with this agreement, Mr. Covert was granted two options, each to purchase 15,500 shares of Class A and Class B Common Stock of Parent. One of the grants has an exercise price of $1,000 per share. The other grant has an exercise price equal to $750 per share plus the amount by which the fair market value of the underlying share exceeds $1,000 on the date of exercise. One-half of each grant vests on each of the first four installments of the grant date, and the other half of each grant vests based on the achievement of certain performance targets. The vesting of the options is subject to Mr. Covert’s continued employment through the applicable vesting date. The options are subject to the terms of the 2012 Plan and the award agreements under which they were granted.

The Company has deferred recognition of the stock-based compensation expense for these time-based and performance-based stock options due to repurchase rights and transfer restrictions included in the terms of the award. The nature of the repurchase rights and transfer restrictions create a performance condition that is not considered probable of being achieved until a liquidity event or certain employment termination events are probable of occurrence. Additionally, the Company has deferred recognition of the stock-based compensation expense for performance-based options until it is probable that the performance targets will be achieved. The fair value of the grant with an exercise price of $1,000 per share was estimated at the date of grant using a binomial model. The fair value of the other grant was estimated at the date of grant using a Monte Carlo simulation method.

On July 26, 2016, the Compensation Committee of Parent amended Mr. Covert’s performance-based options to conform the vesting conditions for the performance-vested options with those granted to other employees. The amendment of the performance hurdles was treated as a modification of stock options for accounting purposes and had no impact on compensation expense. The Company has continued to defer recognition of the stock-based compensation expense for the amended performance-based options. The fair value of the grant with an exercise price of $1,000 per share was estimated at the date of modification using a binomial model. The fair value of the other grant was estimated at the date of modification using a Monte Carlo simulation method.

Accounting for stock-based compensation

Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise and the associated volatility. In accordance with the adoption of ASU No. 2016-09, “Compensation — Stock Compensation, Improvements to Employee Share-Based Payment Accounting” in the first quarter of fiscal 2018, the Company elected to recognize forfeitures in the period they occur as a reversal of previously recognized compensation expense. The reduction in compensation expense is determined based on the specific options forfeited during that period. Prior to the adoption of ASU 2016-09, the Company applied an estimated forfeiture rate as a reduction of current period stock-based compensation expense. During the second quarter and first half of fiscal 2018, the Company recorded stock-based compensation expense of $0.1 million and $0.3 million, respectively. During the second quarter and first half of fiscal 2017, the Company recorded stock-based compensation expense of $0.2 million and $0.4 million, respectively.

There were no stock option grants in the first half of fiscal 2018.

The following summarizes stock option activity in the first half of fiscal 2018:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Options outstanding at the beginning of the period	82,140		$	800
Granted	—		$	—
Exercised	—		$	—
Cancelled	(385	)	$	757

Outstanding at the end of the period	81,755		$	800	8.5

Exercisable at the end of the period	17,443		$	782	8.5

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The following table summarizes the stock awards available for grant under the 2012 Plan as of July 28, 2017:

		Number of Shares
Available for grant as of January 27, 2017		4,670
Authorized		—
Granted		—
Cancelled		385
Available for grant at July 28, 2017		5,055

9. Related-Party Transactions

Management Services Agreements

Upon completion of the Merger, the Company and Parent entered into management services agreements with affiliates of the Sponsors (the “Management Services Agreements”). Under each of the Management Services Agreements, the Company and Parent agreed to, among other things, retain and reimburse affiliates of the Sponsors for certain expenses incurred in connection with the provision by Sponsors of certain management and financial services and provide customary indemnification to the Sponsors and their affiliates. In the first half of fiscal 2018, the Company reimbursed affiliates of the Sponsors their expenses in the amount of less than $0.1 million.

First Lien Term Loan Facility

In connection with the Merger, the Company entered into the First Lien Term Loan Facility, under which various funds affiliated with Ares were lenders. As of July 28, 2017 and January 27, 2017, funds affiliated with Ares and CPPIB held approximately $129.8 million and $130.5 million, respectively, of term loans under the First Lien Term Loan Facility. The terms of the term loans are the same as those held by unaffiliated third party lenders under the First Lien Term Loan Facility.

Senior Notes

As of July 28, 2017 and January 27, 2017 various funds affiliated with Ares and CPPIB have collectively acquired $102.1 million aggregate principal amount of the Company’s Senior Notes in open market transactions. From time to time, these or other affiliated funds may acquire additional Senior Notes.

10. Income Taxes

The effective income tax rate for the first half of fiscal 2018 was a provision rate of (0.2)% compared to a provision rate of (0.2)% for the first half of fiscal 2017. Income tax expense for the interim periods was computed using the effective tax rate estimated to be applicable for the full fiscal year. The effective tax rate reflects the tax effect of the establishment of a valuation allowance against deferred tax assets in the second quarter of fiscal 2016, and the effect of not recognizing the benefit of losses incurred in fiscal 2018 and 2017 in jurisdictions where the Company concluded it is more likely than not that such benefits would not be realized.

The Company assesses its ability to realize deferred tax assets throughout the fiscal year. As a result of this assessment during the second quarter of fiscal 2016, the Company concluded that it was more likely than not that the Company would not realize its deferred tax assets. Therefore, in the second quarter of fiscal 2016, the Company recorded a $31.7 million increase to provision for income taxes in order to establish a valuation allowance against such net deferred tax assets.

As of January 27, 2017, the valuation allowance increased to $137.7 million, which was primarily related to an increase in losses incurred during fiscal 2017.

The Company will continue to evaluate all of the positive and negative evidence in future periods and will make a determination as to whether it is more likely than not that all or a portion of its deferred tax assets will be realized in such future periods. At such time as the Company determines that it is more likely than not that all or a portion of its deferred tax assets are realizable, the valuation allowance will be reduced or released in its entirety, and the corresponding benefit will be reflected in the Company’s tax provision. Deferred tax liabilities associated with indefinite-lived intangibles cannot be considered a source of taxable income to support the realization of deferred tax assets because these deferred tax liabilities will not reverse until some indefinite future period when these assets are either sold or impaired for book purposes. The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude the Company from using its loss carryforwards or utilizing other deferred tax assets in the future.

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As of July 28, 2017 and January 27, 2017, the Company had not accrued any liabilities related to unrecognized tax benefits, and had also not accrued any interest and penalties related to uncertain tax positions for the relevant periods. The Company files income tax returns in the U.S. federal jurisdiction and in various states. The Company is subject to examinations by the major tax jurisdictions in which it files for the tax years 2011 forward.

11. Commitments and Contingencies

Credit Facilities

The Company’s Credit Facilities and commitments are discussed in detail in Note 5, “Debt.”

Mid-Term Cash Incentive Plan and Special Bonus Letters

On July 26, 2016, the Compensation Committee of the Board (the “Compensation Committee”) adopted the 99 Cents Only Stores LLC 2016 Mid-Term Cash Incentive Plan (the “Mid-Term Cash Incentive Plan”). The Mid-Term Cash Incentive Plan is intended to promote the success of the Company by rewarding certain employees for their service to the Company and to provide incentives for such employees to remain in the employ or other service of the Company and to contribute to the performance of the Company. Under the Mid-Term Cash Incentive Plan, if the Company achieves an initial Adjusted EBITDA (as defined in the Mid-Term Cash Incentive Plan) goal for either fiscal 2017 or the fiscal year ending January 26, 2018 (the “Initial Mid-Term Plan Goal”), 50% of a participant’s award will be eligible for payment. No amounts will be paid under the Mid-Term Cash Incentive Plan if the Initial Mid-Term Plan Goal is not achieved. If the Company achieves the Initial Mid-Term Plan Goal and then achieves the same Adjusted EBITDA goal for the fiscal year immediately following the year in which the Initial Mid-Term Plan Goal was achieved, the remaining 50% of the participant’s award will be eligible for payment. Payment of eligible awards will only be made to the extent the Company’s Free Cash Flow (as defined in the Mid-Term Cash Incentive Plan) exceeds the amount eligible for payment, as measured at the end of each second quarter and fourth quarter of each fiscal year after an amount becomes eligible for payment until the end of the fiscal year ending January 31, 2020. The Company does not expect to maintain the Mid-Term Cash Incentive Plan for periods after the fiscal year ending July 31, 2020. The maximum payout under the Mid-Term Cash Incentive Plan is $22.5 million. The Company recognizes the expense associated with this Mid-Term Cash Incentive Plan over the requisite service periods and has accrued $11.9 million and $6.0 million as of July 28, 2017 and January 27, 2017, respectively.

On July 26, 2016, the Compensation Committee approved special bonus letters for three executives. Pursuant to the terms thereof, if a Refinancing Transaction (as defined in the special bonus letters) occurs prior to October 1, 2018, each of the applicable executives will be eligible to receive a special bonus payable within 30 days of such transaction. The special bonuses to be earned by the applicable executives total $4.0 million. No amounts have been accrued as of July 28, 2017.

Workers’ Compensation

The Company self-insures its workers’ compensation claims in California and Texas and provides for losses of estimated known and incurred but not reported insurance claims. The Company does not discount the projected future cash outlays for the time value of money for claims and claim related costs when establishing its workers’ compensation liability.

As of July 28, 2017 and January 27, 2017, the Company had recorded a liability of $68.9 million and $69.1 million, respectively, for estimated workers’ compensation claims in California. The Company has limited self-insurance exposure in Texas and had recorded a liability of less than $0.1 million as of each of July 28, 2017 and January 27, 2017 for workers’ compensation claims in Texas. The Company purchases workers’ compensation insurance coverage in Arizona and Nevada and is not self-insured in those states.

Self-Insured Health Insurance Liability

The Company self-insures for a portion of its employee medical benefit claims. As of both of July 28, 2017 and January 27, 2017, the Company had recorded a liability of $0.9 million for estimated health insurance claims. The Company maintains stop loss insurance coverage to limit its exposure for the self-funded portion of its health insurance program.

Sale of Warehouse Facility

On July 6, 2016, the Company sold and concurrently licensed (through March 31, 2017) a warehouse facility in the City of Commerce, California with a carrying value of $12.1 million and received net proceeds from this transaction of $28.5 million. In addition to the proceeds, $1.0 million purchase price consideration had been held in escrow for the buyer to make certain repairs, and any amount not used for such repairs would be paid to the Company. The repairs were completed in January 2017 and the Company received $0.6 million from amounts held in escrow. The Company was deemed to have “continuing involvement,” which precluded

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the de-recognition of the assets from the consolidated balance sheet when the transactions closed. The resulting lease was accounted for as a financing lease and the Company recorded a financing lease obligation of $30.1 million (as a component of current liabilities) as of January 27, 2017. The Company exited the warehouse facility in March 2017, de-recognized the assets and financing lease obligation and recorded a gain on sale of $18.5 million as part of selling, general and administrative expenses in the first quarter of fiscal 2018.

Legal Matters

Wage and Hour Matters

Shelley Pickett v. 99¢ Only Stores. Plaintiff Shelley Pickett, a former cashier for the Company, filed a representative action complaint against the Company on November 4, 2011 in the Superior Court of the State of California, County of Los Angeles alleging a Private Attorneys General Act of 2004 (“PAGA”) claim that the Company violated section 14 of Wage Order 7-2001 by failing to provide seats for its cashiers behind checkout counters. Pickett seeks civil penalties of $100 to $200 per violation, per each pay period for each affected employee, and attorney’s fees. The court denied the Company’s motion to compel arbitration of Pickett’s individual claims or, in the alternative, to strike the representative action allegations in the complaint, and the Court of Appeals affirmed the trial court’s ruling. On June 27, 2013, Pickett entered into a settlement agreement and release with the Company in another matter. Payment has been made to the plaintiff under that agreement and the other action has been dismissed. The Company’s position is that the release Pickett executed in that matter waives the claims she asserts in this action, waives her right to proceed on a class or representative basis or as a private attorney general and requires her to dismiss this action with prejudice as to her individual claims. The Company notified Pickett of its position by a letter dated as of July 30, 2013, but she refused to dismiss the lawsuit. On February 11, 2014, the Company answered the complaint, denying all material allegations, and filed a cross-complaint against Pickett seeking to enforce her agreement to dismiss this action. Through the cross-complaint, the Company seeks declaratory relief, specific performance and damages. Pickett has answered the cross-complaint, asserting a general denial of all material allegations and various affirmative defenses. On September 30, 2014, the court denied the Company’s motion for judgment on the pleadings as to its cross-complaint and granted leave to Pickett to amend her complaint to add another representative plaintiff, Tracy Humphrey. Plaintiffs filed their amended complaint on October 8, 2014, and the Company answered on October 10, 2014, denying all material allegations. On April 4, 2016, in an unrelated matter involving similar claims against a different employer, the California Supreme Court issued a ruling that provides guidance to lower courts as to California’s employee seating requirement, which is a largely untested area of law. The instant action had been stayed pending the issuance of the California Supreme Court ruling. The stay was lifted and the parties mediated this matter on October 19, 2016. The mediation did not result in a settlement. A bench trial was originally scheduled for May 31, 2017, and had been continued by the Court to June 6, 2017. The Court bifurcated the trial so that it will address liability in the first phase, and penalties in a second phase, if necessary. The Company filed a motion to strike the representative allegations in the complaint and focus the trial on the two stores where the named Plaintiffs worked. That motion was heard on May 9, 2017, and, on May 25, 2017, the motion to strike was denied and the motion to phase trial was granted. The parties engaged in settlement discussions and reached agreement to resolve the matter for an immaterial amount, subject to statutory notice requirements and court approval. The settlement has now been finalized and the Court approved the settlement on August 1, 2017.

Sofia Wilton Barriga v. 99¢ Only Stores. Plaintiff, a former store associate, filed an action against the Company on August 5, 2013, in the Superior Court of the State of California, County of Riverside alleging on behalf of the plaintiff and all others allegedly similarly situated under the California Labor Code that the Company failed to pay wages for all hours worked, provide meal periods, pay wages timely upon termination, and provide accurate wage statements. The plaintiff also asserted a derivative claim for unfair competition under the California Business and Professions Code. The plaintiff seeks to represent a class of all non-exempt employees who were employed in California in the Company’s retail stores who worked the graveyard shift at any time from January 1, 2012, through the date of trial or settlement. Although the class period as originally pled would extend back to August 5, 2009, the parties have agreed that any class period would run beginning January 1, 2012, because of the preclusive effect of a judgment in a previous matter. The plaintiff seeks to recover alleged unpaid wages, statutory penalties, interest, attorney’s fees and costs, and restitution. On September 23, 2013, the Company filed an answer denying all material allegations. A case management conference was held on October 4, 2013, at which the court ordered that discovery may proceed as to class certification issues only. After discovery commenced, a mediation was held on March 12, 2015, resulting in a confidential mediator’s proposal, which the parties verbally accepted. The parties were unable to negotiate and finalize a written settlement agreement. Subsequent settlement discussions directly and through the mediator, as well as a court-ordered settlement conference, were unsuccessful. Discovery resumed and plaintiff’s motion for class certification was fully briefed. Plaintiff also brought a motion to strike the evidence submitted in support of the Company’s opposition to class certification. At the Court’s request the parties mediated this matter prior to any ruling on the class certification motion and the motion to strike. That mediation took place on March 2, 2017, and did not result in a settlement. The motion for class certification and motion to strike were heard on April 20, 2017, and on April 26, 2017, the Court issued a minute order denying both motions. The Court issued a more detailed order setting forth its reasoning on August 10, 2017. On October 26, 2015, plaintiffs’ counsel filed another action in Los Angeles Superior Court, entitled Ivan Guerra v. 99 Cents Only Stores LLC (Case No. BC599119), which asserts PAGA claims based in part on the allegations at issue in the Barriga action. By stipulation of the parties, the Guerra action has been transferred to Riverside Superior Court. This action was mediated along with the Barriga action in the March 2, 2017 mediation that did not result in a settlement. The Company cannot predict the outcome of these lawsuits or the amount of potential loss, if any, that could result from such lawsuits.

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Phillip Clavel v. 99 Cents Only Stores LLC, et al. Former warehouse worker Phillip Clavel filed an action against the Company on March 30, 2016, in the Superior Court of the State of California, County of Los Angeles on behalf of himself and all other alleged aggrieved employees, seeking civil penalties under the PAGA for the following alleged Labor Code violations: failure to pay regular, overtime and minimum wages for all hours worked, failure to provide proper meal and rest periods, failure to pay wages timely during employment and upon termination, failure to provide proper wage statements, failure to reimburse business expenses, and failure to provide notice of the material terms of employment under the Wage Theft Prevention Act. Plaintiff alleges that his claims arose during two periods of employment—one from March 2015 through mid-October 2015, during which he was employed by the Company as a forklift operator in the Commerce Distribution Center, and a second period from late October 2015 through February 2016, when he was similarly employed (through a staffing agency, BaronHR) at the Company’s Washington Boulevard warehouse. On June 9, 2016, Plaintiff filed a First Amended Complaint. The Company answered the First Amended Complaint on June 14, 2016, generally denying the allegations in the complaint and asserting a number of affirmative defenses. BaronHR has also answered the First Amended Complaint. Trial has been set to commence on July 18, 2017. A mediation took place on January 19, 2017, and at the conclusion of the mediation, the parties executed a term sheet settlement agreement to resolve the alleged PAGA claims. The parties have now executed a long-form settlement agreement reflecting the final terms; however, the settlement is contingent on Court approval. The Court conducted a preliminary approval hearing on August 10, 2017, and requested additional information from Plaintiff. At a further hearing on August 29, 2017, preliminary approval of the settlement was granted. The Company accrued an immaterial amount related to this matter as of January 27, 2017 and July 28, 2017. If the proposed settlement is not finalized or not approved by the Court, the Company will not be able to predict the outcome of this lawsuit or the amount of potential loss, if any, that could result from such lawsuit.

Jimmy Mejia, et al. v. 99 Cents Only Stores LLC. Former store associates Jimmy Mejia and Yamilet Serrano filed an action against the Company on September 16, 2016, in the Superior Court of the State of California, County of Los Angeles on behalf of themselves and all other alleged aggrieved employees, seeking civil penalties under the PAGA for the following alleged Labor Code violations: failure to pay overtime and minimum wages for all hours worked, failure to provide proper meal and rest periods, failure to pay timely wages during employment and upon termination, and failure to provide proper wage statements. On November 14, 2016, the Company answered the complaint, generally denying the allegations in the complaint and asserting a number of affirmative defenses. Trial has been scheduled for January 8, 2018. The Company cannot predict the outcome of this lawsuit or the amount of potential loss, if any, that could result from such lawsuit.

Venzel Bradford v. BaronHR, Inc., et al. Former warehouse worker Venzel Bradford filed a putative class action complaint against BaronHR, Inc., Solvis Staffing Services, Inc., Personnel Staffing Group, LLC, and the Company on April 26, 2017, in the Superior Court of the State of California, County of Los Angeles. On behalf of himself and all others alleged to be similarly situated, Bradford is asserting claims for failure to pay overtime wages, failure to provide meal and rest periods, waiting time penalties, failure to provide proper wage statements, and unfair competition. Bradford was not employed by the Company; he was employed by one or more of the staffing agencies named as defendants. The Company has sought indemnity from the employing agency(ies). The Court proceeding is currently stayed and an initial status conference is scheduled for September 15, 2017. The Company cannot predict the outcome of this lawsuit or the amount of potential loss, if any, that could result from such lawsuit.

Environmental Matters

People of the State of California v. 99 Cents Only Stores LLC. This action was brought by the San Joaquin District Attorney and a number of other public prosecutors against the Company in San Joaquin County Superior Court alleging that the Company had violated hazardous waste statutory and regulatory requirements at its retail stores in California. The Company settled this case through the entry of a stipulated judgment in December 2014 which contained injunctive relief requiring the Company to comply with applicable hazardous waste requirements at these stores. On June 29, 2015, the District Attorney informed the Company of alleged hazardous waste violations identified during a March 2015 inspection of a recently-opened store in Sonora, Tuolumne County and requested a meeting with the Company. Since that time, the Company has been cooperating with the District Attorney to provide information regarding the alleged violations. In May 2016, the discussions with the District Attorney were extended to include non-compliance issues identified at an existing store in San Jose during an inspection on March 16, 2016. In connection with this matter, the Company has accrued an immaterial amount. Although any monetary damages ultimately paid by the Company may exceed the accrued amount, it is not currently possible to estimate the amount of any such excess or the impact that any injunctive relief may have on the Company’s business, financial condition and results of operations.

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Other Matters

The Company is also subject to other private lawsuits, administrative proceedings and claims that arise in its ordinary course of business. A number of these lawsuits, proceedings and claims may exist at any given time. While the resolution of such a lawsuit, proceeding or claim may have an impact on the Company’s financial results for the period in which it is resolved, and litigation is inherently unpredictable, in management’s opinion, none of these matters arising in the ordinary course of business is expected to have a material adverse effect on the Company’s financial position, results of operations or overall liquidity.

12. Assets Held for Sale

Assets held for sale as of July 28, 2017 and January 27, 2017 consisted of vacant land in Rancho Mirage and Los Angeles, California and land in Bullhead, Arizona with an aggregate carrying value of $4.9 million.

13. Other Accrued Expenses

Other accrued expenses as of July 28, 2017 and January 27, 2017 are as follows (in thousands):

	July 28, 2017		January 27, 2017
Accrued interest	$	7,072	$	6,840
Accrued occupancy costs	11,825		9,438
Accrued legal reserves and fees	11,125		10,624
Accrued California Redemption Value	2,772		2,343
Accrued transportation	5,141		4,598
Accrued temporary labor	3,228		2,087
Other	13,586		10,152
Total other accrued expenses	$	54,749	$	46,082

14. New Authoritative Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The ASU also requires expanded disclosures about revenue recognition. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. ASU 2014-09 was to be effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption was not permitted. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date”, which defers the effective date of ASU 2014-09 for all entities by one year, while allowing early adoption as of the original public entity date. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” which amends the revenue recognition guidance on accounting for licenses of intellectual property and identifying performance obligations as well as clarifies when a promised good or service is separately identifiable. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients,” which provides clarifying guidance in certain narrow areas such as an assessment of collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition as well as adds some practical expedients. In December 2016, the FASB issued ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” to clarify or to correct unintended application of the Topic 606, including disclosure requirements related to performance obligations. The effective date and transition of these amendments is the same as the effective date and transition of ASU 2014-09, “Revenue from Contracts with Customers,” as amended by the one-year deferral and early adoption provisions in ASU 2015-14. The Company is primarily engaged in the business of selling consumable and general merchandise and seasonal products. Revenues from the sale of such products are recognized at the point of sale. To date, the Company has performed a preliminary detailed review of key contracts and compared historical accounting policies and practices to the new standard. While the Company is still evaluating this standard, it is not expected that this standard will have a material impact on the Company’s consolidated financial statements. The Company will continue to evaluate ASU 2014-09 and other amendments and related interpretive guidance through the date of adoption. The Company expects to adopt ASU 2014-09 under the modified retrospective approach in the first quarter of fiscal 2019.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This ASU simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost or net realizable value test. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The guidance is effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years, with early adoption permitted. This ASU should be applied prospectively. The Company adopted this standard in the first quarter of fiscal 2018 and such adoption did not have an impact on the Company or its consolidated financial statements.

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In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU revises an entity’s accounting on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2017. Early adoption is not permitted except for the provisions related to the presentation of certain fair value changes for financial liabilities measured at fair value. The Company will adopt ASU 2016-01 in the first quarter of fiscal 2019 and such adoption is not expected to have a material impact on the Company or its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which requires lessees to recognize right-of-use assets and lease liabilities, for all leases, with the exception of short-term leases, at the commencement date of each lease. This ASU requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. This ASU is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. The amendments of this update should be applied using a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and is anticipating a material impact on its consolidated financial statements because the Company is party to a significant number of lease contracts.

In March 2016, the FASB issued ASU 2016-04, “Recognition of Breakage for Certain Prepaid Stored-Value Products,” which is designed to provide guidance and eliminate diversity in the accounting for the de-recognition of financial liabilities related to certain prepaid stored-value products using a revenue-like breakage model. Breakage should be recognized in proportion to the pattern of rights expected to be exercised by the product holder to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted, and is to be applied retrospectively or using a modified retrospective approach. The Company will adopt ASU 2016-04 in the first quarter of fiscal 2019 and such adoption is not expected to have a material impact on the Company or its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation, Improvements to Employee Share-Based Payment Accounting”. This ASU requires companies to recognize the income tax effects of awards in the income statement when the awards vest or are settled. The guidance requires companies to present excess tax benefits as an operating activity and cash paid to a taxing authority to satisfy statutory withholding as a financing activity on the statement of cash flows. The guidance will also allow entities to make an alternative policy election to account for forfeitures as they occur. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period. The Company adopted this standard in the first quarter of fiscal 2018. The Company made a policy election to account for forfeitures of share-based payments as they occur and implemented this provision using a modified retrospective transition. There was no impact on retained earnings. The Company also adopted other provisions of ASU 2016-09 in the first quarter of fiscal 2018 and the adoption of these provisions did not have an impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”. This ASU replaces the current incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates. The standard will be effective for fiscal years beginning after December 15, 2019, with early adoption permitted for periods after December 15, 2018. The Company is currently in the process of evaluating the impact of this standard on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted, and is to be applied retrospectively. The adoption is not expected to have a material impact on the Company or its consolidated financial statements.

In October 2016, the FASB has issued ASU No. 2016-17, “Interest Held through Related Parties that are under Common Control”, which provides guidance on the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity (“VIE”) by amending how a reporting entity, that is a single decision maker of a VIE, treats indirect interests in that entity held through related parties that are under common control. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company adopted this standard in the first quarter of fiscal 2018 and such adoption did not have an impact on the Company or its consolidated financial statements.

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In October 2016 the FASB has issued ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory”, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted as of the beginning of a fiscal year. The Company is currently in the process of evaluating the impact of this standard on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Restricted Cash”, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of restricted cash or restricted cash equivalents. The guidance is effective for periods beginning after December 15, 2017 on a retrospective basis, with early adoption permitted. The Company is currently in the process of evaluating the impact of this standard on its consolidated financial statements.

On December 2016, FASB issued ASU 2016-19, “Technical Corrections and Improvements”, which includes amendments related to differences between original guidance and the Accounting Standards Codification, guidance clarification and reference corrections, simplifications to the Accounting Standards Codification, and minor improvements to the guidance. The amendments of the standard that require transition guidance are effective for annual and interim reporting periods beginning after December 15, 2016, and early adoption is permitted. All other amendments were effective immediately. The Company adopted this standard in the first quarter of fiscal 2018 and such adoption did not have an impact on the Company or its consolidated financial statements.

In January 2017 the FASB issued ASU No. 2017-01 “Business Combinations: Clarifying the Definition of a Business”, revises the definition of a business and may affect acquisitions, disposals, goodwill impairment and consolidation. The new guidance specifies that when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business. The changes to the definition of a business in this guidance will likely result in more acquisitions being accounted for as asset acquisitions and would also affect the accounting for disposal transactions. This guidance is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The adoption is not expected to have a material impact on the Company or its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment”, which simplifies the goodwill impairment testing by eliminating Step 2 from the goodwill impairment testing required, should an impairment be discovered during its annual or interim assessment. The new standard is effective for annual or interim impairment tests beginning after December 15, 2019, with early adoption permitted. The Company is currently in the process of evaluating the impact of this standard on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”, which provides clarification about the term “in substance nonfinancial asset” and guidance for recognizing gains and losses from the transfer of nonfinancial assets and for partial sales of nonfinancial assets. The new standard is effective for public entities for annual periods beginning after December 15, 2017 and interim periods therein. Entities may use either a full or modified approach to adopt the standard. The Company is currently in the process of evaluating the impact of this standard on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting”, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance is intended to reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under the new standard, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. The new standard will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The adoption is not expected to have a material impact on the Company or its consolidated financial statements.

15. Financial Guarantees

On December 29, 2011, the Company issued $250.0 million principal amount of the Senior Notes. The Senior Notes are irrevocably and unconditionally guaranteed, jointly and severally, by each of the Company’s existing and future restricted subsidiaries that are guarantors under the Credit Facilities and certain other indebtedness.

As of July 28, 2017 and January 27, 2017, the Senior Notes are fully and unconditionally guaranteed by the Subsidiary Guarantors.

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CONDENSED CONSOLIDATING BALANCE SHEETS

As of July 28, 2017

(In thousands)

(Unaudited)

	Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
ASSETS
Current Assets:
Cash	$	1,189		$	1,217		$	79		$	—		$	2,485
Accounts receivable, net	2,844			83			—			—			2,927
Income taxes receivable	2,739			—			—			—			2,739
Inventories, net	162,642			26,204			—			—			188,846
Assets held for sale	4,903			—			—			—			4,903
Other	16,385			993			5			—			17,383
Total current assets	190,702			28,497			84			—			219,283
Property and equipment, net	417,233			48,899			25			—			466,157
Deferred financing costs, net	2,480			—			—			—			2,480
Equity investments and advances to subsidiaries	852,365			789,728			3,094			(1,645,187		)	—
Intangible assets, net	442,628			1,564			—			—			444,192
Goodwill	380,643			—			—			—			380,643
Deposits and other assets	8,545			323			15			—			8,883
Total assets	$	2,294,596		$	869,011		$	3,218		$	(1,645,187	)	$	1,521,638

LIABILITIES AND MEMBER’S EQUITY
Current Liabilities:
Accounts payable	$	91,783		$	10,077		$	—		$	—		$	101,860
Intercompany payable	791,298			811,361			3,617			(1,606,276		)	—
Payroll and payroll-related	28,467			1,881			—			—			30,348
Sales tax	14,682			623			—			—			15,305
Other accrued expenses	51,187			3,551			11			—			54,749
Workers’ compensation	68,866			75			—			—			68,941
Current portion of long-term debt	5,669			—			—			—			5,669
Current portion of capital and financing lease obligation	1,214			—			—			—			1,214
Total current liabilities	1,053,166			827,568			3,628			(1,606,276		)	278,086
Long-term debt, net of current portion	876,658			—			—			—			876,658
Unfavorable lease commitments, net	3,357			14			—			—			3,371
Deferred rent	28,524			2,108			—			—			30,632
Deferred compensation liability	912			—			—			—			912
Capital and financing lease obligation, net of current portion	52,820			—			—			—			52,820
Deferred income taxes	161,450			—			—			—			161,450
Other liabilities	15,813			—			—			—			15,813
Total liabilities	2,192,700			829,690			3,628			(1,606,276		)	1,419,742

Member’s Equity:
Member units	551,172			—			1			(1		)	551,172
Additional paid-in capital	—			99,943			—			(99,943		)	—
Investment in Number Holdings, Inc. preferred stock	(19,200		)	—			—			—			(19,200		)
Accumulated deficit	(430,076		)	(60,622		)	(411		)	61,033			(430,076		)
Total equity	101,896			39,321			(410		)	(38,911		)	101,896
Total liabilities and equity	$	2,294,596		$	869,011		$	3,218		$	(1,645,187	)	$	1,521,638

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CONDENSED CONSOLIDATING BALANCE SHEETS

As of January 27, 2017

(In thousands)

	Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
ASSETS
Current Assets:
Cash	$	1,207		$	1,105		$	136		$	—		$	2,448
Accounts receivable, net	3,478			32			—			—			3,510
Income taxes receivable (payable)	3,885			(9		)	—			—			3,876
Inventories, net	148,429			27,463			—			—			175,892
Assets held for sale	4,903			—			—			—			4,903
Other	9,571			723			13			—			10,307
Total current assets	171,473			29,314			149			—			200,936
Property and equipment, net	456,020			51,571			29			—			507,620
Deferred financing costs, net	3,488			—			—			—			3,488
Equity investments and advances to subsidiaries	766,276			696,162			2,907			(1,465,345		)	—
Intangible assets, net	445,302			1,725			—			—			447,027
Goodwill	380,643			—			—			—			380,643
Deposits and other assets	8,246			331			15			—			8,592
Total assets	$	2,231,448		$	779,103		$	3,100		$	(1,465,345	)	$	1,548,306

LIABILITIES AND MEMBER’S EQUITY
Current Liabilities:
Accounts payable	$	78,835		$	7,753		$	—		$	—		$	86,588
Intercompany payable	697,590			719,397			3,497			(1,420,484		)	—
Payroll and payroll-related	22,370			1,740			—			—			24,110
Sales tax	18,867			522			—			—			19,389
Other accrued expenses	43,962			2,103			17			—			46,082
Workers’ compensation	69,094			75			—			—			69,169
Current portion of long-term debt	6,138			—			—			—			6,138
Current portion of capital and financing lease obligation	31,330			—			—			—			31,330
Total current liabilities	968,186			731,590			3,514			(1,420,484		)	282,806
Long-term debt, net of current portion	865,375			—			—			—			865,375
Unfavorable lease commitments, net	3,969			19			—			—			3,988
Deferred rent	28,141			2,216			3			—			30,360
Deferred compensation liability	816			—			—			—			816
Capital and financing lease obligation, net of current portion	47,195			—			—			—			47,195
Deferred income taxes	161,450			—			—			—			161,450
Other liabilities	12,297			—			—			—			12,297
Total liabilities	2,087,429			733,825			3,517			(1,420,484		)	1,404,287

Member’s Equity:
Member units	550,918			—			1			(1		)	550,918
Additional paid-in capital	—			99,943			—			(99,943		)	—
Investment in Number Holdings, Inc. preferred stock	(19,200		)	—			—			—			(19,200		)
Accumulated deficit	(387,699		)	(54,665		)	(418		)	55,083			(387,699		)
Total equity	144,019			45,278			(417		)	(44,861		)	144,019
Total liabilities and equity	$	2,231,448		$	779,103		$	3,100		$	(1,465,345	)	$	1,548,306

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Second Quarter Ended July 28, 2017

(In thousands)

(Unaudited)

	Issuer			Subsidiary Guarantor			Non- Guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Net Sales:
Total sales	$	493,393		$	47,057		$	77	$	(77	)	$	540,450
Cost of sales	348,266			36,321			—		—			384,587
Gross profit	145,127			10,736			77		(77		)	155,863
Selling, general and administrative expenses	158,209			14,054			73		(77		)	172,259
Operating (loss) income	(13,082		)	(3,318		)	4		—			(16,396		)
Other (income) expense:
Interest income	(5		)	—			—		—			(5		)
Interest expense	17,161			—			—		—			17,161
Loss on extinguishment of debt	—			—			—		—			—
Equity in loss (earnings) of subsidiaries	3,314			—			—		(3,314		)	—
Total other expense, net	20,470			—			—		(3,314		)	17,156
(Loss) income before provision for income taxes	(33,552		)	(3,318		)	4		3,314			(33,552		)
Provision for income taxes	72			—			—		—			72
Net (loss) income	$	(33,624	)	$	(3,318	)	$	4	$	3,314		$	(33,624	)
Comprehensive (loss) income	$	(33,624	)	$	(3,318	)	$	4	$	3,314		$	(33,624	)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the First Half Ended July 28, 2017

(In thousands)

(Unaudited)

	Issuer			Subsidiary Guarantor			Non- Guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Net Sales:
Total sales	$	991,635		$	96,327		$	143	$	(143	)	$	1,087,962
Cost of sales	695,597			74,149			—		—			769,746
Gross profit	296,038			22,178			143		(143		)	318,216
Selling, general and administrative expenses	297,882			28,135			136		(143		)	326,010
Operating (loss) income	(1,844		)	(5,957		)	7		—			(7,794		)
Other (income) expense:
Interest income	(7		)	—			—		—			(7		)
Interest expense	34,503			—			—		—			34,503
Loss on extinguishment of debt	—			—			—		—			—
Equity in loss (earnings) of subsidiaries	5,950			—			—		(5,950		)	—
Total other expense, net	40,446			—			—		(5,950		)	34,496
(Loss) income before provision for income taxes	(42,290		)	(5,957		)	7		5,950			(42,290		)
Provision for income taxes	87			—			—		—			87
Net (loss) income	$	(42,377	)	$	(5,957	)	$	7	$	5,950		$	(42,377	)
Comprehensive (loss) income	$	(42,377	)	$	(5,957	)	$	7	$	5,950		$	(42,377	)

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Second Quarter Ended July 29, 2016

(In thousands)

(Unaudited)

	Issuer			Subsidiary Guarantor			Non- Guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Net Sales:
Total sales	$	455,238		$	41,220		$	111	$	(111	)	$	496,458
Cost of sales	323,033			32,225			—		—			355,258
Gross profit	132,205			8,995			111		(111		)	141,200
Selling, general and administrative expenses	146,560			13,027			9		(111		)	159,485
Operating (loss) income	(14,355		)	(4,032		)	102		—			(18,285		)
Other (income) expense:
Interest income	(36		)	—			—		—			(36		)
Interest expense	16,784			—			—		—			16,784
Loss on extinguishment of debt	—			—			—		—			—
Equity in loss (earnings) of subsidiaries	3,930			—			—		(3,930		)	—
Total other expense, net	20,678			—			—		(3,930		)	16,748
(Loss) income before provision for income taxes	(35,033		)	(4,032		)	102		3,930			(35,033		)
Provision for income taxes	52			—			—		—			52
Net (loss) income	$	(35,085	)	$	(4,032	)	$	102	$	3,930		$	(35,085	)
Comprehensive (loss) income	$	(35,088	)	$	(4,032	)	$	102	$	3,930		$	(35,088	)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the First Half Ended July 29, 2016

(In thousands)

(Unaudited)

	Issuer			Subsidiary Guarantor			Non- Guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Net Sales:
Total sales	$	924,460		$	84,927		$	111	$	(111	)	$	1,009,387
Cost of sales	653,375			65,845			—		—			719,220
Gross profit	271,085			19,082			111		(111		)	290,167
Selling, general and administrative expenses	290,823			25,940			62		(111		)	316,714
Operating (loss) income	(19,738		)	(6,858		)	49		—			(26,547		)
Other (income) expense:
Interest income	(38		)	—			—		—			(38		)
Interest expense	33,310			—			—		—			33,310
Loss on extinguishment of debt	335			—			—		—			335
Equity in loss (earnings) of subsidiaries	6,809			—			—		(6,809		)	—
Total other expense, net	40,416			—			—		(6,809		)	33,607
(Loss) income before provision for income taxes	(60,154		)	(6,858		)	49		6,809			(60,154		)
Provision for income taxes	125			—			—		—			125
Net (loss) income	$	(60,279	)	$	(6,858	)	$	49	$	6,809		$	(60,279	)
Comprehensive (loss) income	$	(60,117	)	$	(6,858	)	$	49	$	6,809		$	(60,117	)

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the First Half Ended July 28, 2017

(In thousands)

(Unaudited)

	Issuer			Subsidiary Guarantor			Non- Guarantor Subsidiary			Consolidating Adjustments		Consolidated
Cash flows from operating activities:
Net cash (used in) provided by operating activities	$	(14,854	)	$	1,276		$	(57	)	$	—	$	(13,635	)

Cash flows from investing activities:
Purchases of property and equipment	(17,754		)	(1,164		)	—			—		(18,918		)
Proceeds from sales of property and fixed assets	9,396			—			—			—		9,396
Net cash used in investing activities	(8,358		)	(1,164		)	—			—		(9,522		)

Cash flows from financing activities:
Payments of long-term debt	(3,538		)	—			—			—		(3,538		)
Proceeds under revolving credit facility	115,400			—			—			—		115,400
Payments under revolving credit facility	(103,400		)	—			—			—		(103,400		)
Proceeds from financing lease obligations	15,317			—			—			—		15,317
Payments of capital and financing lease obligations	(585		)	—			—			—		(585		)
Net cash provided by financing activities	23,194			—			—			—		23,194
Net (decrease) increase in cash	(18		)	112			(57		)	—		37
Cash — beginning of period	1,207			1,105			136			—		2,448
Cash — end of period	$	1,189		$	1,217		$	79		$	—	$	2,485

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the First Half Ended July 29, 2016

(In thousands)

(Unaudited)

	Issuer			Subsidiary Guarantor			Non- Guarantor Subsidiary			Consolidating Adjustments		Consolidated
Cash flows from operating activities:
Net cash provided by (used in) operating activities	$	26,029		$	1,012		$	(5	)	$	—	$	27,036

Cash flows from investing activities:
Purchases of property and equipment	(22,928		)	(1,032		)	—			—		(23,960		)
Proceeds from sales of fixed assets	612			—			—			—		612
Net cash used in investing activities	(22,316		)	(1,032		)	—			—		(23,348		)

Cash flows from financing activities:
Payments of long-term debt	(3,069		)	—			—			—		(3,069		)
Proceeds under revolving credit facility	92,200			—			—			—		92,200
Payments under revolving credit facility	(119,100		)	—			—			—		(119,100		)
Payments of debt issuance costs	(4,725		)	—			—			—		(4,725		)
Proceeds from financing lease obligations	31,503			—			—			—		31,503
Payments of capital and financing lease obligations	(500		)	—			—			—		(500		)
Net cash used in financing activities	(3,691		)	—			—			—		(3,691		)
Net increase (decrease) in cash	22			(20		)	(5		)	—		(3		)
Cash — beginning of period	1,266			1,009			37			—		2,312
Cash — end of period	$	1,288		$	989		$	32		$	—	$	2,309

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in this quarterly report on Form 10-Q (this “Report”), unless the context suggests otherwise, the terms “Company,” “we,” “us,” and “our” refer to 99¢ Only Stores and its consolidated subsidiaries prior to the Conversion (as described in Note 1 to the Annual Report on Form 10-K for the fiscal year ended January 27, 2017) and to 99 Cents Only Stores LLC and its consolidated subsidiaries on or after the Conversion.

General

We are an extreme value retailer of consumable and general merchandise and seasonal products. Our stores offer a wide assortment of regularly available consumer goods as well as a broad variety of first-quality closeout merchandise. In addition, we carry domestic and imported fresh produce, deli, dairy and frozen and refrigerated food products.

On January 13, 2012, we were acquired through a merger (the “Merger”) with a subsidiary of Number Holdings, Inc., a Delaware corporation (“Parent”) with us surviving. In connection with the Merger, we became a subsidiary of Parent, which is controlled by affiliates of Ares Management, L.P. (“Ares”) and Canada Pension Plan Investment Board (“CPPIB” and, together with Ares, the “Sponsors”).

We follow a fiscal calendar consisting of four quarters with 91 days, each ending on the Friday closest to the last day of April, July, October or January, as applicable, and a 52-week fiscal year with 364 days, with a 53-week year every five to six years. Unless otherwise stated, references to years in this Report relate to fiscal years rather than calendar years. Fiscal 2018 began on January 28, 2017, will end on February 2, 2018 and will consist of 53 weeks. Fiscal year 2017 (“fiscal 2017”) began on January 30, 2016, ended on January 27, 2017 and consisted of 52 weeks. The second quarter ended July 28, 2017 (the “second quarter of fiscal 2018”) and the second quarter ended July 29, 2016 (the “second quarter of fiscal 2017”) were each comprised of 91 days. Each of the six-month period ended July 28, 2017 (the “first half of fiscal 2018”) and the six-month period ended July 29, 2016 (the “first half of fiscal 2017”) was comprised of 182 days.

For the second quarter of fiscal 2018, we had net sales of $540.5 million, operating loss of $16.4 million and a net loss of $33.6 million. Sales increased during the second quarter of fiscal 2018 over the same period in fiscal 2017 primarily due to an increase in same-store sales of 9.0% and the full quarter effect of new stores opened in fiscal 2017. Second quarter of fiscal 2018 results were positively impacted by decreases in shrinkage and negatively impacted by lower product margin compared to the second quarter of fiscal 2017 as further discussed in “Results of Operations — Second Quarter Ended July 28, 2017 Compared to Second Quarter Ended July 29, 2016 — Gross Profit” and also positively impacted by leveraging higher same-store sales, among other factors as further discussed in “Results of Operations — Second Quarter Ended July 28, 2017 Compared to Second Quarter Ended July 29, 2016 — Selling, General and Administrative Expenses”. For the first half of fiscal 2018, we had net sales of $1,088.0 million, operating loss of $7.8 million and a net loss of $42.4 million. Sales increased during the first half of fiscal 2018 over the same period in fiscal 2017 primarily due to an increase in same-store sales of 7.9% and the full year effect of new stores opened in fiscal 2017.

The senior leadership team continues to focus on key strategies designed to enable us to profitably scale our business while continuing to meet the needs of our customers. These areas are discussed in detail under Item 1, “Business—Our Business Strategy” of our Annual Report on Form 10-K for the fiscal year ended January 27, 2017.

In fiscal 2018, we currently intend to open three new stores, all of which are expected to be opened in our existing markets. We expect to close three stores by the end of fiscal 2018 or early fiscal 2019. Of these three stores, one will close upon lease expiration and two will close through exercise of our early lease termination rights. We believe that our near term growth in fiscal 2018 will primarily result from increases in same-store sales and new store openings in our existing territories.

Critical Accounting Policies and Estimates

Our critical accounting policies reflecting management’s estimates and judgments are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended January 27, 2017. Since the filing of our Annual Report on Form 10-K for the fiscal year ended January 27, 2017, there have been no other significant changes to our critical accounting policies and estimates.

Results of Operations

The following discussion defines the components of the statement of comprehensive income.

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Net Sales: Revenue is recognized at the point of sale in our stores (“retail sales”). Bargain Wholesale sales revenue is recognized in accordance with the shipping terms agreed upon on the purchase order. Bargain Wholesale sales are typically recognized free on board origin, where title and risk of loss pass to the buyer when the merchandise leaves our distribution facility.

Cost of Sales: Cost of sales includes the cost of inventory, freight-in, obsolescence, spoilage, scrap and inventory shrink, and is net of discounts and allowances. Cost of sales also includes receiving, warehouse costs and distribution costs (which include payroll and associated costs, occupancy, transportation to and from stores and depreciation expense). Cash discounts for satisfying early payment terms are recognized when payment is made, and allowances and rebates based upon milestone achievements, such as reaching a certain volume of purchases of a vendor’s products, are included as a reduction of cost of sales when such contractual milestones are reached or based on other systematic and rational approaches where possible.

Selling, General and Administrative Expenses: Selling, general and administrative expenses include the costs of selling merchandise in stores (which include payroll and associated costs, occupancy and other store-level costs) and corporate costs (which include payroll and associated costs, occupancy, advertising, professional fees and other corporate administrative costs). Selling, general and administrative expenses also include depreciation and amortization expense relating to these costs.

Other (Income) Expense: Other (income) expense relates primarily to interest expense on our debt and financing leases and loss on extinguishment of debt.

The following table sets forth selected income statement data, including such data as a percentage of net sales for the periods indicated (percentages may not add up due to rounding):

	For the Second Quarter Ended										For the First Half Ended
	July 28, 2017			% of Net Sales		July 29, 2016			% of Net Sales		July 28, 2017			% of Net Sales		July 29, 2016			% of Net Sales
Net Sales:
99¢ Only Stores	$	531,288		98.3	%	$	487,460		98.2	%	$	1,069,280		98.3	%	$	989,226		98.0	%
Bargain Wholesale	9,162			1.7		8,998			1.8		18,682			1.7		20,161			2.0
Total sales	540,450			100.0		496,458			100.0		1,087,962			100.0		1,009,387			100.0
Cost of sales	384,587			71.2		355,258			71.6		769,746			70.8		719,220			71.3
Gross profit	155,863			28.8		141,200			28.4		318,216			29.2		290,167			28.7
Selling, general and administrative expenses	172,259			31.9		159,485			32.1		326,010			30.0		316,714			31.4
Operating loss	(16,396		)	(3.0	)	(18,285		)	(3.7	)	(7,794		)	(0.7	)	(26,547		)	(2.6	)
Other (income) expense:
Interest income	(5		)	0.0		(36		)	0.0		(7		)	0.0		(38		)	0.0
Interest expense	17,161			3.2		16,784			3.4		34,503			3.2		33,310			3.3
Loss on extinguishment of debt	—			0.0		—			0.0		—			0.0		335			0.0
Total other expense, net	17,156			3.2		16,748			3.4		34,496			3.2		33,607			3.3
Loss before provision for income taxes	(33,552		)	(6.2	)	(35,033		)	(7.1	)	(42,290		)	(3.9	)	(60,154		)	(6.0	)

Provision for income taxes	72			0.0		52			0.0		87			0.0		125			0.0

Net loss	$	(33,624	)	(6.2	)%	$	(35,085	)	(7.1	)%	$	(42,377	)	(3.9	)%	$	(60,279	)	(6.0	)%

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Second Quarter Ended July 28, 2017 Compared to Second Quarter Ended July 29, 2016

Net sales. Total net sales increased $44.0 million, or 8.9%, to $540.5 million in the second quarter of fiscal 2018, from $496.5 million in the second quarter of fiscal 2017. Net retail sales increased $43.8 million, or 9.0%, to $531.3 million in the second quarter of fiscal 2018, from $487.5 million in the second quarter of fiscal 2017. Bargain Wholesale net sales increased by $0.2 million, or 2.2%, to $9.2 million in the second quarter of fiscal 2018, from $9.0 million in the second quarter of fiscal 2017. The $43.8 million increase in net retail sales was primarily due to a 9.0% increase in same-store sales and the full quarter effect of stores opened in fiscal 2017. The increase in retail sales was partially offset by a decrease in sales of approximately $5.0 million due to the impact of closed stores. Same-store sales increased 9.0% compared to the second quarter of fiscal 2017, with higher customer traffic of 4.7% and higher average ticket of 4.1%. The increase in same-store sales was primarily driven by higher sales from seasonal merchandise, general merchandise and consumable merchandise, in part due to higher sales of above $1 products, better product assortment and improved store execution. Sales from grocery and fresh offerings also increased, driven by better product availability, improved product assortment and continued improvements of store in-stock levels.

Gross profit. Gross profit increased $14.7 million, or 10.4%, to $155.9 million in the second quarter of fiscal 2018, from $141.2 million in the second quarter of 2017. As a percentage of net sales, overall gross margin increased to 28.8% in the second quarter of fiscal 2018, from 28.4% in the second quarter of fiscal 2017. Among the gross profit components, shrinkage improved by 90 basis points compared to fiscal 2017 as a result of positive trends in recent physical counts that we believe were driven by ongoing initiatives that identify and reduce shrinkage, including loss prevention efforts and adherence to disciplined inventory management processes. Product margin decreased by 80 basis points compared to the second quarter of fiscal 2017 primarily as a result of a higher mix of above $1 products, which drove overall improvements in sales and margin dollars, but was dilutive to product margin rates, as well as the impact of higher import related expenses. Distribution and transportation expenses decreased by 10 basis points primarily due to lower outbound transportation costs. The remaining change was attributable to other less significant items included in costs of sales.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $12.8 million or 8.0%, to $172.3 million in the second quarter of fiscal 2018, from $159.5 million in the second quarter of fiscal 2017. As a percentage of net sales, selling, general and administrative expenses decreased to 31.9% for the second quarter of fiscal 2018 from 32.1% for the second quarter of fiscal 2017. Selling, general and administrative expenses as a percentage of net sales for the second quarter of fiscal 2018 were favorably impacted by 60 basis points as a result of operating leverage on fixed expenses stemming from higher same-store sales, as compared to the second quarter of fiscal 2017. Positively impacted fixed expense categories include but are not limited to depreciation, store occupancy costs and other fixed store-level expenses. These decreases were partially offset by an increase in payroll-related expenses of 40 basis points, primarily due to higher performance compensation expenses and an increase in the minimum wage in California and Arizona, both of which went into effect in January 2017. Selling, general and administrative expenses in the second of fiscal 2018 were also negatively impacted by store impairment charges of 30 basis points (as described in Note 1 to our Unaudited Consolidated Financial Statements). The remaining variance of 30 basis points was primarily due to lower store operating costs, in areas such as workers’ compensation and outside services.

Operating loss. Operating loss was $16.4 million for the second quarter of fiscal 2018 compared to operating loss of $18.3 million for the second quarter of fiscal 2017. Operating loss as a percentage of net sales was (3.0)% in the second quarter of fiscal 2018 compared to operating loss of (3.7)% in the second quarter of fiscal 2017. The decrease in operating loss as a percentage of net sales was primarily due to changes in gross margin and selling, general, and administrative expenses, as discussed above.

Interest expense. Interest expense was $17.2 million for the second quarter of fiscal 2018 compared to interest expense of $16.8 million for the second quarter of fiscal 2017. Interest expense was higher primarily due to increased borrowings under the ABL Facility (as defined below).

Provision for income taxes. The provision for income taxes was less than $0.1 million for each of the second quarter of fiscal 2018 and fiscal 2017. The effective income tax rate for the second quarter of fiscal 2018 was a provision rate of (0.2)% compared to a provision rate of (0.1)% for the second quarter of fiscal 2017. The effective tax rates differ from statutory rates primarily due to the effect of not recognizing the benefit of losses incurred in the second quarter of fiscal 2018 and 2017 in jurisdictions where we concluded it is more likely than not that such benefits would not be realized and a valuation allowance established in the second quarter of fiscal 2016. Income taxes for interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year. The estimated effective tax rate for the entire year is based on current estimates and any changes to those estimates in future periods could result in an effective tax rate that is materially different from the current estimate.

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Net loss. As a result of the items discussed above, net loss for the second quarter of fiscal 2018 was $33.6 million compared to net loss of $35.1 million in the second quarter of fiscal 2017. Net loss as a percentage of net sales was (6.2)% for the second quarter of fiscal 2018, compared to net loss of (7.1)% for the second quarter of fiscal 2017.

First Half Ended July 28, 2017 Compared to First Half Ended July 29, 2016

Net sales. Total net sales increased $78.6 million, or 7.8%, to $1,088.0 million in the first half of fiscal 2018, from $1,009.4 million in the first half of fiscal 2017. Net retail sales increased $80.1 million, or 8.1%, to $1,069.3 million in the first half of fiscal 2018, from $989.2 million in the first half of fiscal 2017. Bargain Wholesale net sales decreased by $1.5 million, or 7.3%, to $18.7 million in the first half of fiscal 2018, from $20.2 million in the first half of fiscal 2017. The $80.1 million increase in net retail sales is primarily due to a 7.9% increase in same-store sales and the full year effect of stores opened in fiscal 2017. The increase in retail sales was partially offset by a decrease in sales of approximately $11.9 million due to the impact of closed stores. Same-store sales increased 7.9% compared to the second quarter of fiscal 2017, with higher customer traffic of 4.5% and higher average ticket of 3.3%. The increase in same-store sales was primarily driven by higher sales from general merchandise, seasonal merchandise and consumable merchandise, in part due to higher sales of above $1 products, better product assortment and improved store execution. Sales from fresh and grocery offerings also increased, driven by better product availability, improved product assortment, continued improvements of store in-stock levels and improved execution of the partnerships with our third party produce distributors.

Gross profit. Gross profit increased $28.0 million, or 9.7%, to $318.2 million in the first half of fiscal 2018, from $290.2 million in the first half of fiscal 2017. As a percentage of net sales, overall gross margin increased to 29.2% in the first half of fiscal 2018 from 28.7% in the first half of fiscal 2017. Among the gross profit components, shrinkage improved by 90 basis points compared to fiscal 2017 as a result of positive trends in recent physical counts that we believe were driven by ongoing initiatives that identify and reduce shrinkage, including loss prevention efforts and adherence to disciplined inventory management processes. Product margin decreased by 70 basis points compared to the first half of fiscal 2017 primarily as a result of a higher mix of above $1 products, which drove overall improvements in sales and margin dollars, but was dilutive to product margin rates, higher import related expenses, including ocean freight and duty, as well as margin investments in the partnerships with our third party produce distributors. Distribution and transportation expenses decreased by 30 basis points primarily due to lower outbound transportation costs.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $9.3 million to $326.0 million in the first half of fiscal 2018, from $316.7 million in the first half of fiscal 2017. As a percentage of net sales, selling, general and administrative expenses decreased to 30.0% for the first half of fiscal 2018 from 31.4% for the first half of fiscal 2017. The 140 basis point decrease in selling, general and administrative expenses as a percentage of net sales was primarily driven by an $18.5 million realized gain on sale of a warehouse facility, representing 170 basis points during the first quarter of fiscal 2018 (as described in Note 11 to our Unaudited Consolidated Financial Statements). In addition, selling, general and administrative expenses as a percentage of net sales for the first half of 2018 were favorably impacted by 40 basis points as a result of operating leverage on fixed expenses stemming from higher same-store sales. Positively impacted fixed expense categories include but are not limited to depreciation, store occupancy costs and other fixed store-level expenses. These decreases were partially offset by an increase in payroll-related expenses of 60 basis points, primarily due to higher performance compensation expenses and an increase in the minimum wage in California and Arizona, both of which went into effect in January 2017.

Operating loss. Operating loss was $7.8 million for the first half of fiscal 2018 compared to operating loss of $26.5 million for the first half of fiscal 2017. Operating loss as a percentage of net sales was (0.7)% in the first half of fiscal 2018 compared to operating loss of (2.6)% in the first half of fiscal 2017. The decrease in operating loss as a percentage of net sales was primarily due to changes in gross margin and selling, general, and administrative expenses, as discussed above.

Interest expense and loss on extinguishment of debt. Interest expense was $34.5 million for the first half of fiscal 2018 compared to interest expense of $33.3 million for the first half of fiscal 2017. Interest expense was higher primarily due to amortization of debt issuance costs, higher borrowings outstanding under the ABL Facility (as defined below) and interest expense on financing leases. Loss on extinguishment of debt was $0.3 million relating to the amendment of the ABL Facility (as defined below) in April 2016.

Provision for income taxes. The provision for income taxes was $0.1 million for each of the first half of fiscal 2018 and the first half of fiscal 2017. The effective income tax rate was (0.2)% for each of the first half of fiscal 2018 and the first half of fiscal 2017. The effective tax rates differ from statutory rates primarily due to the effect of not recognizing the benefit of losses incurred in the first half of fiscal 2018 and 2017 in jurisdictions where we concluded it is more likely than not that such benefits would not be realized and a valuation allowance established in the second quarter of fiscal 2016. Income taxes for interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year. The estimated effective tax rate for the entire year is based on current estimates and any changes to those estimates in future periods could result in an effective tax rate that is materially different from the current estimate.

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Net loss. As a result of the items discussed above, net loss for the first half of fiscal 2018 was $42.4 million compared to net loss of $60.3 million for the first half of fiscal 2017. Net loss as a percentage of net sales was (3.9)% for the first half of fiscal 2018 compared to net loss of (6.0)% for the first half of fiscal 2017.

Liquidity and Capital Resources

Our capital requirements consist primarily of purchases of inventory, expenditures related to new store openings, investments in information technology and supply chain infrastructure, working capital requirements for new and existing stores, including lease obligations, and debt service requirements. Our primary sources of liquidity are the net cash flow from operations and availability under our ABL Facility (as defined below), which we believe will be sufficient to fund our regular operating needs and principal and interest payments on our indebtedness for at least the next 12 months. However, if we face unanticipated cash needs, such as the funding of a capital investment, our existing liquidity sources may be insufficient. Availability under the ABL Facility (as defined below) is not expected to affect our ability to make immediate buying decisions, willingness to take on large volume purchases or ability to pay cash or accept abbreviated credit terms.

As of the end of the second quarter of fiscal 2018, we held $2.5 million in cash, and our total indebtedness was $891.6 million, consisting of gross borrowings under the First Lien Term Loan Facility (as defined below) of $590.3 million, borrowings under the ABL Facility (as defined below) of $51.3 million and $250.0 million of our Senior Notes (as defined below). As of July 28, 2017, availability under the ABL Facility (as defined below) (subject to the borrowing base) was $37.1 million and, subject to certain limitations and the satisfaction of certain conditions, including the receipt of commitments for additional borrowings, we were also permitted to incur up to an aggregate of $50.0 million of additional borrowings pursuant to incremental facilities under the First Lien Term Loan Facility and up to an aggregate of $25.0 million of additional revolving commitments (subject to the borrowing base) pursuant to the ABL Facility (as defined below). The First Lien Term Loan Facility matures on January 13, 2019, and our Senior Notes mature on December 15, 2019. While the maturity date of our ABL Facility (as defined below) has been conditionally extended to April 8, 2021 in connection with the Fourth Amendment, such extension resulted in higher interest rates and, if our First Lien Term Loan Facility and Senior Notes are not refinanced or amended to extend the final maturity dates thereof to a date that is at least 180 days after April 8, 2021, our ABL Facility (as defined below) will mature on the earlier of (i) the date that is 90 days prior to the stated maturity date in respect of our First Lien Term Loan Facility and (ii) the date that is 90 days prior to the stated maturity date in respect of the Senior Notes.

We regularly evaluate market conditions, our liquidity profile, and various financing, refinancing, exchange and other alternatives for opportunities to enhance our capital structure and address maturities under our existing debt arrangements. If opportunities are favorable or are otherwise available on acceptable terms, we may seek to refinance, exchange, amend the terms of our existing debt or issue or incur additional debt, and we have engaged and may continue to engage with existing and prospective holders of our debt in connection with such matters, including by holding discussions from time to time. Although we are actively pursuing opportunities to improve our capital structure, some or all of the foregoing potential transactions or other alternatives may not be available to us or announced in the foreseeable future or at all. If we are unable to complete such a transaction or other alternative, on favorable terms or at all, due to market conditions or otherwise, our financial condition could be materially and adversely affected.

We also have, and will continue to have, significant lease obligations. As of July 28, 2017, our minimum annual rental obligations under long-term leases for the remainder of fiscal 2018 are $43.5 million. These obligations are significant and could affect our ability to pursue significant growth initiatives, such as strategic acquisitions, in the future. However, we expect to be able to service these obligations from our net cash flow from operations and availability under our ABL Facility, and we do not expect these obligations to negatively affect our expansion plans for the foreseeable future, including our plans to increase our store count, planned upgrades to our information technology systems and other planned capital expenditures.

Credit Facilities

On January 13, 2012 (the “Original Closing Date”), in connection with the Merger, we obtained Credit Facilities provided by a syndicate of lenders arranged by Royal Bank of Canada as administrative agent, as well as other agents and lenders that are parties to the agreements governing these Credit Facilities. The Credit Facilities include (a) our first lien asset-based revolving credit facility (as amended, the “ABL Facility”), and (b) our first lien term loan facility (as amended, the “First Lien Term Loan Facility” and together with the ABL Facility, the “Credit Facilities”).

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First Lien Term Loan Facility

Under the First Lien Term Loan Facility, (i) $525.0 million of term loans were incurred on the Original Closing Date and (ii) $100.0 million of additional term loans were incurred pursuant to an incremental facility effected through an amendment entered into on October 8, 2013 (the “Second Amendment”) (all such term loans, collectively, the “Term Loans”). The First Lien Term Loan Facility has a term of seven years with a maturity date of January 13, 2019. All obligations under the First Lien Term Loan Facility are guaranteed by Parent and our direct or indirect 100% owned subsidiaries (with customary exceptions, including immaterial subsidiaries) (collectively, the “Credit Facilities Guarantors”). In addition, the First Lien Term Loan Facility is secured by pledges of certain of our equity interests and the equity interests of the Credit Facilities Guarantors.

We are required to make scheduled quarterly payments each equal to 0.25% of the principal amount of the Term Loans, with the balance due on the maturity date. Borrowings under the First Lien Term Loan Facility bear interest at an annual rate equal to an applicable margin plus, at the Company’s option, either (i) a base rate (the “Base Rate”) determined by reference to the highest of (a) the interest rate in effect determined by the administrative agent as the “Prime Rate” (4.25% as of July 28, 2017), (b) the federal funds effective rate plus 0.50% and (c) an adjusted Eurocurrency rate for one month (determined by reference to the greater of the Eurocurrency rate for the interest period subject to certain adjustments) plus 1.00%, or (ii) an adjusted Eurocurrency Rate.

On April 4, 2012, we amended the terms of the First Lien Term Loan Facility (the “First Amendment”) and incurred related refinancing costs of $11.2 million. The First Amendment, among other things, (i) decreased the applicable margin from London Interbank Offered Rate (“LIBOR”) plus 5.50% (or Base Rate plus 4.50%) to LIBOR plus 4.00% (or Base Rate plus 3.00%) and (ii) decreased the LIBOR floor from 1.50% to 1.25%.

On October 8, 2013, we entered into the Second Amendment which among other things, (i) provided $100.0 million of additional term loans as described above, (ii) decreased the applicable margin from LIBOR plus 4.00% (or Base Rate plus 3.00%) to LIBOR plus 3.50% (or Base Rate plus 2.50%) and (iii) decreased the LIBOR floor from 1.25% to 1.00%. We will continue to be required to make scheduled quarterly payments each equal to 0.25% of the amended principal amount of the Term Loans (approximately $1.5 million).

In addition, the Second Amendment (i) amended certain restricted payment provisions, (ii) removed the maximum capital expenditures covenant from the agreement governing the First Lien Term Loan Facility, (iii) modified the existing provision restricting our ability to make dividend and other payments so that from and after March 31, 2013, the permitted payment amount represents the sum of (a) a calculation based on 50% of Consolidated Net Income (as defined in the First Lien Term Loan Facility agreement), if positive, or a deficit of 100% of Consolidated Net Income, if negative, and (b) $20 million, and (iv) permitted proceeds of any sale leasebacks of any assets acquired after January 13, 2012, to be reinvested in our business without restriction.

Following the end of each fiscal year, we are required to make prepayments on the First Lien Term Loan Facility in an amount equal to (i) 50% of Excess Cash Flow (as defined in the agreement governing the First Lien Term Loan Facility), with the ability to step down to 25% and 0% upon achievement of specified total leverage ratios, minus (ii) the amount of certain voluntary prepayments made on the First Lien Term Loan Facility and/or the ABL Facility during such fiscal year. There was no Excess Cash Flow payment required for fiscal 2017.

Additionally, the First Lien Term Facility requires us to make mandatory prepayments equal to 50% of the net cash proceeds from sale-leasebacks of any assets acquired before January 13, 2012 for consideration above a certain threshold. In May 2017, we made a mandatory term loan prepayment of $2.0 million from sale-leaseback proceeds.

The First Lien Term Loan Facility includes certain customary restrictions, among other things, on our ability and the ability of Parent, the Credit Facilities Guarantors (including our subsidiary 99 Cents Only Stores Texas Inc.) and certain future subsidiaries of ours to incur or guarantee additional indebtedness, make certain restricted payments, acquisitions or investments, materially change our business, incur or permit to exist certain liens, enter into transactions with affiliates, sell assets, make capital expenditures or merge or consolidate with or into, another company. As of July 28, 2017, we were in compliance with the terms of the First Lien Term Loan Facility.

As of July 28, 2017, various funds affiliated with the Sponsors held approximately $129.8 million, respectively, of term loans under the First Lien Term Loan Facility. From time to time, these or other affiliated funds may hold additional term loans. The terms of these term loans are the same as those held by unaffiliated third party lenders under the First Lien Term Loan Facility.

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ABL Facility

Borrowings under the ABL Facility bear interest at a rate based, at our option, on (i) LIBOR plus an applicable margin to be determined (3.25% as of July 28, 2017) or (ii) the determined base rate (Prime Rate) plus an applicable margin to be determined (2.25% at July 28, 2017), in each case based on a pricing grid depending on average daily excess availability for the most recently ended quarter.

In addition to paying interest on outstanding principal under the Credit Facilities, we are required to pay a commitment fee to the lenders under the ABL Facility on unused commitments. The commitment fee is adjusted at the beginning of each quarter based upon the average historical excess availability of the prior quarter (0.50% for the quarter ended July 28, 2017). We must also pay customary letter of credit fees and agency fees.

The ABL Facility includes restrictions on our ability and the ability of Parent and certain of our subsidiaries to incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase, its capital stock, make certain acquisitions or investments, materially change its business, incur or permit to exist certain liens, enter into transactions with affiliates, sell assets or merge or consolidate with or into another company.

On October 8, 2013, we amended the ABL Facility to, among other things, modify the provision restricting our ability to make dividend and other payments. Such payments are subject to achievement of Excess Availability (as defined in the agreement governing the ABL Facility) and a ratio of EBITDA (as defined in the agreement governing the ABL Facility) to fixed charges.

On August 24, 2015, we amended the ABL Facility to increase commitments available under ABL Facility by $10.0 million, resulting in an aggregate ABL Facility size of $185.0 million. The additional commitments implemented pursuant to the amendment have terms identical to the existing commitments under the ABL Facility, including as to interest rate and other pricing terms. We paid amendment fees of $0.5 million to lenders under the ABL Facility.

In addition, the amendment to the ABL Facility (a) modifies certain springing covenants triggered by reference to excess availability under the ABL Facility agreement so that, from August 24, 2015 to April 30, 2016, the occurrence of any such excess availability trigger is determined solely by reference to the available borrowing base under the ABL Facility rather than by reference to the lesser of the available borrowing base and the available aggregate commitments under the ABL Facility, (b) increases the inventory advance rate during such period for purposes of calculating the borrowing base from 90% to 92.5%, (c) provides for certain additional inspection rights by the administrative agent if there is a material increase in the amount of inventory that is not eligible inventory for purposes of the borrowing base and (d) provides for certain additional technical waivers and amendments in order to effect the foregoing.

On April 8, 2016, we amended the ABL Facility to, among other things, decrease the commitments available under the ABL Facility by $25.0 million, resulting in an aggregate facility size of $160.0 million, and extend the maturity date of the ABL Facility to April 8, 2021; provided however, the ABL Facility will mature on the earlier of (i) the date that is 90 days prior to the stated maturity date in respect of the First Lien Term Loan Facility and (ii) the date that is 90 days prior to the stated maturity date in respect of the Senior Notes, unless the First Lien Term Loan Facility and Senior Notes have been repaid or refinanced in full or amended to extend the final maturity dates thereof to a date that is at least 180 days after April 8, 2021 (the date of such repayment or refinancing, the “Term/Notes Refinancing Date” (such amendment, the “Fourth Amendment”). The Fourth Amendment also modified the interest rate margins payable under the ABL Facility. The initial applicable margin for borrowings under the ABL Facility is 2.0% with respect to base rate borrowings and 3.0% with respect to Eurocurrency rate borrowings. Commencing with the first day of the first fiscal quarter commencing after the closing of the Fourth Amendment, the applicable margin for borrowings thereunder is subject to adjustment each fiscal quarter, based on average historical excess availability during the preceding fiscal quarter. Furthermore, the applicable margin will be reduced by 0.50% after the Term/Notes Refinancing Date.

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the First Lien Term Loan Facility and the Senior Notes, in each case, until the occurrence of Term/Notes Refinancing Date, (iii) reduced the letter of credit sublimit from $50.0 million to $45.0 million and (iv) provided for certain additional technical waivers and amendments in order to effect the foregoing.

In connection with the Fourth Amendment and in the first quarter of fiscal 2017, we recognized a loss on debt extinguishment of approximately $0.3 million related to a portion of the unamortized debt issuance costs. We recorded $4.7 million of debt issuance costs in connection with the Fourth Amendment in the first quarter of fiscal 2017 as part of non-current deferred financing costs.

On September 6, 2017, we, Parent, 99 Cents Only Stores Texas Inc., Royal Bank of Canada, as administrative agent for the ABL Facility, the existing lenders party thereto, the lender party thereto providing loans under the FILO Facility (as hereinafter defined) and TPG Specialty Lending, Inc., as agent for the FILO Facility (the “FILO Agent”), entered into an amendment to, among other things, provide a last-out term loan facility under the FILO Facility in an aggregate principal amount of $25.0 million (the “FILO Facility”) (such amendment, the “Fifth Amendment”). We have drawn the entire $25.0 million under the FILO Facility and the $25.0 million of incremental revolving commitments under the ABL Facility have been reduced to $0. As part of the ABL Facility, all obligations under the FILO Facility are guaranteed by Parent and the other Credit Facilities Guarantors and are secured by the same collateral as the ABL Facility.

Loans under the FILO Facility bear interest at a rate based, at our option, on (i) LIBOR plus 7.75% or (ii) the determined base rate (Prime Rate) plus 6.75%. In the event we make a prepayment of the loans under the FILO Facility on or prior to September 6, 2019 we are required to pay certain premiums to the lender under the FILO Facility. We must also pay customary agency fees to the FILO Agent.

The borrowing base under the ABL Facility may be reduced by an amount equal to the excess (if any) of the outstanding loans under the FILO Facility less the borrowing base under the FILO Facility, as reflected in the most recent borrowing base certificate furnished by us, as required pursuant to the ABL Facility.

The FILO Facility will mature (the “FILO Maturity Date”) on the earliest of (a) April 8, 2021, (b) the date that is 90 days prior to the stated maturity date in respect of the First Lien Term Loan Facility, (c) the date that is 90 days prior to the stated maturity date in respect of the Senior Notes, and (d) the date of termination of the commitments under the ABL Facility.

The Fifth Amendment provided the FILO Agent and the FILO Facility lenders with certain consent rights to amendments relating to, among other terms and provisions, the borrowing bases, the financial covenant and certain negative covenants.

In addition, the Fifth Amendment (i) increased the in-transit inventory cap for purposes of calculating the borrowing base under the ABL Facility from $10.0 million to $15.0 million, (ii) amended payment conditions that are required to be satisfied in connection with certain specified payments and (iii) set the systems reserve at 7.5% of store level inventory, eliminating increases to 10%, 12.5% and 15% of store level inventory at the end of the fiscal quarters ending on or about April 30, 2017, July 31, 2017 and October 31, 2017, respectively.

As of July 28, 2017, we were in compliance with the terms of the ABL Facility.

Senior Notes

On December 29, 2011, we issued $250.0 million aggregate principal amount of 11% Senior Notes that mature on December 15, 2019 (the “Senior Notes”). The Senior Notes are guaranteed by the same subsidiaries that guarantee the Credit Facilities.

Pursuant to the terms of the indenture governing the Senior Notes (the “Indenture”), we may redeem all or a part of the Senior Notes at certain redemption prices that vary based on the date of redemption. We are not required to make any mandatory redemptions or sinking fund payments, and may at any time or from time to time purchase notes in the open market.

The Indenture contains covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to incur or guarantee additional indebtedness, create or incur certain liens, pay dividends or make other restricted payments and investments, incur restrictions on the payment of dividends or other distributions from restricted subsidiaries, sell assets, engage in transactions with affiliates, or merge or consolidate with other companies. As of July 28, 2017, we were in compliance with the terms of the Indenture.

As of July 28, 2017, various funds affiliated with the Sponsors have collectively acquired $102.1 million aggregate principal amount of our Senior Notes in open market transactions. From time to time, these or other affiliated funds may acquire additional Senior Notes.

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Cash Flows

Operating Activities

	First Half Ended
	July 28, 2017			July 29, 2016
	(amounts in thousands)
Cash flows from operating activities:
Net loss	$	(42,377	)	$	(60,279	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation	33,748			33,520
Amortization of deferred financing costs and accretion of OID	3,360			2,941
Amortization of intangible assets	875			875
Amortization of favorable/unfavorable leases, net	1,358			1,193
Loss on extinguishment of debt	—			335
Gain on disposal of fixed assets	(17,575		)	293
Long-lived assets impairment	1,515			—
Loss on interest rate hedge	—			514
Stock-based compensation	254			388
Changes in assets and liabilities associated with operating activities:
Accounts receivable	583			193
Inventories	(12,954		)	21,076
Deposits and other assets	(7,652		)	(1,548		)
Accounts payable	15,594			26,591
Accrued expenses	10,821			1,328
Accrued workers’ compensation	(228		)	(1,757		)
Income taxes	1,137			1,278
Deferred rent	272			367
Other long-term liabilities	(2,366		)	(272		)
Net cash (used in) provided by operating activities	$	(13,635	)	$	27,036

Cash used in operating activities during the first half of fiscal 2018 was $13.6 million and consisted of (i) net loss of $42.4 million; (ii) net loss adjustments for depreciation, gain on disposal of fixed assets and other non-cash items of $23.5 million; (iii) an increase in working capital activities of $7.3 million; and (iv) a decrease in other activities of $2.1 million, primarily due to a decrease in other long-term liabilities. The increase in working capital activities was primarily due to an increase in accounts payable and accrued expenses partially offset by an increase in inventory and deposits and other assets. The increase in inventory was primarily due to higher levels of import purchases that have longer transit times and the timing of seasonal inventory, which were both aimed at sustaining same store sales growth.

Cash provided by operating activities during the first half of fiscal 2017 was $27.0 million and consisted of (i) net loss of $60.3 million; (ii) net loss adjustments for depreciation and other non-cash items of $40.1 million; (iii) an increase in working capital activities of $48.0 million; and (iv) a decrease in other activities of $0.8 million, primarily due to an increase in other long-term assets. The increase in working capital activities was primarily due to an increase in accounts payable and a decrease in inventory as a result of the focused effort on inventory and supply chain efficiencies and an increase in accrued expenses.

Investing Activities

	First Half Ended
	July 28, 2017			July 29, 2016
	(amounts in thousands)
Cash flows from investing activities:
Purchases of property and equipment	$	(18,918	)	$	(23,960	)
Proceeds from sale of property and fixed assets	9,396			612
Net cash used in investing activities	$	(9,522	)	$	(23,348	)

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Capital expenditures in the first half of fiscal 2018 consisted of leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects of $18.9 million. Proceeds from sale of property and fixed assets relate to a sale-leaseback transactions completed during the first half of fiscal 2018 (see Note 1 to our Unaudited Consolidated Financial Statements).

Capital expenditures in the first half of fiscal 2017 consisted of leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects of $24.0 million.

We estimate that total capital expenditures in the current fiscal year will be approximately $53 million to $58 million, comprised of approximately $33 million to $35 million for leasehold improvements and fixtures and equipment for new and existing stores, and approximately $20 million to $23 million primarily related to information technology upgrades and supply chain infrastructure upgrades and maintenance. Our estimated capital expenditures exclude expenditures associated with the rebuild of one of our stores in the Los Angeles area that was impacted by a fire in May 2016, a substantial portion of which we have recovered through insurance reimbursements.

Financing Activities

	First Half Ended
	July 28, 2017			July 29, 2016
	(amounts in thousands)
Cash flows from financing activities:
Payments of long-term debt	$	(3,538	)	$	(3,069	)
Proceeds under revolving credit facility	115,400			92,200
Payments under revolving credit facility	(103,400		)	(119,100		)
Payments of debt issuance costs	—			(4,725		)
Proceeds from financing lease obligations	15,317			31,503
Payments of capital and financing lease obligation	(585		)	(500		)
Net cash provided by (used in) financing activities	$	23,194		$	(3,691	)

Net cash provided by financing activities in the first half of fiscal 2018 was comprised primarily of proceeds from financing lease obligations associated with sale-leaseback transactions (see Note 1 to our Unaudited Consolidated Financial Statements) and net debt borrowings under the ABL, partially offset net debt repayments under the First Lien Term Loan Facility.

Net cash used in financing activities in the first half of fiscal 2017 was comprised primarily of net debt repayments under the ABL Facility and the First Lien Term Loan Facility and payments of debt issuance costs associated with the amendment of the ABL Facility, partially offset by proceeds from the financing lease obligations. In the second quarter of fiscal 2017, we sold and concurrently licensed (through March 31, 2017) a warehouse facility in the City of Commerce, California with a carrying value of $12.1 million and received net proceeds from this transaction of $28.5 million. Additional information regarding sale of the warehouse facility is contained in Note 11 to our Unaudited Consolidated Financial Statements

Off-Balance Sheet Arrangements

As of July 28, 2017, we had no off-balance sheet arrangements.

Contractual Obligations

A summary of our contractual obligations as of January 27, 2017 is provided in our Annual Report on Form 10-K for the fiscal year ended January 27, 2017. During the first half of fiscal 2018, there were no material changes in our contractual obligations previously disclosed.

Lease Commitments

We lease various facilities under operating leases (except for six locations classified as financing leases), which will expire at various dates through fiscal year 2035. Most of the lease agreements contain renewal options and/or provide for fixed rent escalations or increases based on the Consumer Price Index. Total minimum lease payments under each of these lease agreements, including scheduled increases, are charged to operations on a straight-line basis over the term of each respective lease. Most leases require us to pay property taxes, maintenance and insurance. Rental expense (including property taxes, maintenance and insurance) charged to operations for the second quarters of fiscal 2018 and fiscal 2017 was $26.2 million and $24.9 million, respectively. Rental expense

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Report. Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, has been appropriately recorded, processed, summarized and reported on a timely basis and are effective in ensuring that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as a result of the material weakness in internal control over financial reporting related to the accounting for deferred income taxes described below, our controls and procedures were not effective as of July 28, 2017.

Material Weakness in Internal Control Over Financial Reporting; Remediation Plan

Deferred Income Taxes

During the fourth quarter of fiscal 2016, we identified a material weakness in our internal controls over financial reporting related to our accounting for deferred income taxes. Specifically, we did not design and maintain effective controls to identify items within the deferred tax balances that could be materially incorrect. We did not provide appropriate oversight of our third-party preparer. This material weakness resulted in various adjustments to our deferred tax accounts for fiscal 2016.

In order to remediate this material weakness and further strengthen the overall controls surrounding the Company’s accounting for income taxes, we have taken, and are taking, several steps to improve the overall processes and controls in our tax function. We have supplemented our accounting and tax professionals with additional personnel with expertise in accounting for deferred taxes; and are continuing to redesign and enhance our income tax review procedures to include a more robust reconciliation of the deferred tax balances. As part of this remediation process, during the fourth quarter of fiscal 2017 (as more fully described in Note 1 to our Consolidated Financial Statements to our Annual Report on Form 10-K for the year ended January 27, 2017), we revised certain amounts as of and for the year ended January 29, 2016. We evaluated the effect of these errors and concluded that they arose as a result of a material weakness over internal controls over financial reporting relating to our accounting for deferred income taxes that existed as of January 29, 2016. In addition, during the fourth quarter of fiscal 2017, we identified certain other adjustments relating to our deferred tax accounts for fiscal 2017 that led management to conclude that the material weakness in our internal controls over financial reporting was not fully remediated.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness in our internal control over financial reporting was a result of not designing effective controls over the assessment of accounting for deferred income taxes as described above. Notwithstanding this material weakness, management has concluded that the consolidated financial statements in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended January 27, 2017 and year ended January 29, 2016 fairly present, in all material respects, our financial position, results of operations and cash flows for all periods and dates presented. In addition, while the material weakness resulted in the audit adjustments described above during our fourth quarter ended January 29, 2016 and other adjustments in the fourth quarter of fiscal 2017, it did not result in any material misstatements of our consolidated financial statements or disclosures for any interim periods during, or for the annual periods of, fiscal 2017, fiscal 2016 or fiscal 2015.

Based on the foregoing processes and remediation measures, management believes that the above mentioned control deficiencies will be remediated, but the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Management may take additional measures over time to address this material weakness or modify the remediation plan described above.

We are committed to a strong internal control environment and will continue to review the effectiveness of our internal controls over financial reporting and other disclosure controls and procedures.

Changes in Internal Control Over Financial Reporting

Except as described above, during the second quarter of fiscal 2018, we did not make any changes that materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

California (State or Other Jurisdiction of Incorporation or Organization)		95-2411605 (I.R.S. Employer Identification No.)

4000 Union Pacific Avenue, City of Commerce, California (Address of Principal Executive Offices)		90023 (Zip Code)

		Page
	Part I - Financial Information
Item 1.	Financial Statements	4
	Consolidated Balance Sheets as of July 28, 2017 (unaudited) and January 27, 2017	4
	Consolidated Statements of Comprehensive Income (Loss) for the second quarter and first half ended July 28, 2017 (unaudited) and July 29, 2016 (unaudited)	5
	Consolidated Statements of Cash Flows for the first half ended July 28, 2017 (unaudited) and July 29, 2016 (unaudited)	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	49
	Part II — Other Information
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	51
	Signatures	53

Exhibit No.		Description

3.1		Limited Liability Company Articles of Organization — Conversion of 99 Cents Only Stores LLC, dated as of October 18, 2013. (1)

3.2		Limited Liability Company Agreement of 99 Cents Only Stores LLC, dated as of October 18, 2013. (1)

10.1		Amendment No. 5 to the ABL Credit Agreement, dated September 6, 2017, among the Company, Number Holdings, Inc., each other Loan Party party thereto, each Lender party thereto and Royal Bank of Canada, as administrative agent.*

31.1		Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.*

31.2		Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.*

32.1		Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.**

32.2		Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.**

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase*

101.DEF		XBRL Taxonomy Extension Definition Linkbase*

101.LAB		XBRL Taxonomy Extension Label Linkbase*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase*

Exhibit No.		Description
3.1		Limited Liability Company Articles of Organization — Conversion of 99 Cents Only Stores LLC, dated as of October 18, 2013. (1)
3.2		Limited Liability Company Agreement of 99 Cents Only Stores LLC, dated as of October 18, 2013. (1)
10.1		Amendment No. 5 to the ABL Credit Agreement, dated September 6, 2017, among the Company, Number Holdings, Inc., each other Loan Party party thereto, each Lender party thereto and Royal Bank of Canada, as administrative agent.*
31.1		Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.*
31.2		Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.*
32.1		Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.**
32.2		Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.**
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase*
101.DEF		XBRL Taxonomy Extension Definition Linkbase*
101.LAB		XBRL Taxonomy Extension Label Linkbase*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase*

	99 CENTS ONLY STORES LLC

Date: September 8, 2017	By:	/s/Felicia Thornton
		Felicia Thornton
		Chief Financial Officer and Treasurer