UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 1, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission file number: 001-38291
STITCH FIX, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
27-5026540
(I.R.S. Employer Identification No.)
1 Montgomery Street, Suite 1500
San Francisco, California 94104
(Address of principal executive offices and zip code)
(415) 882-7765
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Class A common stock, par value $0.00002 per share
SFIX
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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 ☐
1
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☒
☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of February 1, 2020, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s voting
Class A common stock and Class B common stock held by non-affiliates of the registrant was approximately $1,271,120,651 and $2,701,421, respectively,
based on a closing price of $22.90 per share of the registrant’s Class A common stock as reported on The Nasdaq Global Market on January 31, 2020.
As of September 21, 2020, the number of outstanding shares of the registrant’s Class A common stock, par value $0.00002 per share, was 59,222,368, and
the number of outstanding shares of the registrant’s Class B common stock, par value $0.00002 per share, was 45,049,415.
Portions of the registrant’s definitive Proxy Statement for the 2020 Annual Meeting of Stockholders to be filed with the U.S. Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K are
incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
2
Table of Contents
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
SIGNATURES
Page
Number
4
11
28
28
28
29
29
31
33
44
45
69
69
71
72
72
72
72
72
73
76
77
Unless the context suggests otherwise, references in this Annual Report on Form 10-K (the “Annual Report”) to “Stitch Fix,” the “Company,” “we,” “us,”
and “our” refer to Stitch Fix, Inc. and, where appropriate, its subsidiaries.
3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
This Annual Report contains forward-looking statements that involve risks, uncertainties, and assumptions that, if they never materialize or prove incorrect,
could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Annual
Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified
by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,”
“project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. These
statements are based on the beliefs and assumptions of our management, which are in turn based on information currently available to management. Such
forward-looking statements are subject to risks, uncertainties, and other important factors that could cause actual results and the timing of certain events to
differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section titled “Risk Factors” included under Part I, Item 1A below. Furthermore, such forward-looking
statements speak only as of the date of this Annual Report. Except as required by law, we undertake no obligation to update any forward-looking statements
to reflect events or circumstances after the date of such statements.
Item 1. Business.
Stitch Fix is transforming the way people find what they love.
Overview
Stitch Fix was inspired by the vision of a client-first, client-centric new way of retail. What people buy and wear matters. When we serve our clients well,
we help them discover and define their styles, we find jeans that fit and flatter their bodies, we reduce their anxiety and stress when getting ready in the
morning, we give them confidence in job interviews and on first dates, and we give them time back in their lives to invest in themselves or spend with their
families. Most of all, we are fortunate to play a small part in our clients looking, feeling, and ultimately being their best selves.
We are reinventing the shopping experience by delivering one-to-one personalization to our clients through the combination of data science and human
judgment. This combination drives a better client experience and a more powerful business model than either element could deliver independently.
Stitch Fix operates in the United States and United Kingdom. Since our founding in 2011, we have helped millions of men, women, and kids discover and
buy what they love through personalized shipments of apparel, shoes, and accessories, hand-selected by Stitch Fix stylists and delivered to our clients’
homes. We call each of these shipments a Fix. Clients can choose to schedule automatic shipments or order a Fix on demand after they fill out a style
profile on our website or mobile app. For each Fix, we charge clients a styling fee that is credited toward items they purchase. Alternatively, select U.S.
clients may purchase an annual Style Pass, which offers unlimited styling for the year for a $49 fee that is also credited towards items they purchase. After
receiving a Fix, our clients purchase the items they want to keep and return the other items, if any, at no additional charge. In addition, our Extras feature
allows clients to select items such as socks, bras, underwear, and other intimates that are then added to the items their stylist selects for their Fix.
Recently, we introduced a direct-buy offering to allow clients the flexibility of purchasing items outside of a Fix. The first of this offering was launched in
June 2019, allowing clients in the United States to buy previously purchased items in new colors, prints, and sizes. In February 2020, we expanded this
offering by giving clients a personalized set of algorithmically generated items for direct purchase based on items they have already bought from us, and in
June 2020, we introduced functionality which allows Men’s and Women’s clients to shop personalized looks based on their style profiles. No styling fee is
charged for direct-buy purchases.
Stitch Fix was founded with a focus on Women’s apparel. In our first few years, we were able to gain a deep understanding of our clients and merchandise
and build the capability to listen to our clients, respond to feedback, and deliver the experience of personalization. We have since extended those
capabilities into Petite, Maternity, Men’s, Plus, and Kids apparel, as well as shoes and accessories. Our stylists leverage our data science and apply their
own judgment to hand select apparel, shoes, and accessories for our clients from a broad range of merchandise.
We are successful when we are able to help clients find what they love again and again, creating long-term, trusted relationships. Our clients share personal
information with us, including detailed style, size, fit, and price preferences, as well as unique inputs, such as how often they dress for certain occasions or
which parts of their bodies they like to flaunt or cover up. Our clients are motivated to share these personal details with us and provide us with ongoing
feedback because they recognize that doing so will result in more personalized and successful experiences. This feedback also creates a valuable network
effect by helping us to better serve other clients. As of August 1, 2020, we had approximately 3,522,000 active clients. See the section titled
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operating Metrics” for information on how
we define and calculate active clients.
4
The very human experience that we deliver is powered by data science. Our data science capabilities consist of our rich data set and our proprietary
algorithms, which fuel our business by enhancing the client experience and driving business model efficiencies. The vast majority of our client data is
provided directly and explicitly by the client, rather than inferred, scraped, or obtained from other sources. We also gather extensive merchandise data, such
as inseam, pocket shape, silhouette, and fit. This large and growing data set provides the foundation for proprietary algorithms that we use throughout our
business, including those that predict purchase behavior, forecast demand, optimize inventory, and enable us to design new apparel. We believe our data
science capabilities give us a significant competitive advantage, and as our data set grows, our algorithms become more powerful.
Our stylists leverage our data science through a custom-built, web-based styling application that provides recommendations from our broad selection of
merchandise. Our stylists then apply their judgment to select what they believe to be the best items for each Fix. Our stylists provide a personal touch, offer
styling advice and context to each item selected, and help us develop long-term relationships with our clients.
We offer merchandise across multiple price points and styles from established and emerging brands, as well as our own private labels, which we call
Exclusive Brands. Many of our brand partners also design and supply items exclusively for our clients.
Technology is Driving Transformation Across Industries
Industry Overview
Technological innovation has profoundly impacted how consumers discover and purchase products, forcing businesses to adapt to engage effectively with
consumers. We believe that new business models that embrace these changes and truly focus on the consumer will be the winners in this changing
environment.
The Apparel, Shoes, and Accessories Market is Massive, but Many Retailers have Failed to Adapt to Changing Consumer Behavior
The U.S. apparel, shoes, and accessories market is large, but we believe many brick-and-mortar retailers have failed to adapt to evolving consumer
preferences. Historically, brick-and-mortar retailers have been the primary source of apparel, shoes, and accessories sales in the United States. Over time,
brick-and-mortar retail has changed and the era of salespersons who know each customer on a personal level has passed. We believe many of today’s
consumers view the traditional retail experience as impersonal, time-consuming, and inconvenient. This has led to financial difficulties, bankruptcies, and
store closures for many major department stores, specialty retailers, and retail chains, and this has been further exacerbated by the COVID-19 pandemic as
consumers feel less comfortable shopping at physical stores.
eCommerce is Growing, but has Further Depersonalized the Shopping Experience
The internet has created new opportunities for consumers to shop for apparel. eCommerce continues to take market share from brick-and-mortar retail. The
first wave of eCommerce companies prioritized low price and fast delivery. This transaction-focused model is well suited for commoditized products and
when consumers already know what they want. However, we believe eCommerce companies often fall short when consumers do not know what they want
and price and delivery speed are not the primary decision drivers. There is an overwhelming selection of apparel, shoes, and accessories available to
consumers online, and searches and filters are poor tools when it comes to finding items that fit one’s style, figure, and occasion. eCommerce companies
also lack the critical personal touchpoints necessary to help consumers find what they love, further depersonalizing the shopping experience.
Personalization is the Next Wave
To be relevant today, retailers must find a way to connect with consumers on a personal level and fit conveniently into their lifestyles. Personalization in
retail can be difficult and nuanced, as consumers consider many factors that can be difficult to articulate, including style, size, fit, feel, and occasion. We
believe that an intelligent combination of data science and human judgment is required to deliver the personalized retail experience that consumers seek.
Competition
The retail apparel industry is highly competitive. Our competitors include eCommerce companies that market apparel, shoes, and accessories; local,
national, and global department stores; specialty retailers; discount chains; independent retail stores; and the online offerings of these traditional retail
competitors. Additionally, we experience competition for consumer discretionary spending from other product and experiential categories.
We compete primarily on the basis of client experience, brand, product selection, quality, convenience, and price. We believe that we are able to compete
effectively because we offer clients a personalized and fun shopping experience that our competitors are unable to match. Further, as an eCommerce
company without physical store locations, we believe that the COVID-19 pandemic has enhanced our competitive position in the retail industry. See Part I,
Item1A “Risk Factors—Our industry is highly competitive and if we do not compete effectively our operating results could be adversely affected” for more
information.
5
We help millions of clients discover and buy what they love through personalized apparel, shoes, and accessories.
Our Data Science Advantage
Our Service
Our data science capabilities fuel our business. These capabilities consist of our rich and growing set of detailed client and merchandise data and our
proprietary algorithms. We use data science throughout our business, including to style our clients, offer personalized direct buy options, predict purchase
behavior, forecast demand, optimize inventory, and design new apparel.
Our data set is particularly powerful because:
•
•
•
the vast majority of our client data is provided directly and explicitly by the client, rather than inferred, scraped, or obtained from other sources;
our clients are motivated to provide us with relevant personal data, both at initial signup and over time as they use our service, because they trust it
will improve their shopping experience; and
our merchandise data tracks dimensions that enable us to predict purchase behavior and deliver a more personalized experience.
On average, each client directly provides us with over 90 meaningful data points through his or her style profile, including detailed style, size, fit, and price
preferences, as well as unique inputs such as how often he or she dresses for certain occasions or which parts of his or her body the client likes to flaunt or
cover up. Over time, through their feedback on Fixes they receive and other orders they make, clients share additional information about their preferences
as well as detailed data about both the merchandise they keep and return. Historically, over 80% of our shipments have resulted in direct client feedback.
This feedback loop drives important network effects, as our client-provided data informs not only our personalization capabilities for the specific client, but
also helps us better serve other clients. In addition, Style Shuffle, an interactive mobile and web-based feature in which participants rate an assortment of
Stitch Fix merchandise, provides additional data to strengthen our understanding of client tastes and style preferences.
We believe our proprietary merchandise data set is differentiated from other retailers. We encode each of our SKUs with numerous information attributes to
help our algorithms make better recommendations for our clients. The information we store for each SKU includes:
•
•
•
•
basic data, such as brand, size, color, pattern, silhouette, and material;
item measurements, such as length, width, diameter of sleeve opening, and distance from collar to first button;
nuanced descriptors, such as how appropriate the piece is for a client that prefers preppy clothing or whether it is appropriate for a formal event;
and
client feedback, such as how the item fit a 5’10” client or how popular the piece is with young mothers.
Our algorithms use our data set to match merchandise to each of our clients. For every combination of client and merchandise, we compute the probability
the client will keep that item based on her and other clients’ preferences and purchase history as well as the attributes and past performance of the
merchandise.
Pairing Data Science with Human Judgment
The combination of data science and human judgment drives a better client experience and a more powerful business model than either element could
deliver independently. Our advanced data science capabilities harness the power of our data for our stylists by generating predictive recommendations to
streamline our stylists’ individualized curation process. Stylists add a critical layer of contextual, human decision making that augments and improves our
algorithms’ selections and ultimately produces a better, more personalized Fix for each client.
Our Value Proposition to Clients
Our Differentiated Value Proposition
Our clients love our service for many reasons. We help clients find apparel, shoes, and accessories that they love in a way that is convenient and fun. We
save our clients time by doing the shopping, delivering merchandise right to their homes, allowing them to try on merchandise in the comfort of their
homes and in the context of their own closets, and making the return process simple. Our expert styling service connects each client ordering a Fix to a
professional who will understand her fashion needs, hand select items personalized to her, and offer her ongoing style advice. Clients also value the quality
and diversity of our merchandise as we deliver the familiar brands they know, offer items they can’t find anywhere else, and expand their fashion palette by
exposing them to new brands and styles they might not have tried if they shopped for themselves. We often hear from clients that we have helped them find
the perfect pair of jeans or discover a dress silhouette they never would have selected for themselves. In these situations, not only is our service more
convenient, it is in fact more effective at helping clients find what they love. We proudly serve men, women, and kids across ages, sizes, tastes,
geographies, and price preferences.
6
Our Value Proposition to Brand Partners
We believe that we are a preferred channel and a powerful growth opportunity for our brand partners. Unlike many sales channels, we do not rely on
discounts or promotions. Also, by introducing our clients to brands they may not have shopped for, we help our brand partners reach clients they may not
have otherwise reached. Further, we provide our brand partners with insights based on client feedback that help our brand partners improve and evolve their
merchandise to better meet consumer demand.
Our Strengths
Since we were founded in 2011, we have shipped millions of Fixes and direct purchases to our clients. We have achieved this success due to our following
key strengths:
•
•
•
•
•
our rich client and merchandise data;
our expert data science team and proprietary and predictive algorithms;
our team of 4,700+ stylists;
our unique combination of data science and human judgment; and
our superior business model.
Our Strategy
We aim to transform the way people find what they love. We plan to achieve this goal by continuing to:
expand our relationships with existing clients;
acquire new clients; and
expand our addressable market.
•
•
•
The Fix
How it Works
A Fix is a Stitch Fix-branded box containing a combination of apparel, shoes, and accessories personally selected for a client by her Stitch Fix stylist and
delivered to the client for her to try on in the comfort of her own home. She can keep some, all, or none of the items in the Fix and easily return any items
in a prepaid-postage bag provided in the Fix. One of our stylists individually selects each item in a Fix for a client from a broad range of merchandise
recommended to the stylist by our algorithms. These algorithmic recommendations are based on the client’s personal style profile, her own order behavior,
the aggregate historical behavior of our client base, and the aggregate historical data we have collected on each item of merchandise we have available.
We have numerous touch points with our clients. Before a client receives his or her first Fix, he or she shares the following information with us:
•
•
Style profile. Upon registering, each client fills out a style profile on either our website or mobile application. The style profile allows us to
introduce ourselves to a client, initiate a dialogue, and start gathering data.
Personal note to stylist. Each client can share a personal note with his or her stylist when placing a Fix order or after receiving a Fix. For example,
a client might request shoes for a friend’s wedding or shorts for an upcoming vacation. These personal notes enable us to better personalize a Fix.
After completing her initial style profile, a client chooses her preferred order frequency and can select the exact date by which she wants to receive her Fix.
We currently offer two types of Fix scheduling:
•
Auto-ship. A client can elect to auto-ship Fixes every two to three weeks, monthly, bi-monthly, or quarterly.
• On-demand. Our on-demand option allows clients to schedule a one-time Fix at any time, either instead of or in addition to utilizing the auto-ship
option. An on-demand client is prompted to schedule her next Fix each time she checks out, but is not obligated to do so.
We recognize that our clients have different needs, so our Fix frequency options are another way that we personalize the client experience. Each client can
increase or decrease the Fix frequency at any time, and can also easily reschedule any given shipment to better accommodate her needs. Each Fix is
delivered to the client’s address of choice.
We also offer Extras, a feature that allows clients to select items such as socks, bras, underwear, and other intimates that are then added to the items their
stylist selects for their Fix.
In addition to a personalized selection of apparel, shoes, and accessories, each Fix also includes a personal note from the stylist and a style card to provide
clients with outfit ideas for each item.
7
Once a client decides which items she wishes to keep she can easily check out and pick the delivery date for her next Fix via our website or mobile
application.
During the checkout process, each client is invited to provide feedback about the fit, price, style, and quality of the items received. Historically, over 80%
of shipments have resulted in direct client feedback. This feedback informs both our algorithms and stylists to improve each future Fix. We also gather
feedback through Style Shuffle, an interactive mobile and web-based feature in which participants rate an assortment of Stitch Fix merchandise, providing
additional data to strengthen our understanding of client tastes and style preferences.
We charge clients a styling fee of $20 in the United States and £10 in the UK for each Fix, which is credited toward the merchandise purchased. For our
Style Pass clients, we charge a $49 annual fee in the United States, the only country where Style Pass is offered, which provides unlimited styling for the
year and is credited toward the merchandise purchased over the course of the year. If the client chooses to keep all items chosen for them by their stylist,
she receives a discount on the entire shipment, which is 25% in the United States and 20% in the UK. The client can return the items she does not want or
exchange items for a different size if available, using the prepaid-postage bag delivered in her Fix. We request that clients return items to us that they do not
wish to purchase within three calendar days of receiving a Fix.
Direct Buy
In June 2019, we launched direct-buy functionality to allow clients the flexibility of purchasing items outside of a Fix. The first offering of this direct-buy
functionality was Buy it Again, allowing clients in the United States to buy previously purchased items in new colors, prints, and sizes. In February 2020,
we launched Complete Your Looks, which presents clients a personalized set of algorithmically generated items for direct purchase based on items they
have already bought from us, and in June 2020, we introduced Trending For You, which allows Men’s and Women’s clients to shop personalized looks
based on their style profiles, even if they had not previously purchased an item from us. No styling fee is charged for direct-buy purchases.
Our Merchandise, Brand Partners, and Exclusive Brands
The breadth of our merchandise selection is essential to our success. Our algorithms filter over one thousand SKUs to recommend a subset of relevant
merchandise to our stylists, who leverage the information to select the merchandise for a client’s Fix. We source merchandise from brand partners and also
create our own merchandise to serve unmet client needs. We offer apparel, shoes, and accessories across a range of price points. We currently serve our
clients in the following categories: Women’s, Petite, Maternity, Men’s, Plus, and Kids, and our merchandise addresses a diverse range of styles.
Brand Partners
We partner with established and emerging brands across multiple price points and styles. With many of our brand partners, we develop third-party branded
items exclusively sold to Stitch Fix clients. This exclusivity allows our clients to discover personally recommended products that are unavailable
elsewhere.
Exclusive Brands
We also design and bring to market our own styles, which we refer to as Exclusive Brands, in order to target specific client needs that are unmet by what
our merchandising team can source in the market. We use data science to identify and develop the new products for our Exclusive Brands. We then pair our
data with the expertise of our design teams to bring these new products to market. We expect our product development efforts will yield better products for
our clients as we acquire more data and feedback.
Exclusive Brands are a meaningful part of our business and we expect them to be a permanent part of our portfolio. However, we do not have specific
targets for the merchandise mix provided by our brand partners and our Exclusive Brands, and expect it will fluctuate over time. We will continue to
develop products when we identify opportunities or gaps in the market.
Sourcing
We purchase substantially all of our merchandise directly from our brand partners or Exclusive Brands merchandise vendors, who are responsible for the
entire manufacturing process.
For the production of our Exclusive Brands, we contract with merchandise vendors, who are responsible for the entire manufacturing process. Some of
these vendors operate their own manufacturing facilities and others subcontract the manufacturing to other parties. Our vendors generally agree to our
standard vendor terms, which govern our business relationship. Although we do not have long-term agreements with our vendors, we have long-standing
relationships with a diverse base of vendors that we believe to be mutually satisfactory.
All of our Exclusive Brand merchandise is produced according to our specifications, and we require that all of our vendors comply with applicable law and
observe strict standards of conduct. We have hired independent firms that conduct audits of the working conditions at the factories producing our Exclusive
Brands. If an audit reveals potential problems, we require that the vendor institute corrective action plans to bring the factory into compliance with our
standards, or we may discontinue our relationship with the
8
vendor. We require that all new factories producing Exclusive Brand merchandise for us be audited before Stitch Fix production begins.
Inventory Management and Fulfillment
We have eight fulfillment centers, seven of which are in the United States (located in California, Arizona, Texas, Pennsylvania, Georgia, and Indiana), and
the eighth in the UK.
In our fulfillment centers, our algorithms increase efficiencies in processes such as allocation, batch picking, transportation, shipping, returns, and ongoing
process improvement. We have a reverse logistics operation to manage returned merchandise. Our specialist returns teams in our dedicated return intake
areas accept, process, and reallocate returns to our inventory so the merchandise can be selected for another Fix. Our expertise in inventory management
allows us to turn inventory quickly, which drives working capital efficiency.
Seasonality
Seasonality in our business does not follow that of traditional retailers, such as typical concentration of revenue in the holiday quarter. We generally
experience lower quarter-over-quarter growth rates during our second fiscal quarter due to slower active client growth during the holiday season.
Intellectual Property
We protect our intellectual property through a combination of trademarks, domain names, copyrights, trade secrets, and patents, as well as contractual
provisions and restrictions on access to our proprietary technology. Our principal trademark assets include the trademarks “Stitch Fix” and “Fix,” which are
registered in the United States and some foreign jurisdictions, our logos and taglines, and multiple private label apparel and accessory brand names. We
have applied to register or registered many of our trademarks in the United States and other jurisdictions, and we will pursue additional trademark
registrations to the extent we believe they would be beneficial and cost-effective.
We file patents in the United States and abroad and intend to pursue additional patent protection to the extent we believe it would be beneficial and cost-
effective.
We are the registered holder of multiple domestic and international domain names that include “stitchfix” and similar variations. We also hold domain
registrations for many of our private-label brand names and other related trade names and slogans.
Our proprietary algorithm technologies, other than those incorporated into a patent application, are protected by trade secret laws.
In addition to the protection provided by our intellectual property rights, we enter into confidentiality and proprietary rights agreements with our
employees, consultants, contractors, and business partners. Our employees are also subject to invention assignment agreements. We further control the use
of our proprietary technology and intellectual property through provisions in both our client terms of use on our website and in our vendor terms and
conditions.
Government Regulation
As with all retailers and companies operating on the internet, we are subject to a variety of international and U.S. federal and state laws governing the
processing of payments, consumer protection, the privacy of consumer information, and other laws regarding unfair and deceptive trade practices.
Apparel, shoes, and accessories sold by us are also subject to regulation by governmental agencies in the United States and in the UK. These regulations
relate principally to product labeling, licensing requirements, flammability testing, and product safety. We are also subject to environmental laws, rules, and
regulations. Similarly, apparel, shoes, and accessories sold by us are also subject to import regulations in the United States and other countries concerning
the use of wildlife products for commercial and non-commercial trade, including the U.S. Fish and Wildlife Service. We do not estimate any significant
capital expenditures for environmental control matters either in the current fiscal year or in the near future.
Employees
As of August 1, 2020, we had approximately 8,000 employees, including over 4,700 stylists, 1,900 fulfillment center employees, 290 client experience
employees, 240 engineers, and 145 data scientists. As of such date, over 87% of our employees and 40% of our management team identified as female.
None of our employees is represented by a labor union. We have not experienced any work stoppages due to employee disputes, and we consider our
relations with our employees to be good.
Corporate and Available Information
We were incorporated in Delaware in 2011 under the name rack habit inc. We changed our name to Stitch Fix, Inc. in October 2011. Our principal
executive offices are located at 1 Montgomery Street, Suite 1500, San Francisco, California, 94104, and our telephone number is (415) 882-7765. Our
website is located at www.stitchfix.com, and our investor relations website is located at https://investors.stitchfix.com.
9
We file or furnish electronically with the U.S. Securities and Exchange Commission (the “SEC”) annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make
copies of these reports available free of charge through our investor relations website as soon as reasonably practicable after we file or furnish them with
the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding Stitch Fix
and other issuers that file electronically with the SEC.
Information contained on or accessible through our websites is not incorporated into, and does not form a part of, this Annual Report or any other report or
document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
10
Item 1A. Risk Factors.
The COVID-19 pandemic has caused significant disruption to our operations and is negatively impacting our business, key financial and operating
metrics, and results of operations in numerous ways that remain unpredictable.
Our business has been and may continue to be materially impacted by the effects of the COVID-19 outbreak, which was declared a global pandemic in
March 2020. This pandemic and related measures taken to contain the spread of COVID-19, such as government-mandated business closures, orders to
“shelter in place,” and travel and transportation restrictions, have negatively affected the U.S. and global economies, disrupted global supply chains, and
led to unprecedented levels of unemployment. We have also taken certain actions in response to these measures, such as temporarily closing three of our
eight fulfillment centers to assess our ability to operate under shelter-in-place orders and develop protocols to protect the welfare of our warehouse
employees.
These factors have resulted in significant disruption that has negatively impacted and may continue to negatively impact our business, including our
operational capacity. While all of our fulfillment centers are currently open, they were operating at a reduced capacity in the third fiscal quarter of 2020 as
employees worked on an opt-in basis and with social distancing protocols that required fewer employees to be in a fulfillment center than previously. We
also provided all of our fulfillment center employees four weeks of flexible paid time off. Due to these measures, we had significantly less capacity in our
warehouses during the third quarter of fiscal year 2020, which resulted in delayed Fix shipments, a significant Fix backlog, delayed inventory and return
processing, extended wait times for clients, and inventory management challenges. During the fourth quarter of fiscal year 2020, we experienced smaller,
intermittent interruptions at some of our fulfillment centers when we temporarily closed for part of a work day or for a full day to perform safety and
cleaning procedures following an employee testing positive for COVID-19. All of these factors negatively impacted our ability to fulfill new and existing
client demand and our revenue, revenue per active client, and gross margin in the fiscal year ended August 1, 2020.
There continues to be a great deal of uncertainty around the breadth and duration of the COVID-19 pandemic and its impact on U.S. and global economic
activity and consumer behavior. Unemployment rates in the U.S. and UK have increased significantly, which has dampened and could continue to dampen
consumer spending and demand for our service, as could the possibility of a national or global economic recession or depression. To the extent the impact
of COVID-19 continues or worsens, or if there is a resurgence after any containment, consumer behavior may be altered for an extended period, which
would impact our results of operations and financial condition.
Currently, most of our employees in our corporate offices are working remotely. An extended period of remote work arrangements could strain our business
continuity plans, increase operational risk, including heightened vulnerability to cyber attacks, reduce productivity, and impair our ability to manage our
business. Our ability to return to normalized operations and the timing of such a return cannot be predicted at this time.
Additionally, the COVID-19 pandemic and resulting economic disruption has also led to significant volatility in the capital markets and has adversely
impacted our stock price. While we have taken measures to preserve our access to liquidity, our cash generated from operations has been negatively
impacted and future cash flows will be impacted by the development of the pandemic.
The COVID-19 pandemic has negatively impacted our results of operations, but the extent and duration of this impact remain uncertain. It will depend on
factors such as the length of time the pandemic continues; how national, state and local governments continue to respond; the impact of the crisis on the
economy and consumer behavior; and the effect on our clients, employees, vendors, and other partners. For example, we continue to work with our vendors
to minimize inventory disruptions, and while we have not been significantly impacted by delays in inventory receipts, future delays and supply constraints
may negatively affect our ability to obtain and manage inventory.
The impact of the COVID-19 pandemic may also exacerbate other risks discussed below, any of which could have a material effect on us. Though we
continue to monitor the COVID-19 pandemic closely, the situation is changing rapidly, and additional impacts may arise that we are not aware of currently.
In addition, if there is a future resurgence of COVID-19 following its initial containment, the negative impacts on our business may be exacerbated.
Our failure to adequately and effectively staff our fulfillment centers, through third parties or with our own employees, could adversely affect our client
experience and operating results.
We currently receive and distribute merchandise at seven fulfillment centers in the United States. We are in the process of migrating one of these fulfillment
centers, which is operated by a third party, to a nearby facility that we recently opened and are operating. We also have an eighth fulfillment center in the
United Kingdom, which is operated by a third party. During the third quarter of our 2020 fiscal year, in response to the COVID-19 pandemic, we
temporarily closed three of our eight fulfillment centers, offered our fulfillment center employees four weeks of paid time off, and reduced the maximum
number of employees in each fulfillment center in order to implement social distancing protocols. These changes resulted in operational constraints, which
in turn temporarily reduced our ability to ship merchandise to clients and earn revenue during the third quarter of our 2020 fiscal year. During the fourth
quarter of fiscal year 2020, we experienced smaller, intermittent interruptions at some of our fulfillment centers when we temporarily closed for part of a
work day or for a full day to perform safety and cleaning procedures following notice that an employee tested positive for COVID-19. If there is a
resurgence of COVID-19 in the areas where our fulfillment centers are located, or we or our third-party
11
partner are unable to adequately staff our fulfillment centers to meet demand in the future, or if the cost of such staffing is higher than historical or
projected costs due to mandated wage increases, regulatory changes, international expansion, or other factors, these effects could be exacerbated and our
operating results could be further harmed. For example, during the fourth quarter of fiscal 2020, we experienced some difficulty hiring employees in two of
our warehouse locations, which we attribute to COVID-19 concerns and to increased competition and rising wages for eCommerce fulfillment center
workers as eCommerce demand accelerates. In addition, operating fulfillment centers comes with potential risks, such as workplace safety issues and
employment claims for the failure or alleged failure to comply with labor laws or laws respecting union organizing activities. Furthermore, if we fail to
comply with wage and hour laws for our nonexempt employees, many of whom work in our fulfillment centers, we could be subject to legal risk, including
claims for back wages, unpaid overtime pay, and missed meal and rest periods, which could be on a class or representative basis. Any such issues may
result in delays in shipping times, reduced packing quality, or costly litigation, and our reputation and operating results may be harmed.
By using a third-party operator for some of our fulfillment centers, we also face additional risks associated with not having complete control over
operations at those fulfillment centers. Any deterioration in the financial condition or operations of that third party, or the loss of the relationship with that
third party, would have significant impact on our operations.
We rely on consumer discretionary spending and have been, and may in the future be, adversely affected by economic downturns and other
macroeconomic conditions or trends.
Our business and operating results are subject to global economic conditions and their impact on consumer discretionary spending. Some of the factors that
may negatively influence consumer spending include high levels of unemployment; higher consumer debt levels; reductions in net worth, declines in asset
values, and related market uncertainty; home foreclosures and reductions in home values; fluctuating interest rates and credit availability; fluctuating fuel
and other energy costs; fluctuating commodity prices; and general uncertainty regarding the overall future political and economic environment. We have
experienced many of these factors due to the COVID-19 pandemic and related responses and have seen negative impacts on client demand as a result.
Furthermore, any increases in consumer discretionary spending during times of crisis may be temporary, such as those related to government stimulus
programs, and consumer spending may decrease again if the government does not continue such stimulus programs. Economic conditions in certain regions
may also be affected by natural disasters, such as hurricanes, tropical storms, earthquakes, and wildfires; other public health crises; and other major
unforeseen events. Consumer purchases of discretionary items, including the merchandise that we offer, generally decline during recessionary periods or
periods of economic uncertainty, when disposable income is reduced or when there is a reduction in consumer confidence.
Adverse economic changes could reduce consumer confidence, and could thereby negatively affect our operating results. In challenging and uncertain
economic environments, we cannot predict when macroeconomic uncertainty may arise, whether or when such circumstances may improve or worsen or
what impact such circumstances could have on our business.
We have a short operating history in an evolving industry and, as a result, our past results may not be indicative of future operating performance.
We have a short operating history in a rapidly evolving industry that may not develop in a manner favorable to our business. Our relatively short operating
history makes it difficult to assess our future performance. You should consider our business and prospects in light of the risks and difficulties we may
encounter.
Our future success will depend in large part upon our ability to, among other things:
•
•
•
•
•
•
•
cost-effectively acquire new clients and engage with existing clients;
overcome the impacts of the COVID-19 pandemic;
increase our market share;
increase consumer awareness of our brand and maintain our reputation;
anticipate and respond to macroeconomic changes;
successfully expand our offering and geographic reach;
anticipate and respond to changing style trends and consumer preferences;
• manage our inventory effectively;
•
•
•
•
•
compete effectively;
avoid interruptions in our business from information technology downtime, cybersecurity breaches, or labor stoppages;
effectively manage our growth;
continue to enhance our personalization capabilities;
hire, integrate, and retain talented people at all levels of our organization;
12
• maintain the quality of our technology infrastructure;
•
•
develop new features to enhance the client experience; and
retain our existing merchandise vendors and attract new vendors.
If we fail to address the risks and difficulties that we face, including those associated with the challenges listed above as well as those described elsewhere
in this “Risk Factors” section, our business and our operating results will be adversely affected.
If we fail to effectively manage our growth, our business, financial condition, and operating results could be harmed.
To effectively manage our growth, we must continue to implement our operational plans and strategies, improve and expand our infrastructure of people
and information systems, and expand, train, and manage our employee base. From inception to date, we have rapidly and significantly increased our
employee headcount to support the growth of our business. We added a significant number of employees during 2019 and may do so again in the future.
Since our initial public offering in 2017, we have expanded across all areas of our business. To support continued growth, we must effectively integrate,
develop, and motivate a large number of new employees while maintaining our corporate culture, which is made more challenging in the face of shelter-in-
place orders issued by governments in response to the COVID-19 pandemic. The risks associated with a rapidly growing workforce will be particularly
acute as we expand internationally, as we are less familiar with the labor markets outside of the United States, and if we choose to expand into new
merchandise categories.
We are also required to manage numerous relationships with various vendors and other third parties. Further growth of our operations, vendor base,
fulfillment centers, information technology systems, or internal controls and procedures may not be adequate to support our operations. For example, in
May 2019, we launched our service in the UK, which involves working with international vendors, establishing offices and fulfillment centers in the UK,
and complying with UK and European Union (“EU”) laws and regulations. Our launch of Stitch Fix Kids in July 2018 also required us to increase our
vendor base, expand our fulfillment center operations, and evaluate compliance with additional regulatory requirements, among other things. If we are
unable to manage the growth of our organization effectively, our business, financial condition, and operating results may be adversely affected.
Our continued growth depends on attracting new clients.
Our success depends on our ability to attract new clients in a cost-effective manner. To expand our client base, we must appeal to and acquire clients who
have historically used other means to purchase apparel, shoes, and accessories, such as traditional brick-and-mortar apparel retailers or the websites of our
competitors. We also face competition for clients from other retailers who offer or plan to offer similar services as ours. We reach new clients through paid
marketing, referral programs, organic word of mouth, and other methods of discovery, such as mentions in the press or internet search engine results.
Starting in calendar 2017, we began to increase our paid marketing expenses by investing more in digital marketing and launching our first television
advertising campaigns. Although we have reduced our marketing spend at times and most recently reduced marketing in light of the operational constraints
we experienced during our third fiscal quarter of 2020 due to the effects of the COVID-19 pandemic, we expect to increase our spending on digital,
television, and other paid marketing channels in the future and cannot be certain that these efforts will yield more clients, continue to achieve meaningful
payback on our investments, or be as cost effective. For example, in previous periods, we saw higher costs in some key digital marketing channels.
Although we expect to increase marketing spend over time, our marketing activity and spend may vary from period to period, which may result in faster or
slower rates of active client growth in any given period. Moreover, new clients may not purchase from us as frequently or spend as much with us as
existing clients, and the revenue generated from new clients may not be as high as the revenue generated from our existing clients. These factors may harm
our growth prospects and our business could be adversely affected.
We may be unable to maintain a high level of engagement with our clients and increase their spending with us, which could harm our business,
financial condition, or operating results.
A high proportion of our revenue comes from repeat purchases by existing clients, especially those existing clients who are highly engaged and purchase a
significant amount of merchandise from us. The large majority of our clients choose to receive Fixes on a recurring basis, which we call “auto-ship.” In the
third quarter of fiscal 2020, we saw a temporary increase in the rate of auto-ship cancellations. If the COVID-19 pandemic and related economic impact
continue or get worse, auto-ship cancellations may increase again, negatively impacting our business.
If existing clients no longer find our service and merchandise appealing or appropriately priced, they may make fewer purchases and may stop using our
service. Even if our existing clients continue to find our service and merchandise appealing, they may decide to receive fewer Fixes and purchase less
merchandise over time as their demand for new apparel declines. For example, as a result of changes to daily life due to the COVID-19 pandemic,
including increased rates of working remotely from home, many clients’ demand for new apparel may be reduced or eliminated. In addition, as we expand
our assortment to include more products with lower price points, the amount clients spend with us may decrease. If clients who receive Fixes most
frequently and purchase a significant amount of merchandise from us were to make fewer or lower priced purchases or stop using our service, our financial
results could be negatively affected. In addition, we seek to attract high-quality clients who will remain clients for the long term, but our efforts may not be
successful or produce the results we anticipate. A decrease in the number of clients, a decrease in client spending on the
13
merchandise we offer, or our inability to attract high-quality clients could negatively affect our operating results. Further, we believe that our future success
will depend in part on our ability to increase sales to our existing clients over time and, if we are unable to do so, our business may suffer.
We expect to increase our paid marketing to help grow our business, but these efforts may not be successful or cost effective.
Promoting awareness of our service is important to our ability to grow our business, drive client engagement, and attract new clients. We believe that much
of the growth in our client base during our first five years originated from referrals, organic word of mouth, and other methods of discovery, as our
marketing efforts and expenditures were relatively limited. In recent years, we increased our paid marketing initiatives and intend to continue to do so. Our
marketing efforts currently include client referrals, affiliate programs, partnerships, display advertising, television, print, radio, video, content, direct mail,
social media, email, mobile “push” communications, search engine optimization, and keyword search campaigns. In February 2019, we launched our first
integrated brand marketing campaign. We have limited or no experience marketing our services using some of these methods and our efforts may be
unsuccessful. External factors beyond our control, including general economic conditions and decreased discretionary consumer spending, may also impact
the success of our marketing initiatives or how much we decide to spend on marketing in a given period. For example, in response to the COVID-19
pandemic, we reduced our marketing expenditures in the third quarter of our fiscal year 2020. This led to fewer new clients being acquired in the third
quarter, which we anticipate may impact demand for several subsequent quarters.
Our marketing initiatives may become increasingly expensive and generating a meaningful return on those initiatives may be difficult, such as the increased
costs we have seen in certain digital marketing channels. We may also adjust our marketing activity from period to period as we launch new initiatives or
offerings, such as direct buy, run tests, or make decisions on marketing investments in response to anticipated rates of return, such as when we identify
favorable cost per acquisition trends. For example, we tend to reduce our advertising during the holiday season, when many other retailers compete for
marketing opportunities. Even if we successfully increase revenue as a result of our paid marketing efforts, it may not offset the additional marketing
expenses we incur.
We currently obtain a significant number of visits to our websites via organic search engine results. Search engines frequently change the algorithms that
determine the ranking and display of results of a user’s search, which could reduce the number of organic visits to our websites, in turn reducing new client
acquisition and adversely affecting our operating results.
Social networks are important as a source of new clients and as a means by which to connect with current clients, and their importance may be increasing.
We may be unable to effectively maintain a presence within these networks, which could lead to lower than anticipated brand affinity and awareness, and in
turn could adversely affect our operating results.
With respect to our email marketing efforts, if we are unable to successfully deliver emails to our clients or if clients do not engage with our emails,
whether out of choice, because those emails are marked as low priority or spam, or for other reasons, our business could be adversely affected.
Compromises of our data security could cause us to incur unexpected expenses and may materially harm our reputation and operating results.
In the ordinary course of our business, we and our vendors collect, process, and store certain personal information and other data relating to individuals,
such as our clients and employees, including client payment card information. We rely substantially on commercially available systems, software, tools,
and monitoring to provide security for our processing, transmission, and storage of personal information and other confidential information. There can be
no assurance, however, that we or our vendors will not suffer a data compromise, that hackers or other unauthorized parties will not gain access to personal
information or other data, including payment card data or confidential business information, or that any such data compromise or unauthorized access will
be discovered in a timely fashion. The techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not
identified until they are launched against a target, and we and our vendors may be unable to anticipate these techniques or to implement adequate
preventative measures. As we have significantly increased the number of employees and contractors working remotely due to the COVID-19 pandemic,
and as our vendors and other business partners move to remote work as well, we and our partners may be more vulnerable to cyber attacks. In addition, our
employees, contractors, vendors, or other third parties with whom we do business may attempt to circumvent security measures in order to misappropriate
such personal information, confidential information, or other data, or may inadvertently release or compromise such data.
Compromise of our data security or of third parties with whom we do business, failure to prevent or mitigate the loss of personal or business information,
and delays in detecting or providing prompt notice of any such compromise or loss could disrupt our operations, damage our reputation, and subject us to
litigation, government action, or other additional costs and liabilities that could adversely affect our business, financial condition, and operating results.
14
Our industry is highly competitive and if we do not compete effectively our operating results could be adversely affected.
The retail apparel industry is highly competitive. We compete with eCommerce companies that market the same or similar merchandise and services that
we offer; local, national, and global department stores; specialty retailers; discount chains; independent retail stores; and the online offerings of these
traditional retail competitors. Additionally, we experience competition for consumer discretionary spending from other product and experiential categories.
We believe our ability to compete depends on many factors within and beyond our control, including:
•
•
•
•
effectively differentiating our service and value proposition from those of our competitors;
attracting new clients and engaging with existing clients;
our direct relationships with our clients and their willingness to share personal information with us;
further developing our data science capabilities;
• maintaining favorable brand recognition and effectively marketing our services to clients;
•
•
•
•
•
•
delivering merchandise that each client perceives as personalized to him or her;
the amount, diversity, and quality of brands and merchandise that we or our competitors offer;
our ability to expand and maintain appealing Exclusive Brands and exclusive-to-Stitch Fix merchandise;
the price at which we are able to offer our merchandise;
the speed and cost at which we can deliver merchandise to our clients and the ease with which they can use our services to return merchandise;
and
anticipating and quickly responding to changing apparel trends and consumer shopping preferences.
Many of our current competitors have, and potential competitors may have, longer operating histories; larger fulfillment infrastructures; greater technical
capabilities; faster shipping times; lower-cost shipping; larger databases; more purchasing power; higher profiles; greater financial, marketing, institutional,
and other resources; and larger customer bases than we do. Mergers and acquisitions by these companies may lead to even larger competitors with more
resources. These factors may allow our competitors to derive greater revenue and profits from their existing customer bases; acquire customers at lower
costs; or respond more quickly than we can to new or emerging technologies, changes in apparel trends and consumer shopping behavior, and changes in
supply conditions. These competitors may engage in more extensive research and development efforts, enter or expand their presence in the personalized
retail market, undertake more far-reaching marketing campaigns, and adopt more aggressive pricing policies, which may allow them to build larger
customer bases or generate revenue from their existing customer bases more effectively than we do. If we fail to execute on any of the above better than our
competitors, our operating results may be adversely affected.
If we are unable to develop and introduce new merchandise offerings or expand into new markets in a timely and cost-effective manner, our business,
financial condition, and operating results could be negatively impacted.
The largest portion of our revenue today comes from the sale of Women’s apparel. From 2015 to 2018, we expanded our merchandise offering into
categories including Petite, Maternity, Men’s, Plus, Premium Brands, and Kids; began offering different product types including, accessories, and Extras;
and expanded the number of brands we offer. In May 2019, we launched our service in the UK market. In June 2019, we introduced a direct-buy
functionality with Buy It Again allowing clients in the United States to buy previously purchased items in new colors, prints, and sizes, and in February
2020, we expanded Complete Your Looks, which allows clients to discover and shop personalized outfits with new items that complement their prior
purchases, to all U.S. Women’s and Men’s clients. In addition, in early June 2020, we introduced Trending For You, which allows Men’s and Women’s
clients to shop personalized looks based on their style profiles. We continue to explore additional offerings to serve our existing clients, attract new clients,
and expand our geographic scope.
New offerings may not have the same success, or gain traction as quickly, as our current offerings. If the merchandise we offer is not accepted by our
clients or does not attract new clients, or if we are not able to attract clients in new markets such as the UK, our sales may fall short of expectations, our
brand and reputation could be adversely affected, and we may incur expenses that are not offset by sales. If the launch of a new category or offering or in a
new geography requires investments greater than we expect, our operating results could be negatively impacted. Also, our business may be adversely
affected if we are unable to attract brands and other merchandise vendors that produce sufficient high-quality, appropriately priced, and on-trend
merchandise. For example, vendors in the UK may not be familiar with our company or brand, which may make it difficult for us to obtain the merchandise
we seek or be able to purchase products at an appropriate price.
Our current merchandise offerings have a range of margin profiles and we believe new offerings will also have a broad range of margin profiles that will
affect our operating results. New businesses generally contribute lower margins and imported merchandise may be subject to tariffs or duties that lower
margins. Additionally, as we enter into new categories and markets, we may not have as high purchasing power as we do in our current offerings, which
could increase our costs of goods sold and further reduce our margins.
15
Expansion of our merchandise offerings and geographic scope may also strain our management and operational resources, specifically the need to hire and
manage additional merchandise buyers to source new merchandise and to allocate new categories across our distribution network. We may also face greater
competition in specific categories or regions from companies that are more focused on these areas. For example, now that we have launched in the UK, we
compete with existing businesses that have been providing similar services in the region and may be more familiar with trends and customer preferences in
that market. Also, our entry into the Kids category means we now compete with a number of additional companies that have been in the Kids category for a
longer period of time and may have more experience in children’s clothing. If any of the above were to occur, it could damage our reputation, limit our
growth, and have an adverse effect on our operating results.
Expansion of our operations internationally requires management attention and resources, involves additional risks, and may be unsuccessful.
In May 2019, we launched our service in the UK market, and we may choose to expand to other international markets in the future. Prior to launching in
the UK, we had no experience operating internationally or selling our merchandise outside of the United States, and if we continue to expand
internationally, we will need to adapt to different local cultures, standards, laws, and policies. The business model we employ may not appeal as strongly to
consumers in international markets. Furthermore, to succeed with clients in international locations, such as the UK, we will need to locate fulfillment
centers in foreign markets and hire local employees, and we will have to invest in these facilities and employees before proving we can successfully run
foreign operations. We may not be successful in expanding into additional international markets or in generating revenue from foreign operations for a
variety of reasons, including:
•
•
•
•
•
•
the need to localize our merchandise offerings, including translation into foreign languages and adaptation for local practices;
different consumer demand dynamics, which may make our model and the merchandise we offer less successful compared to the United States;
competition from local incumbents that understand the local market and may operate more effectively;
regulatory requirements, taxes, trade laws, trade sanctions and economic embargoes, tariffs, export quotas, custom duties, or other trade
restrictions, or any unexpected changes thereto such as Brexit (as defined below);
laws and regulations regarding anti-bribery and anti-corruption compliance;
differing labor regulations where labor laws may be more advantageous to employees as compared to the United States and result in increased
labor costs;
• more stringent regulations relating to privacy and data security and access to, or use of, commercial and personal information, particularly in
Europe and the United States;
•
•
•
differing payment requirements and customer behavior relating to payments and fraud;
changes in a specific country’s or region’s political, economic, and public health conditions; and
risks resulting from changes in currency exchange rates.
For example, clients in the UK are accustomed to more return shipping options than are typically offered in the United States, which required us to increase
the number of shipping vendors we use in that market, increasing our costs. If we continue to invest substantial time and resources to establish and expand
our operations internationally and are unable to do so successfully and in a timely manner, our operating results would suffer.
We may not be able to sustain our revenue growth rate and we may not be profitable in the future.
Our past revenue growth and profitability should not be considered indicative of our future performance. Our net revenue increased in fiscal year 2020
compared to the prior year, and our rate of revenue growth has varied in recent periods. Our revenue increased by 8.5% in fiscal 2020 compared to fiscal
2019, 28.6% in fiscal 2019 compared to fiscal 2018, and 25.5% in fiscal 2018 compared to fiscal 2017. As we grow our business, our revenue growth rates
may slow in future periods or decline due to a number of reasons, which may include the short- and long-term impacts of the COVID-19 pandemic,
slowing demand for our merchandise and service, increasing competition, a decrease in the growth rate of our overall market, and our failure to capitalize
on growth opportunities, as well as the maturation of our business.
Moreover, our expenses have increased in recent periods, and we expect expenses to increase substantially in the near term, particularly as we make
significant investments in our marketing initiatives; expand our geographic markets, operations, and infrastructure; develop and introduce new merchandise
offerings; and hire additional personnel. We may not always pursue short-term profits but are often focused on long-term growth, which may impact our
financial results. In addition, in connection with operating as a public company, we are incurring significant additional legal, accounting, and other
expenses that we did not incur as a private company. If our revenue does not increase to offset increases in our operating expenses, we may not be
profitable in future periods.
16
We must successfully gauge apparel trends and changing consumer preferences.
Our success is, in large part, dependent upon our ability to identify apparel trends, predict and gauge the tastes of our clients, and provide a service that
satisfies client demand in a timely manner. However, lead times for many of our purchasing decisions may make it difficult for us to respond rapidly to new
or changing apparel trends or client acceptance of merchandise chosen by our merchandising buyers. In addition, external events may disrupt or change
client preferences and behaviors in ways we are not able to anticipate. For example, the COVID-19 pandemic has resulted in significant changes to daily
life, working arrangements, and social events, which has impacted the type of apparel our clients seek to purchase. We generally enter into purchase
contracts significantly in advance of anticipated sales and frequently before apparel trends are confirmed by client purchases. In the past, we have not
always predicted our clients’ preferences and acceptance levels of our merchandise with accuracy. Further, we use our data science to predict our clients’
preferences and gauge demand for our merchandise, and there is no guarantee that our data science and algorithms will accurately anticipate client demand
and tastes. Our entry into the UK also requires us to become familiar with different apparel trends and customer preferences. In addition, consumer
shopping behavior may continue to evolve and we may need to adapt our service to such changes, which could be further complicated by any future
expansion into additional geographic markets. To the extent we misjudge the market for the service we offer or fail to execute on trends and deliver
attractive merchandise to clients, our sales will decline and our operating results will be adversely affected.
If we are unable to manage our inventory effectively, our operating results could be adversely affected.
To ensure timely delivery of merchandise, we generally enter into purchase contracts well in advance of a particular season and often before apparel trends
are confirmed by client purchases. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise
purchases. For example, in response to the initial consumer reaction to COVID-19, we cancelled many inventory orders to be prepared for what we
expected would be lower client demand. Consequently, when client demand increased, we were not as well optimized with our inventory as we would have
liked to meet the demand. We have also sought to rapidly shift elements of our inventory away from office attire and towards athleisure to accommodate
consumer demand changes caused by the COVID-19 pandemic. In the past, we have not always predicted our clients’ preferences and acceptance levels of
our trend items with accuracy, which has resulted in significant inventory write offs and lower gross margins. Furthermore, we do not use the same
liquidation methods as traditional retailers, such as markdowns. We rely on our merchandising team to order styles and products that our clients will
purchase and we rely on our data science to inform the levels of inventory we purchase, including when to reorder items that are selling well and when to
write off items that are not selling well. If our merchandise team does not predict client demand and tastes well or if our algorithms do not help us reorder
the right products or write off the right products timely, we may not effectively manage our inventory and our operating results could be adversely affected.
Our business depends on a strong brand and we may not be able to maintain our brand and reputation.
We believe that maintaining the Stitch Fix brand and reputation is critical to driving client engagement and attracting clients and merchandise vendors.
Building our brand will depend largely on our ability to continue to provide our clients with an engaging and personalized client experience, including
valued personal styling services, high-quality merchandise, and appropriate price points, which we may not do successfully. Client complaints or negative
publicity about our styling services, merchandise, delivery times, or client support, especially on social media platforms, could harm our reputation and
diminish client use of our services, the trust that our clients place in Stitch Fix, and vendor confidence in us.
Our brand depends in part on effective client support, which requires significant personnel expense. Failure to manage or train our client support
representatives properly or inability to handle client complaints effectively could negatively affect our brand, reputation, and operating results.
If we fail to cost-effectively promote and maintain the Stitch Fix brand, our business, financial condition, and operating results may be adversely affected.
If we fail to attract and retain key personnel, effectively manage succession, or hire, develop, and motivate our employees, our business, financial
condition, and operating results could be adversely affected.
Our success, including our ability to anticipate and effectively respond to changing style trends and deliver a personalized styling experience, depends in
part on our ability to attract and retain key personnel on our executive team and in our merchandising, algorithms, engineering, marketing, styling, and
other organizations.
We do not have long-term employment or non-competition agreements with any of our personnel. Senior employees have left Stitch Fix in the past and
others may in the future, which we cannot necessarily anticipate and whom we may not be able to promptly replace. For example, in December 2019, our
Chief Financial Officer and our Chief Marketing Officer left the company and we are continuing to search for candidates to permanently replace them. The
loss of one or more of our key personnel or the inability to promptly identify a suitable successor to a key role could have an adverse effect on our business.
In particular, our Founder and Chief Executive Officer has unique and valuable experience leading our company from its inception through today. If she
were to depart or otherwise reduce her focus on Stitch Fix, our business may be disrupted. We do not currently maintain key-person life insurance policies
on any member of our senior management team or other key employees.
17
We also face significant competition for personnel, particularly in the San Francisco Bay Area where our headquarters are located. To attract top talent, we
have had to offer, and believe we will need to continue to offer, competitive compensation and benefits packages before we can validate the productivity of
those employees. We may also need to increase our employee compensation levels in response to competition. We cannot be sure that we will be able to
attract, retain, and motivate a sufficient number of qualified personnel in the future, or that the compensation costs of doing so will not adversely affect our
operating results. Additionally, we may not be able to hire new employees quickly enough to meet our needs. If we fail to effectively manage our hiring
needs or successfully integrate new hires, our efficiency, ability to meet forecasts, and employee morale, productivity, and retention could suffer, which
may have an adverse effect on our business, financial condition, and operating results.
If we fail to effectively manage our stylists, our business, financial condition and operating results could be adversely affected.
Approximately 4,700 of our employees are stylists, most of whom work remotely and on a part-time basis for us and are paid hourly. They track and report
the time they spend working for us. These employees are classified as nonexempt under federal and state law. If we fail to effectively manage our stylists,
including by ensuring accurate tracking and reporting of their hours worked and proper processing of their hourly wages, then we may face claims alleging
violations of wage and hour employment laws, including, without limitation, claims of back wages, unpaid overtime pay, and missed meal and rest periods.
Any such employee litigation could be attempted on a class or representative basis. Such litigation can be expensive and time-consuming regardless of
whether the claims against us are valid or whether we are ultimately determined to be liable, and could divert management’s attention from our business.
We could also be adversely affected by negative publicity, litigation costs resulting from the defense of these claims, and the diversion of time and
resources from our operations.
We recently announced that we would be eliminating substantially all of our stylist positions in California and hiring more stylists in our other regions of
the United States to replace these positions. This could result in negative publicity and have other consequences for our business. For example, during our
fourth fiscal quarter of 2020, as we reduced our number of stylists in California and increased our hiring of stylists in other locations, we experienced
challenges managing overall styling capacity as we tried to meet increases in client demand. If we fail to effectively execute our strategy of hiring and
training new stylists in regions outside of California to augment our styling team, the personalized styling experience we offer to our clients may be
impacted and our business may suffer.
Our business, including our costs and supply chain, is subject to risks associated with sourcing, manufacturing, and warehousing.
We currently source nearly all of the merchandise we offer from third-party vendors, many of whom use manufacturers in the same geographic region, and
as a result we may be subject to price fluctuations, including from tariffs, or demand disruptions. Our operating results would be negatively impacted by
increases in the cost of our merchandise, and we have no guarantees that costs will not rise. In addition, as we expand into new categories, product types,
and geographies, we expect that we may not have strong purchasing power in these new areas, which could lead to higher costs than we have historically
seen in our current categories. We may not be able to pass increased costs on to clients, which could adversely affect our operating results.
The fabrics used by our vendors are made of raw materials including petroleum-based products and cotton. Significant price fluctuations or shortages in
petroleum, cotton, or other raw materials could significantly increase our cost of goods sold. Moreover, in the event of a significant disruption in the supply
of the fabrics or raw materials used in the manufacture of the merchandise we offer, our vendors might not be able to locate alternative suppliers of
materials of comparable quality at an acceptable price. For example, natural disasters have in the past increased raw material costs, impacting pricing with
certain of our vendors, and caused shipping delays for certain of our merchandise. Similarly, the occurrence of a contagious disease or illness could cause
delays or increase costs in the manufacture of certain merchandise. For example, the COVID-19 pandemic caused delays in some shipments from our
suppliers. In addition, the labor costs to produce our products may fluctuate. Any delays, interruption, damage to, or increased costs in the manufacture of
the merchandise we offer could result in higher prices to acquire the merchandise, or non-delivery of merchandise altogether, and could adversely affect our
operating results.
In addition, we cannot guarantee that merchandise we receive from vendors will be of sufficient quality or free from damage, or that such merchandise will
not be damaged during shipping, while stored in one of our fulfillment centers, or when returned by customers. While we take measures to ensure
merchandise quality and avoid damage, including evaluating vendor product samples, conducting inventory inspections, and inspecting returned product,
we cannot control merchandise while it is out of our possession or prevent all damage while in our fulfillment centers. We may incur additional expenses
and our reputation could be harmed if clients and potential clients believe that our merchandise is not of high quality or may be damaged.
If we are unable to acquire new merchandise vendors or retain existing merchandise vendors, our operating results may be harmed.
We offer merchandise from hundreds of established and emerging brands. In order to continue to attract and retain quality merchandise brands, we must
help merchandise vendors increase their sales and offer them a high-quality, cost-effective fulfillment process.
If we do not continue to acquire new merchandise vendors or retain our existing merchandise vendors on acceptable commercial terms, we may not be able
to maintain a broad selection of products for our clients, and our operating results may suffer.
18
In addition, our Exclusive Brands are sourced from third-party vendors and contract manufacturers. The loss of one of our Exclusive Brand vendors, or our
inability to source any additional vendors needed for our Exclusive Brands, could require us to source Exclusive Brand merchandise from another vendor
or manufacturer, which could cause inventory delays, impact our clients’ experiences, and otherwise harm our operating results.
Any failure by us or our vendors to comply with product safety, labor, or other laws, or our standard vendor terms and conditions, or to provide safe
factory conditions for our or their workers, may damage our reputation and brand, and harm our business.
The merchandise we sell to our clients is subject to regulation by the Federal Consumer Product Safety Commission, the Federal Trade Commission, and
similar state and international regulatory authorities. As a result, such merchandise could in the future be subject to recalls and other remedial actions.
Product safety, labeling, and licensing concerns may result in us voluntarily removing selected merchandise from our inventory. Such recalls or voluntary
removal of merchandise can result in, among other things, lost sales, diverted resources, potential harm to our reputation, and increased client service costs
and legal expenses, which could have a material adverse effect on our operating results.
Some of the merchandise we sell, including the children’s merchandise sold through Stitch Fix Kids, may expose us to product liability claims and
litigation or regulatory action relating to personal injury or environmental or property damage. Although we maintain liability insurance, we cannot be
certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable
terms or at all. In addition, some of our agreements with our vendors may not indemnify us from product liability for a particular vendor’s merchandise or
our vendors may not have sufficient resources or insurance to satisfy their indemnity and defense obligations.
We purchase our merchandise from numerous domestic and international vendors. Our standard vendor terms and conditions require vendors to comply
with applicable laws. We have hired independent firms that conduct audits of the working conditions at the factories producing our Exclusive Brand
products. If an audit reveals potential problems, we require that the vendor institute corrective action plans to bring the factory into compliance with our
standards, or we may discontinue our relationship with the vendor. The loss of an Exclusive Brand vendor due to failure to comply with our standards could
cause inventory delays, impact our clients’ experiences, and otherwise harm our operating results. In addition, failure of our vendors to comply with
applicable laws and regulations and contractual requirements could lead to litigation against us, resulting in increased legal expenses and costs.
Furthermore, the failure of any such vendors to provide safe and humane factory conditions and oversight at their facilities could damage our reputation
with clients or result in legal claims against us.
We may incur significant losses from fraud.
We have in the past incurred and may in the future incur losses from various types of fraud, including stolen credit card numbers, claims that a client did
not authorize a purchase, merchant fraud, and clients who have closed bank accounts or have insufficient funds in open bank accounts to satisfy payments.
Our clients may re-use their login information (i.e., username and password combination) across multiple websites and, therefore, when a third party
website experiences a data breach, that information could be exposed to bad actors and be used to fraudulently access our clients’ accounts. In addition to
the direct costs of such losses, if the fraud is related to credit card transactions and becomes excessive, it could result in us paying higher fees or losing the
right to accept credit cards for payment. In addition, under current credit card practices, we are typically liable for fraudulent credit card transactions. Our
failure to adequately prevent fraudulent transactions could damage our reputation, result in litigation or regulatory action, and lead to expenses that could
substantially impact our operating results.
We are subject to payment-related risks.
We accept payments online via credit and debit cards and online payment systems such as PayPal and AfterPay, which subjects us to certain regulations and
fraud. We may in the future offer new payment options to clients that would be subject to additional regulations and risks. We pay interchange and other
fees in connection with credit card payments, which may increase over time and adversely affect our operating results. While we use a third party to
process payments, we are subject to payment card association operating rules and certification requirements, including the Payment Card Industry Data
Security Standard and rules governing electronic funds transfers. If we fail to comply with applicable rules and regulations, we may be subject to fines or
higher transaction fees and may lose our ability to accept online payments or other payment card transactions. If any of these events were to occur, our
business, financial condition, and operating results could be adversely affected.
System interruptions that impair client access to our website or other performance failures in our technology infrastructure could damage our
business.
The satisfactory performance, reliability, and availability of our website, mobile application, internal applications, and technology infrastructure are critical
to our business. We rely on our website and mobile application to engage with our clients and sell them merchandise. We also rely on a host of internal
custom-built applications to run critical business functions, such as styling, merchandise purchasing, warehouse operations, and order fulfillment. In
addition, we rely on a variety of third-party, cloud-based solution vendors for key elements of our technology infrastructure. These systems are vulnerable
to damage or interruption and we have experienced interruptions in the past. For example, in February 2017, as a result of an outage with Amazon Web
Services, where much of our technology infrastructure is hosted, we experienced disruptions in applications that support our warehouse operations and
19
order fulfillment that caused a temporary slowdown in the number of Fix shipments we were able to make. Interruptions may be caused by a variety of
incidents, including human error, our failure to update or improve our proprietary systems, cyber attacks, fire, flood, earthquake, power loss, or
telecommunications failures. These risks are exacerbated by our move to a more remote workforce in response to the COVID-19 pandemic. Any failure or
interruption of our website, mobile application, internal business applications, or our technology infrastructure could harm our ability to serve our clients,
which would adversely affect our business and operating results.
Our use of personal information and other data subjects us to privacy laws and obligations, and our compliance with or failure to comply with such
obligations could harm our business.
We collect and maintain significant amounts of personal information and other data relating to our clients and employees. Numerous laws, rules, and
regulations in the United States and internationally, including the EU’s General Data Protection Regulation (the “GDPR”) and California’s Consumer
Privacy Act (the “CCPA”), govern privacy and the collection, use, and protection of personal information. These laws, rules, and regulations evolve
frequently and may be inconsistent from one jurisdiction to another or may be interpreted to conflict with our practices. Any failure or perceived failure by
us or any third parties with which we do business to comply with these laws, rules, and regulations, or with other obligations to which we may be or
become subject, may result in actions against us by governmental entities, private claims and litigation, fines, penalties, or other liabilities. Any such action
would be expensive to defend, damage our reputation, and adversely affect our business and operating results. For example, the GDPR imposes more
stringent data protection requirements and provides greater penalties for noncompliance than previous data protection laws. Further, the UK government
withdrew from the EU on January 31, 2020, subject to a transition period that is currently set to end on December 31, 2020 (“Brexit”). Brexit has created
uncertainty with regard to the regulation of data protection in the UK. In particular, it is uncertain whether the UK will enact data protection laws or
regulations designed to be consistent with the GDPR and how data transfers to and from the UK will be regulated. Thus, it is uncertain whether our
operations in, and data transfers to and from, the UK can comply with UK and EU law post-Brexit. Similarly, the State of California legislature passed the
CCPA, which became effective on January 1, 2020. The CCPA requires us to make new disclosures to consumers about our data collection, use, and
sharing practices. The CCPA also allows consumers to opt out of certain data sharing with third parties, and provides a new cause of action for data
breaches with the possibility of significant statutory damage awards. The CCPA prohibits discrimination against individuals who exercise their privacy
rights, provides for civil penalties for violations, and creates a private right of action for data breaches that is expected to increase data breach litigation.
Since the enactment of the CCPA, new privacy and data security laws have been proposed in more than half of the U.S. states and in the U.S. Congress,
reflecting a trend toward more stringent privacy legislation in the U.S. Additionally, the Federal Trade Commission and many state attorneys general are
interpreting federal and state consumer protection laws as imposing standards for the online collection, use, dissemination, and security of data.
The costs of compliance with and other burdens imposed by privacy and data security laws and regulations may reduce the efficiency of our marketing,
lead to negative publicity, make it more difficult to meet expectations of or commitments to clients, or lead to significant fines, penalties or liabilities for
noncompliance, any of which could harm our business. These laws could also impact our ability to offer our products in certain locations. The costs,
burdens, and potential liabilities imposed by existing privacy laws could be compounded if other jurisdictions in the U.S. or abroad begin to adopt similar
or more restrictive laws.
Even the perception that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements could inhibit clients’
use of our service or harm our brand and reputation.
Any of these matters could materially adversely affect our business, financial condition, or operating results.
Unfavorable changes or failure by us to comply with evolving internet and eCommerce regulations could substantially harm our business and
operating results.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the internet and eCommerce. These
regulations and laws may involve taxes, privacy and data security, consumer protection, the ability to collect and/or share necessary information that allows
us to conduct business on the internet, marketing communications and advertising, content protection, electronic contracts, or gift cards. Furthermore, the
regulatory landscape impacting internet and eCommerce businesses is constantly evolving. For example, California’s Automatic Renewal Law requires
companies to adhere to enhanced disclosure requirements when entering into automatically renewing contracts with consumers. As a result, a wave of
consumer class action lawsuits was brought against companies that offer online products and services on a subscription or recurring basis. Any failure, or
perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, lost business, and proceedings or actions
against us by governmental entities or others, which could impact our operating results.
If the use of “cookie” tracking technologies is further restricted, regulated, or blocked, or if changes in technology cause cookies to become less
reliable or acceptable as a means of tracking consumer behavior, the amount or accuracy of internet user information we collect would decrease,
which could harm our business and operating results.
Cookies are small data files that are sent by websites and stored locally on an internet user's computer or mobile device. We, and third parties who work on
our behalf, collect data via cookies that is used to track the behavior of visitors to our sites, to provide a more personal and interactive experience, and to
increase the effectiveness of our marketing. However, internet users can easily disable,
20
delete, and block cookies directly through browser settings or through other software, browser extensions, or hardware platforms that physically block
cookies from being created and stored.
Privacy regulations restrict how we deploy our cookies and this could potentially increase the number of internet users that choose to proactively disable
cookies on their systems. In the EU, the Directive on Privacy and Electronic Communications requires users to give their consent before cookie data can be
stored on their local computer or mobile device. Users can decide to opt out of nearly all cookie data creation, which could negatively impact our operating
results. We may have to develop alternative systems to determine our clients’ behavior, customize their online experience, or efficiently market to them if
clients block cookies or regulations introduce additional barriers to collecting cookie data.
Shipping is a critical part of our business and any changes in our shipping arrangements or any interruptions in shipping could adversely affect our
operating results.
We currently rely on three major vendors for our shipping. If we are not able to negotiate acceptable pricing and other terms with these entities or they
experience performance problems or other difficulties, it could negatively impact our operating results and our clients’ experience. In addition, our ability
to receive inbound inventory efficiently and ship merchandise to clients may be negatively affected by inclement weather, fire, flood, power loss,
earthquakes, public health crises such as the COVID-19 pandemic, labor disputes, acts of war or terrorism, and similar factors. In response to the COVID-
19 pandemic, we temporarily closed three of our eight fulfillment centers, offered our fulfillment center employees four weeks of paid time off, and
implemented social distancing protocols in each fulfillment center, resulting in operational constraints, which in turn reduced our ability to ship
merchandise to clients and earn revenue. In the past, strikes at major international shipping ports have impacted our supply of inventory from our vendors.
In addition, as a result of Hurricane Harvey in September 2017, one of our shipping vendors was unable to deliver Fixes to certain affected areas for several
weeks, resulting in delivery delays and Fix cancellations. We are also subject to risks of damage or loss during delivery by our shipping vendors. If our
merchandise is not delivered in a timely fashion or is damaged or lost during the delivery process, our clients could become dissatisfied and cease using our
services, which would adversely affect our business and operating results.
Our operating results have been, and could be in the future, adversely affected by natural disasters, public health crises, political crises, or other
catastrophic events.
Our principal offices and one of our fulfillment centers are located in the San Francisco Bay Area, which has a history of earthquakes, and are thus
vulnerable to damage. We also operate offices and fulfillment centers in other regions. Natural disasters, such as earthquakes, hurricanes, tornadoes, floods,
fires, and other adverse weather and climate conditions; unforeseen public health crises, such as COVID-19 or other pandemics and epidemics; political
crises, such as terrorist attacks, war, and other political instability; or other catastrophic events, whether occurring in the United States or internationally,
could disrupt our operations in or cause us to close one or more of our offices and fulfillment centers or could disrupt, delay, or otherwise negatively impact
the operations of one or more of our third-party providers or vendors. Furthermore, these types of events could impact our merchandise supply chain,
including our ability to ship merchandise to clients from or to the impacted region, and could impact our ability or the ability of third parties to operate our
sites and ship merchandise. In addition, these types of events could negatively impact consumer spending in the impacted regions. In fact, the COVID-19
pandemic has: disrupted our operations in and caused us to close our offices and require that most of our employees work from home; disrupted our
operations in and caused us to close three of our eight fulfillment centers; required us to implement various operational changes to ensure the health and
safety of our employees; had a range of negative effects on the operations of our third-party providers and vendors, including our merchandise supply
chain; and negatively impacted consumer spending and the economy generally. Because the COVID-19 pandemic has caused many of these factors to
materialize, as described above and throughout these risk factors, it has adversely affected our business and operating results. A resurgence of COVID-19
in the future or the occurrence of another disaster or crisis could recreate and/or exacerbate these effects.
If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy of our reported financial
information and this may lead to a decline in our stock price.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). Specifically, the Sarbanes-Oxley Act requires
management to assess the effectiveness of our internal controls over financial reporting and to report any material weaknesses in such internal control. We
have in the past experienced material weaknesses and significant deficiencies in our internal controls, including for our fiscal year ended August 3, 2019.
Management has concluded that our internal control over financial reporting was effective as of August 1, 2020. However, our testing, or the subsequent
testing by our independent public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material
weaknesses. If we or our accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, it
could harm our operating results, adversely affect our reputation, or result in inaccurate financial reporting. Furthermore, should any such deficiencies arise
we could be subject to lawsuits, sanctions or investigations by regulatory authorities, including SEC enforcement actions and we could be required to
restate our financial results, any of which would require additional financial and management resources.
21
Even if we do not detect deficiencies, our internal control over financial reporting will not prevent or detect all errors and fraud, and individuals, including
employees and contractors, could circumvent such controls. Because of the inherent limitations in all control systems, 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 will be detected.
In addition, we may encounter difficulties in the timely and accurate reporting of our financial results, which would impact our ability to provide our
investors with information in a timely manner. Should we encounter such difficulties, our investors could lose confidence in the reliability of our reported
financial information and trading price of our common stock. could be negatively impacted.
If we cannot successfully protect our intellectual property, our business would suffer.
We rely on trademark, copyright, trade secrets, patents, confidentiality agreements, and other practices to protect our brands, proprietary information,
technologies, and processes. Our principal trademark assets include the registered trademarks “Stitch Fix” and “Fix,” multiple private label clothing and
accessory brand names, and our logos and taglines. Our trademarks are valuable assets that support our brand and consumers’ perception of our services
and merchandise. We also hold the rights to the “stitchfix.com” internet domain name and various other related domain names, which are subject to internet
regulatory bodies and trademark and other related laws of each applicable jurisdiction. If we are unable to protect our trademarks or domain names in the
United States, the UK, or in other jurisdictions in which we may ultimately operate, our brand recognition and reputation would suffer, we would incur
significant expense establishing new brands and our operating results would be adversely impacted.
We currently have three patents issued and a number of additional patent applications pending in the United States. We have also filed patent applications
in the People’s Republic of China. The patents we own and those that may be issued in the future may not provide us with any competitive advantages or
may be challenged by third parties, and our patent applications may never be granted. Even if issued, there can be no assurance that these patents will
adequately protect our intellectual property or survive a legal challenge, as the legal standards relating to the validity, enforceability, and scope of
protection of patent and other intellectual property rights are uncertain. Our limited patent protection may restrict our ability to protect our technologies and
processes from competition. We primarily rely on trade secret laws to protect our technologies and processes, including the algorithms we use throughout
our business. Others may independently develop the same or similar technologies and processes, or may improperly acquire and use information about our
technologies and processes, which may allow them to provide a service similar to ours, which could harm our competitive position.
We may be required to spend significant resources to monitor and protect our intellectual property rights, and the efforts we take to protect our proprietary
rights may not be sufficient.
We may be accused of infringing intellectual property rights of third parties.
We are also at risk of claims by others that we have infringed their copyrights, trademarks, or patents, or improperly used or disclosed their trade secrets.
The costs of supporting any litigation or disputes related to these claims can be considerable, and we cannot assure you that we will achieve a favorable
outcome of any such claim. If any such claims are valid, we may be compelled to cease our use of such intellectual property and pay damages, which could
adversely affect our business. Even if such claims are not valid, defending them could be expensive and distracting, adversely affecting our operating
results.
Changes in U.S. tax or tariff policy regarding apparel produced in other countries could adversely affect our business.
A predominant portion of the apparel we sell is originally manufactured in countries other than the United States. International trade disputes that result in
tariffs and other protectionist measures could adversely affect our business, including disruption and cost increases in our established patterns for sourcing
our merchandise and increased uncertainties in planning our sourcing strategies and forecasting our margins. For example, the U.S. government recently
imposed significant new tariffs on China related to the importation of certain product categories, including apparel, footwear, and other goods. A
substantial portion of our products are manufactured in China. As a result of these tariffs, our cost of goods imported from China increased slightly.
Although we continue to work with our vendors to mitigate our exposure to current or potential tariffs, there can be no assurance that we will be able to
offset any increased costs. Other changes in U.S. tariffs, quotas, trade relationships, or tax provisions could also reduce the supply of goods available to us
or increase our cost of goods. Although such changes would have implications across the entire industry, we may fail to effectively adapt to and manage the
adjustments in strategy that would be necessary in response to those changes. In addition to the general uncertainty and overall risk from potential changes
in U.S. laws and policies, as we make business decisions in the face of such uncertainty, we may incorrectly anticipate the outcomes, miss out on business
opportunities, or fail to effectively adapt our business strategies and manage the adjustments that are necessary in response to those changes. These risks
could adversely affect our revenues, reduce our profitability, and negatively impact our business.
We could be required to collect additional sales taxes or be subject to other tax liabilities that may increase the costs our clients would have to pay for
our offering and adversely affect our operating results.
In general, we have not historically collected state or local sales, use, or other similar taxes in any jurisdictions in which we do not have a tax nexus, in
reliance on court decisions or applicable exemptions that restrict or preclude the imposition of obligations to
22
collect such taxes with respect to online sales of our products. In addition, we have not historically collected state or local sales, use, or other similar taxes
in certain jurisdictions in which we do have a physical presence, in reliance on applicable exemptions. On June 21, 2018, the U.S. Supreme Court decided,
in South Dakota v. Wayfair, Inc., that state and local jurisdictions may, at least in certain circumstances, enforce a sales and use tax collection obligation on
remote vendors that have no physical presence in such jurisdiction. A number of states have already begun, or have positioned themselves to begin,
requiring sales and use tax collection by remote vendors and/or by online marketplaces. The details and effective dates of these collection requirements
vary from state to state. While we now collect, remit, and report sales tax in all states that impose a sales tax, it is still possible that one or more
jurisdictions may assert that we have liability for previous periods for which we did not collect sales, use, or other similar taxes, and if such an assertion or
assertions were successful it could result in substantial tax liabilities, including for past sales taxes and penalties and interest, which could materially
adversely affect our business, financial condition, and operating results.
Federal income tax reform could have unforeseen effects on our financial condition and results of operations.
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and contains many significant changes to U.S. federal tax laws. The Tax
Act requires complex computations that were not previously provided for under U.S. tax law. We provided for an estimated effect of the Tax Act in our
financial statements for the fiscal year ended July 28, 2018. In addition, on March 27, 2020, the U.S. enacted the CARES Act. We provided for an
estimated effect of the CARES Act in our financial statements for the fiscal year ended August 1, 2020. The Tax Act and the CARES Act require
significant judgments to be made in the interpretation of the law and significant estimates in the calculation of the provision for income taxes. However,
additional guidance may be issued by the Internal Revenue Service (“IRS”), the Department of the Treasury, or other governing body that may significantly
differ from our interpretation of the law, which may result in a material adverse effect on our business, cash flow, results of operations, or financial
conditions.
We may be subject to additional tax liabilities, which could adversely affect our operating results.
We are subject to income- and non-income-based taxes in the United States under federal, state, and local jurisdictions and in the UK. The governing tax
laws and applicable tax rates vary by jurisdiction and are subject to interpretation. Various tax authorities may disagree with tax positions we take and if
any such tax authorities were to successfully challenge one or more of our tax positions, the results could have a material effect on our operating results.
Further, the ultimate amount of tax payable in a given financial statement period may be materially impacted by sudden or unforeseen changes in tax laws,
changes in the mix and level of earnings by taxing jurisdictions, or changes to existing accounting rules or regulations. The determination of our overall
provision for income and other taxes is inherently uncertain as it requires significant judgment around complex transactions and calculations. As a result,
fluctuations in our ultimate tax obligations may differ materially from amounts recorded in our financial statements and could adversely affect our business,
financial condition, and operating results in the periods for which such determination is made.
We may require additional capital to support business growth, and this capital might not be available or may be available only by diluting existing
stockholders.
We intend to continue making investments to support our business growth and may require additional funds to support this growth and respond to business
challenges, including the need to develop our services, expand our inventory, enhance our operating infrastructure, expand the markets in which we
operate, and potentially acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure
additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer
significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our Class A
common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other
financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. In addition, we
may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms
satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly
limited, and our business and prospects could fail or be adversely affected.
Some of our software and systems contain open source software, which may pose particular risks to our proprietary applications.
We use open source software in the applications we have developed to operate our business and will use open source software in the future. We may face
claims from third parties demanding the release or license of the open source software or derivative works that we developed from such software (which
could include our proprietary source code) or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in
litigation and could require us to purchase a costly license, publicly release the affected portions of our source code, or cease offering the implicated
solutions unless and until we can re-engineer them to avoid infringement. In addition, our use of open source software may present additional security risks
because the source code for open source software is publicly available, which may make it easier for hackers and other third parties to determine how to
breach our website and systems that rely on open source software. Any of these risks could be difficult to eliminate or manage and, if not addressed, could
have an adverse effect on our business and operating results.
23
Adverse litigation judgments or settlements resulting from legal proceedings in which we are or may be involved could expose us to monetary damages
or limit our ability to operate our business.
Currently, we are involved in various legal proceedings, including the securities litigation and other matters described elsewhere in this Annual Report. We
have in the past and may in the future become involved in other private actions, collective actions, investigations, and various other legal proceedings by
clients, employees, suppliers, competitors, government agencies, stockholders, or others. In addition, the COVID-19 pandemic could give rise to new types
of claims or lawsuits, including, without limitation, workers compensation claims for employees that contracted the virus. The results of any such litigation,
investigations, and other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time
consuming, result in costly litigation, damage our reputation, require significant amounts of management time, and divert significant resources. If any of
these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary
damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition, and operating results.
If we are unable to make acquisitions and investments, or successfully integrate them into our business, our business could be harmed.
As part of our business strategy, we may acquire other companies or businesses. However, we may not be able to find suitable acquisition candidates, and
we may not be able to complete acquisitions on favorable terms, if at all. Acquisitions involve numerous risks, any of which could harm our business and
negatively affect our operating results, including:
•
•
•
•
•
•
•
•
•
•
difficulties in integrating the technologies, operations, existing contracts, and personnel of an acquired company;
difficulties in supporting and transitioning clients and suppliers, if any, of an acquired company;
diversion of financial and management resources from existing operations or alternative acquisition opportunities;
failure to realize the anticipated benefits or synergies of a transaction;
failure to identify all of the problems, liabilities, or other shortcomings or challenges of an acquired company or technology, including issues
related to intellectual property, regulatory compliance practices, revenue recognition or other accounting practices, or employee or client issues;
risks of entering new markets in which we have limited or no experience;
potential loss of key employees, clients, vendors, and suppliers from either our current business or an acquired company’s business;
inability to generate sufficient revenue to offset acquisition costs;
additional costs or equity dilution associated with funding the acquisition; and
possible write-offs or impairment charges relating to acquired businesses.
Risks Relating to Ownership of Our Class A Common Stock
The market price of our Class A common stock may continue to be volatile or may decline steeply or suddenly regardless of our operating performance
and we may not be able to meet investor or analyst expectations. You may lose all or part of your investment.
The market price of our Class A common stock may fluctuate or decline significantly in response to numerous factors, many of which are beyond our
control, including:
•
•
•
•
actual or anticipated fluctuations in our client base, the level of client engagement and client acquisition, revenue, or other operating results;
variations between our actual operating results and the expectations of securities analysts, investors, and the financial community;
any forward-looking financial or operating information we may provide to the public or securities analysts, any changes in this information, or our
failure to meet expectations based on this information;
actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our
company, or our failure to meet these estimates or the expectations of investors;
• whether investors or securities analysts view our stock structure unfavorably, particularly our dual-class structure and the significant voting control
of our executive officers, directors, and their affiliates;
•
additional shares of our Class A common stock being sold into the market by us or our existing stockholders, or the anticipation of such sales;
24
•
•
•
•
•
•
announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint
ventures, or capital commitments;
changes in operating performance and stock market valuations of companies in our industry, including our vendors and competitors;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
lawsuits threatened or filed against us;
developments in new legislation and pending lawsuits or regulatory actions, including interim or final rulings by judicial or regulatory bodies; and
other events or factors, including those resulting from war or incidents of terrorism, public health crises such as the COVID-19 pandemic, or
responses to these events.
In addition, extreme price and volume fluctuations in the stock markets have affected and continue to affect many eCommerce and other technology
companies’ stock prices. Often, their stock prices have fluctuated in ways unrelated or disproportionate to the companies’ operating performance. In the
past, stockholders have filed securities class action litigation following periods of market volatility. For example, beginning in October 2018, we and
certain of our directors and officers were sued in putative class action and derivative lawsuits alleging violations of the federal securities laws for allegedly
making materially false and misleading statements. We may be the target of additional litigation of this type in the future as well. Such securities litigation
could subject us to substantial costs, divert resources and the attention of management from our business, and seriously harm our business.
Moreover, because of these fluctuations, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our
past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of
industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below
any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our
Class A common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue
or earnings forecasts that we may provide.
An active trading market for our Class A common stock may not be sustained.
Our Class A common stock is currently listed on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “SFIX” and trades on that market and
others. We cannot assure you that an active trading market for our Class A common stock will be sustained. Accordingly, we cannot assure you of the
liquidity of any trading market, your ability to sell your shares of our Class A common stock when desired or the prices that you may obtain for your
shares.
Future sales of shares by existing stockholders could cause our stock price to decline.
If our existing stockholders sell or indicate an intention to sell, substantial amounts of our Class A common stock in the public market, the trading price of
our Class A common stock could decline. In addition, shares underlying any outstanding options and restricted stock units will become eligible for sale if
exercised or settled, as applicable, and to the extent permitted by the provisions of various vesting agreements and Rule 144 of the Securities Act. All the
shares of Class A and Class B common stock subject to stock options and restricted stock units outstanding and reserved for issuance under our 2011
Equity Incentive Plan, as amended, our 2017 Incentive Plan, and our 2019 Inducement Plan have been registered on Form S-8 under the Securities Act and
such shares are eligible for sale in the public markets, subject to Rule 144 limitations applicable to affiliates. If these additional shares are sold, or if it is
perceived that they will be sold in the public market, the trading price of our Class A common stock could decline.
The dual class structure of our common stock concentrates voting control with our executive officers, directors and their affiliates, and may depress the
trading price of our Class A common stock.
Our Class B common stock has ten votes per share and our Class A common stock has one vote per share. As a result, the holders of our Class B common
stock, including our directors, executive officers, and their affiliates, are able to exercise considerable influence over matters requiring stockholder
approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or our assets,
even if their stock holdings represent less than 50% of the outstanding shares of our capital stock. As of September 21, 2020, 47,063,067 of our
104,271,783 shares outstanding were held by our directors, executive officers, and their affiliates, and 44,944,259 of such shares held by our directors,
executive officers, and their affiliates were shares of Class B common stock. This concentration of ownership will limit the ability of other stockholders to
influence corporate matters and may cause us to make strategic decisions that could involve risks to you or that may not be aligned with your interests. This
control may adversely affect the market price of our Class A common stock.
In addition, in July 2017, FTSE Russell and Standard & Poor’s announced that they would cease to allow most newly public companies utilizing dual or
multi-class capital structures to be included in their indices. Affected indices include the S&P 500, S&P MidCap 400, and S&P SmallCap 600, which
together make up the S&P Composite 1500. Under the announced policies, our dual class capital structure currently makes us ineligible for inclusion in
Standard & Poor’s indices and, as a result, mutual funds,
25
exchange-traded funds, and other investment vehicles that attempt to passively track the S&P indices will not be investing in our stock. It is unclear what
effect, if any, these policies have had or may have on the valuations of publicly traded companies excluded from the indices, but it is possible that they may
depress these valuations compared to those of other similar companies that are included.
If securities or industry analysts either do not publish research about us or publish inaccurate or unfavorable research about us, our business, or our
market, or if they change their recommendations regarding our common stock adversely, the trading price or trading volume of our Class A common
stock could decline.
The trading market for our Class A common stock is influenced in part by the research and reports that securities or industry analysts may publish about us,
our business, our market, or our competitors. If one or more of the analysts initiate research with an unfavorable rating or downgrade our Class A common
stock, provide a more favorable recommendation about our competitors, or publish inaccurate or unfavorable research about our business, our Class A
common stock price would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which in turn could cause the trading price or trading volume of our Class A common stock to decline.
We do not currently intend to pay dividends on our Class A common stock and, consequently, your ability to achieve a return on your investment will
depend on appreciation of the value of our Class A common stock.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and
expansion of our business, and we do not expect to pay any cash dividends on our Class A common stock in the foreseeable future. As a result, any
investment return our Class A common stock will depend upon increases in the value for our Class A common stock, which is not certain.
Future securities sales and issuances could result in significant dilution to our stockholders and impair the market price of our Class A common stock.
We may issue additional equity securities in the future. We also issue common stock to our employees and others under our incentive plans. Future
issuances of shares of our Class A common stock or the conversion of a substantial number of shares of our Class B common stock, or the perception that
these sales or conversions may occur, could depress the market price of our Class A common stock and result in dilution to existing holders of our Class A
common stock. Also, to the extent outstanding options to purchase our shares of our Class A or Class B common stock are exercised or options or other
stock-based awards are issued or become vested, there will be further dilution. The amount of dilution could be substantial depending upon the size of the
issuances or exercises. Furthermore, we may issue additional equity securities that could have rights senior to those of our Class A common stock. As a
result, holders of our Class A common stock bear the risk that future issuances of debt or equity securities may reduce the value of our Class A common
stock and further dilute their ownership interest.
The requirements of being a public company may strain our resources, result in more litigation, and divert management’s attention.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and
Consumer Protection Act, the listing requirements of the Nasdaq, and other applicable securities rules and regulations. Complying with these rules and
regulations has increased and will continue to increase our legal and financial compliance costs, make some activities more difficult, time consuming, or
costly, and increase demand on our systems and resources. To address these challenges, we have expanded our finance and accounting teams. The
Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. The
Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial
reporting. We are required to disclose changes made in our internal control and procedures on a quarterly basis. In order to maintain and, if required,
improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management
oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business
and operating results. We may need to hire additional employees or engage outside consultants to comply with these requirements, which will increase our
costs and expenses.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies,
increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations, and standards are subject to
varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this
investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating
activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or
governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our
business may be adversely affected.
26
These new rules and regulations may make it more expensive for us to obtain director and officer liability insurance and we may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified
members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.
By disclosing information in filings required of a public company, our business and financial condition are more visible, which we believe may result in
threatened or actual litigation, including by competitors and other third parties. If those claims are successful, our business could be seriously harmed. Even
if the claims do not result in litigation or are resolved in our favor, the time and resources needed to resolve them could divert our management’s resources
and seriously harm our business.
Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender
offer, or proxy contest difficult, thereby depressing the trading price of our Class A common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could depress the trading price of our Class
A common stock by acting to discourage, delay, or prevent a change of control of our company or changes in our management that the stockholders of our
company may deem advantageous. These provisions include the following:
•
•
•
•
•
•
•
•
•
•
•
establish a classified board of directors so that not all members of our board of directors are elected at one time;
permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships;
provide that directors may only be removed for cause;
require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;
eliminate the ability of our stockholders to call special meetings of stockholders;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws;
restrict the forum for certain litigation against us to Delaware;
reflect the dual class structure of our common stock; and
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by
stockholders at annual stockholder meetings.
Any provision of our amended and restated certificate of incorporation or amended and restated bylaws that has the effect of delaying or deterring a change
in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that
some investors are willing to pay for our Class A common stock.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of
the United States are the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to
obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following
types of actions or proceedings under Delaware statutory or common law:
•
•
•
•
any derivative action or proceeding brought on our behalf;
any action asserting a breach of fiduciary duty;
any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation,
or our amended and restated bylaws; and
any action asserting a claim against us that is governed by the internal-affairs doctrine.
This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act
creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction
to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts,
among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States are
the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined
that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the
exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive
27
forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such
action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our
directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find
either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur
additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal physical properties are located in the United States and UK. Our corporate headquarters are located in San Francisco, California, and
comprise approximately 131,000 square feet of space. We lease an additional 36,200 square feet of office space in Texas, where our client experience team
is based. Although the majority of our employees who utilize these office spaces are currently working from home due to the COVID-19 pandemic, as of
the date of this filing we still intend to occupy these locations when conditions permit.
We also lease and operate six fulfillment centers in the United States. These comprise a total of approximately 3,426,000 square feet, at which we receive
merchandise from vendors, ship products to clients and receive and process returns from clients. These facilities are located in California, Arizona, Texas,
Pennsylvania, Indiana, and Georgia. In addition, we have two additional fulfillment centers that are leased and operated by a third-party logistics
contractor: one in in Indiana, representing approximately 400,000 square feet, and a second one in England, representing approximately 277,000 square
feet.
We believe our facilities, including our planned expansions, are sufficient for our current needs.
Item 3. Legal Proceedings.
On October 11, 2018, October 26, 2018, November 16, 2018, and December 10, 2018, four putative class action lawsuits alleging violations of the federal
securities laws were filed in the U.S. District Court for the Northern District of California, naming as defendants us and certain of our officers. The four
lawsuits each make the same allegations of violations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), by us and our officers for
allegedly making materially false and misleading statements regarding our active client growth and strategy with respect to television advertising between
June 2018 and October 2018. The plaintiffs seek unspecified monetary damages and other relief. The four lawsuits have been consolidated and a lead
plaintiff has been appointed. On September 18, 2019, the lead plaintiff in the consolidated class action lawsuits (the “Class Action”) filed a consolidated
complaint for violation of the federal securities laws. On October 28, 2019, we and other defendants filed a motion to dismiss the consolidated complaint.
The lead plaintiff filed an opposition to the motion to dismiss on December 9, 2019, and we and the other defendants filed our reply in support of our
motion to dismiss on December 30, 2019. The court has taken the motion under submission. We believe these claims are without merit and intend to
vigorously defend against them.
On December 12, 2018, a derivative action was filed against our directors in the same court, alleging the same violations of securities laws as alleged in the
Class Action, and breach of fiduciary duties. The derivative action has been stayed pending the outcome of the motion to dismiss in the Class Action. On
December 12, 2019, a second derivative action was filed against our directors in the same court, alleging the same violations of securities laws and breach
of fiduciary duties as the other derivative action. The second derivative action has also been stayed pending the outcome of the motion to dismiss in the
Class Action. The two derivative actions have been related to each other and to the Class Action, and all the related cases are now proceeding before a
single judge in the U.S. District Court for the Northern District of California.
In August 2020, a representative action under California’s Private Attorneys General Act was filed against us in the Superior Court for the State of
California, County of San Diego. The complaint alleges various violations of California’s wage and hour laws relating to our current and former non-
exempt stylist employees and seeks attorney’s fees and penalties. We believe these claims are without merit and intend to vigorously defend against them.
In addition, we are subject to legal proceedings that arise in the ordinary course of business. We have in the past and may in the future become involved in
private actions, collective actions, investigations and various other legal proceedings by clients, employees, suppliers, competitors, government agencies,
stockholders or others. We evaluate any claims and lawsuits with respect to their potential merits, our potential defenses and counter claims, and the
expected effect on us of defending the claims and a potential adverse result. However, the results of any litigation, investigations and other legal
proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time consuming, result in costly
litigation, damage our reputation, require significant amounts of management time and divert significant resources. If any legal proceedings were to be
determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate
our business, which could have an adverse effect on our business, financial condition and operating results.
28
Item 4. Mine Safety Disclosures.
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information for Common Stock
Our Class A common stock, par value $0.00002 per share, is listed on the Nasdaq Global Select Market, under the symbol “SFIX” and began trading on
November 17, 2017. Prior to that date, there was no public trading market for our Class A common stock. There is no public trading market for our Class B
common stock, par value $0.00002 per share.
Holders of Record
As of the close of business on September 21, 2020, there were 49 stockholders of record of our Class A common stock and 27 stockholders of record of our
Class B common stock. The actual number of holders of our Class A and Class B common stock is greater than the number of record holders, and includes
stockholders who are beneficial owners, but whose shares are held in street name by brokers or other nominees. The number of holders of record presented
here also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to fund the
development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination
regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions,
including our financial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of
directors may deem relevant.
Cumulative Stock Performance Graph
The following graph compares the cumulative total return to stockholders on our Class A common stock relative to the cumulative total returns of the
Standard and Poor’s Retail Select Industry Index (S&P Retail Select Industry) and Nasdaq Composite Index (Nasdaq Composite). An investment of $100
(with reinvestment of all dividends) is assumed to have been made in our Class A common stock and in each index on November 17, 2017, the date our
Class A common stock began trading on the Nasdaq, and its relative performance is tracked through August 1, 2020. The comparisons are based on
historical data and are not indicative of, nor intended to forecast, the future performance of our Class A common stock.
29
__________
S&P Retail Select Industry
…………
Nasdaq Composite
– – – – – –
Stitch Fix, Inc.
The following table assumes an investment of $100 (with reinvestment of all dividends) to have been made in our Class A common stock and in each index
on November 17, 2017, the date our Class A common stock began trading on the Nasdaq, and indicates the cumulative total return to stockholders on our
Class A common stock and the cumulative total return of each index at July 28, 2018, August 3, 2019, and August 1, 2020:
(in dollars)
S&P Retail Select Industry
Nasdaq Composite
Stitch Fix, Inc.
November 17, 2017
July 28, 2018
August 3, 2019
August 1, 2020
$
$
$
100.00
100.00
100.00
$
$
$
118.27
114.07
194.79
$
$
$
98.40
118.01
163.89
$
$
$
113.49
158.42
146.20
The information under “Cumulative Stock Performance Graph” is not deemed to be “soliciting material” or “filed” with the SEC or subject to Regulation
14A or 14C, or to the liabilities of Section 18 of the Exchange Act, and is not to be incorporated by reference in any filing of Stitch Fix under the Securities
Act or the Exchange Act, whether made before or after the date of this Annual Report and irrespective of any general incorporation language in those
filings.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
30
Item 6. Selected Financial Data.
The following selected consolidated financial and other data should be read in conjunction with, and are qualified by reference to, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements and the accompanying notes
included elsewhere in this Annual Report. The consolidated statements of operations data for the fiscal years ended August 1, 2020, August 3, 2019, and
July 28, 2018, and the consolidated balance sheet data as of August 1, 2020, and August 3, 2019, are derived from the audited consolidated financial
statements that are included elsewhere in this Annual Report. The consolidated statements of operations data for the fiscal years ended July 29, 2017, and
July 30, 2016, as well as the consolidated balance sheet data as of July 28, 2018, July 29, 2017, and July 30, 2016, are derived from audited consolidated
financial statements that are not included in this Annual Report. We have included, in our opinion, all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not
necessarily indicative of the results to be expected in any period in the future.
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue, net
Cost of goods sold
Gross profit
Selling, general, and administrative expenses (2)(3)
Operating income (loss)
Remeasurement of preferred stock warrant liability
Interest (income) expense
Other (income) expense, net
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Net income (loss) attributable to common stockholders: (4)
Basic
Diluted
Earnings (loss) per share attributable to common stockholders: (4)
Basic
Diluted
Weighted-average shares used to compute earnings per share attributable to common
stockholders: (4)
Basic
Diluted
Key Financial and Operating Metrics (5):
Adjusted EBITDA
Adjusted EBITDA ex. SBC
Free cash flow
Active clients (as of period end)
Net revenue per active client
August 1, 2020
August 3, 2019
(1)
July 28, 2018
July 29, 2017
July 30, 2016
For the Fiscal Year Ended
$
1,711,733
$
1,577,558
$
1,226,505
$
977,139
$
730,313
957,523
754,210
805,874
(51,664)
—
(5,535)
1,593
(47,722)
19,395
(67,117)
(67,117)
(67,117)
(0.66)
(0.66)
$
$
$
$
$
874,429
703,129
679,634
23,495
—
(5,791)
(1,535)
30,821
(6,060)
36,881
36,863
36,864
0.37
0.36
$
$
$
$
$
690,483
536,022
492,998
43,024
(10,685)
(904)
(100)
54,713
9,813
44,900
35,541
27,285
0.47
0.34
$
$
$
$
$
542,718
434,421
402,781
31,640
18,881
(42)
—
12,801
13,395
(594)
(594)
(594)
(0.02)
(0.02)
$
$
$
$
$
407,064
323,249
259,021
64,228
3,019
—
(13)
61,222
28,041
33,181
8,211
9,496
0.36
0.34
102,383,282
100,013,462
75,947,759
24,973,931
22,729,890
102,383,282
103,653,626
81,288,418
24,973,931
27,882,844
$
$
$
(29,102)
38,428
12,670
3,522
486
$
39,590
74,846
47,769
3,236
488
$
$
$
$
$
$
$
$
53,566
68,969
55,613
2,742
$
$
$
60,578
64,123
21,494
2,194
447
$
445
$
72,582
74,432
29,878
1,674
436
$
$
$
$
$
$
$
$
$
(1) Fiscal 2019 was a 53-week year, with the extra week occurring in the quarter ended August 3, 2019. All other periods presented included 52 weeks.
(2) Includes stock-based compensation expense of $67.5 million, $35.3 million, $15.4 million, $3.5 million, and $1.9 million for 2020, 2019, 2018, 2017, and 2016, respectively.
(3) Includes compensation expense related to certain stock sales by current and former employees of $21.3 million and $4.8 million for 2017 and 2016, respectively.
(4) See Note 12 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for an explanation of the calculations of our basic and diluted earnings (loss) per
share attributable to common stockholders and the weighted average number of shares used in the computation of the per share amounts.
(5) See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operating Metrics” for information regarding our use of
these metrics.
31
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents
Short and long-term investments
Total assets
Working capital (1)
Convertible preferred stock
Total stockholders’ equity
August 1, 2020 August 3, 2019
July 28, 2018
July 29, 2017
July 30, 2016
$
143,455
$
170,932
$
297,516
$
110,608
$
91,488
238,134
769,429
254,155
—
196,648
616,066
299,773
—
—
481,585
274,774
—
401,037
396,000
315,072
—
257,205
63,844
42,222
61,861
—
191,600
63,199
42,222
49,947
(1) Working capital for all periods presented above is defined as current assets less current liabilities.
32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial
statements and related notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K, or Annual Report. We use a 52- or 53-week fiscal year,
with our fiscal year ending on the Saturday that is closest to July 31 of that year. Each fiscal year generally consists of four 13-week fiscal quarters, with
each fiscal quarter ending on the Saturday that is closest to the last day of the last month of the quarter. The fiscal years ended August 1, 2020 (“2020”)
and July 28, 2018 (“2018”) consisted of 52 weeks. The fiscal year ended August 3, 2019 (“2019”) consisted of 53 weeks. Throughout this Annual Report,
all references to quarters and years are to our fiscal quarters and fiscal years unless otherwise noted.
In addition, this discussion contains forward-looking statements that reflect our plans, estimates, and beliefs, and involve risks and uncertainties. Our
actual results and the timing of certain events could differ materially from those anticipated in or implied by these forward-looking statements as a result of
several factors, including those discussed in the section titled “Risk Factors” included under Part I, Item 1A and elsewhere in this Annual Report. See
“Special Note Regarding Forward-Looking Statements” in this Annual Report.
A discussion regarding our financial condition and results of operation for the fiscal year ended August 1, 2020, compared to the fiscal year ended
August 3, 2019, is presented below. A discussion regarding our financial condition and results of operations for fiscal year ended August 3, 2019,
compared to the fiscal year ended July 28, 2018, can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended August 3, 2019,
filed with the SEC on October 2, 2019, which is available on the SEC’s website at www.sec.gov and on the SEC Filings section of the Investor Relations
section of our website at: https://investors.stitchfix.com.
Overview
Since our founding in 2011, we have helped millions of men, women, and kids discover and buy what they love through personalized shipments of apparel,
shoes, and accessories, hand-selected by Stitch Fix stylists and delivered to our clients’ homes. We call each of these shipments a Fix. Clients can choose to
schedule automatic shipments or order a Fix on demand after they fill out a style profile on our website or mobile app. For each Fix, we charge clients a
styling fee that is credited toward items they purchase. Alternatively, select U.S. clients may purchase an annual Style Pass, which offers unlimited styling
for the year for a $49 fee that is also credited towards items they purchase. After receiving a Fix, our clients purchase the items they want to keep and
return the other items, if any, at no additional charge. In addition, our Extras feature allows clients to select items such as socks, bras, underwear, and other
intimates that are then added to the items their stylist selects for their Fix.
In May 2019, we launched our service in the UK. In June 2019, we launched direct-buy functionality to allow clients the flexibility of purchasing items
outside of a Fix. The first offering of this direct-buy functionality is Buy It Again, which is available for Men’s and Women’s clients in the United States
and allows clients to order previously purchased items in different colors, sizes, or prints. In February 2020, we launched Complete Your Looks, which
presents clients a personalized set of algorithmically generated items for direct purchase based on items they have already bought from us, and in June
2020, we introduced Trending For You, which allows Men’s and Women’s clients to shop personalized looks based on their style profiles. No styling fee is
charged for direct purchases.
We believe our success in serving clients has resulted in our continued growth. We have achieved positive cash flows from operations on an annual basis
since 2014, while continuing to make meaningful investments to drive growth. For the fiscal year ended August 1, 2020, we reported $1.7 billion of
revenue representing year-over-year growth of 8.5% from the fiscal year ended August 3, 2019. Adjusted for the impact of the extra week in fiscal 2019,
revenue in fiscal 2020 grew by 10.7%. As of August 1, 2020, and August 3, 2019, we had approximately 3,522,000 and 3,236,000 active clients,
respectively, representing year-over-year growth of 8.8%.
Net loss for the fiscal year ended August 1, 2020, was $67.1 million, compared to net income of $36.9 million for the fiscal year ended August 3, 2019. For
more information on the components of net income (loss), refer to the section titled “Results of Operations” below.
COVID-19 Update
We are closely monitoring the effects of the novel coronavirus (“COVID-19”) outbreak, which was declared a global pandemic in March 2020, and its
impact on our business, the full extent of which will depend on factors such as the length of time the pandemic continues; how federal, state and local
governments are responding; the impact of the crisis on the economy and consumer behavior; and the effect on our clients, employees, vendors, and other
partners.
During this time, we are focused on protecting the health and safety of our employees and clients, while seeking to continue operating our business
responsibly. All of our employees who are able to work remotely are required to do so, and we have provided additional paid time off to those employees
who are not able to work remotely.
In March, we temporarily closed three of our eight fulfillment centers to assess our ability to operate under shelter-in-place orders and develop protocols to
protect the welfare of our warehouse employees. Those centers have since reopened, and all eight fulfillment centers are currently operating with safety
measures in place, including social distancing, health screening, enhanced cleaning protocols, and protective equipment such as masks and gloves for
employees.
33
Due to the temporary closure of three of our eight fulfillment centers, we had significantly less capacity in our warehouses during the third quarter of fiscal
2020, which resulted in delayed Fix shipments, delayed return processing, extended wait times for our clients, and significant inventory management
challenges. These factors were the principal causes of our decline in revenue and gross margin during the third quarter. Our warehouse capacity constraints
were more acute during March, but steadily improved during the fourth fiscal quarter.
The effect of the COVID-19 pandemic on the broader economy and consumer behavior continues to evolve. During the latter half of our third fiscal
quarter, we did experience lower demand, which negatively affected net revenue per active client, and which we believe was largely attributable to
consumer reactions as the COVID-19 crisis escalated during March and April. We saw some positive client demand signals during this time, including with
our auto-ship clients and continued growth of our direct buy offering; however, we saw some softness in new client acquisition in part because we reduced
our marketing spend in reaction to the COVID-19 crisis. By pulling back on client acquisition in our third fiscal quarter, we recognized that this would also
impact demand in subsequent quarters given most clients’ repeat purchase behavior. Despite the continuing impact of COVID-19 on the overall economy,
during our fourth fiscal quarter, we continued to see strong retention from our auto-ship clients and growth in new client demand from increases in first Fix
shipments. For further discussion of the COVID-19 related risks facing our business, refer to the “Risk Factors” section included in Part I, Item 1A.
Although we are experiencing unprecedented challenges during this global health crisis, we continue to focus on our long-term growth and strategies that
capture the changing ways people shop. While we cannot reasonably estimate the long-term impacts of the COVID-19 pandemic, we believe that our
business model positions us to emerge from this crisis with a structural advantage and new opportunities to increase market share.
Key Financial and Operating Metrics
Non-GAAP Financial Measures
We report our financial results in accordance with generally accepted accounting principles in the United States (“GAAP”). However, management believes
that certain non-GAAP financial measures provide users of our financial information with additional useful information in evaluating our performance. We
believe that adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, and that this supplemental measure
facilitates comparisons between companies. We also provide adjusted EBITDA excluding the impact of stock-based compensation expense (“ex. SBC”),
which management believes provides useful information to investors and others in understanding our operating performance and facilitates comparisons
between companies. We believe free cash flow is an important metric because it represents a measure of how much cash from operations we have available
for discretionary and non-discretionary items after the deduction of capital expenditures. These non-GAAP financial measures may be different than
similarly titled measures used by other companies.
Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with
GAAP. There are several limitations related to the use of our non-GAAP financial measures as compared to the closest comparable GAAP measures. Some
of these limitations include:
•
•
•
•
•
adjusted EBITDA ex. SBC excludes the non-cash expense of stock-based compensation, which has been, and will continue to be for the
foreseeable future, an important part of how we attract and retain our employees and a significant recurring expense in our business;
adjusted EBITDA and adjusted EBITDA ex. SBC exclude the recurring, non-cash expenses of depreciation and amortization of property and
equipment and, although these are non-cash expenses, the assets being depreciated and amortized may have to be replaced in the future;
adjusted EBITDA and adjusted EBITDA ex. SBC do not reflect our tax provision, which reduces cash available to us;
adjusted EBITDA and adjusted EBITDA ex. SBC exclude interest (income) expense and other (income) expense, net, as these items are not
components of our core business; and
free cash flow does not represent the total residual cash flow available for discretionary purposes and does not reflect our future contractual
commitments.
34
Adjusted EBITDA and Adjusted EBITDA ex. SBC
We define adjusted EBITDA as net income (loss) excluding interest (income) expense, provision (benefit) for income taxes, other (income) expense, net,
and depreciation and amortization. We define adjusted EBITDA ex. SBC as adjusted EBITDA excluding stock-based compensation expense. The
following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to adjusted EBITDA and adjusted EBITDA
ex. SBC for each of the periods presented:
(in thousands)
Adjusted EBITDA ex. SBC reconciliation:
Net income (loss)
Add (deduct):
Interest (income) expense
Other (income) expense, net
Provision (benefit) for income taxes
Depreciation and amortization
Remeasurement of preferred stock warrant liability
Adjusted EBITDA
Add (deduct):
Stock-based compensation expense
Adjusted EBITDA ex. SBC
Free Cash Flow
For the Fiscal Year Ended
August 1, 2020
August 3, 2019
July 28, 2018
$
(67,117)
$
36,881
$
44,900
(5,535)
1,593
19,395
22,562
—
(5,791)
(1,535)
(6,060)
16,095
—
$
$
(29,102)
$
39,590
$
67,530
38,428
$
35,256
74,846
$
(904)
(100)
9,813
10,542
(10,685)
53,566
15,403
68,969
We define free cash flow as cash flows provided by (used in) operating activities reduced by purchases of property and equipment that are included in cash
flows used in investing activities. The following table presents a reconciliation of cash flows provided by (used in) operating activities, the most
comparable GAAP financial measure, to free cash flow for each of the periods presented:
(in thousands)
Free cash flow reconciliation:
Cash flows provided by operating activities
Deduct:
Purchases of property and equipment
Free cash flow
Cash flows used in investing activities
Cash flows provided by (used in) financing activities
Operating Metrics
Active clients (in thousands)
Net revenue per active client(1)
For the Fiscal Year Ended
August 1, 2020
August 3, 2019
July 28, 2018
42,877
$
78,594
$
72,178
(30,207)
12,670
(70,461)
(1,435)
$
$
$
(30,825)
47,769
(225,184)
6,945
$
$
$
(16,565)
55,613
(16,565)
134,795
August 1, 2020
August 3, 2019
July 28, 2018
3,522
486 $
3,236
488 $
2,742
447
$
$
$
$
$
(1) Fiscal year 2019 was a 53-week year, with the extra week occurring in the quarter ended August 3, 2019.
Active Clients
We believe that the number of active clients is a key indicator of our growth and the overall health of our business. We define an active client as a client
who checked out a Fix or was shipped an item using our direct-buy functionality in the preceding 52 weeks, measured as of the last day of that period. A
client checks out a Fix when she indicates what items she is keeping through our mobile application or on our website. We consider each Men’s, Women’s,
or Kids account as a client, even if they share the same household. We had 3,522,000 and 3,236,000 active clients as of August 1, 2020, and August 3,
2019, respectively, representing year-over-year growth of 8.8%.
35
Net Revenue per Active Client
We believe that net revenue per active client is an indicator of client engagement and satisfaction. We calculate net revenue per active client based on net
revenue over the preceding four fiscal quarters divided by the number of active clients, measured as of the last day of the period. Net revenue per active
client was $486 and $488 as of August 1, 2020, and August 3, 2019, respectively, representing a year-over-year decline of 0.4%. Net revenue per active
client as of August 3, 2019, benefited from an additional week of revenue, as fiscal 2019 was a 53-week period while fiscal 2020 included 52 weeks.
Excluding the impact of the 53rd week of fiscal 2019, net revenue per active client increased from $479 to $486 between August 3, 2019, and August 1,
2020, representing an increase of 1.5%.
Factors Affecting Our Performance
Inventory Management
We leverage our data science to buy and manage our inventory, including merchandise assortment and fulfillment center optimization. Because our
merchandise assortment directly correlates to client success, we may at times optimize our inventory to prioritize long-term client success over short-term
gross margin impact. To ensure sufficient availability of merchandise, we generally enter into purchase orders well in advance and frequently before
apparel trends are confirmed by client purchases. As a result, we are vulnerable to demand and pricing shifts and availability of merchandise at time of
purchase. We incur inventory write-offs and changes in inventory reserves that impact our gross margins.
Our inventory investments will fluctuate with the needs of our business. For example, in the first half of our fiscal year, we purchased inventory based on
our pre-COVID-19 pandemic projections, which resulted in excess inventory levels and higher inventory reserves during our third fiscal quarter. As noted
above, in March 2020, we temporarily closed three of our eight fulfillment centers resulting in significantly less capacity in our warehouses and in turn
delayed Fix shipments and a substantial backlog, delayed return processing, extended wait times for our clients, and significant inventory management
challenges. During the fourth quarter of fiscal 2020, we increased capacity at our fulfillment centers and we experienced an uptick in client demand, both of
which contributed to healthier inventory levels and lower inventory reserves than in our third fiscal quarter. Additionally, entering new locations such as the
UK, expanding to new categories such as Stitch Fix Kids, offering new functionalities such as direct buy, or adding new fulfillment centers will all require
additional investments in inventory.
Client Acquisition and Engagement
To grow our business, we must continue to acquire clients and successfully engage them. We believe that implementing broad-based marketing strategies
that increase our brand awareness has the potential to strengthen Stitch Fix as a national consumer brand, help us acquire new clients, and drive revenue
growth. As our business has achieved a greater scale and we are able to support a large and growing client base, we have increased our investments in
marketing to take advantage of more marketing channels to efficiently acquire clients. We currently utilize both digital and offline channels to attract new
visitors to our website or mobile app and subsequently convert them into clients. Our current marketing efforts include client referrals, affiliate programs,
partnerships, display advertising, television, print, radio, video, content, direct mail, social media, email, mobile “push” communications, search engine
optimization, and keyword search campaigns.
To successfully acquire clients and increase engagement, we must also continue to improve the diversity of our offering. These efforts may include
broadening our brand partnerships and expanding into new categories, product types, price points, and geographies. For example, in July 2018 we launched
Stitch Fix Kids, expanding our client and vendor base, and in May 2019, we launched our services in the UK, expanding our geographic scope. In June
2019, we introduced a direct-buy functionality with Buy It Again, allowing clients in the United States to buy previously purchased items in new colors,
prints, and sizes, and in February 2020, we launched Complete Your Looks, which presents clients a personalized set of algorithmically generated items for
direct purchase based on items they have already bought from us. In June 2020, we introduced Trending For You, which allows Men’s and Women’s clients
to shop personalized looks based on their style profiles.
While we expect to continue to make significant marketing investments to grow our business in the long run, our marketing expenses may vary from period
to period. For example, we reduced our advertising spend during the third quarter of fiscal 2020 due to reduced capacity to serve new and existing clients as
we implemented operational changes at our fulfillment centers in response to the COVID-19 pandemic; however, our advertising spend increased to $167.8
million for the fiscal year ended August 1, 2020, compared to $152.1 million for the fiscal year ended August 3, 2019.
Investment in our Operations and Infrastructure
To grow our client base and enhance our offering, we will incur additional expenses. We intend to leverage our data science and deep understanding of our
clients’ needs to inform investments in operations and infrastructure. We anticipate that our expenses will increase as we continue to hire additional
personnel and further advance our technological and data science capabilities. Moreover, we intend to make capital investments in our inventory,
fulfillment centers, and office space and logistics infrastructure as we launch new categories, expand internationally, and drive operating efficiencies. We
expect to increase our spending on these investments in the future and cannot be certain that these efforts will grow our client base or be cost-effective.
However, we believe these strategies will yield positive returns in the long term.
36
Merchandise Mix
We offer apparel, shoes, and accessories across categories, brands, product types, and price points. We currently serve our clients in the following
categories: Women’s, Petite, Maternity, Men’s, Plus, and Kids. We carry a mix of third-party branded merchandise, including premium brands, and our own
Exclusive Brands. We also offer a wide variety of product types, including denim, dresses, blouses, skirts, shoes, jewelry, and handbags. We sell
merchandise across a broad range of price points and may further broaden our price point offerings in the future.
While changes in our merchandise mix have not caused significant fluctuations in our gross margin to date, categories, brands, product types, and price
points do have a range of margin profiles. For example, our Exclusive Brands have generally contributed higher margins, shoes have generally contributed
lower margins, and newer categories, such as Kids, tend to initially have lower margins. Shifts in merchandise mix driven by client demand may result in
fluctuations in our gross margin from period to period.
Components of Results of Operations
Revenue
We generate revenue from the sale of merchandise. We charge a nonrefundable upfront fee, referred to as a “styling fee,” that is credited towards any
merchandise purchased in the Fix. We deduct discounts, sales tax, and estimated refunds to arrive at net revenue, which we refer to as revenue throughout
the report. We offer Style Pass to provide select U.S. clients with an alternative to paying a styling fee per Fix. Style Pass clients pay a nonrefundable
annual fee for unlimited styling that is credited towards merchandise purchases. We also recognize revenue resulting from direct purchases and estimated
breakage income on gift cards. We expect our revenue to increase in absolute dollars as we grow our business, although our revenue growth rate may slow
in future periods.
Cost of Goods Sold
Cost of goods sold consists of the costs of merchandise, expenses for shipping to and from clients and inbound freight, inventory write-offs and changes in
our inventory reserve, payment processing fees, and packaging materials costs, offset by the recoverable cost of merchandise estimated to be returned. We
expect our cost of goods sold to fluctuate as a percentage of revenue primarily due to how we manage our inventory and merchandise mix. Our
classification of cost of goods sold may vary from other companies in our industry and may not be comparable.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses consist primarily of compensation and benefits costs, including stock-based compensation expense, for our
employees including our stylists, fulfillment center operations, data analytics, merchandising, engineering, marketing, client experience, and corporate
personnel. Selling, general, and administrative expenses also include marketing and advertising costs, third-party logistics costs, facility costs for our
fulfillment centers and offices, professional service fees, information technology costs, and depreciation and amortization expense. We expect our selling,
general, and administrative expenses to increase in absolute dollars and to fluctuate as a percentage of revenue due to the anticipated growth of our
business, increased marketing investments, and additional costs associated with being a public company. Our classification of selling, general, and
administrative expenses may vary from other companies in our industry and may not be comparable.
Remeasurement of Preferred Stock Warrant Liability
Prior to the initial public offering of our Class A common stock (our “IPO”), we estimated the fair value of the preferred stock warrant liability at the end
of each reporting period and recognized changes in the fair value through our statement of operations. In connection with our IPO, all warrants were
automatically exercised for no consideration, therefore we do not expect to have preferred stock warrant liability in future periods.
Interest Income
Interest income is generated from our cash, cash equivalents, and investments in available-for-sale securities.
Provision (Benefit) for Income Taxes
Our provision (benefit) for income taxes consists of an estimate of federal, state, and international income taxes based on enacted federal, state, and
international tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, and changes in the valuation of our net federal and state
deferred tax assets.
37
Results of Operations
Comparison of the Fiscal Years Ended August 1, 2020, August 3, 2019, and July 28, 2018
The following table sets forth our results of operations for the periods indicated:
(in thousands)
Revenue, net
Cost of goods sold
Gross profit
Selling, general, and administrative expenses
Operating income (loss)
Remeasurement of preferred stock warrant liability
Interest (income) expense
Other (income) expense, net
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
$
(1)Fiscal 2020 and 2018 included 52 weeks. Fiscal 2019 was a 53-week year.
* Not meaningful
For the Fiscal Year Ended (1)
August 1, 2020
August 3, 2019
July 28, 2018
2020 vs. 2019
% Change
2019 vs. 2018
% Change
$
1,711,733
$
1,577,558
$
1,226,505
957,523
754,210
805,874
(51,664)
—
(5,535)
1,593
(47,722)
19,395
(67,117)
$
$
874,429
703,129
679,634
23,495
—
(5,791)
(1,535)
30,821
(6,060)
36,881
$
$
690,483
536,022
492,998
43,024
(10,685)
(904)
(100)
54,713
9,813
44,900
8.5 %
9.5 %
7.3 %
18.6 %
(319.9) %
— %
(4.4) %
(203.8) %
(254.8) %
(420.0) %
(282.0) %
28.6 %
26.6 %
31.2 %
37.9 %
(45.4) %
(100.0) %
*
*
(43.7) %
(161.8) %
(17.9) %
The following table sets forth the components of our results of operations as a percentage of revenue:
Revenue, net
Cost of goods sold
Gross margin
Selling, general, and administrative expenses
Operating income (loss)
Remeasurement of preferred stock warrant liability
Interest (income) expense
Other (income) expense, net
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Revenue and Gross Margin
For the Fiscal Year Ended
August 1, 2020
August 3, 2019
July 28, 2018
100.0 %
100.0 %
100.0 %
55.9 %
44.1 %
47.1 %
(3.0) %
— %
(0.3) %
0.1 %
(2.8) %
1.1 %
(3.9) %
55.4 %
44.6 %
43.1 %
1.5 %
— %
(0.4) %
(0.1) %
2.0 %
(0.3) %
2.3 %
56.3 %
43.7 %
40.2 %
3.5 %
(0.9) %
(0.1) %
— %
4.5 %
0.8 %
3.7 %
Revenue in the fiscal year ended August 1, 2020, a 52-week year, increased by $134.2 million, or 8.5%, from revenue in the fiscal year ended August 3,
2019, a 53-week year. Adjusted for the impact of the extra week in fiscal 2019, revenue in fiscal 2020 grew by 10.7%. The increase in revenue was
primarily attributable to a 8.8% increase in active clients from August 3, 2019, to August 1, 2020, which drove increased sales of merchandise.
Gross margin for the fiscal year ended August 1, 2020, decreased by 0.5% compared with the fiscal year ended August 3, 2019. The decrease was primarily
attributable to an increase in shipping expense due in part to higher rates with our carriers, partially offset by lower merchandise costs.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses in the fiscal year ended August 1, 2020, increased by $126.2 million, compared with the fiscal year ended
August 3, 2019. As a percentage of revenue, selling, general, and administrative expenses increased to 47.1% for the fiscal year ended August 1, 2020,
compared with 43.1% for the fiscal year ended August 3, 2019. The increase was primarily related to higher compensation and benefits expense and stock-
based compensation expense due to increased headcount in data science and engineering as we continue to invest in technology talent, and higher
advertising spend year over year to support the growth of our business.
38
Remeasurement of Preferred Stock Warrant Liability
Prior to our IPO, the change in the preferred stock warrant liability was due to a change in the underlying fair value of our preferred stock. In November
2017, in connection with our IPO, the preferred stock warrants were automatically exercised into shares of Class B common stock and the preferred stock
warrant liability was reclassified to additional paid-in capital.
Provision for Income Taxes
The following table summarizes our effective tax rate from income for the periods presented:
(in thousands)
Income before income taxes
Provision (benefit) for income taxes
Effective tax rate
For the Fiscal Year Ended
August 1, 2020
August 3, 2019
July 28, 2018
$
(47,722)
$
30,821
$
19,395
(40.6) %
(6,060)
(19.7) %
54,713
9,813
17.9 %
We are subject to income taxes in the United States and the UK. Our effective tax rate and provision for income taxes increased from the fiscal year ended
August 3, 2019, to the fiscal year ended August 1, 2020, primarily due to recording a valuation allowance on our net federal and state deferred tax assets
and decreased excess tax benefits from stock-based compensation, partially offset by the net operating loss carryback provisions of the CARES Act.
39
Quarterly Results of Operations
The following table sets forth our unaudited quarterly consolidated statements of operations for each of the quarters indicated. The information for each
quarter has been prepared on a basis consistent with our audited consolidated financial statements included in this Annual Report and reflect, in the opinion
of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of the financial information contained in those
statements. Our historical results are not necessarily indicative of the results that may be expected for the full year or any other period in the future. The
fiscal year ended August 3, 2019, includes the impact of an additional week that occurred in the fourth quarter of 2019, compared to the fiscal year ended
August 1, 2020, which did not include an extra week. The following quarterly financial information should be read in conjunction with our audited
consolidated financial statements and related notes included in this Annual Report.
(in thousands, except per
share data)
August 1, 2020
May 2, 2020
February 1,
2020
November 2,
2019
August 3, 2019
April 27, 2019
January 26,
2019
October 27,
2018
Quarter Ended
$
443,408
$
371,726
$
451,784
$
444,815
$
432,149
$
408,893
$
370,280
$
366,236
244,298
199,110
220,115
151,611
249,597
202,187
243,513
201,302
241,785
190,364
224,445
184,448
207,131
163,149
201,068
165,168
44.9 %
40.8 %
44.8 %
45.3 %
44.1 %
45.1 %
44.1 %
45.1 %
213,377
(14,267)
(1,033)
197,666
(46,055)
(1,372)
193,689
8,498
(1,477)
201,142
160
(1,653)
188,610
1,754
(1,759)
189,015
(4,567)
(1,463)
147,738
15,411
(1,170)
154,271
10,897
(1,399)
162
569
28
(13,396)
(45,252)
9,947
Net income (loss)
$
(44,467)
$
(33,903)
$
31,071
(11,349)
834
979
1,157
(178)
(178)
(178)
(0.00)
(0.00)
$
$
$
$
$
(571)
(391)
(453)
(120)
4,084
(2,713)
17,034
12,416
(3,095)
(9,761)
5,058
7,179
$
7,048
$
11,976
$
1,738
10,678
7,179
7,179
0.07
0.07
$
$
$
$
7,048
7,048
0.07
0.07
$
$
$
$
11,968
11,968
0.12
0.12
$
$
$
$
10,664
10,665
0.11
0.10
(1,484)
11,431
11,431
11,431
0.11
0.11
$
$
$
$
$
$
$
$
$
(44,467)
(44,467)
(0.44)
(0.44)
$
$
$
$
(33,903)
(33,903)
(0.33)
(0.33)
$
$
$
$
Revenue, net
Cost of goods sold
Gross profit
Gross margin
Selling, general, and
administrative expenses
Operating income (loss)
Interest (income) expense
Other (income) expense,
net
Income (loss) before
income taxes
Provision (benefit) for
income taxes
Net income (loss)
attributable to common
stockholders:
Basic
Diluted
Earnings (loss) per share
attributable to common
stockholders:
Basic
Diluted
Weighted-average shares
used to compute earnings
per share attributable to
common stockholders:
Basic
Diluted
103,278,240
102,650,155
102,045,087
101,557,546
101,111,138
100,301,078
99,590,187
98,965,274
103,278,240
102,650,155
104,637,548
101,557,546
104,190,711
103,615,159
102,817,838
104,539,452
Our quarterly revenue increased through the first six periods presented above before decreasing in the third fiscal quarter of 2020 due to the impacts of the
COVID-19 pandemic. As a result of the COVID-19 pandemic, we temporarily closed three of our fulfillment centers, operated at significantly reduced
capacity for much of the third quarter, and reduced our marketing in light of this reduced capacity. These factors were the principal causes of our decline in
revenue and gross margin during the third quarter. Our warehouse capacity constraints were more acute during March, but steadily improved during the
fourth fiscal quarter. During the fourth quarter of fiscal 2020, with higher capacity levels in our warehouses for the majority of the period, we saw a return
to revenue growth on a year-over-year basis.
Our gross margin was approximately 44% to 45% for all periods, except the third fiscal quarter of 2020. Our gross margin of approximately 40.8% during
the third fiscal quarter was largely due to COVID-19 impacts, as we sold less merchandise than anticipated during the third fiscal quarter, which led to
excess inventory reserves and higher clearance rates. During the fourth quarter of fiscal 2020, our gross margin returned to the 44% to 45% range as we had
increased sales of merchandise and a subsequent reduction in our inventory reserves.
40
Our selling, general, and administrative expenses varied from period to period, but generally increased over the past eight fiscal periods. Our compensation
and benefits, including stock-based compensation continue to increase as we invest in technology talent. Our advertising expenses were the primary driver
in the fluctuation of selling, general, and administrative expenses from period to period. For example, we tend to spend less on advertising during our
second fiscal quarter due to an overly promotional environment during the holiday season. Additionally, we decreased our advertising spend during the
third fiscal quarter of 2020 due to our reduced capacity to serve new and existing clients as a result of COVID-19-related operational constraints at our
fulfillment centers.
Net income (loss) also fluctuated during the previous eight fiscal periods, with our net loss during the third fiscal quarter of 2020 due primarily to COVID-
19-related impacts. During the fourth fiscal quarter of 2020, we recorded a valuation allowance on our deferred tax assets of $43.2 million, which greatly
increased our provision for income taxes and our net loss for the period.
Liquidity and Capital Resources
Sources of Liquidity
Our principal sources of liquidity since inception have been our cash flows from operations, as well as the net proceeds we received through private sales of
equity securities and our IPO. Our primary use of cash includes operating costs such as merchandise purchases, compensation and benefits, marketing, and
other expenditures necessary to support our business growth.
As of August 1, 2020, we had $143.5 million of cash and cash equivalents and investments of $238.1 million. Our investment balance includes $143.0
million of short-term investments with contractual maturities of 12 months or less as of August 1, 2020.
In June 2020, we entered into a $90.0 million credit agreement (“Credit Agreement”) with Silicon Valley Bank and other lenders. The Credit Agreement
will terminate on June 2, 2021. The Credit Agreement includes a letter of credit sub-facility of $20.0 million and a swingline sub-facility of up to $50.0
million. As of August 1, 2020, we did not have any borrowings outstanding under the Credit Agreement.
Though we continue to monitor the COVID-19 pandemic closely, the situation is changing rapidly and the extent and duration of the pandemic's impact
remain uncertain. Our liquidity and working capital needs could be negatively impacted. However, we believe our existing cash, cash equivalents, short-
term investment balances, and the borrowing available under our senior revolving credit facility, if needed, will be sufficient to meet our working capital
and capital expenditure needs for at least the next 12 months.
Cash Flows
The following table summarizes our cash flows for the periods indicated and our cash and working capital balances as of the end of the period (in
thousands):
(in thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash provided by operating activities
For the Fiscal Year Ended
August 1, 2020
August 3, 2019
July 28, 2018
$
$
42,877
$
78,594
$
(70,461)
(1,435)
(225,184)
6,945
(29,019)
$
(139,645)
$
72,178
(16,565)
134,795
190,408
During the fiscal year ended August 1, 2020, cash provided by operating activities was $42.9 million, which consisted of a net loss of $67.1 million,
adjusted by non-cash charges of $122.7 million and a change of $12.7 million in our net operating assets and liabilities. The non-cash charges were largely
driven by $67.5 million of stock-based compensation expense, a $43.2 million valuation allowance on our deferred tax assets, and $22.6 million of
depreciation, amortization, and accretion, partially offset by a $20.3 million change in deferred tax expense. The change in our net operating assets and
liabilities was primarily due to an increase of $15.2 million in our inventory balance due to increased inventory purchases to support our growth and an
increase of $6.7 million in our prepaid expenses and other assets balance due to timing of payments made in the period. This activity was substantially
offset by an increase of $8.3 million in accrued expenses related to increased advertising activity during fiscal 2020 and expenses related to our California
styling organization restructuring.
During the fiscal year ended August 3, 2019, cash provided by operating activities was $78.6 million, which consisted of net income of $36.9 million,
adjusted by non-cash charges of $49.5 million and a change of $7.8 million in our net operating assets and liabilities. The non-cash charges were largely
driven by $35.3 million of stock-based compensation expense and $14.3 million of depreciation, amortization, and accretion, partially offset by a $8.2
million decrease in deferred tax expense. The change in our net operating assets and liabilities was primarily due to an increase of $41.2 million in our
inventory balance due to increased inventory purchases to support our growth, substantially offset by an increase of $33.6 million in accrued expenses and
account payable related to increased business activity.
41
Cash used in investing activities
During the fiscal year ended August 1, 2020, cash used in investing activities was $70.5 million, primarily related to our net investment of $40.3 million in
highly rated available-for-sale securities and $30.2 million in purchases of property and equipment.
During the fiscal year ended August 3, 2019, cash used in investing activities was $225.2 million, primarily related to our net investment of $194.4 million
in highly rated available-for-sale securities and $30.8 million purchases of property and equipment.
Cash provided by (used in) financing activities
During the fiscal year ended August 1, 2020, cash used in financing activities was $1.4 million, which was primarily due to payments for tax withholding
related to vesting of restricted stock units, substantially offset by proceeds from the exercise of stock options.
During the fiscal year ended August 3, 2019, cash provided by financing activities was $6.9 million, which was primarily due to proceeds from the exercise
of stock options, partially offset by tax withholding related to vesting of restricted stock units.
Contractual Obligations and Other Commitments
The following table summarizes our contractual obligations as of August 1, 2020:
(in thousands)
Operating lease obligations
Purchase obligations (1)
Unrecognized tax benefits (2)
Total
Payments Due by Period
Total
Less than 1 year
1 - 3 years
3 - 5 years
More than 5 years
$
$
196,185
$
31,735
$
58,971
$
46,682
$
58,797
372,051
—
361,858
—
10,193
—
—
—
—
—
568,236
$
393,593
$
69,164
$
46,682
$
58,797
(1) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on Stitch Fix and that specify all significant terms. Inventory and fabric
purchase commitments comprise substantially all of total purchase obligations.
(2) Due to the uncertainty with respect to the timing of future cash flows associated with our $16.7 million of unrecognized tax benefits at August 1, 2020, we are unable to make reasonably
reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, the related balances have not been included in the table above.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our financial statements requires us to make assumptions
and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related
disclosures. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results
may differ from these estimates.
We have considered the impact of the COVID-19 pandemic on significant estimates and judgments used in applying accounting policies. While there is a
greater degree of uncertainty in applying these judgments in light of this crisis, we believe reasonable estimates have been used in preparing the
consolidated financial statements.
The critical accounting policies, estimates, and judgments that we believe to have the most significant impacts to our consolidated financial statements are
described below.
Inventory
Inventory consists of finished goods, which are recorded at the lower of cost or net realizable value using the specific identification method. We establish a
reserve for excess and slow-moving inventory we expect to write off based on historical trends. In addition, we estimate and accrue shrinkage as a
percentage of inventory out to the client and damaged items at 100% of cost. Inventory shrinkage and damage estimates are made to reduce the inventory
value for lost, stolen, or damaged items. If actual experience differs significantly from our estimates, our operating results could be adversely affected.
Stock-Based Compensation
We grant stock options to our employees, consultants, and members of our board of directors and recognize stock-based compensation expense based on
the fair value of stock options at grant date. We estimate the fair value of stock options using the Black-Scholes option-pricing model. This model requires
us to use certain estimates and assumptions such as:
•
•
Expected volatility of our common stock-based on the volatility of comparable publicly traded companies;
Expected term of our stock options—as we do not have sufficient historical experience for determining the expected term of the stock option
awards granted, we base our expected term on the simplified method, generally calculated as the mid-point between the vesting date and the end
of the contractual term;
42
•
•
Expected dividend yield—as we have not paid and do not anticipate paying dividends on our common stock, our expected dividend yield is 0%;
and
Risk-free interest rates-based on the U.S. Treasury zero coupon notes in effect at the grant date with maturities equal to the expected terms of the
options granted.
We record stock-based compensation expense net of estimated forfeitures so that expense is recorded for only those stock options that we expect to vest.
We estimate forfeitures based on our historical forfeiture of stock options adjusted to reflect future changes in facts and circumstances, if any. We will
revise our estimated forfeiture rate if actual forfeitures differ from our initial estimates.
Income Taxes
We are subject to income taxes in the United States and the UK. We compute our provision for income taxes using the asset and liability method, under
which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting
and tax bases of assets and liabilities and for tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates
that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled.
Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the amount that is more likely than not to be realized. We
consider many factors when assessing the likelihood of future realization, including our recent cumulative loss, earnings expectations in earlier future
years, unsettled economic disruption of the COVID-19 pandemic, and other relevant factors.
Significant judgment is required in determining our uncertain tax positions. We continuously review issues raised in connection with all ongoing
examinations and open tax years to evaluate the adequacy of our tax liabilities. We evaluate uncertain tax positions under a two-step approach. The first
step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that
the position will be sustained upon examination based on its technical merits. The second step is, for those positions that meet the recognition criteria, to
measure the tax benefit as the largest amount that is more than 50% likely of being realized. We believe our recorded tax liabilities are adequate to cover all
open tax years based on our assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To
the extent that our view as to the outcome of these matters changes, we will adjust income tax expense in the period in which such determination is made.
We classify interest and penalties related to income taxes as income tax expense.
Revenue Recognition
While our revenue recognition does not involve significant judgment, it represents an important accounting policy. Revenue is recognized net of sales
taxes, discounts, and estimated refunds. For a Fix, we generate revenue when clients purchase merchandise, at which point we apply the nonrefundable
upfront styling fee against the price of merchandise purchased. If none of the items within the Fix are purchased, we recognize the nonrefundable upfront
styling fee as revenue at that time. For Style Pass clients, we recognize revenue at the earlier of the time the annual Style Pass fee is applied against the
price of merchandise purchased or the expiry of the annual period. For a direct buy, we generate revenue when the item is shipped to the client. If a client
would like to exchange an item, we recognize revenue at the time the exchanged item is shipped, which coincides with the transfer of control to the
customer. Sales tax collected from clients is not considered revenue and is included in accrued liabilities until remitted to the taxing authorities. Discounts
are recorded as a reduction to revenue when merchandise is purchased. We record a refund reserve based on our historical refund patterns.
We sell gift cards to clients and establish a liability based on the face value of such gift cards. The liability is relieved and we recognize revenue upon
redemption by our clients. If a gift card is not used, we will recognize estimated gift card breakage revenue proportionately to customer usage of gift cards
over the expected gift card usage period, subject to requirements to remit balances to governmental agencies.
Leases
We adopted ASU 2016-02 on August 4, 2019, which requires us to record operating lease right-of-use assets and operating lease liabilities on our
consolidated balance sheets. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future
minimum lease payments over the lease term at commencement date. Certain adjustments to our operating lease right-of-use assets may be required for
items such as initial direct costs paid or incentives received. The discount rate implicit within our leases is generally not determinable, therefore, we use a
collateralized incremental borrowing rate and our expected lease term at commencement date to calculate the present value of our future minimum lease
payments. Due to the lack of comparable long-term borrowings, our incremental borrowing rate is determined for each lease using a peer group of
companies with similar credit profiles, adjusted for the impact of collateralization and lease term. If the estimate of our incremental borrowing rate was
changed, our operating lease right-of-use assets and operating lease liabilities could differ materially.
Recent Accounting Pronouncements
For recent accounting pronouncements, please see “Significant Accounting Policies” in Note 2 of the Notes to Consolidated Financial Statements included
in this Annual Report.
43
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We are primarily exposed to market risks through interest rate risk on our investments. As of August 1, 2020, we had $238.1 million in highly rated
investments accounted for as available-for-sale securities, which are presented on our balance sheet at their fair market value. These interest-earning
instruments carry a degree of interest rate risk; however, a hypothetical 10% change in interest rates during any of the periods presented would not have
had a material impact on our consolidated financial statements.
Foreign Currency Risk
As of August 1, 2020, our revenue was earned in U.S. dollars and British pound sterling. Our expansion into the UK exposes us to fluctuations in foreign
currency exchange rates on our operating expenses. Fluctuations in foreign currency exchange rates may also result in transaction gains or losses on
transactions in currencies other than the U.S. dollar or British pound sterling. For the fiscal year ended August 1, 2020, a hypothetical 10% increase or
decrease in current exchange rates would not have had a material impact on our consolidated financial results.
44
Item 8. Financial Statements and Supplementary Data.
STITCH FIX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
45
Page
Number
46
48
49
50
51
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Stitch Fix, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Stitch Fix, Inc. and subsidiaries (the "Company") as of August 1, 2020 and August 3,
2019, and the related consolidated statements of operations and comprehensive income (loss), convertible preferred stock and stockholders' equity, and
cash flow for each of the fiscal years ended August 1, 2020, August 3, 2019 and July 28, 2018, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 1,
2020 and August 3, 2019, and the results of its operations and its cash flow for each of the fiscal years ended August 1, 2020, August 3, 2019 and July 28,
2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of August 1, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated September 25, 2020 expressed an unqualified opinion on
the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, effective August 4, 2020, the Company adopted FASB ASU No. 2016-02, Leases (“ASC 842”) using the
modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical
audit matter or on the accounts or disclosures to which it relates.
Inventory - Excess and Slow-Moving Inventory Reserve - Refer to Note 2 to the financial statements
Critical Audit Matter Description
The Company establishes an inventory reserve, which includes a reserve for excess and slow-moving inventory on hand that is expected to be written-off or
otherwise disposed of at a future date. The Company’s estimate of the appropriate amount of the excess and slow-moving inventory reserve utilizes certain
inputs and involves judgment. Such inputs include data associated with historic trends, historic inventory write-off activity, and the on-hand inventory
aging distribution. The calculation and analysis of historic trend data, historic write-off activity, and the application of this analysis to on-hand inventory
involves complex calculations. The excess and slow-moving inventory reserve at August 1, 2020 totaled $22.6 million. Net inventory at August 1, 2020
totaled $124.8 million.
We identified the inventory reserve as a critical audit matter because of the significant estimates and assumptions management makes to estimate the excess
and slow-moving inventory reserve, especially considering the introduction of newer product lines and changes in the inventory management process. This
required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and the
reasonableness of related assumptions, as well as the inputs and related calculations related to historic inventory trends, historic inventory write-off activity,
and the on-hand inventory aging distribution.
46
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the excess and slow-moving inventory reserve included the following, among others:
• We evaluated the appropriateness of specified inputs supporting management’s estimate, including the age of on-hand inventory items, historic
inventory trends, and historic write-off activity.
• We evaluated the appropriateness and consistency of management’s methods and assumptions used in developing their estimate of the excess and
slow-moving inventory reserve, which included consideration of reserve trends by merchandise category and the impact of changes in inventory
management processes on the estimate.
• We developed an independent expectation of the excess and slow-moving inventory reserve using historic inventory activity and compared our
independent expectation to the amount recorded in the financial statements.
• We compared actual write-off activity in the current year to the excess and slow-moving reserve estimated by the Company in the prior year to
evaluate management’s ability to accurately estimate the reserve.
• We looked for indications that the reserve for excess and slow-moving inventory may be understated by evaluating write-off activity of inventory
subsequent to August 1, 2020.
/s/ Deloitte & Touche LLP
San Francisco, California
September 25, 2020
We have served as the Company’s auditor since 2014.
47
Stitch Fix, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
August 1, 2020
August 3, 2019
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Inventory, net
Prepaid expenses and other current assets
Total current assets
Long-term investments
Property and equipment, net
Operating lease right-of-use assets
Deferred tax assets
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Operating lease liabilities
Accrued liabilities
Gift card liability
Deferred revenue
Other current liabilities
Total current liabilities
Operating lease liabilities, net of current portion
Deferred rent, net of current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 8)
Stockholders’ equity:
Class A common stock,$0.00002 par value –2,000,000,000 shares authorized as of August 1, 2020, and August 3, 2019;
58,440,930 and 54,551,240 shares issued and outstanding as of August 1, 2020, and August 3, 2019, respectively
Class B common stock, $0.00002 par value – 100,000,000 shares authorized as of August 1, 2020, and August 3, 2019;
45,314,577 and 46,846,240 shares issued and outstanding as of August 1, 2020, and August 3, 2019, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
143,455
$
$
$
143,037
124,816
55,002
466,310
95,097
70,369
132,615
333
4,705
769,429
$
85,177
$
24,333
77,590
8,590
13,059
3,406
212,155
140,175
—
16,062
368,392
1
1
348,750
2,728
49,557
401,037
$
769,429
$
170,932
143,276
118,216
49,980
482,404
53,372
54,888
—
22,175
3,227
616,066
90,883
—
69,734
7,233
11,997
2,784
182,631
—
24,439
12,996
220,066
1
1
279,511
(187)
116,674
396,000
616,066
The accompanying notes are an integral part of these consolidated financial statements.
48
Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except share and per share amounts)
Stitch Fix, Inc.
Revenue, net
Cost of goods sold
Gross profit
Selling, general, and administrative expenses
Operating income (loss)
Remeasurement of preferred stock warrant liability
Interest (income) expense
Other (income) expense, net
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Other comprehensive income (loss):
Change in unrealized gain on available-for-sale securities, net of tax
Foreign currency translation
Total other comprehensive income (loss), net of tax
Comprehensive income (loss)
Net income (loss) attributable to common stockholders:
Basic
Diluted
Earnings (loss) per share attributable to common stockholders:
Basic
Diluted
Weighted-average shares used to compute earnings (loss) per share attributable to common
stockholders:
Basic
Diluted
For the Fiscal Year Ended
August 1, 2020
August 3, 2019
July 28, 2018
$
1,711,733
$
1,577,558
$
1,226,505
957,523
754,210
805,874
(51,664)
—
(5,535)
1,593
(47,722)
19,395
874,429
703,129
679,634
23,495
—
(5,791)
(1,535)
30,821
(6,060)
(67,117)
$
36,881
$
822
2,093
2,915
391
(578)
(187)
690,483
536,022
492,998
43,024
(10,685)
(904)
(100)
54,713
9,813
44,900
—
—
—
(64,202)
$
36,694
$
44,900
(67,117)
(67,117)
(0.66)
(0.66)
$
$
$
$
36,863
36,864
0.37
0.36
$
$
$
$
35,541
27,285
0.47
0.34
102,383,282
102,383,282
100,013,462
103,653,626
75,947,759
81,288,418
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
49
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity
(In thousands, except share amounts)
Stitch Fix, Inc.
Convertible
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
Stockholders’
Equity
Balance as of July 29, 2017
59,511,055
$
42,222
26,834,535
$
1
$
27,002
$
—
$
34,858
$
61,861
—
—
9,175,557
—
127,033
(59,511,055)
(42,222)
59,511,055
1
42,221
Issuance of Class A common stock
upon initial public offering, net of
offering costs
Issuance of Class B common stock
upon conversion of convertible
preferred stock
Reclassification of warrant liability to
additional paid-in capital upon the
initial public offering
Issuance of Class B common stock
upon exercise of stock options
Issuance of Class A common stock
upon settlement of restricted stock
units, net of tax withholdings
Repurchase of Class B common stock
related to early exercised options
Vesting of early exercised options
Stock-based compensation
Net income (loss)
Balance as of July 28, 2018
Cumulative effect of adopting
accounting standards(1)
Issuance of common stock upon
exercise of stock options
Issuance of common stock upon
settlement of restricted stock units, net
of tax withholdings
Vesting of early exercised options
Stock-based compensation
Net income (loss)
Other comprehensive income (loss),
net of tax
Balance as of August 3, 2019
Issuance of common stock upon
exercise of stock options
Issuance of common stock upon
settlement of restricted stock units, net
of tax withholdings
Stock-based compensation
Net income (loss)
Other comprehensive income (loss),
net of tax
Balance as of August 1, 2020
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
44,900
79,758
$
35
—
—
—
—
36,881
(187)
—
127,033
42,222
15,994
6,384
(596)
—
988
16,286
44,900
315,072
35
13,693
(6,748)
209
37,045
36,881
(187)
396,000
12,078
(12,819)
69,980
(67,117)
2,915
401,037
1,066,225
2,192,430
39,538
(19,479)
—
—
—
—
—
—
—
—
—
—
15,994
6,384
(596)
—
988
16,286
—
98,799,861
$
2
$
235,312
$
—
2,200,393
397,226
—
—
—
—
—
—
—
—
—
—
—
—
13,693
(6,748)
209
37,045
—
—
101,397,480
$
2
$
279,511
$
(187)
$
116,674
$
1,278,894
—
12,078
1,079,133
—
—
—
—
—
—
—
(12,819)
69,980
—
—
—
—
—
—
—
—
—
(67,117)
2,915
—
103,755,507
$
2
$
348,750
$
2,728
$
49,557
$
(1) See Note 2, Summary of Significant Accounting Policies, of the Notes to the Condensed Consolidated Financial Statements for more details on the cumulative effect of adopting accounting
standards.
The accompanying notes are an integral part of these consolidated financial statements.
50
Stitch Fix, Inc.
Consolidated Statements of Cash Flow
(In thousands)
Cash Flows from Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
For the Fiscal Year Ended
August 1, 2020
August 3, 2019
July 28, 2018
$
(67,117)
$
36,881
$
44,900
Deferred income taxes
Deferred tax assets valuation allowance
Remeasurement of preferred stock warrant liability
Inventory reserves
Stock-based compensation expense
Depreciation, amortization, and accretion
Other
Change in operating assets and liabilities:
Inventory
Prepaid expenses and other assets
Operating lease right-of-use assets and liabilities
Accounts payable
Accrued liabilities
Deferred revenue
Gift card liability
Other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities
Purchases of property and equipment
Purchases of securities available-for-sale
Sales of securities available-for-sale
Maturities of securities available-for-sale
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from initial public offering, net of underwriting discounts paid
Proceeds from the exercise of stock options, net
Payments for tax withholding related to vesting of restricted stock units
Repurchase of Class B common stock related to early exercised options
Issuance costs on revolving credit facility
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents, and restricted cash
Effect of exchange rate changes on cash
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
Components of Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents
Restricted cash – current portion
Restricted cash – long-term portion
Total cash, cash equivalents, and restricted cash
Supplemental Disclosure
Cash paid for income taxes
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Purchases of property and equipment included in accounts payable and accrued liabilities
Capitalized stock-based compensation
Leasehold improvements paid by landlord
Vesting of early exercised options
Conversion of preferred stock upon initial public offering
Reclassification of preferred stock warrant liability upon initial public offering
Deferred offering costs paid in prior year
(20,273)
43,153
—
8,828
67,530
22,617
882
(15,222)
(6,683)
394
(5,520)
8,297
1,054
1,357
3,580
42,877
(30,207)
(248,318)
36,587
171,477
(70,461)
—
12,078
(12,819)
—
(694)
(1,435)
(29,019)
1,542
170,932
(8,203)
—
—
7,974
35,256
14,331
148
(41,233)
(16,831)
—
10,774
22,856
3,325
825
12,491
78,594
(30,825)
(285,205)
10,596
80,250
(225,184)
—
13,693
(6,748)
—
—
6,945
(139,645)
211
310,366
143,455
$
170,932
$
143,455
$
170,932
$
—
—
—
—
143,455
$
170,932
$
6,588
—
(10,685)
1,916
15,403
10,542
155
(19,416)
(17,307)
—
35,502
(3,595)
1,720
1,624
4,831
72,178
(16,565)
—
—
—
(16,565)
129,046
6,384
(596)
(39)
—
134,795
190,408
—
119,958
310,366
297,516
250
12,600
310,366
365
4,088
2,450
7,406
—
—
—
—
$
$
$
$
$
$
$
966
10,071
5,272
1,789
—
209
—
—
—
$
$
$
$
$
$
$
795
883
—
988
42,222
15,994
1,879
$
$
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
51
1. Description of Business
STITCH FIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stitch Fix, Inc. (“we,” “our,” “us,” or “the Company”) delivers one-to-one personalization to our clients through the combination of data science and
human judgment. Our stylists hand select items from a broad range of merchandise. Stylists pair their own judgment with our analysis of client and
merchandise data to provide a personalized shipment of apparel, shoes, and accessories suited to each client’s needs. We call each of these unique
shipments a Fix. After receiving a Fix, our clients purchase the items they want to keep and return the other items. We also offer a direct-buy functionality
that allows clients the flexibility of purchasing items outside of a Fix. Through direct buy, clients are offered previously purchased items in different colors,
sizes, or prints, as well as a personalized set of algorithmically generated items. No styling fee is charged for direct purchases. We are incorporated in
Delaware and have operations in the United States and the UK.
COVID-19 Update
We are closely monitoring the effects of the novel coronavirus (“COVID-19”) outbreak, which was declared a global pandemic in March 2020, and its
impact on our business, the full extent of which will depend on factors such as the length of time the pandemic continues; how federal, state and local
governments are responding; the impact of the crisis on the economy and consumer behavior; and the effect on our clients, employees, vendors, and other
partners. As a result of the COVID-19 pandemic, in the third quarter of fiscal 2020 we temporarily closed three of our fulfillment centers, operated at
significantly reduced capacity for much of the third quarter, and reduced our marketing in light of this reduced capacity. During the fourth quarter of fiscal
2020, our fulfillment centers returned to higher capacity levels.
We believe our financial resources will allow us to manage the impact of COVID-19 on our business operations. We also believe our existing cash, cash
equivalents, short-term investment balances, and the borrowing available under our senior revolving credit facility, if needed, will be sufficient to meet our
working capital and capital expenditure needs for at least the next 12 months.
Coronavirus Aid, Relief, and Economic Security Act
On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which among other things, provides
employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 pandemic. In addition, the CARES Act permits net
operating loss (“NOL”) carryovers and carrybacks to offset 100% of taxable income for tax years beginning before 2021 and allows NOLs incurred in
2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. We provided for
an estimated $3.1 million benefit of the CARES Act in our financial statements for the period ended August 1, 2020.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”). The consolidated financial statements include the accounts of Stitch Fix, Inc. and our wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
Our fiscal year is a 52-week or 53-week period ending on the Saturday closest to July 31. The fiscal years ended August 1, 2020 (“2020”) and July 28,
2018 (“2018”), consisted of 52 weeks. The fiscal year ended August 3, 2019 (“2019”) consisted of 53 weeks.
Segment Information
We have one operating segment and one reportable segment as our chief operating decision maker, who is our Chief Executive Officer, reviews financial
information on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts in our condensed consolidated financial statements and accompanying footnotes.
Significant estimates and assumptions are used for inventory, stock-based compensation expense, income taxes, leases, and revenue recognition. Actual
results could differ from those estimates and such differences may be material to the condensed consolidated financial statements.
We have considered the impact of the COVID-19 pandemic on significant estimates and judgments used in applying accounting policies. While there is a
greater degree of uncertainty in applying these judgments in light of this crisis, we believe reasonable estimates have been used in preparing the
consolidated financial statements.
52
Cash and Cash Equivalents
Cash consists of bank deposits and amounts in transit from banks for client credit card and debit card transactions that will process in less than seven days.
Cash equivalents consist of investments in short-term money market funds.
Investment Securities
The Company’s short-term and long-term investments have been classified and accounted for as available-for-sale securities. We determine the appropriate
classification of our investments at the time of purchase and reevaluate the classification at each balance sheet date. Available-for-sale securities with
maturities of 12 months or less are classified as short-term and available-for-sale securities with maturities greater than 12 months are classified as long-
term. The Company’s available-for-sale securities are carried at fair value, with unrealized gains and losses, net of taxes, reported within accumulated other
comprehensive income (loss) (“AOCI”) in stockholders’ equity, with the exception of unrealized losses believed to be other-than-temporary, which are
reported in earnings in the current period, if applicable. There were no other-than-temporary losses recorded for the twelve months ended August 1, 2020,
and August 3, 2019, respectively. The cost of securities sold is based upon the specific identification method.
Foreign Currency
The functional currency of our international subsidiary is the local currency. For that subsidiary, we translate assets and liabilities to U.S. dollars using
period-end exchange rates, and average monthly exchange rates for revenues, costs, and expenses. We record translation gains and losses in AOCI as a
component of stockholders’ equity. Net foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to
functional currency are recorded in other income, net in the consolidated statements of operations and comprehensive income.
Inventory, net
Inventory consists of finished goods which are recorded at the lower of cost or net realizable value using the specific identification method. The cost of
inventory consists of merchandise costs and in-bound freight costs. We establish a reserve for excess and slow-moving inventory we expect to write off
based on historical trends. In addition, we estimate and accrue shrinkage as a percentage of inventory out to the client and damaged items at 100% of cost.
Inventory shrinkage and damage estimates are made to reduce the inventory value for lost, stolen, or damaged items.
The inventory reserve, which reduces inventory in our consolidated balance sheets, was $34.4 million and $25.5 million as of August 1, 2020, and
August 3, 2019, respectively.
Property and Equipment, net
Property and equipment, net is recorded at cost less accumulated depreciation and amortization. Depreciation and amortization is recorded on a straight-line
basis over the estimated useful lives of the respective assets. Repair and maintenance costs are expensed as incurred.
The estimated useful lives of our assets are as follows:
Computer equipment and capitalized software
Office furniture and equipment
Buildings
Leasehold improvements
Estimated useful life
3 years
5 years
25 years
Shorter of lease term or estimated useful life
We capitalize eligible costs to develop our proprietary systems, website, and mobile app. Capitalization of such costs begins when the preliminary project
stage is completed and it is probable that the project will be completed and the software will be used to perform the function intended. A subsequent
addition, modification, or upgrade to internal-use software is capitalized to the extent that it enhances the software’s functionality or extends its useful life.
Costs related to design or maintenance are expensed as incurred.
Leases
Currently, we only have operating leases, which include lease arrangements for our corporate offices, fulfillment centers, and, to a lesser extent, equipment.
Operating leases with a term greater than one year are recorded on the consolidated balance sheets as operating lease right-of-use assets and operating lease
liabilities at the commencement date. These balances are initially recorded at the present value of future minimum lease payments calculated using our
incremental borrowing rate and expected lease term. Certain adjustments to our operating lease right-of-use assets may be required for items such as initial
direct costs paid or incentives received. Upon adoption of ASU 2016-02, we elected to combine lease and non-lease components on all new or modified
leases into a single lease component, which we recognize over the expected term on a straight-line expense basis. Prior to fiscal 2020, we accounted for
leases under ASC 840 and did not record operating leases on our consolidated balance sheets. Refer to “Note 4 - Leases” for more information on our
leases.
53
Deferred Offering Costs
Deferred offering costs, which consist of direct incremental legal, consulting, banking, and accounting fees relating to the initial public offering (the “IPO”)
of our Class A common stock, were capitalized and offset against proceeds upon the consummation of the IPO, which became effective on November 21,
2017.
In December 2017, we issued additional shares of Class A common stock following the underwriters’ exercise of their option to purchase additional shares.
The related deferred offering costs were capitalized and offset against proceeds upon issuance of the shares.
Impairment of Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset to the future undiscounted cash flows
expected to be generated from the use of the asset and its eventual disposition. If such assets are considered to be impaired, the impairment to be recognized
is measured as the amount by which the carrying amount exceeds the fair value of the impaired assets. Assets to be disposed of are reported at the lower of
their carrying amount or fair value less cost to sell. We have not recorded an impairment of long-lived assets since inception.
During the third quarter of fiscal 2020, we considered the economic impact of COVID-19 a triggering event and performed a long-lived asset impairment
review. As of August 1, 2020, we have not recorded an impairment on our long-lived assets.
Preferred Stock Warrant Liability
We recorded our preferred stock warrants as current liabilities in the consolidated balance sheets at their estimated fair value because the warrants were
exercisable at any time by the holders for cash at a purchase price per share equal to the lowest price per share at which we had sold shares of a specific
series of our preferred stock or a number of shares of equivalent value as determined by a specified calculation. At initial recognition, we recorded these
warrants at their estimated fair value. The liability associated with these warrants was subject to remeasurement at each balance sheet date, with changes in
fair value recorded as remeasurement of preferred stock warrant liability in the consolidated statements of operations. In November 2017, in connection
with our IPO, the preferred stock warrants were automatically exercised into an aggregate of 1,066,225 shares of our Class B common stock and the
preferred stock warrant liability was reclassified to additional paid-in capital.
Revenue Recognition
We generate revenue primarily from the sale of merchandise in a Fix and, to a lesser extent, from direct purchases. Clients create an online account on our
website or mobile app, complete a style profile, and order a Fix or merchandise to be delivered on a specified date.
Each Fix represents an offer made by us to the client to purchase merchandise. The client is charged a nonrefundable upfront styling fee before the Fix is
shipped. As an alternative to the styling fee, we offer select clients the option to purchase a Style Pass. Style Pass clients pay a nonrefundable annual fee for
unlimited Fixes that is credited towards merchandise purchases. If the offer to purchase merchandise is accepted, we charge the client the order amount for
the accepted merchandise, net of the upfront styling fee or Style Pass annual fee. For each Fix, acceptance occurs when the client checks out the
merchandise on our website or mobile app. We offer a discount to clients who purchase all of the items in the Fix.
We recognize revenue through the following steps: (1) identification of the contract, or contracts, with the customer; (2) identification of the performance
obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract;
and (5) recognition of revenue when, or as, we satisfy a performance obligation.
Both our styling fee and Style Pass arrangements consist of one performance obligation, which is the option to purchase merchandise. The upfront styling
fee is not a performance obligation as the styling activity is not distinct within the context of the contract. Similarly, the right to receive multiple options
under Style Pass does not provide the customer with material stand-alone value and therefore does not give rise to a separate performance obligation. Both
the upfront styling fee and Style Pass annual fee are included in deferred revenue until the performance obligation is satisfied when the client exercises his
or her option to purchase merchandise (i.e., upon checkout of a Fix) or when the option(s) to purchase merchandise expire(s).
Revenue is recognized when control of the promised goods is transferred to the client. For a Fix, control is transferred when the client accepts or rejects the
offer to purchase merchandise. Upon acceptance by purchasing one or more items within the Fix at checkout, the total amount of the order, including the
upfront styling fee, is recognized as revenue. If none of the items within the Fix are accepted at checkout, the upfront styling fee is recognized as revenue at
that time. The Style Pass annual fee is recognized at the earlier of (i) the time at which a client accepts and applies the Style Pass fee to an offer to purchase
merchandise or (ii) upon expiry of the annual period. Under Style Pass arrangements, if a client does not accept any items within the Fix, the annual fee
will continue to be deferred until it is applied to a future purchase or upon expiry of the annual period. If a client would like to exchange an item, we
recognize revenue at the time the exchanged item is shipped, which coincides with the transfer of control to the customer. For a direct purchase, control is
transferred when the item is shipped to the client.
54
We deduct discounts, sales tax, and estimated refunds to arrive at net revenue. Sales tax collected from clients is not considered revenue and is included in
accrued liabilities until remitted to the taxing authorities. All shipping and handling costs are accounted for as fulfillment costs in cost of goods sold and as
selling, general, and administrative expense (“SG&A”), respectively, and are therefore not evaluated as a separate performance obligation. Discounts are
recorded as a reduction to revenue when the order is accepted. We record a refund reserve based on our historical refund patterns. Our refund reserve,
which is included in accrued liabilities in the consolidated balance sheets, was $5.0 million and $3.1 million as of August 1, 2020, and August 3, 2019,
respectively.
The Company has five types of contractual liabilities: (i) cash collections of upfront styling fees, which are included in deferred revenue and are recognized
as revenue upon the earlier of application to a merchandise purchase or expiry of the offer, (ii) cash collections of Style Pass annual fees, which are
included in deferred revenue and are recognized upon the earlier of application to a merchandise purchase or expiry of the Style Pass annual period, (iii)
unredeemed gift cards, which are included in gift card liability and recognized as revenue upon usage or inclusion in gift card breakage estimates, (iv)
referral credits, which are included in other current liabilities and are recognized as revenue when used, and (v) cash collections of direct purchases, which
are included in deferred revenue and are recognized as revenue upon shipment.
We sell gift cards to clients and establish a liability based upon the face value of such gift cards. We reduce the liability and recognize revenue upon usage
of the gift card. We recognize estimated gift card breakage revenue proportionately to customer usage of gift cards over the expected gift card usage period,
subject to requirements to remit balances to governmental agencies. All commissions paid to third parties upon issuance of gift cards are recognized in
SG&A as incurred, as on average, gift cards are used within a one-year period. Similarly, referral credits that are considered incremental costs of obtaining
a contract with a customer are recognized in SG&A when issued, as on average, referral credits are used within a one-year period.
Contractual liabilities included in deferred revenue, gift card liability, and other current liabilities were $13.1 million, $8.6 million, and $2.6 million,
respectively, at August 1, 2020, and $12.0 million, $7.2 million, and $1.6 million, respectively, at August 3, 2019. During the fiscal year ended August 1,
2020, the Company recognized $12.4 million, $2.6 million, and $0.7 million of net revenue included in deferred revenue, gift card liability, and other
current liabilities, respectively, at August 3, 2019.
Deferred revenue related to upfront styling fees totaled $9.1 million as of August 1, 2020, and $9.6 million as of August 3, 2019. Deferred revenue related
to Style Pass annual fees totaled $2.7 million as of August 1, 2020, and $2.3 million as of August 3, 2019. Deferred revenue related to direct orders totaled
$1.2 million as of August 1, 2020, and $0.1 million as of August 3, 2019.
The Company expects deferred revenue for upfront styling fees, direct orders, and Style Pass annual fees to be recognized within one year. On average, gift
card liability and other current liabilities are also recognized within one year.
Cost of Goods Sold
Cost of goods sold consists of the costs of merchandise, expenses for shipping to and from clients and inbound freight, inventory write-offs and changes in
our inventory reserve, payment processing fees, and packaging materials costs, offset by the recoverable cost of merchandise estimated to be returned.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses consist primarily of compensation and benefits costs, including stock-based compensation expense, for our
employees including our stylist, fulfillment center operations, data analytics, merchandising, engineering, client experience, marketing, and corporate
personnel. Selling, general, and administrative expenses also include marketing and advertising, third-party logistics costs, facility costs for our fulfillment
centers and offices, professional services fees, information technology, and depreciation and amortization.
Advertising Expenses
Costs associated with the production of advertising, such as writing, copy, printing, and other production costs are expensed as incurred. Costs associated
with communicating advertising on television and radio are expensed the first time the advertisement is run. Online advertising costs are expensed as
incurred. Advertising costs totaled $167.8 million, $152.1 million, and $102.1 million for 2020, 2019, and 2018, respectively, and are included within
selling, general, and administrative expenses in the consolidated statements of operations.
Marketing Programs
We have a client referral program under which we issue credits for future purchases to clients when the referral results in a new client who has ordered a
Fix. We record a liability at the time of issuing the credit and reduce the liability upon application of the credit to a client’s purchase. We also have an
affiliate program under which we make cash payments to lifestyle or fashion bloggers or others who refer clients in high volumes. Amounts related to both
of these programs are included within selling, general, and administrative expenses in the consolidated statements of operations.
55
Income Taxes
We account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit
carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in
which they are expected to be realized or settled.
Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the amount that is more likely than not to be realized. We
consider many factors when assessing the likelihood of future realization, including our recent cumulative loss, earnings expectations in earlier future
years, unsettled economic disruption of the COVID-19 pandemic, and other relevant factors.
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then
measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize interest and penalties
related to unrecognized tax benefits, if any, as income tax expense.
Stock-Based Compensation Expense
We measure stock-based compensation expense associated with option awards made to employees and members of our board of directors based on the
estimated fair values of the awards at grant date using the Black-Scholes option-pricing model. For options with service conditions only, stock-based
compensation expense is recognized, net of forfeitures, over the requisite service period using the straight-line method such that an expense is only
recognized for those awards that we expect to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
We have granted certain option awards that contain both service and performance conditions. The service condition for such awards is satisfied ratably over
the 24-month period following the fourth anniversary of the grant date. The performance condition for such awards was satisfied if we consummated an
IPO within 12 months of the grant date. Expense related to awards which contain both service and performance conditions is recognized using the
accelerated attribution method. Since an IPO is not deemed probable until such event occurs, no compensation cost related to the performance condition
was recognized prior to the consummation of our IPO in November 2017. Subsequently, we recorded stock-based compensation expense of $0.5 million
related to periods prior to the IPO.
Comprehensive Income (Loss)
Comprehensive income (loss) represents all changes in stockholders’ equity during a period from sources other than transactions with stockholders. For
2020 and 2019, comprehensive income (loss) includes the net income (loss) for the period, the gain (loss) due to foreign currency translation, and the
change in unrealized gain (loss) on available-for-sale securities. Our net income (loss) was equal to our comprehensive income (loss) for 2018.
Concentration of Credit Risks
We are subject to concentrations of credit risk principally from cash and cash equivalents and investment securities. The majority of our cash is held by two
financial institutions within the United States. Our cash balances held by these institutions may exceed federally insured limits. The associated risk of
concentration for cash is mitigated by banking with credit-worthy institutions. The associated risk of concentration for cash equivalents and investments is
mitigated by maintaining a diversified portfolio of highly rated instruments.
No client accounted for greater than 10% of total revenue, net for 2020, 2019, and 2018.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to record most leases on their balance
sheets but recognize the expenses on their income statements in a manner similar to Accounting Standards Codification (“ASC”) 840. ASU 2016-02 states
that a lessee would recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for
the lease term. Presentation of leases within the consolidated statements of operations and comprehensive income and consolidated statements of cash flow
is generally consistent with prior periods presented under ASC 840. However, this standard resulted in a substantial increase in our long-term assets and
liabilities on our consolidated balance sheet. We adopted this standard on August 4, 2019, on a modified retrospective basis through a cumulative-effect
adjustment of zero to opening retained earnings. We also elected the package of practical expedients to leases that commenced before the effective date
whereby we elected to not reassess the following:
(i) whether any expired or existing contracts contain leases;
(ii) the lease classification for any expired or existing leases; and
(iii) initial direct costs for any existing leases.
56
Upon adoption of ASU 2016-02, we did not record right-of-use assets or lease liabilities for leases with an initial term of 12 months or less. Payments on
those leases will be recognized on a straight-line basis through the consolidated statements of operations and comprehensive income over the lease term.
We also elected to combine lease and non-lease components on new or modified leases after adoption. Upon adoption on August 4, 2019, we recorded
$133.0 million in right-of-use assets, net of $25.7 million previously recorded as deferred rent on our consolidated balance sheets. We also recorded $22.0
million in current operating lease liabilities and $136.7 million in operating lease liabilities, net of current portion.
In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting (“ASU 2018-07”). Under ASU 2018-07, the accounting for awards issued to nonemployees will be similar to the accounting for employee
awards. This includes allowing for the measurement of awards at the grant date and recognition of awards with performance conditions when those
conditions are probable, both of which are earlier than under current guidance for nonemployee awards. We adopted this standard in the first quarter of
fiscal year 2020. The standard did not have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amended the existing
FASB Accounting Standards Codification. ASU 2014-09 establishes a principle for recognizing revenue upon the transfer of promised goods or services to
customers, in an amount that reflects the expected consideration received in exchange for those goods or services and also provides guidance on the
recognition of costs related to obtaining and fulfilling customer contracts. The new guidance may be applied retrospectively to each prior period presented
or retrospectively with the cumulative effect recognized as of the date of adoption (“modified retrospective method”).
We adopted the standard in the first quarter of 2019 under the modified retrospective approach. Under the new standard, we recognize estimated gift card
breakage revenue proportionately to customer gift card usage over the expected gift card usage period rather than waiting until the likelihood of redemption
becomes remote. Further, we recognize revenue related to exchanges upon shipment by us, rather than upon receipt by the customer. In the first quarter of
2019, the Company recorded a cumulative catch-up adjustment resulting in an increase to opening retained earnings, net of tax, of $0.4 million, comprised
of the impact of $0.3 million from the change in revenue recognition related to gift cards and $0.1 million from the recognition of exchanges upon
shipment. The impact to net revenue for the fiscal year ended August 3, 2019, was an increase of $1.4 million as a result of adopting the standard.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which amends
existing guidance on the recognition of current and deferred income tax impacts for intra-entity asset transfers other than inventory. We adopted the
standard in the first quarter of 2019 under the modified retrospective approach. As a result, a cumulative adjustment of $0.4 million, net of tax, was
recorded to reduce opening retained earnings in connection with adoption of this standard.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard requires entities to use a financial instrument impairment
model based on expected losses, known as the current expected credit loss model, rather than incurred losses. Under the new guidance, an entity recognizes
an allowance for estimated credit losses upon recognition of the financial instrument. The new guidance also changes the impairment model for available-
for-sale debt securities, requiring the use of an allowance to record estimated credit losses and subsequent recoveries. We expect to adopt this standard in
our first fiscal quarter of 2021. We do not anticipate the adoption of this standard to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-use Software (Subtopic 350-40): Customer’s Accounting
for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendment aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to
develop or obtain internal-use software. This standard is effective beginning in our first fiscal quarter of 2021 on a prospective or retrospective basis, with
early adoption permitted. We do not anticipate the adoption of this standard to have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes. This update amends and
simplifies the accounting for income taxes by eliminating certain exceptions in existing guidance related to performing intraperiod tax allocation,
calculating interim period taxes, and recognizing deferred taxes for investments. The update also provides new guidance to reduce complexity in certain
areas. This standard is effective beginning in our first fiscal quarter of 2022 with early adoption permitted. We are currently evaluating the impact that this
standard will have on our consolidated financial statements.
57
3. Fair Value Measurements
We disclose and recognize the fair value of our assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair
value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between
market participants at the measurement date. The guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or
similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no
market data.
Our financial instruments consist of cash and cash equivalents, short-term and long-term investments, accounts payable, and accrued liabilities. At
August 1, 2020, and August 3, 2019, the carrying values of cash and cash equivalents, accounts payable, and accrued liabilities approximated fair value due
to their short-term maturities.
The following table sets forth the amortized cost, gross unrealized gains, gross unrealized losses and fair values of our short-term and long-term
investments accounted for as available-for-sale securities as of August 1, 2020, and August 3, 2019:
August 1, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Fair Value
Amortized
Cost
August 3, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
(in thousands)
Financial Assets:
Investments:
U.S. Treasury securities
Certificates of deposit
Commercial paper
Asset-backed securities
Corporate bonds
(in thousands)
Financial Assets:
Investments:
U.S. Treasury securities
Certificates of deposit
Commercial paper
Asset-backed securities
Corporate bonds
$
67,335
$
516 $
6,150
35,331
44,854
82,821
—
—
410
723
(1)
—
—
(4)
(1)
(6)
$
67,850 $
49,807 $
100 $
— $
49,907
6,150
35,331
45,260
83,543
—
29,761
42,587
73,969
—
—
145
279
—
—
—
—
—
29,761
42,732
74,248
$
238,134 $
196,124 $
524 $
— $
196,648
Total
$
236,491
$
1,649 $
The following table sets forth the fair value of available-for-sale securities by contractual maturity as of August 1, 2020, and August 3, 2019:
August 1, 2020
Over One Year
Through Five
Years
Over Five
Years
One Year or Less
Total
One Year or Less
August 3, 2019
Over One Year
Through Five
Years
Over Five
Years
Total
Total
$
143,037
$
95,097
$
$
38,794
$
29,056
$
6,150
35,331
6,657
56,105
—
—
38,603
27,438
$
67,850 $
44,772 $
5,135 $
— $
49,907
6,150
35,331
45,260
83,543
—
29,761
5,412
63,331
—
—
37,320
10,917
—
—
—
—
—
29,761
42,732
74,248
$ 238,134 $
143,276 $
53,372 $
— $
196,648
—
—
—
—
—
—
58
The following table sets forth our cash equivalents, and short-term and long-term investments accounted for as available-for-sale securities that were
measured at fair value on a recurring basis based on the fair value hierarchy as of August 1, 2020, and August 3, 2019:
(in thousands)
Financial Assets:
Cash equivalents:
Money market funds
Commercial paper
Investments:
U.S. Treasury securities
Certificates of deposit
Commercial paper
Asset-backed securities
Corporate bonds
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
August 1, 2020
August 3, 2019
$
2,394 $
— $
— $
2,394 $
6,427 $
— $
— $
—
67,850
—
—
—
—
—
—
6,150
35,331
45,260
83,543
—
—
—
—
—
—
—
—
11,970
67,850
6,150
35,331
45,260
83,543
49,907
—
—
—
—
—
—
29,761
42,732
74,248
—
—
—
—
—
—
6,427
11,970
49,907
—
29,761
42,732
74,248
Total
$
70,244 $
170,284 $
— $
240,528 $
56,334 $
158,711 $
— $
215,045
There were no transfers of financial assets or liabilities into or out of Level 1, Level 2, or Level 3 for the fiscal years ended August 1, 2020, and August 3,
2019.
4. Leases
On August 4, 2019, we adopted ASU 2016-02. Upon adoption, we recognized operating lease right-of-use assets and operating lease liabilities of $133.0
million and $158.7 million, respectively. As part of this adoption, we elected to not record operating lease right-of-use assets or operating lease liabilities
for leases with an initial term of 12 months or less. We also elected to combine lease and non-lease components on all new or modified leases into a single
lease component.
Our leasing portfolio includes lease arrangements for our corporate offices, fulfillment centers, and, to a lesser extent, equipment. Such leases generally
have original lease terms between five and eight years, and often include one or more options to renew. We include options to extend in the lease term if
they are reasonably certain of being exercised. We do not currently consider our renewal options reasonably certain to be exercised. We do not have
residual value guarantees associated with our leases.
The following table includes the components of our rent expense recorded in selling, general, and administrative expense:
(in thousands)
Operating lease cost
Variable lease costs
Short-term lease costs
Sublease income
Total
For the Fiscal Year Ended
August 1, 2020
$
$
29,232
6,061
1,031
(1,657)
34,667
Certain leases contain variable payments, which are expensed as incurred and not included in our operating lease right-of-use assets and operating lease
liabilities. These amounts primarily include payments for maintenance, utilities, taxes, and insurance on our office and fulfillment center leases. Operating
lease right-of-use assets and operating lease liabilities are recognized based on the present value of future minimum lease payments at lease
commencement. Certain adjustments to our operating lease right-of-use assets may be required for items such as initial direct costs paid or incentives
received. The Company calculates the present value of its leases using an estimated incremental borrowing rate, which requires judgment. Our incremental
borrowing rate is determined for each lease using a peer group of companies with similar credit profiles, adjusted for the impact of collateralization and
lease term.
We had unsecured letters of credit totaling $13.6 million and $13.9 million as of August 1, 2020, and August 3, 2019, respectively, for our leased
properties.
59
The following is a schedule by year of the maturities of operating lease liabilities with original terms in excess of one year, as of August 1, 2020:
(in thousands)
2021
2022
2023
2024
2025
Thereafter
Total undiscounted future minimum lease payments
Less imputed interest
Total discounted future minimum lease payments
August 1, 2020
31,735
30,512
28,459
24,572
22,110
58,797
196,185
(31,677)
164,508
$
$
A schedule of the future minimum rental commitments under our non-cancelable operating lease agreements with an initial or remaining term in excess of
one year as of August 3, 2019, in accordance with ASC 840 were as follows:
(in thousands)
2020
2021
2022
2023
2024
Thereafter
Total
August 3, 2019
27,018
27,680
25,451
23,258
19,696
56,687
179,790
$
$
The weighted average remaining term for our leases as of August 1, 2020 was 6.7 years. The weighted average discount rate for our leases as of August 1,
2020 was 4.8%.
Supplemental cash flow information related to our leases is as follows:
(in thousands)
Cash paid for amounts included in the measurement of operating lease liabilities
Operating lease right-of-use assets obtained in exchange for operating lease liabilities
5. Property and Equipment, net
Property and equipment, net consisted of the following:
(in thousands)
Computer equipment
Office furniture and equipment
Leasehold improvements
Capitalized software
Construction in progress
Building and land
Total property and equipment
Less: accumulated depreciation and amortization
Property and equipment, net
For the Fiscal Year Ended
August 1, 2020
$
28,922
153,522
August 1, 2020
August 3, 2019
$
$
5,967
$
26,695
37,570
47,151
5,973
430
123,786
(53,417)
70,369
$
3,647
18,010
27,967
34,571
1,381
402
85,978
(31,090)
54,888
Depreciation and amortization expense for 2020, 2019, and 2018 was $22.6 million, $16.1 million, and $10.5 million, respectively.
60
6. Accrued Liabilities
Accrued liabilities consisted of the following:
(in thousands)
Compensation and related benefits
Advertising
Sales taxes
Shipping and freight
Accrued accounts payable
Inventory purchases
Other
Total accrued liabilities
California Styling Organization
August 1, 2020
August 3, 2019
$
$
11,987
$
14,979
7,134
8,624
5,892
15,427
13,547
77,590
$
9,494
12,922
6,956
7,045
7,550
15,703
10,064
69,734
On June 1, 2020, we announced a restructuring plan to eliminate substantially all of our Styling team based in California. As a result of this restructuring,
we recognized aggregate charges of $4.8 million for termination benefits within selling, general, and administrative expenses during 2020. We expect to
incur restructuring and related charges primarily related to employee severance and benefits costs through the first quarter of fiscal 2021. Other costs such
as relocation assistance will be expensed as incurred.
The following table provides the components of and changes in the Company’s restructuring and related charges, included in Compensation and related
benefits in the table above:
(in thousands)
Balance at August 3, 2019
Charges incurred
Cash payments
Balance at August 1, 2020
7. Credit Agreement
Severance and Other
Termination Benefits
—
4,806
(1,650)
3,156
$
$
In June 2020, we entered into a credit agreement (the “Credit Agreement”) with Silicon Valley Bank and other lenders, to provide a revolving line of credit
of up to $90.0 million, including a letter of credit sub-facility in the aggregate amount of $20.0 million, and a swingline sub-facility in the aggregate
amount of $50.0 million. We also have the option to request an incremental facility of up to an additional $60.0 million from one or more of the lenders
under the Credit Agreement.
Under the terms of the Credit Agreement, revolving loans may be either Eurodollar Loans or ABR Loans. Outstanding Eurodollar Loans incur interest at
the Eurodollar Rate, which is defined in the Credit Agreement as LIBOR (or any successor thereto), plus a margin of either 2.25% or 2.50%, depending on
usage. Outstanding ABR Loans incur interest at the highest of (a) the Prime Rate, as published by the Wall Street Journal, (b) the federal funds rate in effect
for such day plus 0.50%, and (c) the Eurodollar Rate plus 1.00%, in each case plus a margin of either 1.25% or 1.50%, depending on usage. We will be
charged a commitment fee of either 0.25% or 0.30% per year, depending on usage, for committed but unused amounts. The Credit Agreement will
terminate on June 2, 2021, unless the termination date is extended at the election of the lenders.
The Credit Agreement is secured by substantially all of our current and future property, rights, and assets, including, but not limited to, cash, goods,
equipment, contractual rights, financial assets, and intangible assets. The Credit Agreement contains covenants limiting our ability to, among other things,
dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock, and make
investments, in each case subject to certain exceptions. The Credit Agreement also contains financial covenants requiring us to maintain minimum free
cash flow and an adjusted current ratio above specified levels, measured in each case at the end of each fiscal quarter. The Credit Agreement contains
events of default that include, among others, non-payment of principal, interest, or fees, breach of covenants, inaccuracy of representations and warranties,
cross defaults to certain other indebtedness, bankruptcy and insolvency events, and material judgments.
We capitalized $0.7 million of issuance costs in connection with the Credit Agreement in the quarter ended August 1, 2020.
As of August 1, 2020, we did not have any borrowings outstanding under the Credit Agreement and we were in compliance with all financial covenants.
61
8. Commitments and Contingencies
Commitments
In November 2019, the Company executed an agreement for cloud computing services. The agreement was effective as of November 1, 2019, and
continues through October 30, 2022. The Company has a total minimum commitment of $23.5 million with annual commitments ranging from $7.5 million
to $8.0 million. Refer to “Note 4 - Leases” for information regarding lease commitments.
Contingencies
We record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We also disclose
material contingencies when we believe a loss is not probable but reasonably possible. Accounting for contingencies requires us to use judgment related to
both the likelihood of a loss and the estimate of the amount or range of loss. Although we cannot predict with assurance the outcome of any litigation or tax
matters, we do not believe there are currently any such actions that, if resolved unfavorably, would have a material impact on our operating results,
financial position, or cash flows.
On October 11, 2018, October 26, 2018, November 16, 2018, and December 10, 2018, four putative class action lawsuits alleging violations of the federal
securities laws were filed in the U.S. District Court for the Northern District of California, naming as defendants us and certain of our officers. The four
lawsuits each make the same allegations of violations of the Securities Exchange Act of 1934, as amended, by us and our officers for allegedly making
materially false and misleading statements regarding our active client growth and strategy with respect to television advertising between June 2018 and
October 2018. The plaintiffs seek unspecified monetary damages and other relief. The four lawsuits have been consolidated and a lead plaintiff has been
appointed. On September 18, 2019, the lead plaintiff in the consolidated class action lawsuits (the “Class Action”) filed a consolidated complaint for
violation of the federal securities laws. On October 28, 2019, we and other defendants filed a motion to dismiss the consolidated complaint. The lead
plaintiff filed an opposition to the motion to dismiss on December 9, 2019, and we and the other defendants filed our reply in support of our motion to
dismiss on December 30, 2019. The court has taken the motion under submission.
On December 12, 2018, a derivative action was filed against our directors in the same court, alleging the same violations of securities laws as alleged in the
Class Action. The derivative action has been stayed pending the outcome of the motion to dismiss in the Class Action. On December 12, 2019, a second
derivative action was filed against our directors in the same court, alleging the same violations of securities laws and breach of fiduciary duties as the other
derivative action. The second derivative action has also been stayed pending the outcome of the motion to dismiss in the Class Action. The two derivative
actions have been related to each other and to the Class Action, and all the related cases are now proceeding before a single judge in the U.S. District Court
for the Northern District of California.
In August 2020, a representative action under California’s Private Attorneys General Act (“PAGA”) was filed against us in the Superior Court for the State
of California, County of San Diego. The complaint alleges various violations of California’s wage and hour laws relating to our current and former non-
exempt stylist employees and seeks attorney’s fees and penalties. We plan to defend this case vigorously.
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to vendors, directors, officers, and other parties with
respect to certain matters. We have not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such
obligations in our consolidated financial statements.
62
9. Accumulated Other Comprehensive Income (Loss)
The table below presents the changes in AOCI by component and the reclassifications out of AOCI:
(in thousands)
Balance at August 3, 2019
Other comprehensive income (loss) before reclassifications(1)
Amounts reclassified from AOCI
Net change in AOCI
Balance at August 1, 2020
(in thousands)
Balance at July 28, 2018
Other comprehensive income (loss) before reclassifications(1)
Net change in AOCI
Balance at August 3, 2019
Changes in Accumulated Other Comprehensive Income (Loss)
Available-for-sale
Securities
Foreign Currency
Translation
Total
391 $
(578) $
882
(60)
822
2,093
—
2,093
1,213 $
1,515 $
Changes in Accumulated Other Comprehensive Income (Loss)
Available-for-sale
Securities
Foreign Currency
Translation
Total
—
$
391
391
391
$
— $
(578)
(578)
(578) $
$
$
$
$
(187)
2,975
(60)
2,915
2,728
—
(187)
(187)
(187)
(1) The associated income tax effects for gains / losses on available-for-sale securities were $430 and $133 for 2020 and 2019, respectively.
10. Stock-Based Compensation
2011 Equity Incentive Plan
In 2011, we adopted the 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan provided for the grant of stock-based awards to employees, directors,
and nonemployees under terms and provisions established by the board of directors.
The 2011 Plan allowed for the grant of incentive stock options or nonqualified stock options as well as restricted stock units, restricted stock and stock
appreciation rights. Only incentive and nonqualified stock options were granted under the 2011 Plan. Stock options outstanding under the 2011 Plan give
the holders the right to purchase shares of our Class B common stock. Effective upon our IPO, the 2011 Plan was replaced by the 2017 Incentive Plan.
2017 Incentive Plan
In November 2017, our board of directors and stockholders adopted our 2017 Incentive Plan (the “2017 Plan”). The remaining shares available for issuance
under the 2011 Plan became reserved for issuance under the 2017 Plan. The 2017 Plan provides for the grant of incentive stock options to employees,
including employees of any parent or subsidiary, and for the grant of nonqualified stock options, stock appreciation rights, restricted stock awards,
restricted stock unit awards, performance stock awards, performance cash awards, and other forms of stock awards to employees, directors, and
consultants, including employees and consultants of our subsidiaries. Under the 2017 Plan, the number of shares available for issuance may be increased
annually by an amount not to exceed 5% of the outstanding shares of our common stock as of the last day of the immediately preceding fiscal year. The
Board of Directors approved an increase of 5,069,874 shares available for issuance under the 2017 Plan as of August 4, 2019. A total of 22,207,698 shares
of Class A common stock were authorized for issuance under the 2017 Plan as of August 1, 2020.
2019 Inducement Plan
In October 2019, our board of directors adopted our 2019 Inducement Plan (the “2019 Plan”). Our 2019 Plan provides for the grant of nonqualified stock
options and restricted stock unit awards with respect to our Class A common stock to individuals who satisfy the standards for inducement grants under the
relevant Nasdaq Stock Market rules. A total of 1,750,000 shares of Class A common stock were authorized for issuance under the 2019 Plan as of
August 1, 2020.
Stock Options
Employee stock options generally vest 25% on the first anniversary of the grant date with the remaining vesting ratably over the next three years. Options
generally expire after 10 years.
63
The following table summarizes the shares available for grant under the 2011 Plan, 2017 Plan, and 2019 Plan:
Balance – August 3, 2019
Authorized
Granted
Forfeited
Balance – August 1, 2020
Stock option activity under the 2011 Plan, 2017 Plan and 2019 Plan is as follows:
Shares Available for Grant
1,133,258
5,069,104
(7,437,409)
2,151,219
916,172
Balance – August 3, 2019
Granted
Exercised
Forfeited
Balance – August 1, 2020
Options vested and exercisable - August 1, 2020
Options vested and expected to vest - August 1, 2020
Options Outstanding
Number of
Options
7,070,125
$
1,602,670
(1,278,894)
(576,705)
6,817,196
2,703,644
6,379,837
$
$
$
Weighted-
Average
Exercise
Price
14.48
23.39
9.45
22.66
17.10
13.34
17.07
Weighted-
Average
Remaining
Contractual
Life (in Years)
Aggregate
Intrinsic
Value
(in thousands)
7.72 $
73,861
7.41 $
6.53 $
7.36 $
40,252
25,702
38,152
The weighted-average grant date fair value of options granted during 2020, 2019, and 2018 was $11.35, $11.60, and $8.40 per share, respectively. The total
grant date fair value of options that vested during 2020, 2019, and 2018 was $15.3 million, $13.1 million, and $8.5 million, respectively. The aggregate
intrinsic value of options exercised during 2020, 2019, and 2018 was $19.1 million, $49.1 million, and $59.6 million, respectively. The aggregate intrinsic
value of options exercised is the difference between the fair value of the underlying common stock on the date of exercise and the exercise price for in-the-
money stock options.
Restricted Stock Units
Employee restricted stock units are granted under the 2017 Plan and 2019 Plan, settle into Class A common stock, and generally vest 25% on the first
anniversary of the grant date with the remaining vesting ratably over the next three years.
The following table summarizes the restricted stock unit (“RSU”) award activity under the 2017 Plan and 2019 Plan:
Unvested at August 3, 2019
Granted
Vested
Forfeited
Unvested at August 1, 2020
Stock-Based Compensation Expense
Unvested RSUs
Class A Common
Stock
Weighted-
Average
Grant Date
Fair Value
4,428,845
$
7,348,143
(1,079,133)
(1,574,514)
9,123,341
$
27.30
17.20
24.50
23.78
20.11
Stock-based compensation expense for options and RSUs granted to employees was $67.5 million, $35.2 million, and $15.4 million for 2020, 2019, and
2018, respectively. The income tax benefit related to stock-based compensation was $17.2 million, $8.9 million, and $4.7 million for 2020, 2019, and 2018,
respectively. Stock-based compensation expense is included in selling, general, and administrative expenses in our consolidated statements of operations.
As of August 1, 2020, the total unrecognized compensation expense related to unvested options and RSUs, net of estimated forfeitures, was $195.7 million,
which we expect to recognize over an estimated weighted average period of 2.7 years.
64
In determining the fair value of the stock-based awards, we use the Black-Scholes option-pricing model and assumptions discussed below. Each of these
inputs is subjective and generally requires significant judgment.
Fair Value of Common Stock - As of August 1, 2020, the fair value of the shares of common stock underlying our stock options has been determined
based on market prices. Prior to our IPO on November 16, 2017, the fair value of the shares of common stock underlying our stock options was determined
by the board of directors. As there was no public market for our common stock, the board of directors determined the fair value of the common stock on the
stock option grant date by considering a number of objective and subjective factors, including third-party valuations of our common stock, sales of our
common stock, operating and financial performance, the lack of marketability of our common stock and general macroeconomic conditions.
Expected Term - The expected term represents the period that our stock options are expected to be outstanding and is determined using the simplified
method (generally calculated as the mid-point between the vesting date and the end of the contractual term).
Expected Volatility - The expected volatility was estimated based on the average volatility for publicly traded companies that we considered comparable,
over a period equal to the expected term of the stock option grants.
Risk-Free Interest Rate - The risk-free interest rate is based on the U.S. Treasury zero coupon notes in effect at the time of grant for periods corresponding
with the expected term of the option.
Expected Dividend - We have not paid dividends on our common stock and do not anticipate paying dividends on our common stock; therefore, we use an
expected dividend yield of zero.
The fair value of stock options granted to employees was estimated at the grant date using the Black-Scholes option-pricing model with the following
assumptions:
Expected term (in years)
Volatility
Risk free interest rate
Dividend yield
For the Fiscal Year Ended
August 1, 2020
August 3, 2019
July 28, 2018
5.5 - 6.2
5.1 - 6.5
5.4 - 6.6
50.1 - 51.2%
41.7 - 52.2%
41.4 - 43.5%
1.4 - 1.7%
— %
2.3 - 3.0%
— %
1.9 - 3.0%
— %
In July 2017, options to purchase an aggregate of 1,097,463 shares of common stock which had both a service-based condition and a liquidity event-related
performance condition were granted to certain members of our executive management team. Such options vest ratably over the 24-month period following
the fourth anniversary of the grant date, subject to an IPO occurring within 12 months of the grant date and the option holder’s continuous service through
each vesting date. The aggregate grant-date fair value of such option awards was $14.0 million. Since an IPO is not deemed probable until such event
occurs, no compensation cost related to the performance condition was recognized prior to the consummation of our IPO in November 2017. Subsequently,
we recorded stock-based compensation expense of $0.5 million related to periods prior to the IPO.
Early Exercise of Employee Options
We allow certain employees to exercise options granted under the 2011 Plan prior to vesting in exchange for shares of restricted common stock subject to a
right of repurchase that lapses according to the original option vesting schedule. The proceeds from the exercise of options are recorded in other current
liabilities and other long-term liabilities in our consolidated balance sheets at the time the options are exercised and reclassified to common stock and
additional paid-in capital as our repurchase right lapses. Upon termination of employment, any unvested shares are subject to repurchase by us at the
original purchase price.
We did not issue any shares upon exercise of unvested stock options during 2020, 2019, and 2018. We issued 111,577 shares of common stock during 2017
upon exercise of unvested stock options. As of August 1, 2020, and August 3, 2019, there were no shares of common stock subject to repurchase. As of
July 28, 2018 there were 160,417 shares of common stock held by employees subject to repurchase at an aggregate price of $0.2 million.
11. Income Taxes
The components of income (loss) before income taxes are as follows:
(in thousands)
Income (loss) before income taxes
United States
Foreign
Total
For the Fiscal Year Ended
August 1, 2020
August 3, 2019
July 28, 2018
$
$
(48,302)
$
31,657
$
580
(836)
(47,722)
$
30,821
$
56,978
(2,265)
54,713
65
The components of the provision (benefit) for income tax expense are as follows:
(in thousands)
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
For the Fiscal Year Ended
August 1, 2020
August 3, 2019
July 28, 2018
$
(5,528)
$
(221)
$
1,768
275
(3,485)
17,367
5,773
(260)
22,880
2,431
(67)
2,143
(5,464)
(2,667)
(72)
(8,203)
Provision (benefit) for income taxes
$
19,395
$
(6,060)
$
The reconciliation of our effective tax rate to the statutory federal rate is as follows:
(in thousands, except percentages)
Taxes at federal statutory rate
State taxes, net of federal effect
Remeasurement of preferred stock warrant liability
Stock-based compensation
Tax Cuts and Jobs Act impact
US Base Erosion and Anti-Abuse tax
CARES Act carryback benefit
Change in valuation allowance
R&D credits
Uncertain tax positions
Return to provision
Meals and entertainment
Other
Effective tax rate
August 1, 2020
August 3, 2019
July 28, 2018
For the Fiscal Year Ended
$
(10,022)
21.0 % $
(4,868)
—
(2,047)
—
589
(3,070)
43,153
(6,536)
2,343
(777)
665
(35)
10.2 %
0.0 %
4.3 %
0.0 %
(1.2) %
6.4 %
(90.4) %
13.7 %
(4.9) %
1.6 %
(1.4) %
0.1 %
6,473
(1,068)
—
(7,114)
—
—
—
—
(5,984)
2,030
(1,821)
765
659
21.0 % $
(3.5) %
0.0 %
(23.1) %
0.0 %
0.0 %
0.0 %
0.0 %
(19.4) %
6.6 %
(5.9) %
2.5 %
2.1 %
$
19,395
(40.6) % $
(6,060)
(19.7) % $
14,752
(755)
(2,881)
(5,454)
6,670
—
—
—
(2,146)
2,846
(3,891)
652
20
9,813
66
2,732
493
—
3,225
7,917
(1,329)
—
6,588
9,813
27.0 %
(1.4) %
(5.3) %
(9.9) %
12.2 %
0.0 %
0.0 %
0.0 %
(3.9) %
5.1 %
(7.1) %
1.2 %
0.0 %
17.9 %
The components of net deferred tax assets are as follows:
(in thousands)
Deferred tax assets:
Inventory reserve and UNICAP
Deferred rent
Accruals and reserves
Research and development credits
Stock-based compensation
Deferred revenue
Operating lease liability
Other
Gross deferred tax assets
Less: valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Depreciation and amortization
Operating lease right-of-use assets
Other
Gross deferred tax liabilities
August 1, 2020
August 3, 2019
July 28, 2018
$
17,015
$
11,696
$
—
4,632
11,611
11,717
435
39,380
1,088
85,878
(43,153)
42,725
(11,044)
(31,267)
(81)
(42,392)
232
6,623
4,778
6,195
713
—
302
30,539
—
30,539
(8,275)
—
(89)
(8,364)
7,504
202
8,274
754
2,210
739
—
404
20,087
—
20,087
(5,860)
—
(120)
(5,980)
Net deferred tax assets, net of valuation allowance
$
333
$
22,175
$
14,107
Our effective tax rate and provision for income taxes increased from the fiscal year ended August 3, 2019, to the fiscal year ended August 1, 2020,
primarily due to recording a valuation allowance on our net federal and state deferred tax assets and decreased excess tax benefits from stock-based
compensation, partially offset by the net operating loss carryback provisions of the CARES Act.
Our effective tax rate and provision for income taxes decreased from the fiscal year ended July 28, 2018, to the fiscal year ended August 3, 2019, primarily
due to increased excess tax benefits from stock-based compensation, additional qualified activities for U.S. and California research and development tax
credits, and the prior year Tax Act remeasurement of deferred tax assets.
The Company considers all undistributed earnings of foreign subsidiaries indefinitely reinvested outside the United States.
As of August 1, 2020, we had state net operating loss carryforwards of $10.7 million which are set to expire in 2025. As of August 1, 2020 and August 3,
2019, we had federal research and development tax credit carryforwards of $6.5 million and $3.5 million which are set to expire in 2040 and 2039,
respectively. As of August 1, 2020 and August 3, 2019, we had California research and development tax credit carryforwards of $9.2 million and $5.2
million, respectively, which are not subject to expiration.
Uncertain Tax Positions
A reconciliation of our unrecognized tax benefits is as follows:
(in thousands)
Balance at the beginning of the year
Lapse of statute of limitations
Increase related to prior period tax positions
Decrease related to prior period tax positions
Increase related to current year tax positions
Balance at the end of the year
August 1, 2020
August 3, 2019
July 28, 2018
$
$
10,995
$
5,503
$
(939)
1,074
—
5,563
(422)
2,602
(183)
3,495
16,693
$
10,995
$
1,052
—
2,334
(241)
2,358
5,503
The amount of unrecognized tax benefits relating to our tax positions is subject to change based on future events including, but not limited to, the
settlements of ongoing audits and/or the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly
uncertain, we anticipate that the balance of the liability for unrecognized tax benefits and related deferred tax assets will decrease by $3.7 million during the
next 12 months due to lapses of applicable statutes of limitation. Our liability for uncertain tax positions as of August 1, 2020, includes $10.9 million
related to amounts that would impact our current and future tax expense.
We recognize interest related to uncertain tax positions in our provision for income taxes. The Company files income tax returns in the U.S. federal and
various state and local jurisdictions and in the UK. As of August 1, 2020, the fiscal 2015 through 2019 tax returns are
67
subject to potential examination in one or more jurisdictions. We are under examination by the California Franchise Tax Board for the fiscal years 2015
through 2017.
We regularly assess whether it is more likely than not that we will realize our deferred tax assets in each taxing jurisdiction in which we operate. We
consider many factors when assessing the likelihood of future realization, including our recent cumulative loss, earnings expectations in earlier future
years, unsettled economic disruption of the COVID-19 pandemic, and other relevant factors. In the fourth quarter of fiscal 2020, we recognized an
estimated charge to tax expense of $43.2 million to record a valuation allowance against our net federal and state deferred tax assets. The valuation
allowance as of August 1, 2020 primarily relates to federal and state deferred tax assets, including unrealized federal and state credit carryforwards and
state net operating losses.
A reconciliation of our valuation allowance is as follows:
(in thousands)
Beginning of year valuation allowance
Valuation allowance charged / (credited) to expense
Valuation allowance charged / (credited) to other accounts
End of year valuation allowance
August 1, 2020
—
43,153
—
43,153
$
$
12. Earnings (Loss) Per Share Attributable to Common Stockholders
Basic and diluted net income (loss) per share attributable to common stockholders is presented in conformity with the two-class method required for
participating securities. We consider convertible preferred stock and early exercised share options to be participating securities. In connection with our IPO,
we established two classes of authorized common stock: Class A common stock and Class B common stock. As a result, all then-outstanding shares of
common stock were converted into shares of Class B common stock upon effectiveness of our IPO. The rights of the holders of Class A and Class B
common stock are identical, except with respect to voting, conversion, and transfer rights. Each share of Class A common stock is entitled to one vote per
share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the
option of the stockholder into one share of Class A common stock.
Undistributed earnings allocated to participating securities are subtracted from net income (loss) in determining net income (loss) attributable to common
stockholders. Basic earnings per share (“EPS”) attributable to common stockholders is computed by dividing the net income (loss) attributable to common
stockholders by the weighted-average number of common shares outstanding during the period. All participating securities are excluded from basic
weighted-average common shares outstanding.
For the calculation of diluted earnings (loss) per share, net income (loss) attributable to common stockholders for basic EPS is adjusted by the effect of
dilutive securities. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) attributable to
common stockholders by the weighted-average number of common shares outstanding, including all potentially dilutive common shares. The undistributed
earnings are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year have been
distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. The computation of the
diluted net income (loss) per share of Class A common stock assumes the conversion of Class B common stock, while diluted net income (loss) per share
of Class B common stock does not assume the conversion of Class A common stock as Class A common stock is not convertible into Class B common
stock.
68
A reconciliation of the numerator and denominator used in the calculation of the basic and diluted EPS attributable to common stockholders is as follows
(in thousands except share and per share amounts):
(in thousands except share and per share amounts)
Class A
Class B
Class A
Class B
Class A
Class B
August 1, 2020
August 3, 2019
July 28, 2018
Numerator:
Net income (loss)
Less: noncumulative dividends to preferred stockholders
Less: undistributed earnings to participating securities
Net income (loss) attributable to common stockholders – basic
Less: change in fair value of preferred stock warrant liability (net of tax)
Add: adjustments to undistributed earnings to participating securities
Reallocation of undistributed earnings as a result of conversion of Class B common
stock to Class A common stock
Reallocation of undistributed earnings to Class B common stock
Net income (loss) attributable to common stockholders – diluted
Denominator:
Weighted-average shares of common stock – basic
Conversion of Class B common stock to Class A common stock outstanding
Effect of dilutive stock options and restricted stock units
Effect of potentially dilutive preferred stock warrants
Weighted-average shares of common stock – diluted
Earnings (loss) per share attributable to common stockholders:
Basic
Diluted
(36,860)
(30,257)
16,604
20,277
—
—
—
—
—
(8)
—
(10)
(36,860)
(30,257)
16,596
20,267
—
—
—
—
—
—
—
—
(36,860)
(30,257)
—
1
20,267
—
36,864
—
—
—
302
20,569
7,650
(131)
(1,464)
6,055
37,250
(637)
(7,127)
29,486
(10,685)
(10,685)
2,429
2,015
29,486
—
27,285
—
2,122
22,938
56,228,429
46,154,853
45,027,352
54,986,110
12,940,593
63,007,166
—
—
—
—
—
—
54,986,110
—
63,007,166
—
3,640,164
2,849,737
5,021,692
5,011,712
—
—
318,967
318,967
56,228,429
46,154,853
103,653,626
57,835,847
81,288,418
68,337,845
$
$
(0.66) $
(0.66) $
(0.66) $
(0.66) $
0.37 $
0.36 $
0.37 $
0.36 $
0.47 $
0.34 $
0.47
0.34
The following common stock equivalents were excluded from the computation of diluted earnings (loss) per share for the periods presented because
including them would have been antidilutive:
Restricted stock units that settle into Class A common stock
Stock options to purchase Class A common stock
Stock options to purchase Class B common stock
Total
August 1, 2020
August 3, 2019
July 28, 2018
7,965,447
2,924,512
3,540,414
14,430,373
2,914,630
1,547,495
969,179
5,431,304
2,276,994
1,271,152
3,689,369
7,237,515
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and interim Chief Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)), as of the end of the period covered by this Annual Report.
Disclosure controls and procedures are designed to provide reasonable assurance that (i) the information required to be disclosed in the reports that we file
or submit under the Exchange Act has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commission’s rules and forms and (ii) such information is accumulated and communicated to management, including our principal
executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our
disclosure controls and procedures as of August 1, 2020, our Chief Executive Officer and interim Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of August 1, 2020.
69
Management’s Report on Internal Control Over Financial Reporting
Management, including our Chief Executive Officer and interim Chief Financial Officer, is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for
external purposes in accordance with U.S. GAAP.
Under the supervision and with the participation of our management, including our Chief Executive Officer and interim Chief Financial Officer, we have
conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on evaluation under these criteria,
management determined that our internal control over financial reporting was effective as of August 1, 2020.
Deloitte & Touche LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as
of August 1, 2020.
Changes in Internal Control over Financial Reporting
During fiscal year 2020, we undertook efforts to remediate the material weaknesses related to certain outsourced IT service providers and in our COSO
components related to control activities and monitoring previously disclosed with the audit of our consolidated financial statements for the year ended
August 3, 2019 with the following remediation actions to improve and strengthen our internal controls:
• Designed and implemented controls and applied other appropriate procedures to address the design and operation of internal controls related to
certain outsourced IT service providers.
•
Enhanced procedures for the identification of control activities and monitoring of control performance to ensure the components of internal
control related to certain outsourced IT service procedures are present and functioning.
As of August 1, 2020, our testing of both the design and operating effectiveness of these controls was completed, and we have concluded that the material
weaknesses existing at August 3, 2019 have been remediated.
Except for the remediation of the outsourced IT service providers and related COSO material weaknesses and changes described above, there were no
changes during the quarter ended August 1, 2020 in our internal control over financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error or overriding of
controls, and therefore can provide only reasonable assurance with respect to reliable financial reporting. Because of its inherent limitations, our internal
control over financial reporting may not prevent or detect all misstatements, including the possibility of human error, the circumvention or overriding of
controls, or fraud. Effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial
statements.
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Stitch Fix, Inc.:
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Stitch Fix, Inc. and subsidiaries (the “Company”) as of August 1, 2020, based on criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 1, 2020, based on
criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
financial statements and related notes (collectively referred to as the “financial statements”) as of and for the year ended August 1, 2020, of the Company
and our report dated September 25, 2020, expressed an unqualified opinion on those financial statements, and included an explanatory paragraph regarding
the Company’s adoption of a new accounting standard.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
San Francisco, California
September 25, 2020
Item 9B. Other Information.
None.
71
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Information required by this item regarding directors and director nominees, executive officers, the board of directors and its committees, certain corporate
governance matters, and compliance with Section 16(a) of the Exchange Act is incorporated by reference to the information set forth under the captions
“Proposal 1: Election of Directors,” “Executive Officers,” and “Delinquent Section 16(a) Reports” in the definitive proxy statement for our 2020 Annual
Meeting of Stockholders (the “2020 Proxy Statement”).
We have adopted a written code of business conduct and ethics (“Code of Conduct”) that applies to all of our employees, officers and directors, including
our principal executive officer, principal financial officer and principal accounting officer. The Code of Conduct is available on our corporate website at
https://investors.stitchfix.com under “Documents” under the section entitled “Governance.” If we make any substantive amendments to our Code of
Conduct or grant any of our directors or executive officers any waiver, including any implicit waiver, from a provision of our Code of Conduct, we will
disclose the nature of the amendment or waiver on our website or in a Current Report on Form 8-K.
Item 11. Executive Compensation.
Information required by this item regarding executive compensation is incorporated by reference to the information set forth under the captions “Executive
Compensation” and “Director Compensation” in our 2020 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by this item regarding security ownership of certain beneficial owners and management and securities authorized for issuance under
our equity compensation plans is incorporated by reference to the information set forth under the captions “Security Ownership of Certain Beneficial
Owners and Management” and “Executive Compensation—Equity Compensation Plan Information” in our 2020 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by this item regarding certain relationships and related transactions and director independence is incorporated by reference to the
information set forth under the captions “Transactions with Related Persons and Indemnification” and “Proposal 1: Election of Directors—Independence of
the Board” in our 2020 Proxy Statement.
Item 14. Principal Accounting Fees and Services.
Information required by this item regarding principal accounting fees and services is incorporated by reference to the information set forth under the
caption “Proposal 3: Ratification of Selection of Independent Registered Public Accounting Firm” in our 2020 Proxy Statement.
72
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Annual Report:
PART IV
(1) The financial statements are filed as part of this Annual Report under “Item 8. Financial Statements and Supplementary Data.”
(2) The financial statement schedules are omitted because they are either not applicable or the information required is presented in the financial
statements and notes thereto under “Item 8. Financial Statements and Supplementary Data.”
(3) The exhibits listed in the following Exhibit Index are filed, furnished, or incorporated by reference as part of this Annual Report.
73
Exhibit Index
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
10.1
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13
10.14
10.15
10.16
10.17
Description
Amended and Restated Certificate of Incorporation of
Stitch Fix, Inc.
Amended and Restated Bylaws of Stitch Fix, Inc.
Form of Class A Common Stock Certificate.
Form of Class B Common Stock Certificate.
Description of Class A Common Stock.
Amended and Restated Investor Rights Agreement, dated
April 10, 2014.
Stitch Fix, Inc. 2011 Equity Incentive Plan, as amended.
Forms of grant notice, stock option agreement, notice of
exercise and early exercise stock purchase agreement under
the Stitch Fix, Inc. 2011 Equity Incentive Plan, as amended.
Stitch Fix, Inc. 2017 Incentive Plan.
Forms of stock option grant notice, stock option agreement
and notice of exercise under the Stitch Fix, Inc. 2017
Incentive Plan.
Forms of restricted stock unit grant notice and award
agreement under the Stitch Fix, Inc. 2017 Incentive Plan.
Form of Indemnity Agreement entered into by and between
Stitch Fix, Inc. and each director and executive officer.
Offer Letter, by and between Stitch Fix, Inc. and Katrina
Lake, dated September 5, 2017.
Amended and Restated Offer Letter, by and between Stitch
Fix, Inc. and Paul Yee, dated September 5, 2017.
Amended and Restated Offer Letter, by and between Stitch
Fix, Inc. and Scott Darling, dated September 5, 2017.
Amended and Restated Offer Letter, by and between Stitch
Fix, Inc. and Mike Smith, dated September 25, 2017.
Stitch Fix, Inc. Independent Director Compensation Policy.
Office Lease, by and between Stitch Fix, Inc. and Post-
Montgomery Associates, dated as of November 10, 2015,
as amended.
First Amendment to Original Office Lease, executed
February 22, 2016, between Stitch Fix, Inc. and Post-
Montgomery Associates.
Second Amendment to Original Office Lease, executed
September 6, 2017, between Stitch Fix, Inc. and Post-
Montgomery Associates.
Third Amendment to the Office Lease, by and between
Stitch Fix, Inc. and Post-Montgomery Associates, dated as
of January 29, 2018.
Fourth Amendment to the Office Lease, by and between
Stitch Fix, Inc. and Post-Montgomery Associates, dated as
of June 4, 2018.
74
Filed or
Furnished
Herewith
X
Incorporation by Reference
File No.
Exhibit
Filing Date
001-38291
001-38291
333-221014
333-221650
333-221014
333-221014
333-221014
333-221014
333-221014
333-221014
3.1
3.2
4.1
4.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
11/21/2017
11/21/2017
11/6/2017
11/17/2017
10/19/2017
10/19/2017
10/19/2017
10/3/2018
11/6/2017
11/6/2017
10/19/2017
10/19/2017
10/19/2017
10-K
001-38291
S-1/A
333-221014
S-1/A
333-221014
Form
8-K
8-K
S-1/A
S-8
S-1
S-1
S-1
S-1
S-1
S-1
S-1
S-1
333-221014
10.11
10/19/2017
333-221014
10-Q
001-38291
10.16
10.1
10/19/2017
12/11/2018
S-1/A
333-221014
10.12
11/6/2017
10-Q
001-38291
10.1
3/13/2018
10-Q
001-38291
10.2
3/13/2018
8-K
001-38291
10.1
2/2/2018
10-Q
001-38291
10.2
6/8/2018
10.18#
10.19#
10.20#
10.21^
10.22
10.23
10.24+
10.25+
10.26+
10.27+
10.28+
21.1
23.1
31.1
31.2
32.1†
101.INS
Logistics Services Agreement, by and between Stitch Fix,
Inc. and Ozburn-Hessey Logistics, LLC, dated as of April
24, 2014.
Amendment One to the Logistics Services Agreement, by
and between Stitch Fix, Inc. and Ozburn-Hessey Logistics
LLC, dated as of July 1, 2016.
Amendment Two to the Logistics Services Agreement, by
and between Stitch Fix, Inc. and Geodis Logistics LLC,
dated as of February 23, 2018.
Amendment Three to the Logistics Services Agreement, by
and between Stitch Fix, Inc. and Geodis Logistics LLC,
dated as of April 9, 2020.
Credit Agreement, by and between Stitch Fix, Inc. and
Silicon Valley Bank, dated as of June 3, 2020.
First Amendment to the Credit Agreement by and between
Stitch Fix, Inc. and Silicon Valley Bank, dated as of July
24, 2020.
Stitch Fix, Inc. 2019 Inducement Plan, as amended.
Forms of stock option grant notice, stock option agreement
and notice of exercise under the Stitch Fix, Inc. 2019
Inducement Plan.
Forms of restricted stock unit grant notice and award
agreement under the Stitch Fix, Inc. 2019 Inducement Plan.
Offer Letter, by and between Stitch Fix, Inc. and Elizabeth
Spaulding, dated November 7, 2019.
Separation Agreement, by and between Stitch Fix, Inc. and
Paul Yee, dated December 9, 2019.
List of Subsidiaries of Stitch Fix, Inc.
Consent of Deloitte & Touche LLP, independent registered
public accounting firm.
Certification of 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.
Certification of 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.
Certification of 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.
Inline XBRL Instance Document (the instance document
does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL
document).
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
101.DEF
101.LAB
101.PRE
Inline XBRL Taxonomy Extension Calculation Linkbase
Document
Inline XBRL Taxonomy Extension Definition Linkbase
Document
Inline XBRL Taxonomy Extension Label Linkbase
Document
Inline XBRL Taxonomy Extension Presentation Linkbase
Document
75
S-1
333-221014
10.14
10/19/2017
10-Q
001-38291
10.4
6/8/2018
10-Q
001-38291
10.3
6/8/2018
10-Q
001-38291
10.1
6/9/2020
S-8
S-8
S-8
10-Q
10-Q
333-234323
333-234323
333-234323
001-38291
001-38291
99.4
99.2
99.3
10.4
10.5
8/14/2020
10/25/2019
10/25/2019
12/10/2019
12/10/2019
X
X
X
X
X
X
X
X
X
X
X
X
X
104
Cover Page Interactive Data File (the cover page interactive
data file does not appear in the Interactive Data File because
its XBRL tags are embedded within the Inline XBRL
document).
+ Indicates management contract or compensatory plan.
# Confidential treatment has been granted for portions of this exhibit. These portions have been omitted from the registration statement and submitted
separately to the SEC.
^ Portions of this exhibit have been omitted in accordance with Item 601(b)(10)(iv) of Regulation S-K.
† The certification attached as Exhibit 32.1 accompanying this Annual Report on Form 10-K is not deemed filed with the Securities and Exchange
Commission and is not to be incorporated by reference into any filing of Stitch Fix, Inc. under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation
language contained in such filing.
Item 16. Form 10-K Summary.
None.
76
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date:
September 25, 2020
Stitch Fix, Inc.
By:
/s/ Michael Smith
Michael Smith
President, Chief Operating Officer, and Interim Chief Financial
Officer
(Principal Financial and Accounting Officer)
77
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Katrina Lake, Michael Smith,
and Scott Darling, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his or
her name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and either of them, his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Katrina Lake
Katrina Lake
/s/ Michael Smith
Michael Smith
/s/ Steven Anderson
Steven Anderson
/s/ J. William Gurley
J. William Gurley
/s/ Marka Hansen
Marka Hansen
/s/ Kirsten Lynch
Kirsten Lynch
/s/ Sharon McCollam
Sharon McCollam
/s/ Mikkel Svane
Mikkel Svane
/s/ Elizabeth Williams
Elizabeth Williams
Founder, Chief Executive Officer and Director
September 25, 2020
(Principal Executive Officer)
President, Chief Operating Officer, and Interim Chief
Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
78
September 25, 2020
September 25, 2020
September 25, 2020
September 25, 2020
September 25, 2020
September 25, 2020
September 25, 2020
September 25, 2020
Exhibit 4.3
DESCRIPTION OF CLASS A COMMON STOCK
As of August 1, 2020, Stitch Fix, Inc. (“we”, “our,” and “us”) had one class of securities registered under Section 12 of the Securities Exchange Act of
1934, as amended: our Class A common stock, par value $0.00002 per share.
The following description of our Class A common stock summarizes certain provisions of our amended and restated certificate of incorporation, our
amended and restated bylaws, and certain provisions of the Delaware General Corporation Law. The description is intended as a summary, and is qualified
in its entirety by reference to our amended and restated certificate of incorporation and our amended and restated bylaws, copies of which have been filed
as exhibits to this Annual Report on Form 10-K.
General
Our amended and restated certificate of incorporation provides for two classes of common stock: Class A common stock and Class B common stock.
In addition, our amended and restated certificate of incorporation authorizes shares of undesignated preferred stock, the rights, preferences and privileges of
which may be designated from time to time by our board of directors.
Our authorized capital stock consists of 2,120,000,000 shares, all with a par value of $0.00002 per share, of which:
•
•
•
2,000,000,000 shares are designated Class A common stock;
100,000,000 shares are designated Class B common stock; and
20,000,000 shares are designated preferred stock.
Our Class A common stock is listed on the Nasdaq Global Select Market and trades under the symbol “SFIX.” The rights, preferences and privileges
of holders of our Class A common stock are subject to, and may be adversely affected by, the voting rights of the holders of shares of Class B common
stock and the rights of holders of any series of preferred stock we may issue in the future.
Class A Common Stock and Class B Common Stock
Voting Rights
The Class A common stock is entitled to one vote per share on any matter that is submitted to a vote of our stockholders. Holders of our Class B
common stock are entitled to ten votes per share on any matter submitted to our stockholders. Holders of shares of Class B common stock and Class A
common stock vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders.
Our amended and restated certificate of incorporation does not provide for cumulative voting for the election of directors.
Economic Rights
Except as otherwise expressly provided in our amended and restated certificate of incorporation or required by applicable law, all shares of Class A
common stock and Class B common stock will have the same rights and privileges and rank equally, share ratably and be identical in all respects for all
matters, including those described below.
Dividends and Distributions. Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of Class A
common stock and Class B common stock will be entitled to share equally, identically and ratably, on a per share basis, with respect to any dividend or
distribution of cash or property paid or distributed by the company, unless different treatment of the shares of the affected class is approved by the
affirmative vote of the holders of a majority of the outstanding shares of such affected class, voting separately as a class.
Liquidation Rights. On our liquidation, dissolution or winding-up, the holders of Class A common stock and Class B common stock will be entitled
to share equally, identically and ratably in all assets remaining after the payment of any liabilities, liquidation preferences and accrued or declared but
unpaid dividends, if any, with respect to any outstanding preferred stock, unless a different treatment is approved by the affirmative vote of the holders of a
majority of the outstanding shares of such affected class, voting separately as a class.
Change of Control Transactions. The holders of Class A common stock and Class B common stock will be treated equally and identically with
respect to shares of Class A common stock or Class B common stock owned by them, unless different treatment of the shares of each class is approved by
the affirmative vote of the holders of a majority of the outstanding shares of the class treated differently, voting separately as a class, on (a) the closing of
the sale, transfer or other disposition of all or substantially all of our assets, (b) the consummation of a merger, reorganization, consolidation or share
transfer which results in our voting securities outstanding immediately before the transaction (or the voting securities issued with respect to our voting
securities outstanding immediately before the transaction) representing less than a majority of the combined voting power of the voting securities of the
company or the surviving or acquiring entity or (c) the closing of the transfer (whether by merger, consolidation or otherwise), in one transaction or a series
of related transactions, to a person or group of affiliated persons of securities of the company if, after closing, the transferee person or group would hold
50% or more of the outstanding voting power of the company (or the surviving or acquiring entity). However, consideration to be paid or received by a
holder of common stock in connection with any such assets sale, merger, reorganization, consolidation or share transfer under any employment, consulting,
severance or other arrangement will be disregarded for the purposes of determining whether holders of common stock are treated equally and identically.
Subdivisions and Combinations. If we subdivide or combine in any manner outstanding shares of Class A common stock or Class B common stock,
the outstanding shares of the other classes will be subdivided or combined in the same manner.
No Preemptive or Similar Rights
Our Class A common stock and Class B common stock are not entitled to preemptive rights, and are not subject to conversion, redemption or sinking
fund provisions, except for the conversion provisions with respect to the Class B common stock described below.
Conversion
Each share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock. Upon any transfer
of shares of Class B common stock, whether or not for value, each such transferred share will automatically convert into one share of Class A common
stock, except for certain transfers described in our amended and restated certificate of incorporation, including transfers for tax and estate planning
purposes, so long as the transferring holder continues to hold sole voting and dispositive power with respect to the shares transferred.
Any holder’s shares of Class B common stock will convert automatically into Class A common stock, on a one-to-one basis, upon the following:
(i) sale or transfer of such share of Class B common stock; (ii) the death of
the Class B common stockholder; and (iii) on the final conversion date, defined as the earlier of (a) the first trading day on or after the date on which the
outstanding shares of Class B common stock represent less than 10% of the then outstanding Class A and Class B common stock; (b) the tenth anniversary
of our initial public offering; or (c) the date specified by vote of the holders of a majority of the outstanding shares of Class B common stock, voting as a
single class.
Once transferred and converted into Class A common stock, the Class B common stock may not be reissued.
Preferred Stock
Under our amended and restated certificate of incorporation, our board of directors may, without further action by our stockholders, fix the rights,
preferences, privileges and restrictions of up to an aggregate of 20,000,000 shares of preferred stock in one or more series and authorize their issuance.
These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the
number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of our Class A common stock
or Class B common stock. Any issuance of our preferred stock could adversely affect the voting power of holders of our Class B common stock, and the
likelihood that such holders would receive dividend payments and payments on liquidation. In addition, the issuance of preferred stock could have the
effect of delaying, deferring or preventing a change of control or other corporate action.
Anti-Takeover Provisions
Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws
Because our stockholders do not have cumulative voting rights, stockholders holding a majority of the voting power of our shares of common stock
are able to elect all of our directors. Our amended and restated certificate of incorporation and amended and restated bylaws provide for stockholder actions
at a duly called meeting of stockholders. A special meeting of stockholders may be called by a majority of our board of directors, the chair of our board of
directors, our chief executive officer or our lead independent director. Our amended and restated bylaws establish an advance notice procedure for
stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of
directors.
Our amended and restated certificate of incorporation further provides for a dual-class common stock structure, which provides holders of our Class
B common stock (which shares are generally held by our founder and certain other officers, employees and investors from before our initial public
offering) with control over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a
merger or other sale of our company or its assets.
In accordance with our amended and restated certificate of incorporation, our board of directors is divided into three classes with staggered three-year
terms.
The foregoing provisions make it more difficult for another party to obtain control of us by replacing our board of directors. Since our board of
directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to
effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred
stock with voting or other rights or preferences that could impede the success of any attempt to change our control.
These provisions, including the dual-class structure of our common stock, are intended to preserve our control structure with our long-term holders
and founders, facilitate our continued product innovation and the risk-taking that it requires, permit us to continue to prioritize our long-term goals rather
than short-term results, enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage certain
types of transactions that may involve an actual or threatened acquisition of us. These provisions are also designed to reduce our vulnerability to an
unsolicited acquisition proposal and to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of
discouraging others from making tender offers for our shares and may have the effect of deterring hostile takeovers or delaying changes in our control or
management. As a consequence, these provisions may also inhibit fluctuations in the market price of our stock that could result from actual or rumored
takeover attempts.
Section 203 of the Delaware General Corporation Law
We are subject to, and have not opted out of, Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested
stockholder, with the following exceptions:
•
•
•
before such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at
least 85 percent of the voting stock of the corporation outstanding at the time the transaction began, excluding for purposes of determining
the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned (i) by persons
who are directors and also officers and (ii) employee stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
on or after such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of the
stockholders by the affirmative vote of at least 66 and 2⁄3 percent of the outstanding voting stock that is not owned by the interested
stockholder.
In general, Section 203 defines a “business combination” to include the following:
•
•
•
•
•
any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, pledge, or other disposition of 10 percent or more of the assets of the corporation involving the interested stockholder;
subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder;
any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class or series of the
corporation beneficially owned by the interested stockholder; or
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges, or other financial benefits by or through
the corporation.
In general, Section 203 defines an “interested stockholder” as an entity or person who, together with the person’s affiliates and associates, beneficially
owns, or within three years prior to the time of determination of interested stockholder status did own, 15 percent or more of the outstanding voting stock
of the corporation.
Choice of Forum
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for: (i) any
derivative action or proceeding brought on our behalf; (ii) any action asserting a breach of fiduciary duty; (iii) any action asserting a claim against us
arising under the Delaware General Corporation Law; (iv) any action regarding our amended and restated certificate of incorporation or our amended and
restated bylaws; or (v) any action asserting a claim against us that is governed by the internal affairs doctrine. Our amended and restated certificate of
incorporation further provides that the federal district courts of the United States of America are the exclusive forum for resolving any complaint asserting
a cause of action arising under the Securities Act.
Exhibit 10.22
SENIOR SECURED CREDIT FACILITIES
CREDIT AGREEMENT
dated as of June 3, 2020,
among
STITCH FIX, INC.,
as the Borrower,
The Several Lenders from Time to Time Party Hereto,
and
SILICON VALLEY BANK,
as Administrative Agent, Issuing Lender and Swingline Lender
Table of Contents
SECTION 1 DEFINITIONS
1.1 Defined Terms
1.2 Other Definitional Provisions.
1.3 Rounding
1.4 Limited Condition Acquisitions.
SECTION 2 AMOUNT AND TERMS OF COMMITMENTS
2.1 [Reserved]
2.2 [Reserved]
2.3 [Reserved]
2.4 Revolving Commitments.
2.5 Procedure for Revolving Loan Borrowing
2.6 Swingline Commitment
2.7 Procedure for Swingline Borrowing; Refunding of Swingline Loans.
2.8 Overadvances
2.9 Fees.
2.10 Termination or Reduction of Revolving Commitments; Prepayments.
2.11 [Reserved].
2.12 [Reserved].
2.13 Conversion and Continuation Options.
2.14 Limitations on Eurodollar Tranches
2.15 Interest Rates and Payment Dates.
2.16 Computation of Interest and Fees.
2.17 Inability to Determine Interest Rate
2.18 Pro Rata Treatment and Payments.
2.19 Illegality; Requirements of Law.
2.20 Taxes.
2.21 Indemnity
2.22 Change of Lending Office
2.23 Substitution of Lenders
2.24 Defaulting Lenders.
2.25 Joint and Several Liability of the Borrowers.
2.26 Notes
2.27 Incremental Facility.
2.28 Extension of Maturity Date
SECTION 3 LETTERS OF CREDIT
3.1 L/C Commitment.
3.2 Procedure for Issuance of Letters of Credit
3.3 Fees and Other Charges.
3.4 L/C Participations; Existing Letters of Credit.
3.5 Reimbursement.
3.6 Obligations Absolute
i
1
1
34
35
35
36
36
36
36
36
36
37
37
39
39
40
40
40
40
41
41
41
42
43
46
48
51
51
52
53
55
59
59
61
62
62
63
64
64
65
66
Table of Contents
(continued)
3.7 Letter of Credit Payments
3.8 Applications
3.9 Interim Interest
3.10 Cash Collateral.
3.11 Additional Issuing Lenders
3.12 Resignation of the Issuing Lender
3.13 Applicability of UCP and ISP
SECTION 4 REPRESENTATIONS AND WARRANTIES
4.1 Financial Condition.
4.2 No Change
4.3 Existence; Compliance with Law
4.4 Power, Authorization; Enforceable Obligations
4.5 No Legal Bar
4.6 Litigation
4.7 No Default
4.8 Ownership of Property; Liens; Investments
4.9 Intellectual Property
4.10 Taxes
4.11 Federal Regulations
4.12 Labor Matters
4.13 ERISA
4.14 Investment Company Act; Other Regulations
4.15 Subsidiaries
4.16 Use of Proceeds
4.17 Environmental Matters
4.18 Accuracy of Information, etc.
4.19 Security Documents.
4.20 Solvency; Voidable Transaction
4.21 Regulation H
4.22 Designated Senior Indebtedness
4.23 [Reserved]
4.24 Insurance
4.25 No Casualty
4.26 [Reserved].
4.27 [Reserved].
4.28 OFAC
4.29 Anti-Corruption Laws
SECTION 5 CONDITIONS PRECEDENT
5.1 Conditions to Initial Extension of Credit
5.2 Conditions to Each Extension of Credit
5.3 Post-Closing Obligations
ii
66
66
66
67
68
68
68
69
69
69
69
69
70
70
70
70
70
71
71
71
71
72
73
73
73
74
74
75
75
75
75
75
75
75
75
75
76
76
76
79
80
Table of Contents
(continued)
SECTION 6 AFFIRMATIVE COVENANTS
6.1 Financial Statements
6.2 Certificates; Reports; Other Information
6.3 [Reserved].
6.4 Payment of Obligations
6.5 Maintenance of Existence; Compliance
6.6 Maintenance of Property; Insurance
6.7 Books and Records; Discussions
6.8 Notices
6.9 Environmental Laws.
6.10 Operating Accounts
6.11 Audits
6.12 Additional Collateral, Etc.
6.13 Use of Proceeds
6.14 Designated Senior Indebtedness
6.15 Anti-Corruption Laws
6.16 Further Assurances
SECTION 7 NEGATIVE COVENANTS
7.1 Financial Condition Covenants.
7.2 Indebtedness
7.3 Liens
7.4 Fundamental Changes
7.5 Disposition of Property
7.6 Restricted Payments
7.7 [Reserved]
7.8 Investments
7.9 ERISA
7.10 Optional Payments and Modifications of Certain Preferred Stock
7.11 Transactions with Affiliates
7.12 Sale Leaseback Transactions
7.13 Swap Agreements
7.14 Accounting Changes
7.15 Negative Pledge Clauses
7.16 Clauses Restricting Subsidiary Distributions
7.17 Lines of Business
7.18 Designation of other Indebtedness
7.19 [Reserved]
7.20 Amendments to Operating Documents and Material Contracts
7.21 Use of Proceeds
7.22 Subordinated Indebtedness.
7.23 Anti-Terrorism Laws
iii
80
80
81
82
82
83
83
83
83
85
85
85
85
87
88
88
88
88
88
88
90
92
92
93
95
95
97
98
98
98
98
98
98
99
100
100
100
100
100
100
100
Table of Contents
(continued)
SECTION 8 EVENTS OF DEFAULT
8.1 Events of Default
8.2 Remedies Upon Event of Default
8.3 Application of Funds
SECTION 9 THE ADMINISTRATIVE AGENT
9.1 Appointment and Authority.
9.2 Delegation of Duties
9.3 Exculpatory Provisions
9.4 Reliance by Administrative Agent
9.5 Notice of Default
9.6 Non-Reliance on Administrative Agent and Other Lenders
9.7 Indemnification
9.8 Agent in Its Individual Capacity
9.9 Successor Administrative Agent.
9.10 Collateral and Guaranty Matters
9.11 Administrative Agent May File Proofs of Claim
9.12 [Reserved]
9.13 Cash Management Bank and Qualified Counterparty Reports
9.14 Survival
SECTION 10 MISCELLANEOUS
10.1 Amendments and Waivers.
10.2 Notices
10.3 No Waiver; Cumulative Remedies
10.4 Survival of Representations and Warranties
10.5 Expenses; Indemnity; Damage Waiver.
10.6 Successors and Assigns; Participations and Assignments.
10.7 Adjustments; Set-off.
10.8 Payments Set Aside
10.9 Interest Rate Limitation
10.10 Counterparts; Electronic Execution of Assignments.
10.11 Severability
10.12 Integration
10.13 GOVERNING LAW
10.14 Submission to Jurisdiction; Waivers
10.15 Acknowledgements
10.16 Releases of Guarantees and Liens.
10.17 Treatment of Certain Information; Confidentiality
10.18 Automatic Debits
10.19 Judgment Currency
10.20 Patriot Act; Other Regulations
10.21 Acknowledgement and Consent to Bail-In of EEA Financial Institutions
iv
101
101
103
104
106
106
107
107
108
108
108
109
109
110
111
112
112
112
113
113
113
115
117
117
117
119
123
124
124
124
125
125
125
125
126
127
127
128
128
129
129
Table of Contents
(continued)
10.22 Acknowledgement Regarding Any Supported QFCs
130
v
CREDIT AGREEMENT
THIS Credit Agreement (this “Agreement”), dated as of June 3, 2020, is entered into by and among STITCH FIX, INC., a
Delaware corporation (the “Borrower”), the several banks and other financial institutions or entities from time to time party to this
Agreement (each a “Lender” and, collectively, the “Lenders”), SILICON VALLEY BANK (“SVB”), as the Issuing Lender and the
Swingline Lender, and SVB, as administrative agent and collateral agent for the Lenders (in such capacities, together with any successors and
assigns in such capacities, the “Administrative Agent”).
RECITALS:
WHEREAS, the Borrower desires to obtain financing for working capital financing and letter of credit facilities;
Whereas, the Lenders have agreed to extend a revolving credit facility to the Borrower, upon the terms and conditions specified in
this Agreement, in an aggregate principal amount not to exceed $90,000,000, including a letter of credit sub-facility in the aggregate
availability amount of $20,000,000 (as a sublimit of the revolving loan facility), and a swingline sub-facility in the aggregate availability
amount of $50,000,000; (as a sublimit of the revolving loan facility);
WHEREAS, the Borrower has agreed to secure all of its Obligations by granting to the Administrative Agent, for the benefit of the
Secured Parties, a first priority lien on substantially all of its assets; and
WHEREAS, each of the Guarantors has agreed to guarantee the Obligations of the Borrower and to secure its respective Obligations
in respect of such guarantee by granting to the Administrative Agent, for the benefit of the Secured Parties, a first priority lien on
substantially all of its assets.
Now, Therefore, the parties hereto hereby agree as follows:
SECTION 1
DEFINITIONS
1.1
Defined Terms. As used in this Agreement (including the recitals hereof), the terms listed in this Section 1.1 shall have the
respective meanings set forth in this Section 1.1.
“ABR”: for any day, a rate per annum equal to the highest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective
Rate in effect for such day plus 0.50%, and (c) Eurodollar Rate plus 1.00%. Any change in the ABR due to a change in any of the Prime
Rate, the Federal Funds Effective Rate or the Eurodollar Rate, as the case may be, shall be effective as of the opening of business on the
effective day of the change in such rates.
“ABR Loans”: Loans, the rate of interest applicable to which is based upon the ABR.
“Account Debtor”: any Person who may become obligated to any Person under, with respect to, or on account of, an Account, chattel
paper or general intangibles (including a payment intangible). Unless otherwise stated, the term “Account Debtor,” when used herein, shall
mean an Account Debtor in respect of an Account of a Group Member.
1
“Accounts”: all “accounts” (as defined in the UCC) of a Person, including, without limitation, accounts, accounts receivable, monies
due or to become due and obligations in any form (whether arising in connection with contracts, contract rights, instruments, general
intangibles, or chattel paper), in each case whether arising out of goods sold or services rendered or from any other transaction and whether
or not earned by performance, now or hereafter in existence, and all documents of title or other documents representing any of the foregoing,
and all collateral security and guaranties of any kind, now or hereafter in existence, given by any Person with respect to any of the foregoing.
Unless otherwise stated, the term “Account,” when used herein, shall mean an Account of a Group Member.
“Adjusted Current Ratio”: for any date of determination, the ratio of Current Assets to Current Liabilities.
“Administrative Agent”: SVB, as the administrative agent under this Agreement and the other Loan Documents, together with any of
its successors in such capacity.
“Affected Lender”: as defined in Section 2.23.
“Affiliate”: with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls
or is Controlled by or is under common Control with the Person specified; provided that, neither the Administrative Agent nor the Lenders
shall be deemed Affiliates of the Loan Parties as a result of the exercise of their rights and remedies under the Loan Documents.
“Agent Parties”: as defined in Section 10.2(c)(ii).
“Aggregate Exposure”: with respect to any Lender at any time, an amount equal to the sum of (a) the amount of such Lender’s
Revolving Commitment then in effect or, if the Revolving Commitments have been terminated, the amount of such Lender’s Revolving
Extensions of Credit then outstanding, and (b) without duplication of clause (a), the L/C Commitment of such Lender then in effect (as a
sublimit of the Revolving Commitment of such Lender).
“Aggregate Exposure Percentage”: with respect to any Lender at any time, the ratio (expressed as a percentage) of such Lender’s
Aggregate Exposure at such time to the Aggregate Exposure of all Lenders at such time.
“Agreement”: as defined in the preamble hereto.
“Applicable Margin”: commencing on the first day of the second full quarter ending after the Closing Date, the rate per annum set
forth under the relevant column heading below based on the applicable Average Daily Usage for the prior quarter:
Level
I
II
Average Daily Usage
Applicable Margin for
Eurodollar Loans
Applicable Margin for
ABR Loans
> 40%
< 40%
2.25%
2.50%
1.25%
1.50%
Notwithstanding the foregoing, (a) until and including the last day of the first full calendar quarter ending after the Closing Date, the
Applicable Margin shall be the rates corresponding to level II in the
2
foregoing table, and (b) no reduction to the Applicable Margin shall become effective at any time when an Event of Default has occurred and
is continuing.
“Applicable Time”: with respect to any Revolving Extensions of Credit, the local time in the place of settlement as may be
determined by the Administrative Agent or the Issuing Lender, as the case may be, to be necessary for timely settlement on the relevant date
in accordance with normal banking procedures in the place of payment.
“Application”: an application, in such form as the Issuing Lender may specify from time to time, requesting the Issuing Lender to
issue a Letter of Credit.
“Approved Fund”: any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender, or (c) an entity or an
Affiliate of an entity that administers or manages a Lender.
“Assignment and Assumption”: an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent
of any party whose consent is required by Section 10.6), and accepted by the Administrative Agent, in substantially the form of Exhibit E or
any other form approved by the Administrative Agent.
“Available Revolving Commitment”: at any time, an amount equal to (a) the Total Revolving Commitments in effect at such time,
minus (b) the aggregate undrawn amount of all outstanding Letters of Credit at such time, minus (c) the aggregate amount of all L/C
Disbursements that have not yet been reimbursed or converted into Revolving Loans at such time, minus (d) the aggregate principal balance
of any Revolving Loans outstanding at such time.
“Available Revolving Increase Amount”: as of any date of determination, an amount equal to the result of (a) $60,000,000 minus (b)
the aggregate principal amount of Increases to the Revolving Commitments previously made pursuant to Section 2.27 after the Closing Date.
“Average Daily Usage”: the average of the Usage for each day of the immediately preceding calendar quarter.
“Bail-In Action”: the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of
any liability of an EEA Financial Institution.
“Bail-In Legislation”: with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European
Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is
described in the EU Bail-In Legislation Schedule.
“Bankruptcy Code”: Title 11 of the United States Code entitled “Bankruptcy.”
“Benefitted Lender”: as defined in Section 10.7(a).
“Blocked Person”: as defined in Section 7.23.
“Board”: the Board of Governors of the Federal Reserve System of the United States (or any successor).
“Borrower”: as defined in the preamble hereto.
3
“Borrowing Date”: any Business Day specified by the Borrower in a Notice of Borrowing as a date on which the Borrower requests
the relevant Lenders to make Loans hereunder.
“Business”: as defined in Section 4.17(b).
“Business Day”: a day other than a Saturday, Sunday or other day on which commercial banks in the State of New York or the State
of California are authorized or required by law to close; provided that with respect to notices and determinations in connection with, and
payments of principal and interest on, Eurodollar Loans, such day is also a day for trading by and between banks in Dollar deposits in the
interbank eurodollar market.
“Capital Lease Obligations”: as to any Person, the obligations of such Person to pay rent or other amounts under any lease of (or
other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be
classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the
amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP; provided
that, for all purposes hereunder, any obligations of such Person in respect of leases of real property that would have been treated as operating
leases in accordance with Accounting Standards Codification 840 (regardless of whether or not then in effect) shall be treated as operating
leases for purposes of all financial definitions, calculations and covenants, without giving effect to Accounting Standards Codification 842
requiring operating leases to be recharacterized or treated as capital leases.
“Capital Stock”: with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such
Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other
ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other
ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or
such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests
therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date
of determination; provided, however, that any Indebtedness convertible into equity interests that are not Disqualified Stock shall not
constitute Capital Stock.
“Cash Collateralize”: to pledge and deposit with or deliver to (a) with respect to Obligations in respect of Letters of Credit, the
Administrative Agent, for the benefit of the Issuing Lender and one or more of the Lenders, as applicable, as collateral for L/C Exposure or
obligations of the Lenders to fund participations in respect thereof, cash or deposit account balances or, if the Administrative Agent and the
Issuing Lender shall agree in their sole discretion, other credit support, in each case pursuant to documentation in form and substance
satisfactory to the Administrative Agent and such Issuing Lender; (b) with respect to Obligations arising under any Cash Management
Agreement in connection with Cash Management Services, the applicable Cash Management Bank, for its own or any of its applicable
Affiliate’s benefit, as provider of such Cash Management Services, cash or deposit account balances or, if the Administrative Agent and the
applicable Cash Management Bank shall agree in their sole discretion, other credit support, in each case pursuant to documentation in form
and substance satisfactory to the Administrative Agent and such Cash Management Bank; or (c) with respect to Obligations in respect of any
Specified Swap Agreements, the applicable Qualified Counterparty, as Collateral for such Obligations, cash or deposit account balances or, if
such Qualified Counterparty shall agree in its sole discretion, other credit support, in each case pursuant to documentation in form and
substance satisfactory
4
to such Qualified Counterparty. “Cash Collateral” shall have a meaning correlative to the foregoing and shall include the proceeds of such
cash collateral and other credit support.
“Cash Equivalents”: (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or
issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date
of acquisition; (b) certificates of deposit, time deposits, eurodollar time deposits or overnight bank deposits having maturities of 12 months or
less from the date of acquisition issued by any Lender or by any commercial bank organized under the laws of the United States or any state
thereof having combined capital and surplus of not less than $250,000,000; (c) commercial paper of an issuer rated at least A-1 by S&P or P-
1 by Moody’s, or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease
publishing ratings of commercial paper issuers generally, and maturing within 12 months from the date of acquisition; (d) repurchase
obligations of any Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more
than 30 days, with respect to securities issued or fully guaranteed or insured by the United States government; (e) securities with maturities of
one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any
political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which
state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P
or A by Moody’s; (f) securities with maturities of 12 months or less from the date of acquisition backed by standby letters of credit issued by
any Lender or any commercial bank satisfying the requirements of clause (b) of this definition; (g) money market mutual or similar funds that
invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition; (h) money market funds that (i) comply
with the criteria set forth in SEC Rule 2a-7 under the Investment Company Act of 1940, as amended, (ii) are rated AAA by S&P and Aaa by
Moody’s and (iii) have portfolio assets of at least $5,000,000,000; (i) in the case of any Group Member organized or having its principal
place of business outside the United States, investments denominated in the currency of the jurisdiction in which such Group member is
organized or has its principal place of business which are similar and of comparable credit quality to the items specified in clauses (b)
through (i) above; or (j) investments permitted by the Borrower’s board-approved investment policy as approved from time to time by the
Administrative Agent (such approval not to be unreasonably withheld, delayed or conditioned).
“Cash Management Agreement”: as defined in the definition of “Cash Management Services.”
“Cash Management Bank”: any Person that, at the time it enters into a Cash Management Agreement, is a Lender or an Affiliate of
a Lender, in its capacity as a party to such Cash Management Agreement.
“Cash Management Services”: cash management and other services provided to one or more of the Group Members by a Cash
Management Bank which may include treasury, depository, return items, overdraft, controlled disbursement, merchant store value cards,
e(cid:0)payables services, electronic funds transfer, interstate depository network, automatic clearing house transfer (including the Automated
Clearing House processing of electronic funds transfers through the direct Federal Reserve Fedline system), merchant services, direct deposit
of payroll, business credit card (including so-called “purchase cards”, “procurement cards” or “p(cid:0)cards”), credit card processing services,
debit cards, stored value cards, and check cashing services identified in such Cash Management Bank’s various cash management services or
other similar agreements (each, a “Cash Management Agreement”).
5
“Casualty Event”: any damage to or any destruction of, or any condemnation or other taking by any Governmental Authority of any
property of the Loan Parties.
“Certificated Securities”: as defined in Section 4.19(a).
“Change of Control”: (a) at any time, any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange
Act) other than Baseline Ventures LLC or its Control Investment Affiliates shall become, or obtain rights (whether by means of warrants,
options or otherwise) to become, the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)(cid:0)5 under the Exchange Act), directly or
indirectly, of 40% or more of the ordinary voting power for the election of directors of the Borrower (determined on a fully diluted basis); or
(b) at any time, the Borrower shall cease to own and control, of record and beneficially, directly or indirectly, 100% of each class of
outstanding Capital Stock of each Guarantor free and clear of all Liens other than Liens permitted by Section 7.3 (other than director’s
qualifying shares as required by law); or (c) a “change of control” or any comparable term under and as defined in any agreement governing
any other Indebtedness of the Group Members in an aggregate principal amount in excess of $10,000,000.
“Closing Date”: the date on which all of the conditions precedent set forth in Section 5.1 are satisfied or waived by the
Administrative Agent and, as applicable, the Lenders or the Required Lenders.
“Code”: the Internal Revenue Code of 1986, as amended from time to time.
“Collateral”: all property of the Loan Parties, now owned or hereafter acquired, upon which a Lien is purported to be created by any
Security Document. For the avoidance of doubt, no Excluded Asset shall constitute “Collateral.”
“Collateral Information Certificate”: the Collateral Information Certificate to be executed and delivered by the Borrower pursuant
to Section 5.1, substantially in the form of Exhibit J.
“Collateral-Related Expenses”: all reasonable costs and expenses of the Administrative Agent paid or incurred in connection with
any sale, collection or other realization on the Collateral, including reasonable compensation to the Administrative Agent and its agents and
counsel, and reimbursement for all other reasonable costs, expenses and liabilities and advances made or incurred by the Administrative
Agent in connection therewith (including as described in Section 6.6 of the Guarantee and Collateral Agreement), and all amounts for which
the Administrative Agent is entitled to indemnification under the Security Documents and all advances made by the Administrative Agent
under the Security Documents for the account of any Loan Party.
“Commitment”: as to any Lender, its Revolving Commitment.
“Commitment Fee Rate”: the rate per annum set forth under the relevant column heading below based on the applicable Average
Daily Usage for the prior calendar quarter:
Level
I
II
Average Daily
Usage
> 40%
< 40%
Commitment Fee Rate
0.25%
0.30%
6
Notwithstanding the foregoing, until and including the last day of the first full calendar quarter ending after the Closing Date, the
Commitment Fee Rate shall be the rates corresponding to level II in the foregoing table.
“Commodity Exchange Act”: the Commodity Exchange Act (7 U.S.C. Section 1 et seq.), as amended from time to time, and any
successor statute.
“Communications”: as defined in Section 10.2(c)(ii).
“Compliance Certificate”: a certificate duly executed by a Responsible Officer of the Borrower substantially in the form of
Exhibit B.
“Connection Income Taxes”: Other Connection Taxes that are imposed on or measured by net income (however denominated) or
that are franchise Taxes or branch profits Taxes.
“Consolidated Adjusted EBITDA”: with respect to the Group Members for any period,
(a) Consolidated Net Income, plus
(b) sum, without duplication, of the following amounts for such period but solely to the extent deducted in calculating Consolidated
Net Income (other than in the case of clause (xviii)) for such period of:
(i) Consolidated Interest Expense, plus
(ii) provisions for Taxes based on income, plus
(iii) total depreciation expense, plus
(iv) total amortization expense (including, without limitation, amortization of intangibles from purchase price accounting),
plus
(v) noncash stock based compensation expense, plus
(vi) noncash exchange, transaction or performance losses relating to any foreign currency hedging transactions or currency
fluctuations, plus
(vii) costs, fees and expenses in connection with the execution and delivery of this Agreement and the other Loan Documents
and any amendments or other modifications thereto, in each case to the extent incurred within 6 months after the Closing Date or the
effectiveness of such amendment or other modification (or such later time period as approved in writing by the Administrative Agent
in its sole discretion), plus
(viii) one-time costs, fees, and expenses in connection with Permitted Acquisitions, Investments, dispositions, issuances or
repurchases of Capital Stock, or the incurrence, amendment or waiver of Indebtedness (in each case permitted hereunder), in each
case, whether or not consummated; provided that, any amounts described in this clause (b)(viii) with respect to transactions that are
not consummated shall not exceed $5,000,000 in the aggregate for any period, plus
7
(ix) noncash purchase accounting adjustments (including, but not limited to deferred revenue write down) and any
adjustments as required or permitted by the application of FASB 141 (requiring the use of purchase method of accounting for
acquisitions and consolidations), FASB 142 (relating to changes in accounting for the amortization of good will and certain other
intangibles) and FASB 144 (relating to the write downs of long-lived assets), in each case, in connection with Permitted Acquisitions,
plus
(x) noncash charges for goodwill and other intangible write-offs and write-downs in connection with Permitted Acquisitions
or otherwise, plus
(xi) the amount of any restructuring charge, accrual or reserve, integration cost or other business optimization expense,
including any restructuring costs incurred in connection with acquisitions, mergers or consolidations after the date hereof and any
other restructuring expenses, severance expenses, one-time compensation charges, post-retirement employee benefits plans, any
expenses relating to reconstruction, decommissioning or recommissioning fixed assets for alternate use, expenses or charges relating
to facility closing costs, acquisition integration costs and signing, retention or completion bonuses or expenses, in an amount, when
taken together with any amounts under clause (xviii) below, not to exceed $7,500,000 in any period; plus
(xii) (A) any extraordinary, unusual or non-recurring non-cash expenses or non-cash charges and (B) any non-recurring
expenses or charges in an amount not to exceed $5,000,000 in any period; plus
(xiii) other noncash items reducing Consolidated Net Income (excluding any such non cash item to the extent that it
represents an accrual or reserve for potential cash items in any future period or amortization of a prepaid cash item that was paid in a
prior period) approved by the Administrative Agent in writing as an ‘add-back’ to Consolidated Adjusted EBITDA, plus
(xiv) any Insurance Loss Addback; plus
(xv) expenses and payments that are covered by indemnification or purchase price adjustment provisions in any agreement
entered into by a Group Member in connection with any proposed or actual Permitted Acquisition and for which (A) the indemnitor
or counterparty has assumed coverage and (B) the Borrower reasonably expects to receive such expenses and payments within one
year from the date of calculation; plus
(xvi) any expense deducted in calculating Consolidated Net Income and reimbursed by third parties (other than a Group
Member); plus
(xvii) the amount of earn-out obligations incurred in connection with any Permitted Acquisition, to the extent such earn-outs
are permitted under this Agreement and expensed under GAAP standards in an aggregate amount not to exceed $7,500,000 in any
period; plus
(xviii) the amount of cost savings, operating expense reductions, other operating improvements and initiatives and synergies
projected by the Borrower in good faith to result from actions taken or to be taken in connection with any Investment, Disposition,
merger, amalgamation, consolidation, discontinued operations, or operational changes (which will be added to Consolidated Adjusted
EBITDA as so projected until fully realized and calculated on a Pro Forma Basis as though such cost savings, operating expense
reductions, other operating improvements and initiatives and synergies had been realized on the first day of such period), net
8
of the amount of actual benefits realized during such period from such actions in an amount, when taken together with any amounts
under clause (xi) above, not to exceed $7,500,000 in any period; provided that (x) such actions have been taken or are expected to be
taken within 12 months after the consummation of the Investment, acquisition, Disposition, merger, amalgamation, consolidation,
discontinued operations, or operational change expected to result in such cost savings or other benefits, and (y) such cost savings are
reasonably identifiable and factually supportable (in the good faith determination of the Borrower); plus
(xix) write-downs of capitalized software development costs; minus
(c) the sum, without duplication of the amounts for such period of
(i) noncash items increasing Consolidated Net Income for such period (excluding any such noncash item to the extent it
represents the reversal of an accrual or reserve for potential cash item in any prior period), plus
(ii) interest income; plus
(iii) capitalized software development costs;
provided that Consolidated Adjusted EBITDA for any period shall be determined on a Pro Forma Basis to give effect to any
Permitted Acquisitions or any Disposition of any business or assets consummated during such period, in each case as if such transaction
occurred on the first day of such period and in accordance with Regulation S-X promulgated by the SEC.
“Consolidated Capital Expenditures”: for any period, with respect to the Group Members, the aggregate of all expenditures
(whether paid in cash or other consideration or accrued as a liability and including that portion of Capital Lease Obligations which is
capitalized on the consolidated balance sheet of the Group Members) by such Group Members during such period for the acquisition or
leasing (pursuant to a capital lease) of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and
improvements during such period) that, in conformity with GAAP, are included in “purchases of property and equipment” or comparable
items reflected in the consolidated statement of cash flows of the Group Members; provided that “Consolidated Capital Expenditures” shall
not include (a) expenditures in respect of normal replacements and maintenance which are properly charged to current operations, (b)
expenditures made in connection with the replacement, substitution or restoration of assets to the extent financed (i) from insurance proceeds
paid on account of the loss of or damage to the assets being replaced or restored or (ii) with awards of compensation arising from the taking
by eminent domain or condemnation of the assets being replaced, (c) expenditures made as a tenant as leasehold improvements during such
period to the extent reimbursed by the landlord during such period, (d) expenditures that constitute Permitted Acquisitions, or (e) the
purchase price of equipment that is purchased simultaneously with the trade-in of existing equipment to the extent that the gross amount of
such purchase price is reduced by the credit granted by the seller of such equipment for the equipment being traded in at such time.
“Consolidated Interest Expense”: for any period, total cash interest expense (including that attributable to Capital Lease
Obligations) of the Group Members for such period with respect to all outstanding Indebtedness of such Persons (including all commissions,
discounts and other fees and charges owed with respect to letters of credit and bankers’ acceptance financing and net costs under Swap
Agreements in respect of interest rates to the extent such net costs are allocable to such period in accordance with GAAP).
9
“Consolidated Net Income”: for any period, the consolidated net income (or loss) of the Group Members, determined on a
consolidated basis in accordance with GAAP; provided that there shall be excluded from the calculation of “Consolidated Net Income” (a)
the income (or deficit) of any such Person accrued prior to the date it becomes a Subsidiary of the Borrower or is merged into or consolidated
with a Group Member, (b) the income (or deficit) of any such Person (other than a Subsidiary of the Borrower) in which a Group Member
has an ownership interest, except to the extent that any such income is actually received by a Group Member in the form of dividends or
similar distributions, and (c) the undistributed earnings of any Subsidiary of the Borrower to the extent that the declaration or payment of
dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of any Contractual Obligation (other than under
any Loan Document) or Requirement of Law applicable to such Subsidiary.
“Contractual Obligation”: as to any Person, any provision of any security issued by such Person or of any agreement, instrument or
other undertaking to which such Person is a party or by which it or any of its property is bound.
“Control”: the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a
Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings
correlative thereto.
“Control Agreement”: any account control agreement in form and substance reasonably satisfactory to the Administrative Agent
entered into among the depository institution at which a Loan Party maintains a Deposit Account or the securities intermediary at which a
Loan Party maintains a Securities Account, such Loan Party, and the Administrative Agent pursuant to which the Administrative Agent
obtains control (within the meaning of the UCC or any other applicable law) over such Deposit Account or Securities Account.
“Control Investment Affiliate”: as to any Person, any other Person that (a) directly or indirectly, is in Control of, is Controlled by, or
is under common Control with, such Person and (b) is organized by such Person primarily for the purpose of making equity or debt
investments in one or more companies.
“Current Assets”: on any date, the sum of (a) the Loan Parties’ consolidated, unrestricted and unencumbered cash and Cash
Equivalents subject to, at all times on and after August 3, 2020, a perfected first priority Lien in favor of the Administrative Agent, plus (b)
the amount of the Loan Parties’ net billed Accounts, plus (c) the Loan Parties’ Inventory (excluding consigned Inventory, Inventory that is
aged more than 90 days, and damaged Inventory or Inventory marked for clearance) held for sale in the ordinary course of business (valued
at the lower of cost and fair market value), located in the United States which is either (i) at all times on and after August 3, 2020, at a
location for which the Administrative Agent has received a landlord waiver in form and substance reasonably satisfactory to the
Administrative Agent (or at a location for which the Borrower has used commercially reasonably efforts to obtain such a landlord waiver);
provided that there shall be no requirement to obtain or use commercially reasonable efforts to obtain a landlord waiver for locations where
the value of Collateral located therein is less than $5,000,000, or (ii) Inventory-in-transit which is or has been shipped to the consumers of the
Loan Parties and for which title has not transferred to such consumer, in each case of clauses (a) through (c) above, as reported on the
Borrower’s consolidated balance sheet most recently delivered under Section 6.1.
“Current Liabilities”: the Obligations (excluding any outstanding drawn or undrawn Letters of Credit supporting short term
operating lease obligations if such operating lease obligations are otherwise
10
included as Current Liabilities), plus, without duplication, the aggregate amount of the Group Members’ Total Liabilities (excluding leases of
real property) that mature within one year from the applicable date of determination.
“Debtor Relief Laws”: the Bankruptcy Code, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of
creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief laws of the United States or other
applicable jurisdictions from time to time in effect.
“Default”: any of the events specified in Section 8.1, whether or not any requirement for the giving of notice, the lapse of time, or
both, has been satisfied.
“Default Rate”: as defined in Section 2.15(c).
“Defaulting Lender”: subject to Section 2.24(b), any Lender that (a) has failed to (i) fund all or any portion of its Loans within 2
Business Days of the date such Loans were required to be funded hereunder unless such Lender notifies the Administrative Agent and the
Borrower in writing that such failure is the result of such Lender’s reasonable determination that one or more conditions precedent to funding
(each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been
satisfied, or (ii) pay to the Administrative Agent, the Issuing Lender, the Swingline Lender or any other Lender any other amount required to
be paid by it hereunder (including in respect of its participation in Letters of Credit or Swingline Loans) within 2 Business Days of the date
when due, (b) has notified the Borrower, the Administrative Agent, the Issuing Lender or the Swingline Lender in writing that it does not
intend to comply with its funding obligations hereunder, or has made a public statement to that effect (unless such writing or public statement
relates to such Lender’s obligation to fund a Loan hereunder and states that such position is based on such Lender’s reasonable determination
that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such
writing or public statement) cannot be satisfied), (c) has failed, within 3 Business Days after written request by the Administrative Agent or
the Borrower, to confirm in writing to the Administrative Agent and the Borrower that it will comply with its prospective funding obligations
hereunder (provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon receipt of such written
confirmation by the Administrative Agent and the Borrower), or (d) has, or has a direct or indirect parent company that has, (i) become the
subject of a proceeding under any Debtor Relief Law, (ii) become the subject of a Bail-In Action or (iii) had appointed for it a receiver,
custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation
of its business or assets, including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such
a capacity; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any equity interest in
that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result
in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or
writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any
contracts or agreements made with such Lender. Any determination by the Administrative Agent that a Lender is a Defaulting Lender under
any one or more of clauses (a) through (d) above shall be conclusive and binding absent manifest error, and such Lender shall be deemed to
be a Defaulting Lender (subject to Section 2.24(b)) upon delivery of written notice of such determination to the Borrower, the Issuing Lender,
the Swingline Lender and each Lender.
11
“Deposit Account”: any “deposit account” as defined in the UCC with such additions to such term as may hereafter be made.
“Deposit Account Control Agreement”: any Control Agreement entered into by the Administrative Agent, a Loan Party and a
financial institution holding a Deposit Account of such Loan Party pursuant to which the Administrative Agent is granted “control” (for
purposes of the UCC) over such Deposit Account.
“Designated Jurisdiction”: any country or territory to the extent that such country or territory itself is the subject of any Sanction.
“Determination Date”: as defined in the definition of “Pro Forma Basis”.
“Discharge of Obligations”: subject to Section 10.8, the satisfaction of the Obligations (including all such Obligations relating to
Cash Management Services) by the payment in full, in cash (or, as applicable, Cash Collateralization in accordance with the terms hereof) of
the principal of and interest on or other liabilities relating to each Loan and any previously provided Cash Management Services, all fees and
all other expenses or amounts payable under any Loan Document (other than inchoate indemnification obligations and any other obligations
which pursuant to the terms of any Loan Document specifically survive repayment of the Loans for which no claim has been made), and
other Obligations under or in respect of Specified Swap Agreements and Cash Management Services, to the extent (a) no default or
termination event shall have occurred and be continuing thereunder, (b) any such Obligations in respect of Specified Swap Agreements have,
if required by any applicable Qualified Counterparties, been Cash Collateralized, (c) no Letter of Credit shall be outstanding (or, as
applicable, each outstanding and undrawn Letter of Credit has been Cash Collateralized in accordance with the terms hereof), (d) no
Obligations in respect of any Cash Management Services are outstanding (or, as applicable, all such outstanding Obligations in respect of
Cash Management Services have been Cash Collateralized in accordance with the terms hereof), and (e) the aggregate Commitments of the
Lenders are terminated.
“Disclosure Letter”: the disclosure letter, dated as of the date hereof, delivered by each Loan Party to Administrative Agent for the
benefit of the Lenders.
“Disposition”: with respect to any property (including, without limitation, Capital Stock of any Group Member), any sale, lease, Sale
Leaseback Transaction, assignment, conveyance, transfer, encumbrance or other disposition thereof (in one transaction or in a series of
transactions and whether effected pursuant to a Division or otherwise) and any issuance of Capital Stock of any Group Member. The terms
“Dispose” and “Disposed of” shall have correlative meanings.
“Disqualified Stock”: any Capital Stock that, by its terms (or by the terms of any security into which it is convertible, or for which it
is exchangeable, in each case at the option of the holder thereof), or upon the happening of any event (other than a change of control or
similar event), matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the
holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Loans mature. The amount of
Disqualified Stock deemed to be outstanding at any time for purposes of this Agreement will be the maximum amount that the Group
Members may become obligated to pay upon maturity of, or pursuant to any mandatory redemption provisions of, such Disqualified Stock or
portion thereof, plus accrued dividends. Notwithstanding the preceding sentence, any Capital Stock that would constitute Disqualified Stock
solely because the holders of the Capital Stock have the right to be paid upon liquidation, dissolution, winding up or pursuant to such other
applicable statutory or regulatory
12
obligations of the issuer of such Capital Stock will not constitute Disqualified Stock if the terms of such Capital Stock provide that such
payments may not be made with respect to such Capital Stock unless such payments are made after the Discharge of Obligations.
“Division”: in reference to any Person which is an entity, the division of such Person into two (2) or more separate Persons, with the
dividing Person either continuing or terminating its existence as part of such division, including as contemplated under Section 18-217 of the
Delaware Limited Liability Company Act, or any analogous action taken pursuant to any other applicable Requirements of Law.
“Dollars” and “$”: dollars in lawful currency of the United States.
“Domestic Subsidiary”: any Subsidiary of the Borrower organized under the laws of any jurisdiction within the United States.
“EEA Financial Institution”: (a) any credit institution or investment firm established in any EEA Member Country which is subject
to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution
described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a Subsidiary of an
institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.
“EEA Member Country”: any of the member states of the European Union, Iceland, Liechtenstein, and Norway.
“EEA Resolution Authority”: any public administrative authority or any person entrusted with public administrative authority of any
EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.
“Eligible Assignee”: any Person that meets the requirements to be an assignee under Section 10.6(b)(iii), (v) and (vi) (subject to such
consents, if any, as may be required under Section 10.6(b)(iii)); provided that, so long as no Event of Default has occurred and is continuing,
no Excluded Lender shall be an Eligible Assignee without the prior consent of the Borrower (which consent shall not be unreasonably
withheld, conditioned or delayed and shall be deemed granted by the Borrower if the Borrower has not delivered to Administrative Agent a
written objection to a request for consent to an assignment within 10 days of the Borrower’s receipt of a written request to consent to such
assignment).
“Environmental Laws”: any and all foreign, federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances,
codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to
or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter
be in effect.
“Environmental Liability”: any liability, contingent or otherwise (including any liability for damages, costs of environmental
remediation, fines, penalties or indemnities), of any Group Member directly or indirectly resulting from or based upon (a) a violation of an
Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Materials of Environmental
Concern, (c) exposure to any Materials of Environmental Concern, (d) the release or threatened release of any Materials of Environmental
Concern into the environment, or (e) any contract, agreement or other
13
consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.
“ERISA”: the Employee Retirement Income Security Act of 1974, as amended, including (unless the context otherwise requires) any
rules or regulations promulgated thereunder.
“ERISA Affiliate”: each business or entity which is, or within the last six years was, a member of a “controlled group of
corporations,” under “common control” or an “affiliated service group” with any Loan Party within the meaning of Section 414(b), (c), (m)
or (n) of the Code, required to be aggregated with any Loan Party under Section 414(o) of the Code, or is, or within the last six years was,
under “common control” with any Loan Party, within the meaning of Section 4001(a)(14) of ERISA.
“ERISA Event”: any of (a) a reportable event as defined in Section 4043 of ERISA with respect to a Pension Plan, excluding,
however, such events as to which the PBGC by regulation has waived the requirement of Section 4043(a) of ERISA that it be notified within
30 days of the occurrence of such event; (b) the applicability of the requirements of Section 4043(b) of ERISA with respect to a contributing
sponsor, as defined in Section 4001(a)(13) of ERISA, to any Pension Plan where an event described in paragraph (9), (10), (11), (12) or (13)
of Section 4043(c) of ERISA is reasonably expected to occur with respect to such plan within the following 30 days; (c) a withdrawal by any
Loan Party or any ERISA Affiliate thereof from a Pension Plan or the termination of any Pension Plan resulting in liability to a Loan Party
under Sections 4063 or 4064 of ERISA; (d) the withdrawal of any Loan Party or any ERISA Affiliate thereof in a complete or partial
withdrawal (within the meaning of Section 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability to a
Loan Party therefor, or the receipt by any Loan Party or any ERISA Affiliate thereof of notice from any Multiemployer Plan that it is in
reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA; (e) the filing of a notice of intent to terminate, the treatment of a
Pension Plan or Multiemployer Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of
proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (f) the imposition of liability on any Loan Party or any ERISA
Affiliate thereof pursuant to Sections 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (g) the failure
by any Loan Party or any ERISA Affiliate thereof to make any required contribution to a Pension Plan, or the failure to meet the minimum
funding standard of Section 412 of the Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(c) of
the Code) or the failure to make by its due date a required installment under Section 430 of the Code with respect to any Pension Plan or the
failure to make any required contribution to a Multiemployer Plan; (h) the determination that any Pension Plan is considered an at-risk plan
or a plan in endangered to critical status within the meaning of Sections 430, 431 and 432 of the Code or Sections 303, 304 and 305 of
ERISA; (i) an event or condition which would reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; (j) the imposition of any liability under Title I or
Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon any Loan Party or any ERISA
Affiliate thereof; (k) an application for a funding waiver under Section 303 of ERISA or an extension of any amortization period pursuant to
Section 412 of the Code with respect to any Pension Plan; (l) the occurrence of a non(cid:0)exempt prohibited transaction under Sections 406 or
407 of ERISA for which any Group Member may be directly or indirectly liable; (m) a violation of the applicable requirements of Section
404 or 405 of ERISA or the exclusive benefit rule under Section 401(a) of the Code by any fiduciary or disqualified person for which any
Loan Party or any ERISA Affiliate thereof may be directly or indirectly liable; (n) the occurrence of an act or omission which could give rise
to the imposition on any Loan Party or any ERISA Affiliate thereof of fines, penalties, taxes or related charges under Chapter 43 of the Code
or under Sections 409, 502(c), (i) or (1) or 4071 of ERISA; (o) the assertion
14
of a material claim (other than routine claims for benefits) against any Plan or the assets thereof, or against any Group Member in connection
with any such Plan; (p) receipt from the IRS of notice of the failure of any Qualified Plan to qualify under Section 401(a) of the Code, or the
failure of any trust forming part of any Qualified Plan to qualify for exemption from taxation under Section 501(a) of the Code; (q) the
imposition of any lien (or the fulfillment of the conditions for the imposition of any lien) on any of the rights, properties or assets of any Loan
Party or any ERISA Affiliate thereof, in either case pursuant to Title I or IV of ERISA, including Section 302(f) or 303(k) of ERISA or to
Section 401(a)(29) or 430(k) of the Code; or (r) the establishment or amendment by any Group Member of any “welfare plan” as such term is
defined in Section 3(1) of ERISA, that provides post-employment welfare benefits in a manner that would increase the liability of any Loan
Party.
“ERISA Funding Rules”: the rules regarding minimum required contributions (including any installment payment thereof) to
Pension Plans, as set forth in Section 412 of the Code and Section 302 of ERISA, with respect to Plan years ending prior to the effective date
of the Pension Protection Act of 2006, and thereafter, as set forth in Sections 412, 430, 431, 432 and 436 of the Code and Sections 302, 303,
304 and 305 of ERISA.
“EU Bail-In Legislation Schedule”: the EU Bail-In Legislation Schedule published by the Loan Market Association (or any
successor Person), as in effect from time to time.
“Eurocurrency Reserve Requirements”: for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the
maximum rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including basic, supplemental, marginal and
emergency reserves) under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto dealing
with reserve requirements prescribed for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the
Board) maintained by a member bank of the Federal Reserve System.
“Eurodollar Base Rate”: with respect to each day during each Interest Period pertaining to (a) a Eurodollar Loan, the rate per annum
determined by the Administrative Agent by reference to the ICE Benchmark Administration London Interbank Offered Rate (“LIBOR”) (or
any successor thereto if the ICE Benchmark Administration is no longer making LIBOR available) for deposits (for delivery on the first day
of such Interest Period) with a term equivalent to such Interest Period in Dollars, determined as of approximately 11:00 A.M. (London,
England time) 2 Business Days prior to the beginning of such Interest Period (as set forth by Bloomberg Information Service or any
successor thereto or any other commercially available service selected by the Administrative Agent which provides quotations of LIBOR);
and (b) an ABR Loan, the rate per annum determined by the Administrative Agent to be LIBOR (for delivery on the first day of such Interest
Period) with a term of 1 month in Dollars, determined as of approximately 11:00 A.M. (London, England time) 2 Business Days prior to the
beginning of such Interest Period (as set forth by Bloomberg Information Service or any successor thereto or any other commercially
available service selected by the Administrative Agent which provides quotations of LIBOR); provided that in either case (a) or (b), the
Eurodollar Base Rate shall not be less than 0.50%. In the event that the Administrative Agent determines that LIBOR is not available, the
“Eurodollar Base Rate” shall be determined by reference to the rate per annum equal to the offered quotation rate to first class banks in the
London interbank market by SVB for deposits (for delivery on the first day of the relevant Interest Period) in Dollars of amounts in same day
funds comparable to the principal amount of the applicable Loan of the Administrative Agent, in its capacity as a Lender, for which the
Eurodollar Base Rate is then being determined with maturities comparable to such period, in the case of a Eurodollar Loan, and of 1 month,
in the case of an ABR Loan, as of approximately 11:00 A.M. (London, England
15
time) 2 Business Days prior to the beginning of such Interest Period; provided that, in all events, such Eurodollar Base Rate shall not be less
than 0.50%.
“Eurodollar Loans”: Loans the rate of interest applicable to which is based upon clause (a) of the definition of “Eurodollar Base
Rate”.
“Eurodollar Rate”: with respect to each day during each Interest Period pertaining to a Eurodollar Loan, a rate per annum
determined for such day in accordance with the following formula:
Eurodollar Base Rate
1.00 - Eurocurrency Reserve Requirements
The Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Eurocurrency Reserve
Requirements; provided that the Eurodollar Rate shall not be less than 0.50%.
“Eurodollar Tranche”: the collective reference to Eurodollar Loans under a particular Facility (other than the L/C Facility), the then
current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall
originally have been made on the same day).
“Event of Default”: any of the events specified in Section 8.1; provided that any requirement for the giving of notice, the lapse of
time, or both, has been satisfied.
“Exchange Act”: the Securities Exchange Act of 1934, as amended from time to time and any successor statute.
“Excluded Assets”: as defined in the Guarantee and Collateral Agreement.
“Excluded Lender”: any Person (a) that has been specifically identified by name in writing (which shall set forth in reasonable detail
the basis of each applicable designation) by the Borrower to the Administrative Agent as constituting an “Excluded Lender” on or prior to the
Closing Date or (b) that is a direct competitor of the Borrower or a vulture/distressed fund that has been specifically identified by name in
writing (which shall set forth in reasonable detail the basis of each applicable designation) by the Borrower to the Administrative Agent as
constituting an “Excluded Lender” (A) on or prior to the Closing Date or (B) periodically during the term of this Agreement; provided, in
every case, such Persons shall no longer be designated as an Excluded Lender if any Event of Default has occurred and is continuing.
“Excluded Subsidiary”: any Subsidiary that is (a) a Foreign Subsidiary, (b) a FSHCO or (c) an Immaterial Subsidiary.
“Excluded Swap Obligations”: with respect to any Guarantor, any Swap Obligation if, and to the extent that, all or a portion of the
Guarantee Obligation of such Guarantor with respect to, or the grant by such Guarantor of a Lien to secure, such Swap Obligation (or any
guarantee thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures
Trading Commission (or the application or official interpretation of any thereof) by virtue of such Guarantor’s failure for any reason to
constitute an “eligible contract participant” as defined in the Commodity Exchange Act at the time such Guarantee Obligation of such
Guarantor, or the grant by such Guarantor of such Lien, becomes effective with respect to such Swap Obligation. If such a Swap Obligation
arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion
16
of such Swap Obligation that is attributable to swaps for which such Guarantee Obligation or Lien is or becomes excluded in accordance with
the first sentence of this definition.
“Excluded Taxes”: any of the following Taxes imposed on or with respect to a Recipient or required to be withheld or deducted from
a payment to a Recipient, (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits
Taxes, in each case, (i) imposed as a result of such Recipient being organized under the laws of, or having its principal office or, in the case of
any Lender, its applicable lending office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are
Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of
such Lender with respect to an applicable interest in a Loan or Commitment pursuant to a law in effect on the date on which (i) such Lender
acquires such interest in the Loan or Commitment (other than pursuant to an assignment request by the Borrower under Section 2.23) or
(ii) such Lender changes its lending office, except in each case to the extent that, pursuant to Section 2.20, amounts with respect to such
Taxes were payable either to such Lender’s assignor immediately before such Lender became a party hereto or to such Lender immediately
before it changed its lending office, (c) Taxes attributable to such Recipient’s failure to comply with Section 2.20(f) and (d) any U.S. federal
withholding Taxes imposed under FATCA.
“Existing Letters of Credit”: the letters of credit described on Schedule 1.1B to the Disclosure Letter.
“Facility”: each of (a) the L/C Facility (which is a sub-facility of the Revolving Facility), (b) the Revolving Facility and (c) the
Swingline Facility (which is a sub-facility of the Revolving Facility).
“FASB ASC”: the Accounting Standards certification of the Financial Accounting Standards Board
“FATCA”: Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is
substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations
thereof, any agreement entered into pursuant to Section 1471(b)(1) of the Code and any fiscal or regulatory legislation, rules or practices
adopted pursuant to any intergovernmental agreement, treaty or convention among Governmental Authorities and implementing such
Sections of the Code.
“Federal Funds Effective Rate”: for any day, the weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day that is a Business Day, the average of the quotations for the day of such transactions received by
SVB from three federal funds brokers of recognized standing selected by it.
“Fee Letter”: the letter agreement dated June 3, 2020, between the Borrower and the Administrative Agent.
“Flood Laws”: the National Flood Insurance Reform Act of 1994 and related legislation (including the regulations of the Board of
Governors of the Federal Reserve System).
“Flow of Funds Agreement”: the spreadsheet or other similar statement prepared by the Administrative Agent regarding the
disbursement of Loan proceeds (if any) on the Closing Date, the funding and the payment of the Administrative Agent’s reasonable and
documented expenses and the
17
reasonable and documented expenses of the Administrative Agent’s counsel, and such other matters as may be agreed to by the Borrower and
the Administrative Agent.
“Foreclosed Borrowers”: as defined in Section 2.25.
“Foreign Lender”: (a) if the Borrower is a U.S. Person, a Lender that is not a U.S. Person, and (b) if the Borrower is not a U.S.
Person, a Lender that is resident or organized under the laws of a jurisdiction other than that in which the Borrower is resident for tax
purposes.
“Foreign Subsidiary”: any Subsidiary of the Borrower that is not a Domestic Subsidiary.
“Free Cash Flow”: for any period, with respect to the Group Members, an amount equal to (a) the Consolidated Adjusted EBITDA,
minus (b) Consolidated Capital Expenditures, minus (c) all Taxes that have been paid in cash, in each case, during the applicable period of
determination.
“Fronting Exposure”: at any time there is a Defaulting Lender, as applicable, (a) with respect to the Issuing Lender, such Defaulting
Lender’s L/C Percentage of the outstanding L/C Exposure other than L/C Exposure as to which such Defaulting Lender’s participation
obligation has been reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof, and (b) with respect to the
Swingline Lender, such Defaulting Lender’s Revolving Percentage of outstanding Swingline Loans made by the Swingline Lender other than
Swingline Loans as to which such Defaulting Lender’s participation obligation has been reallocated to other Lenders.
“FSHCO”: any Subsidiary that owns (directly or indirectly) no material assets other than equity or debt interests of one or more
Foreign Subsidiaries.
“Fund”: any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing
in commercial loans, bonds and similar extensions of credit in the ordinary course of its activities.
“Funding Office”: the Revolving Loan Funding Office.
“GAAP”: generally accepted accounting principles in the United States as in effect from time to time, except that for purposes of
Section 7.1, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the
preparation of the most recent audited financial statements referred to in Section 4.1(b). In the event that any “Accounting Change” (as
defined below) shall occur and such change results in a change in the method of calculation of financial covenants, standards or terms in this
Agreement, then the Borrower and the Administrative Agent agree to enter into negotiations to amend such provisions of this Agreement so
as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating the Borrower’s financial condition shall
be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall
have been executed and delivered by the Borrower, the Administrative Agent and the Required Lenders, all financial covenants, standards
and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. “Accounting
Changes” refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the
Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC, or the adoption of
IFRS.
18
“Governmental Approval”: any consent, authorization, approval, order, license, franchise, permit, certificate, accreditation,
registration, filing or notice, of, issued by, from or to, or other act by or in respect of, any Governmental Authority.
“Governmental Authority”: the government of the United States of America or any other nation, or of any political subdivision
thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising
executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-
national bodies such as the European Union or the European Central Bank), and any group or body charged with setting accounting or
regulatory capital rules or standards (including the Financial Standards Board, the Bank for International Settlements, the Basel Committee
on Banking Supervision and any successor or similar authority to any of the foregoing).
“Group Members”: the collective reference to the Borrower and its Subsidiaries.
“Guarantee and Collateral Agreement”: the Guarantee and Collateral Agreement to be executed and delivered by the Loan Parties,
substantially in the form of Exhibit A.
“Guarantee Obligation”: as to any Person (the “guaranteeing person”), any obligation, including a reimbursement,
counterindemnity or similar obligation, of the guaranteeing person that guarantees or in effect guarantees, or which is given to induce the
creation of a separate obligation by another Person (including any bank under any letter of credit) that guarantees or in effect guarantees, any
Indebtedness, leases, dividends or other obligations (the “primary obligations”) of any other third Person (the “primary obligor”) in any
manner, whether directly or indirectly, including any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any
such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or
payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain
the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the
owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to
assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided that the term Guarantee Obligation
shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee
Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the
primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person
may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the
maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such
Guarantee Obligation shall be such guaranteeing person’s maximum reasonably anticipated liability in respect thereof as determined by the
Borrower in good faith.
“Guarantors”: a collective reference to each Subsidiary of the Borrower which has become a Guarantor pursuant to the requirements
of Section 6.12 hereof and the Guarantee and Collateral Agreement. Notwithstanding the foregoing or any contrary provision herein or in any
other Loan Document, no Excluded Subsidiary shall be required to be a Guarantor, and no Subsidiary shall be required to become a
Guarantor if, in the reasonable judgment of the Administrative Agent and the Borrower, the burden or cost of providing a guarantee shall be
excessive in view of the benefits to be obtained by the Secured Parties therefrom.
19
“IFRS”: international accounting standards within the meaning of IAS Regulation 1606/2002 to the extent applicable to the relevant
financial statements delivered under or referred to herein.
“Immaterial Subsidiary”: at any date of determination, any Subsidiary of any Loan Party (other than a Borrower or a Guarantor)
designated as such by the Borrower in writing and which as of such date (a) holds assets representing 10% or less of the Borrower’s
consolidated total assets as of such date (determined in accordance with GAAP), (b) has generated less than 10% of the Borrower’s
consolidated total revenues determined in accordance with GAAP for the four fiscal quarter period ending on the last day of the most recent
period for which financial statements have been delivered after the Closing Date pursuant to Section 6.1(b); provided that all Subsidiaries
that are individually “Immaterial Subsidiaries” shall not have aggregate consolidated total assets that would represent 10% or more of the
Borrower’s consolidated total assets as of such date or have generated 10% or more of the Borrower’s consolidated total revenues for such
four fiscal quarter period, in each case determined in accordance with GAAP, (c) owns no Capital Stock of any Subsidiary that is not an
Immaterial Subsidiary, and (d) owns no material Intellectual Property. As of the Closing Date, Stitch Fix Gift Cards, LLC is an Immaterial
Subsidiary.
“Increase”: as defined in Section 2.27.
“Increase Joinder”: an instrument, in form and substance reasonably satisfactory to the Administrative Agent, by which a Lender
becomes a party to this Agreement pursuant to Section 2.27.
“Incurred”: as defined in the definition of “Pro Forma Basis”.
“Indebtedness”: of any Person at any date, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all
obligations of such Person for the deferred purchase price of property or services (other than (i) current trade payables incurred in the
ordinary course of such Person’s business, (ii) any earn-out obligation unless either such obligation is not paid after becoming due and
payable or such obligation is required to be reflected on the Borrower’s balance sheet in accordance with GAAP and (iii) accruals for payroll
and other liabilities, including deferred compensation arrangements, in each case, accrued in the ordinary course of business), (c) all
obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under
any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies
of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all Capital Lease
Obligations and all Synthetic Lease Obligations of such Person, (f) all obligations of such Person, contingent or otherwise, as an account
party or applicant under or in respect of acceptances, letters of credit, surety bonds or similar arrangements, (g) all obligations of such Person
to purchase, redeem, retire, defease or otherwise make any payment in respect of Disqualified Stock, (h) all Guarantee Obligations of such
Person in respect of obligations of the kind referred to in clauses (a) through (g) above, (i) all obligations of the kind referred to in clauses (a)
through (h) above secured by (or for which the holder of such obligation has an existing right, contingent or otherwise, to be secured by) any
Lien on property (including accounts and contract rights) owned by such Person, whether or not such Person has assumed or become liable
for the payment of such obligation, and (j) the net obligations of such Person in respect of Swap Agreements. The Indebtedness of any Person
shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such
Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms
of such Indebtedness expressly provide that such Person is not liable therefor.
20
“Indemnified Taxes”: (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of
any obligation of any Loan Party under any Loan Document and (b) to the extent not otherwise described in clause (a), Other Taxes.
“Indemnitee”: as defined in Section 10.5(b).
“Insolvency Proceeding”: (a) any case, action or proceeding before any court or other Governmental Authority relating to
bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment
for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of any Person’s creditors
generally or any substantial portion of such Person’s creditors, in each case undertaken under U.S. federal, state or foreign law, including any
Debtor Relief Law.
“Insurance Loss Addback”: with respect to any fiscal period, the amount of any loss incurred during such fiscal period for which
there is insurance or indemnity coverage and for which a related insurance or indemnity recovery is not recorded in accordance with GAAP,
but for which such insurance or indemnity recovery is reasonably expected to be received by a Loan Party in a subsequent fiscal period and
within one year of the date of the underlying loss.
“Intellectual Property”: the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising
under United States, multinational or foreign laws or otherwise, including copyrights, copyright licenses, patents, patent licenses, trademarks,
trademark licenses, technology, know-how and processes, and all rights to sue at law or in equity for any infringement or other impairment
thereof, including the right to receive all proceeds and damages therefrom.
“Intellectual Property Security Agreement”: an intellectual property security agreement entered into between a Loan Party and the
Administrative Agent pursuant to the terms of the Guarantee and Collateral Agreement in form and substance satisfactory to the
Administrative Agent, together with each other intellectual property security agreement and supplement thereto delivered pursuant to
Section 6.12, in each case as amended, restated, supplemented or otherwise modified from time to time.
“Interest Payment Date”: (a) as to any ABR Loan (including any Swingline Loan), the first Business Day of each calendar quarter to
occur while such Loan is outstanding and the final maturity date of such Loan, (b) as to any Eurodollar Loan having an Interest Period of 3
months or less, the last Business Day of such Interest Period, (c) as to any Eurodollar Loan having an Interest Period longer than 3 months,
each day that is 3 months (or, if such date is not a Business Day, the Business Day next succeeding such date) after the first day of such
Interest Period and the last Business Day of such Interest Period, and (d) as to any Loan (other than any Revolving Loan that is an ABR Loan
and any Swingline Loan), the date of any repayment or prepayment made in respect thereof.
“Interest Period”: as to any Eurodollar Loan, (a) initially, the period commencing on the borrowing or conversion date, as the case
may be, with respect to such Eurodollar Loan and ending 1, 3 or 6 months thereafter, as selected by the Borrower in its Notice of Borrowing
or Notice of Conversion/Continuation, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last
day of the next preceding Interest Period applicable to such Eurodollar Loan and ending 1, 3 or 6 months thereafter, as selected by the
Borrower by irrevocable notice to the Administrative Agent in a Notice of Conversion/Continuation not later than 10:00 A.M. on the date
that is 3 Business Days prior to the last day of the then current Interest Period with respect thereto; provided that all of the foregoing
provisions relating to Interest Periods are subject to the following:
21
if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be
extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar
month in which event such Interest Period shall end on the immediately preceding Business Day;
(1)
Revolving Termination Date;
(2)
the Borrower may not select an Interest Period under a particular Facility that would extend beyond the
any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is
no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar
month; and
(3)
Loan during an Interest Period for such Loan.
(4)
the Borrower shall select Interest Periods so as not to require a payment or prepayment of any Eurodollar
“Interest Rate Agreement”: any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate
hedging agreement or other similar agreement or arrangement, each of which is for the purpose of hedging the interest rate exposure
associated with the Group Members’ operations and not for speculative purposes.
“Inventory”: all “inventory,” as such term is defined in the UCC, now owned or hereafter acquired by any Loan Party, wherever
located, and in any event including inventory, merchandise, goods and other personal property that are held by or on behalf of any Loan Party
for sale or lease or are furnished or are to be furnished under a contract of service or that constitutes raw materials, work in process, finished
goods, returned goods, or materials or supplies of any kind used or consumed or to be used or consumed in such Loan Party’s business or in
the processing, production, packaging, promotion, delivery or shipping of the same, including all supplies and embedded software.
“Investments”: as defined in Section 7.8.
“IRS”: the Internal Revenue Service, or any successor thereto.
“ISP”: with respect to any Letter of Credit, the “International Standby Practices 1998” published by the Institute of International
Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance).
“Issuing Lender”: as the context may require, (a) SVB or any Affiliate thereof, in its capacity as issuer of any Letter of Credit
(including, without limitation, each Existing Letter of Credit), and (b) any other Lender or an Affiliate thereof that may become an Issuing
Lender pursuant to Section 3.11 or 3.12, with respect to Letters of Credit issued by such Lender or its Affiliate. The Issuing Lender may, in
its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Lender or other financial institutions, in
which case the term “Issuing Lender” shall include any such Affiliate or other financial institution with respect to Letters of Credit issued by
such Affiliate or other financial institution.
“Issuing Lender Fees”: as defined in Section 3.3(a).
“L/C Advance”: each L/C Lender’s funding of its participation in any L/C Disbursement in accordance with its L/C Percentage of the
L/C Commitment. All L/C Advances shall be denominated in Dollars.
22
“L/C Commitment”: as to any L/C Lender, the obligation of such L/C Lender, if any, to purchase an undivided interest in the Issuing
Lenders’ obligations and rights under and in respect of each Letter of Credit (including to make payments with respect to draws made under
any Letter of Credit pursuant to Section 3.5(b)) in an aggregate principal amount not to exceed the amount set forth under the heading “L/C
Commitment” opposite such L/C Lender’s name on Schedule 1.1A or in the Assignment and Assumption or Increase Joinder pursuant to
which such L/C Lender becomes a party hereto, as the same may be changed from time to time pursuant to the terms hereof. The L/C
Commitment is a sublimit of the Revolving Commitment and the aggregate amount of the L/C Commitments shall not exceed the amount of
the Total L/C Commitments at any time.
“L/C Disbursements”: a payment or disbursement made by the Issuing Lender pursuant to a Letter of Credit.
“L/C Exposure”: at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time, and (b)
the aggregate amount of all L/C Disbursements that have not yet been reimbursed or converted into Revolving Loans at such time. The L/C
Exposure of any L/C Lender at any time shall equal its L/C Percentage of the aggregate L/C Exposure at such time.
“L/C Facility”: the L/C Commitments and the extensions of credit made thereunder.
“L/C Fee Payment Date”: as defined in Section 3.3(a).
“L/C Lender”: a Lender with an L/C Commitment.
“L/C Percentage”: as to any L/C Lender at any time, the percentage of the Total L/C Commitments represented by such L/C
Lender’s L/C Commitment, as such percentage may be adjusted as provided in Section 2.24.
“L/C-Related Documents”: collectively, each Letter of Credit (including any Existing Letter of Credit), all applications for any
Letter of Credit (and applications for the amendment of any Letter of Credit) submitted by the Borrower to the Issuing Lender and any other
document, agreement and instrument relating to any Letter of Credit, including any of the Issuing Lender’s standard form documents for
letter of credit issuances.
“LCA Election”: as defined in Section 1.4.
“LCA Test Date”: as defined in Section 1.4.
“Lenders”: as defined in the preamble hereto; provided that unless the context otherwise requires, each reference herein to the
Lenders shall be deemed to include the Issuing Lender, the L/C Lenders, and the Swingline Lender.
“Letter of Credit”: as defined in Section 3.1(a); provided that such term shall include each Existing Letter of Credit.
“Letter of Credit Availability Period”: the period from and including the Closing Date to but excluding the Letter of Credit Maturity
Date.
“Letter of Credit Fees”: as defined in Section 3.3(a).
23
“Letter of Credit Fronting Fees”: as defined in Section 3.3(a).
“Letter of Credit Maturity Date”: the date occurring 15 days prior to the Revolving Termination Date then in effect (or, if such day is
not a Business Day, the next preceding Business Day).
“LIBOR”: as defined in the definition of “Eurodollar Base Rate.”
“Lien”: any mortgage, deed of trust, pledge, hypothecation, collateral assignment, deposit arrangement, encumbrance, lien (statutory
or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or
nature whatsoever (including any conditional sale or other title retention agreement and any capital lease having substantially the same
economic effect as any of the foregoing).
“Limited Condition Acquisition”: any Permitted Acquisition, the consummation of which is not conditioned on the availability of, or
on obtaining, third party financing and is being financed with an Increase; provided, that, in the event the consummation of any such
Permitted Acquisition shall not have occurred on or prior to the date that is 120 days following the signing of the applicable Limited
Condition Acquisition Agreement, such Permitted Acquisition shall no longer constitute a Limited Condition Acquisition for any purpose.
“Limited Condition Acquisition Agreement”: any agreement providing for a Limited Condition Acquisition.
“Loan”: any loan made or maintained by any Lender pursuant to this Agreement.
“Loan Documents”: this Agreement, each Security Document, each Note, the Fee Letter, the Flow of Funds Agreement, each
Assignment and Assumption, each Compliance Certificate, each Increase Joinder, each Notice of Borrowing, each Notice of
Conversion/Continuation, the Solvency Certificate, the Collateral Information Certificate, each L/C-Related Document, each subordination
or intercreditor agreement and any agreement creating or perfecting rights in cash collateral pursuant to the provisions of Section 3.10, or
otherwise, and any amendment, waiver, supplement or other modification to any of the foregoing.
“Loan Parties”: each Group Member that is a party to a Loan Document, as a Borrower or a Guarantor.
“Material Adverse Effect”: (a) a material adverse change in, or a material adverse effect on, the operations, business, assets,
properties, liabilities (actual or contingent), or financial condition of the Group Members, taken as a whole; (b) a material impairment of the
rights and remedies, taken as a whole, of the Administrative Agent or any Lender under any Loan Document, or of the ability of the Loan
Parties, taken as a whole, to perform their obligations under the Loan Documents; or (c) a material adverse effect upon the legality, validity,
binding effect or enforceability against any Loan Party of any Loan Document to which it is a party.
“Materials of Environmental Concern”: any substance, material or waste that is defined, regulated, governed or otherwise
characterized under any Environmental Law as hazardous or toxic or as a pollutant or contaminant (or by words of similar meaning and
regulatory effect), any petroleum or petroleum products, asbestos, polychlorinated biphenyls, urea-formaldehyde insulation, molds or fungus,
and radioactivity, radiofrequency radiation at levels known to be hazardous to human health and safety.
24
“Minority Lender”: as defined in Section 10.1(b).
“Moody’s”: Moody’s Investors Service, Inc.
“Mortgaged Properties”: the real properties as to which, pursuant to Section 6.12(b) or otherwise, the Administrative Agent, for the
benefit of the Secured Parties, shall be granted a Lien pursuant to the Mortgages.
“Mortgages”: each of the mortgages, deeds of trust, deeds to secure debt or such equivalent documents hereafter entered into and
executed and delivered by one or more of the Loan Parties to the Administrative Agent, in each case, as such documents may be amended,
amended and restated, supplemented or otherwise modified, renewed or replaced from time to time and in form and substance reasonably
acceptable to the Administrative Agent.
“Multiemployer Plan”: a “multiemployer plan” (within the meaning of Section 3(37) of ERISA) to which any Loan Party or any
ERISA Affiliate thereof makes, is making, or is obligated to make, contributions or has any liability.
“Non-Consenting Lender”: any Lender that does not approve any consent, waiver or amendment that (a) requires the approval of all
Affected Lenders in accordance with the terms of Section 10.1 and (b) has been approved by the Required Lenders.
“Non-Defaulting Lender”: at any time, each Lender that is not a Defaulting Lender at such time.
“Note”: a Revolving Loan Note or a Swingline Loan Note.
“Notice of Borrowing”: a notice substantially in the form of Exhibit K.
“Notice of Conversion/Continuation”: a notice substantially in the form of Exhibit L.
“Obligations”: the unpaid principal of and interest on (including interest accruing after the maturity of the Loans and interest
accruing after the filing of any petition in bankruptcy, or the commencement of any Insolvency Proceeding relating to any Loan Party,
whether or not a claim for post-filing or post-petition interest is allowed or allowable in such proceeding) the Loans and all other obligations
and liabilities (including any fees or expenses that accrue after the filing of any petition in bankruptcy, or the commencement of any
insolvency, reorganization or like proceeding, relating to any Loan Party, whether or not a claim for post-filing or post-petition interest is
allowed or allowable in such proceeding) of the Loan Parties (and the other Group Members in the cash of obligations in respect of Cash
Management Services) to the Administrative Agent, the Issuing Lender, any other Lender, any applicable Cash Management Bank, and any
Qualified Counterparty, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which
may arise under, out of, or in connection with, this Agreement, any other Loan Document, the Letters of Credit, any Cash Management
Agreement, any Specified Swap Agreement or any other document made, delivered or given in connection herewith or therewith, whether on
account of principal, interest, reimbursement obligations, payment obligations, fees, indemnities, costs, expenses (including all reasonable
and documented out-of-pocket fees, charges and disbursements of counsel to the Administrative Agent, the Issuing Lender, any other Lender,
any applicable Cash Management Bank, to the extent that any applicable Cash Management Agreement requires the reimbursement by any
applicable Group Member of any such expenses, and any Qualified Counterparty) that are required to be paid by any Group Member
pursuant any Loan Document, Cash Management Agreement, Specified Swap Agreement or otherwise. For the avoidance of doubt, the
25
Obligations shall not include (a) any obligations arising under any warrants or other equity instruments issued by any Loan Party to any
Lender, or (b) solely with respect to any Guarantor that is not a Qualified ECP Guarantor, any Excluded Swap Obligations of such Guarantor.
“OFAC”: the Office of Foreign Assets Control of the United States Department of the Treasury and any successor thereto.
“Operating Documents”: for any Person as of any date, such Person’s constitutional documents, formation documents and/or
certificate of incorporation (or equivalent thereof), and, (a) if such Person is a corporation, its bylaws or memorandum and articles of
association (or equivalent thereof) in current form, (b) if such Person is a limited liability company, its limited liability company agreement
(or similar agreement), and (c) if such Person is a partnership, its partnership agreement (or similar agreement), each of the foregoing with all
current amendments or modifications thereto.
“Other Connection Taxes”: with respect to any Recipient, Taxes imposed as a result of a present or former connection between such
Recipient and the jurisdiction imposing such Tax (other than connections arising from such Recipient having executed, delivered, become a
party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other
transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan or Loan Document).
“Other Taxes”: all present or future stamp, court or documentary, intangible, recording, filing or similar Taxes that arise from any
payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security
interest under, or otherwise with respect to, any Loan Document, except any such Taxes that are Other Connection Taxes imposed with
respect to an assignment (other than an assignment made pursuant to Section 2.23).
“Overadvance”: as defined in Section 2.8.
“Participant”: as defined in Section 10.6(d).
“Participant Register”: as defined in Section 10.6(d).
“Patriot Act”: the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
(USA PATRIOT ACT) Act of 2001, Title III of Pub. L. 107-56, signed into law October 26, 2001.
“PBGC”: the Pension Benefit Guaranty Corporation, or any successor thereto.
“Pension Plan”: an employee benefit plan (as defined in Section 3(3) of ERISA) other than a Multiemployer Plan (a) that is
sponsored by any Loan Party or any ERISA Affiliate thereof or to which any Loan Party or any ERISA Affiliate thereof has any obligation to
make, contributions or has any liability (contingent or otherwise), and (b) that is or was subject to Section 412 of the Code, Section 302 of
ERISA or Title IV of ERISA.
“Permitted Acquisition”: as defined in Section 7.8(o).
“Person”: any natural Person, corporation, limited liability company, trust, joint venture, association, company, partnership,
Governmental Authority or other entity.
26
“Plan”: (a) an employee benefit plan (as defined in Section 3(3) of ERISA) other than a Multiemployer Plan which is maintained or
sponsored by any Group Member or to which any Group Member is obligated to make, contributions or has any liability, (b) a Pension Plan,
or (c) a Qualified Plan.
“Plan Assets Regulation”: as defined in Section 4.13(f).
“Platform”: is any of Debt Domain, Intralinks, Syndtrak, DebtX or a substantially similar electronic transmission system.
“Preferred Stock”: the preferred Capital Stock of the Borrower, if any.
“Prime Rate”: for any day, a rate per annum equal to the highest of (a) the rate of interest per annum published in the money rates
section of the Wall Street Journal or any successor publication thereto as the “prime rate” then in effect; provided that if such rate of interest,
as set forth from time to time in the money rates section of the Wall Street Journal, becomes unavailable for any reason as determined by the
Administrative Agent, the “Prime Rate” shall mean the rate of interest per annum announced by the Administrative Agent as its prime rate in
effect at its principal office in the State of California (such announced Prime Rate not being intended to be the lowest rate of interest charged
by the Administrative Agent in connection with extensions of credit to debtors) and (b) 3.25%.
“Pro Forma Basis”: with respect to any calculation or determination for any period, in making such calculation or determination on
the specified date of determination (the “Determination Date”):
1.
pro forma effect will be given to any Indebtedness incurred by a Group Member (including by assumption of then
outstanding Indebtedness or by a Person becoming a Subsidiary) (“Incurred”) after the beginning of the applicable period and on or before
the Determination Date to the extent the Indebtedness is outstanding or is to be Incurred on the Determination Date, as if such Indebtedness
had been Incurred on the first day of such period;
2.
pro forma calculations of interest on Indebtedness bearing a floating interest rate will be made as if the rate in effect
on the Determination Date (taking into account any Swap Agreement applicable to the Indebtedness) had been the applicable rate for the
entire reference period; and
3.
pro forma effect will be given to: (A) the acquisition or disposition of companies, divisions or lines of businesses by
a Group Member, including any acquisition or disposition of a company, division or line of business since the beginning of the reference
period by a Person that became a Subsidiary after the beginning of the applicable period; and (B) the discontinuation of any discontinued
operations; in each case of clauses (A) and (B), that have occurred since the beginning of the applicable period and before the Determination
Date as if such events had occurred, and, in the case of any disposition, the proceeds thereof applied, on the first day of such period. To the
extent that pro forma effect is to be given to an acquisition or disposition of a company, division or line of business, the pro forma calculation
will be calculated in good faith by a responsible financial or accounting officer of the Borrower in accordance with Regulation S-X under the
Securities Act based upon the most recent four full fiscal quarters for which the relevant financial information is available.
“Projections”: as defined in Section 6.2(c).
“Properties”: as defined in Section 4.17(a).
27
“Qualified Counterparty”: with respect to any Specified Swap Agreement, any counterparty thereto that is a Lender or an Affiliate
of a Lender or, at the time such Specified Swap Agreement was entered into or as of the Closing Date, was the Administrative Agent or a
Lender or an Affiliate of the Administrative Agent or a Lender.
“Qualified ECP Guarantor”: in respect of any Swap Obligation, (a) each Guarantor that has total assets exceeding $10,000,000 at
the time the relevant Guarantee Obligation of such Guarantor provided in respect of, or the Lien granted by such Guarantor to secure, such
Swap Obligation (or guaranty thereof) becomes effective with respect to such Swap Obligation, and (b) any other Guarantor that
(i) constitutes an “eligible contract participant” under the Commodity Exchange Act or any regulations promulgated thereunder, or (ii) can
cause another Person (including, for the avoidance of doubt, any other Guarantor not then constituting a “Qualified ECP Guarantor”) to
qualify as an “eligible contract participant” at such time by entering into a “keepwell, support, or other agreement” as contemplated by
Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.
“Qualified Plan”: an employee benefit plan (as defined in Section 3(3) of ERISA) other than a Multiemployer Plan (a) that is
maintained or sponsored by any Loan Party or any ERISA Affiliate thereof or to which any Loan Party or any ERISA Affiliate is obligated to
make contributions or has liability (contingent or otherwise), and (b) that is intended to be tax(cid:0)qualified under Section 401(a) of the Code.
“Recipient”: the (a) Administrative Agent, (b) any Lender or (c) the Issuing Lender, as applicable.
“Refunded Swingline Loans”: as defined in Section 2.7(b).
“Register”: as defined in Section 10.6(c).
“Regulation T”: Regulation T of the Board as in effect from time to time.
“Regulation U”: Regulation U of the Board as in effect from time to time.
“Regulation X”: Regulation X of the Board as in effect from time to time.
“Related Parties”: with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents,
trustees, administrators, managers, advisors and representatives of such Person and of such Person’s Affiliates.
“Replacement Lender”: as defined in Section 2.23.
“Required Lenders”: at any time, (a) if only one Lender holds the Total Revolving Commitments, such Lender; and (b) if more than
one Lender holds the Total Revolving Commitments, then at least two Lenders who together hold more than 50% of the Total Revolving
Commitments (including, without duplication, the L/C Commitments) then in effect or, if the Revolving Commitments have been terminated,
the Total Revolving Extensions of Credit then outstanding; provided that for the purposes of this clause (b), the Revolving Commitments of,
and the portion of the Revolving Loans and participations in L/C Exposure and Swingline Loans held or deemed held by, any Defaulting
Lender shall be excluded for purposes of making a determination of Required Lenders; provided further that a Lender and its Affiliates shall
be deemed one Lender.
28
“Requirement of Law”: as to any Person, the Operating Documents of such Person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental Authority (including, for the avoidance of doubt, the Basel Committee on
Banking Supervision and any successor thereto or similar authority or successor thereto), in each case applicable to or binding upon such
Person or any of its property or to which such Person or any of its property is subject.
“Responsible Officer”: with respect to any Loan Party, the chief executive officer, president, vice president, chief financial officer,
treasurer, controller or comptroller of such Loan Party, but in any event, with respect to financial matters, the chief financial officer, treasurer,
controller or comptroller of such Loan Party.
“Restricted Payments”: as defined in Section 7.6.
“Revolving Commitment”: as to any Lender, the obligation of such Lender, if any, to make Revolving Loans and participate in
Swingline Loans and Letters of Credit in an aggregate principal amount not to exceed the amount set forth under the heading “Revolving
Commitment” opposite such Lender’s name on Schedule 1.1A or in the Assignment and Assumption or Increase Joinder pursuant to which
such Lender became a party hereto, as the same may be changed from time to time pursuant to the terms hereof (including in connection with
assignments and Increases permitted hereunder). The amount of the Total Revolving Commitments as of the Closing Date is $90,000,000.
The L/C Commitment and the Swingline Commitment are each sublimits of the Total Revolving Commitments.
“Revolving Commitment Period”: the period from and including the Closing Date to the Revolving Termination Date.
“Revolving Extensions of Credit”: as to any Revolving Lender at any time, an amount equal to the sum of (a) the aggregate principal
amount of all Revolving Loans held by such Lender then outstanding, plus (b) such Lender’s L/C Percentage of the aggregate undrawn
amount of all outstanding Letters of Credit (including the Existing Letter of Credit) at such time, plus (c) such Lender’s L/C Percentage of
the aggregate amount of all L/C Disbursements that have not yet been reimbursed or converted into Revolving Loans at such time, plus
(d) such Lender’s Revolving Percentage of the aggregate principal amount of Swingline Loans then outstanding.
“Revolving Facility”: the Revolving Commitments and the extensions of credit made thereunder.
“Revolving Lender”: each Lender that has a Revolving Commitment or that holds Revolving Loans.
“Revolving Loan Conversion”: as defined in Section 3.5(b).
“Revolving Loan Funding Office”: the office of the Administrative Agent specified in Section 10.2 or such other office as may be
specified from time to time by the Administrative Agent as its funding office by written notice to the Borrower and the Lenders.
“Revolving Loan Note”: a promissory note in the form of Exhibit H-1, as it may be amended, supplemented or otherwise modified
from time to time.
“Revolving Loans”: as defined in Section 2.4(a).
29
“Revolving Percentage”: as to any Revolving Lender at any time, the percentage which such Lender’s Revolving Commitment then
constitutes of the Total Revolving Commitments or, at any time after the Revolving Commitments of all Lenders shall have expired or
terminated, the percentage which the aggregate principal amount of such Lender’s Revolving Loans then outstanding constitutes of the
aggregate principal amount of all Revolving Loans then outstanding; provided that in the event that the Revolving Loans are paid in full prior
to the reduction to zero of the Total Revolving Commitments, the Revolving Percentages shall be determined in a manner designed to ensure
that the other outstanding Revolving Extensions of Credit shall be held by the Revolving Lenders on a comparable basis.
“Revolving Termination Date”: June 2, 2021 (as extended pursuant to Section 2.28).
“S&P”: Standard & Poor’s Ratings Services.
“Sale Leaseback Transaction”: any arrangement with any Person or Persons, whereby in contemporaneous or substantially
contemporaneous transactions a Loan Party sells substantially all of its right, title and interest in any property and, in connection therewith,
acquires, leases or licenses back the right to use all or a material portion of such property.
“Sanction(s)”: any international economic sanction administered or enforced by the United States Government (including OFAC),
the United Nations Security Council, the European Union, Her Majesty’s Treasury or other relevant sanctions authority.
“SEC”: the Securities and Exchange Commission, any successor thereto and any analogous Governmental Authority.
“Secured Parties”: the collective reference to the Administrative Agent, the Lenders (including any Issuing Lender in its capacity as
Issuing Lender and any Swingline Lender in its capacity as Swingline Lender), any Cash Management Bank (in its or their respective
capacities as providers of Cash Management Services), and any Qualified Counterparties.
“Securities Account”: any “securities account” as defined in the UCC with such additions to such term as may hereafter be made.
“Securities Account Control Agreement”: any Control Agreement entered into by the Administrative Agent, a Loan Party and a
securities intermediary holding a Securities Account of such Loan Party pursuant to which the Administrative Agent is granted “control” (for
purposes of the UCC) over such Securities Account.
“Securities Act”: the Securities Act of 1933, as amended from time to time and any successor statute.
“Security Documents”: the collective reference to (a) the Guarantee and Collateral Agreement, (b) the Mortgages (if any), (c) each
Intellectual Property Security Agreement, (d) each Deposit Account Control Agreement, (e) each Securities Account Control Agreement,
(f) all other security documents hereafter delivered to the Administrative Agent granting a Lien on any property of any Person to secure the
Obligations of any Loan Party arising under any Loan Document, (g) each Pledge Supplement, (h) each Assumption Agreement, (i) all other
security documents hereafter delivered to any applicable Cash Management Bank granting a Lien on any property of any Person to secure the
Obligations of any Group Member arising under any Cash Management Agreement and (j) all financing statements, fixture
30
filings, Patent, Trademark and Copyright filings, assignments, acknowledgments and other filings, documents and agreements made or
delivered pursuant to any of the foregoing.
“Solvency Certificate”: the Solvency Certificate, dated the Closing Date, delivered to the Administrative Agent pursuant to Section
5.1(p), which Solvency Certificate shall be in substantially the form of Exhibit D.
“Solvent”: when used with respect to any Person, as of any date of determination, (a) the amount of the “fair value” of the assets of
such Person will, as of such date, exceed the amount of all “liabilities of such Person, contingent or otherwise,” as of such date, as such
quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b)
the “present fair saleable value” of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the
liability of such Person on its debts as such debts become absolute and matured, as such quoted terms are determined in accordance with
applicable federal and state laws governing determinations of the insolvency of debtors, (c) such Person will not have, as of such date, an
unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts generally as they
mature. For purposes of this definition, (i) “debt” means liability on a “claim,” and (ii) “claim” means any (x) right to payment, whether or
not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment,
whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed,
secured or unsecured.
“Specified Acquisition Agreement Representations”: such of the representations and warranties made by the sellers and their
Affiliates in the Limited Condition Acquisition Agreement as are material to the interests of the Lenders, but only to the extent that the
Borrower (or its applicable Affiliates) has the right (taking into account any applicable cure provisions) to terminate its (or such Affiliates’)
obligations under the Limited Condition Acquisition Agreement, or decline to consummate the acquisition (in each case, in accordance with
the terms thereof), as a result of a breach of such representations and warranties.
“Specified Representations”: those representations and warranties made in Sections 4.3(a) (with respect to the organizational
existence of the Loan Parties only after giving effect to the Limited Condition Acquisition), 4.4 (excluding the third sentence thereof), 4.5
(solely with respect to the first sentence and with respect to Operating Documents), 4.11, 4.14, 4.19, 4.20 (giving effect to the Limited
Condition Acquisition and the incurrence of the Increase loans in connection therewith), 4.28 and 4.29.
“Specified Swap Agreement”: any Swap Agreement entered into by a Loan Party (or in the sole discretion of the Administrative
Agent, any other Group Member) and any Qualified Counterparty (or any Person who was a Qualified Counterparty as of the Closing Date or
as of the date such Swap Agreement was entered into).
“Subordinated Debt Document”: any agreement, certificate, document or instrument executed or delivered by any Group Member
and evidencing Indebtedness of any Group Member which is subordinated to the Obligations (including payment, lien and remedies
subordination terms, as applicable) in a manner approved in writing by the Administrative Agent, and any renewals, modifications, or
amendments thereof which are not prohibited by this Agreement or the applicable subordination agreement or are otherwise approved in
writing by the Administrative Agent.
31
“Subordinated Indebtedness”: Indebtedness of a Loan Party subordinated to the Obligations pursuant to subordination terms
(including payment, lien and remedies subordination terms, as applicable) reasonably acceptable to the Administrative Agent.
“Subsidiary”: as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other
ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of
the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity
are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both,
by such Person. Unless otherwise qualified, all references to a “Subsidiary” or to “Subsidiaries” in this Agreement shall refer to a Subsidiary
or Subsidiaries of the Borrower.
“Surety Indebtedness”: as of any date of determination, indebtedness (contingent or otherwise) owing to sureties arising from surety
bonds issued on behalf of any Group Member as support for, among other things, their contracts with customers, whether such indebtedness
is owing directly or indirectly by such Group Member.
“SVB”: as defined in the preamble hereto.
“Swap Agreement”: any agreement with respect to any swap, hedge, forward, future or derivative transaction or option or similar
agreement (including without limitation, any Interest Rate Agreement) involving, or settled by reference to, one or more rates, currencies,
commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing
risk or value or any similar transaction or any combination of these transactions; provided that the following shall not constitute “Swap
Agreements”: (a) any phantom stock or similar plan providing for payments only on account of services provided by current or former
directors, officers, employees or consultants of the Group Members, (b) any stock option or warrant agreement for the purchase of Capital
Stock of the Borrower, (c) the purchase of Capital Stock or Indebtedness (including securities convertible into Capital Stock) of the Borrower
pursuant to delayed delivery contracts, accelerated stock repurchase agreements, forward contracts or other similar agreements and (d) any of
the items specified in the foregoing clauses (a) through (c), to the extent the same constitutes a derivative embedded in a convertible security
issued by the Borrower.
“Swap Obligation”: with respect to any Guarantor, any obligation of such Guarantor to pay or perform under any agreement, contract
or transaction that constitutes a “swap” within the meaning of Section 1a(47) of the Commodity Exchange Act.
“Swap Termination Value”: in respect of any one or more Swap Agreements, after taking into account the effect of any legally
enforceable netting agreement relating to such Swap Agreements, (a) for any date on or after the date any such Swap Agreement has been
closed out and termination value determined in accordance therewith, such termination value, and (b) for any date prior to the date referenced
in clause (a), the amount determined as the mark-to-market value for such Swap Agreement, as determined based upon one or more mid-
market or other readily available quotations provided by any recognized dealer in such Swap Agreements (which may include a Qualified
Counterparty).
“Swingline Commitment”: at any time of determination, the obligation of the Swingline Lender to make Swingline Loans pursuant
to Section 2.6 in an aggregate principal amount at any one time
32
outstanding not to exceed the lesser of (a) $50,000,000 and (b) the amount of the Swingline Lender’s Revolving Commitment.
“Swingline Lender”: SVB, in its capacity as the lender of Swingline Loans or such other Lender as the Borrower may from time to
time select as the Swingline Lender hereunder pursuant to Section 2.7(f); provided that such Lender has agreed to be a Swingline Lender.
“Swingline Loan Note”: a promissory note in the form of Exhibit H-2, as it may be amended, supplemented or otherwise modified
from time to time.
“Swingline Loans”: as defined in Section 2.6.
“Swingline Participation Amount”: as defined in Section 2.7(c).
“Synthetic Lease Obligation”: the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention
lease or (b) an agreement for the use of property creating obligations that do not appear on the balance sheet of such Person but which, upon
the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting
treatment).
“Taxes”: all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments,
fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
“Total L/C Commitments”: at any time, the sum of all L/C Commitments at such time, as the same may be reduced from time to time
pursuant to Section 2.10 or 3.5(b). The initial amount of the Total L/C Commitments on the Closing Date is $20,000,000.
“Total Liabilities”: on any date of determination, obligations that should, under GAAP, be classified as liabilities on the Borrower’s
consolidated balance sheet, including all Indebtedness.
“Total Revolving Commitments”: at any time, the aggregate amount of the Revolving Commitments then in effect.
“Total Revolving Extensions of Credit”: at any time, the aggregate amount of the Revolving Extensions of Credit outstanding at
such time.
“Trade Date”: as defined in Section 10.6(b)(i)(B).
“Transferee”: any Eligible Assignee or Participant.
“Type”: as to any Loan, its nature as an ABR Loan or a Eurodollar Loan.
“Unfriendly Acquisition”: any acquisition that has not, at the time of the first public announcement of an offer relating thereto, been
approved by the board of directors (or other legally recognized governing body) of the Person to be acquired; except that with respect to any
acquisition of a non-U.S. Person, an otherwise friendly acquisition shall not be deemed to be unfriendly if it is not customary in such
jurisdiction to obtain such approval prior to the first public announcement of an offer relating to a friendly acquisition.
33
“Uniform Commercial Code” or “UCC”: the Uniform Commercial Code (or any similar or equivalent legislation) as in effect from
time to time in the State of New York, or as the context may require, any other applicable jurisdiction.
“United States” and “U.S.”: the United States of America.
“Usage”: the result, expressed as a percentage, of (a) the sum of (x) the aggregate undrawn amount of all outstanding Letters of
Credit at such time, (y) the aggregate amount of all Letter of Credit disbursements that have not yet been reimbursed or converted into
Revolving Loans at such time, and (z) the aggregate principal balance of any Loans (including Swingline Loans) outstanding at such time,
divided by (b) the Total Revolving Commitments at such time.
“USCRO”: the U.S. Copyright Office.
“USPTO”: the U.S. Patent and Trademark Office.
“U.S. Person”: any Person that is a “United States Person” as defined in Section 7701(a)(30) of the Code.
“U.S. Tax Compliance Certificate”: as defined in Section 2.20(f).
“Withholding Agent”: as applicable, any of any applicable Loan Party and the Administrative Agent, as the context may require.
“Write-Down and Conversion Powers”: with respect to any EEA Resolution Authority, the write-down and conversion powers of
such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down
and conversion powers are described in the EU Bail-In Legislation Schedule.
1.2
Other Definitional Provisions.
(a)
Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used
in the other Loan Documents or any certificate or other document made or delivered pursuant hereto or thereto.
(b)
As used herein and in the other Loan Documents, and in any certificate or other document made or delivered
pursuant hereto or thereto, (i) accounting terms relating to any Group Member not defined in Section 1.1 and accounting terms partly defined
in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP, (ii) the words “include,” “includes”
and “including” shall be deemed to be followed by the phrase “without limitation,” (iii) the word “incur” shall be construed to mean incur,
create, issue, assume, become liable in respect of or suffer to exist (and the words “incurred” and “incurrence” shall have correlative
meanings), (iv) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible
and intangible assets and properties, including cash, Capital Stock, securities, revenues, accounts, leasehold interests and contract rights,
(v) references to a given time of day shall, unless otherwise specified, be deemed to refer to Pacific time, and (vi) references to agreements
(including this Agreement) or other Contractual Obligations shall, unless otherwise specified, be deemed to refer to such agreements or
Contractual Obligations as amended, supplemented, restated, amended and restated or otherwise modified from time to time.
34
(c)
The words “hereof,” “herein” and “hereunder” and words of similar import, when used in this Agreement, shall
refer to this Agreement as a whole and not to any particular provision of this Agreement, unless otherwise specified. The word “will” shall be
construed to have the same meaning and effect as the word “shall.” Unless the context requires otherwise, (i) any reference herein to any
Person shall be construed to include such Person’s successors and assigns, (ii) all references herein to Articles, Sections, Exhibits and
Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement, and (iii) any reference to
any law or regulation herein shall, unless otherwise specified, refer to such law or regulation as amended, modified or supplemented from
time to time.
(d)
The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such
terms. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms.
(e)
Any reference in any Loan Document to a merger, transfer, consolidation, amalgamation, consolidation, assignment,
sale, disposition or transfer, or similar term, shall be deemed to apply to a Division of or by a limited liability company, or an allocation of
assets to a series of a limited liability company (or the unwinding of such a Division or allocation), as if it were a merger, transfer,
consolidation, amalgamation, consolidation, assignment, sale or transfer, or similar term, as applicable, to, of or with a separate Person. Any
Division of a limited liability company shall constitute a separate Person under the Loan Documents (and each Division of any limited
liability company that is a Subsidiary, joint venture or any other like term shall also constitute such a Person) on the first date of its existence.
In connection with any Division, if any asset, right, obligation or liability of any Person becomes the asset, right, obligation or liability of a
different Person, then such asset shall be deemed to have been transferred from the original Person to the subsequent Person.
1.3
Rounding. Any financial ratios required to be maintained by the Borrower pursuant to this Agreement shall be calculated by
dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such
ratio is expressed herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number).
1.4
Limited Condition Acquisitions. In connection with any action being taken in connection with a Limited Condition
Acquisition, for purposes of determining compliance with any provision of this Agreement which requires the calculation of any financial
ratio or metric, at the option of the Borrower (and, if the Borrower elects to exercise such option, such option shall be exercised on or prior to
the date on which the definitive agreement for such Limited Condition Acquisition is executed) (the Borrower’s election to exercise such
option in connection with any Limited Condition Acquisition, an “LCA Election”), then notwithstanding anything else to the contrary
contained in this Agreement, the date of determination of whether any such action is permitted hereunder, shall be deemed to be the date the
definitive agreements for such Limited Condition Acquisition are entered into (the “LCA Test Date”), and if, after giving pro forma effect to
the Limited Condition Acquisition and the other transactions to be entered into in connection therewith (including any Incurrence of
Indebtedness and the use of proceeds thereof) as if they had occurred at the beginning of the most recent period of four fiscal quarters then
ended prior to the LCA Test Date for which consolidated financial statements of the Borrower are available, the Borrower could have taken
such action on the relevant LCA Test Date in compliance with such ratio or basket, such ratio or basket shall be deemed to have been
complied with. If the Borrower has made an LCA Election for any Limited Condition Acquisition, then in connection with any subsequent
calculation of any basket availability with respect to the incurrence of Indebtedness, the grant of Liens, or
35
the making of Investments, Restricted Payments, Dispositions, mergers and consolidations or other transfer of all or substantially all of the
assets of any Group Member on or following the relevant LCA Test Date and prior to the earlier of the date on which such Limited Condition
Acquisition is consummated or the definitive agreement for such Limited Condition Acquisition is terminated or expires without
consummation of such Limited Condition Acquisition, any such ratio or basket shall be calculated on a Pro Forma Basis assuming both that
such Limited Condition Acquisition and other transactions in connection therewith (including any incurrence of Indebtedness and the use of
proceeds thereof) have been consummated and have not been consummated.
AMOUNT AND TERMS OF COMMITMENTS
SECTION 2
2.1
2.2
2.3
2.4
[Reserved].
[Reserved].
[Reserved].
Revolving Commitments.
(a)
Subject to the terms and conditions hereof, each Revolving Lender severally agrees to make revolving credit loans
(each, a “Revolving Loan” and, collectively, the “Revolving Loans”) to the Borrower from time to time during the Revolving Commitment
Period in an aggregate principal amount at any one time outstanding which, when added to the aggregate outstanding amount of the
Swingline Loans, the aggregate undrawn amount of all outstanding Letters of Credit, and the aggregate amount of all L/C Disbursements that
have not yet been reimbursed or converted into Revolving Loans, incurred on behalf of the Borrower and owing to such Lender, does not
exceed the amount of such Lender’s Revolving Commitment. In addition, such aggregate obligations shall not at any time exceed the Total
Revolving Commitments in effect at such time. During the Revolving Commitment Period the Borrower may use the Revolving
Commitments by borrowing, prepaying the Revolving Loans in whole or in part, and reborrowing, all in accordance with the terms and
conditions hereof. The Revolving Loans may from time to time be Eurodollar Loans or ABR Loans, as determined by the Borrower and
notified to the Administrative Agent in accordance with Sections 2.5 and 2.13.
(b)
The Borrower shall repay all outstanding Revolving Loans on the Revolving Termination Date.
2.5
Procedure for Revolving Loan Borrowing. The Borrower may borrow under the Revolving Commitments during the
Revolving Commitment Period on an37y Business Day; provided that the Borrower shall give the Administrative Agent an irrevocable
Notice of Borrowing (which must be received by the Administrative Agent prior to 10:00 A.M. (a) 3 Business Days prior to the requested
Borrowing Date, in the case of Eurodollar Loans, or (b) 1 Business Day prior to the requested Borrowing Date, in the case of ABR Loans)
(provided that any such Notice of Borrowing of ABR Loans under the Revolving Facility to finance payments under Section 3.5(a) may be
given not later than 10:00 A.M. on the date of the proposed borrowing), in each such case specifying (i) the amount and Type of Revolving
Loans to be borrowed, (ii) the requested Borrowing Date, (iii) in the case of Eurodollar Loans, the respective amounts of each such Type of
Loan and the respective lengths of the initial Interest Period
36
therefor, and (iv) instructions for remittance of the proceeds of the applicable Loans to be borrowed. Unless otherwise agreed by the
Administrative Agent in its sole discretion, no Revolving Loan may be made as, converted into or continued as a Eurodollar Loan having an
Interest Period in excess of 1 month prior to the date that is 30 days after the Closing Date. Each borrowing under the Revolving
Commitments shall be in an amount equal to $1,000,000 or a whole multiple of $100,000 in excess thereof (or, if the then Available
Revolving Commitments are less than $1,000,000, such lesser amount); provided that the Swingline Lender may request, on behalf of the
Borrower, borrowings under the Revolving Commitments that are ABR Loans in other amounts pursuant to Section 2.7. Upon receipt of any
such Notice of Borrowing from the Borrower, the Administrative Agent shall promptly notify each Revolving Lender thereof. Each
Revolving Lender will make the amount of its pro rata share of each such borrowing available to the Administrative Agent for the account of
the Borrower at the Revolving Loan Funding Office prior to 12:00 P.M. on the Borrowing Date requested by the Borrower in immediately
available funds to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent
crediting such account as is designated in writing to the Administrative Agent by the Borrower with the aggregate of the amounts made
available to the Administrative Agent by the Revolving Lenders and in like funds as received by the Administrative Agent or, if so specified
in the Flow of Funds Agreement, the Administrative Agent shall wire transfer all or a portion of such aggregate amounts in accordance with
the wire instructions specified for such purpose in the Flow of Funds Agreement.
2.6
Swingline Commitment. Subject to the terms and conditions hereof, the Swingline Lender agrees to make available a
portion of the credit accommodations otherwise available to the Borrower under the Revolving Commitments from time to time during the
Revolving Commitment Period by making swing line loans (each a “Swingline Loan” and, collectively, the “Swingline Loans”) to the
Borrower; provided that (a) the aggregate principal amount of Swingline Loans outstanding at any time shall not exceed the Swingline
Commitment then in effect, (b) the Borrower shall not request, and the Swingline Lender shall not make, any Swingline Loan if, after giving
effect to the making of such Swingline Loan, the amount of the Available Revolving Commitments would be less than zero, and (c) the
Borrower shall not use the proceeds of any Swingline Loan to refinance any then outstanding Swingline Loan. During the Revolving
Commitment Period, the Borrower may use the Swingline Commitment by borrowing, repaying and reborrowing, all in accordance with the
terms and conditions hereof. Swingline Loans shall be ABR Loans only. The Borrower shall repay to the Swingline Lender the then unpaid
principal amount of each Swingline Loan on the Revolving Termination Date. The Swingline Lender shall not make a Swingline Loan during
the period commencing at the time it has received notice (by telephone or in writing) from the Administrative Agent at the request of any
Lender, acting in good faith, that one or more of the applicable conditions specified in Section 5.2 (other than Section 5.2(c)) is not then
satisfied and has had a reasonable opportunity to react to such notice and ending when such conditions are satisfied or duly waived.
2.7
Procedure for Swingline Borrowing; Refunding of Swingline Loans.
(a)
Whenever the Borrower desires that the Swingline Lender make Swingline Loans the Borrower shall give the
Swingline Lender irrevocable telephonic notice (which telephonic notice must be received by the Swingline Lender not later than 12:00 P.M.
on the proposed Borrowing Date) confirmed promptly in writing by a Notice of Borrowing, specifying (i) the amount to be borrowed, (ii) the
requested Borrowing Date (which shall be a Business Day during the Revolving Commitment Period), and (iii) instructions for the remittance
of the proceeds of such Loan. Each borrowing under the Swingline Commitment shall be in an amount equal to $500,000 or a whole multiple
of $100,000 in excess thereof. Promptly thereafter, on the Borrowing Date specified in a notice in respect of Swingline
37
Loans, the Swingline Lender shall make available to the Borrower an amount in immediately available funds equal to the amount of the
Swingline Loan to be made by depositing such amount in the account designated in writing to the Administrative Agent by the Borrower.
Unless a Swingline Loan is sooner refinanced by the advance of a Revolving Loan pursuant to Section 2.7(b), such Swingline Loan shall be
repaid by the Borrower no later than 5 Business Days after the advance of such Swingline Loan.
(b)
The Swingline Lender, at any time and from time to time in its sole and absolute discretion may, on behalf of the
Borrower (which hereby irrevocably directs the Swingline Lender to act on its behalf), on 1 Business Day’s telephonic notice given by the
Swingline Lender no later than 12:00 P.M. and promptly confirmed in writing, request each Revolving Lender to make, and each Revolving
Lender hereby agrees to make, a Revolving Loan, in an amount equal to such Revolving Lender’s Revolving Percentage of the aggregate
amount of such Swingline Loan (each a “Refunded Swingline Loan”) outstanding on the date of such notice, to repay the Swingline Lender.
Each Revolving Lender shall make the amount of such Revolving Loan available to the Administrative Agent at the Revolving Loan Funding
Office in immediately available funds, not later than 10:00 A.M. 1 Business Day after the date of such notice. The proceeds of such
Revolving Loan shall immediately be made available by the Administrative Agent to the Swingline Lender for application by the Swingline
Lender to the repayment of the Refunded Swingline Loan. The Borrower irrevocably authorizes the Swingline Lender to charge the
Borrower’s accounts with the Administrative Agent (up to the amount available in each such account) immediately to pay the amount of any
Refunded Swingline Loan to the extent amounts received from the Revolving Lenders are not sufficient to repay in full such Refunded
Swingline Loan.
(c)
If prior to the time that the Borrower has repaid the Swingline Loans pursuant to Section 2.7(a) or a Revolving Loan
has been made pursuant to Section 2.7(b), one of the events described in Section 8.1(f) shall have occurred or if for any other reason, as
determined by the Swingline Lender in its sole discretion, Revolving Loans may not be made as contemplated by Section 2.7(b), each
Revolving Lender shall, on the date such Revolving Loan was to have been made pursuant to the notice referred to in Section 2.7(b) or on the
date requested by the Swingline Lender (with at least 1 Business Day notice to the Revolving Lenders), purchase for cash an undivided
participating interest in the then outstanding Swingline Loans by paying to the Swingline Lender an amount (the “Swingline Participation
Amount”) equal to (i) such Revolving Lender’s Revolving Percentage times (ii) the sum of the aggregate principal amount of the outstanding
Swingline Loans that were to have been repaid with such Revolving Loans.
(d)
Whenever, at any time after the Swingline Lender has received from any Revolving Lender such Lender’s Swingline
Participation Amount, the Swingline Lender receives any payment on account of the Swingline Loans, the Swingline Lender will distribute
to such Lender its Swingline Participation Amount (appropriately adjusted, in the case of interest payments, to reflect the period of time
during which such Lender’s participating interest was outstanding and funded and, in the case of principal and interest payments, to reflect
such Lender’s pro rata portion of such payment if such payment is not sufficient to pay the principal of and interest on all Swingline Loans
then due); provided that in the event that such payment received by the Swingline Lender is required to be returned, such Revolving Lender
will return to the Swingline Lender any portion thereof previously distributed to it by the Swingline Lender.
(e)
Each Revolving Lender’s obligation to make the Loans referred to in Section 2.7(b) and to purchase participating
interests pursuant to Section 2.7(c) shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any setoff,
counterclaim, recoupment, defense or other right that such Revolving Lender or the Borrower may have against the Swingline Lender, the
Borrower or any other Person for any reason whatsoever, (ii) the occurrence of a
38
Default or an Event of Default or the failure to satisfy any of the other conditions specified in Section 5, (iii) any adverse change in the
condition (financial or otherwise) of the Borrower, (iv) any breach of this Agreement or any other Loan Document by the Borrower, any
other Loan Party or any other Revolving Lender, or (v) any other circumstance, happening or event whatsoever, whether or not similar to any
of the foregoing.
(f)
The Swingline Lender may resign at any time by giving 30 days’ prior notice to the Administrative Agent, the
Lenders and the Borrower. Following such notice of resignation from the Swingline Lender, the Swingline Lender may be replaced at any
time by written agreement among the Borrower, the Administrative Agent, the Required Lenders and the successor Swingline Lender. After
the resignation or replacement of the Swingline Lender hereunder, the retiring Swingline Lender shall remain a party hereto and shall
continue to have all the rights and obligations of the Swingline Lender under this Agreement and the other Loan Documents with respect to
Swingline Loans made by it prior to such resignation or replacement, but shall not be required or permitted to make any additional Swingline
Loans.
2.8
Overadvances.
If at any time or for any reason the aggregate amount of the Total Revolving Extensions of Credit exceeds the amount of the
Total Revolving Commitments then in effect (any such excess, an “Overadvance”), the Borrower shall immediately pay the full amount of
such Overadvance to the Administrative Agent, without notice or demand. Any prepayment of any Revolving Loan that is a Eurodollar Loan
hereunder shall be subject to Borrower’s obligation to pay any amounts owing pursuant to Section 2.21.
2.9
Fees.
(a)
Fee Letter. The Borrower agrees to pay to the Administrative Agent the fees in the amounts and on the dates as set
forth in the Fee Letter and to perform any other obligations contained therein.
(b)
Commitment Fee. As additional compensation for the Revolving Commitments, the Borrower shall pay to the
Administrative Agent for the account of the Lenders, in arrears, on the first day of each calendar quarter of the Borrower prior to the
Revolving Termination Date and on the Revolving Termination Date, a fee for the Borrower’s non-use of available funds in an amount equal
to the Commitment Fee Rate per annum multiplied by the difference between (x) the Total Revolving Commitments (as they may be reduced
or increased from time to time) and (y) the sum of (A) the average for the period of the daily closing balance of the Revolving Loans
excluding the aggregate principal amount of Swingline Loans which shall be deemed to be zero for purposes hereof, (B) the aggregate
undrawn amount of all Letters of Credit outstanding at such time and (C) the aggregate amount of all L/C Disbursements that have not yet
been reimbursed or converted into Revolving Loans at such time.
(c)
Fees Nonrefundable. All fees payable under this Section 2.9 shall be fully earned on the date paid and
nonrefundable.
(d)
Increase in Fees. At any time that an Event of Default exists, upon the request of the Required Lenders, the amount
of any of the foregoing fees due under subsection (b) shall be increased by adding 2.0% per annum thereto.
39
2.10
Termination or Reduction of Revolving Commitments; Prepayments.
The Borrower shall have the right, upon not less than 3 Business Days’ notice to the Administrative Agent, to terminate the
Revolving Commitments or, from time to time, to reduce the amount of the Revolving Commitments; provided that no such termination or
reduction of the Revolving Commitments shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Loans and
Swingline Loans made on the effective date thereof, the Total Revolving Extensions of Credit then outstanding would exceed the Total
Revolving Commitments then in effect. Any such reduction shall be in an amount equal to $1,000,000, or a whole multiple thereof (or, if the
then Total Revolving Commitments are less than $1,000,000, such lesser amount), and shall reduce permanently the Revolving
Commitments then in effect; provided further, if in connection with any such reduction or termination of the Revolving Commitments a
Eurodollar Loan is prepaid on any day other than the last day of the Interest Period applicable thereto, the Borrower shall also pay any
amounts owing (if any) pursuant to Section 2.21. The Borrower shall have the right, without penalty or premium, upon not less than 3
Business Days’ notice to the Administrative Agent, to terminate the L/C Commitments or, from time to time, to reduce the amount of the L/C
Commitments; provided that no such termination or reduction of L/C Commitments shall be permitted if, after giving effect thereto, the Total
L/C Commitments shall be reduced to an amount that would result in the aggregate L/C Exposure exceeding the Total L/C Commitments (as
so reduced). Any such reduction shall be in an amount equal to $1,000,000, or a whole multiple thereof (or, if the then Total L/C
Commitments are less than $1,000,000, such lesser amount), and shall reduce permanently the L/C Commitments then in effect. The
Borrower shall have the right, at any time and from time to time to prepay any Loan in whole or in part, upon not less than 3 Business Days’
notice to the Administrative Agent. Upon receipt of any such notice, the Administrative Agent shall promptly notify each relevant Lender
thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with
(except in the case of Revolving Loans that are ABR Loans and Swingline Loans) accrued interest to such date on the amount prepaid. Partial
prepayments of Revolving Loans shall be in an aggregate principal amount of $100,000 or a whole multiple thereof. Partial prepayments of
Swingline Loans shall be in an aggregate principal amount of $100,000 or a whole multiple thereof.
2.11
[Reserved].
2.12
[Reserved].
2.13
Conversion and Continuation Options.
(a)
The Borrower may elect from time to time to convert Eurodollar Loans to ABR Loans by giving the Administrative
Agent prior irrevocable notice in a Notice of Conversion/Continuation of such election no later than 10:00 A.M. on the Business Day
preceding the proposed conversion date; provided that any such conversion of Eurodollar Loans may only be made on the last day of an
Interest Period with respect thereto. The Borrower may elect from time to time to convert ABR Loans to Eurodollar Loans by giving the
Administrative Agent prior irrevocable notice in a Notice of Conversion/Continuation of such election no later than 10:00 A.M. on the third
Business Day preceding the proposed conversion date (which notice shall specify the length of the initial Interest Period therefor); provided
that no ABR Loan may be converted into a Eurodollar Loan when any Event of Default has occurred and is continuing. Upon receipt of any
such notice, the Administrative Agent shall promptly notify each relevant Lender thereof.
40
(b)
Any Eurodollar Loan may be continued as such upon the expiration of the then current Interest Period with respect
thereto by the Borrower giving irrevocable notice in a Notice of Conversion/Continuation to the Administrative Agent, in accordance with
the applicable provisions of the term “Interest Period” set forth in Section 1.1, of the length of the next Interest Period to be applicable to
such Loans; provided that no Eurodollar Loan may be continued as such when any Event of Default has occurred and is continuing; provided
further that if the Borrower shall fail to give any required notice as described above in this paragraph or if such continuation is not permitted
pursuant to the preceding proviso, such Loans shall be automatically converted to ABR Loans on the last day of such then expiring Interest
Period. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof.
2.14
Limitations on Eurodollar Tranches. Notwithstanding anything to the contrary in this Agreement, all borrowings,
conversions and continuations of Eurodollar Loans and all selections of Interest Periods shall be in such amounts and be made pursuant to
such elections so that, (a) after giving effect thereto, the aggregate principal amount of the Eurodollar Loans comprising each Eurodollar
Tranche shall be equal to $1,000,000 or a whole multiple of $100,000 in excess thereof, and (b) no more than seven (7) Eurodollar Tranches
shall be outstanding at any one time.
2.15
Interest Rates and Payment Dates.
(a)
Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per
annum equal to (i) the Eurodollar Rate determined for such day plus (ii) the Applicable Margin.
(b)
Each ABR Loan (including any Swingline Loan) shall bear interest at a rate per annum equal to (i) the ABR plus (ii)
the Applicable Margin.
(c)
During the existence of an Event of Default, at the request of the Required Lenders, all outstanding Loans shall bear
interest at a rate per annum equal to the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section
2.15 plus 2.00% (the “Default Rate”); provided that the Default Rate shall apply to all outstanding Loans automatically and without any
Required Lender consent therefor upon the occurrence of any Event of Default arising under Section 8.1(a) or (f).
(d)
Interest shall be payable in arrears on each Interest Payment Date; provided that interest accruing pursuant to
Section 2.15(c) shall be payable from time to time on demand.
2.16
Computation of Interest and Fees.
(a)
Interest and fees payable pursuant hereto shall be calculated on the basis of a 360-day year for the actual days
elapsed, except that, with respect to ABR Loans the rate of interest on which is calculated on the basis of the Prime Rate (or, as applicable, on
the basis of the Eurodollar Rate), the interest thereon shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the
actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Lenders of each
determination of a Eurodollar Rate (and, as applicable, of the determination of the Eurodollar Rate applicable to an ABR Loan). Any change
in the interest rate on a Loan resulting from a change in the ABR or the Eurocurrency Reserve Requirements shall become effective as of the
opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon
41
as practicable notify the Borrower and the relevant Lenders of the effective date and the amount of each such change in interest rate.
(b)
Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall
be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request
of the Borrower, deliver to the Borrower a statement showing the quotations used by the Administrative Agent in determining any interest
rate pursuant to Section 2.16(a).
2.17
Inability to Determine Interest Rate.
(a)
If prior to the first day of any Interest Period, or as applicable, on any day on which an ABR Loan bearing interest
determined by reference to the Eurodollar Rate is outstanding) the Administrative Agent or the Required Lenders shall have determined
(which determination shall be conclusive and binding upon the Borrower) in connection with any request for a Eurodollar Loan, a request for
an ABR Loan to bear interest with reference to the Eurodollar Rate, or a conversion to or a continuation of either of the foregoing that, by
reason of circumstances affecting the relevant market, (i) Dollar deposits are not being offered to banks in the London interbank market for
the applicable amount and Interest Period of such requested Loan or conversion or continuation, as applicable, (ii) adequate and reasonable
means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or (iii) the Eurodollar Rate determined or to be determined
for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making
or maintaining their affected Loans during such Interest Period, then, in any such case (i), (ii) or (iii), the Administrative Agent shall
promptly notify the Borrower and the relevant Lenders thereof as soon as practicable thereafter. Any such determination shall specify the
basis for such determination and shall, in the absence of manifest error, be conclusive and binding for all purposes. Thereafter, (w) any
Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as ABR Loans, (x) any such requested ABR
Loans which were to have utilized a Eurodollar Rate component in determining the ABR shall not utilize a Eurodollar Rate component in
determining the ABR applicable to such requested ABR Loan, (y) any Loans that were to have been converted on the first day of such
Interest Period to Eurodollar Loans shall be continued as ABR Loans and (z) any outstanding Eurodollar Loans shall be converted, on the last
day of the then-current Interest Period, to ABR Loans. Until such notice has been withdrawn by the Administrative Agent, no further
Eurodollar Loans shall be made or continued as such, nor shall the Borrower have the right to convert Loans to Eurodollar Loans, and the
utilization of the Eurodollar Rate component in determining the ABR shall be suspended.
(b)
If at any time the Administrative Agent determines (which determination shall be conclusive absent manifest error)
that (i) the circumstances set forth in Section 2.17(a)(i) or (ii) have arisen and such circumstances are unlikely to be temporary or (ii) the
circumstances set forth in Section 2.17(a)(i) or (ii) have not arisen but the supervisor for the administrator of the LIBOR reporting system or
a Governmental Authority having jurisdiction over the Administrative Agent has made a public statement identifying a specific date after
which LIBOR shall no longer be used for determining interest rates for loans, then Administrative Agent and Borrower shall endeavor to
establish an alternate rate of interest to LIBOR that gives due consideration to the then prevailing market convention for determining a rate of
interest for syndicated loans in the United States at such time, and shall enter into an amendment to this Agreement to reflect such alternate
rate of interest and such other related changes to this Agreement as may be applicable; provided that if such alternate rate of interest shall be
less than 0.50%, such rate shall be deemed to be 0.50% for the purposes of this Agreement. Notwithstanding anything to the contrary in
Section 12.7, such amendment shall become effective without any further action or consent of any other
42
party to this Agreement so long as the Administrative Agent shall not have received, within 5 Business Days of the date notice of such
alternative rate of interest is provided to the Lenders, a written notice from the Required Lenders stating that such Required Lenders object to
such amendment. Until an alternate rate of interest shall be determined in accordance with this clause (b) (but in the case of the circumstances
described in clause (ii) of the first sentence of this Section 2.17(b), only to the extent that LIBOR for such Interest Period is not available or
published at such time on a current basis), (x) any Eurodollar Loans requested to be made shall be made as ABR Loans, and (y) any
outstanding Eurodollar Loans shall be converted, on the last day of the then-current Interest Period, to ABR Loans.
2.18
Pro Rata Treatment and Payments.
(a)
Each borrowing by the Borrower from the Lenders hereunder, each payment by the Borrower on account of any
commitment fee and any reduction of the Commitments shall be made pro rata according to the respective L/C Percentages or Revolving
Percentages, as the case may be, of the relevant Lenders.
(b)
[Reserved].
(c)
Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Revolving
Loans shall be made pro rata according to the respective outstanding principal amounts of the Revolving Loans then held by the Revolving
Lenders.
(d)
All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal,
interest, fees or otherwise, shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff and shall be
made prior to 10:00 A.M. on the due date thereof to the Administrative Agent, for the account of the Lenders, at the applicable Funding
Office, in Dollars. The Administrative Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received.
Any payment received by the Administrative Agent after 10:00 A.M. shall be deemed received on the next succeeding Business Day and any
applicable interest or fee shall continue to accrue. If any payment hereunder (other than payments on the Eurodollar Loans) becomes due and
payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day. If any payment on a
Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding
Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment
shall be made on the immediately preceding Business Day. In the case of any extension of any payment of principal pursuant to the preceding
two sentences, interest thereon shall be payable at the then applicable rate during such extension.
(e)
Unless the Administrative Agent shall have been notified in writing by any Lender prior to the proposed date of any
borrowing that such Lender will not make the amount that would constitute its share of such borrowing available to the Administrative
Agent, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on such date in
accordance with Section 2, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a
corresponding amount. If such amount is not in fact made available to the Administrative Agent by the required time on the Borrowing Date
therefor, such Lender and the Borrower severally agree to pay to the Administrative Agent forthwith, on demand, such corresponding amount
with interest thereon, for each day from and including the date on which such amount is made available to the Borrower but excluding the
date of payment to the Administrative Agent, at (i) in the case of a payment to be made by such Lender, a rate equal to the greater of (A) the
Federal Funds Effective Rate
43
and (B) a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation, and (ii) in the
case of a payment to be made by the Borrower, the rate per annum applicable to ABR Loans. If the Borrower and such Lender shall pay such
interest to the Administrative Agent for the same or an overlapping period, the Administrative Agent shall promptly remit to the Borrower
the amount of such interest paid by the Borrower for such period. If such Lender pays its share of the applicable borrowing to the
Administrative Agent, then the amount so paid shall constitute such Lender’s Loan included in such borrowing. Any payment by the
Borrower shall be without prejudice to any claim the Borrower may have against a Lender that shall have failed to make such payment to the
Administrative Agent.
(f)
Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any
payment is due to the Administrative Agent for the account of the Lenders or the Issuing Lender hereunder that the Borrower will not make
such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and
may, in reliance upon such assumption, distribute to the Lenders or the Issuing Lender, as the case may be, the amount due. In such event, if
the Borrower has not in fact made such payment, then each of the Lenders or the Issuing Lender, as the case may be, severally agrees to
repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or Issuing Lender, with interest thereon, for
each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the
greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on
interbank compensation. Nothing herein shall be deemed to limit the rights of Administrative Agent or any Lender against any Loan Party.
(g)
If any Lender makes available to the Administrative Agent funds for any Loan to be made by such Lender as
provided in the foregoing provisions of this Section 2, and such funds are not made available to the Borrower by the Administrative Agent
because the conditions to the applicable extension of credit set forth in Section 5.1 or Section 5.2 are not satisfied or waived in accordance
with the terms hereof, the Administrative Agent shall return such funds (in like funds as received from such Lender) to such Lender, without
interest.
(h)
The obligations of the Lenders hereunder to (i) make Revolving Loans, (ii) fund its participations in L/C
Disbursements in accordance with its respective L/C Percentage, (iii) fund its respective Swingline Participation Amount of any Swingline
Loan, and (iv) make payments pursuant to Section 9.7, as applicable, are several and not joint. The failure of any Lender to make any such
Loan, to fund any such participation or to make any such payment under Section 9.7 on any date required hereunder shall not relieve any
other Lender of its corresponding obligation to do so on such date, and no Lender shall be responsible for the failure of any other Lender to
so make its Loan, to purchase its participation or to make its payment under Section 9.7.
(i)
Nothing herein shall be deemed to obligate any Lender to obtain the funds for any Loan in any particular place or
manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Loan in any particular place or
manner.
(j)
If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of
principal, interest and fees then due hereunder, such funds shall be applied (i) first, toward payment of interest and fees then due hereunder,
ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, toward
payment of principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to
such parties.
44
(k)
If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off,
or otherwise) on account of the principal of or interest on any Loan made by it, its participation in the L/C Exposure or other obligations
hereunder, as applicable (other than pursuant to a provision hereof providing for non-pro rata treatment), in excess of its Revolving
Percentage or L/C Percentage, as applicable, of such payment on account of the Loans or participations obtained by all of the Lenders, such
Lender shall (a) notify the Administrative Agent of the receipt of such payment, and (b) within 5 Business Days of such receipt purchase (for
cash at face value) from the other Revolving Lenders or L/C Lenders, as applicable (through the Administrative Agent), without recourse,
such participations in the Revolving Loans made by them and/or participations in the L/C Exposure held by them, as applicable, or make
such other adjustments as shall be equitable, as shall be necessary to cause such purchasing Lender to share the excess payment ratably with
each of the other Lenders in accordance with their respective Revolving Percentages or L/C Percentages, as applicable; provided, however,
that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall
be rescinded and the purchase price restored to the extent of such recovery, without interest and (ii) the provisions of this clause (k) shall not
be construed to apply to (x) any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement
(including the application of funds arising from the existence of a Defaulting Lender) or (y) any payment obtained by a Lender as
consideration for the assignment or sale of a participation in any of its Loans or participations in L/C Disbursements to any assignee or
participant, other than to the Borrower or any of its Affiliates (as to which the provisions of this clause (k) shall apply). The Borrower agrees
that any Lender so purchasing a participation from another Lender pursuant to this Section 2.18(k) may exercise all its rights of payment
(including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the
amount of such participation. No documentation other than notices and the like referred to in this Section 2.18(k) shall be required to
implement the terms of this Section 2.18(k). The Administrative Agent shall keep records (which shall be conclusive and binding in the
absence of manifest error) of participations purchased pursuant to this Section 2.18(k) and shall in each case notify the Revolving Lenders or
the L/C Lenders, as applicable, following any such purchase. The provisions of this Section 2.18(k) shall not be construed to apply to (i) any
payment made by or on behalf of the Borrower pursuant to and in accordance with the express terms of this Agreement (including the
application of funds arising from the existence of a Defaulting Lender), (ii) the application of Cash Collateral provided for in Section 3.10, or
(iii) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or sub-
participations in any L/C Exposure to any assignee or participant, other than an assignment to the Borrower or any Affiliate thereof (as to
which the provisions of this Section 2.18(k) shall apply). The Borrower consents on behalf of itself and each other Loan Party to the
foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the
foregoing arrangements may exercise against each Loan Party rights of setoff and counterclaim with respect to such participation as fully as
if such Lender were a direct creditor of each Loan Party in the amount of such participation. For the avoidance of doubt, no amounts received
by the Administrative Agent or any Lender from any Guarantor that is not a Qualified ECP Guarantor shall be applied in partial or complete
satisfaction of any Excluded Swap Obligations.
(l)
Notwithstanding anything to the contrary in this Agreement, the Administrative Agent may, in its discretion at any
time or from time to time, without the Borrower’s request and even if the conditions set forth in Section 5.2 would not be satisfied, make a
Revolving Loan in an amount equal to the portion of the Obligations constituting overdue interest and fees and Swingline Loans from time to
time due and payable to itself, any Revolving Lender, the Swingline Lender or the Issuing Lender, and apply the proceeds of any such
Revolving Loan to those Obligations; provided that after giving effect to
45
any such Revolving Loan, the aggregate outstanding Revolving Loans will not exceed the Total Revolving Commitments then in effect.
2.19
Illegality; Requirements of Law.
(a)
Illegality. If after the Closing Date any Lender determines that any Requirement of Law has made it unlawful, or that
any Governmental Authority has asserted that it is unlawful, for such Lender to make, maintain or fund Loans whose interest is determined
by reference to the Eurodollar Rate, or to determine or charge interest rates based upon the Eurodollar Rate, or any Governmental Authority
has imposed material restrictions on the authority of such Lender to purchase or sell, or to take deposits of, Dollars in the London interbank
market, then, on notice thereof by such Lender to the Borrower through the Administrative Agent, (i) any obligation of such Lender to make
or continue Eurodollar Loans or to convert ABR Loans to Eurodollar Loans shall be suspended, and (ii) if such notice asserts the illegality of
such Lender making or maintaining ABR Loans the interest rate on which is determined by reference to the Eurodollar Rate component of
the ABR, the interest on such ABR Loans of such Lender shall, if necessary to avoid such illegality, be determined by the Administrative
Agent without reference to the Eurodollar Rate component of the ABR, in each case, until such Lender notifies the Administrative Agent and
the Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, (x) the Borrower shall,
upon demand from such Lender (with a copy to the Administrative Agent), prepay or, if applicable, convert all Eurodollar Loans of such
Lender to ABR Loans (the interest rate on which ABR Loans of such Lender shall, if necessary to avoid such illegality, be determined by the
Administrative Agent without reference to the Eurodollar Rate component of the ABR), either on the last day of the Interest Period therefor,
if such Lender may lawfully continue to maintain such Eurodollar Loans to such day, or immediately, if such Lender may not lawfully
continue to maintain such Eurodollar Loans, and (y) if such notice asserts the illegality of such Lender determining or charging interest based
upon the Eurodollar Rate, the Administrative Agent shall, during the period of such suspension compute the ABR applicable to such Lender
without reference to the Eurodollar Rate component thereof until the Administrative Agent is advised in writing by such Lender that it is no
longer illegal for such Lender to determine or charge interest based upon the Eurodollar Rate . Upon any such prepayment or conversion, the
Borrower shall also pay accrued interest on the amount so prepaid or converted.
(b)
Requirements of Law. If the adoption of or any change in any Requirement of Law or in the administration,
interpretation, implementation or application thereof by any Governmental Authority, or the making or issuance of any request, rule,
guideline or directive (whether or not having the force of law) by any Governmental Authority made subsequent to the date hereof:
(i)
shall subject any Recipient to any Taxes (other than (A) Indemnified Taxes, (B) Taxes described in clauses
(b) through (d) of the definition of Excluded Taxes, and (C) Connection Income Taxes) on its Loans, loan principal, letters of credit,
commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto;
(ii)
shall impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or
similar requirement against assets of, deposits with or for the account of or credit extended or participated in by, any Lender (except
any reserve requirement reflected in the Eurodollar Rate); or
46
(iii)
impose on any Lender or the London interbank market any other condition, cost or expense (other than
Taxes) affecting this Agreement or Loans made by such Lender or any Letter of Credit or participation therein;
and the result of any of the foregoing shall be to increase the cost to such Lender or such other Recipient of making, converting to, continuing
or maintaining Loans determined with reference to the Eurodollar Rate or of maintaining its obligation to make such Loans, or to increase the
cost to such Lender or such other Recipient of issuing, maintaining or participating in Letters of Credit (or of maintaining its obligation to
participate in or to issue any Letter of Credit), or to reduce the amount of any sum receivable or received by such Lender or other Recipient
hereunder in respect thereof (whether of principal, interest or any other amount), then, in any such case, upon the request of such Lender or
other Recipient, the Borrower will promptly pay such Lender or other Recipient, as the case may be, any additional amount or amounts
necessary to compensate such Lender or other Recipient, as the case may be, for such additional costs incurred or reduction suffered. If any
Lender becomes entitled to claim any additional amounts pursuant to this paragraph, it shall promptly notify the Borrower (with a copy to the
Administrative Agent) of the event by reason of which it has become so entitled.
(c)
If any Lender determines that any change in any Requirement of Law affecting such Lender or any lending office of
such Lender or such Lender’s holding company, if any, regarding capital or liquidity requirements, has or would have the effect of reducing
the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement,
the Commitments of such Lender or the Loans made by, or participations in Letters of Credit or Swingline Loans held by, such Lender, or the
Letters of Credit issued by the Issuing Lender, to a level below that which such Lender or such Lender’s holding company could have
achieved but for such change in such Requirement of Law (taking into consideration such Lender’s policies and the policies of such Lender’s
holding company with respect to capital adequacy or liquidity), then from time to time the Borrower will pay to such Lender or the Issuing
Lender, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Lender or such Lender’s or
Issuing Lender’s holding company for any such reduction suffered.
(d)
For purposes of this Agreement, (i) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all
requests, rules, guidelines, or directives thereunder or issued in connection therewith and (ii) all requests, rules, guidelines or directives
promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority)
or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case (i) and (ii) be deemed to be a
change in any Requirement of Law, regardless of the date enacted, adopted or issued.
(e)
A certificate as to any additional amounts payable pursuant to paragraphs (b), (c), or (d) of this Section submitted by
any Lender to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. The Borrower
shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. Failure or delay on the part of
any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender’s right to demand such
compensation. Notwithstanding anything to the contrary in this Section 2.19, the Borrower shall not be required to compensate a Lender
pursuant to this Section 2.19 for any amounts incurred more than 9 months prior to the date that such Lender notifies the Borrower of the
change in the Requirement of Law giving rise to such increased costs or reductions, and of such Lender’s intention to claim compensation
therefor; provided that if the circumstances giving rise to such claim have a retroactive effect, then such 9-month period shall be extended to
include the period of such
47
retroactive effect. The obligations of the Borrower arising pursuant to this Section 2.19 shall survive the Discharge of Obligations and the
resignation of the Administrative Agent.
2.20
Taxes.
For purposes of this Section 2.20, the term “Lender” includes the Issuing Lender and the term “applicable law” includes FATCA.
(a)
Payments Free of Taxes. Any and all payments by or on account of any obligation of any Loan Party under any Loan
Document shall be made without deduction or withholding for any Taxes, except as required by applicable Requirements of Law, and the
Borrower shall, and shall cause each other Loan Party, to comply with the requirements set forth in this Section 2.20. If any applicable
Requirements of Law (as determined in the good faith discretion of an applicable Withholding Agent) requires the deduction or withholding
of any Tax from any such payment by a Withholding Agent, then the applicable Withholding Agent shall be entitled to make such deduction
or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with
applicable law and, if such Tax is an Indemnified Tax, then the sum payable by the applicable Loan Party shall be increased as necessary so
that after such deduction or withholding has been made (including such deductions and withholdings applicable to additional sums payable
under this Section 2.20) the applicable Recipient receives an amount equal to the sum it would have received had no such deduction or
withholding been made.
(b)
Payment of Other Taxes. The Borrower shall and shall cause each other Loan Party to, timely pay to the relevant
Governmental Authority in accordance with applicable law, or at the option of the Administrative Agent timely reimburse it for the payment
of, any Other Taxes applicable to such Loan Party.
(c)
Evidence of Payments. As soon as practicable after any payment of Taxes by any Loan Party to a Governmental
Authority pursuant to this Section 2.20, the Borrower shall, or shall cause such other Loan Party to, deliver to the Administrative Agent the
original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such
payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.
(d)
Indemnification by Loan Parties. The Borrower shall, and shall cause each other Loan Party to, jointly and severally
indemnify each Recipient, within 10 days after demand therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes
imposed or asserted on or attributable to amounts payable under this Section 2.20) payable or paid by such Recipient or required to be
withheld or deducted from a payment to such Recipient and any reasonable expenses arising therefrom or with respect thereto, whether or not
such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount
of such payment or liability delivered to the Borrower by a Lender (with a copy to the Administrative Agent), or by the Administrative Agent
on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.
(e)
Indemnification by Lenders. Each Lender shall severally indemnify the Administrative Agent, within 10 days after
demand therefor, for (i) any Indemnified Taxes attributable to such Lender (but only to the extent that any Loan Party has not already
indemnified the Administrative Agent for such Indemnified Taxes and without limiting the obligation of the Loan Parties to do so), (ii) any
Taxes attributable to such Lender’s failure to comply with the provisions of Section 10.6 relating
48
to the maintenance of a Participant Register and (iii) any Excluded Taxes attributable to such Lender, in each case, that are payable or paid by
the Administrative Agent in connection with any Loan Document, and any reasonable expenses arising therefrom or with respect thereto,
whether or not such Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the
amount of such payment or liability delivered to any Lender by the Administrative Agent shall be conclusive absent manifest error. Each
Lender hereby authorizes the Administrative Agent to set off and apply any and all amounts at any time owing to such Lender under any
Loan Document or otherwise payable by the Administrative Agent to the Lender from any other source against any amount due to the
Administrative Agent under this Section 2.20(e).
(f)
Status of Lenders.
(i)
Any Lender that is entitled to an exemption from or reduction of withholding Tax with respect to payments
made under any Loan Document shall deliver to the Borrower and the Administrative Agent, at the time or times reasonably requested by the
Borrower or the Administrative Agent, such properly completed and executed documentation reasonably requested by the Borrower or the
Administrative Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any
Lender, if reasonably requested by the Borrower or the Administrative Agent, shall deliver such other documentation prescribed by
applicable Requirements of Law or reasonably requested by the Borrower or the Administrative Agent as will enable the Borrower or the
Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements.
Notwithstanding anything to the contrary in the preceding two sentences, the completion, execution and submission of such documentation
(other than such documentation set forth in Sections 2.20(f)(ii)(A), (ii)(B) and (ii)(D) below) shall not be required if, in the Lender’s
reasonable judgment, such completion, execution or submission would subject such Lender to any material unreimbursed cost or expense or
would materially prejudice the legal or commercial position of such Lender.
(ii)
Without limiting the generality of the foregoing, in the event that the Borrower is a U.S. Person,
(A)
any Lender that is a U.S. Person shall deliver to the Borrower and the Administrative Agent on or
prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request
of the Borrower or the Administrative Agent), executed copies of IRS Form W-9 certifying that such Lender is exempt from U.S. federal
backup withholding tax;
any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower and the
Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender
becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative
Agent), whichever of the following is applicable:
(B)
(1)
in the case of a Foreign Lender claiming the benefits of an income tax treaty to which the
United States is a party (x) with respect to payments of interest under any Loan Document, executed originals of IRS Form W-8BEN or IRS
Form W-8BEN-E, as applicable (or any successor form) establishing an exemption from, or reduction of, U.S. federal withholding Tax
pursuant to the “interest” article of such tax treaty and (y) with respect to any other applicable payments under any Loan Document, IRS
Form W-8BEN or IRS Form W-8BEN-E, as applicable (or any successor form) establishing an exemption from, or reduction of, U.S. federal
withholding Tax pursuant to the “business profits” or “other income” article of such tax treaty;
49
(2)
executed copies of IRS Form W-8ECI;
in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest
under Section 881(c) of the Code, (x) a certificate substantially in the form of Exhibit F-1 to the effect that such Foreign Lender is not a
“bank” within the meaning of Section 881(c)(3)(A) of the Code, a “10 percent shareholder” of the Borrower within the meaning of Section
881(c)(3)(B) of the Code, or a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code (a “U.S. Tax Compliance
Certificate”) and (y) executed copies of IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable (or any successor form); or
(3)
(4)
to the extent a Foreign Lender is not the beneficial owner, executed copies of IRS Form W-
8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable (or any successor form), a U.S. Tax
Compliance Certificate substantially in the form of Exhibit F-2 or Exhibit F-3, IRS Form W-9, and/or other certification documents from
each beneficial owner, as applicable; provided that if the Foreign Lender is a partnership and one or more direct or indirect partners of such
Foreign Lender are claiming the portfolio interest exemption, such Foreign Lender may provide a U.S. Tax Compliance Certificate
substantially in the form of Exhibit F-4 on behalf of each such direct and indirect partner;
(C)
any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower and the
Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender
becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative
Agent), executed copies of any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. federal
withholding Tax, duly completed, together with such supplementary documentation as may be prescribed by applicable law to permit the
Borrower or the Administrative Agent to determine the withholding or deduction required to be made; and
(D)
if a payment made to a Lender under any Loan Document would be subject to U.S. federal
withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including
those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the Borrower and the Administrative
Agent at the time or times prescribed by law and at such time or times reasonably requested by the Borrower or the Administrative Agent
such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional
documentation reasonably requested by the Borrower or the Administrative Agent as may be necessary for the Borrower and the
Administrative Agent to comply with their obligations under FATCA and to determine that such Lender has complied with such Lender’s
obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (D),
“FATCA” shall include any amendments made to FATCA after the date of this Agreement.
Each Lender agrees that if any form or certification it previously delivered expires or becomes
obsolete or inaccurate in any respect, it shall update such form or certification or promptly notify the Borrower and the Administrative Agent
in writing of its legal inability to do so.
(iii)
(g)
Treatment of Certain Refunds. If any party determines, in its sole discretion exercised in good faith, that it has
received a refund of any Taxes as to which it has been indemnified pursuant to this Section 2.20 (including by the payment of additional
amounts pursuant to this Section 2.20), it shall pay to the indemnifying party an amount equal to such refund (but only to the
50
extent of indemnity payments made under this Section with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses
(including Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Authority with
respect to such refund). Such indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the
amount paid over pursuant to this Section 2.20(g) (plus any penalties, interest or other charges imposed by the relevant Governmental
Authority) in the event that such indemnified party is required to repay such refund to such Governmental Authority. Notwithstanding
anything to the contrary in this Section 2.20(g), in no event will the indemnified party be required to pay any amount to an indemnifying
party pursuant to this Section 2.20(g) the payment of which would place the indemnified party in a less favorable net after-Tax position than
the indemnified party would have been in if the Tax subject to indemnification and giving rise to such refund had not been deducted,
withheld or otherwise imposed and the indemnification payments or additional amounts with respect to such Tax had never been paid. This
paragraph shall not be construed to require any indemnified party to make available its Tax returns (or any other information relating to its
Taxes that it deems confidential) to the indemnifying party or any other Person.
(h)
Survival. Each party’s obligations under this Section 2.20 shall survive the resignation or replacement of the
Administrative Agent or any assignment of rights by, or the replacement of, a Lender and the Discharge of Obligations.
2.21
Indemnity. The Borrower agrees to indemnify each Lender for, and to hold each Lender harmless from, any loss or expense
that such Lender may sustain or incur as a consequence of (a) a default by the Borrower in making a borrowing of, conversion into or
continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this
Agreement, (b) a default by the Borrower in making any prepayment of or conversion from Eurodollar Loans after the Borrower has given a
notice thereof in accordance with the provisions of this Agreement, or (c) for any reason, the making of a prepayment of Eurodollar Loans on
a day that is not the last day of an Interest Period with respect thereto. Such losses and expenses shall be equal to the excess, if any, of (i) the
amount of interest that would have accrued on the amount so prepaid, or not so borrowed, reduced, converted or continued, for the period
from the date of such prepayment or of such failure to borrow, reduce, convert or continue to the last day of such Interest Period (or, in the
case of a failure to borrow, reduce, convert or continue, the Interest Period that would have commenced on the date of such failure) in each
case at the applicable rate of interest or other return for such Loans provided for herein (excluding, however, the Applicable Margin included
therein, if any), over (ii) the amount of interest (as reasonably determined by such Lender) that would have accrued to such Lender on such
amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. A certificate as to
any amounts payable pursuant to this Section submitted to the Borrower by any Lender shall be conclusive in the absence of manifest error.
This covenant shall survive the Discharge of Obligations.
2.22
Change of Lending Office. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of
Section 2.19(b), Section 2.19(c), Section 2.20(a), Section 2.20(b) or Section 2.20(d) with respect to such Lender or that would require any
Loan Party to pay any Indemnified Taxes or additional amounts to any Lender or Governmental Authority for the account of such Lender
pursuant to Section 2.19 or Section 2.20, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations
of such Lender) to designate a different lending office for funding or booking its Loans affected by such event or to assign its rights and
obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment
(i) would eliminate or reduce amounts payable pursuant to Section 2.19 or 2.20, as the case
51
may be, in the future, and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be
disadvantageous to such Lender; provided that nothing in this Section shall affect or postpone any of the obligations of the Borrower or the
rights of any Lender pursuant to Section 2.19(b), Section 2.19(c), Section 2.20(a), Section 2.20(b) or Section 2.20(d). The Borrower hereby
agrees to pay all reasonable and documented costs and expenses incurred by any Lender in connection with any such designation or
assignment made at the request of the Borrower.
2.23
Substitution of Lenders. Upon the receipt by the Borrower of any of the following (or in the case of clause (a) below, if the
Borrower is required to pay any such amount), with respect to any Lender (any such Lender described in clauses (a) through (c) below being
referred to as an “Affected Lender” hereunder):
(a)
a request from a Lender for payment of Indemnified Taxes or additional amounts under Section 2.20 or of increased
costs pursuant to Section 2.19(b) or Section 2.19(c) (and, in any such case, such Lender has declined or is unable to designate a different
lending office in accordance with Section 2.22 or is a Non-Consenting Lender);
(b)
a notice from the Administrative Agent under Section 10.1(b) that one or more Minority Lenders are unwilling to
agree to an amendment or other modification approved by the Required Lenders and the Administrative Agent; or
(c)
notice from the Administrative Agent that a Lender is a Defaulting Lender;
then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent and such Affected Lender:
(i) request that one or more of the other Lenders acquire and assume all or part of such Affected Lender’s Loans and Commitment; or
(ii) designate a replacement lending institution (which shall be an Eligible Assignee) to acquire and assume all or a ratable part of such
Affected Lender’s Loans and Commitment (the replacing Lender or lender in (i) or (ii) being a “Replacement Lender”); provided, however,
that the Borrower shall be liable for the payment upon demand of all costs and other amounts arising under Section 2.21 that result from the
acquisition of any Affected Lender’s Loan and/or Commitment (or any portion thereof) by a Lender or Replacement Lender, as the case may
be, on a date other than the last day of the applicable Interest Period with respect to any Eurodollar Loans then outstanding; and provided
further, however, that if the Borrower elects to exercise such right with respect to any Affected Lender under clause (a) or (b) of this Section
2.23, then the Borrower shall be obligated to replace all Affected Lenders under such clauses. The Affected Lender replaced pursuant to this
Section 2.23 shall be required to assign and delegate, without recourse, all of its interests, rights and obligations under this Agreement and the
related Loan Documents to one or more Replacement Lenders that so agree to acquire and assume all or a ratable part of such Affected
Lender’s Loans and Commitment upon payment to such Affected Lender of an amount (in the aggregate for all Replacement Lenders) equal
to 100% of the outstanding principal of the Affected Lender’s Loans, accrued interest thereon, accrued fees and all other amounts payable to
it hereunder and under the other Loan Documents from such Replacement Lenders (to the extent of such outstanding principal and accrued
interest and fees) or the Borrower (in the case of all other amounts, including amounts under Section 2.21 hereof). Any such designation of a
Replacement Lender shall be effected in accordance with, and subject to the terms and conditions of, the assignment provisions contained in
Section 10.6 (with the assignment fee to be paid by the Borrower in such instance), and if such Replacement Lender is not already a Lender
hereunder or an Affiliate of a Lender or an Approved Fund, shall be subject to the prior written consent of the Administrative Agent (which
consent shall not be unreasonably withheld). Notwithstanding the foregoing, with respect to any assignment pursuant to this Section 2.23,
(a) in the case of any such
52
assignment resulting from a claim for compensation under Section 2.19 or payments required to be made pursuant to Section 2.20, such
assignment shall result in a reduction in such compensation or payments thereafter; (b) such assignment shall not conflict with applicable law
and (c) in the case of any assignment resulting from a Lender being a Minority Lender referred to in clause (b) of this Section 2.23, the
applicable assignee shall have consented to the applicable amendment, waiver or consent. Notwithstanding the foregoing, an Affected Lender
shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Affected Lender or
otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.
2.24
Defaulting Lenders.
(a)
Defaulting Lender Adjustments. Notwithstanding anything to the contrary contained in this Agreement, if any
Lender becomes a Defaulting Lender, then, until such time as such Lender is no longer a Defaulting Lender, to the extent permitted by
applicable law:
consent with respect to this Agreement shall be restricted as set forth in Section 10.1 and in the definition of Required Lenders.
(i) Waivers and Amendments. Such Defaulting Lender’s right to approve or disapprove any amendment, waiver or
(ii) Defaulting Lender Waterfall. Any payment of principal, interest, fees or other amounts received by the
Administrative Agent for the account of such Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to Section 8 or
otherwise, and including any amounts made available to the Administrative Agent by such Defaulting Lender pursuant to Section 10.7), shall
be applied at such time or times as may be determined by the Administrative Agent as follows: first, to the payment of any amounts owing by
such Defaulting Lender to the Administrative Agent hereunder; second, to the payment on a pro rata basis of any amounts owing by such
Defaulting Lender to the Issuing Lender or to the Swingline Lender hereunder; third, to be held as Cash Collateral for the funding obligations
of such Defaulting Lender of any participation in any Letter of Credit; fourth, as the Borrower may request (so long as no Default or Event of
Default exists), to the funding of any Loan in respect of which such Defaulting Lender has failed to fund its portion thereof as required by
this Agreement, as determined by the Administrative Agent; fifth, if so determined by the Administrative Agent and the Borrower, to be held
in a Deposit Account and released pro rata to (x) satisfy such Defaulting Lender’s potential future funding obligations with respect to Loans
under this Agreement, and (y) be held as Cash Collateral for the future funding obligations of such Defaulting Lender of any participation in
any future Letter of Credit; sixth, to the payment of any amounts owing to any L/C Lender, Issuing Lender or Swingline Lender as a result of
any judgment of a court of competent jurisdiction obtained by any L/C Lender, Issuing Lender or Swingline Lender against such Defaulting
Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; seventh, so long as no Default or Event of
Default has occurred and is continuing, to the payment of any amounts owing to the Borrower as a result of any judgment of a court of
competent jurisdiction obtained by the Borrower against such Defaulting Lender as a result of such Defaulting Lender’s breach of its
obligations under this Agreement; and eighth, to such Defaulting Lender or as otherwise directed by a court of competent jurisdiction;
provided that if (A) such payment is a payment of the principal amount of any Loans or L/C Advances in respect of which such Defaulting
Lender has not fully funded its appropriate share and (B) such Loans or L/C Advances were made at a time when the conditions set forth in
Section 5.2 were satisfied or waived, such payment shall be applied solely to pay the Loans of, and L/C Advances owed to, all Non-
Defaulting Lenders on a pro rata basis prior to being applied to the payment of any Loans of, or L/C Advances owed to, such Defaulting
Lender until such time as all Loans and funded and unfunded participations in L/C Advances and Swingline Loans are held by the Lenders
pro rata in accordance with the Commitments under the
53
applicable Facility without giving effect to Section 2.24(a)(iv). Any payments, prepayments or other amounts paid or payable to a Defaulting
Lender that are applied (or held) to pay amounts owed by a Defaulting Lender or to post Cash Collateral pursuant to this Section 2.24(a)(ii)
shall be deemed paid to and redirected by such Defaulting Lender, and each Lender irrevocably consents hereto.
(iii) Certain Fees.
No Defaulting Lender shall be entitled to receive any fee pursuant to Section 2.9(b) for any period
during which such Lender is a Defaulting Lender (and the Borrower shall not be required to pay any such fee that otherwise would have been
required to have been paid to such Defaulting Lender).
(A)
Section 3.3(d).
(B)
Each Defaulting Lender shall be limited in its right to receive Letter of Credit Fees as provided in
(C)
With respect to any Letter of Credit Fee not required to be paid to any Defaulting Lender pursuant to
clause (A) or (B) above, the Borrower shall (x) pay to each Non-Defaulting Lender that portion of any such fee otherwise payable to such
Defaulting Lender with respect to such Defaulting Lender’s participation in Letters of Credit or Swingline Loans that has been reallocated to
such Non-Defaulting Lender pursuant to clause (iv) below, (y) pay to the Issuing Lender and the Swingline Lender, as applicable, the amount
of any such fee otherwise payable to such Defaulting Lender to the extent allocable to the Issuing Lender’s or the Swingline Lender’s
Fronting Exposure to such Defaulting Lender, and (z) not be required to pay the remaining amount of any such fee.
(iv) Reallocation of Pro Rata Share to Reduce Fronting Exposure. During any period in which there is a Defaulting
Lender, for purposes of computing the amount of the obligation of each Non-Defaulting Lender to acquire, refinance or fund participations in
Letters of Credit pursuant to Section 3.4 or in Swingline Loans pursuant to Section 2.7(c), the L/C Percentage of each Non-Defaulting Lender
of any such Letter of Credit and the Revolving Percentage of each Non-Defaulting Lender of any such Swingline Loan, as the case may be,
shall be computed without giving effect to the Revolving Commitment of such Defaulting Lender; provided that, (A) each such reallocation
shall be given effect only if, at the date the applicable Lender becomes a Defaulting Lender, no Event of Default has occurred and is
continuing; and (B) the aggregate obligations of each Non-Defaulting Lender to acquire, refinance or fund participations in Letters of Credit
and Swingline Loans shall not exceed the positive difference, if any, of (1) the Revolving Commitment of that Non-Defaulting Lender minus
(2) the aggregate outstanding amount of the Revolving Loans of that Lender plus the aggregate amount of that Lender’s L/C Percentage of
the then outstanding Letters of Credit. Subject to Section 10.21, no reallocation hereunder shall constitute a waiver or release of any claim of
any party hereunder against a Defaulting Lender arising from that Lender having become a Defaulting Lender, including any claim of a Non-
Defaulting Lender as a result of such Non-Defaulting Lender’s increased exposure following such reallocation.
(v) Cash Collateral, Repayment of Swingline Loans. If the reallocation described in clause (iv) above cannot, or
can only partially, be effected, the Borrower shall, without prejudice to any right or remedy available to it hereunder or under law, (x) first,
prepay Swingline Loans in an amount equal to the Swingline Lender’s Fronting Exposure and (y) second, Cash Collateralize the Issuing
Lender’s Fronting Exposure in accordance with the procedures set forth in Section 3.10.
54
(b)
Defaulting Lender Cure. If the Borrower, the Administrative Agent, the Swingline Lender and the Issuing Lender
agree in writing that a Lender is no longer a Defaulting Lender, the Administrative Agent will so notify the parties hereto, whereupon as of
the effective date specified in such notice and subject to any conditions set forth therein (which may include arrangements with respect to any
Cash Collateral), such Lender will, to the extent applicable, purchase at par that portion of outstanding Loans of the other Lenders or take
such other actions as the Administrative Agent may determine to be necessary to cause the Loans and funded and unfunded participations in
Letters of Credit and Swingline Loans to be held on a pro rata basis by the Lenders in accordance with their respective Revolving
Percentages and L/C Percentages, as applicable (without giving effect to Section 2.24(a)(iv)), whereupon such Lender will cease to be a
Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of
the Borrower while such Lender was a Defaulting Lender; and provided further that, except to the extent otherwise expressly agreed by the
affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party
hereunder arising from such Lender having been a Defaulting Lender.
(c)
New Swingline Loans/Letters of Credit. So long as any Lender is a Defaulting Lender, (i) the Swingline Lender shall
not be required to fund any Swingline Loans unless it is satisfied that it will have no Fronting Exposure after giving effect to such Swingline
Loan, and (ii) the Issuing Lender shall not be required to issue, extend, renew or increase any Letter of Credit unless it is satisfied that it will
have no Fronting Exposure in respect of Letters of Credit after giving effect thereto.
(d)
Termination of Defaulting Lender. The Borrower may terminate the unused amount of the Revolving Commitment
of any Revolving Lender that is a Defaulting Lender upon not less than 10 Business Days’ prior notice to the Administrative Agent (which
shall promptly notify the Lenders thereof), and in such event the provisions of Section 2.24(a)(ii) will apply to all amounts thereafter paid by
the Borrower for the account of such Defaulting Lender under this Agreement (whether on account of principal, interest, fees, indemnity or
other amounts); provided that (i) no Event of Default shall have occurred and be continuing, and (ii) such termination shall not be deemed to
be a waiver or release of any claim the Borrower, the Administrative Agent, the Issuing Lender, the Swingline Lender or any other Lender
may have against such Defaulting Lender.
2.25
Joint and Several Liability of the Borrowers.
If at any time there is more than one Person composing the Borrower:
(a)
Each Borrower is accepting joint and several liability hereunder and under the other Loan Documents in
consideration of the financial accommodations to be provided by the Lenders under this Agreement, for the mutual benefit, directly and
indirectly, of each Borrower and in consideration of the undertakings of the other Borrowers to accept joint and several liability for the
Obligations.
(b)
Each Borrower, jointly and severally, hereby irrevocably and unconditionally accepts, not merely as a surety but also
as a co-debtor, joint and several liability with the other Borrowers, with respect to the payment and performance of all of the Obligations
(including any Obligations arising under this Section 2.25), it being the intention of the parties hereto that all the Obligations shall be the
joint and several obligations of each Borrower without preferences or distinction among them.
55
(c)
If and to the extent that any Borrower shall fail to make any payment with respect to any of the Obligations as and
when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event the other Borrowers will make
such payment with respect to, or perform, such Obligations.
(d)
The Obligations of each Borrower under the provisions of this Section 2.25 constitute the absolute and
unconditional, full recourse Obligations of each Borrower enforceable against each Borrower to the full extent of its properties and assets,
irrespective of the validity, regularity or enforceability of this Agreement or any other circumstances whatsoever.
(e)
Except as otherwise expressly provided in this Agreement, each Borrower hereby waives notice of acceptance of its
joint and several liability, notice of any Loans made or Letters of Credit issued under or pursuant to this Agreement, notice of the occurrence
of any Default, Event of Default, or of any demand for any payment under this Agreement, notice of any action at any time taken or omitted
by the Administrative Agent or Lenders under or in respect of any of the Obligations, any requirement of diligence or to mitigate damages
and, generally, to the extent permitted by applicable law, all demands, notices and other formalities of every kind in connection with this
Agreement (except as otherwise provided in this Agreement). Each Borrower hereby assents to, and waives notice of, any extension or
postponement of the time for the payment of any of the Obligations, the acceptance of any payment of any of the Obligations, the acceptance
of any partial payment thereon, any waiver, consent or other action or acquiescence by the Administrative Agent or Lenders at any time or
times in respect of any default by any Borrower in the performance or satisfaction of any term, covenant, condition or provision of this
Agreement, any and all other indulgences whatsoever by the Administrative Agent or Lenders in respect of any of the Obligations, and the
taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Obligations or the addition,
substitution or release, in whole or in part, of any Borrower. Without limiting the generality of the foregoing, each Borrower assents to any
other action or delay in acting or failure to act on the part of the Administrative Agent or Lender with respect to the failure by any Borrower
to comply with any of its respective Obligations, including, without limitation, any failure strictly or diligently to assert any right or to pursue
any remedy or to comply fully with applicable laws or regulations thereunder, which might, but for the provisions of this Section 2.25 afford
grounds for terminating, discharging or relieving any Borrower, in whole or in part, from any of its Obligations under this Section 2.25, it
being the intention of each Borrower that, so long as any of the Obligations hereunder remain unsatisfied, the Obligations of each Borrower
under this Section 2.25 shall not be discharged except by performance and then only to the extent of such performance. The Obligations of
each Borrower under this Section 2.25 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement,
liquidation, reconstruction or similar proceeding with respect to any Borrower, the Administrative Agent or any Lender.
(f)
Each Borrower represents and warrants to the Administrative Agent and Lenders that such Borrower is currently
informed of the financial condition of the Borrowers and of all other circumstances which a diligent inquiry would reveal and which bear
upon the risk of nonpayment of the Obligations. Each Borrower further represents and warrants to the Administrative Agent and Lenders that
such Borrower has read and understands the terms and conditions of the Loan Documents. Each Borrower hereby covenants that such
Borrower will continue to keep informed of the Borrowers’ financial condition, the financial condition of other guarantors, if any, and of all
other circumstances which bear upon the risk of nonpayment or nonperformance of the Obligations.
(g)
Each Borrower waives all rights and defenses (i) arising out of an election of remedies by the Administrative Agent
or any Lender, even though that election of remedies, such as a
56
nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed such Borrower’s rights of subrogation and
reimbursement against any applicable Loan Party by the operation of Section 580 or 726 of the California Code of Civil Procedure or
otherwise, and (ii) relating to any suretyship defenses available to it under the Uniform Commercial Code or any other applicable law,
including, without limitation, the benefit of California Civil Code Section 2815 permitting revocation as to future transactions and the benefit
of California Civil Code Sections 1432, 2787 through 2855, 2899 and 3433.
(h)
Each Borrower waives all rights and defenses that such Borrower may have because the Obligations are secured by
real property at any time. This means, among other things:
or personal property Collateral pledged by the Borrowers.
(i)
The Administrative Agent and Lenders may collect from such Borrower without first foreclosing on any real
by the Borrowers:
(ii)
If the Administrative Agent or any Lender forecloses on any Collateral consisting of real property pledged
the foreclosure sale, even if the collateral is worth more than the sale price.
(A)
The amount of the Obligations may be reduced only by the price for which that collateral is sold at
Agent or Lenders, by foreclosing on real property, has destroyed any right such Borrower may have to collect from the other Borrowers.
(B)
The Administrative Agent and Lenders may collect from such Borrower even if the Administrative
This is an unconditional and irrevocable waiver of any rights and defenses such Borrower may have because the Obligations are
secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b,
580d or 726 of the California Code of Civil Procedure.
(i)
The provisions of this Section 2.25 are made for the benefit of the Administrative Agent, the Lenders, and their
respective successors and assigns, and may be enforced by it or them from time to time against any or all the Borrowers as often as occasion
therefor may arise and without requirement on the part of the Administrative Agent, any Lender, any successor or any assign first to marshal
any of its or their claims or to exercise any of its or their rights against any Borrower or to exhaust any remedies available to it or them
against any Borrower or to resort to any other source or means of obtaining payment of any of the Obligations hereunder or to elect any other
remedy. The provisions of this Section 2.25 shall remain in effect until all of the Obligations shall have been paid in full or otherwise fully
satisfied. If at any time, any payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be
restored or returned by the Administrative Agent or any Lender upon the insolvency, bankruptcy or reorganization of any Borrower, or
otherwise, the provisions of this Section 2.25 will forthwith be reinstated in effect, as though such payment had not been made.
(j)
Each Borrower hereby agrees that it will not enforce any of its rights of contribution or subrogation against any other
Borrower with respect to any liability incurred by it hereunder or under any of the other Loan Documents, any payments made by it to the
Administrative Agent or Lenders with respect to any of the Obligations or any collateral security therefor until such time as all of the
Obligations have been paid in full in cash. Any claim which any Borrower may have against
57
any other Borrower with respect to any payments to the Administrative Agent or Lender hereunder or under any other Loan Documents are
hereby expressly made subordinate and junior in right of payment, without limitation as to any increases in the Obligations arising hereunder
or thereunder, to the prior payment in full in cash of the Obligations and, in the event of any insolvency, bankruptcy, receivership, liquidation,
reorganization or other similar proceeding under the laws of any jurisdiction relating to any Borrower, its debts or its assets, whether
voluntary or involuntary, all such Obligations shall be paid in full in cash before any payment or distribution of any character, whether in
cash, securities or other property, shall be made to any other Borrower therefor. Notwithstanding anything to the contrary contained in this
Section 2.25, no Borrower shall exercise any rights of subrogation, contribution, indemnity, reimbursement or other similar rights against,
and shall not proceed or seek recourse against or with respect to any property or asset of, any other Borrower (the “Foreclosed Borrower”),
including after payment in full of the Obligations, if all or any portion of the Obligations have been satisfied in connection with an exercise
of remedies in respect of the Capital Stock of such Foreclosed Borrower whether pursuant to the Security Documents or otherwise.
(k)
Each Borrower hereby agrees that, after the occurrence and during the continuance of any Default or Event of
Default, the payment of any amounts due with respect to the indebtedness owing by any Borrower to any other Borrower is hereby
subordinated to the prior payment in full in cash of the Obligations. Each Borrower hereby agrees that after the occurrence and during the
continuance of any Default or Event of Default, such Borrower will not demand, sue for or otherwise attempt to collect any indebtedness of
any other Borrower owing to such Borrower until the Obligations shall have been paid in full in cash. If, notwithstanding the foregoing
sentence, such Borrower shall collect, enforce or receive any amounts in respect of such indebtedness, such amounts shall be collected,
enforced and received by such Borrower as trustee for the Administrative Agent, and such Borrower shall deliver any such amounts to the
Administrative Agent for application to the Obligations in accordance with the terms of this Agreement.
(l)
Subject to the foregoing, to the extent that any Borrower shall, under this Agreement as a joint and several obligor,
repay any of the Obligations made to another Borrower hereunder or other Obligations incurred directly and primarily by any other Borrower
(an “Accommodation Payment”), then the Borrower making such Accommodation Payment shall be entitled to contribution and
indemnification from, and be reimbursed by, each other Borrower in an amount, for each of such other Borrower, equal to a fraction of such
Accommodation Payment, the numerator of which fraction is such other Borrower’s Allocable Amount and the denominator of which is the
sum of the Allocable Amounts of all of the Borrowers. As of any date of determination, the “Allocable Amount” of each Borrower shall be
equal to the maximum amount of liability for Accommodation Payments which could be asserted against such Borrower hereunder without
(a) rendering such Borrower “insolvent” within the meaning of Section 101(31) of the Bankruptcy Code, Section 2 of the Uniform
Fraudulent Transfer Act (“UFTA”) or Section 2 of the Uniform Fraudulent Conveyance Act (“UFCA”), (b) leaving such Borrower with
unreasonably small capital or assets, within the meaning of Section 548 of the Bankruptcy Code, Section 4 of the UFTA, or Section 5 of the
UFCA, or (c) leaving such Borrower unable to pay its debts as they become due within the meaning of Section 548 of the Bankruptcy Code
or Section 4 of the UFTA, or Section 5 of the UFCA.
(m)
Each entity composing the Borrower hereby irrevocably appoints Stitch Fix, Inc. as the borrowing agent and
attorney-in-fact for all entities composing the Borrower (the “Administrative Borrower”), which appointment shall remain in full force and
effect unless and until the Administrative Agent shall have received prior written notice signed by each entity composing the Borrower that
such appointment has been revoked and that another entity composing the Borrower has been appointed
58
Administrative Borrower. Each entity composing the Borrower hereby irrevocably appoints and authorizes the Administrative Borrower (a)
to provide Agent with all notices with respect to Loans and Letters of Credit obtained for the benefit of any entity composing the Borrower
and all other notices and instructions under this Agreement and the other Loan Documents, and (b) to take such action as the Administrative
Borrower deems appropriate on its behalf to obtain Loans and Letters of Credit and to exercise such other powers as are reasonably incidental
thereto to carry out the purposes of this Agreement and the other Loan Documents.
2.26
Notes. If so requested by any Lender by written notice to the Borrower (with a copy to the Administrative Agent), the
Borrower shall execute and deliver to such Lender (and/or, if applicable and if so specified in such notice, to any Person who is an assignee
of such Lender pursuant to Section 10.6) (promptly after the Borrower’s receipt of such notice) a Note or Notes to evidence such Lender’s
Loans.
2.27
Incremental Facility.
(a)
At any time during the Revolving Commitment Period, the Borrower may request from time to time from one or
more existing Lenders or from other Eligible Assignees reasonably acceptable to the Administrative Agent, the Issuing Lender, the Swingline
Lender and the Borrower (but subject to the conditions set forth in clause (b) below) that the Total Revolving Commitments be increased by
an amount not to exceed the Available Revolving Increase Amount (each such increase, an “Increase”); provided that the Borrower may not
request an Increase on more than 2 occasions during the Revolving Commitment Period. No Lender shall be obligated to increase its
Revolving Commitments in connection with a proposed Increase. The Administrative Agent shall invite each Lender to provide a portion of
the Increase ratably in accordance with its Revolving Percentage of each requested Increase (it being agreed that no Lender shall be obligated
to provide an Increase and that any Lender may elect to participate in such Increase in an amount that is less than its Revolving Percentage of
such requested Increase or more than its Revolving Percentage of such requested Increase if other Lenders have elected not to participate in
any applicable requested Increase in accordance with their Revolving Percentage) and to the extent, 5 Business Days after receipt of
invitation, sufficient Lenders do not agree to provide the full amount of such Increase, then the Administrative Agent may invite any
prospective lender that satisfies the criteria of being an “Eligible Assignee” to become a Lender in connection with the proposed Increase.
Any Increase shall be in an amount of at least $5,000,000 (or, if the Available Revolving Increase Amount is less than $5,000,000, such
remaining Available Revolving Increase Amount) and integral multiples of $1,000,000 in excess thereof. Additionally, for the avoidance of
doubt, it is understood and agreed that in no event shall the aggregate amount of the Increases to the Revolving Commitments exceed the
Available Revolving Increase Amount during the term of the Agreement. Each request for an Increase delivered by the Borrower to the
Administrative Agent shall set forth the amount and proposed terms of the Increase.
(b)
Each of the following shall be conditions precedent to any Increase of the Revolving Commitments in connection
therewith:
(i)
any Increase shall be on the same terms (including the interest rate, and maturity date), as applicable, as, and
pursuant to documentation applicable to, the Revolving Facility then in effect; provided that any such Increase may provide for terms
(including interest rate) more favorable to such Increase lenders, if any existing Revolving Loans at the time of such Increase are also
provided the benefit of such more favorable terms (and the consent of any existing Revolving Lender shall not be required to implement such
terms);
59
the Borrower shall have delivered a written request for such Increase at least 10 Business Days prior to the
requested establishment of such Increase (or such later date as may be reasonably approved by the Administrative Agent), which request
shall set forth the amount and proposed terms of the Increase;
(ii)
(iii)
each lender agreeing to such Increase, the Borrower and the Administrative Agent shall have signed an
Increase Joinder (any Increase Joinder may, with the consent of the Administrative Agent, the Borrower and the lenders agreeing to such
Increase, effect such amendments to this Agreement and the other Loan Documents as may be necessary or appropriate to effectuate the
provisions of this Section 2.27 (including the preceding clause (ii))) and the Borrower shall have executed any Notes requested by any
Lender in connection with the making of the Increase. Notwithstanding anything to the contrary in this Agreement or in any other Loan
Document, an Increase Joinder reasonably satisfactory to the Administrative Agent, and the amendments to this Agreement effected thereby,
shall not require the consent of any Lender other than the Lender(s) agreeing to establish such Increase;
(iv)
immediately after giving pro forma effect to such Increase and the use of proceeds thereof, each of the
conditions precedent in Section 5.2(a) are satisfied (other than in connection with Limited Condition Acquisitions, in which case (i) Section
5.2(a) shall be satisfied only in connection with the Specified Representations and (ii) the Specified Acquisition Agreement Representations
shall be true and correct on the date Loans are made under the Increase, but only to the extent that the Borrower (or any of its Affiliates) has
the right (taking into account any applicable cure provisions) to terminate its (or such Affiliates’) obligations under the Limited Condition
Acquisition, or to decline to consummate the Limited Condition Acquisition Agreement (in each case, in accordance with the terms thereof)
as a result of a breach of such Specified Acquisition Agreement Representations);
(v)
immediately after giving pro forma effect to such Increase and the use of proceeds thereof, (A) no Default or
Event of Default shall have occurred and be continuing at the time of such Increase (other than in connection with Limited Condition
Acquisitions, in which case there shall be no Default or Event of Default as of the LCA Test Date and no Event of Default under Section
8.1(a) or (f) immediately after giving effect to such Increase and the use of proceeds thereof) and (B) the Borrower shall be in compliance
with the financial covenants set forth in Section 7.1 hereof as of the end of the most recently ended month and quarter for which financial
statements are required to be delivered prior to such Increase, and the Borrower shall have delivered to the Administrative Agent a
Compliance Certificate evidencing compliance with the requirements of this clause (v) (provided that, in the case of a Limited Condition
Acquisition, such calculation shall be made in compliance with Section 1.4);
in connection with such Increase, the Borrower shall pay to the Administrative Agent, for the benefit of the
Administrative Agent or the Increase lenders, as applicable, all fees that the Borrower has agreed to pay in connection with such Increase
(including pursuant to the Fee Letter); and
(vi)
(vii)
upon each Increase in accordance with this Section 2.27, all outstanding Loans, participations hereunder in
Letters of Credit and participations hereunder in Swingline Loans held by each Lender shall be reallocated among the Lenders (including any
newly added Lenders) in accordance with the Lenders’ respective revised Revolving Percentages and L/C Percentages, pursuant to
procedures reasonably determined by the Administrative Agent in consultation with the Borrower.
60
(c)
Upon the effectiveness of any Increase, (i) all references in this Agreement and any other Loan Document to the
Revolving Loans shall be deemed, unless the context otherwise requires, to include such Increase advanced pursuant to this Section 2.27 and
any amendments effected through the Increase Joinder and (ii) all references in this Agreement and any other Loan Document to the
Revolving Commitment shall be deemed, unless the context otherwise requires, to include the commitment to advance an amount equal to
such Increase pursuant to this Section 2.27.
(d)
The Revolving Loans and Revolving Commitments established pursuant to this Section 2.27 shall constitute
Revolving Loans and Revolving Commitments under, and shall be entitled to all the benefits afforded by, this Agreement and the other Loan
Documents, and shall, without limiting the foregoing, benefit equally and ratably from any guarantees and the security interests created by
the Loan Documents. The Borrower shall take any actions reasonably required by Administrative Agent to ensure and demonstrate that the
Liens and security interests granted by the Loan Documents continue to be perfected under the UCC or otherwise after giving effect to the
establishment of any such new Revolving Commitments.
2.28
Extension of Maturity Date.
(a)
Request for Extension. The Borrower may, by notice to the Administrative Agent (who shall promptly notify the
Lenders) not earlier than 90 days and not later than 50 days prior to the Revolving Termination Date then in effect hereunder (any such date,
an “Existing Maturity Date”), either (i) a one-time request that each applicable Lender extend such Lender’s Revolving Termination Date, as
applicable, for an additional 728 days from the Existing Maturity Date or (ii) on up to 2 occasions during the term of this Agreement, request
that each applicable Lender extend such Lender’s Revolving Termination Date, as applicable, for an additional 364 days from the Existing
Maturity Date. If the Borrower makes a request under clause (i) above, the Borrower shall not make a subsequent request under clause (ii)
above and vice versa.
(b)
Lender Elections to Extend. Each Lender, acting in its sole and individual discretion, shall, not later than the date
that is 20 days prior to the Existing Maturity Date (the “Notice Date”), advise the Administrative Agent whether or not such Lender agrees to
such extension (and each Lender that determines not to so extend its Revolving Termination Date (a “Non-Extending Lender”) shall notify
the Administrative Agent of such determination promptly (but in any event no later than the Notice Date) and any Lender that does not so
advise the Administrative Agent on or before the Notice Date shall be deemed to be a Non-Extending Lender). The election of any Lender to
agree to such extension shall not obligate any other Lender to so agree.
(c)
Notification by Administrative Agent. The Administrative Agent shall notify the Borrower of each Lender’s
determination under this Section no later than the date 15 days prior to the Existing Maturity Date (or, if such date is not a Business Day, on
the next preceding Business Day).
(d)
Minimum Extension Requirement. If (and only if) the total of the Revolving Commitments of the Lenders that have
agreed so to extend their Revolving Termination Date (each, an “Extending Lender”) shall be more than 35% of the aggregate amount of the
Total Revolving Commitments in effect immediately prior to the Existing Maturity Date, then, effective as of the Existing Maturity Date, the
Maturity Date in respect of the Revolving Credit Facility of each Extending Lender shall be extended to the applicable date corresponding to
the request made under clause (b) of this Section 2.28 (except that, if such date is not a Business Day, such Revolving Termination Date as so
extended shall be the next preceding Business Day).
61
(e)
Conditions to Effectiveness of Extensions. As a condition precedent to such extension, the Borrower shall deliver to
the Administrative Agent (i) a certificate dated as of the Existing Maturity Date signed by a Responsible Officer certifying and attaching the
resolutions adopted by such Loan Party approving or consenting to such extension, (ii) a certificate dated as of the Existing Maturity Date
signed by a Responsible Officer certifying that, before and after giving effect to such extension, (A) the representations and warranties
contained in Section 4 and the other Loan Documents are true and correct in all material respects on and as of the Existing Maturity Date,
except (1) to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and
correct in all material respects as of such earlier date, (2) in the case of any representation and warranty qualified by materiality, they shall be
true and correct in all respects, and (B) no Default or Event of Default exists, (iii) such financial, business and other information regarding
each Group Member as requested by the Administrative Agent or any Extending Lender necessary for the Administrative Agent or such
Extending Lender to complete any required due diligence investigations and (iv) the Borrower, the Administrative Agent and the Extending
Lenders shall have agreed to appropriate updates to the covenants set forth in Section 7.1. In addition, on the Revolving Termination Date of
each Non-Extending Lender, the Borrowers shall repay any Loans outstanding on such date (and pay any breakage fees required hereunder)
to the extent necessary to keep outstanding Loans ratable with any revised Revolving Percentages of the respective Lenders effective as of
such date.
(f)
Conflicting Provisions. This Section shall supersede any provisions in Section 2.18 or Section 10.1 to the contrary.
3.1
L/C Commitment.
SECTION 3
LETTERS OF CREDIT
(a)
Subject to the terms and conditions hereof, the Issuing Lender agrees to issue letters of credit (“Letters of Credit”)
for the account of the Borrower (or any other Group Member so long as the Borrower is the applicant on the applicable Application and such
Group Member has furnished any documentation required by the Issuing Lender pursuant to “know-your-customer” or any internal
requirements) on any Business Day during the Letter of Credit Availability Period in such form as may reasonably be approved from time to
time by the Issuing Lender; provided that the Issuing Lender shall have no obligation to issue any Letter of Credit if, after giving effect to
such issuance, the L/C Exposure would exceed either the Total L/C Commitments or the Available Revolving Commitment at such time.
Each Letter of Credit shall (i) be denominated in Dollars and (ii) unless otherwise agreed to by the Issuing Lender, expire no later than the
earlier of (x) the first anniversary of its date of issuance and (y) the Letter of Credit Maturity Date, provided that any Letter of Credit with a
one-year term may provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the date referred to
in clause (y) above unless the Issuing Lender otherwise agrees).
(b)
The Issuing Lender shall not at any time be obligated to issue any Letter of Credit if:
(i)
imposed by, any applicable Requirement of Law;
such issuance would conflict with, or cause the Issuing Lender or any L/C Lender to exceed any limits
any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to
enjoin or restrain the Issuing Lender from issuing, amending or reinstating such Letter of Credit, or any law, rule or regulation applicable to
the Issuing Lender or any
(ii)
62
request, guideline or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Issuing
Lender shall prohibit, or request that the Issuing Lender refrain from, the issuance, amendment, renewal or reinstatement of letters of credit
generally or such Letter of Credit in particular or shall impose upon the Issuing Lender with respect to such Letter of Credit any restriction,
reserve or capital requirement (for which the Issuing Lender is not otherwise compensated) not in effect on the Closing Date, or shall impose
upon the Issuing Lender any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which the Issuing Lender
in good faith deems material to it;
the Issuing Lender has received written notice from any Lender, the Administrative Agent or the Borrower,
at least 1 Business Day prior to the requested date of issuance, amendment, renewal or reinstatement of such Letter of Credit, that one or
more of the applicable conditions contained in Section 5.2 shall not then be satisfied;
(iii)
amendment or renewal of a Letter of Credit shall violate any applicable laws or regulations or any applicable policies of the Issuing Lender;
(iv)
any requested Letter of Credit is not in form and substance acceptable to the Issuing Lender, or the issuance,
after any drawing thereunder;
(v)
such Letter of Credit contains any provisions providing for automatic reinstatement of the stated amount
(vi)
such Letter of Credit is not denominated in Dollars;
an initial face amount less than $250,000; or
(vii)
except as otherwise agreed by the Administrative Agent and the Issuing Lender, such Letter of Credit is in
(viii)
any Lender is at that time a Defaulting Lender, unless the Issuing Lender has entered into arrangements,
including the delivery of Cash Collateral pursuant to Section 3.10, satisfactory to the Issuing Lender (in its sole discretion) with the Borrower
or such Defaulting Lender to eliminate the Issuing Lender’s actual or potential Fronting Exposure (after giving effect to Section 2.24(a)(iv))
with respect to the Defaulting Lender arising from either the Letter of Credit then proposed to be issued or such Letter of Credit and all other
L/C Exposure as to which the Issuing Lender has actual or potential Fronting Exposure, as it may elect in its sole discretion.
3.2
Procedure for Issuance of Letters of Credit. The Borrower may from time to time request that the Issuing Lender issue
a Letter of Credit for the account of the Borrower by delivering to the Issuing Lender at its address for notices specified herein an Application
therefor, completed to the satisfaction of the Issuing Lender, and such other certificates, documents and other papers and information as the
Issuing Lender may request. Upon receipt of any Application, the Issuing Lender will process such Application and the certificates,
documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall
promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Lender be required to issue any Letter of Credit earlier
than 3 Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information
relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed to by the Issuing
Lender and the Borrower. The Issuing Lender shall furnish a copy of such Letter of Credit to the Borrower promptly following the issuance
thereof. The Issuing Lender shall promptly furnish to the Administrative Agent, which shall in turn promptly furnish to the Lenders, notice of
the issuance of each Letter of Credit (including the amount thereof).
63
3.3
Fees and Other Charges.
(a)
The Borrower agrees to pay, with respect to each Existing Letter of Credit and each outstanding Letter of Credit
issued for the account of (or at the request of) the Borrower, (i) a fronting fee of 0.125% per annum on the daily amount available to be
drawn under each such Letter of Credit to the Issuing Lender for its own account (a “Letter of Credit Fronting Fee”), and (ii) a letter of
credit fee equal to the Applicable Margin for Eurodollar Loans multiplied by the daily amount available to be drawn under each such Letter
of Credit on the drawable amount of such Letter of Credit to the Administrative Agent for the ratable account of the L/C Lenders (determined
in accordance with their respective L/C Percentages) (a “Letter of Credit Fee”), in each case payable quarterly in arrears on the last Business
Day of March, June, September and December of each year and on the Letter of Credit Maturity Date (each, an “L/C Fee Payment Date”)
after the issuance date of such Letter of Credit, and (iii) the Issuing Lender’s standard and reasonable fees with respect to the issuance,
amendment, renewal or extension of any Letter of Credit issued for the account of (or at the request of) the Borrower or processing of
drawings thereunder (the fees in this clause (iii), collectively, the “Issuing Lender Fees”). All Letter of Credit Fronting Fees and Letter of
Credit Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days.
(b)
In addition to the foregoing fees, the Borrower shall pay or reimburse the Issuing Lender for such normal and
customary costs and expenses as are incurred or charged by the Issuing Lender in issuing, negotiating, effecting payment under, amending or
otherwise administering any Letter of Credit.
(c)
The Borrower shall furnish to the Issuing Lender and the Administrative Agent such other documents and
information pertaining to any requested Letter of Credit issuance, amendment or renewal, including any L/C-Related Documents, as the
Issuing Lender or the Administrative Agent may reasonably require. This Agreement shall control in the event of any conflict with any L/C-
Related Document (other than any Letter of Credit).
(d)
Any Letter of Credit Fees otherwise payable for the account of a Defaulting Lender with respect to any Letter of
Credit as to which such Defaulting Lender has not provided Cash Collateral satisfactory to the Issuing Lender pursuant to Section 3.10 shall
be payable, to the maximum extent permitted by applicable law, to the other L/C Lenders in accordance with the upward adjustments in their
respective L/C Percentages allocable to such Letter of Credit pursuant to Section 2.24(a)(iv), with the balance of such fee, if any, payable to
the Issuing Lender for its own account.
(e)
All fees payable under this Section 3.3 shall be fully earned on the date paid and nonrefundable.
3.4
L/C Participations; Existing Letters of Credit.
(a)
L/C Participations. The Issuing Lender irrevocably agrees to grant and hereby grants to each L/C Lender, and, to
induce the Issuing Lender to issue Letters of Credit, each L/C Lender irrevocably agrees to accept and purchase and hereby accepts and
purchases from the Issuing Lender, on the terms and conditions set forth below, for such L/C Lender’s own account and risk an undivided
interest equal to such L/C Lender’s L/C Percentage in the Issuing Lender’s obligations and rights under and in respect of each Letter of
Credit and the amount of each draft paid by the Issuing Lender thereunder. Each L/C Lender agrees with the Issuing Lender that, if a draft is
paid under any Letter of Credit for which the Issuing Lender is not reimbursed in full by the Borrower pursuant to Section 3.5(a),
64
such L/C Lender shall pay to the Issuing Lender upon demand at the Issuing Lender’s address for notices specified herein an amount equal to
such L/C Lender’s L/C Percentage of the amount of such draft, or any part thereof, that is not so reimbursed. Each L/C Lender’s obligation to
pay such amount shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any setoff, counterclaim,
recoupment, defense or other right that such L/C Lender may have against the Issuing Lender, the Borrower or any other Person for any
reason whatsoever, (ii) the occurrence of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in
Section 5.2, (iii) any adverse change in the condition (financial or otherwise) of the Borrower, (iv) any breach of this Agreement or any other
Loan Document by the Borrower, any other Loan Party or any other L/C Lender, or (v) any other circumstance, happening or event
whatsoever, whether or not similar to any of the foregoing.
(b)
Existing Letters of Credit. On and after the Closing Date, the Existing Letters of Credit shall be deemed for all
purposes, including for purposes of the fees to be collected pursuant to Sections 3.3(a) and (b), reimbursement of costs and expenses to the
extent provided herein and for purposes of being secured by the Collateral, a Letter of Credit outstanding under this Agreement and entitled
to the benefits of this Agreement and the other Loan Documents, and shall be governed by the applications and agreements pertaining thereto
and by this Agreement (which shall control in the event of a conflict).
3.5
Reimbursement.
(a)
If the Issuing Lender shall make any L/C Disbursement in respect of a Letter of Credit, the Issuing Lender shall
notify the Borrower and the Administrative Agent thereof and the Borrower shall pay or cause to be paid to the Issuing Lender an amount
equal to the entire amount of such L/C Disbursement not later than the immediately following Business Day. Each such payment shall be
made to the Issuing Lender at its address for notices referred to herein in immediately available funds; provided that the Borrower may,
subject to the satisfaction of the conditions to borrowing set forth herein, request in accordance with Section 2.5 or Section 2.7(a) that such
payment be financed with a Revolving Loan or a Swingline Loan, as applicable, in an equivalent amount and, to the extent so financed, the
Borrower’s obligations to make such payment shall be discharged and replaced by the resulting Revolving Loan or Swingline Loan.
(b)
If the Issuing Lender shall not have received from the Borrower the payment that it is required to make pursuant to
Section 3.5(a) with respect to a Letter of Credit within the time specified in such Section, the Issuing Lender will promptly notify the
Administrative Agent of the L/C Disbursement and the Administrative Agent will promptly notify each L/C Lender of such L/C
Disbursement and its L/C Percentage thereof, and each L/C Lender shall pay to the Issuing Lender upon demand at the Issuing Lender’s
address for notices specified herein an amount equal to such L/C Lender’s L/C Percentage of such L/C Disbursement (and the Administrative
Agent may apply Cash Collateral provided for this purpose); upon such payment pursuant to this paragraph to reimburse the Issuing Lender
for any L/C Disbursement, the Borrower shall be required to reimburse the L/C Lenders for such payments (including interest accrued
thereon from the date of such payment until the date of such reimbursement at the rate applicable to Revolving Loans that are ABR Loans
plus 2% per annum) on demand; provided that if at the time of and after giving effect to such payment by the L/C Lenders, the conditions to
borrowings and Revolving Loan Conversions set forth in Section 5.2 are satisfied, the Borrower may, by written notice to the Administrative
Agent certifying that such conditions are satisfied and that all interest owing under this paragraph has been paid, request that such payments
by the L/C Lenders be converted into Revolving Loans (a “Revolving Loan Conversion”), in which case, if such
65
conditions are in fact satisfied, the L/C Lenders shall be deemed to have extended, and the Borrower shall be deemed to have accepted, a
Revolving Loan in the aggregate principal amount of such payment without further action on the part of any party, and the Total L/C
Commitments shall be permanently reduced by such amount; any amount so paid pursuant to this paragraph shall, on and after the payment
date thereof, be deemed to be Revolving Loans for all purposes hereunder; provided that the Issuing Lender, at its option, may effectuate a
Revolving Loan Conversion regardless of whether the conditions to borrowings and Revolving Loan Conversions set forth in Section 5.2 are
satisfied.
3.6
Obligations Absolute. The Borrower’s obligations under this Section 3 shall be absolute and unconditional under any and
all circumstances and irrespective of any setoff, counterclaim or defense to payment that the Borrower may have or have had against the
Issuing Lender, any beneficiary of a Letter of Credit or any other Person. The Borrower also agrees with the Issuing Lender that the Issuing
Lender shall not be responsible for, and the Borrower’s obligations hereunder shall not be affected by, among other things, the validity or
genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or
forged, or any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of
Credit may be transferred or any claims whatsoever of the Borrower against any beneficiary of such Letter of Credit or any such transferee.
The Issuing Lender shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or
advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions found by a final and nonappealable
decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Issuing Lender. The
Borrower agrees that any action taken or omitted by the Issuing Lender under or in connection with any Letter of Credit or the related drafts
or documents, if done in the absence of gross negligence or willful misconduct, shall be binding on the Borrower and shall not result in any
liability of the Issuing Lender to the Borrower.
In addition to amounts payable as elsewhere provided in the Agreement, the Borrower hereby agrees to pay and to protect,
indemnify, and save Issuing Lender harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and
expenses (including reasonable attorneys’ fees) that the Issuing Lender may incur or be subject to as a consequence, direct or indirect, of (a)
the issuance of any Letter of Credit, or (b) the failure of Issuing Lender or of any L/C Lender to honor a demand for payment under any
Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or
Governmental Authority, in each case other than to the extent solely as a result of the gross negligence or willful misconduct of Issuing
Lender or such L/C Lender (as finally determined by a court of competent jurisdiction).
3.7
Letter of Credit Payments. If any draft shall be presented for payment under any Letter of Credit, the Issuing Lender shall
promptly notify the Borrower and the Administrative Agent of the date and amount thereof. The responsibility of the Issuing Lender to the
Borrower in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation
expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such
Letter of Credit in connection with such presentment are substantially in conformity with such Letter of Credit.
3.8
Applications: To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the
provisions of this Section 3, the provisions of this Section 3 shall apply.
3.9
Interim Interest. If the Issuing Lender shall make any L/C Disbursement in respect of a Letter of Credit, then, unless either
the Borrower shall have reimbursed such L/C Disbursement in full
66
within the time period specified in Section 3.5(a) or the L/C Lenders shall have reimbursed such L/C Disbursement in full on such date as
provided in Section 3.5(b), in each case the unpaid amount thereof shall bear interest for the account of the Issuing Lender, for each day from
and including the date of such L/C Disbursement to but excluding the date of payment by the Borrower, at the rate per annum that would
apply to such amount if such amount were a Revolving Loan that is an ABR Loan; provided that the provisions of Section 2.15(c) shall be
applicable to any such amounts not paid when due.
3.10
Cash Collateral.
(a)
Certain Credit Support Events. Upon the request of the Administrative Agent or the Issuing Lender (i) if the Issuing
Lender has honored any full or partial drawing request under any Letter of Credit and such drawing has resulted in an L/C Advance by all the
L/C Lenders that is not reimbursed by the Borrower or converted into a Revolving Loan or Swingline Loan pursuant to Section 3.5(b), or
(ii) if, as of the Letter of Credit Maturity Date, any L/C Exposure for any reason remains outstanding, the Borrower shall, in each case,
immediately Cash Collateralize the then effective L/C Exposure in an amount equal to 105% of such L/C Exposure.
At any time that there shall exist a Defaulting Lender, within 1 Business Day following the request of the Administrative Agent or
the Issuing Lender (with a copy to the Administrative Agent), the Borrower shall deliver to the Administrative Agent Cash Collateral in an
amount sufficient to cover 105% of the Fronting Exposure relating to the Letters of Credit (after giving effect to Section 2.24(a)(iv) and any
Cash Collateral provided by such Defaulting Lender).
(b)
Grant of Security Interest. All Cash Collateral (other than credit support not constituting funds subject to deposit)
shall be maintained in blocked, non-interest bearing deposit accounts with the Administrative Agent. The Borrower, and to the extent
provided by any Lender or Defaulting Lender, such Lender or Defaulting Lender, hereby grants to (and subjects to the control of) the
Administrative Agent, for the benefit of the Administrative Agent, the Issuing Lender and the L/C Lenders, and agrees to maintain, a first
priority security interest and Lien in all such Cash Collateral and in all proceeds thereof, as security for the Obligations to which such Cash
Collateral may be applied pursuant to Section 3.10(c). If at any time the Administrative Agent determines that Cash Collateral is subject to
any right or claim of any Person other than the Administrative Agent or any Issuing Lender as herein provided, or that the total amount of
such Cash Collateral is less than 105% of the applicable L/C Exposure, Fronting Exposure and other Obligations secured thereby, the
Borrower or the relevant Lender or Defaulting Lender, as applicable, will, promptly upon demand by the Administrative Agent, pay or
provide to the Administrative Agent additional Cash Collateral in an amount sufficient to eliminate such deficiency (after giving effect to any
Cash Collateral provided by such Defaulting Lender).
(c)
Application. Notwithstanding anything to the contrary contained in this Agreement, Cash Collateral provided under
any of this Section 3.10, Section 2.24 or otherwise in respect of Letters of Credit shall be held and applied to the satisfaction of the specific
L/C Exposure, obligations to fund participations therein (including, as to Cash Collateral provided by a Defaulting Lender, any interest
accrued on such obligation) and other obligations for which the Cash Collateral was so provided, prior to any other application of such
property as may otherwise be provided for herein.
(d)
Termination of Requirement. Cash Collateral (or the appropriate portion thereof) provided to reduce Fronting
Exposure in respect of Letters of Credit or other Obligations shall no longer be required to be held as Cash Collateral pursuant to this Section
3.10 following (i) the elimination of the applicable Fronting Exposure and other Obligations giving rise thereto (including by the termination
of the Defaulting Lender status of the applicable Lender), or (ii) a determination by the Administrative
67
Agent and the Issuing Lender that there exists excess Cash Collateral; provided, however, (A) that Cash Collateral furnished by or on behalf
of a Loan Party shall not be released during the existence of an Event of Default, and (B) that, subject to Section 2.24, the Person providing
such Cash Collateral and the Issuing Lender may agree that such Cash Collateral shall not be released but instead shall be held to support
future anticipated Fronting Exposure or other obligations, and provided further, that to the extent that such Cash Collateral was provided by
the Borrower or any other Loan Party, such Cash Collateral shall remain subject to any security interest and Lien granted pursuant to the
Loan Documents including any applicable Cash Management Agreement.
3.11
Additional Issuing Lenders. The Borrower may, at any time and from time to time with the consent of the Administrative
Agent (which consent shall not be unreasonably withheld) and such Lender, designate one or more additional Lenders to act as an issuing
bank under the terms of this Agreement. Any Lender designated as an issuing bank pursuant to this paragraph shall be deemed to be an
“Issuing Lender” (in addition to being a Lender) in respect of Letters of Credit issued or to be issued by such Lender, and, with respect to
such Letters of Credit, such term shall thereafter apply to the other Issuing Lender and such Lender.
3.12
Resignation of the Issuing Lender. The Issuing Lender may resign at any time by giving at least 30 days’ prior written
notice to the Administrative Agent, the Lenders and the Borrower. Subject to the next succeeding paragraph, upon the acceptance of any
appointment as the Issuing Lender hereunder by a Lender that shall agree to serve as successor Issuing Lender, such successor shall succeed
to and become vested with all the interests, rights and obligations of the retiring Issuing Lender and the retiring Issuing Lender shall be
discharged from its obligations to issue additional Letters of Credit hereunder without affecting its rights and obligations with respect to
Letters of Credit previously issued by it. At the time such resignation shall become effective, the Borrower shall pay all accrued and unpaid
fees pursuant to Section 3.3. The acceptance of any appointment as the Issuing Lender hereunder by a successor Lender shall be evidenced
by an agreement entered into by such successor, in a form satisfactory to the Borrower and the Administrative Agent, and, from and after the
effective date of such agreement, (i) such successor Lender shall have all the rights and obligations of the previous Issuing Lender under this
Agreement and the other Loan Documents and (ii) references herein and in the other Loan Documents to the term “Issuing Lender” shall be
deemed to refer to such successor or to any previous Issuing Lender, or to such successor and all previous Issuing Lenders, as the context
shall require. After the resignation of the Issuing Lender hereunder, the retiring Issuing Lender shall remain a party hereto and shall continue
to have all the rights and obligations of an Issuing Lender under this Agreement and the other Loan Documents with respect to Letters of
Credit issued by it prior to such resignation, but shall not be required to issue additional Letters of Credit or to extend, renew or increase any
existing Letter of Credit.
3.13
Applicability of UCP and ISP. Unless otherwise expressly agreed by the Issuing Lender and the Borrower when a Letter of
Credit is issued and subject to applicable laws, the Letters of Credit shall be governed by and subject to (a) with respect to standby Letters of
Credit, the rules of the ISP, and (b) with respect to commercial Letters of Credit, the rules of the Uniform Customs and Practice for
Documentary Credits, as published in its most recent version by the International Chamber of Commerce on the date any commercial Letter
of Credit is issued.
68
SECTION 4
REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into this Agreement and to make the Loans and issue the Letters of
Credit, the Borrower hereby represents and warrants to the Administrative Agent and each Lender, as to itself and each of its Subsidiaries,
that:
4.1
Financial Condition.
(a)
[Reserved].
(b)
The audited consolidated balance sheets of the Borrower and its Subsidiaries as of July 29, 2017, July 28, 2018 and
August 3, 2019 and the related consolidated statements of income and of cash flows for the fiscal years ended on such dates, present fairly in
all material respects the consolidated financial condition of the Borrower and its Subsidiaries as at such date, and the consolidated results of
its operations and its consolidated cash flows for the respective fiscal years then ended. The unaudited consolidated balance sheet of the
Borrower and its Subsidiaries as at February 1, 2020, and the related unaudited consolidated statements of income and cash flows for the 12
month period ended on such date, present fairly in all material respects the consolidated financial condition of the Borrower and its
Subsidiaries as at such date, and the consolidated results of its operations and its consolidated cash flows for the trailing 12 month period then
ended (subject to normal year end audit adjustments). All such financial statements, including the related schedules and notes thereto, have
been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned
firm of accountants and disclosed therein). Except as disclosed on Schedule 4.1(b) to the Disclosure Letter, no Group Member has, as of the
Closing Date, any material Guarantee Obligations, contingent liabilities and past due liabilities for taxes, or any long term leases or unusual
forward or long term commitments, including any interest rate or foreign currency swap or exchange transaction or other obligation in
respect of derivatives, that are not reflected in the most recent financial statements referred to in this paragraph. During the period from
February 1, 2020 to and including the date hereof, there has been no Disposition by any Group Member of any material part of its business or
property.
4.2
No Change. Since the Closing Date, there has been no development or event that has had or could reasonably be expected to
have a Material Adverse Effect.
4.3
Existence; Compliance with Law. Each Group Member (a) is duly organized, validly existing and in good standing (if
applicable) under the laws of the jurisdiction of its organization, (b) has the power and authority, and the legal right, to own and operate its
property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a
foreign corporation or other organization and in good standing (if applicable) under the laws of each jurisdiction where the failure to be so
qualified or in good standing could reasonably be expected to have a Material Adverse Effect and (d) is in material compliance with all
Requirements of Law except in such instances in which (i) such Requirement of Law is being contested in good faith by appropriate
proceedings diligently conducted and the prosecution of such contest would not reasonably be expected to result in a Material Adverse
Effect, or (ii) the failure to comply therewith, either individually or in the aggregate, would not reasonably be expected to have a Material
Adverse Effect.
4.4
Power, Authorization; Enforceable Obligations. Each Loan Party has the power and authority, and the legal right, to make,
deliver and perform the Loan Documents to which it is a party and, in the case of the Borrower, to obtain extensions of credit hereunder.
Each Loan Party has taken all
69
necessary organizational action to authorize the execution, delivery and performance of the Loan Documents to which it is a party and, in the
case of the Borrower, to authorize the extensions of credit on the terms and conditions of this Agreement. No material Governmental
Approval or consent or authorization of, filing with, notice to or other act by or in respect of, any other Person is required in connection with
the extensions of credit hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement or any of the
Loan Documents, except (i) Governmental Approvals, consents, authorizations, filings and notices described on Schedule 4.4to the
Disclosure Letter, which Governmental Approvals, consents, authorizations, filings and notices have been obtained or made and are in full
force and effect, and (ii) the filings referred to in Section 4.19. Each Loan Document has been duly executed and delivered on behalf of each
Loan Party party thereto. This Agreement constitutes, and each other Loan Document upon execution will constitute, a legal, valid and
binding obligation of each Loan Party party thereto, enforceable against each such Loan Party in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of
creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).
4.5
No Legal Bar. The execution, delivery and performance of this Agreement and the other Loan Documents, the issuance of
Letters of Credit, the extensions of credit hereunder and the use of the proceeds thereof will not violate any Requirement of Law or any
material Contractual Obligation of any Group Member and will not result in, or require, the creation or imposition of any Lien on any of their
respective properties or revenues pursuant to any Requirement of Law or any such material Contractual Obligation (other than the Liens
created by the Security Documents). No Group Member has violated any Requirement of Law or violated or failed to comply with any
Contractual Obligation applicable to a Group Member that could reasonably be expected to have a Material Adverse Effect.
4.6
Litigation. Except as disclosed on Schedule 4.6 to the Disclosure Letter, no litigation, investigation or proceeding of or
before any arbitrator or Governmental Authority is pending or threatened in writing by or against any Group Member or against any of their
respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or
(b) that could reasonably be expected to have a Material Adverse Effect.
4.7
No Default. No Group Member is in default under or with respect to any of its Contractual Obligations in any respect that
could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing, nor shall
either result from the making of a requested credit extension.
4.8
Ownership of Property; Liens; Investments. Each Group Member has title in fee simple to, or a valid leasehold interest in,
all of its real property, and good title to, or a valid leasehold interest in, all of its other property, and none of such property is subject to any
Lien except as permitted by Section 7.3. No Loan Party owns any Investment except as permitted by Section 7.8. Section 10 of the Collateral
Information Certificate sets forth a complete and accurate list of all real property owned by each Loan Party as of the Closing Date, if any.
The Collateral Information Certificate sets forth a complete and accurate list of all leases of real property under which any Loan Party is the
lessee as of the Closing Date.
4.9
Intellectual Property. Each Group Member owns, or is licensed to use, all Intellectual Property necessary for the conduct of
its business as currently conducted. No claim has been asserted and is pending by any Person challenging or questioning any Group
Member’s use of any Intellectual Property or the validity or effectiveness of any Group Member’s Intellectual Property, nor does any
70
Group Member know of any valid basis for any such claim, unless such claim could not reasonably be expected to have a Material Adverse
Effect. The use of Intellectual Property by each Group Member, and the conduct of such Group Member’s business, as currently conducted,
does not infringe on or otherwise violate the rights of any Person, unless such infringement could not reasonably be expected to have a
Material Adverse Effect, and there are no claims pending or, to the knowledge of any Group Member, threatened to such effect.
4.10
Taxes. Each Group Member has (a) filed or caused to be filed all Federal, state and other material tax returns that are
required to be filed (taking into account any extensions granted or grace periods in effect) and (b) has paid all taxes shown to be due and
payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or
any of its property by any Governmental Authority (other than any taxes, charges or assessments the amount or validity of which are
currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been
provided on the books of the relevant Group Member or where the amount is less than $1,000,000 (or such greater amount approved by the
Admin Agent in its sole discretion) in the aggregate); no tax Lien has been filed, other than Liens for Taxes not yet due and payable and
Liens for Taxes the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to
which reserves in conformity with GAAP have been provided on the books of the relevant Group Member, and, to the knowledge of the
Group Members, no claim is being asserted, with respect to any such tax, fee or other charge.
4.11
Federal Regulations. The Borrower is not engaged and will not engage, principally or as one of its important activities, in
the business of “buying” or “carrying” “margin stock” (within the respective meanings of each of the quoted terms under Regulation U as
now and from time to time hereafter in effect) or extending credit for the purpose of purchasing or carrying margin stock. No part of the
proceeds of any Loans, and no other extensions of credit hereunder, will be used for buying or carrying any such margin stock or for
extending credit to others for the purpose of purchasing or carrying margin stock in violation of Regulations T, U or X of the Board. If any
margin stock directly or indirectly constitutes Collateral securing the Obligations, if requested by any Lender or the Administrative Agent,
the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the
requirements of FR Form G-3 or FR Form U-1, as applicable, referred to in Regulation U.
4.12
Labor Matters. Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect: (a) there
are no strikes or other labor disputes against any Group Member pending or, to the knowledge of the Group Members, threatened; (b) hours
worked by and payment made to employees of each Group Member have not been in violation of the Fair Labor Standards Act or any other
applicable Requirement of Law dealing with such matters; and (c) all payments due from any Group Member on account of employee health
and welfare insurance have been paid or accrued as a liability on the books of the relevant Group Member.
4.13
ERISA.
(a)
Schedule 4.13 to the Disclosure Letter is a complete and accurate list of all Pension Plans maintained or sponsored
by the Borrower or any ERISA Affiliate or to which the Borrower or any ERISA Affiliate contributes as of the Closing Date;
71
(b)
except as could not reasonably be expected to result in a Material Adverse Effect, the Borrower and its ERISA
Affiliates are in compliance with all applicable provisions and requirements of ERISA with respect to each Plan, and have performed all their
obligations under each Plan;
(c)
except as could not reasonably be expected to result in a Material Adverse Effect, no ERISA Event has occurred or is
reasonably expected to occur;
(d)
except as could not reasonably be expected to result in a Material Adverse Effect, the Borrower and each of its
ERISA Affiliates have met all applicable requirements under the ERISA Funding Rules with respect to each Pension Plan, and no waiver of
the minimum funding standards under the ERISA Funding Rules has been applied for or obtained;
(e)
as of the most recent valuation date for any Pension Plan, the funding target attainment percentage (as defined in
Section 430(d)(2) of the Code) is at least 60%, and neither the Borrower nor any of its ERISA Affiliates knows of any facts or circumstances
that could reasonably be expected to cause the funding target attainment percentage to fall below 60% as of the most recent valuation date;
(f)
no Plan provides health or welfare benefits (through the purchase of insurance or otherwise) for any retired or former
employee of the Borrower or any of its ERISA Affiliates except to the extent required under Section 4980B of the Code, and except to the
extent such benefit could not reasonably be expected to result in a Material Adverse Effect;
(g)
assuming the assets of the Lenders do not constitute “plan assets” within the meaning of the United States
Department of Labor Regulations set forth in 29 C.F.R §2510.3-101 as modified by ERISA Section 3(42) (the “Plan Assets Regulation”) the
execution and delivery of this Agreement and the consummation of the transactions contemplated hereunder will not involve any transaction
that is subject to the prohibitions of Section 406 of ERISA or in connection with which taxes could be imposed pursuant to Section 4975(c)
(1)(A)-(D) of the Code;
(h)
except as could not reasonably be expected to result in a Material Adverse Effect, all liabilities under each Plan are
(i) funded to at least the minimum level required by law or, if higher, to the level required by the terms governing the Plans, (ii) insured with
a reputable insurance company, or (iii) (A) provided for or recognized in the financial statements most recently delivered to the
Administrative Agent and the Lenders pursuant hereto or (B) estimated in the formal notes to the financial statements most recently delivered
to the Administrative Agent and the Lenders pursuant hereto; and
(i)
(i) the Borrower is not and will not be a “plan” within the meaning of Section 4975(e) of the Code; (ii) the assets of
the Borrower do not and will not constitute “plan assets” within the meaning of the Plan Assets Regulation; (iii) the Borrower is not and will
not be a “governmental plan” within the meaning of Section 3(32) of ERISA; and (iv) transactions by or with the Borrower are not and will
not be subject to state statutes applicable to the Borrower regulating investments of fiduciaries with respect to governmental plans.
4.14
Investment Company Act; Other Regulations. No Loan Party is required to register as an “investment company” within
the meaning of the Investment Company Act of 1940, as amended. No Loan Party is subject to regulation under any Requirement of Law
(other than Regulation X of the Board) that limits its ability to incur Indebtedness or which may otherwise render all or any portion of the
Obligations unenforceable.
72
4.15
Subsidiaries.
(a)
Except as disclosed to the Administrative Agent by the Borrower in writing from time to time after the Closing Date,
(a) Schedule 4.15 to the Disclosure Letter sets forth the name and jurisdiction of organization of each Subsidiary of the Borrower and, as to
each such Subsidiary, the percentage of each class of Capital Stock owned by any Loan Party, and (b) there are no outstanding subscriptions,
options, warrants, calls, rights or other agreements or commitments (other than stock options or profits interests granted to employees,
officers, consultants or directors and directors’ qualifying shares) of any nature relating to any Capital Stock of any Group Member, except as
may be created by the Loan Documents.
(b)
definition thereof.
No Subsidiary which has been designated as an Immaterial Subsidiary fails to satisfy the limitations set forth in the
4.16
Use of Proceeds. The proceeds of the Revolving Loans, Swingline Loans and Letters of Credit shall be used to pay related
fees and expenses contemplated hereunder and for general corporate purposes (including Permitted Acquisitions).
4.17
Environmental Matters. Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect:
(a)
except as disclosed on Schedule 4.17 to the Disclosure Letter, the facilities and properties owned, leased or operated
by any Group Member (the “Properties”) do not contain, and have not previously contained, any Materials of Environmental Concern in
amounts or concentrations or under circumstances that constitute or have constituted a violation of, or could give rise to liability under, any
Environmental Law;
(b)
no Group Member has received or is aware of any notice of violation, alleged violation, non-compliance, liability or
potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the
business operated by any Group Member (the “Business”), nor does any Group Member have knowledge or reason to believe that any such
notice will be received or is being threatened;
(c)
no Group Member has transported or disposed of Materials of Environmental Concern from the Properties in
violation of, or in a manner or to a location that could give rise to liability under, any Environmental Law, nor has any Group Member
generated, treated, stored or disposed of Materials of Environmental Concern at, on or under any of the Properties in violation of, or in a
manner that could give rise to liability under, any applicable Environmental Law;
(d)
no judicial proceeding or governmental or administrative action is pending or, to the knowledge of any Group
Member, threatened, under any Environmental Law to which any Group Member is or will be named as a party with respect to the Properties
or the Business, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other
administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or the Business;
(e)
there has been no release or threat of release of Materials of Environmental Concern at or from the Properties arising
from or related to the operations of any Group Member or
73
otherwise in connection with the Business, in violation of or in amounts or in a manner that could reasonably be expected to give rise to
liability under Environmental Laws;
(f)
the Properties and all operations of the Group Members at the Properties are in compliance, and have in the last five
years been in compliance, with all applicable Environmental Laws, and except as set forth on Schedule 4.17 to the Disclosure Letter, to the
knowledge of the Borrower, there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to
the Properties or the Business; and
(g)
no Group Member has assumed any liability of any other Person under Environmental Laws.
4.18
Accuracy of Information, etc. No statement or information contained in this Agreement, any other Loan Document or any
other document, certificate or statement furnished by or on behalf of any Loan Party to the Administrative Agent or the Lenders, or any of
them, for use in connection with the transactions contemplated by this Agreement or the other Loan Documents, contained as of the date such
statement, information, document or certificate was so furnished, any untrue statement of a material fact or omitted to state a material fact
necessary to make the statements contained herein or therein not misleading in light of the circumstances under which such statement,
information, document or certificate was furnished. The projections contained in the materials referenced above are based upon good faith
estimates and assumptions believed by management of the Borrower to be reasonable at the time made, it being recognized by the Lenders
that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods
covered by such financial information may differ from the projected results set forth therein by a material amount. There is no fact known to
any Loan Party that could reasonably be expected to have a Material Adverse Effect that has not been expressly disclosed herein, in the other
Loan Documents or in any other documents, certificates and statements furnished to the Administrative Agent and the Lenders for use in
connection with the transactions contemplated hereby and by the other Loan Documents.
4.19
Security Documents.
(a)
The Guarantee and Collateral Agreement is effective to create in favor of the Administrative Agent, for the benefit of
the Secured Parties, a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof. In the case of the
Pledged Stock described in the Guarantee and Collateral Agreement that are securities represented by stock certificates or otherwise
constituting certificated securities within the meaning of Section 8-102(a)(15) of the UCC or the corresponding code or statute of any other
applicable jurisdiction (“Certificated Securities”), when certificates representing such Pledged Stock are delivered to the Administrative
Agent, and in the case of the other Collateral constituting personal property described in the Guarantee and Collateral Agreement, when
financing statements and other filings specified on Schedule 4.19(a) to the Disclosure Letter in appropriate form are filed in the offices
specified on Schedule 4.19(a) to the Disclosure Letter, the Administrative Agent, for the benefit of the Secured Parties, shall have a fully
perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in such Collateral and the proceeds thereof, as
security for the Obligations, in each case prior and superior in right to any other Person (except, in the case of Collateral other than Pledged
Stock, Liens permitted by Section 7.3). As of the Closing Date, none of the Capital Stock of any Group Member that is a limited liability
company or partnership has any Capital Stock that is a Certificated Security.
74
(b)
Each of the Mortgages delivered after the Closing Date will be, upon execution, effective to create in favor of the
Administrative Agent, for the benefit of the Secured Parties, a legal, valid and enforceable Lien on the Mortgaged Properties described
therein and proceeds thereof, and when the Mortgages are filed in the offices for the applicable jurisdictions in which the Mortgaged
Properties are located, each such Mortgage shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the
Loan Parties in the Mortgaged Properties and the proceeds thereof, as security for the Obligations (as defined in the relevant Mortgage), in
each case prior and superior in right to any other Person (subject only to Liens expressly permitted by Section 7.3).
4.20
Solvency; Voidable Transaction. Each Loan Party is, and after giving effect to the incurrence of all Indebtedness,
Obligations and obligations being incurred in connection herewith, will be and will continue to be, Solvent. No transfer of property is being
made by any Loan Party and no obligation is being incurred by any Loan Party in connection with the transactions contemplated by this
Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of such Loan Party.
4.21
Regulation H. No Mortgage encumbers improved real property that is located in an area that has been identified by the
Secretary of Housing and Urban Development as an area having special flood hazards and in which flood insurance has not been made
available under the National Flood Insurance Act of 1968.
4.22
Designated Senior Indebtedness. The Loan Documents and all of the Obligations have been deemed “Designated Senior
Indebtedness” or a similar concept thereto, if applicable, for purposes of any other Indebtedness of the Loan Parties.
4.23
[Reserved].
4.24
Insurance. All insurance maintained by the Loan Parties is in full force and effect, all premiums have been duly paid, no
Loan Party has received notice of violation or cancellation thereof, and there exists no default under any requirement of such insurance. Each
Loan Party maintains insurance with financially sound and reputable insurance companies on all its property in at least such amounts and
against at least such risks (but including in any event public liability, product liability, and business interruption) as are usually insured
against in the same general area by companies engaged in the same or a similar business.
4.25
No Casualty. No Loan Party has received any notice of, nor does any Loan Party have any knowledge of, the occurrence or
pendency or contemplation of any Casualty Event affecting all or any material portion of its property.
4.26
[Reserved].
4.27
[Reserved].
4.28 OFAC. No Group Member, nor, to the knowledge of any Group Member, any director, officer, employee, agent, affiliate or
representative thereof, is an individual or an entity that is, or is owned or controlled by an individual or entity that is (a) currently the subject
of any Sanctions, or (b) located, organized or resident in a Designated Jurisdiction.
75
4.29
Anti-Corruption Laws. Each Group Member has conducted its business in compliance in all material respects with
applicable anti-corruption laws and has instituted and maintained policies and procedures designed to promote and achieve compliance with
such laws.
SECTION 5
CONDITIONS PRECEDENT
5.1
Conditions to Initial Extension of Credit. The effectiveness of this Agreement and the obligation of each Lender to make
its initial extension of credit hereunder shall be subject to the satisfaction or waiver, prior to or concurrently with the making of such
extension of credit on the Closing Date, of the following conditions precedent:
(a)
Loan Documents. The Administrative Agent shall have received each of the following, each of which shall be in
form and substance satisfactory to the Administrative Agent:
(i)
this Agreement, executed and delivered by the Administrative Agent, the Borrower and each Lender listed
on Schedule 1.1A;
the Borrower;
Revolving Lender;
Swingline Lender;
(ii)
the Collateral Information Certificate and the Disclosure Letter, each executed by a Responsible Officer of
(iii)
if required by any Revolving Lender, a Revolving Loan Note executed by the Borrower in favor of such
(iv)
if required by the Swingline Lender, the Swingline Loan Note executed by the Borrower in favor of such
(v)
the Guarantee and Collateral Agreement, executed and delivered by each Grantor named therein;
(vi)
each Intellectual Property Security Agreement, executed by the applicable Grantor related thereto;
(vii)
each other Security Document required to be delivered on the Closing Date, executed and delivered by the
applicable Loan Party party thereto; and
i.the Flow of Funds Agreement, approved by the Borrower.
(b)
Financial Statements. The Administrative Agent shall have received the financial statements set forth in Section 4.1.
(c)
Approvals. Except for the Governmental Approvals described on Schedule 4.4 to the Disclosure Letter, all
Governmental Approvals and consents and approvals of, or notices to, any other Person (including the holders of any Capital Stock issued by
any Loan Party) required in connection with the execution and performance of the Loan Documents, and the consummation of the
transactions contemplated hereby, shall have been obtained and be in full force and effect.
(d)
Secretary’s or Managing Member’s Certificates; Certified Operating Documents; Good Standing Certificates. The
Administrative Agent shall have received (i) a certificate of each Loan Party, dated the Closing Date and executed by the Secretary,
Managing Member or equivalent officer of
76
such Loan Party, substantially in the form of Exhibit C, with appropriate insertions and attachments, including (A) the Operating Documents
of such Loan Party certified, in the case of formation documents, as of a recent date by the secretary of state or similar official of the relevant
jurisdiction of organization of such Loan Party, (B) the relevant board resolutions or written consents of such Loan Party adopted by such
Loan Party for the purposes of authorizing such Loan Party to enter into and perform the Loan Documents to which such Loan Party is party,
and (C) the names, titles, incumbency and signature specimens of those representatives of such Loan Party who have been authorized by such
resolutions and/or written consents to execute Loan Documents on behalf of such Loan Party, (ii) a long form good standing certificate for
each Loan Party from its respective jurisdiction of organization, and (iii) except as set forth in Section 5.3 certificates of foreign qualification
from each jurisdiction where the failure of a Loan Party to be qualified could reasonably be expected to have a Material Adverse Effect.
(e)
Responsible Officer’s Certificates.
(i)
The Administrative Agent shall have received a certificate signed by a Responsible Officer of the Borrower,
in form and substance reasonably satisfactory to it, either (A) attaching copies of all consents, licenses and approvals required in connection
with the execution, delivery and performance by such Loan Party and the validity against such Loan Party of the Loan Documents to which it
is party, and such consents, licenses and approvals shall be in full force and effect, or (B) stating that no such consents, licenses or approvals
are so required.
(ii)
The Administrative Agent shall have received a certificate signed by a Responsible Officer of the Borrower,
dated as of the Closing Date and in form and substance reasonably satisfactory to it, certifying (A) that the conditions specified in Sections
5.2(a) and (d) have been satisfied, and (B) that there has been no event or circumstance since the Closing Date, that has had or that could
reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect.
(f)
Patriot Act, etc. The Administrative Agent and each Lender shall have received, prior to the Closing Date, all
documentation and other information requested to comply with applicable “know your customer” and anti-money-laundering rules and
regulations, including the Patriot Act, and a properly completed and signed IRS Form W-8 or W-9, as applicable, for each Loan Party.
(g)
Due Diligence Investigation. The Administrative Agent shall have completed a due diligence investigation of the
Group Members in scope, and with results, satisfactory to the Administrative Agent and shall have been given such access to the
management, records, books of account, contracts and properties of the Group Members and shall have received such financial, business and
other information regarding each of the foregoing Persons and businesses as it shall have requested.
(h)
Reports. The Administrative Agent shall have received, in form and substance satisfactory to it, all asset appraisals,
field audits, and such other reports and certifications, as it has reasonably requested.
(i)
(j)
[Reserved].
Collateral Matters.
Lien Searches. The Administrative Agent shall have received the results of recent lien, judgment and
litigation searches in each of the jurisdictions reasonably required by the Administrative Agent, and such searches shall reveal no Liens on
any of the assets of the Loan Parties except for Liens permitted by Section 7.3, or Liens to be discharged on or prior to the Closing Date.
(i)
77
(ii)
Pledged Stock; Stock Powers; Pledged Notes. Except as set forth in Section 5.3, the Administrative Agent
shall have received (A) the certificates, if any, representing the shares of Capital Stock pledged to the Administrative Agent (for the benefit of
the Secured Parties) pursuant to the Guarantee and Collateral Agreement, together with an undated stock power for each such certificate
executed in blank by a duly authorized officer of the pledgor thereof, and (B) each promissory note (if any) pledged to the Administrative
Agent (for the benefit of the Secured Parties) pursuant to the Guarantee and Collateral Agreement, endorsed (without recourse) in blank (or
accompanied by an executed transfer form in blank) by the pledgor thereof.
(iii)
Filings, Registrations, Recordings, Agreements, Etc. Except as set forth in Section 5.3, each document
(including any UCC financing statements, Intellectual Property Security Agreements, Control Agreements and landlord access agreements
and/or bailee waivers) required by the Security Documents or under law or reasonably requested by the Administrative Agent to be filed,
registered or recorded to create in favor of the Administrative Agent (for the benefit of the Secured Parties), a perfected Lien on the
Collateral described therein, prior and superior in right and priority to any Lien in the Collateral held by any other Person (other than with
respect to Liens expressly permitted by Section 7.3), shall have been executed and delivered to the Administrative Agent or, as applicable, be
in proper form for filing, registration or recordation.
(k)
Insurance. Except as set forth in Section 5.3, the Administrative Agent shall have received insurance certificates and
endorsements satisfying the requirements of Section 6.6 hereof and Section 5.2(b) of the Guarantee and Collateral Agreement, in form and
substance satisfactory to the Administrative Agent.
(l)
Fees. The Lenders and the Administrative Agent shall have received all fees required to be paid on or prior to the
Closing Date (including pursuant to the Fee Letter), and all reasonable and documented fees and expenses for which invoices have been
presented at least 1 Business Day prior to the Closing Date (including the reasonable and documented fees and expenses of legal counsel to
the Administrative Agent) for payment on or before the Closing Date.
(m)
Legal Opinions. The Administrative Agent shall have received the executed legal opinion of Cooley LLP, counsel to
the Loan Parties, in form and substance reasonably satisfactory to the Administrative Agent.
Borrowing Notices. The Administrative Agent shall have received, in respect of any Revolving Loans to be made on
the Closing Date, a completed Notice of Borrowing executed by the Borrower and otherwise complying with the requirements of Section 2.5.
(n)
(o)
officer or treasurer of the Borrower.
Solvency Certificate. The Administrative Agent shall have received a Solvency Certificate from the chief financial
(p)
No Material Adverse Effect. There shall not have occurred since the Closing Date, any event or condition that has
had or could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.
(q)
No Litigation. Except as disclosed on Schedule 4.6 to the Disclosure Letter, no litigation, investigation or proceeding
of or before any arbitrator or Governmental Authority is pending or, to the knowledge of any Group Member, threatened, that could
reasonably be expected to have a Material Adverse Effect.
78
For purposes of determining compliance with the conditions specified in this Section 5.1, each Lender that has executed this
Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent (or
made available) by the Administrative Agent to such Lender for consent, approval, acceptance or satisfaction, or required thereunder to be
consented to or approved by or acceptable or satisfactory to such Lender, unless an officer of the Administrative Agent responsible for the
transactions contemplated by the Loan Documents shall have received notice from such Lender prior to the Closing Date specifying such
Lender’s objection thereto and either such objection shall not have been withdrawn by notice to the Administrative Agent to that effect on or
prior to the Closing Date or, if any extension of credit on the Closing Date has been requested, such Lender shall not have made available to
the Administrative Agent on or prior to the Closing Date such Lender’s Revolving Percentage of such requested extension of credit.
5.2
Conditions to Each Extension of Credit. The agreement of each Lender to make any extension of credit requested to be
made by it on any date (including its initial extension of credit but excluding any Revolving Loan Conversion and any conversion of Loans
pursuant to Section 2.13) is subject to the satisfaction of the following conditions precedent:
(a)
Representations and Warranties. Each of the representations and warranties made by each Loan Party in or pursuant
to any Loan Document (i) that is qualified by materiality shall be true and correct, and (ii) that is not qualified by materiality, shall be true
and correct in all material respects, in each case, on and as of such date as if made on and as of such date, except to the extent any such
representation and warranty expressly relates to an earlier date, in which case such representation and warranty shall have been true and
correct in all material respects (or all respects, as applicable) as of such earlier date, subject to the limitations set forth in Section 2.27.
(b)
Availability. With respect to any requests for any Revolving Extensions of Credit, after giving effect to such
Revolving Extension of Credit, the availability and borrowing limitations specified in Section 2.4 shall be complied with.
(c)
Notices of Borrowing. The Administrative Agent shall have received a Notice of Borrowing in connection with any
such request for extension of credit which complies with the requirements hereof.
(d)
No Default. No Default or Event of Default shall have occurred and be continuing as of or on such date or after
giving effect to the extensions of credit requested to be made on such date and the use of proceeds thereof (other than in connection with
Limited Condition Acquisitions as set forth in Section 2.27, in which case there shall be (i) no Default or Event of Default as of the LCA Test
Date and (ii) no Event of Default under Section 8.1(a) or (f) as of or on the date of such Revolving Extension of Credit or after giving effect
to the extensions of credit requested to be made on such date and the use of proceeds thereof).
(e)
Pro Forma Covenant Compliance. Immediately after giving pro forma effect to such extension of credit and the use
of proceeds thereof, the Borrower shall be in compliance with the financial covenants set forth in Section 7.1 hereof as of the end of the most
recently ended fiscal quarter for which financial statements were required to be delivered prior to the date of such extension of credit
(provided that, in the case of an extension of credit to finance a Limited Condition Acquisition in accordance with Section 2.27, such
calculation shall be made in compliance with Section 1.4) .
79
Each borrowing by and issuance of a Letter of Credit on behalf of the Borrower hereunder and each Revolving Loan Conversion
shall constitute a representation and warranty by the Borrower as of the date of such extension of credit, or Revolving Loan
Conversion, as applicable, that the conditions contained in this Section 5.2 have been satisfied.
5.3
Post-Closing Obligations. The Borrower shall satisfy each of the below to the reasonable satisfaction of the Administrative
Agent, in each case, by no later than the date specified for such condition below (or such later date as the Administrative Agent shall agree in
its sole discretion):
(a)
within 10 Business Days after the Closing Date, the Administrative Agent shall have received a certificate that the
Borrower is qualified to do business as a foreign entity issued by the Office of the Secretary of State of California;
(b)
within 30 days after the Closing Date, the Administrative Agent shall have received certificates (i) representing 66%
of the Capital Stock of Stitch Fix UK, LTD, and (ii) representing 66% of the Capital Stock of Stitch Fix International (Delaware), Inc.,
together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof;
(c)
within 30 days after the Closing Date, the Administrative Agent shall have received insurance certificates and
endorsements satisfying the requirements of Section 6.6 hereof and Section 5.2(b) of the Guarantee and Collateral Agreement, in form and
substance satisfactory to the Administrative Agent;
(d)
within 60 days after the Closing Date, the Administrative Agent shall have received each Control Agreement with
respect to each Deposit Account and Securities Account of the Loan Parties (other than to the extent constituting an Excluded Account (as
defined in the Guarantee and Collateral Agreement)); and
(e)
within 60 days after the Closing Date, the Borrower shall have used commercially reasonable efforts to obtain a
landlord’s agreement or bailee waiver, as applicable, for its corporate headquarters and each other location where Collateral having a value in
excess of $5,000,000 is stored or located, each in form and substance satisfactory to the Administrative Agent.
SECTION 6
AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, at all times prior to the Discharge of Obligations, each of the Loan Parties shall, and, where
applicable, shall cause each of its Subsidiaries to:
6.1
Financial Statements. Furnish to the Administrative Agent for distribution to each Lender:
(a)
as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the
audited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such fiscal year and the related audited
consolidated statements of income and of cash flows for such fiscal year, setting forth in each case in comparative form the figures for the
previous year, reported on without a “going concern” or like qualification or exception (other than a “going concern” or like qualification or
exception solely as a result of the final maturity date of any Loan being scheduled to occur within 12 months from the date of such opinion),
or qualification arising
80
out of the scope of the audit, by Deloitte or other independent certified public accountants of nationally recognized standing and reasonably
acceptable to the Administrative Agent; and
(b)
as soon as available, but in any event within 45 days after the end of the first three fiscal quarters and 60 days after
the end of the fourth fiscal quarter of each fiscal year of the Borrower, the unaudited consolidated balance sheet of the Borrower and its
consolidated Subsidiaries as at the end of such fiscal quarter and the related unaudited consolidated statements of income and of cash flows
for such fiscal quarter and the portion of the fiscal year through the end of such fiscal quarter, setting forth in each case in comparative form
the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects.
All such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in
accordance with GAAP (except in the case of interim statements for the absence of footnotes and normal year-end adjustments) applied
(except as approved by such accountants or officer, as the case may be, and disclosed in reasonable detail therein) consistently throughout the
periods reflected therein and with prior periods.
Additionally, documents required to be delivered pursuant to this Section 6.1 and Section 6.2(e) (to the extent any such documents are
included in materials otherwise filed with the SEC) may be delivered electronically and, shall be deemed to have been delivered on the date
on which the Borrower posts such documents, or provides a link thereto, either: (i) on the Borrower’s website on the Internet at the website
address listed in Section 10.2; (ii) when such documents are posted electronically on the Borrower’s behalf on an internet or intranet website
to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the
Administrative Agent), if any; or (iii) on which the Borrower files such documents with the SEC and such documents are publicly available
on the SEC’s EDGAR filing system or any successor thereto, if any; provided that, (A) the Borrower shall deliver paper copies of such
documents to the Administrative Agent or any Lender upon its request to the Borrower to deliver such paper copies until written request to
cease delivering paper copies is given by the Administrative Agent or such Lender and (B) the Borrower shall notify (which may be by
facsimile or electronic mail) the Administrative Agent and each Lender of the posting of any such documents. The Administrative Agent
shall have no obligation to request the delivery of or to maintain paper copies of the documents referred to above, and in any event shall have
no responsibility to monitor compliance by the Borrower with any such request by a Lender for delivery, and each Lender shall be solely
responsible for requesting delivery to it or maintaining its copies of such documents.
6.2
Certificates; Reports; Other Information. Furnish to the Administrative Agent, for distribution to each Lender:
(a)
[reserved];
(b)
concurrently with the delivery of any financial statements pursuant to Section 6.1, (i) a certificate of a Responsible
Officer of the Borrower stating that, to the best of such Responsible Officer’s knowledge, each Loan Party during such period has observed
or performed all of its covenants and other agreements, and satisfied every condition contained in this Agreement and the other Loan
Documents to which it is a party to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of
any Default or Event of Default except as specified in such certificate, (ii) (x) a Compliance Certificate containing all information and
calculations necessary for determining compliance by each Loan Party with the provisions of this Agreement referred to therein as of the last
day of the applicable fiscal quarter of the Borrower, (y) monthly perpetual inventory reports for
81
Inventory valued on a specific identification basis at the lower of cost or market (in accordance with GAAP) or such other inventory reports
as are requested by the Administrative Agent in its good faith business judgment, as of the end of each fiscal month included in each fiscal
quarter and (z) to the extent not previously disclosed to the Administrative Agent, a description of any change in the jurisdiction of
organization of any Loan Party and a list of any registered Intellectual Property issued to, applied for, or acquired by any Loan Party since the
date of the most recent report delivered pursuant to this clause (z) (or, in the case of the first such report so delivered, since the Closing Date),
and (iii) in the case of financial statements delivered pursuant to Section 6.1(a), updated insurance certificates evidencing the insurance
coverage required to be maintained pursuant to Section 6.6;
(c)
as soon as available, and in any event no later than 45 days after the end of each fiscal year of the Borrower, a
detailed consolidated board of director approved operating budget for the following fiscal year (including a projected consolidated balance
sheet of the Borrower and its Subsidiaries as of the end of each fiscal quarter of such fiscal year, the related consolidated statements of
projected cash flow, projected changes in financial position and projected income and a description of the underlying assumptions applicable
thereto), and, as soon as available, material revisions, if any, of such operating budget and projections with respect to such fiscal year
(collectively, the “Projections”), which Projections shall in each case be accompanied by a certificate of a Responsible Officer of the
Borrower stating that such Projections are based on reasonable estimates, information and assumptions and that such Responsible Officer has
no reason to believe that such Projections are incorrect or misleading in any material respect;
(d)
promptly, and in any event within 10 Business Days after receipt thereof by any Group Member, copies of each
notice or other correspondence received from the SEC (or comparable agency in any applicable non-U.S. jurisdiction) concerning any
investigation or possible investigation by such agency regarding financial or other operational results of any Group Member (other than
routine comment letters from the staff of the SEC relating to the Borrower’s filings with the SEC);
(e)
within 5 days after the same are sent, copies of each annual report, proxy or financial statement or other material
report that any Group Member sends to the holders of any class of its Indebtedness or public equity securities and, within 5 days after the
same are filed, copies of all annual, regular, periodic and special reports and registration statements which the Borrower may file with the
SEC under Section 13 or 15(d) of the Exchange Act, or with any national securities exchange, and not otherwise required to be delivered to
the Administrative Agent pursuant hereto;
(f)
upon reasonable request by the Administrative Agent, within 5 days after the same are sent or received, copies of all
correspondence, reports, documents and other filings with any Governmental Authority regarding compliance with or maintenance of
Governmental Approvals or Requirements of Law or that could reasonably be expected to have a Material Adverse Effect on any of the
Governmental Approvals or otherwise on the operations of the Group Members; and
(g)
promptly, such additional other information regarding the operations, business affairs and financial condition of the
Group Members, or compliance with the terms of the Loan Documents as the Administrative Agent may from time to time reasonably
request.
6.3
6.4
[Reserved].
Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent (after
giving effect to any extensions granted or grace periods in effect), as
82
the case may be, all its material obligations of whatever nature, except where the amount or validity thereof is currently being contested in
good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the
relevant Group Member.
6.5
Maintenance of Existence; Compliance. (a)(i) Preserve, renew and keep in full force and effect its organizational existence
and (ii) take all reasonable action to maintain or obtain all Governmental Approvals and all other rights, privileges and franchises necessary
or desirable in the normal conduct of its business or necessary for the performance by such Person of its Obligations under any Loan
Document, except, in each case, as otherwise permitted by Section 7.4 and except, in the case of clause (ii) above, to the extent that failure to
do so could not reasonably be expected to have a Material Adverse Effect; (b) comply with all Contractual Obligations (including with
respect to leasehold interests of the Borrower) and Requirements of Law except to the extent that failure to comply therewith could not, in the
aggregate, reasonably be expected to have a Material Adverse Effect; and (c) comply with all Governmental Approvals, and any term,
condition, rule, filing or fee obligation, or other requirement related thereto, except to the extent that failure to do so could not reasonably be
expected to have a Material Adverse Effect. Without limiting the generality of the foregoing, the Borrower shall, and shall cause each of its
ERISA Affiliates to: (1) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code or other
Federal or state law; (2) cause each Qualified Plan to maintain its qualified status under Section 401(a) of the Code; (3) make all required
material contributions to any Plan; and (4) not become a party to any Multiemployer Plan.
6.6
Maintenance of Property; Insurance. (a) Keep all property useful and necessary in its business in good working order and
condition, ordinary wear and tear and casualty excepted, (b) maintain with financially sound and reputable insurance companies insurance on
all its property in at least such amounts and against at least such risks (but including in any event public liability, product liability and
business interruption) as are usually insured against in the same general area by companies engaged in the same or a similar business, and (c)
maintain flood insurance on all real property subject to a Mortgage as required under Section 6.12(b).
6.7
Books and Records; Discussions. (a) Keep proper books of records and account in which full, true and correct entries in
conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities
and (b) permit representatives and independent contractors of the Administrative Agent (who may be accompanied by any Lender) to visit
and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as
may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Group Members with
officers, directors and employees of the Group Members and with their independent certified public accountants; provided that (i) such
inspections shall not be undertaken more frequently than once every 12 months unless an Event of Default has occurred and is continuing,
and (ii) nothing in this Section 6.7 shall require any Group Member to take any action that would violate a confidentiality agreement (to the
extent not created in contemplation of such Group Member’s obligations hereunder) or waive any attorney-client or similar privilege (to the
extent not created in contemplation of such Group Member’s obligations hereunder) of such Group Member.
6.8
Notices. Give prompt written notice to the Administrative Agent of:
(a)
the occurrence of any Default or Event of Default;
83
(b)
any (i) default or event of default under any Contractual Obligation of any Group Member or (ii) litigation,
investigation or proceeding that may exist at any time between any Group Member and any Governmental Authority, that in either case, if
not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect;
(c)
any litigation or proceeding affecting any Group Member (i) in which the amount involved is $1,000,000 or more
and not covered by insurance, (ii) in which injunctive or similar relief is sought against any Group Member which, if granted, could
reasonably be expected to have a Material Adverse Effect, or (iii) which relates to any Loan Document;
(d)
(i) promptly after the Borrower has knowledge or becomes aware of the occurrence of any of the following ERISA
Events affecting the Borrower or any ERISA Affiliate (but in no event more than 10 days after such event), the occurrence of any of the
following ERISA Events, and shall provide the Administrative Agent with a copy of any notice with respect to such event that may be
required to be filed with a Governmental Authority and any notice delivered by a Governmental Authority to the Borrower or any ERISA
Affiliate with respect to such event: (A) an ERISA Event, (B) the adoption of any new Pension Plan by the Borrower or any ERISA Affiliate,
(C) the adoption of any amendment to a Pension Plan, if such amendment will result in a material increase in contribution obligations or
unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA), or (D) the commencement of contributions by the Borrower or any
ERISA Affiliate to any Plan that is subject to Title IV of ERISA or Section 412 of the Code; and
(ii) (A) promptly after request from the Administrative Agent, copies of each Schedule B (Actuarial Information)
to the annual report (Form 5500 Series) filed by the Borrower or any of its ERISA Affiliates with the IRS with respect to each Pension Plan
and such other documents or governmental reports or filings relating to any Pension Plan or Multiemployer Plan as the Administrative Agent
shall reasonably request, and (B) promptly after the giving, sending or filing thereof, or the receipt thereof, copies of all notices received by
the Borrower or any of its ERISA Affiliates from a Multiemployer Plan sponsor concerning an ERISA Event;
(e)
unless a Loan Party is a public company or an issuer of securities that are registered with the SEC under Section 12
of the Exchange Act or that is required to file reports under Section 15(d) of the Exchange Act, any changes to the beneficial ownership
information set forth in item 37 of the Collateral Information Certificate in the event that (A) any individual shall become the owner, directly
or indirectly, of 25% or more of the equity interests of the Borrower or (B) the individual identified in Section 37 of the Collateral
Information Certificate delivered on the Closing Date shall no longer be an individual with significant responsibility for managing the Group
Members. The Loan Parties understand and acknowledge that the Secured Parties rely on such true, accurate and up-to-date beneficial
ownership information to meet their regulatory obligations to obtain, verify and record information about the beneficial owners of their legal
entity customers;
(f)
(g)
[reserved]; and
any development or event that has had or could reasonably be expected to have a Material Adverse Effect.
Each notice pursuant to this Section 6.8 shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth
details of the occurrence referred to therein and stating what action the relevant Group Member proposes to take with respect thereto.
84
6.9
Environmental Laws.
(a)
Except as could not reasonably be expected to result in a Material Adverse Effect, comply with, and ensure
compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws, and obtain and comply with and maintain, and
ensure that all tenants and subtenants obtain and comply with and maintain, any and all licenses, approvals, notifications, registrations or
permits required by applicable Environmental Laws.
(b)
Except as could not reasonably be expected to result in a Material Adverse Effect, conduct and complete all
investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly
comply with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws.
6.10 Operating Accounts. Unless the Borrower and the Administrative Agent otherwise agree, at all times after the date that is
180 days after the Closing Date, the Borrower and its Domestic Subsidiaries shall migrate their operating, depository and securities accounts
to one or more Lenders or Affiliates thereof in accordance with the terms and conditions separately agreed between the Administrative Agent
and the Borrower.
6.11
Audits. At reasonable times, on 5 Business Day’s’ notice (provided that no notice is required if an Event of Default has
occurred and is continuing), the Administrative Agent, or its agents or independent contractors, shall have the right to inspect the Collateral
and the right to audit and copy any and all of any Loan Party’s books and records including ledgers, federal and state tax returns, records
regarding assets or liabilities, the Collateral, business operations or financial condition, and all computer programs or storage or any
equipment containing such information. The foregoing inspections and audits shall be at the Borrower’s expense, and the charge therefor
shall be $1,000 per person per day (or such higher amount as shall represent the Administrative Agent’s then-current standard charge for the
same), plus reasonable out-of-pocket expenses. Such inspections and audits shall not be undertaken more frequently than once every 12
months, unless an Event of Default has occurred and is continuing.
6.12
Additional Collateral, Etc.
(a)
With respect to any property (to the extent included in the definition of Collateral) acquired after the Closing Date by
any Loan Party (other than (x) any property described in paragraph (b), (c) or (d) below, and (y) any property subject to a Lien expressly
permitted by Section 7.3(g)) as to which the Administrative Agent, for the benefit of the Secured Parties, does not have a perfected Lien,
promptly (and in any event within 10 Business Days or such later date as the Administrative Agent may agree in its sole discretion) take all
actions necessary or advisable in the opinion of the Administrative Agent to grant to the Administrative Agent, for the benefit of the Secured
Parties, a perfected first priority (except as expressly permitted by Section 7.3) security interest and Lien in such property, including the filing
of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by
law or as may be requested by the Administrative Agent.
(b)
With respect to any fee interest in any real property having a fair market value (together with improvements thereof)
of at least $5,000,000 (or such other amount as approved in writing by the Administrative Agent in its sole discretion) acquired after the
Closing Date by any Loan Party (other than any such real property subject to a Lien expressly permitted by Section 7.3(g)), promptly (and in
any event within 60 days (or such longer time period as the Administrative Agent may agree in its sole
85
discretion)) after such acquisition, to the extent requested by the Administrative Agent, (i) execute and deliver a first priority Mortgage, in
favor of the Administrative Agent, for the benefit of the Secured Parties, covering such real property, (ii) if requested by the Administrative
Agent, provide the Lenders with title and extended coverage insurance covering such real property in an amount not in excess of the fair
market value as reasonably estimated by the Borrower as well as a current ALTA survey thereof, together with a surveyor’s certificate, each
of the foregoing in form and substance reasonably satisfactory to the Administrative Agent and (iii) if requested by the Administrative Agent,
deliver to the Administrative Agent legal opinions relating to the matters described above, which opinions shall be in form and substance,
and from counsel, reasonably satisfactory to the Administrative Agent. In connection with the foregoing, no later than 5 Business Days prior
to the date on which a Mortgage is executed and delivered pursuant to this Section 6.12, in order to comply with the Flood Laws, the
Administrative Agent (for delivery to each Lender) shall have received the following documents (collectively, the “Flood Documents”): (A)
a completed standard “life of loan” flood hazard determination form (a “Flood Determination Form”) and such other documents as any
Lender may reasonably request to complete its flood due diligence, (B) if the improvement(s) to the applicable improved real property is
located in a special flood hazard area, a notification to the applicable Loan Party (if applicable) (“Loan Party Notice”) that flood insurance
coverage under the National Flood Insurance Program (“NFIP”) is not available because the community does not participate in the NFIP, (C)
documentation evidencing the applicable Loan Party’s receipt of any such Loan Party Notice (e.g., countersigned Loan Party Notice, return
receipt of certified U.S. Mail, or overnight delivery), and (D) if the Loan Party Notice is required to be given and, to the extent flood
insurance is required by any applicable Requirement of Law or any Lenders’ written regulatory or compliance procedures and flood
insurance is available in the community in which the property is located, a copy of one of the following: the flood insurance policy, the
applicable Loan Party’s application for a flood insurance policy plus proof of premium payment, a declaration page confirming that flood
insurance has been issued, or such other evidence of flood insurance that complies with all applicable laws and regulations reasonably
satisfactory to the Administrative Agent and each Lender (any of the foregoing being “Evidence of Flood Insurance”). Notwithstanding
anything contained herein to the contrary, no Mortgage will be executed and delivered until each Lender has confirmed to the Administrative
Agent that such Lender has satisfactorily completed its flood insurance due diligence and compliance requirements.
(c)
With respect to any Subsidiary (other than an Excluded Subsidiary) created or acquired after the Closing Date by any
Loan Party (including pursuant to a Permitted Acquisition), or any new Subsidiary formed by Division or if an Excluded Subsidiary ceases to
qualify as an Excluded Subsidiary, the Loan Parties shall, except to the extent compliance with this Section 6.12 is prohibited by existing
Contractual Obligations (so long as such prohibition is not incurred in contemplation of such acquisition or the obligations hereunder) or
Requirements of Law binding on such Subsidiary or its properties, promptly (i) execute and deliver to the Administrative Agent such
amendments to the Guarantee and Collateral Agreement as the Administrative Agent reasonably deems necessary or advisable to grant to the
Administrative Agent, for the benefit of the Secured Parties, a perfected first priority security interest in the Capital Stock of such Subsidiary
that is owned directly by such Loan Party, (ii) deliver to the Administrative Agent such documents and instruments as may be required to
grant, perfect, protect and ensure the priority of such security interest, including but not limited to, the certificates representing such Capital
Stock (if applicable), together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the relevant Loan
Party, (iii) cause such Subsidiary (A) to become a party to the Guarantee and Collateral Agreement, (B) to take such actions as are necessary
or advisable in the opinion of the Administrative Agent to grant to the Administrative Agent for the benefit of the Secured Parties a perfected
first priority security interest in the Collateral described in the Guarantee and Collateral Agreement, with respect to such Subsidiary,
including the filing of Uniform
86
Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as
may be reasonably requested by the Administrative Agent and (C) to deliver to the Administrative Agent a certificate of such Subsidiary, in a
form reasonably satisfactory to the Administrative Agent, with appropriate insertions and attachments, and (iv) if requested by the
Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described above, which opinions shall be in
form and substance, and from counsel, reasonably satisfactory to the Administrative Agent; it being agreed that if such new Subsidiary is
formed by a Division, the foregoing requirements shall be satisfied concurrently with the formation of such Subsidiary.
(d)
With respect to any direct Foreign Subsidiary or FSHCO that is not an Immaterial Subsidiary created or acquired
after the Closing Date by any Loan Party or if such Foreign Subsidiary or FSHCO ceases to qualify as an Immaterial Subsidiary, then, except
to the extent compliance with this Section 6.12 is prohibited by existing Contractual Obligations (so long as such prohibition is not incurred
in contemplation of such acquisition or the obligation hereunder) or Requirements of Law binding on such Subsidiary of its properties,
promptly (i) execute and deliver to the Administrative Agent such amendments to the Guarantee and Collateral Agreement, as the
Administrative Agent deems necessary or advisable to grant to the Administrative Agent, for the benefit of the Secured Parties, a perfected
first priority security interest in the Capital Stock of such Foreign Subsidiary or FSHCO that is directly owned by any such Loan Party
(provided that in no event shall more than 66% of the total outstanding voting Capital Stock of any such Foreign Subsidiary or FSHCO be
required to be so pledged), (ii) deliver to the Administrative Agent the certificates representing such Capital Stock (if certificated), together
with undated stock powers, in blank, executed and delivered by a duly authorized officer of the relevant Loan Party, and take such other
action (including, as applicable, the delivery of any foreign law pledge documents reasonably requested by the Administrative Agent) as may
be necessary or, in the opinion of the Administrative Agent, desirable to perfect the Administrative Agent’s security interest therein, and (iii)
if reasonably requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described
above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent.
(e)
At the request of the Administrative Agent, each Loan Party shall use commercially reasonable efforts to obtain a
landlord’s agreement or bailee letter, as applicable, from the lessor of each leased property or bailee with respect to any warehouse, processor
or converter facility or other location where Collateral having a value in excess of $5,000,000 is stored or located, which agreement or letter
shall contain a waiver or subordination of all Liens or claims that the landlord or bailee may assert against the Collateral at that location, and
shall otherwise be reasonably satisfactory in form and substance to the Administrative Agent. After the Closing Date, no Collateral having a
value in excess of $5,000,000 shall be stored at any location leased by any Loan Party and no Collateral having a value in excess of
$5,000,000 shall be shipped to a processor or converter under arrangements established after the Closing Date without the prior written
consent of the Administrative Agent unless and until the Borrower shall have used commercially reasonable efforts to obtain a reasonably
satisfactory landlord agreement or bailee letter, as appropriate, with respect to such location. Each Loan Party shall pay and perform its
material obligations under all leases and other agreements with respect to each leased location, warehouse or processing center where any
Collateral is or may be located.
6.13
Use of Proceeds. Use the proceeds of each credit extension only for the purposes specified in Section 4.16.
87
6.14
Designated Senior Indebtedness. Cause the Loan Documents and all of the Obligations to be deemed “Designated Senior
Indebtedness” or a similar concept thereto, if applicable, for purposes of any Indebtedness of the Loan Parties.
6.15
Anti-Corruption Laws. Conduct its business in compliance in all material respects with all applicable anti-corruption laws
and maintain policies and procedures designed to promote and achieve compliance with such laws.
6.16
Further Assurances. Execute any further instruments and take such further action as the Administrative Agent reasonably
deems necessary to perfect, protect, ensure the priority of or continue the Administrative Agent’s Lien on the Collateral or to effect the
purposes of this Agreement.
SECTION 7
NEGATIVE COVENANTS
The Borrower hereby agrees that, at all times prior to the Discharge of Obligations, no Loan Party shall, nor shall any Loan Party
permit any of its respective Subsidiaries to, directly or indirectly:
7.1
Financial Condition Covenants.
(a)
Free Cash Flow. Permit the Free Cash Flow for any trailing 12 month period ending on the last day of any fiscal
quarter of the Borrower set forth below to be less than the amount set forth below opposite such fiscal quarter:
Fiscal Quarter Ending
July 31, 2020
October 31, 2020
January 31, 2021
April 30, 2021
July 31, 2021
Free Cash Flow
$(30,000,000)
$(40,000,000)
$(50,000,000)
$(20,000,000)
$(20,000,000)
(b)
Adjusted Current Ratio. Permit the Adjusted Current Ratio of the Borrower and its consolidated Subsidiaries, as of
the last day of any fiscal quarter of the Borrower to be less than 1.15:1.00.
7.2
Indebtedness. Create, issue, incur, assume, become liable in respect of or suffer to exist any Indebtedness, except:
(a)
Indebtedness of any Loan Party pursuant to any Loan Document and under any Cash Management Agreement;
(b)
Indebtedness of (i) any Loan Party owing to any other Loan Party; (ii) any Group Member (which is not a Loan
Party) owing to any other Group Member (which is not a Loan Party); (iii) any Group Member (which is not a Loan Party) owing to any
Loan Party, which constitutes an Investment permitted by Section 7.8(f)(iii); provided, that, such Indebtedness owing from any Group
Member which is not a Loan Party to a Loan Party (other than to the extent such Indebtedness constitutes an Investment permitted by Section
7.8(f)(iii)(B)) shall be evidenced by a promissory note and such promissory note
88
shall be pledged as Collateral; and (iv) any Loan Party owing to any Group Member (which is not a Loan Party); provided that such
Indebtedness is subordinated to the Obligations on terms and conditions reasonably acceptable to the Administrative Agent;
(c)
Guarantee Obligations (i) of any Loan Party of the Indebtedness of any other Loan Party; (ii) of any Group Member
(which is not a Loan Party) of the Indebtedness of any Loan Party; (iii) by any Group Member (which is not a Loan Party) of the
Indebtedness of any other Group Member (which is not a Loan Party) or (iv) of any Loan Party of the Indebtedness of any Group Member
that is not a Loan Party, so long as the aggregate amount of such Guarantee Obligations is an Investment permitted by Section 7.8(f)(iii);
provided that, in any case of clauses (i), (ii), (iii) or (iv), the underlying Indebtedness so guaranteed is otherwise permitted by the terms
hereof;
(d)
Indebtedness outstanding on the date hereof and listed on Schedule 7.2(d) to the Disclosure Letter and any
refinancings, refundings, renewals or extensions thereof (which do not shorten the maturity thereof or increase the principal amount thereof,
except by an amount equal to a reasonable premium and other fees and expenses reasonably incurred in connection therewith);
(e)
Indebtedness (including, without limitation, Capital Lease Obligations and purchase money financing) secured by
Liens permitted by Section 7.3(g) in an aggregate principal amount not to exceed $34,000,000 (or such greater amount as the Administrative
Agent may agree in its sole discretion) (of which non-robotic equipment may be financed in an amount of up to $10,000,000 (or such greater
amount as the Administrative Agent may agree in its sole discretion)) at any one time outstanding and any refinancings, refundings, renewals
or extensions thereof (which do not shorten the maturity thereof or increase the principal amount thereof, except by an amount equal to a
reasonable premium and other fees and expenses reasonably incurred in connection therewith);
(f)
Subordinated Indebtedness in an aggregate principal amount not to exceed $5,000,000 at any time outstanding;
(g)
Surety Indebtedness and any other Indebtedness in respect of letters of credit, banker’s acceptances, bank guarantees
or similar arrangements, provided that the aggregate principal amount of any such Indebtedness outstanding at any time shall not exceed
$10,000,000;
(h)
unsecured Indebtedness of the Group Members in an aggregate principal amount, for all such Indebtedness taken
together, not to exceed $10,000,000 at any one time outstanding;
(i)
obligations (contingent or otherwise) of the Group Members existing or arising under any Specified Swap
Agreement, provided that such obligations are (or were) entered into by such Person in accordance with Section 7.13 and not for purposes of
speculation;
(j)
Indebtedness of a Person (other than a Loan Party or an existing Subsidiary) existing at the time such Person is
merged with or into a Loan Party or a Subsidiary or becomes a Subsidiary, provided that (i) such Indebtedness was not, in any case, incurred
by such other Person in connection with, or in contemplation of, such merger or acquisition, (ii) such merger or acquisition constitutes a
Permitted Acquisition, (iii) with respect to any such Person who becomes a Subsidiary, (A) such Subsidiary and any of its Subsidiaries are
the only obligors in respect of such Indebtedness, and (B) to the extent such Indebtedness is permitted to be secured hereunder, only the
assets of such Subsidiary and any of its Subsidiaries secure such Indebtedness, and (iv) the aggregate amount of such Indebtedness does not
exceed $10,000,000 in the aggregate;
89
(k)
Indebtedness incurred as a result of endorsing negotiable instruments received in the ordinary course of business;
(l)
Indebtedness in the form of purchase price adjustments, earn outs, deferred compensation, or other arrangements
representing acquisition consideration or deferred payments of a similar nature incurred in connection with Investments permitted by Section
7.8; provided that the amount of such obligation shall be deemed part of the cost of such Investment (the amount of which shall be deemed to
be the amount required to be accrued as a liability in accordance with GAAP or the amount actually paid);
(m)
Indebtedness consisting of the financing of insurance premiums;
(n)
(o)
Indebtedness incurred with corporate credit cards in the ordinary course of business;
Indebtedness consisting of tenant improvement loans in an outstanding principal amount not to exceed $15,000,000
(or such greater amount as may be approved in writing by the Administrative Agent in its sole discretion) in the aggregate at any time; and
(p)
Indebtedness not otherwise permitted by this Section in an aggregate principal amount not to exceed $5,000,000 at
any time outstanding.
7.3
Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, whether now owned or hereafter acquired,
except:
(a)
Liens for taxes not yet due or that are being contested in good faith by appropriate proceedings; provided that
adequate reserves with respect thereto are maintained on the books of the applicable Group Member in conformity with GAAP;
(b)
carriers’, warehousemen’s, landlord’s, mechanics’, materialmen’s, repairmen’s supplier’s, construction or other like
Liens arising in the ordinary course of business that are not overdue for a period of more than 30 days or that are being contested in good
faith by appropriate proceedings;
(c)
pledges or deposits in connection with workers’ compensation, unemployment insurance and other social security
legislation;
(d)
deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business
(other than for indebtedness or any Liens arising under ERISA) or deposits made in connection with Permitted Acquisitions;
(e)
easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business
that, in the aggregate, are not substantial in amount and that do not in any case materially detract from the value of the property subject
thereto or materially interfere with the ordinary conduct of the business of the applicable Group Member;
(f)
Liens in existence on the date hereof listed on Schedule 7.3(f) to the Disclosure Letter; provided that (i) no such Lien
is spread to cover any additional property after the Closing Date, (ii) the amount of Indebtedness or obligations secured or benefitted thereby
is not increased, (iii) the direct or
90
any contingent obligor with respect thereto is not changed, and (iv) any renewal or extension of the obligations secured thereby is permitted
by Section 7.2(d);
(g)
Liens securing Indebtedness incurred pursuant to Section 7.2(e) to finance the acquisition of fixed or capital assets;
provided that (i) such Liens shall be created substantially simultaneously with, or within 90 days after, the acquisition of such fixed or capital
assets, (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness and the proceeds
thereof, and (iii) the amount of Indebtedness secured thereby is not increased;
(h)
Liens created pursuant to the Security Documents;
(i)
(x) any interest or title of a lessor or licensor under any lease or license entered into by a Group Member in the
ordinary course of its business and covering only the assets so leased or licensed, (y) leases, licenses, subleases and sublicenses of real
property granted to others in the ordinary course of business and (z) non-exclusive licenses of Intellectual Property in the ordinary course of
business;
(j)
judgment Liens that do not constitute a Default or an Event of Default under Section 8.1(h) of this Agreement;
(k)
bankers’ Liens, rights of setoff and other similar Liens existing solely with respect to cash, Cash Equivalents,
securities, commodities and other funds on deposit in one or more accounts maintained by a Group Member, in each case arising in the
ordinary course of business in favor of banks, other depositary institutions, securities or commodities intermediaries or brokerages with
which such accounts are maintained securing amounts owing to such banks or financial institutions with respect to cash management and
operating account management or are arising under Section 4-208 or 4-210 of the UCC on items in the course of collection;
(l)
(i) cash deposits and liens on cash and Cash Equivalents pledged to secure Indebtedness permitted under Section
7.2(g), (ii) Liens securing reimbursement obligations with respect to letters of credit, banker’s acceptances, bank guarantees permitted by
Section 7.2(g) that encumber documents and other property relating to such letters of credit, and (iii) Liens securing Obligations under any
Specified Swap Agreements permitted by Section 7.2(i);
(m)
Liens on property of a Person existing at the time such Person is acquired by, merged into or consolidated with a
Group Member or becomes a Subsidiary of a Group Member or acquired by a Group Member; provided that (i) such Liens were not created
in contemplation of such acquisition, merger, consolidation or Investment, (ii) such Liens do not extend to any assets other than those of such
Person, and (iii) the applicable Indebtedness or obligation secured by such Lien is not prohibited under Section 7.2;
(n)
the replacement, extension or renewal of any Lien permitted by clause (m) above upon or in the same property
theretofore subject thereto or the replacement, extension or renewal (without increase in the amount or change in any direct or contingent
obligor) of the Indebtedness secured thereby;
(o)
Liens on insurance proceeds in favor of insurance companies granted solely to secured financed insurance
premiums;
(p)
Liens in favor of custom and revenue authorities arising as a matter of law to secure the payment of custom duties in
connection with the importation of goods;
91
(q)
Liens on any earnest money deposits required in connection with a Permitted Acquisition or consisting of earnest
money deposits required in connection with an acquisition of property not otherwise prohibited hereunder;
(r)
(s)
Liens securing Subordinated Indebtedness permitted under Section 7.2(f);
Liens that are contractual rights of setoff relating to purchase orders and other agreements entered into with
customers of such Person in the ordinary course of business;
(t)
(u)
Liens securing Indebtedness incurred pursuant to Section 7.2(o); and
other Liens securing obligations in an outstanding amount not to exceed $5,000,000 at any one time.
7.4
Fundamental Changes. Consummate any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or Dispose of all or substantially all of its property or business, except that:
(a)
(i) any Group Member that is not a Loan Party may be merged, amalgamated or consolidated with or into (A) any
Loan Party (provided that a Loan Party shall be the continuing or surviving Person, or the continuing or surviving Person shall become a
Loan Party substantially contemporaneous with such merger, amalgamation or consolidation) or (B) any Group Member that is not a Loan
Party, and (ii) any Loan Party may be merged, amalgamated or consolidated with or into with any other Loan Party (provided that if such
merger, amalgamation or consolidation involves the Borrower, the Borrower shall be the continuing or surviving Person);
(b)
(i) any Group Member that is not a Loan Party may Dispose of any or all of its assets (including upon voluntary
liquidation, dissolution or otherwise) (A) to any other Group Member or (B) pursuant to a Disposition permitted by Section 7.5; and (ii) any
Loan Party (other than the Borrower) may Dispose of any or all of its assets (including upon voluntary liquidation, dissolution or otherwise)
(A) to any other Loan Party or (B) pursuant to a Disposition permitted by Section 7.5;
(c)
any Investment expressly permitted by Section 7.8 may be structured as a merger, consolidation or amalgamation;
and
(d)
any Subsidiary that is a limited liability company may consummate a Division as the dividing Person if, immediately
upon the consummation of the Division, the assets of the applicable dividing Person are held by one or more Guarantors.
7.5
Disposition of Property. Dispose of any of its property, whether now owned or hereafter acquired, or, in the case of any
Subsidiary of the Borrower, issue or sell any shares of such Subsidiary’s Capital Stock to any Person, except:
(a)
(b)
(c)
Dispositions of obsolete, worn out or surplus property in the ordinary course of business;
Dispositions of Inventory in the ordinary course of business;
Dispositions permitted by Sections 7.4(b)(i)(A) and (b)(ii)(A);
92
(d)
the sale or issuance of the Capital Stock of a Subsidiary of the Borrower (i) to the Borrower or any other Loan Party,
or (ii) by a Subsidiary that is not a Loan Party to another Subsidiary that is not a Loan Party or (iii) in connection with any transaction that
does not result in a Change of Control;
(e)
the use or transfer of money, cash or Cash Equivalents in a manner that is not prohibited by the terms of this
Agreement or the other Loan Documents;
(f)
course of business;
the non-exclusive licensing of patents, trademarks, copyrights, and other Intellectual Property rights in the ordinary
(g)
the Disposition of property (i) from any Loan Party to any other Loan Party, and (ii) from any Group Member
(which is not a Loan Party) to any other Group Member; provided that in each case in which there is a Lien over the relevant property in
favor of the Administrative Agent in advance of the Disposition, an equivalent Lien will be granted to the Administrative Agent by the Group
Member which acquires the property;
(h)
Dispositions of property subject to a Casualty Event;
(i)
(j)
leases or subleases of real property;
the sale or discount without recourse of accounts receivable arising in the ordinary course of business in connection
with the compromise or collection thereof;
(k)
any abandonment, cancellation, non-renewal or discontinuance of use or maintenance of Intellectual Property (or
rights relating thereto) of any Group Member that the Borrower determines in good faith is desirable in the conduct of its business and not
materially disadvantageous to the interests of the Lenders;
(l)
Dispositions of other property having a fair market value not to exceed $5,000,000 in the aggregate for any fiscal
year of the Borrower, provided that at the time of any such Disposition, no Event of Default shall have occurred and be continuing or would
result from such Disposition; and
(m)
Restricted Payments permitted by Section 7.6, Investments permitted by Section 7.8 and Liens permitted by Section
7.3.
provided, however, that any Disposition made pursuant to this Section 7.5 (other than Dispositions (x) solely between Loan Parties,
(y) Dispositions solely between Group Members that are not Loan Parties or (z) Dispositions between a Loan Party and a Group Member that
is not a Loan Party in which the terms thereof in favor of a Loan Party are at least arm’s length terms) shall be made in good faith on an arm’s
length basis for fair value.
7.6
Restricted Payments. Make any payment or prepayment of principal of, premium, if any, or interest on, or redemption,
purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similar payment with respect to, any
Subordinated Indebtedness, pay any earn-out payment, seller debt or deferred purchase price payments, declare or pay any dividend on, or
make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance,
retirement or other acquisition of, any Capital Stock of any Group Member, whether now or hereafter outstanding, or make any other
distribution in respect thereof, either
93
directly or indirectly, whether in cash or property or in obligations of any Group Member (collectively, “Restricted Payments”), except that,
so long as no Event of Default shall have occurred and be continuing at the time of any action described below or would result therefrom:
(a)
any Group Member may make Restricted Payments to any Loan Party and any Group Member that is not a Loan
Party may make Restricted Payments to any other Group Member;
(b)
each Loan Party may (i) purchase Capital Stock from present or former officers, directors or employees, of any
Group Member upon the death, disability or termination of employment of such officer, director or employee; provided that the aggregate
amount of payments made under this clause (i) shall not exceed $5,000,000 during any fiscal year of the Borrower, and (ii) declare and make
dividends payments or other distributions payable solely in Capital Stock (other than Disqualified Stock) of the Borrower;
(c)
the Borrower may repurchase its Capital Stock, make payments in respect of any earn-out obligation, seller debt or
deferred purchase price payments in an unlimited amount so long as immediately before and immediately after giving effect to any such
purchase, the Group Members shall be in pro forma compliance with the covenant set forth in Section 7.1(a) and have a pro forma Adjusted
Current Ratio of at least 1.25:1.00, in each case, as of the most recently ended fiscal quarter for which financial statements were required to
be delivered, based upon financial statements delivered to the Administrative Agent which give effect, on a pro forma basis, to such
purchase;
(d)
(i) each Group Member may make repurchases of Capital Stock deemed to occur upon exercise of stock options or
warrants if such repurchased Capital Stock represents a portion of the exercise price of such options or warrants, and (ii) each Group Member
may make repurchases of Capital Stock deemed to occur upon the withholding of a portion of the Capital Stock issued, granted or awarded to
a current or former officer, director, employee or consultant to pay for the taxes payable by such Person upon such issuance, grant or award
(or upon vesting thereof);
(e)
any Group Member may make payments in respect of Subordinated Indebtedness solely to the extent such payment
is made in accordance with Section 7.22;
(f)
each Group Member may purchase, redeem or otherwise acquire Capital Stock issued by it solely with the proceeds
received from the substantially concurrent issue of new shares of its Capital Stock (other than Disqualified Stock); provided that any such
issuance is otherwise permitted hereunder;
(g)
the Borrower may deliver its common Capital Stock upon conversion of any convertible Indebtedness having been
issued by the Borrower; provided that such Indebtedness is otherwise permitted by Section 7.2;
(h)
the Borrower may deliver its common Capital Stock in connection with the exercise of stock options, warrants,
restricted stock units or other equity awards by way of cashless exercise;
Stock);
(i)
(j)
the Borrower may make distributions or dividends consisting solely of its Capital Stock (other than Disqualified
any Subsidiary of the Borrower may make dividends and distributions to the Borrower or another Loan Party;
94
(k)
any Subsidiary of the Borrower may make dividends or any distribution to the Borrower for the purposes of working
capital, payment of interest of outstanding debt or other indebtedness obligations; and
(l)
the Group Members may make other Restricted Payments in an aggregate amount not to exceed $5,000,000 in any
fiscal year of the Group Members, which amount shall increase to $20,000,000 so long as immediately before and immediately after giving
effect to any such purchase, the Group Members shall be in pro forma compliance with each of the financial covenants set forth in Section
7.1 as of the most recently ended fiscal quarter for which financial statements were required to be delivered, based upon financial statements
delivered to the Administrative Agent which give effect, on a pro forma basis, to such purchase.
7.7
[Reserved].
7.8
Investments. Make any advance, loan, extension of credit (by way of guarantee or otherwise) or capital contribution to, or
purchase any Capital Stock, bonds, notes, debentures or other debt securities of, or any assets constituting a business unit of, or make any
other investment in, any Person (all of the foregoing, “Investments”), except:
(a)
(b)
(c)
extensions of trade credit in the ordinary course of business;
Investments in cash and Cash Equivalents;
Guarantee Obligations permitted by Section 7.2 and Guarantee Obligations of obligations not constituting
Indebtedness in the ordinary course of business;
(d)
loans and advances to employees, officers, consultants or directors of any Group Member in the ordinary course of
business (including for travel, entertainment and relocation expenses) in an aggregate amount for all Group Members not to exceed
$5,000,000 at any one time outstanding;
(e)
Investments existing on the Closing Date and set forth on Schedule 7.8 to the Disclosure Letter;
(f)
intercompany Investments by (i) any Loan Party in any other Loan Party, (ii) any Group Member that is not a Loan
Party in any other Group Member, (iii) any Loan Party in any Group Member that is not a Loan Party (A) to the extent (x) no Default or
Event of Defaults exists or would result therefrom and (y) such Investments (valued at cost) do not exceed $10,000,000 in any fiscal year of
the Group Members (or such greater amount as the Administrative Agent may agree to in its sole discretion) or (B) to the extent arising from
customary cost-plus services agreements entered into in the ordinary course of business and on terms that are, when taken as a whole and in
the good faith judgment of the Borrower, no less favorable to the Loan Parties than would be obtained in arm’s length transactions with a
nonaffiliated third party;
(g)
Investments in the ordinary course of business consisting of endorsements of negotiable instruments for collection or
deposit;
(h)
Investments received in settlement of amounts due to any Group Member effected in the ordinary course of business
or owing to such Group Member as a result of Insolvency Proceedings involving an Account Debtor or upon the foreclosure or enforcement
of any Lien in favor of such Group Member;
95
(i)
Investments held by any Person as of the date such Person is acquired in connection with a Permitted Acquisition,
provided that (A) such Investments were not made, in any case, by such Person in connection with, or in contemplation of, such Permitted
Acquisition, and (B) with respect to any such Person which becomes a Subsidiary as a result of such Permitted Acquisition, such Subsidiary
remains the only holder of such Investment;
(j)
so long as no Event of Default exists at the time of such Investment or immediately after giving effect thereto, in
addition to Investments otherwise expressly permitted by this Section 7.8, any Investments in an aggregate amount not to exceed
$10,000,000 in any fiscal year of the Group Members so long as no Default or Event of Defaults exists or would result therefrom;
(k)
deposits made to secure the performance of leases, licenses or contracts in the ordinary course of business, and other
deposits made in connection with the incurrence of Liens permitted under Section 7.3;
(l)
the licensing or contribution of Intellectual Property pursuant to joint marketing or joint venture arrangements with
other Persons in the ordinary course of business;
(m)
promissory notes and other non-cash consideration received in connection with Dispositions permitted by
Section 7.5, to the extent not exceeding the limits specified therein with respect to the receipt of non-cash consideration in connection with
such Dispositions; and
(n)
so long as no Event of Default exists at the time of such Investment or immediately after giving effect thereto,
Investments in joint ventures, corporate collaborations, or strategic alliances; provided that, the aggregate amount of all such Investments
made in cash shall not exceed $20,000,000 in any fiscal year of the Group Members; and
(o)
purchases or other acquisitions by any Group Member of the Capital Stock in a Person that, upon the consummation
thereof, will be a Subsidiary (including as a result of a merger or consolidation) or all or substantially all of the assets of, or assets
constituting one or more business units of, any Person (each, a “Permitted Acquisition”); provided that, with respect to each such purchase or
other acquisition consummated pursuant to this Section 7.8(o):
the newly-created or acquired Subsidiary (or assets acquired in connection with such asset sale) shall be
(x) in the same or a related line of business as that conducted by the Borrower on the date hereof, or (y) in a business permitted by Section
7.17;
(i)
accordance with all Requirements of Law;
(ii)
all transactions related to such purchase or acquisition shall be consummated in all material respects in
(iii)
no Loan Party shall, as a result of or in connection with any such purchase or acquisition, assume or incur
any direct or contingent liabilities (whether relating to environmental, tax, litigation or other matters) that, as of the date of such purchase or
acquisition (or in the case of a Limited Condition Acquisition, as of the LCA Test Date), could reasonably be expected to result in the
existence or incurrence of a Material Adverse Effect;
purchase or acquisition;
(iv)
the Borrower shall give the Administrative Agent at least 20 Business Days’ prior written notice of any such
96
the Borrower shall provide to the Administrative Agent as soon as available but in any event not later than 5
Business Days after the execution thereof, a copy of any executed purchase agreement or similar agreement with respect to any such
purchase or acquisition;
(v)
any such newly-created or acquired Subsidiary, or the Loan Party that is the acquirer of assets in connection
with an asset acquisition, shall comply or be prepared to comply with the requirements of Section 6.12, except to the extent compliance with
Section 6.12 is prohibited by pre-existing Contractual Obligations or Requirements of Law binding on such Subsidiary or its properties;
(vi)
(vii)
immediately before and immediately after giving effect to any such purchase or other acquisition, no Default
or Event of Default shall have occurred and be continuing (other than in connection with a Limited Condition Acquisition, in which case
there shall be (x) no Default or Event of Default as of the LCA Test Date and (y) no Event of Default under Section 8.1(a) or (f) immediately
before and immediately after giving effect to any such purchase or other acquisition);
(viii)
immediately before and immediately after giving effect to any such purchase or other acquisition, the Group
Members shall be in pro forma compliance with the covenant set forth in Section 7.1(a) and have a pro forma Adjusted Current Ratio of at
least 1.25:1.00, in each case, as of the most recently ended fiscal quarter for which financial statements were required to be delivered, based
upon financial statements delivered to the Administrative Agent which give effect, on a Pro Forma Basis, to such acquisition or other
purchase (which shall be calculated in accordance with Section 1.4 in the case of a Limited Condition Acquisition);
(ix)
Indebtedness permitted by the terms of Section 7.2(j);
no Indebtedness is assumed or incurred in connection with any such purchase or acquisition other than
(x)
such purchase or acquisition shall not constitute an Unfriendly Acquisition;
hereunder; unless in each case otherwise agreed to in writing by the Administrative Agent; and
(xi)
each such Permitted Acquisition is of a Person that becomes a Loan Party or of assets that become Collateral
(xii)
the Borrower shall have delivered to the Administrative Agent, at least 5 Business Days prior to the date on
which any such purchase or other acquisition is to be consummated (or such later date as is agreed by the Administrative Agent in its sole
discretion), a certificate of a Responsible Officer of the Borrower, in form and substance reasonably satisfactory to the Administrative Agent,
certifying that all of the requirements set forth in this definition have been satisfied or will be satisfied on or prior to the consummation of
such purchase or other acquisition.
Notwithstanding anything herein to the contrary, no Group Member shall consummate an Unfriendly Acquisition.
7.9
ERISA. The Borrower shall not, and shall not permit any of its ERISA Affiliates to: (a) terminate any Pension Plan so as to
result in any material liability to the Borrower or any ERISA Affiliate, (b) permit to exist any ERISA Event, or any other event or condition,
which presents the risk of a material liability to any ERISA Affiliate, (c) make a complete or partial withdrawal (within the meaning of
ERISA Section 4201) from any Multiemployer Plan so as to result in any material liability to the Borrower or any ERISA Affiliate, (d) enter
into any new Pension Plan or Multiemployer Plan or modify any existing Pension Plan or Multiemployer Plan so as to increase its
obligations thereunder which could
97
be reasonably likely to result in material liability to any ERISA Affiliate or permit the present value of all nonforfeitable accrued benefits
under any Pension Plan (using the actuarial assumptions utilized by the PBGC upon termination of a Plan) materially to exceed the fair
market value of Pension Plan assets allocable to such benefits, all determined as of the most recent valuation date for each such Pension Plan,
or (e) engage in any transaction which would cause any obligation, or action taken or to be taken, hereunder (or the exercise by the
Administrative Agent or any Lender of any of its rights under this Agreement, any Note or the other Loan Documents) to be a non-exempt
(under a statutory or administrative class exemption) prohibited transaction under Section 406 of ERISA or Section 4975 of the Code with
respect to a Plan, except, in the case of each of the foregoing clauses, to the extent that failure to comply therewith could not reasonably be
expected to have a Material Adverse Effect.
7.10 Optional Payments and Modifications of Certain Preferred Stock. Amend, modify, waive or otherwise change, or
consent or agree to any amendment, modification, waiver or other change to, any of the terms of the Preferred Stock (i) that would move to
an earlier date the scheduled redemption date (but only to the extent that moving any such scheduled redemption date would result in the
redemption to be prior to 91 days after the Revolving Termination Date) or increase the amount of any scheduled redemption payment or
increase the rate or move to an earlier date any date for payment of dividends thereon or (ii) that could reasonably be expected to be
otherwise materially adverse to any Lender or any other Secured Party.
7.11
Transactions with Affiliates. Enter into any transaction, including any purchase, sale, lease or exchange of property, the
rendering of any service or the payment of any management, advisory or similar fees, with any Affiliate (other than any other Loan Party)
unless such transaction is (a)(i) otherwise permitted under this Agreement, and (ii) upon fair and reasonable terms no less favorable to the
relevant Group Member than it would obtain in a comparable arm’s length transaction with a Person that is not an Affiliate, (b) a Restricted
Payment permitted by Section 7.6, (c) reasonable and customary indemnification arrangements, employee benefits, compensation
arrangements (including equity-based compensation and bonuses), and reimbursement of expenses of employees, consultants, officers, and
directors, in each case, approved by the board of directors or management of a Group Member, or (d) equity (other than Disqualified Stock)
or debt financings with the Borrower’s investors so long as any such debt financings constitute Subordinated Indebtedness permitted under
Section 7.2.
7.12
Sale Leaseback Transactions. Enter into any Sale Leaseback Transaction, except in connection with transactions that would
be permitted under this Section 7.
7.13
Swap Agreements. Enter into any Swap Agreement, except Specified Swap Agreements which are entered into by a Group
Member to (a) hedge or mitigate risks to which such Group Member has actual exposure, or (b) effectively cap, collar or exchange interest
rates (from fixed to floating rates, from one floating rate to another floating rate or otherwise) with respect to any interest-bearing liability or
investment of such Group Member.
7.14
Accounting Changes. Make any change in its (a) accounting policies or reporting practices, except as required or permitted
by GAAP, or (b) fiscal year, in each case, without the prior written consent of the Administrative Agent (such consent not to be unreasonably
withheld or delayed).
7.15
Negative Pledge Clauses. Enter into or suffer to exist or become effective any agreement that prohibits or limits the ability
of any Loan Party to create, incur, assume or suffer to exist any Lien upon any of its property or revenues, whether now owned or hereafter
acquired, to secure its Obligations under the Loan Documents to which it is a party, other than (a) this Agreement and the other
98
Loan Documents, (b) any agreements governing any purchase money Liens or Capital Lease Obligations otherwise permitted hereby (in
which case, any prohibition or limitation shall only be effective against the assets financed thereby), (c) customary restrictions on the
assignment of leases, licenses and other agreements, (d) any agreement in effect at the time any Subsidiary becomes a Subsidiary of a Loan
Party, so long as such agreement was not entered into solely in contemplation of such Person becoming a Subsidiary or, in any such case, that
is set forth in any agreement evidencing any amendments, restatements, supplements, modifications, extensions, renewals and replacements
of the foregoing, so long as such amendment, restatement, supplement, modification, extension, renewal or replacement applies only to such
Subsidiary and does not otherwise expand in any material respect the scope of any restriction or condition contained therein, (e) customary
provisions in joint venture agreements and other similar agreements applicable to joint ventures permitted under Section 7.8 and applicable
solely to equity interests in such joint venture and (f) any restriction pursuant to any document, agreement or instrument governing or relating
to any Lien permitted under Sections 7.3(c), (d), (f), (g), (l), (m), (n), (q) and (r) or any agreement or option to Dispose any asset of any
Group Member, the Disposition of which is permitted by any other provision of this Agreements (in each case, provided that any such
restriction relates only to the assets or property subject to such Lien or being Disposed).
7.16
Clauses Restricting Subsidiary Distributions. Enter into or suffer to exist or become effective any consensual
encumbrance or restriction on the ability of any Subsidiary to (a) make Restricted Payments in respect of any Capital Stock of such
Subsidiary held by, or to pay any Indebtedness owed to, any other Group Member, (b) make loans or advances to, or other Investments in,
any other Group Member, or (c) transfer any of its assets to any other Group Member, except for such encumbrances or restrictions existing
under or by reason of (i) any restrictions existing under the Loan Documents, (ii) any restrictions with respect to a Subsidiary imposed
pursuant to an agreement that has been entered into in connection with a Disposition permitted hereby of all or substantially all of the Capital
Stock or assets of such Subsidiary, (iii) customary restrictions on the assignment of leases, licenses and other agreements, (iv) restrictions of
the nature referred to in clause (c) above under agreements governing purchase money liens or Capital Lease Obligations otherwise permitted
hereby which restrictions are only effective against the assets financed thereby, (v) any agreement in effect at the time any Subsidiary
becomes a Subsidiary of a Borrower, so long as such agreement applies only to such Subsidiary, was not entered into solely in contemplation
of such Person becoming a Subsidiary or, in each case that is set forth in any agreement evidencing any amendments, restatements,
supplements, modifications, extensions, renewals and replacements of the foregoing, so long as such amendment, restatement, supplement,
modification, extension, renewal or replacement is not as a whole materially less favorable to such Subsidiary, (vi) restrictions under any
Subordinated Debt Documents, (vii) restrictions on the transfer of any asset pending the close of the sale of such asset and customary
restrictions contained in purchase agreements and acquisition agreements (including by way of merger, acquisition or consolidation), to the
extent in effect pending the consummation of such transaction, (viii) customary net worth provisions or similar financial maintenance
provisions contained in real property leases entered into by a Foreign Subsidiary, so long as the Borrower has determined in good faith that
such net worth provisions could not reasonably be expected to impair the ability of the Borrower and its Subsidiaries to meet their ongoing
obligations under the Loan Documents, (ix) applicable law, (x) restrictions on cash or other deposits or net worth imposed under agreements
entered into in the ordinary course of business, (xi) provisions in joint venture agreements and other similar agreements (including equity
holder agreements) relating to such joint venture or its members or entered into in the ordinary course of business, (xii) Requirements of Law
applicable to a Foreign Subsidiary prohibiting or restricting the applicable Foreign Subsidiary from making Restricted Payments to the
Borrower, or (xiii) any restriction pursuant to any document, agreement or instrument governing or relating to any Lien permitted under
Sections 7.3(c), (d),
99
(f), (g), (l), (m), (n), (q) and (r) (provided that any such restriction relates only to the assets or property subject to such Lien or being
Disposed).
7.17
Lines of Business. Enter into any business, either directly or through any Subsidiary, except for those businesses in which
the Group Members are engaged on the date of this Agreement or that are reasonably related, ancillary or incidental thereto.
7.18
Designation of other Indebtedness. Designate any Indebtedness or indebtedness other than the Obligations as “Designated
Senior Indebtedness” or a similar concept thereto, if applicable.
7.19
[Reserved].
7.20
Amendments to Operating Documents and Material Contracts. (a) Amend or permit any amendments to any Loan
Party’s organizational documents if such amendment, termination, or waiver would be adverse to the Administrative Agent or the Lenders in
any material respect; or (b) amend or permit any amendments to, or terminate or waive any provision of, any material Contractual Obligation
if such amendment, termination or waiver could reasonably be expected to result in a Material Adverse Effect.
7.21
Use of Proceeds. Use the proceeds of any Loan or extension of credit hereunder, whether directly or indirectly, and whether
immediately, incidentally or ultimately, (a) to purchase or carry margin stock (within the meaning of Regulation U of the Board) or to extend
credit to others for the purpose of purchasing or carrying margin stock or to refund Indebtedness originally incurred for such purpose, in each
case in violation of, or for a purpose which violates, or would be inconsistent with, Regulation T, U or X of the Board; (b) to finance an
Unfriendly Acquisition; (c) to fund any activities of or business with any individual or entity, or in any Designated Jurisdiction, that, at the
time of such funding, is the subject of Sanctions, or in any other manner that will result in a violation by any individual or entity (including
any individual or entity participating in the transaction, whether as Lender, Arranger, Administrative Agent, Issuing Lender, Swingline
Lender, or otherwise) of Sanctions (or lend, contribute or otherwise make available such proceeds to any Subsidiary, joint venture partner or
other individual or entity in violation of the foregoing); or (d) for any purpose which would breach the United States Foreign Corrupt
Practices Act of 1977, the UK Bribery Act 2010, or other similar legislation in other jurisdictions.
7.22
Subordinated Indebtedness.
(a)
Amendments. Amend, modify, supplement, waive compliance with, or consent to noncompliance with, any
Subordinated Debt Document, unless the amendment, modification, supplement, waiver or consent is in compliance with the subordination
provisions therein and any subordination agreement with respect thereto in favor of the Administrative Agent and the Lenders.
(b)
Payments. Make any payment (including any interest payment, other than paid-in-king interest), prepayment or
repayment on, redemption, exchange or acquisition for value of, any sinking fund or similar payment with respect to, any Subordinated
Indebtedness, except as permitted by the subordination provisions in the applicable Subordinated Debt Documents and any subordination
agreement with respect thereto in favor of the Administrative Agent and the Lenders.
7.23
Anti-Terrorism Laws. Conduct, deal in or engage in or permit any Affiliate or agent of any Loan Party within its control to
conduct, deal in or engage in any of the following activities: (a) conduct any business or engage in any transaction or dealing with any person
blocked pursuant to Executive Order No. 13224 (a “Blocked Person”), including the making or receiving any contribution of
100
funds, goods or services to or for the benefit of any Blocked Person; (b) deal in, or otherwise engage in any transaction relating to, any
property or interests in property blocked pursuant to Executive Order No. 13224; or (c) engage in or conspire to engage in any transaction
that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in Executive Order
No. 13224 or the Patriot Act.
SECTION 8
EVENTS OF DEFAULT
8.1
Events of Default. The occurrence of any of the following shall constitute an Event of Default:
(a)
the Borrower shall fail to pay any amount of principal of any Loan when due in accordance with the terms hereof; or
the Borrower shall fail to pay any amount of interest on any Loan, or any other amount payable hereunder or under any other Loan
Document, within 3 Business Days after any such interest or other amount becomes due in accordance with the terms hereof; or
(b)
any representation or warranty made or deemed made by any Loan Party herein or in any other Loan Document or
that is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this
Agreement or any such other Loan Document (i) if qualified by materiality, shall be incorrect or misleading when made or deemed made, or
(ii) if not qualified by materiality, shall be incorrect or misleading in any material respect when made or deemed made; or
(c)
(i) any Loan Party shall default in the observance or performance of any agreement contained in, Section 5.3,
Section 6.1, Section 6.2, clause (i) or (ii) of Section 6.5(a), Section 6.6(b), Section 6.8(a), Section 6.10, Section 6.16 or Section 7 of this
Agreement or (ii) an “Event of Default” under and as defined in any Security Document shall have occurred and be continuing; or
(d)
any Loan Party shall default in the observance or performance of any other agreement contained in this Agreement
or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section 8.1), and such default shall continue
unremedied for a period of 30 days thereafter; or
(e)
(i) any Group Member shall (A) default in making any payment of any principal of any Indebtedness (including any
Guarantee Obligation, but excluding the Loans) on the scheduled or original due date with respect thereto; (B) default in making any
payment of any interest, fees, costs or expenses on any such Indebtedness beyond the period of grace, if any, provided in the instrument or
agreement under which such Indebtedness was created; (C) default in making any payment or delivery under any such Indebtedness
constituting a Swap Agreement beyond the period of grace, if any, provided in such Swap Agreement; or (D) default in the observance or
performance of any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing,
securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to (1)
cause, or to permit the holder or beneficiary of, or, in the case of any such Indebtedness constituting a Swap Agreement, counterparty under,
such Indebtedness (or a trustee or agent on behalf of such holder, beneficiary, or counterparty) to cause, with the giving of notice if required,
such Indebtedness to become due prior to its stated maturity or (in the case of any such Indebtedness constituting a Guarantee Obligation) to
become payable or (in the case of any such Indebtedness constituting a Swap Agreement) to be terminated, or (2) to cause, with the giving of
notice
101
if required, any Group Member to purchase, redeem, mandatorily prepay or make an offer to purchase, redeem or mandatorily prepay such
Indebtedness prior to its stated maturity; provided that, unless such Indebtedness constitutes a Specified Swap Agreement, a default, event or
condition described in clauses (i)(A), (B), (C), or (D) of this Section 8.1(e) shall not at any time constitute an Event of Default unless, at such
time, one or more defaults, events or conditions of the type described in any of clauses (i)(A), (B), (C), or (D) of this Section 8.1(e) shall have
occurred with respect to Indebtedness, the outstanding principal amount (and, in the case of Swap Agreements, other than Specified Swap
Agreements, the Swap Termination Value) of which, individually or in the aggregate for all such Indebtedness, exceeds $10,000,000; or (ii)
any default or event of default (however designated) shall occur with respect to any Subordinated Indebtedness of any Group Member; or
(f)
(i) any Group Member shall commence any case, proceeding or other action (a) under any Debtor Relief Law
seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding(cid:0)up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (b) seeking
appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or any
Group Member shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any Group Member
any case, proceeding or other action of a nature referred to in clause (i) above that (x) results in the entry of an order for relief or any such
adjudication or appointment or (y) remains undismissed, undischarged or unbonded for a period of 60 days (provided that, during such 60
day period, no Loan shall be advanced or Letters of Credit issued hereunder); or (iii) there shall be commenced against any Group Member
any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any
substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, or stayed or
bonded pending appeal within 60 days from the entry thereof (provided that, during such 60 day period, no Loan shall be advanced or Letters
of Credit issued hereunder); or (iv) any Group Member shall take any action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) any Group Member shall generally not, or shall be unable to,
or shall admit in writing its inability to, pay its debts as they become due; or
(g)
there shall occur one or more ERISA Events which individually or in the aggregate results in or otherwise is
associated with liability of any Loan Party in excess of $10,000,000 during the term of this Agreement; or
(h)
there is entered against any Group Member (i) one or more final judgments or orders for the payment of money
involving in the aggregate a liability (not paid or fully covered by insurance as to which the relevant insurance company has acknowledged
coverage) of $10,000,000 or more, or (ii) one or more non-monetary final judgments that have, or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect and, in either case, (A) enforcement proceedings are commenced by any creditor
upon such judgment or order, or (B) all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal
within 45 days from the entry thereof; or
(i)
(i) any of the Security Documents shall cease, for any reason, to be in full force and effect (other than pursuant to
the terms thereof), or any Loan Party shall so assert, or any Lien created by any of the Security Documents shall cease to be enforceable and
of the same effect and priority purported to be created thereby; or
102
business for more than 7 consecutive Business Days; or
(ii) any court order enjoins, restrains or prevents a Loan Party from conducting all or any material part of its
(j)
the guarantee contained in Section 2 of the Guarantee and Collateral Agreement shall cease, for any reason, to be in
full force and effect or any Loan Party shall so assert; or
(k)
a Change of Control shall occur; or
(l)
any of the Governmental Approvals necessary for an of the Group Members to operate its respective business shall
have been (i) revoked, rescinded, suspended, modified in an adverse manner or not renewed in the ordinary course for a full term or
(ii) subject to any decision by a Governmental Authority that designates a hearing with respect to any applications for renewal of any of the
Governmental Approvals or that could result in the Governmental Authority taking any of the actions described in clause (i) above, and such
decision or such revocation, rescission, suspension, modification or nonrenewal (x) has, or could reasonably be expected to have, a Material
Adverse Effect, or (y) adversely affects the legal qualifications of any Group Member to hold any material Governmental Approval in any
applicable jurisdiction and such adverse effect on the legal qualifications of any such Group Member to hold any material Governmental
Approval in any applicable jurisdiction could reasonably be expected to have a Material Adverse Effect; or
(m)
any Loan Document (including the subordination provisions of any subordination or intercreditor agreement
governing Subordinated Indebtedness) not otherwise referenced in Section 8.1(i) or (j), at any time after its execution and delivery and for
any reason other than as expressly permitted hereunder or thereunder or the Discharge of Obligations, ceases to be in full force and effect; or
any Loan Party or any other Person contests in any manner the validity or enforceability of any Loan Document; or any Loan Party denies
that it has any liability or obligation under any Loan Document to which it is a party, or purports to revoke, terminate or rescind any such
Loan Document.
8.2
Remedies Upon Event of Default. If any Event of Default occurs and is continuing, the Administrative Agent shall, at the
request of, or may, with the consent of, the Required Lenders, take any or all of the following actions:
(a)
if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) of Section 8.1 with respect to the
Borrower, the Commitments shall immediately terminate automatically and the Loans (with accrued interest thereon) and all other amounts
owing under this Agreement and the other Loan Documents shall automatically immediately become due and payable, and
(b)
if such event is any other Event of Default, any of the following actions may be taken: (i) with the consent of the
Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to
the Borrower declare the Revolving Commitments, the Swingline Commitments and the L/C Commitments to be terminated forthwith,
whereupon the Revolving Commitments, the Swingline Commitments and the L/C Commitments shall immediately terminate; (ii) with the
consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall,
by notice to the Borrower, declare the Loans (with accrued interest thereon) and all other amounts owing under this Agreement and the other
Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable; (iii) any Cash
Management Bank may terminate any Cash Management Agreement then outstanding and declare all Obligations then owing by the Loan
Parties under any such Cash Management Agreements then outstanding to be due and payable forthwith, whereupon the same
103
shall immediately become due and payable; and (iv) the Administrative Agent may exercise on behalf of itself, any Cash Management Bank,
the Lenders and the Issuing Lender all rights and remedies available to it, any such Cash Management Bank, the Lenders and the Issuing
Lender under the Loan Documents.
With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an
acceleration pursuant to this paragraph, the Borrower shall Cash Collateralize an amount equal to 105% of the aggregate then undrawn and
unexpired amount of such Letters of Credit. Amounts so Cash Collateralized shall be applied by the Administrative Agent to the payment of
drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully
drawn upon, if any, shall be applied to repay other Obligations of the Borrower hereunder and under the other Loan Documents in accordance
with Section 8.3.
In addition, (x) the Borrower shall also Cash Collateralize the full amount of any Swingline Loans then outstanding, and
(y) to the extent elected by any applicable Cash Management Bank, the Borrower shall also Cash Collateralize the amount of any Obligations
in respect of Cash Management Services then outstanding, which Cash Collateralized amounts shall be applied by the Administrative Agent
to the payment of all such outstanding Cash Management Services, and any unused portion thereof remaining after all such Cash
Management Services shall have been fully paid and satisfied in full shall be applied by the Administrative Agent to repay other Obligations
of the Loan Parties hereunder and under the other Loan Documents in accordance with the terms of Section 8.3.
(c)
After all such Letters of Credit and Cash Management Agreements shall have been terminated, expired or fully
drawn upon, as applicable, and all amounts drawn under any such Letters of Credit shall have been reimbursed in full and all other
Obligations of the Borrower and the other Loan Parties (including any such Obligations arising in connection with Cash Management
Services) shall have been paid in full, the balance, if any, of the funds having been so Cash Collateralized shall be returned to the Borrower
(or such other Person as may be lawfully entitled thereto). Except as expressly provided above in this Section, presentment, demand, protest
and all other notices of any kind are hereby expressly waived by the Borrower.
8.3
Application of Funds. After the exercise of remedies provided for in Section 8.2, any amounts received by the
Administrative Agent on account of the Obligations shall be applied by the Administrative Agent in the following order:
First, to the payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (other than
principal and interest but including any Collateral-Related Expenses, fees, charges and disbursements of counsel to the Administrative Agent
and amounts payable under Sections 2.19, 2.20 and 2.21 (including interest thereon)) payable to the Administrative Agent, in its capacity as
such;
Second, to payment of that portion of the Obligations constituting fees, indemnities and other amounts (other than principal,
interest, and Letter of Credit Fees) payable to the Lenders, the Issuing Lender ((including any Letter of Credit Fronting Fees and Issuing
Lender Fees), and any Qualified Counterparty and any applicable Cash Management Bank (in its respective capacity as a provider of Cash
Management Services), and the reasonable and documented out-of-pocket fees, charges and disbursements of counsel to the respective
Lenders and the Issuing Lender, and amounts payable under Sections 2.19, 2.20 and 2.21), in each case, ratably among them in proportion to
the respective amounts described in this clause Second payable to them;
104
Third, to the extent that the Swingline Lender has advanced any Swingline Loans that have not been refunded by each
Lender’s Swingline Participation Amount, payment to the Swingline Lender of that portion of the Obligations constituting the unpaid
principal of and interest upon the Swingline Loans advanced by the Swingline Lender;
Fourth, to the payment of that portion of the Obligations constituting accrued and unpaid Letter of Credit Fees and interest in
respect of any Cash Management Services and on the Loans and L/C Disbursements which have not yet been converted into Revolving
Loans, and to payment of premiums and other fees (including any interest thereon) under any Specified Swap Agreements and any Cash
Management Agreements, in each case, ratably among the Lenders, any applicable Cash Management Bank (in its respective capacity as a
provider of Cash Management Services), and any Qualified Counterparties, in each case, ratably among them in proportion to the respective
amounts described in this clause Fourth payable to them;
Fifth, to payment of that portion of the Obligations constituting unpaid principal of the Loans, L/C Disbursements which
have not yet been converted into Revolving Loans, and settlement amounts, payment amounts and other termination payment obligations
under any Specified Swap Agreements and Cash Management Agreements, in each case, ratably among the Lenders, any applicable Cash
Management Bank (in its respective capacity as a provider of Cash Management Services), and any applicable Qualified Counterparties, in
each case, ratably among them in proportion to the respective amounts described in this clause Fifth and payable to them;
Sixth, to the Administrative Agent for the account of the Issuing Lender, to Cash Collateralize that portion of the L/C
Exposure comprised of the aggregate undrawn amount of Letters of Credit pursuant to Section 3.10;
Seventh, for the account of any applicable Qualified Counterparty and any applicable Cash Management Bank, to any
settlement amounts, payment amounts and other termination payment obligations under any Specified Swap Agreements and Cash
Management Agreements not paid pursuant to clause Fifth and to Cash Collateralize Obligations arising under any then outstanding
Specified Swap Agreements and Cash Management Services, in each case, ratably among them in proportion to the respective amounts
described in this clause Seventh payable to them;
Eight, to the payment of all other Obligations of the Loan Parties that are then due and payable to the Administrative Agent
and the other Secured Parties on such date, in each case, ratably among them in proportion to the respective aggregate amounts of all such
Obligations described in this clause Eight and payable to them;
Last, the balance, if any, after the Discharge of Obligations, to the Borrower or as otherwise required by Law.
Subject to Sections 2.24(a), 3.4, 3.5 and 3.10, amounts used to Cash Collateralize the aggregate undrawn amount of Letters of Credit
pursuant to clause Sixth above shall be applied to satisfy drawings under such Letters of Credit as they occur. If any amount remains on
deposit as Cash Collateral for Letters of Credit after all Letters of Credit have either been fully drawn or expired, such remaining amount
shall be applied to the other Obligations, if any, in the order set forth above.
Notwithstanding the foregoing, no Excluded Swap Obligation of any Guarantor shall be paid with amounts received from such
Guarantor or from any Collateral in which such Guarantor has granted to the Administrative Agent a Lien (for the benefit of the Secured
Parties) pursuant to the Guarantee and
105
Collateral Agreement; provided, however, that each party to this Agreement hereby acknowledges and agrees that appropriate adjustments
shall be made by the Administrative Agent (which adjustments shall be controlling in the absence of manifest error) with respect to payments
received from other Loan Parties to preserve the allocation of such payments to the satisfaction of the Obligations in the order otherwise
contemplated in this Section 8.3.
SECTION 9
THE ADMINISTRATIVE AGENT
9.1
Appointment and Authority.
(a)
Each of the Lenders hereby irrevocably appoints SVB to act on its behalf as the Administrative Agent hereunder and
under the other Loan Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as
are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental
thereto.
(b)
The provisions of Section 9 are solely for the benefit of the Administrative Agent, the Lenders, the Issuing Lender,
and the Swingline Lender, and neither the Borrower nor any other Loan Party shall have rights as a third party beneficiary of any of such
provisions. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or
obligations, except those expressly set forth herein and in the other Loan Documents, or any fiduciary relationship with any Lender, and no
implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document
or otherwise exist against the Administrative Agent. It is understood and agreed that the use of the term “agent” herein or in any other Loan
Documents (or any other similar term) with reference to the Administrative Agent is not intended to connote any fiduciary or other implied
(or express) obligations arising under agency doctrine of any applicable law. Instead such term is used as a matter of market custom, and is
intended to create or reflect only an administrative relationship between contracting parties.
(c)
The Administrative Agent shall also act as the collateral agent under the Loan Documents, and each of the Lenders
(in their respective capacities as a Lender and, as applicable, Qualified Counterparty and provider of Cash Management Services) hereby
irrevocably (i) authorizes the Administrative Agent to enter into all other Loan Documents, as applicable, including the Guarantee and
Collateral Agreement and any Subordination Agreements, and (ii) appoints and authorizes the Administrative Agent to act as the agent of the
Secured Parties for purposes of acquiring, holding and enforcing any and all Liens on Collateral granted by any of the Loan Parties to secure
any of the Obligations, together with such powers and discretion as are reasonably incidental thereto. The Administrative Agent, as collateral
agent and any co-agents, sub-agents and attorneys-in-fact appointed by the Administrative Agent pursuant to Section 9.2 for purposes of
holding or enforcing any Lien on the Collateral (or any portion thereof) granted under the Security Documents, or for exercising any rights
and remedies thereunder at the direction of the Administrative Agent, shall be entitled to the benefits of all provisions of this Section 9 and
Section 10 (including Section 9.7, as though such co-agents, sub-agents and attorneys-in-fact were the collateral agent under the Loan
Documents) as if set forth in full herein with respect thereto. Without limiting the generality of the foregoing, the Administrative Agent is
further authorized on behalf of all the Lenders, without the necessity of any notice to or further consent from the Lenders, from time to time
to take any action, or permit the any co-agents, sub-agents and attorneys-in-fact appointed by the Administrative Agent to take any action,
with respect to any Collateral or the Loan
106
Documents which may be necessary to perfect and maintain perfected the Liens upon any Collateral granted pursuant to any Loan Document.
9.2
Delegation of Duties. The Administrative Agent may perform any and all of its duties and exercise its rights and powers
hereunder or under any other Loan Document by or through any one or more sub-agents appointed by the Administrative Agent. The
Administrative Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their
respective Related Parties. The exculpatory provisions of this Section shall apply to any such sub-agent and to the Related Parties of the
Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the Facilities
provided for herein as well as activities as the Administrative Agent. The Administrative Agent shall not be responsible for the negligence or
misconduct of any sub-agents except to the extent that a court of competent jurisdiction determines in a final and nonappealable judgment
that the Administrative Agent acted with gross negligence or willful misconduct in the selection of such sub agents.
9.3
Exculpatory Provisions. The Administrative Agent shall have no duties or obligations except those expressly set forth
herein and in the other Loan Documents, and its duties hereunder and thereunder shall be administrative in nature. Without limiting the
generality of the foregoing, the Administrative Agent shall not:
(a)
be subject to any fiduciary or other implied duties, regardless of whether any Default or any Event of Default has
occurred and is continuing;
(b)
have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and
powers expressly contemplated hereby or by the other Loan Documents that the Administrative Agent is required to exercise as directed in
writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other
Loan Documents), as applicable; provided that the Administrative Agent shall not be required to take any action that, in its opinion or the
opinion of its counsel, may expose the Administrative Agent to liability or that is contrary to any Loan Document or applicable law,
including for the avoidance of doubt any action that may be in violation of the automatic stay under any Debtor Relief Law or that may effect
a forfeiture, modification or termination of property of a Defaulting Lender in violation of any Debtor Relief Law; and
(c)
except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and the
Administrative Agent shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Affiliates that is
communicated to or obtained by any Person serving as the Administrative Agent or any of its Affiliates in any capacity.
The Administrative Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the
Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Administrative Agent shall believe in
good faith shall be necessary, under the circumstances as provided in Sections 8.2 and 10.1), or (ii) in the absence of its own gross negligence
or willful misconduct as determined by a court of competent jurisdiction by final and nonappealable judgment.
The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or
representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other
document delivered hereunder or
107
thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or
conditions set forth herein or therein or the occurrence of any Default or Event of Default, (iv) the validity, enforceability, effectiveness or
genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or (v) the satisfaction of any
condition set forth in Section 5.1, Section 5.2 or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to
the Administrative Agent.
9.4
Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability
for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic
message, internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise
authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and
believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with
any condition hereunder to the making of a Loan, or the issuance, extension, renewal or increase of a Letter of Credit, that by its terms must
be fulfilled to the satisfaction of a Lender, the Administrative Agent may presume that such condition is satisfactory to such Lender unless
the Administrative Agent shall have received notice to the contrary from such Lender prior to the making of such Loan or the issuance of
such Letter of Credit. The Administrative Agent may consult with legal counsel (who may be counsel for any of the Loan Parties),
independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the
advice of any such counsel, accountants or experts. The Administrative Agent may deem and treat the payee of any Note as the owner thereof
for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The
Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document
unless it shall first receive such advice or concurrence of the Required Lenders (or such other number or percentage of Lenders as shall be
provided for herein or in the other Loan Documents) as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders
against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. The
Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan
Documents in accordance with a request of the Required Lenders (or such other number or percentage of Lenders as shall be provided for
herein or in the other Loan Documents), and such request and any action taken or failure to act pursuant thereto shall be binding upon the
Lenders and all future holders of the Loans.
9.5
Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any
Default or Event of Default unless the Administrative Agent has received notice in writing from a Lender or the Borrower referring to this
Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default.” In the event that the
Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent
shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders (or, if so
specified by this Agreement, all Lenders); provided that unless and until the Administrative Agent shall have received such directions, the
Administrative Agent may (but shall not be obligated to) take such action or refrain from taking such action with respect to such Default or
Event of Default as it shall deem advisable in the best interests of the Lenders.
9.6
Non-Reliance on Administrative Agent and Other Lenders. Each Lender expressly acknowledges that neither the
Administrative Agent nor any of its officers, directors, employees, agents, attorneys in fact or Affiliates has made any representations or
warranties to it and that no act by the Administrative Agent hereafter taken, including any review of the affairs of a Group Member or any
108
Affiliate of a Group Member, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each
Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other
Lender or any of their Related Parties, and based on such documents and information as it has deemed appropriate, made its own appraisal of,
and investigation into, the business, operations, property, financial and other condition and creditworthiness of the Group Members and their
Affiliates and made its own credit analysis and decision to make its Loans hereunder and enter into this Agreement. Each Lender also agrees
that it will, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties, and based
on such documents and information as it shall from time to time deem appropriate, continue to make its own credit analysis, appraisals and
decisions in taking or not taking action under or based upon this Agreement, the other Loan Documents or any related agreement or any
document furnished hereunder or thereunder, and to make such investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the Group Members and their Affiliates. Except for notices,
reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative
Agent shall have no duty or responsibility to provide any Lender with any credit or other information concerning the business, operations,
property, condition (financial or otherwise), prospects or creditworthiness of any Group Member or any Affiliate of a Group Member that
may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys in fact or Affiliates.
9.7
Indemnification. Each of the Lenders agrees to indemnify each of the Administrative Agent, the Issuing Lender and the
Swingline Lender and each of its Related Parties in its capacity as such (to the extent not reimbursed by the Borrower or any other Loan
Party and without limiting the obligation of the Borrower or any other Loan Party to do so) according to its Aggregate Exposure Percentage
in effect on the date on which indemnification is sought under this Section 9.7 (or, if indemnification is sought after the date upon which the
Commitments shall have terminated and the Loans shall have been paid in full, in accordance with its Aggregate Exposure Percentage
immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind whatsoever that may at any time (whether before or after the payment of the Loans) be imposed
on, incurred by or asserted against the Administrative Agent or such other Person in any way relating to or arising out of, the Commitments,
this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by the Administrative Agent or such other Person under or in connection with
any of the foregoing and any other amounts not reimbursed by the Borrower or such other Loan Party; provided that no Lender shall be liable
for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements that are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted primarily from the
Administrative Agent’s or such other Person’s gross negligence or willful misconduct, and that with respect to such unpaid amounts owed to
any Issuing Lender or Swingline Lender solely in its capacity as such, only the Revolving Lenders shall be required to pay such unpaid
amounts, such payment to be made severally among them based on such Revolving Lenders’ Revolving Percentage (determined as of the
time that the applicable unreimbursed expense or indemnity payment is sought). The agreements in this Section shall survive the payment of
the Loans and all other amounts payable hereunder.
9.8
Agent in Its Individual Capacity. The Person serving as the Administrative Agent hereunder shall have the same rights and
powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and the
term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person
109
serving as the Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend
money to, own securities of, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business
with the Borrower or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without
any duty to account therefor to the Lenders.
9.9
Successor Administrative Agent.
(a)
The Administrative Agent may at any time give notice of its resignation to the Lenders and the Borrower. Upon
receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor.
If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the
retiring Administrative Agent gives notice of its resignation (or such earlier day as shall be agreed by the Required Lenders) (the
“Resignation Effective Date”), then the retiring Administrative Agent may (but shall not be obligated to), on behalf of the Lenders, appoint a
successor Administrative Agent meeting the qualifications set forth above; provided that in no event shall any such successor Administrative
Agent be a Defaulting Lender. Whether or not a successor has been appointed, such resignation shall become effective in accordance with
such notice on the Resignation Effective Date.
(b)
If the Person serving as Administrative Agent is a Defaulting Lender pursuant to clause (d) of the definition thereof,
the Required Lenders may, to the extent permitted by applicable law, by notice in writing to the Borrower and such Person remove such
Person as Administrative Agent and, in consultation with the Borrower, appoint a successor. If no such successor shall have been so
appointed by the Required Lenders and shall have accepted such appointment within 30 days (or such earlier day as shall be agreed by the
Required Lenders) (the “Removal Effective Date”), then such removal shall nonetheless become effective in accordance with such notice on
the Removal Effective Date.
(c)
With effect from the Resignation Effective Date or the Removal Effective Date (as applicable) (i) the retiring or
removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents (except
that in the case of any collateral security held by the Administrative Agent on behalf of the Secured Parties under any of the Loan
Documents, the retiring or removed Administrative Agent shall continue to hold such collateral security until such time as a successor
Administrative Agent is appointed and such collateral security is assigned to such successor Administrative Agent) and (ii) except for any
indemnity payments owed to the retiring or removed Administrative Agent, all payments, communications and determinations provided to be
made by, to or through the Administrative Agent shall instead be made by or to each Lender directly, until such time, if any, as the Required
Lenders appoint a successor Administrative Agent as provided for above in this Section. Upon the acceptance of a successor’s appointment
as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of
the retiring or removed Administrative Agent (other than any rights to indemnity payments owed to the retiring or removed Administrative
Agent), and the retiring or removed Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the
other Loan Documents (if not already discharged therefrom as provided above in this Section). The fees payable by the Borrower to a
successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such
successor. After the retiring or removed Administrative Agent’s resignation or removal hereunder and under the other Loan Documents, the
provisions of Section 9 and Section 10.5 shall continue in effect for the benefit of such retiring or removed Administrative Agent, its sub-
agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring or removed
Administrative Agent was acting as the Administrative Agent.
110
9.10
Collateral and Guaranty Matters.
(a)
The Lenders irrevocably authorize the Administrative Agent, at its option and in its discretion,
(i)
to release any Lien on any Collateral or other property granted to or held by the Administrative Agent under
any Loan Document (A) upon the Discharge of Obligations (other than contingent indemnification obligations) and the expiration or
termination of all Letters of Credit (other than Letters of Credit as to which other arrangements satisfactory to the Administrative Agent and
the applicable Issuing Lender shall have been made), (B) that is sold or otherwise disposed of or to be sold or otherwise disposed of as part of
or in connection with any sale or other disposition permitted hereunder or under any other Loan Document, or (C) subject to Section 10.1, if
approved, authorized or ratified in writing by the Required Lenders;
under any Loan Document to the holder of any Lien on such property that is permitted by Sections 7.3 (g) and (i); and
(ii)
to subordinate any Lien on any Collateral or other property granted to or held by the Administrative Agent
ceases to be a Subsidiary as a result of a transaction permitted under the Loan Documents.
(iii)
to release any Guarantor from its obligations under the Guarantee and Collateral Agreement if such Person
Upon request by the Administrative Agent at any time, the Required Lenders will confirm in writing the Administrative Agent’s
authority to release or subordinate its interest in particular types or items of property, or to release any Guarantor from its obligations under
the guaranty pursuant to this Section 9.10.
(b)
The Administrative Agent shall not be responsible for or have a duty to ascertain or inquire into any representation
or warranty regarding the existence, value or collectability of the Collateral, the existence, priority or perfection of the Administrative
Agent’s Lien thereon, or any certificate prepared by any Loan Party in connection therewith, nor shall the Administrative Agent be
responsible or liable to the Lenders for any failure to monitor or maintain any portion of the Collateral.
(c)
Notwithstanding anything contained in any Loan Document, no Secured Party shall have any right individually to
realize upon any of the Collateral or to enforce any guaranty of the Obligations (including any such guaranty provided by the Guarantors
pursuant to the Guarantee and Collateral Agreement), it being understood and agreed that all powers, rights and remedies under the Loan
Documents may be exercised solely by the Administrative Agent on behalf of the Secured Parties in accordance with the terms thereof;
provided that, for the avoidance of doubt, in no event shall a Secured Party be restricted hereunder from filing a proof of claim on its own
behalf during the pendency of a proceeding relative to any Loan Party under any Debtor Relief Law or any other judicial proceeding. In the
event of a foreclosure by the Administrative Agent on any of the Collateral pursuant to a public or private sale or other disposition, the
Administrative Agent or any Secured Party may be the purchaser or licensor of any or all of such Collateral at any such sale or other
disposition, and the Administrative Agent, as agent for and representative of such Secured Party (but not any Lender or Lenders in its or their
respective individual capacities unless the Required Lenders shall otherwise agree in writing) shall be entitled, for the purpose of bidding and
making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any
of the Obligations as a credit on account of the purchase price for any Collateral payable by the Administrative Agent on behalf of the
111
Secured Parties at such sale or other disposition. Each Secured Party, whether or not a party hereto, will be deemed, by its acceptance of the
benefits of the Collateral and of the guarantees of the Obligations provided by the Loan Parties under the Guarantee and Collateral
Agreement, to have agreed to the foregoing provisions. In furtherance of the foregoing, and not in limitation thereof, no Specified Swap
Agreement and no Cash Management Agreement, the Obligations under which constitute Obligations, will create (or be deemed to create) in
favor of any Secured Party that is a party thereto any rights in connection with the management or release of any Collateral or of the
Obligations of any Loan Party under any Loan Document except as expressly provided herein or in the Guarantee and Collateral Agreement.
By accepting the benefits of the Collateral and of the guarantees of the Obligations provided by the Loan Parties under the Guarantee and
Collateral Agreement, any Secured Party that is a Cash Management Bank or a Qualified Counterparty shall be deemed to have appointed the
Administrative Agent to serve as administrative agent and collateral agent under the Loan Documents and to have agreed to be bound by the
Loan Documents as a Secured Party thereunder, subject to the limitations set forth in this paragraph.
9.11
Administrative Agent May File Proofs of Claim. In case of the pendency of any proceeding under any Debtor Relief Law
or any other judicial proceeding relative to any Loan Party, the Administrative Agent (irrespective of whether the principal of any Loan or
Obligation in respect of any Letter of Credit shall then be due and payable as herein expressed or by declaration or otherwise and irrespective
of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered (but not obligated), by
intervention in such proceeding or otherwise:
(a)
to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans,
Obligations in respect of any Letter of Credit and all other Obligations that are owing and unpaid and to file such other documents as may be
necessary or advisable to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other
amounts due the Lenders and the Administrative Agent under Sections 2.9 and 10.5) allowed in such judicial proceeding; and
(b)
to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the
same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby
authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent
to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation,
expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative
Agent under Sections 2.9 and 10.5.
Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on
behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any
Lender to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.
9.12
[Reserved].
9.13
Cash Management Bank and Qualified Counterparty Reports. Each Cash Management Bank and each Qualified
Counterparty agrees to furnish to the Administrative Agent, as
112
frequently as the Administrative Agent may reasonably request, with a summary of all Obligations in respect of Cash Management Services
and/or Specified Swap Agreements, as applicable, due or to become due to such Cash Management Bank or Qualified Counterparty, as
applicable. In connection with any distributions to be made hereunder, the Administrative Agent shall be entitled to assume that no amounts
are due to any Cash Management Bank or Qualified Counterparty (in its capacity as a Cash Management Bank or Qualified Counterparty and
not in its capacity as a Lender) unless the Administrative Agent has received written notice thereof from such Cash Management Bank or
Qualified Counterparty and if such notice is received, the Administrative Agent shall be entitled to assume that the only amounts due to such
Cash Management Bank or Qualified Counterparty on account of Cash Management Services or Specified Swap Agreements are set forth in
such notice.
9.14
Survival. This Section 9 shall survive the Discharge of Obligations.
SECTION 10
MISCELLANEOUS
10.1
Amendments and Waivers.
(a)
Neither this Agreement, any other Loan Document (other than any L/C Related Document), nor any terms hereof or
thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 10.1. The Required Lenders and
each Loan Party party to the relevant Loan Document may, or, with the written consent of the Required Lenders, the Administrative Agent
and each Loan Party party to the relevant Loan Document may, from time to time, (i) enter into written amendments, supplements or
modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan
Documents or changing in any manner the rights of the Lenders or of the Loan Parties hereunder or thereunder or (ii) waive, on such terms
and conditions as the Required Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the
requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided that no such
waiver and no such amendment, supplement or modification shall (A) forgive the principal amount or extend the final scheduled date of
maturity of any Loan, reduce the stated rate of any interest or fee payable hereunder (except that no amendment or modification of defined
terms used in the financial covenants in this Agreement or waiver of any Default or Event of Default or the right to receive interest at the
Default Rate shall constitute a reduction in the rate of interest or fees for purposes of this clause (A)) or extend the scheduled date of any
payment thereof, or increase the amount or extend the expiration date of any Lender’s Revolving Commitment, in each case, without the
written consent of each Lender directly affected thereby; (B) eliminate or reduce the voting rights of any Lender under this Section 10.1
without the written consent of such Lender; (C) reduce any percentage specified in the definition of Required Lenders, consent to the
assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents, release all or
substantially all of the Collateral or release all or substantially all of the value of the guarantees (taken as a whole) of the Guarantors from
their obligations under the Guarantee and Collateral Agreement, in each case without the written consent of all Lenders; (D) (i) amend,
modify or waive the pro rata requirements of Section 2.18 or any other provision of the Loan Documents requiring pro rata treatment of the
Lenders in a manner that adversely affects Revolving Lenders without the written consent of each Revolving Lender or (ii) amend, modify or
waive the pro rata requirements of Section 2.18 or any other provision of the Loan Documents requiring pro rata treatment of the Lenders in
a manner that adversely affects the L/C Lenders without the written consent of each L/C Lender; (E) [reserved]; (F) amend, modify or waive
any provision of Section 9 without the written consent of the Administrative Agent; (G) amend, modify or waive any provision of
113
Section 2.6 or 2.7 without the written consent of the Swingline Lender; (H) amend, modify or waive any provision of Section 3, or Section
1.6 without the written consent of the Administrative Agent, the Issuing Lender and each Lender; or (I) (i) amend or modify the application
of payments set forth in Section 8.3 in a manner that adversely affects Revolving Lenders without the written consent of each affected
Revolving Lender, (ii) amend or modify the application of payments set forth in Section 8.3 in a manner that adversely affects L/C Lenders
without the written consent of the L/C Lenders, or (iii) amend or modify the application of payments provisions set forth in Section 8.3 in a
manner that adversely affects the Issuing Lender, any Cash Management Bank or any Qualified Counterparty, as applicable, without the
written consent of the Issuing Lender, such Cash Management Bank or any such Qualified Counterparty, as applicable. Any such waiver and
any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Loan Parties, the
Lenders, the Administrative Agent, the Issuing Lender, each Cash Management Bank, each Qualified Counterparty, and all future holders of
the Loans. In the case of any waiver, the Loan Parties, the Lenders and the Administrative Agent shall be restored to their former position and
rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured during the
period such waiver is effective; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right
consequent thereon. Notwithstanding the foregoing, the Issuing Lender may amend any of the L/C Related Documents without the consent of
the Administrative Agent or any other Lender and the Issuing Lender, Administrative Agent and the Borrower may make customary
technical amendments if any Letter of Credit shall be issued hereunder in a currency other than U.S. Dollars. Notwithstanding anything to the
contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder (and any
amendment, waiver or consent which by its terms requires the consent of all Lenders or each affected Lender may be effected with the
consent of the applicable Lenders other than Defaulting Lenders), except that (x) the Revolving Commitment of any Defaulting Lender may
not be increased or extended without the consent of such Lender and (y) any waiver, amendment or modification requiring the consent of all
Lenders or each affected Lender that by its terms affects any Defaulting Lender disproportionately adversely relative to other affected
Lenders shall require the consent of such Defaulting Lender.
(b)
Notwithstanding anything to the contrary contained in Section 10.1(a) above, in the event that the Borrower requests
that this Agreement or any of the other Loan Documents be amended or otherwise modified in a manner which would require the consent of
all of the Lenders and such amendment or other modification is agreed to by the Borrower, the Required Lenders and the Administrative
Agent, then, with the consent of the Borrower, the Administrative Agent and the Required Lenders, this Agreement or such other Loan
Document may be amended without the consent of the Lender or Lenders who are unwilling to agree to such amendment or other
modification (each, a “Minority Lender”), to provide for:
(i)
(ii)
the termination of the Commitment of each such Minority Lender;
the assumption of the Loans and Commitment of each such Minority Lender by one or more Replacement
Lenders pursuant to the provisions of Section 2.23; and
the payment of all interest, fees and other obligations payable or accrued in favor of each Minority Lender
and such other modifications to this Agreement or to such Loan Documents as the Borrower, the Administrative Agent and the Required
Lenders may determine to be appropriate in connection therewith.
(iii)
114
(c)
Notwithstanding any provision herein to the contrary, this Agreement may be amended (or amended and restated)
with the written consent of the Required Lenders, the Administrative Agent, and the Borrower, (i) to add one or more additional credit or
term loan facilities to this Agreement and to permit all such additional extensions of credit and all related obligations and liabilities arising in
connection therewith and from time to time outstanding thereunder to share ratably (or on a basis subordinated to the existing facilities
hereunder) in the benefits of this Agreement and the other Loan Documents with the obligations and liabilities from time to time outstanding
in respect of the existing facilities hereunder, and (ii) in connection with the foregoing, to permit, as deemed appropriate by the
Administrative Agent and approved by the Required Lenders, the Lenders providing such additional credit facilities to participate in any
required vote or action required to be approved by the Required Lenders.
(d)
Notwithstanding any provision herein to the contrary, any Cash Management Agreement may be amended or
otherwise modified by the parties thereto in accordance with the terms thereof without the consent of the Administrative Agent or any
Lender.
(e)
Notwithstanding any provision herein or in any other Loan Document to the contrary, no Cash Management Bank
and no Qualified Counterparty shall have any voting or approval rights hereunder (or be deemed a Lender) solely by virtue of its status as the
provider or holder of Cash Management Services or Specified Swap Agreements or Obligations owing thereunder, nor shall the consent of
any such Cash Management Bank or Qualified Counterparty, as applicable, be required for any matter, other than in their capacities as
Lenders, to the extent applicable.
(f)
Notwithstanding any other provision herein to the contrary, no consent of any Lender (or other Secured Party other
than the Administrative Agent) shall be required to effectuate any amendment to implement any Increase permitted by Section 2.27 or
extension of the Revolving Termination Date permitted by Section 2.28.
(g)
The Administrative Agent may, with the consent of the Borrower only, amend, modify or supplement this Agreement
or any of the Loan Documents to cure any omission, mistake or defect.
10.2
Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing
(including by facsimile or electronic mail), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or
made when delivered, or 3 Business Days after being deposited in the mail, postage prepaid, or, in the case of facsimile or electronic mail
notice, when received, addressed as follows in the case of the Borrower and the Administrative Agent, and as set forth in an administrative
questionnaire delivered to the Administrative Agent in the case of the Lenders, or to such other address as may be hereafter notified by the
respective parties hereto:
115
Borrower:
Administrative Agent:
Stitch Fix, Inc.
One Montgomery St. Suite 1500
San Francisco, CA 94104
Attention: Legal Department
E-Mail: legal-notices@stitchfix.com
with a copy (which shall not constitute notice) to :
Cooley LLP
101 California Street
San Francisco, CA 94111-5800
Attention: Maricel Mojares-Moore
Email: mmoore@cooley.com
Silicon Valley Bank
2400 Hanover Street
Palo Alto, CA 94304
Attn: Jon Wolter
E-Mail: JWolter@svb.com
with a copy (which shall not constitute notice) to:
Morrison & Foerster LLP
200 Clarendon Street
Boston, Massachusetts 02116
Attention: Charles W. Stavros, Esq.
E-Mail: Cstavros@mofo.com
provided that any notice, request or demand to or upon the Administrative Agent or the Lenders shall not be effective until received.
(a)
Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic
communications (including email and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent; provided
that the foregoing shall not apply to notices to any Lender pursuant to Section 2 unless otherwise agreed by the Administrative Agent and the
applicable Lender. The Administrative Agent or any Loan Party may, in its discretion, agree to accept notices and other communications to it
hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to
particular notices or communications. Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an
email address shall be deemed received upon the sender’s receipt of an acknowledgment from the intended recipient (such as by the “return
receipt requested” function, as available, return email or other written acknowledgment); and (ii) notices or communications posted to an
Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its email address as described in
the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor; provided
that, for both clauses (i) and (ii), if such notice or other communication is not sent during the normal business hours of the recipient, such
notice or
116
communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient.
(b)
Any party hereto may change its address or facsimile number for notices and other communications hereunder by
notice to the other parties hereto.
(c)
(i) Each Loan Party agrees that the Administrative Agent may, but shall not be obligated to, make the
Communications (as defined below) available to the Issuing Lender and the other Lenders by posting the Communications on the Platform.
(ii) The Platform is provided “as is” and “as available.” The Agent Parties (as defined below) do not warrant the
adequacy of the Platform and expressly disclaim liability for errors or omissions in the Communications. No warranty of any kind, express,
implied or statutory, including, without limitation, any warranty of merchantability, fitness for a particular purpose, non-infringement of
third-party rights or freedom from viruses or other code defects, is made by any Agent Party in connection with the Communications or the
Platform. In no event shall the Administrative Agent or any of its Related Parties (collectively, the “Agent Parties”) have any liability to the
Borrower or the other Loan Parties, any Lender or any other Person for damages of any kind, including direct or indirect, special, incidental
or consequential damages, losses or expenses (whether in tort, contract or otherwise) arising out of the Borrower’s, any Loan Party’s or the
Administrative Agent’s transmission of communications through the Platform. “Communications” means, collectively, any notice, demand,
communication, information, document or other material provided by or on behalf of any Loan Party pursuant to any Loan Document or the
transactions contemplated therein which is distributed to the Administrative Agent, any Lender or the Issuing Lender by means of electronic
communications pursuant to this Section, including through the Platform.
10.3
No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Administrative
Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof;
nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not
exclusive of any rights, remedies, powers and privileges provided by law.
10.4
Survival of Representations and Warranties. All representations and warranties made hereunder, in the other Loan
Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and
delivery of this Agreement and the making of the Loans and other extensions of credit hereunder.
10.5
Expenses; Indemnity; Damage Waiver.
(a)
Costs and Expenses. The Borrower shall pay (i) all reasonable and documented out-of-pocket expenses incurred by
the Administrative Agent and its Affiliates (including the reasonable fees, charges and disbursements of counsel for the Administrative
Agent), in connection with the syndication of the Facilities, the preparation, negotiation, execution, delivery and administration of this
Agreement and the other Loan Documents, or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not
the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable and documented out(cid:0)of(cid:0)pocket expenses incurred
by the Issuing Lender in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any
117
demand for payment thereunder, and (iii) all reasonable and documented out(cid:0)of(cid:0)pocket expenses incurred by the Administrative Agent or
any Lender (including the fees, charges and disbursements of counsel for the Administrative Agent or any Lender), in connection with the
enforcement or protection of its rights (A) in connection with this Agreement and the other Loan Documents, including its rights under this
Section, or (B) in connection with the Loans made or Letters of Credit issued or participated in hereunder, including all such documented
out(cid:0)of(cid:0)pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit.
(b)
Indemnification by the Borrower. The Borrower shall indemnify the Administrative Agent (and any sub-agent
thereof), each Lender (including the Issuing Lender), and each Related Party of any of the foregoing Persons (each such Person being called
an “Indemnitee”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses
(including the fees, charges and disbursements of any counsel for any Indemnitee), incurred by any Indemnitee or asserted against any
Indemnitee by any Person (including the Borrower or any other Loan Party) other than such Indemnitee and its Related Parties arising out of,
in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument
contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder or thereunder or the
consummation of the transactions contemplated hereby or thereby, (ii) any Loan or Letter of Credit or the use or proposed use of the proceeds
therefrom (including any refusal by the Issuing Lender to honor a demand for payment under a Letter of Credit if the documents presented in
connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or release of
Materials of Environmental Concern on or from any property owned or operated by the Group Members, or any Environmental Liability
related in any way to the Group Members, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the
foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by the Borrower or any other Loan Party,
and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the
extent that such losses, claims, damages, liabilities or related expenses (x) are determined by a court of competent jurisdiction by final and
nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee or (y) result from a claim
brought by the Borrower or any other Loan Party against an Indemnitee for breach in bad faith of such Indemnitee’s obligations hereunder or
under any other Loan Document, if the Borrower or such Loan Party has obtained a final and nonappealable judgment in its favor on such
claim as determined by a court of competent jurisdiction. This Section 10.5(b) shall not apply with respect to Taxes other than any Taxes that
represent losses, claims, damages, etc. arising from any non-Tax claim.
(c)
Reimbursement by Lenders. To the extent that the Borrower for any reason fails indefeasibly to pay any amount
required under paragraph (a) or (b) of this Section to be paid by it to the Administrative Agent (or any sub-agent thereof), the Issuing Lender,
the Swingline Lender or any Related Party of any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any
such sub-agent), the Issuing Lender, the Swingline Lender or such Related Party, as the case may be, such Lender’s pro rata share
(determined as of the time that the applicable unreimbursed expense or indemnity payment is sought based on each Lender’s Revolving
Percentage at such time) of such unpaid amount (including any such unpaid amount in respect of a claim asserted by such Lender); provided
that with respect to such unpaid amounts owed to the Issuing Lender or the Swingline Lender solely in its capacity as such, only the
Revolving Lenders shall be required to pay such unpaid amounts, such payment to be made severally among them based on such Revolving
Lenders’ Revolving Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought);
provided further, that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case
118
may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent), the Issuing Lender or the Swingline Lender in
its capacity as such, or against any Related Party of any of the foregoing acting for the Administrative Agent (or any such sub-agent), the
Issuing Lender or the Swingline Lender in connection with such capacity. The obligations of the Lenders under this paragraph (c) are subject
to the provisions of Sections 2.1, 2.4 and 2.20(e).
(d)
Waiver of Consequential Damages, Etc. To the fullest extent permitted by applicable law, the Borrower and each
other Loan Party shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect,
consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this
Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby,
any Loan or Letter of Credit, or the use of the proceeds thereof. No Indemnitee referred to in paragraph (b) above shall be liable for any
damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications,
electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions
contemplated hereby or thereby.
(e)
(f)
Payments. All amounts due under this Section shall be payable promptly after demand therefor.
Survival. Each party’s obligations under this Section shall survive the Discharge of Obligations.
10.6
Successors and Assigns; Participations and Assignments.
(a)
Successors and Assigns Generally. The provisions of this Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns permitted hereby (which, for purposes of this Section 10.6, shall include any
Cash Management Bank and any Qualified Counterparty), except that neither the Borrower nor any other Loan Party may assign or otherwise
transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender, and no
Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions
of paragraph (b) of this Section, (ii) by way of participation in accordance with the provisions of Section 10.6(d), or (iii) by way of pledge or
assignment of a security interest subject to the restrictions of Section 10.6(e) (and any other attempted assignment or transfer by any party
hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the
parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in paragraph (d) of this Section
and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or
equitable right, remedy or claim under or by reason of this Agreement.
(b)
Assignments by Lenders. Any Lender may at any time assign to one or more assignees all or a portion of its rights
and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that (in
each case with respect to any Facility) any such assignment shall be subject to the following conditions:
(i)
Minimum Amounts.
(A)
and/or the Loans at the time owing to it (in each case with respect to
in the case of an assignment of the entire remaining amount of the assigning Lender’s Commitment
119
any Facility) or contemporaneous assignments to related Approved Funds (determined after giving effect to such assignments) that equal at
least the amount specified in paragraph (b)(i)(B) of this Section in the aggregate or in the case of an assignment to a Lender, an Affiliate of a
Lender or an Approved Fund, no minimum amount need be assigned; and
(B)
in any case not described in paragraph (b)(i)(A) of this Section, the aggregate amount of the
Commitment (which for this purpose includes Loans outstanding thereunder) or, if the applicable Commitment is not then in effect, the
principal outstanding balance of the Loans of the assigning Lender subject to each such assignment (determined as of the date the
Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the
Assignment and Assumption, as of the Trade Date) shall not be less than $5,000,000, unless each of the Administrative Agent and, so long as
no Default or Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably
withheld or delayed).
(ii)
Proportionate Amounts. Each partial assignment shall be made as an assignment of a proportionate part of
all the assigning Lender’s rights and obligations under this Agreement with respect to the Loan or the Commitment assigned, except that this
clause (ii) shall not prohibit any Lender from assigning all or a portion of its rights and obligations among separate Facilities on a non-pro
rata basis.
(iii)
paragraph (b)(i)(B) of this Section and, in addition:
Required Consents. No consent shall be required for any assignment except to the extent required by
the consent of the Borrower (such consent not to be unreasonably withheld or delayed) shall be
required unless (x) an Event of Default has occurred and is continuing at the time of such assignment, or (y) such assignment is to a Lender,
an Affiliate of a Lender or an Approved Fund; provided that the Borrower shall be deemed to have consented to any such assignment unless
it shall object thereto by written notice to the Administrative Agent within 5 Business Days after having received notice thereof;
(A)
the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed)
shall be required for assignments in respect of the Revolving Facility if such assignment is to a Person that is not a Lender with a Revolving
Commitment; and
(B)
withheld or delayed) shall be required for any assignment in respect of the Revolving Facility.
(C)
the consent of the Issuing Lender and the Swingline Lender (such consent not to be unreasonably
(iv)
Assignment and Assumption. The parties to each assignment shall execute and deliver to the Administrative
Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500; provided that the Administrative Agent
may, in its sole discretion, elect to waive such processing and recordation fee in the case of any assignment. The assignee, if it is not a
Lender, shall deliver to the Administrative Agent any such administrative questionnaire as the Administrative Agent may request.
No Assignment to Certain Persons. No such assignment shall be made to (A) the Borrower or any of the
Borrower’s Affiliates or Subsidiaries or (B) to any Defaulting Lender or any of its Subsidiaries, or any Person who, upon becoming a Lender
hereunder, would constitute any of the foregoing Persons described in this clause (B).
(v)
120
company, investment vehicle or trust established for, or owned and operated for the primary benefit of, a natural Person).
(vi)
No Assignment to Natural Persons. No such assignment shall be made to a natural Person (or a holding
(vii)
Certain Additional Payments. In connection with any assignment of rights and obligations of any Defaulting
Lender hereunder, no such assignment shall be effective unless and until, in addition to the other conditions thereto set forth herein, the
parties to the assignment shall make such additional payments to the Administrative Agent in an aggregate amount sufficient, upon
distribution thereof as appropriate (which may be outright payment, purchases by the assignee of participations or subparticipations, or other
compensating actions, including funding, with the consent of the Borrower and the Administrative Agent, the applicable pro rata share of
Loans previously requested but not funded by the Defaulting Lender, to each of which the applicable assignee and assignor hereby
irrevocably consent), to (x) pay and satisfy in full all payment liabilities then owed by such Defaulting Lender to the Administrative Agent,
the Issuing Lender, the Swingline Lender and each other Lender hereunder (and interest accrued thereon), and (y) acquire (and fund as
appropriate) its full pro rata share of all Loans and participations in Letters of Credit and Swingline Loans in accordance with its Revolving
Percentage. Notwithstanding the foregoing, in the event that any assignment of rights and obligations of any Defaulting Lender hereunder
shall become effective under applicable law without compliance with the provisions of this paragraph, then the assignee of such interest shall
be deemed to be a Defaulting Lender for all purposes of this Agreement until such compliance occurs.
Subject to acceptance and recording thereof by the Administrative Agent pursuant to paragraph (c) of this Section, from and after the
effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Agreement and, to the extent of
the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the
assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations
under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under
this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 2.19, 2.20, 2.21 and
10.5 with respect to facts and circumstances occurring prior to the effective date of such assignment; provided, that except to the extent
otherwise expressly agreed by the affected parties, no assignment by a Defaulting Lender will constitute a waiver or release of any claim of
any party hereunder arising from that Lender’s having been a Defaulting Lender. Any assignment or transfer by a Lender of rights or
obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such
Lender of a participation in such rights and obligations in accordance with paragraph (d) of this Section.
(c)
Register. The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at one
of its offices in California a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and
addresses of the Lenders, and the Commitments of, and principal amounts (and stated interest) of the Loans owing to, each Lender pursuant
to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive absent manifest error, and the Borrower,
the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a
Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower and any Lender, at any
reasonable time and from time to time upon reasonable prior notice.
(d)
Participations. Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative
Agent, sell participations to any Person (other than a natural Person, a
121
holding company, investment vehicle or trust established for, or owned and operated for the primary benefit of, a natural Person, or the
Borrower or any of the Borrower’s Affiliates or Subsidiaries) (each, a “Participant”) in all or a portion of such Lender’s rights and/or
obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it); provided that (i) such Lender’s
obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations, and (iii) the Borrower, the Administrative Agent, the Issuing Lender and the other Lenders shall continue to
deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. For the avoidance of
doubt, each Lender shall be responsible for the indemnities under Sections 2.20(e) and 9.7 with respect to any payments made by such
Lender to its Participant(s).
Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole
right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that
such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment,
modification or waiver which affects such Participant and for which the consent of such Lender is required (as described in Section 10.1).
The Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.19, 2.20 and 2.21 (subject to the requirements and
limitations therein, including the requirements under Section 2.20(f) (it being understood that the documentation required under
Section 2.20(f) shall be delivered by such Participant to the Lender granting such participation)) to the same extent as if it were a Lender and
had acquired its interest by assignment pursuant to Section 10.6(b); provided that such Participant (A) agrees to be subject to the provisions
of Sections 2.23 as if it were an assignee under Section 10.6(b); and (B) shall not be entitled to receive any greater payment under Sections
2.19 or 2.20, with respect to any participation, than its participating Lender would have been entitled to receive, except to the extent such
entitlement to receive a greater payment results from a change in any Requirement of Law that occurs after the Participant acquired the
applicable participation. Each Lender that sells a participation agrees, at the Borrower’s request and expense, to use reasonable efforts to
cooperate with the Borrower to effectuate the provisions of Section 2.23 with respect to any Participant. To the extent permitted by law, each
Participant also shall be entitled to the benefits of Section 10.7 as though it were a Lender; provided that such Participant agrees to be subject
to Section 2.18(k) as though it were a Lender. Each Lender that sells a participation shall, acting solely for this purpose as a non-fiduciary
agent of the Borrower, maintain a register on which it enters the name and address of each Participant and the principal amounts (and stated
interest) of each Participant’s interest in the Loans or other obligations under the Loan Documents (the “Participant Register”); provided that
no Lender shall have any obligation to disclose all or any portion of the Participant Register (including the identity of any Participant or any
information relating to a Participant’s interest in any Commitments, Loans, Letters of Credit or its other obligations under any Loan
Document) to any Person except to the extent that such disclosure is necessary to establish that such commitment, loan, letter of credit or
other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant
Register shall be conclusive absent manifest error, and such Lender shall treat each Person whose name is recorded in the Participant Register
as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. For the avoidance of doubt,
the Administrative Agent (in its capacity as Administrative Agent) shall have no responsibility for maintaining a Participant Register.
(e)
Certain Pledges. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights
under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve
Bank; provided that no such pledge or
122
assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a
party hereto.
(f)
Notes. The Borrower, upon receipt by the Borrower of written notice from the relevant Lender, agrees to issue Notes
to any Lender requiring Notes to facilitate transactions of the type described in Section 10.6.
(g)
Representations and Warranties of Lenders. Each Lender, upon execution and delivery hereof or upon succeeding to
an interest in the Commitments or Loans, as the case may be, represents and warrants as of the Closing Date or as of the effective date of the
applicable Assignment and Assumption that (i) it is an Eligible Assignee; (ii) it has experience and expertise in the making of or investing in
commitments, loans or investments such as the Commitments and Loans; and (iii) it will make or invest in its Commitments and Loans for its
own account in the ordinary course of its business and without a view to distribution of such Commitments and Loans within the meaning of
the Securities Act or the Exchange Act, or other federal securities laws (it being understood that, subject to the provisions of this
Section 10.6, the disposition of such Commitments and Loans or any interests therein shall at all times remain within its exclusive control).
10.7
Adjustments; Set-off.
(a)
Except to the extent that this Agreement expressly provides for payments to be allocated to a particular Lender or to
the Lenders under a particular Facility, if any Lender (a “Benefitted Lender”) shall receive any payment of all or part of the Obligations
owing to it, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set(cid:0)off, pursuant to events or proceedings of
the nature referred to in Section 8.1(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other
Lender, if any, in respect of the Obligations owing to such other Lender, such Benefitted Lender shall purchase for cash from the other
Lenders a participating interest in such portion of the Obligations owing to each such other Lender, or shall provide such other Lenders with
the benefits of any such collateral, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of such
collateral ratably with each of the Lenders; provided that if all or any portion of such excess payment or benefits is thereafter recovered from
such Benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but
without interest.
(b)
Upon (i) the occurrence and during the continuance of any Event of Default and (ii) obtaining the prior written
consent of the Administrative Agent, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, without
prior notice to the Borrower or any other Loan Party, any such notice being expressly waived by the Borrower and each Loan Party, to the
fullest extent permitted by applicable law, to set off and apply any and all deposits (general or special, time or demand, provisional or final),
in any currency, at any time held or owing, and any other credits, indebtedness, claims or obligations, in any currency, in each case whether
direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender, its Affiliates or any branch or
agency thereof to or for the credit or the account of the Borrower or any other Loan Party, as the case may be, against any and all of the
obligations of the Borrower or such other Loan Party now or hereafter existing under this Agreement or any other Loan Document to such
Lender or its Affiliates, irrespective of whether or not such Lender or Affiliate shall have made any demand under this Agreement or any
other Loan Document and although such obligations of the Borrower or such other Loan Party may be contingent or unmatured or are owed
to a branch, office or Affiliate of such Lender different from the branch, office or Affiliate holding such deposit or obligated on such
indebtedness; provided, that in the
123
event that any Defaulting Lender or any of its Affiliates shall exercise any such right of setoff, (x) all amounts so set off shall be paid over
immediately to the Administrative Agent for further application in accordance with the provisions of Section 2.23 and, pending such
payment, shall be segregated by such Defaulting Lender or Affiliate thereof from its other funds and deemed held in trust for the benefit of
the Administrative Agent and the Lenders, and (y) the Defaulting Lender shall provide promptly to the Administrative Agent a statement
describing in reasonable detail the Obligations owing to such Defaulting Lender or Affiliate thereof as to which it exercised such right of
setoff. Each Lender agrees to notify the Borrower and the Administrative Agent promptly after any such setoff and application made by such
Lender or any of its Affiliates; provided that the failure to give such notice shall not affect the validity of such setoff and application. The
rights of each Lender and its Affiliates under this Section 10.7 are in addition to other rights and remedies (including other rights of set-off)
which such Lender or its Affiliates may have.
10.8
Payments Set Aside. To the extent that any payment by or on behalf of the Borrower is made to the Administrative Agent or
any Lender, or the Administrative Agent or any Lender exercises its right of setoff, and such payment or the proceeds of such setoff or any
part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement
entered into by the Administrative Agent or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection
with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred, and
(b) each Lender severally agrees to pay to the Administrative Agent upon demand its applicable share (without duplication) of any amount so
recovered from or repaid by the Administrative Agent, plus interest thereon from the date of such demand to the date such payment is made
at a rate per annum equal to the Federal Funds Effective Rate from time to time in effect. The obligations of the Lenders under clause (b) of
the preceding sentence shall survive the Discharge of Obligations.
10.9
Interest Rate Limitation. Notwithstanding anything to the contrary contained in any Loan Document, the interest paid or
agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable law (the
“Maximum Rate”). If the Administrative Agent or any Lender shall receive interest in an amount that exceeds the Maximum Rate, the excess
interest shall be applied to the principal of the Loans or, if it exceeds such unpaid principal, refunded to the Borrower. In determining whether
the interest contracted for, charged, or received by the Administrative Agent or a Lender exceeds the Maximum Rate, such Person may, to the
extent permitted by applicable law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b)
exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total
amount of interest throughout the contemplated term of the Obligations hereunder.
10.10 Counterparts; Electronic Execution of Assignments.
(a)
This Agreement may be executed by one or more of the parties to this Agreement on any number of separate
counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed
signature page of this Agreement by facsimile or other electronic mail transmission shall be effective as delivery of an original executed
counterpart hereof. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Administrative
Agent.
124
(b)
The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption shall be
deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity
or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as
provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State
Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.
10.11 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
Without limiting the foregoing provisions of this Section 10.11, if and to the extent that the enforceability of any provisions in this
Agreement relating to Defaulting Lenders shall be limited under or in connection with any Insolvency Proceeding, as determined in good
faith by the Administrative Agent or the Issuing Lender, as applicable, then such provisions shall be deemed to be in effect only to the extent
not so limited.
10.12
Integration. This Agreement and the other Loan Documents represent the entire agreement of the Borrower, the other Loan
Parties, the Administrative Agent and the Lenders with respect to the subject matter hereof and thereof, and there are no promises,
undertakings, representations or warranties by the Administrative Agent or any Lender relative to the subject matter hereof not expressly set
forth or referred to herein or in the other Loan Documents.
10.13 GOVERNING LAW. THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, AND ANY CLAIM,
CONTROVERSY, DISPUTE, CAUSE OF ACTION, OR PROCEEDING (WHETHER BASED IN CONTRACT, TORT, OR
OTHERWISE) BASED UPON, ARISING OUT OF, CONNECTED WITH, OR RELATING TO THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT (EXCEPT, AS TO ANY OTHER LOAN DOCUMENT, AS EXPRESSLY SET FORTH THEREIN)
AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY, AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HERETO AND THERETO, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. This Section 10.13 shall survive the Discharge of Obligations.
10.14 Submission to Jurisdiction; Waivers. Each party hereto hereby irrevocably and unconditionally:
(a)
agrees that all disputes, controversies, claims, actions and other proceedings involving, directly or indirectly, any
matter in any way arising out of, related to, or connected with, this Agreement, any other Loan Document, any contemplated transactions
related hereto or thereto, or the relationship between any Loan Party, on the one hand, and the Administrative Agent or any Lender or any
other Secured Party, on the other hand, and any and all other claims of the Borrower or any other Group Member against the Administrative
Agent or any Lender or any other Secured Party of any kind, shall be brought only in a state court located in the Borough of Manhattan, or, to
the extent permitted by law, in a federal court sitting in the Borough of Manhattan; provided that nothing in this Agreement shall be deemed
to operate to preclude the Administrative Agent or any Lender or any other Secured Party from bringing suit or taking other legal action in
any other jurisdiction to realize on the Collateral or any other security for the Obligations, or to enforce a judgment or other court order in
favor of Administrative
125
Agent or such Lender or any other Secured Party, to the extent permitted by law. The Borrower, on behalf of itself and each other Loan Party
(i) expressly submits and consents in advance to such jurisdiction in any action or suit commenced in any such court and to the selection of
any referee referred to below, (ii) hereby waives any objection that it may have based upon lack of personal jurisdiction, improper venue, or
forum non conveniens and hereby consents to the granting of such legal or equitable relief as is deemed appropriate by such court, and (iii)
agrees that it shall not file any motion or other application seeking to change the venue of any such suit or other action. The Borrower, on
behalf of itself and each other Loan Party, hereby waives personal service of any summons, complaints, and other process issued in any such
action or suit and agrees that service of any such summons, complaints, and other process may be made by registered or certified mail
addressed to the Borrower at the address set forth in Section 10.2 of this Agreement and that service so made shall be deemed completed
upon the earlier to occur of the Borrower’s actual receipt thereof or 3 days after deposit in the U.S. mails, proper postage prepaid;
(b)
WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ITS RIGHT TO A JURY TRIAL OF
ANY CLAIM, CAUSE OF ACTION, OR PROCEEDING (WHETHER BASED IN CONTRACT, TORT, OR OTHERWISE)
BASED UPON, ARISING OUT OF, CONNECTED WITH, OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN
DOCUMENT, OR ANY TRANSACTION CONTEMPLATED HEREBY AND THEREBY, AMONG ANY OF THE PARTIES
HERETO AND THERETO. THIS WAIVER IS A MATERIAL INDUCEMENT FOR THE PARTIES HERETO TO ENTER INTO
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. THE BORROWER HAS REVIEWED THIS WAIVER WITH ITS
COUNSEL; and
(c)
waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or
proceeding referred to in this Section any special, exemplary, punitive or consequential damages.
This Section 10.14 shall survive the Discharge of Obligations.
10.15 Acknowledgements. The Borrower hereby acknowledges that:
(a)
it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan
Documents;
(b)
in connection with all aspects of each transaction contemplated hereby (including in connection with any
amendment, waiver or other modification hereof or of any other Loan Document), the Borrower, on behalf of each Group Member,
acknowledges and agrees that: (i) (A) the arranging and other services regarding this Agreement provided by the Administrative Agent and
any Affiliate thereof, and the Lenders and any Affiliate thereof are arm’s-length commercial transactions between the Borrower, each other
Loan Party and their respective Affiliates, on the one hand, and the Administrative Agent, the Lenders and their respective applicable
Affiliates (collectively, solely for purposes of this Section 10.15, the “Lenders”), on the other hand, (B) each of the Borrower and the other
Loan Parties has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate, and (C) the
Borrower and each other Loan Party is capable of evaluating, and understands and accepts, the terms, risks and conditions of the transactions
contemplated hereby and by the other Loan Documents; (ii) (A) the Administrative Agent, its Affiliates, each Lender and their Affiliates is
and has been acting solely as a principal and, except as expressly agreed in writing by the relevant parties, has not been, is not, and will not
be acting as an advisor, agent or fiduciary for Borrower, any other Loan Party or any of their
126
respective Affiliates, or any other Person and (B) neither the Administrative Agent, its Affiliates, any Lender nor any of their Affiliates has
any obligation to the Borrower, any other Loan Party or any of their respective Affiliates with respect to the transactions contemplated hereby
except those obligations expressly set forth herein and in the other Loan Documents; and (iii) the Administrative Agent, its Affiliates, the
Lenders and their Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Borrower, the
other Loan Parties and their respective Affiliates, and neither the Administrative Agent, its Affiliates, any Lender nor any of their Affiliates
has any obligation to disclose any of such interests to the Borrower, any other Loan Party or any of their respective Affiliates. To the fullest
extent permitted by law, each of the Borrower and each other Loan Party hereby waives and releases any claims that it may have against the
Administrative Agent, its Affiliates, each Lender and any of their Affiliates with respect to any breach or alleged breach of agency or
fiduciary duty in connection with any aspect of any transactions contemplated hereby; and
(c)
no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions
contemplated hereby among the Lenders or among the Group Members and the Lenders.
10.16 Releases of Guarantees and Liens.
(a)
Notwithstanding anything to the contrary contained herein or in any other Loan Document, the Administrative Agent
is hereby irrevocably authorized by each Lender (without requirement of notice to or consent of any Lender except as expressly required by
Section 10.1) to take any action requested by the Borrower having the effect of releasing any Collateral or guarantee obligations (1) to the
extent necessary to permit consummation of any transaction not prohibited by any Loan Document or that has been consented to in
accordance with Section 10.1 or (2) under the circumstances described in Section 10.16(b) below.
(b)
Upon the Discharge of Obligations, the Collateral (other than any cash collateral securing any Specified Swap
Agreements, any Cash Management Services or outstanding Letters of Credit) shall be released from the Liens created by the Security
Documents and Cash Management Agreements (other than any Cash Management Agreements used to Cash Collateralize any Obligations
arising in connection with Cash Management Agreements), and all obligations (other than those expressly stated to survive such termination)
of the Administrative Agent and each Loan Party under the Security Documents and Cash Management Agreements (other than any Cash
Management Agreements used to Cash Collateralize any Obligations arising in connection with Cash Management Agreements) shall
terminate, all without delivery of any instrument or performance of any act by any Person.
10.17 Treatment of Certain Information; Confidentiality. Each of the Administrative Agent and each Lender agrees to maintain
the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its Related
Parties (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information
and instructed to keep such Information confidential); (b) to the extent required or requested by any regulatory authority purporting to have
jurisdiction over such Person or its Related Parties (including any self-regulatory authority, such as the National Association of Insurance
Commissioners); (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process; (d) to any other
party hereto; (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding
relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder; (f) subject to an agreement
containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective
127
assignee of or Participant in, any of its rights and obligations under this Agreement, or (ii) any actual or prospective party (or its Related
Parties) to any swap, derivative or other transaction under which payments are to be made by reference to the Borrower and its obligations,
this Agreement or payments hereunder; (g) on a confidential basis to (i) any rating agency in connection with rating the Group Members or
the Facilities or (ii) the CUSIP Service Bureau or any similar agency in connection with the issuance and monitoring of CUSIP numbers with
respect to the Facilities; (h) with the consent of the Borrower; or (i) to the extent such Information (x) becomes publicly available other than
as a result of a breach of this Section, or (y) becomes available to the Administrative Agent, any Lender or any of their respective Affiliates
on a non-confidential basis from a source other than the Borrower. In addition, the Administrative Agent, the Lenders, and any of their
respective Related Parties, may (A) disclose the existence of this Agreement and information about this Agreement to market data collectors,
similar service providers to the lending industry and service providers to the Administrative Agent or the Lenders in connection with the
administration of this Agreement, the other Loan Documents, and the Commitments; and (B) use any information (not constituting
Information subject to the foregoing confidentiality restrictions) related to the syndication and arrangement of the credit facilities
contemplated by this Agreement in connection with marketing, press releases, or other transactional announcements or updates provided to
investor or trade publications, including the placement of “tombstone” advertisements in publications of its choice at its own expense.
Notwithstanding anything herein to the contrary, any party to this Agreement (and any employee, representative, or other agent of
any party to this Agreement) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the
transactions contemplated by this Agreement and all materials of any kind (including opinions or other tax analyses) that are provided to it
relating to such tax treatment and tax structure. However, any such information relating to the tax treatment or tax structure is required to be
kept confidential to the extent necessary to comply with any applicable federal or state securities laws, rules, and regulations.
For purposes of this Section, “Information” means all information received from the Group Members relating to the Group Members
or any of their respective businesses, other than any such information that is available to the Administrative Agent or any Lender on a non-
confidential basis prior to disclosure by the Group Members; provided that, in the case of information received from the Group Members
after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the
confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has
exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential
information.
10.18 Automatic Debits. With respect to any principal, interest, fee, or any other cost or expense (including attorney costs of the
Administrative Agent or any Lender payable by the Borrower hereunder) due and payable to the Administrative Agent or any Lender under
the Loan Documents, the Borrower hereby irrevocably authorizes the Administrative Agent to debit any deposit account of the Borrower
maintained with the Administrative Agent in an amount such that the aggregate amount debited from all such deposit accounts does not
exceed such principal, interest, fee or other cost or expense. If there are insufficient funds in such deposit accounts to cover the amount then
due, such debits will be reversed (in whole or in part, in the Administrative Agent’s sole discretion) and such amount not debited shall be
deemed to be unpaid. No such debit under this Section 10.18 shall be deemed a set-off.
10.19
Judgment Currency. If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder
or any other Loan Document in one currency into another
128
currency, the rate of exchange used shall be that at which in accordance with normal banking procedures the Administrative Agent could
purchase the first currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of
the Borrower and each other Loan Party in respect of any such sum due from it to the Administrative Agent or any Lender hereunder or
under any other Loan Document shall, notwithstanding any judgment in a currency (the “Judgment Currency”) other than that in which such
sum is denominated in accordance with the applicable provisions of this Agreement (the “Agreement Currency”), be discharged only to the
extent that on the Business Day following receipt by the Administrative Agent or such Lender, as the case may be, of any sum adjudged to be
so due in the Judgment Currency, the Administrative Agent or such Lender, as the case may be, may in accordance with normal banking
procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less
than the sum originally due to the Administrative Agent or any Lender from the Borrower or any other Loan Party in the Agreement
Currency, the Borrower and each other Loan Party agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the
Administrative Agent or such Lender, as the case may be, against such loss. If the amount of the Agreement Currency so purchased is greater
than the sum originally due to the Administrative Agent or any Lender in such currency, the Administrative Agent or such Lender, as the case
may be, agrees to return the amount of any excess to the Borrower or other Loan Party, as applicable (or to any other Person who may be
entitled thereto under applicable law).
10.20 Patriot Act; Other Regulations. Each Lender and the Administrative Agent (for itself and not on behalf of any other party)
hereby notifies the Borrower and each other Loan Party that, pursuant to the requirements of “know your customer” and anti-money
laundering rules and regulations, including the Patriot Act and 31 C.F.R. § 1010.230, it is required to obtain, verify and record information
that identifies each Loan Party and certain related parties thereto, which information includes the names and addresses and other information
that will allow such Lender or the Administrative Agent, as applicable, to identify each Loan Party and certain of their beneficial owners and
other officers in accordance with the Patriot Act and 31 C.F.R. § 1010.230. The Borrower and each other Loan Party will, and will cause each
of their respective Subsidiaries to, provide, to the extent commercially reasonable or required by any Requirement of Law, such information
and documents and take such actions as are reasonably requested by the Administrative Agent or any Lender to assist the Administrative
Agent and the Lenders in maintaining compliance with “know your customer” requirements under the PATRIOT Act, 31 C.F.R. § 1010.230
or other applicable anti-money laundering laws.
10.21
Acknowledgement and Consent to Bail-In of EEA Financial Institutions.
Notwithstanding anything to the contrary in this Agreement or in any other Loan Document, each party hereto acknowledges that any
liability of any EEA Financial Institution arising under any Loan Document, to the extent such liability is unsecured, may be subject to the
write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound
by:
(a)
the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities
arising hereunder which may be payable to it by any party hereto that is an EEA Financial Institution;
(b)
a conversion of all, or a portion of, such liability into Capital Stock in such EEA Financial Institution, its parent
undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such Capital Stock will be accepted by it in
lieu of any rights with respect to any such liability under this Agreement or any other Loan Document; or
129
(c)
of any EEA Resolution Authority.
the variation of the terms of such liability in connection with the exercise of the write-down and conversion powers
10.22 Acknowledgement Regarding Any Supported QFCs. To the extent that the Loan Documents provide support, through a
guarantee or otherwise, for Swap Agreements or any other agreement or instrument that is a QFC (such support, “QFC Credit Support” and
each such QFC a “Supported QFC”), the parties acknowledge and agree as follows with respect to the resolution power of the Federal
Deposit Insurance Corporation under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (together with the regulations promulgated thereunder, the “U.S. Special Resolution Regimes”) in respect of such Supported
QFC and QFC Credit Support (with the provisions below applicable notwithstanding that the Loan Documents and any Supported QFC may
in fact be stated to be governed by the laws of the State of New York and/or of the United States or any other state of the United States):
(a)
In the event a Covered Entity that is party to a Supported QFC (each, a “Covered Party”) becomes subject to a
proceeding under a U.S. Special Resolution Regime, the transfer of such Supported QFC and the benefit of such QFC Credit Support (and
any interest and obligation in or under such Supported QFC and such QFC Credit Support, and any rights in property securing such
Supported QFC or such QFC Credit Support) from such Covered Party will be effective to the same extent as the transfer would be effective
under the U.S. Special Resolution Regime if the Supported QFC and such QFC Credit Support (and any such interest, obligation and rights in
property) were governed by the laws of the United States or a state of the United States. In the event a Covered Party or a BHC Act Affiliate
of a Covered Party becomes subject to a proceeding under a U.S. Special Resolution Regime, Default Rights under the Loan Documents that
might otherwise apply to such Supported QFC or any QFC Credit Support that may be exercised against such Covered Party are permitted to
be exercised to no greater extent than such Default Rights could be exercised under the U.S. Special Resolution Regime if the Supported
QFC and the Loan Documents were governed by the laws of the United States or a state of the United States.
(b)
As used in this Section 10.22, the following terms have the following meanings:
“BHC Act Affiliate” of a party means an “affiliate” (as such term is defined under, and interpreted in accordance with, 12
U.S.C. 1841(k)) of such party.
“Covered Entity” means any of the following:
(i)
(ii)
a “covered entity” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b)
a “covered bank” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 47.3(b); or
(iii)
a “covered FSI” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 382.2(b).
“Default Right” has the meaning assigned to that term in, and shall be interpreted in accordance with, 12 C.F.R. §§ 252.81,
47.2 or 382.1, as applicable.
“QFC” has the meaning assigned to the term “qualified financial contract” in, and shall be interpreted in accordance with, 12
U.S.C. 5390(c)(8)(D).
130
[Remainder of page left blank intentionally]
131
In Witness Whereof, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly
authorized officers as of the day and year first above written.
BORROWER:
STITCH FIX, INC.
By:___/s/ Michael
Smith_______________
Name:___Michael
Smith_______________
Title:___Chief Financial
Officer__________
ADMINISTRATIVE AGENT
SILICON VALLEY BANK
By:___/s/ Jonathan
Wolter_______________
Name:___Jonathan
Wolter_______________
Title:___Director______________________
LENDERS:
SILICON VALLEY BANK,
an Issuing Lender, Swingline Lender and as a Lender
By:___/s/ Jonathan Wolter________
Name:___Jonathan Wolter________
Title:___Director________________
JPMORGAN CHASE BANK, N.A.,
as a Lender
By:___/s/ Tony
Yung__________________
Name:___Tony
Yung__________________
Title:___Executive
Director_____________
Exhibit 10.23
FIRST AMENDMENT
TO CREDIT AGREEMENT
This First Amendment to Credit Agreement (this “Amendment”) dated and effective as of July 24, 2020 (the “First
Amendment Effective Date”) by and among STITCH FIX, INC., a Delaware corporation (the “Borrower”), the several banks
and other financial institutions or entities party hereto (the “Lenders”) and SILICON VALLEY BANK (“SVB”), as the
Administrative Agent (SVB, in such capacity, the “Administrative Agent”), and as the Issuing Lender and the Swingline Lender.
W I T N E S S E T H:
WHEREAS, the Borrower, the Administrative Agent, the Issuing Lender and the Swingline Lender are parties to that
certain Credit Agreement dated as of June 3, 2020 (as amended, modified, supplemented or restated and in effect from time to
time, the “Credit Agreement”); and
WHEREAS, the Borrower has requested that the Lenders and the Administrative Agent agree to modify and amend
certain terms and conditions of the Credit Agreement, subject to the terms and conditions contained herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
1.
Capitalized Terms. All capitalized terms used herein and not otherwise defined shall have the same meaning
herein as in the Credit Agreement or in the other Loan Documents, as applicable.
Amendment to the Credit Agreement. The Credit Agreement is hereby amended by amending and restating the definition
of “Current Assets” in Section 1.1 thereof as follows:
““Current Assets”: on any date, the sum of (a) the Loan Parties’ consolidated, unrestricted and unencumbered
cash and Cash Equivalents subject to, at all times on and after August 3, 2020, a perfected first priority Lien in
favor of the Administrative Agent, plus (b) the amount of the Loan Parties’ net billed Accounts, plus (c) the Loan
Parties’ Inventory (excluding consigned Inventory, Inventory that is aged more than 90 days, damaged Inventory,
and Inventory marked for clearance) held for sale in the ordinary course of business (valued at the lower of cost
and fair market value), located in the United States which is either (i) at a location owned, leased or controlled by
a Loan Party for which the Administrative Agent has received, at all times on and after August 3, 2020, a landlord
waiver in form and substance reasonably satisfactory to the Administrative Agent (or at such a location for which
the Borrower has used commercially reasonably efforts to obtain such a landlord waiver); provided that there shall
be no requirement to obtain or use commercially reasonable efforts to obtain a landlord waiver for locations where
the value of Collateral located therein is less than $5,000,000, (ii) in-transit to or in the possession of the
customers of the Loan Parties and for which title has not transferred to such customer, or (iii) in-transit from a
Loan Party’s vendor on a vehicle from a freight processing facility or vendor location to a location described in
clause (c)(i), which has cleared customs and for which title has transferred from the applicable vendor to a Loan
Party that is, in each case of clauses (a) through (c) above, as reported on the Borrower’s consolidated balance
sheet most recently delivered under Section 6.1.”
1
2.
Conditions Precedent to Effectiveness. This Amendment shall not be effective until each of the following
conditions precedent have been fulfilled to the satisfaction of the Administrative Agent:
(a)
(b)
(c)
(d)
This Amendment shall have been duly executed and delivered by the respective parties hereto. The Administrative
Agent shall have received a fully executed copy hereof.
All necessary consents and approvals to this Amendment shall have been obtained.
No Default or Event of Default shall have occurred and be continuing.
The representations and warranties set forth in this Amendment, the Credit Agreement, as amended by this
Amendment, and after giving effect hereto, and the other Loan Documents to which it is a party (i) that is qualified
by materiality shall be true and correct, and (ii) that is not qualified by materiality, shall be true and correct in all
material respects, in each case, on and as of such date as if made on and as of such date, except to the extent any
such representation and warranty expressly relates to an earlier date, in which case such representation and
warranty shall have been true and correct in all material respects (or all respects, as applicable) as of such earlier
date.
(e)
The Lenders and the Administrative Agent shall have received all fees required to be paid, and all expenses for
which invoices have been presented (including the reasonable fees and expenses of legal counsel required to be
paid hereunder or under any other Loan Document), on or before the First Amendment Effective Date.
3.
Representations and Warranties. Each Loan Party hereby represents and warrants to the Administrative Agent and
the Lenders as follows:
(a)
(b)
This Amendment is, and each other Loan Document to which it is or will be a party, when executed and delivered
by each Loan Party that is a party thereto, will be the legally valid and binding obligation of such Loan Party,
enforceable against such Loan Party in accordance with its respective terms, except as enforcement may be limited
by equitable principles or by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or
limiting creditors’ rights generally.
The representations and warranties set forth in this Amendment, the Credit Agreement, as amended by this
Amendment and after giving effect hereto, and the other Loan Documents to which it is a party (i) that is qualified
by materiality shall be true and correct, and (ii) that is not qualified by materiality, shall be true and correct in all
material respects, in each case, on and as of such date as if made on and as of such date, except to the extent any
such representation and warranty expressly relates to an earlier date, in which case such representation and
warranty shall have been true and correct in all material respects (or all respects, as applicable) as of such earlier
date.
4.
Payment of Costs and Fees. The Borrower shall pay to the Administrative Agent all reasonable costs, out-of-
pocket expenses, and fees and charges of every kind in connection with the preparation, negotiation, execution and delivery of
this Amendment and any documents and instruments relating hereto (which costs include, without limitation, the reasonable fees
and expenses of any attorneys retained by the Administrative Agent) to the extent provided in Section 10.5 of the Credit
Agreement.
2
5.
Choice of Law. This Amendment and the rights of the parties hereunder, shall be determined under, governed by,
and construed in accordance with the laws of the New York. Section 10.14 of the Credit Agreement is hereby incorporated by
reference.
6.
Counterpart Execution. This Amendment may be executed in any number of counterparts, all of which when taken
together shall constitute one and the same instrument, and any of the parties hereto may execute this Amendment by signing any
such counterpart. Delivery of an executed counterpart of this Amendment by telefacsimile or other electronic method of
transmission shall be equally as effective as delivery of an original executed counterpart of this Amendment.
7.
(a)
Effect on Loan Documents.
The Credit Agreement, as amended hereby, and each of the other Loan Documents shall be and remain in full
force and effect in accordance with their respective terms and hereby are ratified and confirmed in all respects.
The execution, delivery, and performance of this Amendment shall not operate as a modification or waiver of any
right, power, or remedy of the Administrative Agent or any Lender under the Credit Agreement or any other Loan
Document except as expressly set forth herein. The modifications and other agreements herein are limited to the
specifics hereof (including facts or occurrences on which the same are based), shall not apply with respect to any
facts or occurrences other than those on which the same are based, shall not excuse any non-compliance with the
Loan Documents, and shall not operate as a consent or waiver to any matter under the Loan Documents. Except
for the amendments to the Credit Agreement expressly set forth herein, the Credit Agreement and other Loan
Documents shall remain unchanged and in full force and effect. To the extent any terms or provisions of this
Amendment conflict with those of the Credit Agreement or other Loan Documents, the terms and provisions of
this Amendment shall control.
(b)
To the extent that any terms and conditions in any of the Loan Documents shall contradict or be in conflict with
any terms or conditions of the Credit Agreement, after giving effect to this Amendment, such terms and conditions
are hereby deemed modified or amended accordingly to reflect the terms and conditions of the Credit Agreement
as modified or amended hereby.
(c)
This Amendment is a Loan Document.
8.
Entire Agreement. This Amendment, and terms and provisions hereof, the Credit Agreement and the other Loan
Documents constitute the entire understanding and agreement between the parties hereto with respect to the subject matter hereof
and supersedes any and all prior or contemporaneous amendments or understandings with respect to the subject matter hereof,
whether express or implied, oral or written.
9.
Severability. In case any provision in this Amendment shall be invalid, illegal or unenforceable, such provision
shall be severable from the remainder of this Amendment and the validity, legality and enforceability of the remaining provisions
shall not in any way be affected or impaired thereby.
[Signature pages follow]
3
In Witness Whereof, the parties hereto have caused this Amendment to be duly executed and delivered by their proper
and duly authorized officers as of the day and year first above written.
BORROWER:
STITCH FIX, INC.
By:___/s/ Scott Darling_______________
Name:___Scott Darling_______________
Title:___Chief Legal Officer___________
ADMINISTRATIVE AGENT AND LENDER:
SILICON VALLEY BANK
By:___/s/ Jonathan Wolter_____________
Name:___Jonathan Wolter_____________
Title:___Director_____________________
JPMORGAN CHASE BANK, N.A.
as a Lender
By:___/s/ Barry Bergman_____________
Name:___Barry Bergman_____________
Title:___Managing Director___________
Exhibit 21.1
List of Subsidiaries of Stitch Fix, Inc.
Name of Subsidiary
Stitch Fix Gift Cards, LLC
Stitch Fix UK, Ltd.
Jurisdiction
Virginia
United Kingdom
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-221650, 333-234058, 333-234323 and 333-246358 on Form S-8 of our
reports dated September 25, 2020, relating to the financial statements of Stitch Fix, Inc. and its subsidiaries (the “Company”), and the effectiveness of the
Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of Stitch Fix, Inc. and its subsidiaries for the year
ended August 1, 2020.
Exhibit 23.1
/s/ Deloitte & Touche LLP
San Francisco, California
September 25, 2020
Exhibit 31.1
I, Katrina Lake, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Stitch Fix, Inc.;
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;
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;
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.
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:
September 25, 2020
/s/ Katrina Lake
Katrina Lake
Founder, Chief Executive Officer and Director
(Principal Executive Officer)
Exhibit 31.2
I, Michael Smith, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Stitch Fix, Inc.;
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;
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;
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.
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:
September 25, 2020
/s/ Michael Smith
Michael Smith
President, Chief Operating Officer, and Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 32.1
CERTIFICATION
In connection with the Annual Report of Stitch Fix, Inc. (the “Company”) on Form 10-K for the period ended August 1, 2020, as filed with the Securities
and Exchange Commission (the “Annual Report”), we, Katrina Lake, Chief Executive Officer of the Company, and Michael Smith, 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 Annual Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and
2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: September 25, 2020
/s/ Katrina Lake
Katrina Lake
Founder, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Michael Smith
Michael Smith
President, Chief Operating Officer, and Interim Chief Financial
Officer
(Principal Financial and Accounting Officer)