Chewy, Inc 10-Q for FY2024 Q1
Chewy, Inc. (CHWY)
10-Q
2023-05-31
For: 2023-04-30
View Original
Added on
April 09, 2026
About this 10-Q
Chewy, Inc filed this 10-Q on May 31, 2023, covering the quarter ended April 30, 2023 (FY2024 Q1).
Headline figures
Quarter ended April 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.78B
- up 14.7% from $2.43B a year earlier
- Net income
- $22.18M
- up 20.1% from net income of $18.47M a year earlier
- Diluted EPS
- $0.05
- up 25.0% from $0.04 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended April 30, 2023
or
For the transition period from ____ to ____
Commission File Number: 001-38936
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(786 ) 320-7111
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
| Class | Outstanding as of May 24, 2023 | |||||||
| Class A Common Stock, $0.01 par value per share | ||||||||
| Class B Common Stock, $0.01 par value per share | ||||||||
CHEWY, INC.
FORM 10-Q
For the Quarterly Period Ended April 30, 2023
TABLE OF CONTENTS
| Page | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 6. | ||||||||
PART I. FINANCIAL INFORMATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning our ability to:
•sustain our recent growth rates and successfully manage challenges to our future growth, including introducing new products or services, improving existing products and services, and expanding into new offerings;
•successfully manage risks related to the macroeconomic environment, including any adverse impacts on our business operations, financial performance, supply chain, workforce, facilities, customer services and operations;
•acquire and retain new customers in a cost-effective manner and increase our net sales, improve margins and maintain profitability;
•manage our growth effectively;
•maintain positive perceptions of our company and preserve, grow and leverage the value of our reputation and our brand;
•limit operating losses as we continue to expand our business;
•forecast net sales and appropriately plan our expenses in the future;
•estimate the size of our addressable market;
•strengthen our current supplier relationships, retain key suppliers and source additional suppliers;
•negotiate acceptable pricing and other terms with third-party service providers, suppliers and outsourcing partners and maintain our relationships with such parties;
•mitigate changes in, or disruptions to, our shipping arrangements and operations;
•optimize, operate and manage the expansion of the capacity of our fulfillment centers;
•provide our customers with a cost-effective platform that is able to respond and adapt to rapid changes in technology;
•limit our losses related to online payment methods;
•maintain and scale our technology, including the reliability of our website, mobile applications, and network infrastructure;
•maintain adequate cybersecurity with respect to our systems and ensure that our third-party service providers do the same with respect to their systems;
•maintain consumer confidence in the safety, quality and health of our products;
•limit risks associated with our suppliers and our outsourcing partners;
•comply with existing or future laws and regulations in a cost-efficient manner;
•compete with other retailers and service providers;
•utilize tax attributes, net operating loss and tax credit carryforwards, and limit fluctuations in our tax obligations and effective tax rate;
•adequately protect our intellectual property rights;
•successfully defend ourselves against any allegations or claims that we may be subject to;
•attract, develop, motivate and retain highly-qualified and skilled employees;
•predict and respond to economic conditions, industry trends, and market conditions, and their impact on the pet products market;
•reduce merchandise returns or refunds;
•respond to severe weather and limit disruption to normal business operations;
•manage new acquisitions, investments or alliances, and integrate them into our existing business;
•successfully compete in the pet insurance market;
•manage challenges presented by international markets;
•successfully compete in the pet products and services health and retail industry, especially in the e-commerce sector;
•raise capital as needed; and
•maintain effective internal control over financial reporting and disclosure controls and procedures.
1
You should not rely on forward-looking statements as predictions of future events, and you should understand that these statements are not guarantees of performance or results, and our actual results could differ materially from those expressed in the forward-looking statements due to a variety of factors. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current assumptions, expectations and projections about future events and trends that we believe may affect our business, financial condition, and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 29, 2023, our subsequent quarterly reports, and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
Investors and others should note that we may announce material information to our investors using our investor relations website (https://investor.chewy.com/), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our investors and the public about our company, our business and other issues. It is possible that the information that we post on these channels could be deemed to be material information. We therefore encourage investors to visit these websites from time to time. The information contained on such websites and social media posts is not incorporated by reference into this filing. Further, our references to website URLs in this filing are intended to be inactive textual references only.
2
Item 1. Financial Statements (Unaudited)
CHEWY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| As of | |||||||||||
| April 30, 2023 | January 29, 2023 | ||||||||||
| Assets | (Unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities | |||||||||||
| Accounts receivable | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Trade accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (Note 6) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Class A common stock, $ | |||||||||||
Class B common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
2
CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
| 13 Weeks Ended | |||||||||||||||||||||||
| April 30, 2023 | May 1, 2022 | ||||||||||||||||||||||
| Net sales | $ | $ | |||||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Advertising and marketing | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Interest income (expense), net | ( | ||||||||||||||||||||||
| Other expense, net | ( | ||||||||||||||||||||||
| Income before income tax provision | |||||||||||||||||||||||
| Income tax provision | |||||||||||||||||||||||
| Net income | $ | $ | |||||||||||||||||||||
| Earnings per share attributable to common Class A and Class B stockholders: | |||||||||||||||||||||||
| Basic | $ | $ | |||||||||||||||||||||
| Diluted | $ | $ | |||||||||||||||||||||
| Weighted-average common shares used in computing earnings per share: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
| 13 Weeks Ended April 30, 2023 | |||||||||||||||||||||||||||||
| Class A and Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of January 29, 2023 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Vesting of share-based compensation awards | ( | — | |||||||||||||||||||||||||||
| Tax sharing agreement with related parties | — | — | ( | — | ( | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Balance as of April 30, 2023 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| 13 Weeks Ended May 1, 2022 | |||||||||||||||||||||||||||||
| Class A and Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of January 30, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Vesting of share-based compensation awards | ( | — | |||||||||||||||||||||||||||
| Tax withholdings for share-based compensation awards | ( | ( | ( | — | ( | ||||||||||||||||||||||||
| Tax sharing agreement with related parties | — | — | — | ||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Balance as of May 1, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| 13 Weeks Ended | |||||||||||
| April 30, 2023 | May 1, 2022 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation expense | |||||||||||
| Non-cash lease expense | |||||||||||
| Change in fair value of equity warrants and investments | |||||||||||
| Other | |||||||||||
| Net change in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Other non-current assets | ( | ||||||||||
| Trade accounts payable | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Other long-term liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Cash paid for acquisition of business, net of cash acquired | ( | ||||||||||
| Purchases of marketable securities | ( | ||||||||||
| Proceeds from maturities of marketable securities | |||||||||||
| Other | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Payments for tax sharing agreement with related parties | ( | ( | |||||||||
| Payment of debt modification costs | ( | ||||||||||
| Principal repayments of finance lease obligations | ( | ( | |||||||||
| Payments for tax withholdings related to vesting of share-based compensation awards | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents, as of beginning of period | |||||||||||
| Cash and cash equivalents, as of end of period | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
CHEWY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Description of Business
Chewy, Inc. and its wholly-owned subsidiaries (collectively “Chewy” or the “Company”) is a pure play e-commerce business geared toward pet products and services for dogs, cats, fish, birds, small pets, horses, and reptiles. Chewy serves its customers through its retail website, www.chewy.com, and its mobile applications and focuses on delivering exceptional customer service, competitive prices, outstanding convenience (including Chewy’s Autoship subscription program, fast shipping, and hassle-free returns), and a large selection of high-quality pet food, treats and supplies, and pet healthcare products.
The Company is controlled by a consortium including private investment funds advised by BC Partners and its affiliates, La Caisse de dépôt et placement du Québec, affiliates of GIC Special Investments Pte Ltd, affiliates of StepStone Group LP, and funds advised by Longview Asset Management, LLC (collectively, the “Sponsors”). The Company was controlled by PetSmart LLC (“PetSmart”), a wholly-owned subsidiary of the Sponsors through February 11, 2021.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and related notes include the accounts of Chewy, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. The unaudited condensed consolidated financial statements and notes thereto of Chewy, Inc. have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board’s (“FASB”) accounting standards codification (“ASC”). In the opinion of management, all adjustments necessary for a fair statement of the financial information, which are of a normal and recurring nature, have been made for the interim periods reported. Results of operations for the quarterly period ended April 30, 2023 are not necessarily indicative of the results for the entire fiscal year. The unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2023 (“10-Q Report”) should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2023 (“10-K Report”).
Fiscal Year
The Company has a 52- or 53-week fiscal year ending each year on the Sunday that is closest to January 31 of that year. The Company’s 2023 fiscal year ends on January 28, 2024 and is a 52-week year. The Company’s 2022 fiscal year ended January 29, 2023 and was a 52-week year.
Significant Accounting Policies
Other than policies noted herein, there have been no significant changes from the significant accounting policies disclosed in Note 2 of the “Notes to Consolidated Financial Statements” included in the 10-K Report.
Use of Estimates
GAAP requires management to make certain estimates, judgments, and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates and judgments. Actual results could differ from those estimates.
6
Accrued Expenses and Other Current Liabilities
The following table presents the components of accrued expenses and other current liabilities (in thousands):
| As of | |||||||||||
| April 30, 2023 | January 29, 2023 | ||||||||||
| Outbound fulfillment | $ | $ | |||||||||
| Advertising and marketing | |||||||||||
| Payroll liabilities | |||||||||||
| Accrued expenses and other | |||||||||||
| Total accrued expenses and other current liabilities | $ | $ | |||||||||
Stockholders’ Equity
Conversion of Class B Common Stock
On May 8, 2020, Buddy Chester Sub LLC, a wholly-owned subsidiary of the Sponsors, converted 17,584,098 17,584,098 shares of the Company’s Class A common stock at the exchange date, with the number of shares to be issued based on the trading price of the Company’s common stock during a 20 -day observation period. On each of May 15, 2023 and May 16, 2023, Buddy Chester Sub LLC settled its obligations under the Contract and delivered a total of 17,584,098 shares.
| 13 Weeks Ended | |||||||||||||||||||||||
| April 30, 2023 | May 1, 2022 | ||||||||||||||||||||||
| Interest income | $ | $ | |||||||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||||||||
| Interest income (expense), net | $ | $ | ( | ||||||||||||||||||||
| 13 Weeks Ended | |||||||||||||||||||||||
| April 30, 2023 | May 1, 2022 | ||||||||||||||||||||||
| Change in fair value of equity warrants | $ | ( | $ | ||||||||||||||||||||
| Change in fair value of equity investments | ( | ||||||||||||||||||||||
| Foreign currency transaction gains | |||||||||||||||||||||||
| Other expense, net | $ | ( | $ | ||||||||||||||||||||
7
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
ASU 2022-04—Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. In September 2022, the FASB issued this Accounting Standards Update (“ASU”) which requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of the programs and information about obligations outstanding at the end of the reporting period. This update became effective at the beginning of the Company’s 2023 fiscal year. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. In June 2022, the FASB issued this ASU to clarify the guidance when measuring the fair value of an equity security subject to contractual sale restrictions that prohibit the sale of an equity security. This update is effective at the beginning of the Company’s 2024 fiscal year, with early adoption permitted. The Company does not believe the adoption of this standard will have a material impact on the Company’s condensed consolidated financial statements.
3. Acquisitions
Petabyte Acquisition
On October 23, 2022, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Petabyte Technology Inc. (“Petabyte”), a Delaware corporation. Under the terms of the Merger Agreement, the Company and Petabyte effected a merger on November 7, 2022, and Petabyte became a wholly-owned subsidiary of the Company. Headquartered in Bellevue, Washington, Petabyte is a provider of cloud-based technology solutions to the veterinary sector and the acquisition is expected to further strengthen the Company’s pet healthcare product and service offering.
The following table reconciles the estimated purchase price to the cash paid for the acquisition, net of cash acquired (in thousands):
| Estimated purchase price | $ | ||||
| Less: cash acquired | |||||
| Cash paid for acquisition of business, net of cash acquired | $ | ||||
The Petabyte transaction was accounted for as a business combination in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values, with the remaining unallocated purchase price recorded as goodwill. Goodwill represents the expected synergies and cost rationalization from the merger of operations as well as intangible assets that do not qualify for separate recognition such as an assembled workforce.
The following table summarizes the assets acquired and liabilities assumed as of the acquisition date (in thousands):
| Assets acquired: | |||||
| Cash and cash equivalents | $ | ||||
| Accounts receivable | |||||
| Goodwill | |||||
| Identified intangible assets | |||||
| Other current and non-current assets | |||||
| Liabilities assumed: | |||||
| Other current and long-term liabilities | ( | ||||
| Estimated purchase price | $ | ||||
8
As of April 30, 2023, the purchase price allocation is considered preliminary and is subject to change based on the final value of the net assets acquired. Pro forma information for the Petabyte acquisition has not been provided as the impact was not material to the Company’s consolidated results of operations.
Based on a preliminary allocation, in connection with this acquisition, the Company recorded goodwill of $39.4 million, none of which is anticipated to be deductible for tax purposes. The identified intangible assets consisted of $1.5 million of developed technology with an amortization period of 3.0 years.
4. Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1-Valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2-Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3-Valuations based on unobservable inputs reflecting the Company’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
Cash equivalents are carried at cost, which approximates fair value and are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
Marketable securities are carried at fair value and are classified within Level 1 because they are valued using quoted market prices. Specific to marketable fixed income securities, the Company did not record any gross unrealized gains and losses as fair value approximates amortized cost. The Company did no t record any credit losses during the thirteen weeks ended April 30, 2023. Further, as of April 30, 2023, the Company did no t record an allowance for credit losses related to its fixed income securities.
Equity investments in public companies that have readily determinable fair values are carried at fair value and are classified within Level 1 because they are valued using quoted market prices.
The following table includes a summary of financial instruments measured at fair value as of April 30, 2023 (in thousands):
| Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||
| Cash | $ | $ | $ | ||||||||||||||||||||||||||
| Money market funds | |||||||||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||||||||
| Cash and cash equivalents | |||||||||||||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||||||||
| Equity investments | |||||||||||||||||||||||||||||
| Marketable securities | |||||||||||||||||||||||||||||
| Equity warrants | |||||||||||||||||||||||||||||
| Total financial instruments | $ | $ | $ | ||||||||||||||||||||||||||
9
The following table includes a summary of financial instruments measured at fair value as of January 29, 2023 (in thousands):
| Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Cash | $ | $ | $ | |||||||||||||||||
| Money market funds | ||||||||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||
| U.S. Treasury securities | ||||||||||||||||||||
| Equity investments | ||||||||||||||||||||
| Marketable securities | ||||||||||||||||||||
| Equity warrants | ||||||||||||||||||||
| Total financial instruments | $ | $ | $ | |||||||||||||||||
The following table summarizes the change in fair value for financial instruments using unobservable Level 3 inputs (in thousands):
13 Weeks Ended | |||||||||||
| April 30, 2023 | May 1, 2022 | ||||||||||
| Beginning balance | $ | $ | |||||||||
| Change in fair value of equity warrants | ( | ||||||||||
| Ending balance | $ | $ | |||||||||
As of April 30, 2023 and January 29, 2023, the deferred credit subject to vesting requirements recognized within other long-term liabilities in exchange for the equity warrants was $45.0
The following table presents quantitative information about Level 3 significant unobservable inputs used in the fair value measurement of the equity warrants as of April 30, 2023 (in thousands):
| Range | |||||||||||||||||||||||||||||||||||
| Fair Value | Valuation Techniques | Unobservable Input | Min | Max | Weighted Average | ||||||||||||||||||||||||||||||
| Equity warrants | $ | Black-Scholes and Monte Carlo | Probability of vesting | ||||||||||||||||||||||||||||||||
| Equity volatility | |||||||||||||||||||||||||||||||||||
5. Property and Equipment, net
The following is a summary of property and equipment, net (in thousands):
| As of | |||||||||||
| April 30, 2023 | January 29, 2023 | ||||||||||
| Furniture, fixtures and equipment | $ | $ | |||||||||
| Computer equipment | |||||||||||
| Internal-use software | |||||||||||
| Leasehold improvements | |||||||||||
| Construction in progress | |||||||||||
| Less: accumulated depreciation and amortization | |||||||||||
| Property and equipment, net | $ | $ | |||||||||
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Internal-use software includes labor and license costs associated with software development for internal use. As of April 30, 2023 and January 29, 2023, the Company had accumulated amortization related to internal-use software of $63.1 million and $56.5 million, respectively.
Construction in progress is stated at cost, which includes the cost of construction and other directly attributable costs. No provision for depreciation is made on construction in progress until the relevant assets are completed and put into use.
6. Commitments and Contingencies
Legal Matters
Various legal claims arise from time to time in the normal course of business. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
The Company believes that it has adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. The Company does not believe that the ultimate resolution of any matters to which it is presently a party will have a material adverse effect on the Company’s results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
International Business Machines Corporation (“IBM”) previously alleged that the Company is infringing four of its patents. On February 15, 2021, the Company filed a declaratory judgment action in the United States District Court for the Southern District of New York (the “District Court”) against IBM seeking the District Court’s declaration that the Company is not infringing the four asserted IBM patents. On April 19, 2021, IBM filed an answer with counterclaims, alleging that the Company is infringing the four patents by operation of the Chewy.com website and mobile application, and seeking unspecified damages, including a request that the amount of compensatory damages be trebled, injunctive relief and costs and reasonable attorneys’ fees. The Company filed a motion to dismiss IBM’s claims against three of the asserted patents on May 14, 2021. In response, IBM filed an amended complaint on May 24, 2021 that included an additional assertion that the Company is infringing a fifth IBM patent. On October 8, 2021, the parties had a claim construction hearing and on November 9, 2021, the claim construction rulings resulted in one of the five patents (the “‘414 patent”) being eliminated from the case.
The parties filed their motions for summary judgment which were fully briefed on February 24, 2022. After oral arguments on the motions for summary judgment, on April 11, 2022, the District Court granted the Company’s motions for summary judgment that the Company did not infringe three of the patents and that the fourth patent is invalid. On April 29, 2022, IBM filed a notice of appeal in the United States Court of Appeals for the Federal Circuit to appeal the District Court’s judgment. On August 18, 2022, IBM filed its opening appellate brief in the United States Court of Appeals for the Federal Circuit to appeal the District Court’s judgment granting the Company’s motions for summary judgment of non-infringement of certain of the patents. The appeal is fully briefed, and the parties are waiting for a hearing date. On May 3, 2023, IBM sent the Company a letter indicating that the ‘414 patent that was invalidated by the District Court was reexamined by the U.S. Patent & Trademark Office and a reexamination certificate was issued. As a result, IBM is asserting that the Company infringes the new claims of the ‘414 patent.The Company continues to deny this recent allegation related to the ‘414 patent and all other allegations of any infringement and intends to vigorously defend itself in this matter.
7. Debt
ABL Credit Facility
The Company has a senior secured asset-based credit facility (the “ABL Credit Facility”) which matures on August 27, 2026 and provides for non-amortizing revolving loans in an aggregate principal amount of up to $800 million, subject to a borrowing base comprised of, among other things, inventory and sales receivables (subject to certain reserves). The ABL Credit Facility provides the right to request incremental commitments and add incremental asset-based revolving loan facilities in an aggregate principal amount of up to $250 million, subject to customary conditions.
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8. Leases
The Company leases all of its fulfillment and customer service centers and corporate offices under non-cancelable operating lease agreements. The terms of the Company’s real estate leases generally range from 5 to 15 years and typically allow for the leases to be renewed for up to three additional five-year terms. Fulfillment and customer service centers and corporate office leases expire at various dates through 2034, excluding renewal options. The Company also leases certain equipment under operating and finance leases. The terms of equipment leases generally range from 3 to 5 years and do not contain renewal options. These leases expire at various dates through 2025.
The Company’s finance leases as of April 30, 2023 and January 29, 2023 were not material and were included in property and equipment, net, on the Company’s condensed consolidated balance sheets.
The table below presents the operating lease-related assets and liabilities recorded on the condensed consolidated balance sheets (in thousands):
| As of | ||||||||||||||||||||
| Leases | Balance Sheet Classification | April 30, 2023 | January 29, 2023 | |||||||||||||||||
| Assets | ||||||||||||||||||||
| Operating | Operating lease right-of-use assets | $ | $ | |||||||||||||||||
| Total operating lease assets | $ | $ | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current | ||||||||||||||||||||
| Operating | $ | $ | ||||||||||||||||||
| Non-current | ||||||||||||||||||||
| Operating | Operating lease liabilities | |||||||||||||||||||
| Total operating lease liabilities | $ | $ | ||||||||||||||||||
For the thirteen weeks ended April 30, 2023 and May 1, 2022, assets acquired in exchange for new operating lease liabilities were $33.7 million and $8.9 million, respectively. Lease expense primarily relates to operating lease costs. Lease expense for the thirteen weeks ended April 30, 2023 and May 1, 2022 was $26.1 million and $21.3 million, respectively. The aforementioned lease expense was included within selling, general and administrative expenses in the condensed consolidated statements of operations.
Cash flows used in operating activities related to operating leases were approximately $21.1 million and $18.6 million for the thirteen weeks ended April 30, 2023 and May 1, 2022, respectively.
9. Share-Based Compensation
2022 Omnibus Incentive Plan
In July 2022, the Company’s stockholders approved the Chewy, Inc. 2022 Omnibus Incentive Plan (the “2022 Plan”) replacing the Chewy, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”). The 2022 Plan became effective on July 14, 2022 and allows for the issuance of up to 40.0 million shares of Class A common stock and 1.0 million shares for new grants rolled over from the 2019 Plan. No awards may be granted under the 2022 Plan after July 2032. The 2022 Plan provides for the grants of: (i) options, including incentive stock options and non-qualified stock options, (ii) restricted stock units, (iii) other share-based awards, including share appreciation rights, phantom stock, restricted shares, performance shares, deferred share units, and share-denominated performance units, (iv) cash awards, (v) substitute awards, and (vi) dividend equivalents (collectively the “awards”). The awards may be granted to (i) the Company’s employees, consultants, and non-employee directors, (ii) employees of the Company’s affiliates and subsidiaries, and (iii) consultants of the Company’s subsidiaries.
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Service and Performance-Based Awards
The Company granted restricted stock units which vested upon satisfaction of both service-based vesting conditions and company performance-based vesting conditions (“PRSUs”), subject to the employee’s continued employment with the Company through the applicable vesting date. The Company recorded share-based compensation expense for PRSUs over the requisite service period and accounted for forfeitures as they occur.
Service and Performance-Based Awards Activity
The following table summarizes the activity related to the Company’s PRSUs for the thirteen weeks ended April 30, 2023 (in thousands, except for weighted-average grant date fair value):
| Number of PRSUs | Weighted-Average Grant Date Fair Value | ||||||||||
| Unvested and outstanding as of January 29, 2023 | $ | ||||||||||
| Granted | $ | ||||||||||
| Vested | ( | $ | |||||||||
| Forfeited | ( | $ | |||||||||
| Unvested and outstanding as of April 30, 2023 | $ | ||||||||||
The following table summarizes the weighted average grant-date fair value of PRSUs granted and total fair value of PRSUs vested for the periods presented:
| 13 Weeks Ended | |||||||||||
| April 30, 2023 | May 1, 2022 | ||||||||||
| Weighted average grant-date fair value of PRSUs | $ | $ | |||||||||
| Total fair value of vested PRSUs (in millions) | $ | $ | |||||||||
As of April 30, 2023, total unrecognized compensation expense related to unvested PRSUs was $9.3 million and is expected to be recognized over a weighted-average expected performance period of 2.3 years.
The fair value for PRSUs with a Company performance-based vesting condition is established based on the market price of the Company’s Class A common stock on the date of grant.
Service-Based Awards
The Company granted restricted stock units with service-based vesting conditions (“RSUs”) which vested subject to the employee’s continued employment with the Company through the applicable vesting date. The Company recorded share-based compensation expense for RSUs on a straight-line basis over the requisite service period and accounted for forfeitures as they occur.
Service-Based Awards Activity
The following table summarizes the activity related to the Company’s RSUs for the thirteen weeks ended April 30, 2023 (in thousands, except for weighted-average grant date fair value):
| Number of RSUs | Weighted-Average Grant Date Fair Value | ||||||||||
| Unvested and outstanding as of January 29, 2023 | $ | ||||||||||
| Granted | $ | ||||||||||
| Vested | ( | $ | |||||||||
| Forfeited | ( | $ | |||||||||
| Unvested and outstanding as of April 30, 2023 | $ | ||||||||||
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The following table summarizes the weighted average grant-date fair value of RSUs granted and total fair value of RSUs vested for the periods presented:
| 13 Weeks Ended | |||||||||||
| April 30, 2023 | May 1, 2022 | ||||||||||
| Weighted average grant-date fair value of RSUs | $ | $ | |||||||||
| Total fair value of vested RSUs (in millions) | $ | $ | |||||||||
As of April 30, 2023, total unrecognized compensation expense related to unvested RSUs was $626.0 million and is expected to be recognized over a weighted-average expected performance period of 3.1 years.
The fair value for RSUs is established based on the market price of the Company’s Class A common stock on the date of grant.
As of April 30, 2023, there were 29.1 million additional shares of Class A common stock reserved for future issuance under the 2022 Plan.
Share-Based Compensation Expense
Share-based compensation expense is included within selling, general and administrative expenses in the condensed consolidated statements of operations. The Company recognized share-based compensation expense as follows (in thousands):
| 13 Weeks Ended | |||||||||||||||||||||||
| April 30, 2023 | May 1, 2022 | ||||||||||||||||||||||
| PRSUs | $ | ( | $ | ||||||||||||||||||||
| RSUs | |||||||||||||||||||||||
| Total share-based compensation expense | $ | $ | |||||||||||||||||||||
10. Income Taxes
Chewy is subject to taxation in the U.S. and various state, local, and foreign jurisdictions. Income taxes as presented in the Company’s condensed consolidated financial statements have been prepared based on Chewy’s separate return method.
The Company had a current income tax provision during the thirteen weeks ended April 30, 2023 of $1.0 million. The Company did no
Concurrent with its initial public offering during the fiscal year ended February 2, 2020, the Company, PetSmart, and Argos Holdco entered into a tax sharing agreement which governs the respective rights, responsibilities, and obligations of the Company, PetSmart, and Argos Holdco with respect to tax matters, including taxes attributable to PetSmart, entitlement to refunds, allocation of tax attributes, preparation of tax returns, certain tax elections, control of tax contests and other tax matters regarding U.S. federal, state, and local income taxes.
During the thirteen weeks ended April 30, 2023, and May 1, 2022, the Company paid $3.8 million and $0.7 million, respectively, pursuant to the tax sharing agreement. The tax sharing agreement was effectively terminated for federal income taxes upon tax deconsolidation with PetSmart, however, there may be future settlements upon final adjustment to the consolidated federal tax returns. The tax sharing agreement remains in effect for certain states in which the Company continues to file with Argos Holdco. As of April 30, 2023 and January 29, 2023, the Company had a payable related to the tax sharing agreement of $3.8 million and $5.3 million, respectively.
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11. Earnings per Share
Basic and diluted earnings per share attributable to common stockholders are presented using the two-class method required for participating securities. Under the two-class method, net income attributable to common stockholders is determined by allocating undistributed earnings between common stock and participating securities. Undistributed earnings for the periods presented are calculated as net income less distributed earnings. Undistributed earnings are allocated proportionally to common Class A and Class B stockholders as both classes are entitled to share equally, on a per share basis, in dividends and other distributions. Basic and diluted earnings per share are calculated by dividing net income attributable to common stockholders by the weighted-average shares outstanding during the period.
The following table sets forth basic and diluted earnings per share attributable to common stockholders for the periods presented (in thousands, except per share data):
| 13 Weeks Ended | |||||||||||||||||||||||
| Basic and diluted earnings per share | April 30, 2023 | May 1, 2022 | |||||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| Earnings attributable to common Class A and Class B stockholders | $ | $ | |||||||||||||||||||||
| Denominator | |||||||||||||||||||||||
| Weighted-average common shares used in computing earnings per share: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Effect of dilutive stock-based awards | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Anti-dilutive stock-based awards excluded from diluted common shares | |||||||||||||||||||||||
| Earnings per share attributable to common Class A and Class B stockholders: | |||||||||||||||||||||||
| Basic | $ | $ | |||||||||||||||||||||
| Diluted | $ | $ | |||||||||||||||||||||
12. Certain Relationships and Related Party Transactions
Certain of the Company’s healthcare operations are conducted through a wholly-owned subsidiary of PetSmart for which the Company and PetSmart entered into a services agreement which provides for the payment of a management fee due from PetSmart. The Company recognized $2.0 million and $1.3 million within net sales in the condensed consolidated statements of operations for the services provided during the thirteen weeks ended April 30, 2023 and May 1, 2022, respectively.
As of April 30, 2023 and January 29, 2023, the Company had a net payable to PetSmart of $4.1 million and $4.9 million, respectively, which was included in accrued expenses and other current liabilities on the Company’s condensed consolidated balance sheets.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and related notes thereto included in this Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2023 (“10-Q Report”) and our audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2023 (“10-K Report”). This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” sections herein and in our 10-K Report, our actual results may differ materially from those anticipated in these forward-looking statements. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Chewy,” “the Company,” “we,” “our,” or “us” refer to Chewy, Inc. and its consolidated subsidiaries.
Investors and others should note that we may announce material information to our investors using our investor relations website (https://investor.chewy.com/), Securities and Exchange Commission (the “SEC”) filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our investors and the public about our company, our business and other issues. It is possible that the information that we post on these channels could be deemed to be material information. We therefore encourage investors to visit these websites from time to time. The information contained on such websites and social media posts is not incorporated by reference into this filing. Further, our references to website URLs in this filing are intended to be inactive textual references only.
Overview
We are the largest pure-play pet e-tailer in the United States, offering virtually every product a pet needs. We launched Chewy in 2011 to bring the best of the neighborhood pet store shopping experience to a larger audience, enhanced by the depth and wide selection of products and services, as well as the around-the-clock convenience, that only e-commerce can offer. We believe that we are the preeminent destination for pet parents as a result of our broad selection of high-quality products and expanded menu of service offerings, which we offer at great prices and deliver with an exceptional level of care and a personal touch. We are the trusted source for pet parents and partners and continually develop innovative ways for our customers to engage with us. We partner with more than 3,500 of the best and most trusted brands in the pet industry, and we create and offer our own outstanding private brands. Through our website and mobile applications, we offer our customers more than 110,000 products, compelling merchandising, an easy and enjoyable shopping experience, and exceptional customer service.
Macroeconomic Considerations
The evolving macroeconomic conditions, including rising inflation and interest rates, have affected, and continue to affect, our business and consumer shopping behavior. We continue to monitor conditions closely and adapt aspects of our logistics, transportation, supply chain, and purchasing processes accordingly to meet the needs of our growing community of pets, pet parents and partners. As our customers react to these economic conditions, we will adapt our business accordingly to meet their evolving needs.
We are unable to predict the duration and ultimate impact of the evolving macroeconomic conditions on the broader economy or our operations and liquidity. As such, macroeconomic risks and uncertainties remain. Please refer to the “Cautionary Note Regarding Forward-Looking Statements” in this 10-Q Report and in the section titled “Risk Factors” in Item 1A of Form 10-K for the fiscal year ended January 29, 2023.
Fiscal Year End
We have a 52- or 53-week fiscal year ending each year on the Sunday that is closest to January 31 of that year. Our 2023 fiscal year ends on January 28, 2024 and is a 52-week year. Our 2022 fiscal year ended January 29, 2023 and was a 52-week year.
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Key Financial and Operating Data
We measure our business using both financial and operating data and use the following metrics and measures to assess the near-term and long-term performance of our overall business, including identifying trends, formulating financial projections, making strategic decisions, assessing operational efficiencies, and monitoring our business.
| 13 Weeks Ended | |||||||||||||||||||||||||||||||||||
| (in thousands, except net sales per active customer, per share data, and percentages) | April 30, 2023 | May 1, 2022 | % Change | ||||||||||||||||||||||||||||||||
| Financial and Operating Data | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 2,784,675 | $ | 2,428,327 | 14.7 | % | |||||||||||||||||||||||||||||
Net income (1) | $ | 22,181 | $ | 18,472 | 20.1 | % | |||||||||||||||||||||||||||||
| Net margin | 0.8 | % | 0.8 | % | |||||||||||||||||||||||||||||||
Adjusted EBITDA (2) | $ | 110,174 | $ | 60,516 | 82.1 | % | |||||||||||||||||||||||||||||
Adjusted EBITDA margin (2) | 4.0 | % | 2.5 | % | |||||||||||||||||||||||||||||||
Adjusted net income (2) | $ | 87,249 | $ | 45,666 | 91.1 | % | |||||||||||||||||||||||||||||
Earnings per share, basic and diluted (1) | $ | 0.05 | $ | 0.04 | 25.0 | % | |||||||||||||||||||||||||||||
Adjusted earnings per share, basic and diluted (2) | $ | 0.20 | $ | 0.11 | 81.8 | % | |||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 148,392 | $ | 82,433 | 80.0 | % | |||||||||||||||||||||||||||||
Free cash flow (2) | $ | 126,819 | $ | 6,412 | n/m | ||||||||||||||||||||||||||||||
| Active customers | 20,419 | 20,601 | (0.9) | % | |||||||||||||||||||||||||||||||
| Net sales per active customer | $ | 512 | $ | 446 | 14.8 | % | |||||||||||||||||||||||||||||
| Autoship customer sales | $ | 2,080,510 | $ | 1,753,681 | 18.6 | % | |||||||||||||||||||||||||||||
| Autoship customer sales as a percentage of net sales | 74.7 | % | 72.2 | % | |||||||||||||||||||||||||||||||
| n/m - not meaningful | |||||||||||||||||||||||||||||||||||
(1) Includes share-based compensation expense and related taxes of $53.8 million for the thirteen weeks ended April 30, 2023, compared to $27.2 million for the thirteen weeks ended May 1, 2022. | |||||||||||||||||||||||||||||||||||
(2) Adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted basic and diluted earnings per share, and free cash flow are non-GAAP financial measures. | |||||||||||||||||||||||||||||||||||
We define net margin as net income (loss) divided by net sales and adjusted EBITDA margin as adjusted EBITDA divided by net sales.
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
To provide investors with additional information regarding our financial results, we have disclosed here and elsewhere in this 10-Q Report adjusted EBITDA, a non-GAAP financial measure that we calculate as net income (loss) excluding depreciation and amortization; share-based compensation expense and related taxes; income tax provision; interest income (expense), net; transaction related costs; changes in the fair value of equity warrants; exit costs; and litigation matters and other items that we do not consider representative of our underlying operations. We have provided a reconciliation below of adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.
We have included adjusted EBITDA and adjusted EBITDA margin in this 10-Q Report because each is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating adjusted EBITDA and adjusted EBITDA margin facilitates operating performance comparability across reporting periods by removing the effect of non-cash expenses and certain variable charges. Accordingly, we believe that adjusted EBITDA and adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
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We believe it is useful to exclude non-cash charges, such as depreciation and amortization and share-based compensation expense from our adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. We believe it is useful to exclude income tax provision; interest income (expense), net; transaction related costs; changes in the fair value of equity warrants; exit costs; and litigation matters and other items which are not components of our core business operations. Adjusted EBITDA has limitations as a financial measure and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or for new capital expenditures;
•adjusted EBITDA does not reflect share-based compensation and related taxes. Share-based compensation has been, and will continue to be for the foreseeable future, a recurring expense in our business and an important part of our compensation strategy;
•adjusted EBITDA does not reflect interest income (expense), net; or changes in, or cash requirements for, our working capital;
•adjusted EBITDA does not reflect transaction related costs and other items which are either not representative of our underlying operations or are incremental costs that result from an actual or planned transaction and include changes in the fair value of equity warrants, exit costs, litigation matters, integration consulting fees, internal salaries and wages (to the extent the individuals are assigned full-time to integration and transformation activities) and certain costs related to integrating and converging IT systems; and
•other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA and adjusted EBITDA margin alongside other financial performance measures, including various cash flow metrics, net income (loss), net margin, and our other GAAP results.
The following table presents a reconciliation of net income to adjusted EBITDA, as well as the calculation of net margin and adjusted EBITDA margin, for each of the periods indicated.
| (in thousands, except percentages) | 13 Weeks Ended | ||||||||||||||||||||||
| Reconciliation of Net Income to Adjusted EBITDA | April 30, 2023 | May 1, 2022 | |||||||||||||||||||||
| Net income | $ | 22,181 | $ | 18,472 | |||||||||||||||||||
| Add: | |||||||||||||||||||||||
| Depreciation and amortization | 28,877 | 17,340 | |||||||||||||||||||||
| Share-based compensation expense and related taxes | 53,777 | 27,194 | |||||||||||||||||||||
| Interest (income) expense, net | (8,016) | 344 | |||||||||||||||||||||
| Change in fair value of equity warrants | 8,934 | — | |||||||||||||||||||||
| Income tax provision | 1,003 | — | |||||||||||||||||||||
| Exit costs | 2,357 | — | |||||||||||||||||||||
| Transaction related costs | — | 1,158 | |||||||||||||||||||||
| Other | 1,061 | (3,992) | |||||||||||||||||||||
| Adjusted EBITDA | $ | 110,174 | $ | 60,516 | |||||||||||||||||||
| Net sales | $ | 2,784,675 | $ | 2,428,327 | |||||||||||||||||||
| Net margin | 0.8 | % | 0.8 | % | |||||||||||||||||||
| Adjusted EBITDA margin | 4.0 | % | 2.5 | % | |||||||||||||||||||
Adjusted Net Income and Adjusted Basic and Diluted Earnings per Share
To provide investors with additional information regarding our financial results, we have disclosed here and elsewhere in this 10-Q Report adjusted net income and adjusted basic and diluted earnings per share, which represent non-GAAP financial measures. We calculate adjusted net income as net income excluding share-based compensation expense and related taxes, changes in the fair value of equity warrants, and exit costs. We calculate adjusted basic and diluted earnings per share by dividing adjusted net income attributable to common stockholders by the weighted-average shares outstanding during the period. We have provided a reconciliation below of adjusted net income to net income, the most directly comparable GAAP financial measure.
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We have included adjusted net income and adjusted basic and diluted earnings per share in this 10-Q Report because each is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating adjusted net income and adjusted basic and diluted earnings per share facilitates operating performance comparability across reporting periods by removing the effect of non-cash expenses and certain variable gains and losses that do not represent a component of our core business operations. We believe it is useful to exclude non-cash share-based compensation expense because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. We believe it is useful to exclude exit costs and the changes in the fair value of equity warrants, because exit costs and the variability of equity warrant gains and losses are not representative of our underlying operations. Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Adjusted net income and adjusted basic and diluted earnings per share have limitations as financial measures and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Other companies may calculate adjusted net income and adjusted basic and diluted earnings per share differently, which reduces their usefulness as comparative measures. Because of these limitations, you should consider adjusted net income and adjusted basic and diluted earnings alongside other financial performance measures, including various cash flow metrics, net income, basic and diluted earnings per share, and our other GAAP results.
The following table presents a reconciliation of net income to adjusted net income, as well as the calculation of adjusted basic and diluted earnings per share, for each of the periods indicated.
| (in thousands, except per share data) | 13 Weeks Ended | ||||||||||||||||||||||
| Reconciliation of Net Income to Adjusted Net Income | April 30, 2023 | May 1, 2022 | |||||||||||||||||||||
| Net income | $ | 22,181 | $ | 18,472 | |||||||||||||||||||
| Add: | |||||||||||||||||||||||
| Share-based compensation expense and related taxes | 53,777 | 27,194 | |||||||||||||||||||||
| Change in fair value of equity warrants | 8,934 | — | |||||||||||||||||||||
| Exit costs | 2,357 | — | |||||||||||||||||||||
| Adjusted net income | $ | 87,249 | $ | 45,666 | |||||||||||||||||||
| Weighted-average common shares used in computing adjusted earnings per share: | |||||||||||||||||||||||
| Basic | 426,852 | 420,406 | |||||||||||||||||||||
| Effect of dilutive share-based awards | 3,619 | 6,304 | |||||||||||||||||||||
| Diluted | 430,471 | 426,710 | |||||||||||||||||||||
| Earnings per share attributable to common Class A and Class B stockholders | |||||||||||||||||||||||
| Basic | $ | 0.05 | $ | 0.04 | |||||||||||||||||||
| Diluted | $ | 0.05 | $ | 0.04 | |||||||||||||||||||
| Adjusted basic | $ | 0.20 | $ | 0.11 | |||||||||||||||||||
| Adjusted diluted | $ | 0.20 | $ | 0.11 | |||||||||||||||||||
Free Cash Flow
To provide investors with additional information regarding our financial results, we have also disclosed here and elsewhere in this 10-Q Report free cash flow, a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less capital expenditures (which consist of purchases of property and equipment, capitalization of labor related to our website, mobile applications, and software development, and leasehold improvements). We have provided a reconciliation below of free cash flow to net cash provided by (used in) operating activities, the most directly comparable GAAP financial measure.
We have included free cash flow in this 10-Q Report because it is used by our management and board of directors as an important indicator of our liquidity as it measures the amount of cash we generate. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
19
Free cash flow has limitations as a financial measure and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. There are limitations to using non-GAAP financial measures, including that other companies, including companies in our industry, may calculate free cash flow differently. Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash provided by (used in) operating activities, capital expenditures and our other GAAP results.
The following table presents a reconciliation of net cash provided by operating activities to free cash flow for each of the periods indicated.
| (in thousands) | 13 Weeks Ended | ||||||||||||||||||||||
| Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow | April 30, 2023 | May 1, 2022 | |||||||||||||||||||||
| Net cash provided by operating activities | $ | 148,392 | $ | 82,433 | |||||||||||||||||||
| Deduct: | |||||||||||||||||||||||
| Capital expenditures | (21,573) | (76,021) | |||||||||||||||||||||
| Free Cash Flow | $ | 126,819 | $ | 6,412 | |||||||||||||||||||
Free cash flow may be affected in the near to medium term by the timing of capital investments (such as the launch of new fulfillment centers, customer service centers, and corporate offices and purchases of IT and other equipment), fluctuations in our growth and the effect of such fluctuations on working capital, and changes in our cash conversion cycle due to increases or decreases of vendor payment terms as well as inventory turnover.
Key Operating Metrics
Active Customers
As of the last date of each reporting period, we determine our number of active customers by counting the total number of individual customers who have ordered a product or service, and for whom a product has shipped or for whom a service has been provided, at least once during the preceding 364-day period. The change in active customers in a reporting period captures both the inflow of new customers as well as the outflow of customers who have not made a purchase in the last 364 days. We view the number of active customers as a key indicator of our growth—acquisition and retention of customers—as a result of our marketing efforts and the value we provide to our customers. The number of active customers has grown over time as we acquired new customers and retained previously acquired customers.
Net Sales Per Active Customer
We define net sales per active customer as the aggregate net sales for the preceding four fiscal quarters, divided by the total number of active customers at the end of that period. We view net sales per active customer as a key indicator of our customers’ purchasing patterns, including their initial and repeat purchase behavior.
Autoship and Autoship Customer Sales
We define Autoship customers as customers in a given fiscal quarter that had an order shipped through our Autoship subscription program during the preceding 364-day period. We define Autoship as our subscription program, which provides automatic ordering, payment, and delivery of products to our customers. We view our Autoship subscription program as a key driver of recurring net sales and customer retention. For a given fiscal quarter, Autoship customer sales consist of sales and shipping revenues from all Autoship subscription program purchases and purchases outside of the Autoship subscription program by Autoship customers, excluding taxes collected from customers, excluding any refund allowance, and net of any promotional offers (such as percentage discounts off current purchases and other similar offers) for that quarter. For a given fiscal year, Autoship customer sales equal the sum of the Autoship customer sales for each of the fiscal quarters in that fiscal year.
Autoship Customer Sales as a Percentage of Net Sales
We define Autoship customer sales as a percentage of net sales as the Autoship customer sales in a given reporting period divided by the net sales from all orders in that period. We view Autoship customer sales as a percentage of net sales as a key indicator of our recurring sales and customer retention.
20
Components of Results of Consolidated Operations
Net Sales
We derive net sales primarily from sales of both third-party brand and private brand pet food, pet products, pet medications and other pet health products, and related shipping fees. Sales of third-party brand and private brand pet food, pet products and shipping revenues are recorded when products are shipped, net of promotional discounts and refund allowances. Taxes collected from customers are excluded from net sales. Net sales is primarily driven by growth of new customers and active customers, and the frequency with which customers purchase and subscribe to our Autoship subscription program.
We also periodically provide promotional offers, including discount offers, such as percentage discounts off current purchases and other similar offers. These offers are treated as a reduction to the purchase price of the related transaction and are reflected as a net amount in net sales.
Cost of Goods Sold
Cost of goods sold consists of the cost of third-party brand and private brand products sold to customers, inventory freight, shipping supply costs, inventory shrinkage costs, and inventory valuation adjustments, offset by reductions for promotions and percentage or volume rebates offered by our vendors, which may depend on reaching minimum purchase thresholds. Generally, amounts received from vendors are considered a reduction of the carrying value of inventory and are ultimately reflected as a reduction of cost of goods sold.
Selling, General and Administrative
Selling, general and administrative expenses consist of payroll and related expenses for employees involved in general corporate functions, including accounting, finance, tax, legal and human resources; costs associated with use by these functions, such as depreciation expense and rent relating to facilities and equipment; professional fees and other general corporate costs; share-based compensation; and fulfillment costs.
Fulfillment costs represent costs incurred in operating and staffing fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting and warehousing inventories, picking, packaging and preparing customer orders for shipment, payment processing and related transaction costs and responding to inquiries from customers. Included within fulfillment costs are merchant processing fees charged by third parties that provide merchant processing services for credit cards.
Advertising and Marketing
Advertising and marketing expenses consist of advertising and payroll related expenses for personnel engaged in marketing, business development and selling activities.
Interest Income (Expense), net
We generate interest income from our cash and cash equivalents and marketable securities. We incur interest expense from our credit facilities and finance leases.
Other Income (Expense), net
Our other income (expense), net consists of changes in the fair value of equity warrants and investments, foreign currency transaction gains and losses, and allowances for credit losses.
21
Results of Consolidated Operations
The following tables set forth our results of operations for the periods presented and express the relationship of certain line items as a percentage of net sales for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
| 13 Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % of net sales | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | April 30, 2023 | May 1, 2022 | % Change | April 30, 2023 | May 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Statements of Operations | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 2,784,675 | $ | 2,428,327 | 14.7 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of goods sold | 1,993,220 | 1,760,507 | 13.2 | % | 71.6 | % | 72.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 791,455 | 667,820 | 18.5 | % | 28.4 | % | 27.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 583,666 | 504,283 | 15.7 | % | 21.0 | % | 20.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Advertising and marketing | 183,733 | 144,721 | 27.0 | % | 6.6 | % | 6.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | 767,399 | 649,004 | 18.2 | % | 27.6 | % | 26.7 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income from operations | 24,056 | 18,816 | 27.8 | % | 0.9 | % | 0.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income (expense), net | 8,016 | (344) | n/m | 0.3 | % | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other expense, net | (8,888) | — | n/m | (0.3) | % | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income before income tax provision | 23,184 | 18,472 | 25.5 | % | 0.8 | % | 0.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax provision | 1,003 | — | n/m | — | % | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 22,181 | $ | 18,472 | 20.1 | % | 0.8 | % | 0.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| n/m - not meaningful | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Thirteen Weeks Ended April 30, 2023 Compared to Thirteen Weeks Ended May 1, 2022
Net Sales
| 13 Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | April 30, 2023 | May 1, 2022 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||||
| Consumables | $ | 2,004,384 | $ | 1,698,139 | $ | 306,245 | 18.0 | % | |||||||||||||||||||||||||||||||||||||||
| Hardgoods | 311,115 | 316,024 | (4,909) | (1.6) | % | ||||||||||||||||||||||||||||||||||||||||||
| Other | 469,176 | 414,164 | 55,012 | 13.3 | % | ||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 2,784,675 | $ | 2,428,327 | $ | 356,348 | 14.7 | % | |||||||||||||||||||||||||||||||||||||||
Net sales for the thirteen weeks ended April 30, 2023 increased by $356.3 million, or 14.7%, to $2.8 billion compared to $2.4 billion for the thirteen weeks ended May 1, 2022. This increase was primarily due to increases in spending per customer from our large and stable customer base. Net sales per active customer increased $66, or 14.8%, in the thirteen weeks ended April 30, 2023 compared to the thirteen weeks ended May 1, 2022, driven by growth across our consumables and healthcare businesses.
Cost of Goods Sold and Gross Profit
Cost of goods sold for the thirteen weeks ended April 30, 2023 increased by $232.7 million, or 13.2%, to $2.0 billion compared to $1.8 billion in the thirteen weeks ended May 1, 2022. This increase was primarily due to an increase in associated product, outbound freight, and shipping supply costs, as well as an increase in orders shipped. The increase in cost of goods sold was lower than the increase in net sales on a percentage basis, reflecting pricing strength, favorable changes in our mix of sales, and supply chain efficiency gains across our fulfillment network.
Gross profit for the thirteen weeks ended April 30, 2023 increased by $123.6 million, or 18.5%, to $791.5 million compared to $667.8 million in the thirteen weeks ended May 1, 2022. This increase was primarily due to the year-over-year increase in net sales as described above. Gross profit as a percentage of net sales for the thirteen weeks ended April 30, 2023 increased by 90 basis points compared to the thirteen weeks ended May 1, 2022, primarily due to margin expansion across our consumables, healthcare, and specialty businesses.
22
Selling, General and Administrative
Selling, general and administrative expenses for the thirteen weeks ended April 30, 2023 increased by $79.4 million, or 15.7%, to $583.7 million compared to $504.3 million in the thirteen weeks ended May 1, 2022. This was primarily due to an increase of $45.5 million in facilities expenses and other general and administrative expenses, principally due to business growth and new initiatives as well as the opening and operating of corporate offices in Plantation, Florida, and Seattle, Washington. This also included an increase of $26.6 million in non-cash share-based compensation expense and related taxes as well as an increase of $7.3 million in fulfillment costs largely attributable to investments to support the overall growth of our business, including the costs associated with the opening and operating of fulfillment centers in Reno, Nevada and Nashville, Tennessee.
Advertising and Marketing
Advertising and marketing expenses for the thirteen weeks ended April 30, 2023 increased by $39.0 million, or 27.0%, to $183.7 million compared to $144.7 million in the thirteen weeks ended May 1, 2022. Our marketing expenses increased due to additional investment in our upper funnel marketing channels as well as expansion into new channels, contributing to new customer acquisition and an increase in wallet share from our large and stable customer base.
Interest Income (Expense), net
Interest income for the thirteen weeks ended April 30, 2023 increased by $8.3 million, to $8.0 million compared to interest expense of $0.3 million in the thirteen weeks ended May 1, 2022. This increase was due to interest income generated by cash and cash equivalents and marketable securities exceeding interest expenses incurred.
Other Income (Expense), net
Other expenses for the thirteen weeks ended April 30, 2023 were $8.9 million and consisted of changes in the fair value of equity warrants and investments, partially offset by foreign currency transaction gains.
Liquidity and Capital Resources
We finance our operations and capital expenditures primarily through cash flows generated by operations. Our principal sources of liquidity are expected to be our cash and cash equivalents, marketable securities, and our revolving credit facility. Cash and cash equivalents consist primarily of cash on deposit with banks and investments in money market funds, U.S. Treasury securities, certificates of deposit, and commercial paper. Cash and cash equivalents totaled $408.7 million as of April 30, 2023, an increase of $78.2 million from January 29, 2023. Marketable securities consist primarily of U.S. treasury securities, certificates of deposit, and commercial paper and totaled $394.5 million as of April 30, 2023, an increase of $47.5 million from January 29, 2023.
We believe that our cash and cash equivalents, marketable securities, and availability under our revolving credit facility will be sufficient to fund our working capital, capital expenditure requirements, and contractual obligations for at least the next twelve months. In addition, we may choose to raise additional funds at any time through equity or debt financing arrangements, which may or may not be needed for additional working capital, capital expenditures or other strategic investments. Our opinions concerning liquidity are based on currently available information. To the extent this information proves to be inaccurate, or if circumstances change, future availability of trade credit or other sources of financing may be reduced and our liquidity could be adversely affected. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the section titled “Risk Factors” in Item 1A of our 10-K Report. Depending on the severity and direct impact of these factors on us, we may be unable to secure additional financing to meet our operating requirements on terms favorable to us, or at all.
Cash Flows
| 13 Weeks Ended | |||||||||||
| ($ in thousands) | April 30, 2023 | May 1, 2022 | |||||||||
| Net cash provided by operating activities | $ | 148,392 | $ | 82,433 | |||||||
| Net cash used in investing activities | $ | (66,038) | $ | (77,421) | |||||||
| Net cash used in financing activities | $ | (4,110) | $ | (3,330) | |||||||
23
Operating Activities
Net cash provided by operating activities was $148.4 million for the thirteen weeks ended April 30, 2023, which primarily consisted of $22.2 million of net income, non-cash adjustments such as depreciation and amortization expense of $28.9 million and share-based compensation expense of $48.6 million, and a cash increase of $30.4 million from working capital. Cash increases from working capital were primarily driven by an increase in payables and other current liabilities, partially offset by an increase in inventories, receivables, and other current assets.
Net cash provided by operating activities was $82.4 million for the thirteen weeks ended May 1, 2022, which primarily consisted of $18.5 million of net income, non-cash adjustments such as depreciation and amortization expense of $17.3 million and share-based compensation expense of $25.8 million, and a cash increase of $14.8 million from working capital. Cash increases from working capital were primarily driven by an increase in payables, partially offset by an increase in inventories, other current assets, and receivables.
Investing Activities
Net cash used in investing activities was $66.0 million for the thirteen weeks ended April 30, 2023, primarily consisting of $44.1 million for the purchases of marketable securities, net of maturities and $21.6 million for capital expenditures. Capital expenditures were related to the launch of new and future fulfillment centers and additional investments in IT hardware and software.
Net cash used in investing activities was $77.4 million for the thirteen weeks ended May 1, 2022, primarily consisting of capital expenditures related to the launch of new and future fulfillment centers and additional investments in IT hardware and software.
Financing Activities
Net cash used in financing activities was $4.1 million for the thirteen weeks ended April 30, 2023 and consisted of payments made pursuant to the tax sharing agreement with related parties, payment of debt modification costs, and principal repayments of finance lease obligations.
Net cash used in financing activities was $3.3 million for the thirteen weeks ended May 1, 2022, and consisted of $2.5 million for payments of tax withholdings related to vesting of share-based compensation awards, payments pursuant to the tax sharing agreement with related parties, and principal repayments of finance lease obligations.
Other Liquidity Measures
ABL Credit Facility
We have a senior secured asset-based credit facility (the “ABL Credit Facility”) which matures on August 27, 2026 and provides for non-amortizing revolving loans in the aggregate principal amount of up to $800 million, subject to a borrowing base comprised of, among other things, inventory and sales receivables (subject to certain reserves). The ABL Credit Facility provides the right to request incremental commitments and add incremental asset-based revolving loan facilities up to $250 million, subject to customary conditions. We are required to pay a 0.25% per annum commitment fee with respect to the undrawn portion of the commitments, which is generally based on average daily usage of the facility. Based on our borrowing base as of April 30, 2023, which is reduced by standby letters of credit, we had $749.6 million of borrowing capacity under the ABL Credit Facility. As of April 30, 2023 and January 29, 2023, we had no outstanding borrowings under the ABL Credit Facility, respectively.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is included in Note 2 in the “Notes to Condensed Consolidated Financial Statements” of this 10-Q Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to the quantitative and qualitative disclosures about market risk disclosed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2023.
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Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.
As of the end of the period covered by this 10-Q Report, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of April 30, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the thirteen weeks ended April 30, 2023.
Limitations on the Effectiveness of Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information concerning legal proceedings is provided in Item 1 of Part I, “Financial Statements (Unaudited)–Note 6– Commitments and Contingencies–Legal Matters” and is incorporated by reference herein.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2023.
25
Item 6. Exhibits
| Incorporation by Reference | ||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | Filed Herewith | ||||||||||||||
| 3.2 | 8-K | 001-38936 | 3.2 | April 12, 2023 | ||||||||||||||||
| 10.1 | X | |||||||||||||||||||
| 10.2 | X | |||||||||||||||||||
| 31.1 | X | |||||||||||||||||||
| 31.2 | X | |||||||||||||||||||
| 32.1 | X | |||||||||||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||
| * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto | ||||||||||||||||||||
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
| CHEWY, INC. | |||||||||||
| Date: | May 31, 2023 | By: | /s/ Mario Marte | ||||||||
| Mario Marte | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
27
Exhibit 10.1
AWARD NOTICE
RELATING TO
THE PERFORMANCE-BASED RESTRICTED STOCK UNIT AGREEMENT
CHEWY, INC.
2022 OMNIBUS INCENTIVE PLAN
The Participant has been granted Performance-Based Restricted Stock Units with the terms set forth in this Award Notice, and subject to the terms and conditions of the Plan and the Performance-Based Restricted Stock Unit Agreement to which this Award Notice is attached. Capitalized terms used and not defined in this Award Notice shall have the meanings set forth in the Performance-Based Restricted Stock Unit Agreement and the Plan, as applicable.
Participant:
Date of Grant:
Target PRSUs Granted: PRSUs (the “Award”)
Vesting Commencement Date:
Vesting Schedule:
The Award is subject to both Performance Conditions and the Service Condition (each, as defined below) and in order for any portion of the Award to vest both the Performance Conditions and the Service Condition must be met.
1.Performance Vesting.
(a)The Participant will be eligible to receive between [•] percent ([•]%) and [•] ([•]%) of the Target PRSUs depending on the extent to which the performance-based vesting conditions described in Appendix A (the “Performance Conditions”) are satisfied during the Performance Period. PRSUs that do not vest in accordance with the Performance Conditions as of the Certification Date (as defined in Appendix A) shall be immediately forfeited for no consideration as of the Certification Date.
2.Service Vesting
(a)The Award will be subject to a service-based vesting condition (the “Service Condition”) which will be satisfied based on the Participant’s continued Service with the Company.
(b)The Service Condition will be satisfied with respect to 100% of the Award on the [•] of the Vesting Commencement Date, subject to the Participant’s continued Service with the Company through the vesting date. In all cases, if the number of PRSUs specified above does not result in a whole number, then no fractional PRSUs shall vest.
(c)Upon the Participant’s termination of Service, any portion of the Award for which the Service Condition has not been satisfied shall be forfeited.
3.Change in Control Treatment. Upon a Change in Control, subject to the Participant’s continued Service through the Change in Control, (i) if the Change of Control occurs prior to the Certification Date, then the Performance Condition will be deemed satisfied at 100% and the Service Condition will be deemed satisfied with respect to 100% of the Award or (ii) if the Change of Control occurs on or following the Certification Date, then the Performance Condition will be determined based on the actual results as determined on the Certification Date and the Service Condition will be deemed satisfied with respect to 100% of the Award.
* * *
2
PERFORMANCE-BASED RESTRICTED STOCK UNIT AGREEMENT
CHEWY, INC.
2022 OMNIBUS INCENTIVE PLAN
This Performance-Based Restricted Stock Unit Agreement, effective as of the Date of Grant (as defined below), is between Chewy, Inc., a Delaware corporation (“Chewy”), and the Participant (as defined below).
WHEREAS, Chewy has adopted the Chewy, Inc. 2022 Omnibus Incentive Plan (as it may be amended, the “Plan”) in order to provide equity-based incentive awards to eligible service providers to encourage them to maintain stockholder value, act consistent with the interest of Chewy’s stockholders, deliver outcomes and/or continue in the Service of the Company; and
WHEREAS, the Board of Directors has determined to grant PRSUs (as defined below) to the Participant (as defined below) as provided herein and the Company and the Participant (as defined below) hereby wish to memorialize the terms and conditions applicable to such PRSUs; and
WHEREAS, Participant’s participation in the terms of the Plan and this Agreement through acceptance of PRSUs is entirely voluntary, and is not a term and/or condition of employment, and is not compensation for services rendered, but is instead an award granted on a discretionary basis to align Participant’s interests with those of Chewy’s stockholders and is an award that Participant is free to decline at Participant’s discretion.
NOW, THEREFORE, the parties hereto agree as follows:
1.Definitions. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan. The following terms shall have the following meanings for purposes of this Agreement:
(a)“Agreement” shall mean this Performance-Based Restricted Stock Unit Agreement including (unless the context otherwise requires) the Award Notice.
(b)“Award Notice” shall mean the notice to the Participant.
(c)“Cause” shall have the meaning ascribed to such term in any employment agreement entered into by the Participant and Company and if not so defined, or no such agreement exists, “Cause” shall mean (i) a refusal or failure to follow the lawful and reasonable directions of the Board or individual to whom the Participant reports, which refusal or failure is not cured within thirty (30) days following delivery of written notice of such conduct to the Participant; (ii) conviction of the Participant of any felony involving fraud or act of dishonesty against the Company or any of its affiliates; (iii) conduct by the Participant which, based upon good faith and reasonable factual investigation and determination of the Company, demonstrates gross unfitness to serve; (iv) intentional, material violation by the Participant of any contractual, statutory, or fiduciary duty owed by the Participant to the Company or any of its affiliates; or (v)
willful misconduct causing material economic harm or public disgrace to the Company of any of its subsidiaries or affiliates.
(d)“Company” shall mean Chewy and all of its Subsidiaries, collectively.
(e)“Date of Grant” shall mean the “Date of Grant” listed in the Award Notice.
(f)“Detrimental Activities Violation” shall mean the Participant’s breach of a covenant contained in Appendix B to this Agreement or any contractual covenant with the Company regarding confidentiality, competitive activity, solicitation of the Company’s vendors, suppliers, customers, or employees, disparagement, or any similar provision applicable to or agreed to by the Participant.
(g)“Participant” shall mean the “Participant” listed in the Award Notice.
(h)“PRSUs” shall mean that number of Performance-Based Restricted Stock Units listed in the Award Notice as “Target PRSUs Granted.”
(i)“Subsidiary” shall mean any subsidiary within the meaning of Rule 405 of the Securities Act of 1933, as amended.
2.Grant of Units. The Company hereby grants the PRSUs to the Participant, each of which represents the right to receive one Share upon vesting of such PRSU, subject to and in accordance with the terms, conditions and restrictions set forth in the Plan, the Award Notice, and this Agreement.
3.PRSU Account. The Company shall cause an account (the “Unit Account”) to be established and maintained on the books of the Company to record the number of PRSUs credited to the Participant under the terms of this Agreement. The Participant’s interest in the Unit Account shall be that of a general, unsecured creditor of the Company. Each PRSU shall accrue dividend equivalents (“Dividend Equivalents”) with respect to dividends that would otherwise be paid on the Share underlying such PRSU during the period from the Date of Grant to the date such Share is delivered in accordance with Section 4. Dividend Equivalents shall be subject to the same vesting conditions applicable to the PRSU on which such Dividend Equivalents are accrued and shall be paid in cash to the Participant upon delivery of the underlying Share in respect of which the Dividend Equivalents were accrued.
4.Vesting; Settlement.
(a)The PRSUs shall become vested after the Performance Conditions and the Service Condition are met, in accordance with the schedule set forth on the Award Notice. The Company shall deliver to the Participant one Share for each PRSU (as adjusted under the Plan) as soon as practicable and no later than twenty (20) business days following the applicable vesting date, subject to Section 5(b) below, and such vested PRSU shall be cancelled upon such delivery.
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(b)Unless otherwise determined by the Committee, upon settlement pursuant to Section 4(a), the Company shall issue the number of Shares underlying such vested PRSUs to the Participant, free and clear of all restrictions, less a number of Shares equal to or greater in value than the minimum amount necessary to satisfy federal, state, local or foreign withholding tax requirements, if any (but which may in no event be greater than the maximum statutory withholding amounts in the Participant’s jurisdiction) required to be withheld by the Company (the “Withholding Taxes”) in accordance with Section 13 of the Plan (except to the extent the Participant shall have a written agreement with the Company or any of its Affiliates under which the Company or an Affiliate of the Company is responsible for payment of taxes with respect to the issuance of the Shares, or in the event the Company is not required to withhold any payments in respect of taxes, in which case the full number of Shares shall be issued). To the extent any Withholding Taxes may become due prior to the settlement of any PRSUs, the Committee may accelerate the vesting of a number of PRSUs equal in value to the Withholding Taxes, the Shares delivered in settlement of such PRSUs shall be delivered to the Company, and the number of PRSUs so accelerated shall reduce the number of PRSUs which would otherwise become vested on the next applicable vesting date. The number of PRSUs or Shares equal to the Withholding Taxes shall be determined using the closing price per Share on the NYSE (or other principal exchange on which the Shares then trade) on the trading day immediately prior to the date of delivery of the Shares to the Participant or the Company, as applicable, and shall be rounded up to the nearest whole PRSU or Share.
(c)The Company shall pay any costs incurred in connection with issuing the Shares. Upon the issuance of the Shares to the Participant, the Participant’s Unit Account shall be eliminated. Notwithstanding anything in this Agreement to the contrary, the Company shall have no obligation to issue or transfer the Shares as contemplated by this Agreement unless and until such issuance or transfer shall comply with all relevant provisions of law and the requirements of any stock exchange on which the Company’s shares are listed for trading.
5.Termination of Service.
(a)In the event that the Participant’s Service with the Company terminates for any reason, any unvested PRSUs shall be forfeited and all of the Participant’s rights hereunder with respect to such unvested PRSUs (and any Dividend Equivalents accrued thereon) shall cease as of the Termination Date (unless otherwise provided for by the Committee in accordance with the Plan).
(b)The Participant’s rights with respect to the PRSUs shall not be affected by any change in the nature of the Participant’s Service so long as the Participant continues to be an employee or service provider, as applicable, of the Company. Whether (and the circumstances under which) the Participant’s Service has terminated and the determination of the Termination Date for the purposes of this Agreement shall be determined by the Committee (or, with respect to any Participant who is not a director or “officer” as defined under Rule 16a-1(f) of the Exchange Act, its designee, whose good faith determination shall be final, binding and conclusive; provided, that such designee
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may not make any such determination with respect to the designee’s own Service for purposes of the PRSUs).
6.Restrictions on Transfer. The Participant may not assign, alienate, pledge, attach, sell or otherwise transfer or encumber the PRSUs or the Participant’s right under the PRSUs to receive Shares, except other than by will or by the laws of descent and distribution and any such attempted or purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any of its Affiliates; provided, that the designation of a beneficiary (if permitted by the Committee) shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance.
7.Repayment of Proceeds; Clawback Policy.
(a)If the Participant’s Service is terminated by the Company for Cause or the Participant resigns while grounds for Cause exist, a Detrimental Activities Violation occurs, or the Company discovers that after a termination of Service that grounds for a termination with Cause existed at the time thereof, then the Participant shall be required, in addition to any other remedy available (on a non-exclusive basis), to pay to the Company, within ten (10) business days of the Company’s request to the Participant therefor, the aggregate after-tax proceeds (taking into account all amounts of tax that would be recoverable upon a claim of loss for payment of such proceeds in the year of repayment) the Participant received upon the sale or other disposition of, or distributions in respect of, the PRSUs or Shares issued in settlement of the PRSUs. With respect to the scenario where the Company discovers that after a termination of Service that grounds for a termination with Cause existed at the time thereof, then any reference in this Agreement to grounds existing for a termination with Cause shall be determined without regard to any cure period or other procedural delay or event required prior to a finding of, or termination with, Cause.
(b)The PRSUs and all proceeds of the PRSUs shall be subject to the Company’s Clawback Policy, if any, and as in effect from time to time, to the extent the Participant is a director or “officer” as defined under Rule 16a-1(f) of the Exchange Act.
(c)By acceptance of the grant of PRSUs pursuant to this Agreement, the Participant acknowledges and agrees that the Company may cause the cancellation or forfeiture of PRSUs or Shares issuable upon settlement of any PRSU on the books and records of the Company or any transfer agent to enforce the provisions of this Section 7.
8.No Right to Continued Service. Neither the Plan nor this Agreement nor the Participant’s receipt of the PRSUs hereunder shall impose any obligation on the Company to continue the Service of the Participant. Further, the Company may at any time terminate the Service of the Participant, free from any liability or claim under the Plan or this Agreement, except as otherwise expressly provided herein.
9.No Rights as a Stockholder. The Participant’s interest in the PRSUs shall not entitle the Participant to any rights as a Chewy stockholder. The Participant shall not be deemed to be the holder of, or have any of the rights and privileges of a Chewy stockholder in respect of, the Shares unless and until such Shares have been issued to the Participant.
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10.Adjustments Upon Change in Capitalization. The terms of this Agreement, including the PRSUs, the Participant’s Unit Account, and/or the Shares, shall be subject to adjustment in accordance with Section 8 of the Plan. This paragraph shall also apply with respect to any extraordinary dividend or other extraordinary distribution in respect of Chewy’s common stock (whether in the form of cash or other property).
11.Award Subject to Plan. By entering into this Agreement, the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. The PRSUs granted hereunder are subject to the Plan. The terms and provisions of the Plan, as it may be amended from time to time, are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
12.Severability. Except where otherwise expressly indicated, Participant’s obligations under this Agreement are severable and/or subject to reformation or partial enforcement. If a court of competent jurisdiction determines that at the time this Agreement is presented for enforcement any provisions are overly broad or unenforceable, the parties agree that the court shall engage in partial enforcement and/or reform the Agreement to make it enforceable to the maximum extent possible for the protection of the Company’s interests and prevention of irreparable harm which is the express intent of the parties. If despite the forgoing, a provision of this Agreement is held by a court or arbitrator of competent jurisdiction (an “Adjudicator”) to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.
13.Venue; Personal Jurisdiction; Language. Subject to any arbitration agreement between Participant and the Company, any suit, action or proceeding with respect to this Agreement (or any provision incorporated by reference) or a judgment entered by an Adjudicator, that can be pursued or enforced in a court of law, shall be brought in the U.S. District Court for the District of Delaware or in another court of competent subject matter jurisdiction located in the State of Delaware. The Participant, the Company, and any transferees who hold PRSUs pursuant to a valid assignment, all hereby submit to the exclusive jurisdiction of the courts of proper subject matter jurisdiction located in Delaware (the “Chosen Venue”), consent to the exercise of personal jurisdiction over them by such courts, and waive (a) any objections which they may now or hereafter have to the laying of the venue of any suit, action, or proceeding arising out of or relating to this Agreement that can be pursued in a court of law in the Chosen Venue; (b) any claim that any such suit, action, or proceeding brought in the Chosen Venue has been brought in any inconvenient forum; and (c) any right to a jury trial in the Chosen Venue (unless such jury waiver would violate controlling law or otherwise make the remainder of the forgoing provisions regarding Chosen Venue unenforceable). Nothing herein shall be construed to waive the arbitration obligations Participant or Company may have as a result of any arbitration agreement between them. If the Participant has received a copy of this Agreement (or the Plan or any other document related hereto or thereto) translated into a language other than English, such translated copy is qualified in its entirety by reference to the English version thereof, and in the event of any conflict the English version will govern.
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14.Successors in Interest. Any successor to the Company shall have the benefits of the Company under, and be entitled to enforce, this Agreement. Likewise, the Participant’s legal representative shall have the benefits of the Participant under, and be entitled to enforce, this Agreement. All obligations imposed upon the Participant and all rights granted to the Company under this Agreement shall be final, binding and conclusive upon the Participant’s heirs, executors, administrators and successors.
15.Data Privacy Consent.
(a)General. The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Participant’s personal data as described in this Agreement and any other PRSU grant materials by and among, as applicable, the Participant’s service-recipient or contracting party (the “Service Recipient”) and the Company for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. The Participant understands that the Company may hold certain personal information about the Participant, including, but not limited to, the Participant’s name, home address and telephone number, work location and phone number, date of birth, social security number or other identification number, salary, nationality, job title, hire date, any shares of stock or directorships held in the Company, details of all awards or any other entitlement to shares awarded, cancelled, exercised, vested, unvested or outstanding in the Participant’s favor, for the purpose of implementing, administering and managing the Plan (“Personal Data”).
(b)Use of Personal Data; Retention. The Participant understands that Personal Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, now or in the future, that these recipients may be located in the Participant’s country or elsewhere, and that the recipient’s country may have different data privacy laws and protections than the Participant’s country. The Participant understands that the Participant may request a list with the names and addresses of any potential recipients of the Personal Data by contacting the Participant’s local human resources representative. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Personal Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan. The Participant understands that Personal Data will be held only as long as is necessary to implement, administer and manage the Participant’s participation in the Plan. The Participant understands that the Participant may, at any time, view Personal Data, request additional information about the storage and processing of Personal Data, require any necessary amendments to Personal Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Participant’s local human resources representative.
(c)Withdrawal of Consent. The Participant understands that the Participant is providing the consents herein on a purely voluntary basis. If the Participant does not consent, or if the Participant later seeks to revoke the Participant’s consent, the Participant’s Service and career with the Service Recipient will not be adversely affected; the only consequence of the Participant’s refusing or withdrawing the Participant’s consent is that the Company would not be able to grant PRSUs or other equity awards to
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the Participant or administer or maintain such awards. Therefore, the Participant understands that refusing or withdrawing the Participant’s consent may affect the Participant’s ability to participate in the Plan. For more information on the consequences of Participant’s refusal to consent or withdrawal of consent, the Participant understands that the Participant may contact the Participant’s local human resources representative.
16.Detrimental Activities. The Participant acknowledges and recognizes that an important purpose of this Agreement is to align the interests of Participant with those of Chewy’s stockholders and to ensure that the Participant does not engage in activity detrimental to the interests of Chewy’s stockholders if Participant is going to be allowed the opportunity to participate in the financial rewards that result from the PRSU and their relationship to the value of equity participation in Chewy. In addition, Participant acknowledges that an ancillary purpose consistent with protecting the interests of the stockholders arises with respect to Participant because Participant will be allowed access to confidential and proprietary information (including, but not limited to, trade secrets), as well as access to the prospective and actual customers, suppliers, investors, clients and partners of the Company, and the goodwill associated with the Company. Participant accordingly agrees to comply with the provisions of Appendix B to this Agreement (the “Commitment to Avoid Detrimental Activities”) as a condition of receipt and retention of the PRSUs provided for in this Agreement and their beneficial value. For the avoidance of doubt, the covenants made by Participant in this Agreement supplement and are in addition to, and not in lieu of, any other restrictive covenants or similar covenants or agreements between the Participant and the Company, nor will they be construed to replace, reduce or otherwise detrimentally impact the applicability or enforceability of any other such restrictive covenants Participant may agree to with the Company. Participant acknowledges and agrees not to contest or dispute the Company’s position that the prohibition of detrimental activities provided for in Appendix B is inextricably connected to and part of the Company’s governance of its internal affairs and relates directly to the interests of Chewy’s stockholders.
17.Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation. By accepting this Agreement and the grant of the PRSUs contemplated hereunder, the Participant expressly acknowledges that (a) the Plan is established voluntarily by the Company, it is discretionary in nature and may be suspended or terminated by the Company at any time, to the extent permitted by the Plan; (b) the grant of PRSUs is exceptional, voluntary and occasional and does not create any contractual or other right to receive future grants of PRSUs, or benefits in lieu of PRSUs, even if PRSUs have been granted in the past; (c) all determinations with respect to future grants of PRSUs, if any, including the date of grant, the number of Shares granted and the applicable vesting terms, will be at the sole discretion of the Company; (d) the Participant’s participation in the Plan is voluntary; (e) the value of the PRSUs is an extraordinary item that is outside the scope of the Participant’s Services contract, if any, and nothing can or must automatically be inferred from such Services contract or its consequences; (f) grants of PRSUs, and the income and value of same, are not part of normal or expected compensation for any purpose and are not to be used for calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, the Participant waives any claim on such basis, and for the avoidance of doubt, the PRSUs shall not constitute an “acquired right” under the applicable law of any jurisdiction; and (g) the future value of the underlying Shares is unknown and cannot be predicted with certainty. In addition, the Participant understands, acknowledges and agrees
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that the Participant will have no rights to compensation or damages related to PRSU proceeds in consequence of the termination of the Participant’s Service for any reason whatsoever and whether or not in breach of contract.
18.Award Administrator. The Company may from time to time designate a third party (an “Award Administrator”) to assist the Company in the implementation, administration, and management of the Plan and any PRSUs granted thereunder, including by sending award notices on behalf of the Company to Participants, and by facilitating through electronic means acceptance of PRSU Agreements by Participants.
19.Section 409A of the Code.
(a)This Agreement is intended to comply with the provisions of Section 409A of the Code and the regulations promulgated thereunder. Without limiting the foregoing, the Committee shall have the right to amend the terms and conditions of this Agreement in any respect as may be necessary or appropriate to comply with Section 409A of the Code or any regulations promulgated thereunder, including without limitation by delaying the issuance of the Shares contemplated hereunder.
(b)Notwithstanding any other provision of this Agreement to the contrary, if a Participant is a “specified employee” within the meaning of Section 409A of the Code, no payments in respect of any PRSU that is “deferred compensation” subject to Section 409A of the Code and not exempt for Section 409A as a short-term deferral or otherwise and which would otherwise be payable upon the Participant’s “separation from service” (as defined in Section 409A of the Code) shall be made to such Participant prior to the date that is six months after the date of the Participant’s “separation from service” or, if earlier, the Participant’s date of death. Following any applicable six-month delay, all such delayed payments will be paid in a single lump sum on the earliest date permitted under Section 409A of the Code that is also a business day. The Participant is solely responsible and liable for the satisfaction of all taxes and penalties under Section 409A of the Code that may be imposed on or in respect of the Participant in connection with this Agreement, and the Company shall not be liable to any Participant for any payment made under this Plan that is determined to result in an additional tax, penalty or interest under Section 409A of the Code, nor for reporting in good faith any payment made under this Agreement as an amount includible in gross income under Section 409A of the Code. Each payment in a series of payments hereunder shall be deemed to be a separate payment for purposes of Section 409A of the Code.
20.Book Entry Delivery of Shares. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing one or more Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.
21.Electronic Delivery and Acceptance. The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
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22.Acceptance and Agreement by the Participant. By accepting the PRSUs (including through electronic means), the Participant agrees to be bound by the terms, conditions, and restrictions set forth in the Plan, this Agreement, and the Company’s policies, as in effect from time to time, relating to the Plan. The Participant’s rights under the PRSUs will lapse forty-five (45) days from the Date of Grant, and the PRSUs will be forfeited on such date if the Participant shall not have accepted this Agreement by such date. For the avoidance of doubt, the Participant’s failure to accept this Agreement shall not affect the Participant’s continuing obligations under any other agreement between the Company and the Participant.
23.No Advice Regarding Grant. The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Participant’s participation in the Plan, or the Participant’s acquisition or sale of the underlying Shares. The Participant is hereby advised to consult with the Participant’s own personal tax, legal and financial advisors regarding the Participant’s participation in the Plan before taking any action related to the Plan.
24.Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Participant’s participation in the Plan, on the PRSUs and on any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Participant to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.
25.Waiver. The Participant acknowledges that a waiver by the Company of breach of any provision of this Agreement shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by the Participant or any other participant in the Plan.
26.Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one in the same agreement.
[Signatures follow]
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CHEWY INC.
By:
Acknowledge and agreed as of the date first written above:
Participant Signature:
Appendix A
1.Performance Metrics. This Appendix A contains the performance vesting conditions and methodology applicable to the PRSUs. Subject to the terms and conditions set forth in the Plan, the Agreement and the Award Notice, the portion of the PRSUs subject to this Award, if any, that become earned during each Performance Period will be determined upon the Committee’s certification of achievement of the Performance Conditions in accordance with this Appendix A, which shall occur within seventy five (75) days following the end of each Performance Period (the “Certification Date”). Capitalized terms used but not defined herein shall have the same meaning as is ascribed thereto in the Agreement, the Award Notice or the Plan.
(a)Upon the Certification Date, the Participant’s achievement of the Performance Conditions with respect to [•] percent ([•]%) of the Award will be determined in accordance with the table below with linear interpolation between the listed values:
| Percent of Target PRSUs Earned | |||||
[•]% | |||||
[•]% | |||||
[•]% | |||||
(b)Upon the Certification Date, the Participant’s achievement of the Performance Conditions with respect to [•] percent ([•]%) of the Award will be determined in accordance with the table below with linear interpolation between the listed values:
| Percent of Target PRSUs Earned | |||||
[•]% | |||||
[•]% | |||||
[•]% | |||||
(c)Upon the Certification Date, the Participant’s achievement of the Performance Conditions with respect to [•] percent ([•]%) of the Award will be determined in accordance with the table below with linear interpolation between the listed values:
| Percent of Target PRSUs Earned | |||||
[•]% | |||||
[•]% | |||||
[•]% | |||||
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2.Certain Defined Terms. For purposes of this Agreement, the following terms will have the following meanings:
(a)“ ” means .
(b)“ ” means .
(c)“ ” means .
(d)“Performance Period” means fiscal year , which begins on and ends on .
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Appendix B
Commitment to Avoid Detrimental Activities
Participant acknowledges that as an individual being presented with the opportunity to share in the growth and value of Chewy through PRSUs it is important to avoid certain activities while engaged to provide services to the Company and for a reasonable period of time thereafter that would be detrimental to Chewy’s business and its potential value to stockholders. Participant agrees that it is reasonable for the Company to require a commitment from Participant of this nature in order to allow Participant to participate in and retain the benefits of the PRSUs. Accordingly, Participant agrees that any activity or conduct by Participant that violates one of the restrictions or obligations provided for in Parts B-1, B-2, B-3, or B-4 below will be considered a “Detrimental Activities Violation”.
B-1. Avoidance of Competition and Other Detrimental Acts During Engagement.
While employed or otherwise engaged as an individual to provide services to the Company (as an employee, consultant, or otherwise), Participant will comply with each of the restrictions and obligations below.
1. While employed with the Company, Participant will comply at all times with Participant’s duty of loyalty to the Company as an employee or agent of the Company placed in a position of special trust and confidence. This duty shall be understood to include, but not be limited to,
(a) an obligation not to engage or participate in the business of a Competitor (as defined below), or become employed with a Competitor as an employee, owner, member, partner, consultant, director or otherwise, without the express written consent of the Company,
(b) an obligation not to interfere with or otherwise knowingly cause harm to the Company’s ongoing or prospective business relationship with a Company employee, consultant or individual providing services as an independent contractor, or a supplier, distributor, vendor, customer, or other person or entity that does business with the Company or that the Company has a reasonable expectation of doing business with, and
(c) an obligation to inform the Company of business opportunities that fall within the Company’s line of business and not pursue them for personal gain separate from the Company without the Company’s express written consent in advance, or otherwise participate in any conduct or relationship that creates a conflict of interest in violation of Company policies.
2. Participant will not knowingly participate in or pursue activities that harm the value of the Company’s intellectual property and will honor all agreements with the Company concerning the ownership and protection of proprietary works and intellectual property. Participant will be responsible for understanding, complying with, and implementing any intellectual property policy or guidelines published by the Company as they apply to the Participant’s position and area of accountability at the Company.
3.The “Business” of the Company is providing retail and wholesale pet food, pet pharmacy and compounding, pet health and wellness, pet insurance, and other pet supply products and services (with “pets” as referenced in this Agreement to include, without limitation, in addition to household pets, any domesticated livestock); (ii) the Company is one of the limited number of
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entities to have developed such a Business; (iii) the Company’s Business is national in scope; (iv) the Company directly competes with: e-commerce and mail-order pharmacies and pharmacy compounders; e- commerce retailers and wholesalers of pet food, pet pharmacy and compounding, pet health and wellness, pet insurance and other pet supply services and pet products, including those that exclusively sell pet-related products as well as those offering pet food, pet pharmacy and compounding, pet health and wellness, pet insurance, and/or other pet supply services and pet products as one amongst many product categories available for purchase; and brick-and-mortar retailers and wholesalers whose primary business is the retail or wholesale of pet food, pet pharmacy or compounding, pet health and wellness, and/or other pet supply services and pet products (the entities enumerated above are collectively referred to as “Competitors”); (v) over the course of Participant’s career, the Company’s business may expand beyond its current Business, and therefore, the definition of Competitors also includes any business engaged in the developing, marketing or selling of any product(s) or service(s) the Company is developing, marketing or selling or has plans to develop, market or sell at the time of Participant’s termination of employment, in which Participant had involvement or about which Participant was provided Confidential Information (as defined below) during the Look Back Period (as defined below).
B-2. Avoidance of Competition and Other Detrimental Acts After Engagement.
Participant will comply with the following restrictions for a period of two (2) years after Participant’s employment or other services engagement with the Company ends:
1. Noncompete. Participant will not, within the Participant’s Territory, directly or through the direction or control of others, acting individually or as an owner, shareholder, partner, employee, contractor, agent or otherwise, on behalf of a Competitor: (a) provide, supervise or manage services that are the same as or similar in function or purpose to the services Participant provided to the Company during the last two years of employment or such shorter period of time as Participant was actually employed or engaged to provide personal services to the Company (the “Look Back Period”) (b) assist in the development or improvement of a competing product or service, or (c) provide services that are otherwise likely or probable to result in the use or disclosure of Confidential Information to a Competitor. “Territory” means the geographic territory(ies) assigned to Participant by Company during the Look Back Period (by state, county, or other recognized geographic boundary used in the Company’s Business); and, if Participant has no such specifically assigned geographic territory then: (i) those states and counties in which Participant participated in the Company’s Business and/or about which Participant was provided access to Confidential Information during the Look Back Period; and, (ii) the state and county where Participant resides. If Participant is employed by the Company in a research and development capacity and/or if Participant is employed in a senior management position (such as Director, Senior Director, Vice President and above, Board Member, or Officer) then Participant is presumed to have participated in the Company’s Business and/or had Confidential Information about the Company’s Business throughout the United States (including state and state-equivalents and county and county-equivalents therein), as the Company and Participant agree that the Company’s Business is e-commerce, is conducted nationwide and competes nationwide.
2. Worker Nonsolicit. Participant will not, directly or indirectly through providing assistance to others, knowingly participate in soliciting or communicating (verbally, electronically, or in other written form) with a Covered Worker for the purpose of persuading the Covered Worker to go to work for a Competitor or to end or modify the Covered Worker’s relationship with the Company or assist a Competitor in efforts to hire a Covered Worker away from the Company. A “Covered Worker” means an employee or individual worker engaged as
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an independent contractor of the Company that Participant works with, gains knowledge of or is provided Confidential Information about in the Look Back Period. A worker who resigns will continue to be considered a Covered Worker for a period of six months after the workers employment or other engagement with the Company ends except where it would make this restriction unenforceable.
3. Customer Nonsolicit. Participant will not, working alone or in conjunction with one or more other persons or entities, whether for compensation or not, on behalf of (or for the benefit of) a Competitor: (i) solicit, assist in soliciting, or facilitate the solicitation of, competing business from a customer of the Company that Participant had material contact or involvement with or was provided Confidential Information about during the Look Back Period (“Covered Customer”); or (ii) interfere with the Company’s business relationship with any such Covered Customer.
4. Business Relationship Interference. Participant will not, directly or indirectly through providing assistance to others, knowingly interfere with the Company’s ongoing or prospective business relationship with a supplier, distributor, or vendor that the Company has a reasonable expectation of doing business with, and that Participant had material contact or involvement with or gained knowledge of through Participant’s role with the Company in the Look Back Period, by soliciting, inducing or otherwise encouraging the supplier, distributor, or vendor to cease or reduce doing business with the Company or to give a valuable business opportunity to a Competitor.
B-3. Avoidance of Unauthorized Confidential Information Use or Disclosure.
1. Participant will honor all agreements with the Company regarding maintaining the confidentiality of information that qualifies as contractually protected Confidential Information, protect and preserve the value of the Company’s trade secrets and proprietary information to the Company (irrespective of whether same is also covered by contractual definition of Confidential Information), and comply with Company policies and directives regarding the handling of Company records, files, computer system access, materials and property at all times. To the extent Participant is not otherwise subject to another contractual agreement with the Company covering Confidential Information, Participant agrees that until such time as the Confidential Information is readily-available publicly (other than as a result of disclosure by Participant), Participant shall not disclose to any person or use, copy, download, upload or transfer any Confidential Information, whether or not created in whole or in part by the efforts of Participant, and regardless of whether Participant is still employed by the Company. Participant will only disclose or use, copy, download, upload or transfer such Confidential Information as is required by law or as necessary in the performance of Participant’s duties on behalf of the Company.
2. If Participant is subject to another contractual agreement that defines what constitutes the Company’s “Confidential Information”, that definition shall control. Absent such a controlling definition, it is understood that “Confidential Information” refers to an item of information, or a compilation of information, in any form (tangible or intangible), related to the business of the Company that the Company has not made public or authorized public disclosure of, and that is not generally known to the public through proper means. Participant acknowledges that, in Participant’s position with the Company, Participant will obtain and/or have access to Confidential Information regarding the Company’s business, including, but not limited to: business plans and forecasts, market analysis, marketing plans and strategies, branding strategies, pricing-related variables and strategy, the actual and anticipated research and development activities of the Company, unpatented inventions, technical data, knowledge, information and materials about trade secrets, mailing/e-mailing lists, methods of operation, customer or client lists, consumer preferences and buying histories, services, proprietary know-how, non-public
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information about financial performance, human resources information such as that obtained from a confidential personnel file, other proprietary matters relating to the Company, and information that is entrusted to the Company in confidence by third parties with whom the Company does business or is negotiating to do business, all of which constitute valuable assets of the Company which this Agreement is designed to protect. Nothing herein restricts or prevents an employee from sharing information about their own compensation with other employees nor prevents other employees from making inquiries about the compensation earned or paid to co-workers.
3. Participant agrees that, upon the termination of Participant’s employment or personal services relationship with the Company for any reason whatsoever, Participant shall return all copies, in whatever form or media, including hard copies and electronic copies, of Confidential Information to the Company, and Participant shall delete any copy of the Confidential Information on any computer file or database maintained by Participant and, upon request by the Company, Participant shall certify in writing that this has process has been completed and no copies of Confidential Information are retained.
B-4. Avoidance of Disparagement.
Participant agrees to avoid making comments that are disparaging, false, misleading, defamatory or cast in a negative light the Company, or the Company’s current or former directors, officers, or employees. And, Participant agrees not to, in any respect, make any disparaging or defamatory comments concerning any aspect of the Participant’s relationship with the Company or any comments concerning the conduct or events which precipitated any termination of the Participant’s employment from the Company. However, the Participant’s obligations under this covenant shall not prevent Participant from exercising the right to (1) communicate with a law enforcement officer acting within the line and scope of the officer's law enforcement duties that a violation of the law has occurred or is occurring; (2) communicate with a government regulator acting within the line and scope of the regulator's regulatory duties that a violation of the law has occurred or is occurring; (3) respond to a lawfully served judicial, grand jury, or other lawful subpoena; (4) testify in a judicial or administrative proceeding in response to a lawfully served subpoena or an order of a court of competent jurisdiction; (5) confer with the obligated party's attorney for the purpose of obtaining legal advice or representation; (6) respond to lawful discovery in a judicial or administrative action; provided the disparaging statement is either ordered by a court of competent jurisdiction or made in compliance with a protective order entered by the same court; (7) prosecute or defend a civil action between or among parties to a covered contract; provided the party making the disparaging statement attempts to and, if permitted by law, does file the disparaging statement and any related pleading under seal or in compliance with a protective order entered by a court of competent jurisdiction in the civil action; or (8) exercise federally protected statutory rights, including, but not limited to, the exercise of rights under the National Labor Relations Act or the Civil Rights Act of 1964, as amended.
B-5. Enforcement.
1. In the event the Committee has reason to believe Participant has engaged in a Detrimental Activities Violation or is pursuing a course of conduct that threatens such a violation, Company shall have the right to suspend the vesting schedule with respect to any unvested PRSUs until it determines that a violation has occurred and/or that any threatened violation has been resolved so as to longer be a threat. In the event of a Detrimental Activities Violation, Section 7 (Repayment
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of Proceeds; Clawback Policy) may be applied as determined appropriate by the Committee in the exercise of the full degree of discretion allowed under the Plan. The type of harm to the Company caused by a Detrimental Activities Violation cannot be fully measured and remedied through monetary damages and would be irreparable in nature. Accordingly, in addition to the forgoing, the Company shall retain all rights and remedies available in law or equity to enforce the restrictions and obligations that Participant has committed to in Appendix B.
2. Participant’s Commitment to Avoid Detrimental Activities and the terms of this Agreement awarding PRSUs to Participant are mutually dependent, material terms. Accordingly, in the event the enforceability of any portion of the Commitment to Avoid Detrimental Activities is challenged by Participant and found by an Adjudicator to be void or unenforceable in any part deemed material by the Company, then the Company shall have the right to demand and receive from Participant within ten (10) business days of the Company’s request to the Participant, the aggregate after-tax proceeds (taking into account all amounts of tax that would be recoverable upon a claim of loss for payment of such proceeds in the year of repayment) the Participant received upon the sale or other disposition of, or distributions in respect of, the PRSUs or Shares issued in settlement of the PRSUs.
3. If Participant violates one of the restrictions in Section B-2, the period of the breached restriction will be extended for an additional period of time equal to the time that elapses from commencement of the breach to the later of (a) the definitive termination of such breach or (b) the final resolution of any litigation arising from such breach; provided, however, that this extension of time shall be capped so that the extension of time itself does not exceed the length of time originally proscribed for the restriction, and if this extension would make the restriction unenforceable under controlling law it will not be enforced.
B-6. Limitations.
1.Exceptions to Restrictions. Notwithstanding anything in this Agreement to the contrary, nothing herein prohibits Participant from owning a non-controlling interest consisting of two percent (2%) or less of any class of securities in any publicly traded company or passive investments through an independently controlled fund such as a mutual fund, provided that Participant is not a controlling person of, or a member of a group that controls, a business that is a Competitor, and further provided that Participant does not otherwise participate in any conduct prohibited under this Agreement. In addition, nothing herein shall be construed to prohibit Participant’s employment in a separately operated subsidiary or other business unit of a company that would not be a Competitor but for common ownership with a Competitor so long as Participant provides written assurances regarding the non-competitive nature of Participants position that are satisfactory to the Company and Participant remains employed solely in such non-competitive entity or unit during the pendency of the restrictions in Section B-2. Nothing herein is intended to be or is to be construed as a prohibition against general generic advertising of a company’s products, services, or job openings to the public such as “help wanted” ads that are not targeted at the Company. The parties acknowledge that some states prohibit or place limitations on the use of covenants not to compete or noncompete covenants with an employee considered to be a low wage worker based on the employee’s rate of compensation or overtime exemption status under the Fair Labor Standards Act (a “Low Wage Worker Protection” law, or “LWWP law”). It is the parties’ intent not to create any restriction that would violate any controlling state LWWP law. Where the controlling state’s law includes an LWWP law, it is the parties’ intent that this Agreement’s obligations be construed so as to fit within any applicable exclusion for duty of loyalty obligations, nonsolicitation covenants, confidential information
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protection covenants, and intellectual property assignment agreements recognized under the LWWP law at issue, and that it does not create a prohibited covenant not to compete.
2. Protected Conduct. Nothing in this Agreement prohibits Participant from opposing or reporting to the relevant law-enforcement agency (such as the Securities and Exchange Commission, Equal Employment Commission, or Department of Labor) an event that Participant reasonably and in good faith believes is a violation of law, requires notice to or approval from Company before doing so, or prohibits Participant from cooperating in an investigation conducted by such a government agency, nor does it prohibit Participant from disclosing information about unlawful acts in the workplace, such as harassment or discrimination or any other conduct that Participant has reason to believe is unlawful. Participant acknowledges notice that the Defend Trade Secrets Act provides that no individual will be held criminally or civilly liable under Federal or State trade secret law for the disclosure of a trade secret that: (a) is made in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and made solely for the purpose of reporting or investigating a suspected violation of law; or, (b) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal so that it is not made public. It also provides that an individual who pursues a lawsuit for retaliation by an employer for reporting a suspected violation of the law may in pursuing such lawsuit disclose trade secrets to his/her attorney and use trade secrets in court submissions so long as documents containing the trade secret are filed under seal and do not disclose trade secrets except as permitted by court order. Nothing in this Agreement prohibits Participant from using information acquired through lawful means regarding the wages, benefits, or other terms and conditions of employment of individuals employed by Company for any purpose protected under the National Labor Relations Act (such as the right of employees to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection), unless the information is entrusted to Participant in confidence by Company as part of Participant’s job duties or Participant is employed in a supervisor or management level position. Conduct of the above-described nature is referred to herein as “Protected Conduct.” Nothing in this paragraph shall be construed to protect, invite, permit, or limit liability for, otherwise illegal activity such a breaking and entering, illegal computer access (hacking) or theft of the Company’s property.
3. State-Specific Modifications. It is the intent of the Company to apply Appendix B in a manner that does not violate any law that is deemed to be the controlling law for the parties with respect to the obligations in the Agreement. If Participant resides in California and when Participant last worked for the Company Participant primarily resided and worked in California, then Section B-2 shall not apply except to the extent Participant’s conduct also involves the use or disclosure of trade secrets of the Company. If Participant resides in Washington and when you last worked for the Company Participant was a Washington-based employee, then Section B-2 (Noncompete) and B-2 (Business Relationship Interference) shall not apply and Sections B-2 (Worker Nonsolicit) and B-2 (Customer Nonsolicit) shall be limited so that they only apply to prohibit Participant’s solicitation of an employee of the Company to leave such employment, and solicitation of a customer of the Company to cease or reduce the extent to which it is doing business with the Company. If the Company is deemed to operate in the District of Columbia and when Participant last worked for the Company Participant worked for it in the District of Columbia, then nothing in Appendix B will be applied to prohibit Participant from being simultaneously or subsequently employed by another person, performing work or providing services for pay for another person, or operating Participant’s own business. However, conduct involving disclosure of confidential, proprietary, or sensitive information, client lists, customer lists, or a trade secret (as defined in the Uniform Trade Secrets Act) will remain prohibited.
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Exhibit 10.2
AWARD NOTICE
RELATING TO
THE RESTRICTED STOCK UNIT AGREEMENT
Senior Leadership Award
CHEWY, INC.
2022 OMNIBUS INCENTIVE PLAN
The Participant has been granted Restricted Stock Units with the terms set forth in this Award Notice, and subject to the terms and conditions of the Plan and the Restricted Stock Unit Agreement to which this Award Notice is attached. Capitalized terms used and not defined in this Award Notice shall have the meanings set forth in the Restricted Stock Unit Agreement and the Plan, as applicable.
Participant:
Date of Grant:
Restricted Stock Units Granted: Restricted Stock Units (the “Award”)
Vesting Commencement Date:
Vesting Schedule:
1.Regular Vesting.
(a)The Award will be subject to a service-based vesting condition (the “Service Condition”), which will be satisfied based on the Participant’s continued Service with the Company.
(b)The Service Condition will be satisfied [•], subject to the Participant’s continued Service with the Company through the applicable vesting date. In all cases, if the number of RSUs specified above does not result in a whole number, then no fractional units shall vest and the installments shall be as equal as possible over the applicable vesting period with the smaller installments vesting first.
(c)Upon the Participant’s termination of Service, any portion of the Award for which the Service Condition has not been satisfied shall be forfeited.
2.Change in Control Treatment. Upon a Change in Control, subject to the Participant’s continued Service through the Change in Control, the Service Condition will be deemed satisfied with respect to 100% of the Award.
* * *
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RESTRICTED STOCK UNIT AGREEMENT
CHEWY, INC.
2022 OMNIBUS INCENTIVE PLAN
This Restricted Stock Unit Agreement, effective as of the Date of Grant (as defined below), is between Chewy, Inc., a Delaware corporation (“Chewy”), and the Participant (as defined below).
WHEREAS, Chewy has adopted the Chewy, Inc. 2022 Omnibus Incentive Plan (as it may be amended, the “Plan”) in order to provide equity-based incentive awards to eligible service providers to encourage them to maintain stockholder value, act consistent with the interest of Chewy’s stockholders, deliver outcomes and/or continue in the Service of the Company; and
WHEREAS, the Board of Directors has determined to grant RSUs (as defined below) to the Participant (as defined below) as provided herein and the Company and the Participant (as defined below) hereby wish to memorialize the terms and conditions applicable to such RSUs; and
WHEREAS, Participant’s participation in the terms of the Plan and this Agreement (as defined below) through acceptance of RSUs is entirely voluntary, and is not a term and/or condition of employment, and is not compensation for services rendered, but is instead an award granted on a discretionary basis to align Participant’s interests with those of Chewy’s stockholders and is an award that Participant is free to decline at Participant’s discretion.
NOW, THEREFORE, the parties hereto agree as follows:
1.Definitions. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan. The following terms shall have the following meanings for purposes of this Agreement:
(a)“Agreement” shall mean this Restricted Stock Unit Agreement including (unless the context otherwise requires) the Award Notice.
(b)“Award Notice” shall mean the notice to the Participant.
(c)“Cause” shall have the meaning ascribed to such term in any employment agreement entered into by the Participant and Company and if not so defined, or no such agreement exists, “Cause” shall mean (i) a refusal or failure to follow the lawful and reasonable directions of the Board of Directors or individual to whom the Participant reports, which refusal or failure is not cured within thirty (30) days following delivery of written notice of such conduct to the Participant; (ii) conviction of the Participant of any felony involving fraud or act of dishonesty against the Company or any of its affiliates; (iii) conduct by the Participant which, based upon good faith and reasonable factual investigation and determination of the Company, demonstrates gross unfitness to serve; (iv) intentional, material violation by the Participant of any contractual, statutory, or fiduciary duty owed by the Participant to the Company or any of its affiliates; or (v) willful misconduct causing material economic harm or public disgrace to the Company of any of its subsidiaries or affiliates.
(d)“Company” shall mean Chewy and all of its Subsidiaries, collectively.
(e)“Date of Grant” shall mean the “Date of Grant” listed in the Award Notice.
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(f)“Detrimental Activities Violation” shall mean the Participant’s breach of a covenant contained in Appendix A to this Agreement or any contractual covenant with the Company regarding confidentiality, competitive activity, solicitation of the Company’s vendors, suppliers, customers, or employees, disparagement, or any similar provision applicable to or agreed to by the Participant.
(g)“Participant” shall mean the “Participant” listed in the Award Notice.
(h)“RSUs” shall mean that number of Restricted Stock Units listed in the Award Notice as “Restricted Stock Units Granted.”
(i)“Subsidiary” shall mean any subsidiary within the meaning of Rule 405 of the Securities Act of 1933, as amended.
2.Grant of Units. The Company hereby grants the RSUs to the Participant, each of which represents the right to receive one Share upon vesting of such RSU, subject to and in accordance with the terms, conditions and restrictions set forth in the Plan, the Award Notice, and this Agreement.
3.RSU Account. The Company shall cause an account (the “Unit Account”) to be established and maintained on the books of the Company to record the number of RSUs credited to the Participant under the terms of this Agreement. The Participant’s interest in the Unit Account shall be that of a general, unsecured creditor of the Company. Each RSU shall accrue dividend equivalents (“Dividend Equivalents”) with respect to dividends that would otherwise be paid on the Share underlying such RSU during the period from the Date of Grant to the date such Share is delivered in accordance with Section 4 below. Dividend Equivalents shall be subject to the same vesting conditions applicable to the RSU on which such Dividend Equivalents are accrued and shall be paid in cash to the Participant upon delivery of the underlying Share in respect of which the Dividend Equivalents were accrued.
4.Vesting; Settlement.
(a)The RSUs shall become vested in accordance with the schedule set forth on the Award Notice. The Company shall deliver to the Participant one Share for each RSU (as adjusted under the Plan) as soon as practicable and no later than twenty (20) business days following the applicable vesting date, subject to Section 5(b) below, and such vested RSU shall be cancelled upon such delivery.
(b)Unless otherwise determined by the Committee, upon settlement pursuant to Section 4(a), the Company shall issue the number of Shares underlying such vested RSUs to the Participant, free and clear of all restrictions, less a number of Shares equal to or greater in value than the minimum amount necessary to satisfy federal, state, local or foreign withholding tax requirements, if any (but which may in no event be greater than the maximum statutory withholding amounts in the Participant’s jurisdiction) required to be withheld by the Company (the “Withholding Taxes”) in accordance with Section 15 of the Plan (except to the extent the Participant shall have a written agreement with the Company or any of its Affiliates under which the Company or an Affiliate of the Company is responsible for payment of taxes with respect to the issuance of the Shares, or in the event the Company is not required to withhold any payments in respect of taxes, in which case the full number of Shares shall be issued). To the extent any Withholding Taxes may become due prior to the settlement of any RSUs, the Committee may accelerate the vesting of a number of RSUs equal in value to the Withholding Taxes, the Shares delivered in settlement of such RSUs shall be delivered to the Company, and the number of RSUs so accelerated shall reduce the number of RSUs which would otherwise
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become vested on the next applicable vesting date. The number of RSUs or Shares equal to the Withholding Taxes shall be determined using the closing price per Share on the NYSE (or other principal exchange on which the Shares then trade) on the trading day immediately prior to the date of delivery of the Shares to the Participant or the Company, as applicable, and shall be rounded up to the nearest whole RSU or Share.
(c)The Company shall pay any costs incurred in connection with issuing the Shares. Upon the issuance of the Shares to the Participant, the Participant’s Unit Account shall be eliminated. Notwithstanding anything in this Agreement to the contrary, the Company shall have no obligation to issue or transfer the Shares as contemplated by this Agreement unless and until such issuance or transfer shall comply with all relevant provisions of law and the requirements of any stock exchange on which the Company’s shares are listed for trading.
5.Termination of Service.
(a)In the event that the Participant’s Service with the Company terminates for any reason, any unvested RSUs shall be forfeited and all of the Participant’s rights hereunder with respect to such unvested RSUs (and any Dividend Equivalents accrued thereon) shall cease as of the Termination Date (unless otherwise provided for by the Committee in accordance with the Plan).
(b)The Participant’s rights with respect to the RSUs shall not be affected by any change in the nature of the Participant’s Service so long as the Participant continues to be an employee or service provider, as applicable, of the Company. Whether (and the circumstances under which) the Participant’s Service has terminated and the determination of the Termination Date for the purposes of this Agreement shall be determined by the Committee (or, with respect to any Participant who is not a director or “officer” as defined under Rule 16a-1(f) of the Exchange Act, its designee, whose good faith determination shall be final, binding and conclusive; provided, that such designee may not make any such determination with respect to the designee’s own Service for purposes of the RSUs).
6.Restrictions on Transfer. The Participant may not assign, alienate, pledge, attach, sell or otherwise transfer or encumber the RSUs or the Participant’s right under the RSUs to receive Shares, except other than by will or by the laws of descent and distribution and any such attempted or purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any of its Affiliates; provided, that the designation of a beneficiary (if permitted by the Committee) shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance.
7.Repayment of Proceeds; Clawback Policy.
(a)If the Participant’s Service is terminated by the Company for Cause or the Participant resigns while grounds for Cause exist, a Detrimental Activities Violation occurs, or the Company discovers that after a termination of Service that grounds for a termination with Cause existed at the time thereof, then the Participant shall be required, in addition to any other remedy available (on a non-exclusive basis), to pay to the Company, within ten (10) business days of the Company’s request to the Participant therefor, the aggregate after-tax proceeds (taking into account all amounts of tax that would be recoverable upon a claim of loss for payment of such proceeds in the year of repayment) the Participant received upon the sale or other disposition of, or distributions in respect of, the RSUs or Shares issued in settlement of the RSUs. With respect to the scenario where the Company discovers that after a termination of Service that grounds for
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a termination with Cause existed at the time thereof, then any reference in this Agreement to grounds existing for a termination with Cause shall be determined without regard to any cure period or other procedural delay or event required prior to a finding of, or termination with, Cause.
(b)The RSUs and all proceeds of the RSUs shall be subject to the Company’s clawback or recoupment policy, if any, and as in effect from time to time, to the extent the Participant is a director or “officer” as defined under Rule 16a-1(f) of the Exchange Act.
(c)By acceptance of the grant of RSUs pursuant to this Agreement, the Participant acknowledges and agrees that the Company may cause the cancellation or forfeiture of RSUs or Shares issuable upon settlement of any RSU on the books and records of the Company or any transfer agent to enforce the provisions of this Section 7.
8.No Right to Continued Service. Neither the Plan nor this Agreement nor the Participant’s receipt of the RSUs hereunder shall impose any obligation on the Company to continue the Service of the Participant. Further, the Company may at any time terminate the Service of the Participant, free from any liability or claim under the Plan or this Agreement, except as otherwise expressly provided herein.
9.No Rights as a Stockholder. The Participant’s interest in the RSUs shall not entitle the Participant to any rights as a Chewy stockholder. The Participant shall not be deemed to be the holder of, or have any of the rights and privileges of a Chewy stockholder in respect of, the Shares unless and until such Shares have been issued to the Participant.
10.Adjustments Upon Change in Capitalization. The terms of this Agreement, including the RSUs, the Participant’s Unit Account, and/or the Shares, shall be subject to adjustment in accordance with Section 9 of the Plan. This paragraph shall also apply with respect to any extraordinary dividend or other extraordinary distribution in respect of Chewy’s common stock (whether in the form of cash or other property).
11.Award Subject to Plan. By entering into this Agreement, the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. The RSUs granted hereunder are subject to the Plan. The terms and provisions of the Plan, as it may be amended from time to time, are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
12.Severability. Except where otherwise expressly indicated, Participant’s obligations under this Agreement are severable and/or subject to reformation or partial enforcement. If a court of competent jurisdiction determines that at the time this Agreement is presented for enforcement any provisions are overly broad or unenforceable, the parties agree that the court shall engage in partial enforcement and/or reform the Agreement to make it enforceable to the maximum extent possible for the protection of the Company’s interests and prevention of irreparable harm which is the express intent of the parties. If despite the forgoing, a provision of this Agreement is held by a court or arbitrator of competent jurisdiction (an “Adjudicator”) to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.
13.Venue; Personal Jurisdiction; Language. Subject to any arbitration agreement between Participant and the Company, any suit, action or proceeding with respect to this Agreement (or any provision incorporated by reference) or a judgment entered by an
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Adjudicator, that can be pursued or enforced in a court of law, shall be brought in the U.S. District Court for the District of Delaware or in another court of competent subject matter jurisdiction located in the State of Delaware. The Participant, the Company, and any transferees who hold RSUs pursuant to a valid assignment, all hereby submit to the exclusive jurisdiction of the courts of proper subject matter jurisdiction located in Delaware (the “Chosen Venue”), consent to the exercise of personal jurisdiction over them by such courts, and waive (a) any objections which they may now or hereafter have to the laying of the venue of any suit, action, or proceeding arising out of or relating to this Agreement that can be pursued in a court of law in the Chosen Venue; (b) any claim that any such suit, action, or proceeding brought in the Chosen Venue has been brought in any inconvenient forum; and (c) any right to a jury trial in the Chosen Venue (unless such jury waiver would violate controlling law or otherwise make the remainder of the forgoing provisions regarding Chosen Venue unenforceable). Nothing herein shall be construed to waive the arbitration obligations Participant or Company may have as a result of any arbitration agreement between them. If the Participant has received a copy of this Agreement (or the Plan or any other document related hereto or thereto) translated into a language other than English, such translated copy is qualified in its entirety by reference to the English version thereof, and in the event of any conflict the English version will govern.
14.Successors in Interest. Any successor to the Company shall have the benefits of the Company under, and be entitled to enforce, this Agreement. Likewise, the Participant’s legal representative shall have the benefits of the Participant under, and be entitled to enforce, this Agreement. All obligations imposed upon the Participant and all rights granted to the Company under this Agreement shall be final, binding and conclusive upon the Participant’s heirs, executors, administrators and successors.
15.Data Privacy Consent.
(a)General. The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Participant’s personal data as described in this Agreement and any other RSU grant materials by and among, as applicable, the Participant’s service-recipient or contracting party (the “Service Recipient”) and the Company for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. The Participant understands that the Company may hold certain personal information about the Participant, including, but not limited to, the Participant’s name, home address and telephone number, work location and phone number, date of birth, social security number or other identification number, salary, nationality, job title, hire date, any shares of stock or directorships held in the Company, details of all awards or any other entitlement to shares awarded, cancelled, exercised, vested, unvested or outstanding in the Participant’s favor, for the purpose of implementing, administering and managing the Plan (“Personal Data”).
(b)Use of Personal Data; Retention. The Participant understands that Personal Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, now or in the future, that these recipients may be located in the Participant’s country or elsewhere, and that the recipient’s country may have different data privacy laws and protections than the Participant’s country. The Participant understands that the Participant may request a list with the names and addresses of any potential recipients of the Personal Data by contacting the Participant’s local human resources representative. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Personal Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan. The Participant understands that Personal Data will be held only as long as is necessary to implement, administer and manage the Participant’s participation in the Plan. The Participant understands that the Participant may, at any time, view Personal
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Data, request additional information about the storage and processing of Personal Data, require any necessary amendments to Personal Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Participant’s local human resources representative.
(c)Withdrawal of Consent. The Participant understands that the Participant is providing the consents herein on a purely voluntary basis. If the Participant does not consent, or if the Participant later seeks to revoke the Participant’s consent, the Participant’s Service and career with the Service Recipient will not be adversely affected; the only consequence of the Participant’s refusing or withdrawing the Participant’s consent is that the Company would not be able to grant RSUs or other equity awards to the Participant or administer or maintain such awards. Therefore, the Participant understands that refusing or withdrawing the Participant’s consent may affect the Participant’s ability to participate in the Plan. For more information on the consequences of Participant’s refusal to consent or withdrawal of consent, the Participant understands that the Participant may contact the Participant’s local human resources representative.
16.Detrimental Activities. The Participant acknowledges and recognizes that an important purpose of this Agreement is to align the interests of Participant with those of Chewy’s stockholders and to ensure that the Participant does not engage in activity detrimental to the interests of Chewy’s stockholders if Participant is going to be allowed the opportunity to participate in the financial rewards that result from the RSU and their relationship to the value of equity participation in Chewy. In addition, Participant acknowledges that an ancillary purpose consistent with protecting the interests of the stockholders arises with respect to Participant because Participant will be allowed access to confidential and proprietary information (including, but not limited to, trade secrets), as well as access to the prospective and actual customers, suppliers, investors, clients and partners of the Company, and the goodwill associated with the Company. Participant accordingly agrees to comply with the provisions of Appendix A to this Agreement (the “Commitment to Avoid Detrimental Activities”) as a condition of receipt and retention of the RSUs provided for in this Agreement and their beneficial value. For the avoidance of doubt, the covenants made by Participant in this Agreement supplement and are in addition to, and not in lieu of, any other restrictive covenants or similar covenants or agreements between the Participant and the Company, nor will they be construed to replace, reduce or otherwise detrimentally impact the applicability or enforceability of any other such restrictive covenants Participant may agree to with the Company. Participant acknowledges and agrees not to contest or dispute the Company’s position that the prohibition of detrimental activities provided for in Appendix A is inextricably connected to and part of the Company’s governance of its internal affairs and relates directly to the interests of Chewy’s stockholders.
17.Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation. By accepting this Agreement and the grant of the RSUs contemplated hereunder, the Participant expressly acknowledges that (a) the Plan is established voluntarily by the Company, it is discretionary in nature and may be suspended or terminated by the Company at any time, to the extent permitted by the Plan; (b) the grant of RSUs is exceptional, voluntary and occasional and does not create any contractual or other right to receive future grants of RSUs, or benefits in lieu of RSUs, even if RSUs have been granted in the past; (c) all determinations with respect to future grants of RSUs, if any, including the date of grant, the number of Shares granted and the applicable vesting terms, will be at the sole discretion of the Company; (d) the Participant’s participation in the Plan is voluntary; (e) the value of the RSUs is an extraordinary item that is outside the scope of the Participant’s Services contract, if any, and nothing can or must automatically be inferred from such Services contract or its consequences; (f) grants of RSUs, and the income and value of same, are not part of normal or expected compensation for any purpose and are not to be used for calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement
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benefits or similar payments, the Participant waives any claim on such basis, and for the avoidance of doubt, the RSUs shall not constitute an “acquired right” under the applicable law of any jurisdiction; and (g) the future value of the underlying Shares is unknown and cannot be predicted with certainty. In addition, the Participant understands, acknowledges and agrees that the Participant will have no rights to compensation or damages related to RSU proceeds in consequence of the termination of the Participant’s Service for any reason whatsoever and whether or not in breach of contract.
18.Award Administrator. The Company may from time to time designate a third party as an “Award Administrator” to assist the Company in the implementation, administration, and management of the Plan and any RSUs granted thereunder, including by sending award notices on behalf of the Company to Participants, and by facilitating through electronic means acceptance of RSU Agreements by Participants.
19.Section 409A of the Code.
(a)This Agreement is intended to comply with the provisions of Section 409A of the Code and the regulations promulgated thereunder. Without limiting the foregoing, the Committee shall have the right to amend the terms and conditions of this Agreement in any respect as may be necessary or appropriate to comply with Section 409A of the Code or any regulations promulgated thereunder, including without limitation by delaying the issuance of the Shares contemplated hereunder.
(b)Notwithstanding any other provision of this Agreement to the contrary, if a Participant is a “specified employee” within the meaning of Section 409A of the Code, no payments in respect of any RSU that is “deferred compensation” subject to Section 409A of the Code and not exempt for Section 409A as a short-term deferral or otherwise and which would otherwise be payable upon the Participant’s “separation from service” (as defined in Section 409A of the Code) shall be made to such Participant prior to the date that is six (6) months after the date of the Participant’s “separation from service” or, if earlier, the Participant’s date of death. Following any applicable six (6)-month delay, all such delayed payments will be paid in a single lump sum on the earliest date permitted under Section 409A of the Code that is also a business day. The Participant is solely responsible and liable for the satisfaction of all taxes and penalties under Section 409A of the Code that may be imposed on or in respect of the Participant in connection with this Agreement, and the Company shall not be liable to any Participant for any payment made under this Plan that is determined to result in an additional tax, penalty or interest under Section 409A of the Code, nor for reporting in good faith any payment made under this Agreement as an amount includible in gross income under Section 409A of the Code. Each payment in a series of payments hereunder shall be deemed to be a separate payment for purposes of Section 409A of the Code.
20.Book Entry Delivery of Shares. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing one or more Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.
21.Electronic Delivery and Acceptance. The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
22.Acceptance and Agreement by the Participant. By accepting the RSUs (including through electronic means), the Participant agrees to be bound by the terms, conditions,
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and restrictions set forth in the Plan, this Agreement, and the Company’s policies, as in effect from time to time, relating to the Plan. The Participant’s rights under the RSUs will lapse forty-five (45) days from the Date of Grant, and the RSUs will be forfeited on such date if the Participant shall not have accepted this Agreement by such date. For the avoidance of doubt, the Participant’s failure to accept this Agreement shall not affect the Participant’s continuing obligations under any other agreement between the Company and the Participant.
23.No Advice Regarding Grant. The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Participant’s participation in the Plan, or the Participant’s acquisition or sale of the underlying Shares. The Participant is hereby advised to consult with the Participant’s own personal tax, legal and financial advisors regarding the Participant’s participation in the Plan before taking any action related to the Plan.
24.Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Participant’s participation in the Plan, on the RSUs and on any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Participant to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.
25.Waiver. The Participant acknowledges that a waiver by the Company of breach of any provision of this Agreement shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by the Participant or any other participant in the Plan.
26.Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one in the same agreement.
[Signatures follow]
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CHEWY INC.
By: ______________________
Acknowledge and agreed as of the date first written above:
___________________
Participant Signature:
Appendix A
Commitment to Avoid Detrimental Activities
Participant acknowledges that as an individual being presented with the opportunity to share in the growth and value of Chewy through RSUs it is important to avoid certain activities while engaged to provide services to the Company and for a reasonable period of time thereafter that would be detrimental to Chewy’s business and its potential value to stockholders. Participant agrees that it is reasonable for the Company to require a commitment from Participant of this nature in order to allow Participant to participate in and retain the benefits of the RSUs. Accordingly, Participant agrees that any activity or conduct by Participant that violates one of the restrictions or obligations provided for in Parts A-1, A-2, A-3, or A-4 below will be considered a “Detrimental Activities Violation”.
A-1. Avoidance of Competition and Other Detrimental Acts During Engagement.
While employed or otherwise engaged as an individual to provide services to the Company (as an employee, consultant, or otherwise), Participant will comply with each of the restrictions and obligations below.
1. While employed with the Company, Participant will comply at all times with Participant’s duty of loyalty to the Company as an employee or agent of the Company placed in a position of special trust and confidence. This duty shall be understood to include, but not be limited to,
(a) an obligation not to engage or participate in the business of a Competitor (as defined below), or become employed with a Competitor as an employee, owner, member, partner, consultant, director or otherwise, without the express written consent of the Company,
(b) an obligation not to interfere with or otherwise knowingly cause harm to the Company’s ongoing or prospective business relationship with a Company employee, consultant or individual providing services as an independent contractor, or a supplier, distributor, vendor, customer, or other person or entity that does business with the Company or that the Company has a reasonable expectation of doing business with, and
(c) an obligation to inform the Company of business opportunities that fall within the Company’s line of business and not pursue them for personal gain separate from the Company without the Company’s express written consent in advance, or otherwise participate in any conduct or relationship that creates a conflict of interest in violation of Company policies.
2. Participant will not knowingly participate in or pursue activities that harm the value of the Company’s intellectual property and will honor all agreements with the Company concerning the ownership and protection of proprietary works and intellectual property. Participant will be responsible for understanding, complying with, and implementing any intellectual property policy or guidelines published by the Company as they apply to Participant’s position and area of accountability at the Company.
3. The “Business” of the Company is providing retail and wholesale pet food, pet pharmacy and compounding, pet health and wellness, pet insurance, and other pet supply products and services (with “pets” as referenced in this Agreement to include, without limitation, in addition to household pets, any domesticated livestock); (ii) the Company is one of the limited number of entities to have developed such a Business; (iii) the Company’s Business is national in scope; (iv) the Company directly competes with: e-commerce and mail-order pharmacies and pharmacy compounders; e- commerce retailers and wholesalers of pet food, pet pharmacy and compounding, pet health and wellness, pet insurance and other pet supply services and pet
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products, including those that exclusively sell pet-related products as well as those offering pet food, pet pharmacy and compounding, pet health and wellness, pet insurance, and/or other pet supply services and pet products as one amongst many product categories available for purchase; and brick-and-mortar retailers and wholesalers whose primary business is the retail or wholesale of pet food, pet pharmacy or compounding, pet health and wellness, and/or other pet supply services and pet products (the entities enumerated above are collectively referred to as “Competitors”); (v) over the course of Participant’s career, the Company’s business may expand beyond its current Business, and therefore, the definition of Competitors also includes any business engaged in the developing, marketing or selling of any product(s) or service(s) the Company is developing, marketing or selling or has plans to develop, market or sell at the time of Participant’s termination of employment, in which Participant had involvement or about which Participant was provided Confidential Information (as defined below) during the Look Back Period (as defined below).
A-2. Avoidance of Competition and Other Detrimental Acts After Engagement.
Participant will comply with the following restrictions for a period of two (2) years after Participant’s employment or other services engagement with the Company ends:
1. Noncompete. Participant will not, within Participant’s Territory (as defined below), directly or through the direction or control of others, acting individually or as an owner, shareholder, partner, employee, contractor, agent or otherwise, on behalf of a Competitor: (a) provide, supervise or manage services that are the same as or similar in function or purpose to the services Participant provided to the Company during the last two (2) years of employment or such shorter period of time as Participant was actually employed or engaged to provide personal services to the Company (the “Look Back Period”) (b) assist in the development or improvement of a competing product or service, or (c) provide services that are otherwise likely or probable to result in the use or disclosure of Confidential Information to a Competitor. “Territory” means the geographic territory(ies) assigned to Participant by Company during the Look Back Period (by state, county, or other recognized geographic boundary used in the Company’s Business); and, if Participant has no such specifically assigned geographic territory then: (i) those states and counties in which Participant participated in the Company’s Business and/or about which Participant was provided access to Confidential Information during the Look Back Period; and, (ii) the state and county where Participant resides. If Participant is employed by the Company in a research and development capacity and/or if Participant is employed in a senior management position (such as Director, Senior Director, Vice President and above, Board Member, or Officer) then Participant is presumed to have participated in the Company’s Business and/or had Confidential Information about the Company’s Business throughout the United States (including state and state-equivalents and county and county-equivalents therein), as the Company and Participant agree that the Company’s Business is e-commerce, is conducted nationwide and competes nationwide.
2. Worker Nonsolicit. Participant will not, directly or indirectly through providing assistance to others, knowingly participate in soliciting or communicating (verbally, electronically, or in other written form) with a Covered Worker (as defined below) for the purpose of persuading the Covered Worker to go to work for a Competitor or to end or modify the Covered Worker’s relationship with the Company or assist a Competitor in efforts to hire a Covered Worker away from the Company. A “Covered Worker” means an employee or individual worker engaged as an independent contractor of the Company that Participant works with, gains knowledge of or is provided Confidential Information about in the Look Back Period. A worker who resigns will continue to be considered a Covered Worker for a period of six (6) months after the workers employment or other engagement with the Company ends except where it would make this restriction unenforceable.
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3. Customer Nonsolicit. Participant will not, working alone or in conjunction with one or more other persons or entities, whether for compensation or not, on behalf of (or for the benefit of) a Competitor: (a) solicit, assist in soliciting, or facilitate the solicitation of, competing business from a customer of the Company that Participant had material contact or involvement with or was provided Confidential Information about during the Look Back Period (“Covered Customer”); or (b) interfere with the Company’s business relationship with any such Covered Customer.
4. Business Relationship Interference. Participant will not, directly or indirectly through providing assistance to others, knowingly interfere with the Company’s ongoing or prospective business relationship with a supplier, distributor, or vendor that the Company has a reasonable expectation of doing business with, and that Participant had material contact or involvement with or gained knowledge of through Participant’s role with the Company in the Look Back Period, by soliciting, inducing or otherwise encouraging the supplier, distributor, or vendor to cease or reduce doing business with the Company or to give a valuable business opportunity to a Competitor.
A-3. Avoidance of Unauthorized Confidential Information Use or Disclosure.
1. Participant will honor all agreements with the Company regarding maintaining the confidentiality of information that qualifies as contractually protected Confidential Information, protect and preserve the value of the Company’s trade secrets and proprietary information to the Company (irrespective of whether same is also covered by contractual definition of Confidential Information), and comply with Company policies and directives regarding the handling of Company records, files, computer system access, materials and property at all times. To the extent Participant is not otherwise subject to another contractual agreement with the Company covering Confidential Information, Participant agrees that until such time as the Confidential Information is readily-available publicly (other than as a result of disclosure by Participant), Participant shall not disclose to any person or use, copy, download, upload or transfer any Confidential Information, whether or not created in whole or in part by the efforts of Participant, and regardless of whether Participant is still employed by the Company. Participant will only disclose or use, copy, download, upload or transfer such Confidential Information as is required by law or as necessary in the performance of Participant’s duties on behalf of the Company.
2. If Participant is subject to another contractual agreement that defines what constitutes the Company’s “Confidential Information”, that definition shall control. Absent such a controlling definition, it is understood that “Confidential Information” refers to an item of information, or a compilation of information, in any form (tangible or intangible), related to the business of the Company that the Company has not made public or authorized public disclosure of, and that is not generally known to the public through proper means. Participant acknowledges that, in Participant’s position with the Company, Participant will obtain and/or have access to Confidential Information regarding the Company’s business, including, but not limited to: business plans and forecasts, market analysis, marketing plans and strategies, branding strategies, pricing-related variables and strategy, the actual and anticipated research and development activities of the Company, unpatented inventions, technical data, knowledge, information and materials about trade secrets, mailing/e-mailing lists, methods of operation, customer or client lists, consumer preferences and buying histories, services, proprietary know-how, non-public information about financial performance, human resources information such as that obtained from a confidential personnel file, other proprietary matters relating to the Company, and information that is entrusted to the Company in confidence by third parties with whom the Company does business or is negotiating to do business, all of which constitute valuable assets of the Company which this Agreement is designed to protect. Nothing herein restricts or prevents an employee from sharing information about their own compensation with other employees nor
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prevents other employees from making inquiries about the compensation earned or paid to co-workers.
3. Participant agrees that, upon the termination of Participant’s employment or personal services relationship with the Company for any reason whatsoever, Participant shall return all copies, in whatever form or media, including hard copies and electronic copies, of Confidential Information to the Company, and Participant shall delete any copy of the Confidential Information on any computer file or database maintained by Participant and, upon request by the Company, Participant shall certify in writing that this has process has been completed and no copies of Confidential Information are retained.
A-4. Avoidance of Disparagement.
Participant agrees to avoid making comments that are disparaging, false, misleading, defamatory or cast in a negative light the Company, or the Company’s current or former directors, officers, or employees. And, Participant agrees not to, in any respect, make any disparaging or defamatory comments concerning any aspect of Participant’s relationship with the Company or any comments concerning the conduct or events which precipitated any termination of Participant’s employment from the Company. However, Participant’s obligations under this covenant shall not prevent Participant from exercising the right to (1) communicate with a law enforcement officer acting within the line and scope of the officer's law enforcement duties that a violation of the law has occurred or is occurring; (2) communicate with a government regulator acting within the line and scope of the regulator's regulatory duties that a violation of the law has occurred or is occurring; (3) respond to a lawfully served judicial, grand jury, or other lawful subpoena; (4) testify in a judicial or administrative proceeding in response to a lawfully served subpoena or an order of a court of competent jurisdiction; (5) confer with the obligated party's attorney for the purpose of obtaining legal advice or representation; (6) respond to lawful discovery in a judicial or administrative action; provided the disparaging statement is either ordered by a court of competent jurisdiction or made in compliance with a protective order entered by the same court; (7) prosecute or defend a civil action between or among parties to a covered contract; provided the party making the disparaging statement attempts to and, if permitted by law, does file the disparaging statement and any related pleading under seal or in compliance with a protective order entered by a court of competent jurisdiction in the civil action; or (8) exercise federally protected statutory rights, including, but not limited to, the exercise of rights under the National Labor Relations Act or the Civil Rights Act of 1964, as amended.
A-5. Enforcement.
1. In the event the Committee has reason to believe Participant has engaged in a Detrimental Activities Violation or is pursuing a course of conduct that threatens such a violation, the Company shall have the right to suspend the vesting schedule with respect to any unvested RSUs until it determines that a violation has occurred and/or that any threatened violation has been resolved so as to longer be a threat. In the event of a Detrimental Activities Violation, Section 7 (Repayment of Proceeds; Clawback Policy) of the Agreement may be applied as determined appropriate by the Committee in the exercise of the full degree of discretion allowed under the Plan. The type of harm to the Company caused by a Detrimental Activities Violation cannot be fully measured and remedied through monetary damages and would be irreparable in nature. Accordingly, in addition to the forgoing, the Company shall retain all rights and remedies available in law or equity to enforce the restrictions and obligations that Participant has committed to in Appendix A.
2. Participant’s Commitment to Avoid Detrimental Activities and the terms of this Agreement awarding RSUs to Participant are mutually dependent, material terms. Accordingly, in the event the enforceability of any portion of the Commitment to Avoid Detrimental Activities
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is challenged by Participant and found by an Adjudicator to be void or unenforceable in any part deemed material by the Company, then the Company shall have the right to demand and receive from Participant within ten (10) business days of the Company’s request to Participant, the aggregate after-tax proceeds (taking into account all amounts of tax that would be recoverable upon a claim of loss for payment of such proceeds in the year of repayment) Participant received upon the sale or other disposition of, or distributions in respect of, the RSUs or Shares issued in settlement of the RSUs.
3. If Participant violates one of the restrictions in Section A-2, the period of the breached restriction will be extended for an additional period of time equal to the time that elapses from commencement of the breach to the later of (a) the definitive termination of such breach or (b) the final resolution of any litigation arising from such breach; provided, however, that this extension of time shall be capped so that the extension of time itself does not exceed the length of time originally proscribed for the restriction, and if this extension would make the restriction unenforceable under controlling law it will not be enforced.
A-6. Limitations.
1. Exceptions to Restrictions. Notwithstanding anything in this Agreement to the contrary, nothing herein prohibits Participant from owning a non-controlling interest consisting of two percent (2%) or less of any class of securities in any publicly traded company or passive investments through an independently controlled fund such as a mutual fund, provided that Participant is not a controlling person of, or a member of a group that controls, a business that is a Competitor, and further provided that Participant does not otherwise participate in any conduct prohibited under this Agreement. In addition, nothing herein shall be construed to prohibit Participant’s employment in a separately operated subsidiary or other business unit of a company that would not be a Competitor but for common ownership with a Competitor so long as Participant provides written assurances regarding the non-competitive nature of Participants position that are satisfactory to the Company and Participant remains employed solely in such non-competitive entity or unit during the pendency of the restrictions in Section A-2. Nothing herein is intended to be or is to be construed as a prohibition against general generic advertising of a company’s products, services, or job openings to the public such as “help wanted” ads that are not targeted at the Company. The parties acknowledge that some states prohibit or place limitations on the use of covenants not to compete or noncompete covenants with an employee considered to be a low wage worker based on the employee’s rate of compensation or overtime exemption status under the Fair Labor Standards Act (a “Low Wage Worker Protection” law, or “LWWP law”). It is the parties’ intent not to create any restriction that would violate any controlling state LWWP law. Where the controlling state’s law includes an LWWP law, it is the parties’ intent that this Agreement’s obligations be construed so as to fit within any applicable exclusion for duty of loyalty obligations, nonsolicitation covenants, confidential information protection covenants, and intellectual property assignment agreements recognized under the LWWP law at issue, and that it does not create a prohibited covenant not to compete.
2. Protected Conduct. Nothing in this Agreement prohibits Participant from opposing or reporting to the relevant law-enforcement agency (such as the Securities and Exchange Commission, Equal Employment Commission, or Department of Labor) an event that Participant reasonably and in good faith believes is a violation of law, requires notice to or approval from Company before doing so, or prohibits Participant from cooperating in an investigation conducted by such a government agency, nor does it prohibit Participant from disclosing information about unlawful acts in the workplace, such as harassment or discrimination or any other conduct that Participant has reason to believe is unlawful. Participant acknowledges notice that the Defend Trade Secrets Act provides that no individual will be held criminally or civilly liable under Federal or State trade secret law for the disclosure of a trade secret that: (a) is made in confidence to a Federal, State, or local government official, either directly or indirectly, or to
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an attorney; and made solely for the purpose of reporting or investigating a suspected violation of law; or, (b) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal so that it is not made public. It also provides that an individual who pursues a lawsuit for retaliation by an employer for reporting a suspected violation of the law may in pursuing such lawsuit disclose trade secrets to his/her attorney and use trade secrets in court submissions so long as documents containing the trade secret are filed under seal and do not disclose trade secrets except as permitted by court order. Nothing in this Agreement prohibits Participant from using information acquired through lawful means regarding the wages, benefits, or other terms and conditions of employment of individuals employed by Company for any purpose protected under the National Labor Relations Act (such as the right of employees to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection), unless the information is entrusted to Participant in confidence by Company as part of Participant’s job duties or Participant is employed in a supervisor or management level position. Conduct of the above-described nature is referred to herein as “Protected Conduct.” Nothing in this paragraph shall be construed to protect, invite, permit, or limit liability for, otherwise illegal activity such a breaking and entering, illegal computer access (hacking) or theft of the Company’s property.
3. State-Specific Modifications. It is the intent of the Company to apply Appendix A in a manner that does not violate any law that is deemed to be the controlling law for the parties with respect to the obligations in the Agreement. If Participant resides in California and when Participant last worked for the Company Participant primarily resided and worked in California, then Section A-2 shall not apply except to the extent Participant’s conduct also involves the use or disclosure of trade secrets of the Company. If Participant resides in Washington and when Participant last worked for the Company Participant was a Washington-based employee, then Section A-2 (Noncompete) and A-2 (Business Relationship Interference) shall not apply and Sections A-2 (Worker Nonsolicit) and A-2 (Customer Nonsolicit) shall be limited so that they only apply to prohibit Participant’s solicitation of an employee of the Company to leave such employment, and solicitation of a customer of the Company to cease or reduce the extent to which it is doing business with the Company. If the Company is deemed to operate in the District of Columbia and when Participant last worked for the Company Participant worked for it in the District of Columbia, then nothing in Appendix A will be applied to prohibit Participant from being simultaneously or subsequently employed by another person, performing work or providing services for pay for another person, or operating Participant’s own business. However, conduct involving disclosure of confidential, proprietary, or sensitive information, client lists, customer lists, or a trade secret (as defined in the Uniform Trade Secrets Act) will remain prohibited.
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EXHIBIT 31.1
Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Sumit Singh, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Chewy, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | May 31, 2023 | /s/ Sumit Singh | |||||||||
| Sumit Singh | |||||||||||
| Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
EXHIBIT 31.2
Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Mario Marte, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Chewy, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | May 31, 2023 | /s/ Mario Marte | |||||||||
| Mario Marte | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
EXHIBIT 32.1
Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Chewy, Inc. (the “Company”) on Form 10-Q for the period ended April 30, 2023, as filed with the Securities and Exchange Commission (the “Periodic Report”), we, Sumit Singh, Chief Executive Officer of the Company, and Mario Marte, Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:
1.The Periodic Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
2.The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 31, 2023
| /s/ Sumit Singh | |||||
| Sumit Singh | |||||
| Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| /s/ Mario Marte | |||||
| Mario Marte | |||||
| Chief Financial Officer | |||||
| (Principal Financial Officer) | |||||