Petco Health & Wellness Company, Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are subject to market risks arising from transactions in the normal course of our business. These risks are primarily associated with interest rate fluctuations, as well as changes in our credit standing, based on the capital and credit markets, which are not predictable. We do not currently hold any instruments for trading purposes. Interest Rate Risk We are subject to interest rate risk in connection with the senior secured credit facilities. As of January 30, 2021, we had $1,678.1 million outstanding under the term loan facility and no amounts outstanding under the revolving credit facility. The Amended Term Loan Facility and the Amended Revolving Credit Facility each bore interest at variable rates. An increase of 100 basis points in the variable rates on these facilities as of January 30, 2021 would have increased annual cash interest in the aggregate by approximately $17.0 million. As of January 30, 2021, the underlying interest rate on these facilities was at the floor in the agreements. On March 4, 2021, we entered into the First Lien Term Loan and repaid all outstanding principal and interest on the Amended Term Loan Facility . We also entered into the ABL Revolving Credit Facility and terminated the Amended Revolving Credit Facility. Refer to Note 8 to the consolidated financial statements for further discussion on these refinancing transactions. We cannot predict market fluctuations in interest rates and their impact on our debt, nor can there be any assurance that long-term fixed-rate debt will be available at favorable rates, if at all. Consequently, future results may differ materially from estimated results due to adverse changes in interest rates or debt availability. Credit Risk As of January 30, 2021, our cash and cash equivalents were maintained at major financial institutions in the United States, and our current deposits are likely in excess of insured limits. We believe these institutions have sufficient assets and liquidity to conduct their operations in the ordinary course of business with little or no credit risk to us. Foreign Currency Risk Substantially all of our business is currently conducted in U.S. dollars. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar as compared to other currencies would have a material effect on our operating results. 58 Item 8. Financial Statement s and Supplementary Data. PETCO HEALTH AND WELLNESS COMPANY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Audited Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 60 Consolidated Balance Sheets 62 Consolidated Statements of Operations 63 Consolidated Statements of Comprehensive Loss 64 Consolidated Statements of Stockholders’ / Members’ Equity 65 Consolidated Statements of Cash Flows 66 Notes to Consolidated Financial Statements 67 Other Financial Information Schedule I — Parent Company Condensed Financial Information 95 59 P ETCO HEALTH AND WELLNESS COMPANY, INC. Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Petco Health and Wellness Company, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Petco Health and Wellness Company, Inc. (the Company) as of January 30, 2021 and February 1, 2020, the related consolidated statements of operations, comprehensive loss, stockholders’ / members' equity and cash flows for each of the three years in the period ended January 30, 2021, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 30, 2021 and February 1, 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 30, 2021, in conformity with U.S. generally accepted accounting principles. 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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 Matter 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 the critical audit matter does not alter in any way our opinion on the consolidated 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. 60 Vendor Allowances Description of the Matter As discussed in Note 1 of the consolidated financial statements, the Company receives vendor allowances from certain merchandise vendors through a variety of programs intended to offset the cost of inventory and for promoting and selling merchandise inventory. Purchases-based vendor allowances are recorded as a reduction of merchandise inventory and are recognized as a reduction to cost of sales when the associated inventory is sold. Other promotional allowances not specifically related to volume of purchases or sales, such as cooperative advertising, are recognized as a reduction to cost of sales over the performance period as the product promotion or placement is completed. Funds that are determined to be a reimbursement of specific, incremental, and identifiable costs incurred to sell a vendor’s products are recorded as an offset to the related expense when incurred. Auditing vendor allowances was complex due to the number of individual agreements and the varying terms in the respective agreements. Significant audit effort was required to evaluate the terms of the vendor agreements and the related treatment of the vendor allowances in the consolidated financial statements. How We Addressed the Matter in Our Audit In order to test the recorded amount of vendor allowances, for a sample of vendor contracts, we tested whether the recorded amounts were consistent with the nature of the vendor allowances and evaluated whether the allowances had been earned as of January 30, 2021, were appropriately recorded in the statement of operations and were appropriately classified as a reduction of cost of sales or selling, general and administrative expenses based on the contractual terms. For a sample of vendor arrangements, we confirmed the terms of the agreement directly with the vendor, and for confirmations not received, we performed alternative procedures such as agreeing to underlying contractual arrangements, testing the settlement of the arrangement, and holding discussions with applicable Company buyers to understand the terms of the agreement. We also evaluated and recalculated the amount of deferred vendor allowances recorded as a reduction to merchandise inventory by developing an expectation for the amount based on the historical amounts recorded as a percentage of vendor allowances earned and comparing our expectation to the amount recorded by management. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2020. San Diego, California April 5, 2021 61 PET CO HEALTH AND WELLNESS COMPANY, INC. CONSOLIDATED BALANCE SHEETS (In thousands) January 30, 2021 February 1, 2020 ASSETS Current assets: Cash and cash equivalents $ 111,402 $ 148,785 Receivables, less allowance for credit losses ($3,267 and $1,982, respectively) 41,827 31,516 Merchandise inventories, net 538,675 478,968 Prepaid expenses 40,032 24,854 Other current assets 45,613 26,882 Total current assets 777,549 711,005 Fixed assets, net 627,547 656,256 Operating lease right-of-use assets 1,328,108 1,459,604 Goodwill 2,179,310 2,179,310 Trade name 1,025,000 1,025,000 Other intangible assets, net 714 1,553 Other long-term assets 137,474 122,390 Total assets $ 6,075,702 $ 6,155,118 LIABILITIES AND EQUITY Current liabilities: Accounts payable and book overdrafts $ 339,485 $ 293,203 Accrued salaries and employee benefits 129,484 93,685 Accrued expenses and other liabilities 145,846 148,181 Current portion of operating lease liabilities 258,289 278,229 Current portion of long-term debt and other lease liabilities 2,203 28,643 Total current liabilities 875,307 841,941 Senior secured credit facilities, net, excluding current portion 1,646,281 2,362,302 Senior notes, net — 866,145 Operating lease liabilities, excluding current portion 1,083,575 1,156,742 Deferred taxes, net 280,920 265,276 Other long-term liabilities 134,354 101,651 Total liabilities 4,020,437 5,594,057 Commitments and contingencies (Notes 8, 9 and 16) Stockholders' equity / members' equity: Members’ interest (1) — 1,358,130 Class A common stock, par value $0.001 per share (1,000,000,000 shares authorized and 226,424,140 shares issued and outstanding as of January 30, 2021) 226 — Class B-1 common stock, par value $0.001 per share (75,000,000 shares authorized and 37,790,781 shares issued and outstanding as of January 30, 2021) 38 — Class B-2 common stock, par value $0.000001 per share (75,000,000 shares authorized and 37,790,781 shares issued and outstanding as of January 30, 2021) — — Preferred stock, par value $0.001 per share (25,000,000 shares authorized and no shares issued or outstanding as of January 30, 2021) — — Additional paid-in-capital 2,092,110 — Accumulated deficit (1) (22,251 ) (780,466 ) Accumulated other comprehensive loss (1,275 ) (8,273 ) Total stockholders’ equity / members' equity 2,068,848 569,391 Noncontrolling interest (13,583 ) (8,330 ) Total equity 2,055,265 561,061 Total liabilities and equity $ 6,075,702 $ 6,155,118 (1) Balances prior to the Company's conversion to a Delaware corporation have been reclassified to additional paid-in capital to give effect to the organizational transactions described in Note 1. See accompanying notes to consolidated financial statements. 62 PETCO HEALTH AND WELLNESS COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Fiscal years ended January 30, 2021 February 1, 2020 February 2, 2019 (52 weeks) (52 weeks) (52 weeks) Net sales $ 4,920,202 $ 4,434,514 $ 4,392,173 Cost of sales 2,813,464 2,527,995 2,487,334 Gross profit 2,106,738 1,906,519 1,904,839 Selling, general and administrative expenses 1,912,314 1,776,919 1,746,387 Goodwill and indefinite-lived intangible impairment — 19,000 373,172 Operating income (loss) 194,424 110,600 (214,720 ) Interest income (653 ) (335 ) (420 ) Interest expense 219,083 253,018 243,744 Loss on extinguishment of debt 17,549 — 460 Loss before income taxes and (income) loss from equity method investees (41,555 ) (142,083 ) (458,504 ) Income tax benefit (3,337 ) (35,658 ) (45,840 ) (Income) loss from equity method investees (6,482 ) (2,441 ) 1,124 Net loss (31,736 ) (103,984 ) (413,788 ) Net loss attributable to noncontrolling interest (5,253 ) (8,111 ) — Net loss attributable to Class A and B-1 common stockholders $ (26,483 ) $ (95,873 ) $ (413,788 ) Net loss per Class A and B-1 common share (1): Basic $ (0.13 ) $ (0.46 ) $ (1.98 ) Diluted $ (0.13 ) $ (0.46 ) $ (1.98 ) Weighted average shares used in computing net loss per Class A and B-1 common share (1): Basic 210,683 208,933 208,815 Diluted 210,683 208,933 208,815 (1) Amounts for periods prior to the Company’s conversion to a Delaware corporation have been retrospectively adjusted to give effect to the organizational transactions described in Note 1. See Note 13 for further discussion. See accompanying notes to consolidated financial statements. 63 PETCO HEALTH AND WELLNESS COMPANY, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) Fiscal years ended January 30, 2021 February 1, 2020 February 2, 2019 (52 weeks) (52 weeks) (52 weeks) Net loss $ (31,736 ) $ (103,984 ) $ (413,788 ) Net loss attributable to noncontrolling interest (5,253 ) (8,111 ) — Net loss attributable to Class A and B-1 common stockholders (26,483 ) (95,873 ) (413,788 ) Other comprehensive income (loss), net of tax: Foreign currency translation adjustment (905 ) 952 (79 ) Unrealized loss on derivatives (86 ) (9,088 ) (3,434 ) Losses on derivatives reclassified to income 7,989 2,058 1,215 Total other comprehensive income (loss), net of tax 6,998 (6,078 ) (2,298 ) Comprehensive loss (24,738 ) (110,062 ) (416,086 ) Comprehensive loss attributable to noncontrolling interest (5,253 ) (8,111 ) — Comprehensive loss attributable to Class A and B-1 common stockholders $ (19,485 ) $ (101,951 ) $ (416,086 ) See accompanying notes to consolidated financial statements. 64 PET CO HEALTH AND WELLNESS COMPANY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ / MEMBERS’ EQUITY (In thousands) Common stock Members’ interest Class A (shares) Class B-1 (shares) Class B-2 (shares) Amount Additional paid-in capital Accumulated deficit Accumulated other comprehensive income (loss) Total members’ equity Noncontrolling interest Total equity Balance at February 3, 2018 $ 1,339,272 — — — $ — $ — $ (295,337 ) $ 1,710 $ 1,045,645 $ — $ 1,045,645 Equity-based compensation expense (Note 13) 8,452 — — — — — — — 8,452 — 8,452 Repurchase of equity (102 ) — — — — — — — (102 ) — (102 ) Net loss — — — — — — (413,788 ) — (413,788 ) — (413,788 ) Foreign currency translation adjustment, net of tax of $(28) — — — — — — — (79 ) (79 ) — (79 ) Unrealized loss on derivatives, net of tax of $(1,211) — — — — — — — (3,434 ) (3,434 ) — (3,434 ) Losses on derivatives reclassified to income, net of tax of $427 — — — — — — — 1,215 1,215 — 1,215 Cumulative effect adjustments — — — — — — 1,607 (1,607 ) — — — Balance at February 2, 2019 1,347,622 — — — — — (707,518 ) (2,195 ) 637,909 — 637,909 Consolidation of joint venture — — — — — — — — — (462 ) (462 ) Equity-based compensation expense (Note 13) 9,489 — — — — — — — 9,489 — 9,489 Partial settlement of member note 1,019 — — — — — — — 1,019 — 1,019 Net loss — — — — — — (95,873 ) — (95,873 ) (8,111 ) (103,984 ) Contributions from noncontrolling interest — — — — — — — — — 243 243 Foreign currency translation adjustment, net of tax of $335 — — — — — — — 952 952 — 952 Unrealized loss on derivatives, net of tax of $(3,184) — — — — — — — (9,088 ) (9,088 ) — (9,088 ) Losses on derivatives reclassified to income, net of tax of $721 — — — — — — — 2,058 2,058 — 2,058 Cumulative effect adjustments — — — — — — 22,925 — 22,925 — 22,925 Balance at February 1, 2020 1,358,130 — — — — — (780,466 ) (8,273 ) 569,391 (8,330 ) 561,061 Equity-based compensation expense (Note 13) 9,757 — — — — 3,158 — — 12,915 — 12,915 Repurchase of equity (104 ) — — — — — — — (104 ) — (104 ) Net loss — — — — — — (26,483 ) — (26,483 ) (5,253 ) (31,736 ) Foreign currency translation adjustment, net of tax of $(318) — — — — — — — (905 ) (905 ) — (905 ) Unrealized loss on derivatives, net of tax of $(30) — — — — — — — (86 ) (86 ) — (86 ) Losses on derivatives reclassified to income, net of tax of $2,804 — — — — — — — 7,989 7,989 — 7,989 Contributions of Senior Notes (Note 9) — — — — — 573,934 — — 573,934 — 573,934 Conversion to Delaware corporation (Note 1) (1,367,783 ) 171,224 37,791 37,791 209 582,876 784,698 — — — — Issuance of common stock in initial public offering, net of offering costs (Note 1) — 55,200 — — 55 932,142 — — 932,197 — 932,197 Balance at January 30, 2021 $ — 226,424 37,791 37,791 $ 264 $ 2,092,110 $ (22,251 ) $ (1,275 ) $ 2,068,848 $ (13,583 ) $ 2,055,265 See accompanying notes to consolidated financial statements. 65 PETCO HEALTH AND WELLNESS COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Fiscal years ended January 30, 2021 February 1, 2020 February 2, 2019 (52 weeks) (52 weeks) (52 weeks) Cash flows from operating activities: Net loss $ (31,736 ) $ (103,984 ) $ (413,788 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 174,836 173,544 186,997 Amortization of debt discounts and issuance costs 24,237 23,455 22,588 Provision for deferred taxes 25,548 (45,087 ) (51,748 ) Equity-based compensation 12,915 9,489 8,452 Impairments, write-offs and losses on sale of fixed and other assets 15,606 11,871 17,677 Loss on extinguishment of debt 17,549 — 460 (Income) loss from equity method investees (6,482 ) (2,441 ) 1,124 Amounts reclassified out of accumulated other comprehensive income (Note 10) 10,793 2,806 1,642 Change in contingent consideration obligation (398 ) 883 (4 ) Goodwill and indefinite-lived intangible impairment — 19,000 373,172 Non-cash operating lease costs 430,359 441,981 — Changes in assets and liabilities: Receivables (10,311 ) (3,845 ) 23,630 Merchandise inventories (60,635 ) (8,193 ) 644 Prepaid expenses and other assets (13,842 ) (5,223 ) 9,663 Accounts payable and book overdrafts 46,303 15,928 23,771 Accrued salaries and employee benefits 34,295 (1,395 ) 18,006 Accrued expenses and other liabilities (28,289 ) (3,043 ) (21,861 ) Operating lease liabilities (399,557 ) (408,562 ) — Other long-term liabilities 27,424 (6,847 ) 2,777 Net cash provided by operating activities 268,615 110,337 203,202 Cash flows from investing activities: Cash paid for fixed assets (159,560 ) (156,906 ) (148,063 ) Cash paid for intangible assets — (450 ) (300 ) Insurance recoveries — 489 — Cash paid for other acquisitions, net of cash acquired (Note 4) — (2,813 ) — Cash from consolidation of joint venture (Note 1) — 1,205 — Cash paid for investments (1,000 ) (585 ) (9,912 ) Proceeds from sale of investment 73 — 9,145 Proceeds from sale of assets 3,302 — — Proceeds from sale-leasebacks, net (Note 3) — 18,549 2,298 Proceeds from partial surrender of officers’ life insurance — 1,470 4,150 Net cash used in investing activities (157,185 ) (139,041 ) (142,682 ) Cash flows from financing activities: Borrowings under long-term debt agreements 476,000 1,297,000 313,000 Repayments of long-term debt (1,554,890 ) (1,293,250 ) (338,250 ) Debt prepayment, issuance and refinancing costs — (58 ) (3,098 ) Payments for finance and capital lease liabilities (3,404 ) (3,447 ) (2,890 ) Partial settlement of member note — (809 ) — Cash received from noncontrolling interest — 243 — Proceeds from initial public offering, net of issuance costs 936,041 — — Repurchase of equity (105 ) — (111 ) Payment of contingent consideration (250 ) (2,750 ) (750 ) Net cash used in financing activities (146,608 ) (3,071 ) (32,099 ) Net (decrease) increase in cash, cash equivalents and restricted cash (35,178 ) (31,775 ) 28,421 Cash, cash equivalents and restricted cash at beginning of year 154,718 186,493 158,072 Cash, cash equivalents and restricted cash at end of year $ 119,540 $ 154,718 $ 186,493 Supplemental cash flow disclosures: Interest paid, net $ 178,960 $ 217,664 $ 213,254 Capitalized interest $ 499 $ 953 $ 83 Income taxes paid $ 2,388 $ 15,036 $ 11,379 Supplemental non-cash investing and financing activities disclosures: Accounts payable and accrued expenses for capital expenditures $ 19,723 $ 21,962 $ 17,132 Accrued expenses for issuance costs in initial public offering $ 3,844 $ — $ — Contributions of Senior Notes (Note 9) $ 573,934 $ — $ — See accompanying notes to consolidated financial statements. 66 PETCO HEALTH AND WELLNESS COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Description of Business and Basis of Presentation Petco Health and Wellness Company, Inc. (together with its consolidated subsidiaries, the “Company”) is a national specialty retailer of premium pet consumables, supplies and companion animals and services with 1,454 pet care centers in 50 states, the District of Columbia and Puerto Rico as of January 30, 2021. The Company also offers an expanded range of consumables, supplies and services through its www.petco.com, www.petcoach.co, www.petinsurancequotes.com, and www.pupbox.com websites. The Company was formed as a Delaware limited liability company under the name PET Acquisition LLC on November 19, 2015 as an acquisition entity controlled by Scooby LP, which was indirectly owned by funds affiliated with CVC Capital Partners, CPP Investments, a Canadian company (together with CVC Capital Partners, the “Sponsors”), and certain co-investors. On January 26, 2016, the Company completed a merger (the “Acquisition”) whereby Petco Holdings, Inc. converted from a Delaware corporation to a Delaware limited liability company and became a wholly owned subsidiary of the Company. Under this ownership structure, the Company had four classes of membership units: (i) Common Series A Units, (ii) Common Series B Units, (iii) Common Series C Units, and (iv) Voting Common Units. Corporate Conversion and Initial Public Offering In January 2021, all of the Company’s Common Series A Units, Common Series B Units, and Common Series C Units were contributed from Scooby LP to a newly formed and wholly owned subsidiary, Scooby Aggregator, LP. The Company then converted to a Delaware corporation pursuant to a statutory conversion and changed its name to Petco Health and Wellness Company, Inc. In connection with the conversion and immediately prior to the Company’s initial public offering, all outstanding membership units were converted into 171.2 million shares of newly-issued Class A common stock, 37.8 million shares of newly-issued Class B-1 common stock, and 37.8 million shares of newly-issued Class B-2 common stock. The existing balances of members’ interest and accumulated deficit prior to the conversion were reclassified to additional paid-in capital in the consolidated balance sheets. This reclassification had no effect on the Company’s results of operations. The rights of the holders of Class A common stock and Class B-1 common stock are identical in all respects, except that Class B-1 common stock does not vote on the election or removal of the Company’s directors. The rights of the holders of Class B-2 common stock differ from the rights of the holders of Class A common stock and Class B-1 common stock in that holders of Class B-2 common stock only possess the right to vote on the election or removal of the Company’s directors. On January 19, 2021, the Company completed its initial public offering of 55.2 million newly-issued shares of its Class A common stock. The price was $18.00 per share. The Company received net cash proceeds of approximately $936.0 million from the initial public offering after deducting underwriting discounts, commissions, and offering expenses through January 30, 2021, with $3.8 million of accrued offering expenses reflected in accrued expenses and other liabilities in the consolidated balance sheets. The net proceeds from the initial public offering were used to pay a portion of the principal amount and accrued interest on the Company’s debt obligations. Refer to Note 8 and Note 9 for further discussion on the Company’s use of proceeds from the initial public offering. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Petco Health and Wellness Company, Inc., its wholly owned subsidiaries, and a variable interest entity for which it is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation. 67 Use of Estimates The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates are based on information that is currently available and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions. Fiscal Year The Company’s fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. All references to a fiscal year refer to the fiscal year ending on the Saturday closest to January 31 of the following year. For example, references to fiscal 2020 refer to the fiscal year beginning on February 2, 2020 and ending on January 30, 2021. Fiscal 2020, 2019 and 2018 included 52 weeks. Segment Reporting Operating segments are components of an enterprise about which separate financial information is available and is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. A select group of senior executives collectively serves as the Company’s CODM. The Company manages its business as one reportable operating segment which is designed to sell pet food, supplies and companion animals, and services to pet parents across pet care center and online channels. Cash and Cash Equivalents Cash equivalents represent all liquid investments with original maturities of three months or less and include money market mutual funds. The Company maintains cash and cash equivalent balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances. Included in the Company’s cash and cash equivalents are credit and debit card receivables from banks, which typically settle within five business days, of $34.6 million and $31.1 million at January 30, 2021 and February 1, 2020, respectively. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated balance sheets to the total amounts reported in the consolidated statements of cash flows. Restricted cash is held in a trust used for certain employee benefit costs. January 30, 2021 February 1, 2020 February 2, 2019 Cash and cash equivalents $ 111,402 $ 148,785 $ 180,649 Restricted cash included in other current assets 8,138 5,933 5,844 Total cash, cash equivalents and restricted cash in the statement of cash flows $ 119,540 $ 154,718 $ 186,493 Outstanding checks in excess of funds on deposit (book overdrafts) totaled $52.5 million and $52.4 million at January 30, 2021 and February 1, 2020, respectively, and are reflected in accounts payable and book overdrafts in the consolidated balance sheets. Vendor Rebates and Allowances Most of the Company’s receivables are due from vendors. Receivables are stated net of an allowance for estimated credit losses, which is determined by continually evaluating individual receivables, the vendor’s financial condition and current and expected economic conditions. The additions and deductions to the allowance for estimated credit losses were not material for all periods presented. The Company receives vendor allowances, primarily in the form of cooperative advertising reimbursements, rebate incentives, prompt purchase discounts, and vendor compliance charges pursuant to agreements with certain vendors. Substantially all vendor allowances are initially deferred as a reduction of the cost of inventory purchased and recorded as a reduction to cost of sales in the consolidated statements of operations as the inventory is sold. Vendor rebates and allowances that are identified as specific, incremental and identifiable costs incurred by the Company in selling the vendors’ products are classified as a reduction of selling, general and administrative expenses in the consolidated statements of operations as the costs are incurred, as the related costs are also classified as selling, general and administrative expenses. 68 Merchandise Inventories Merchandise inventories represent finished goods and are stated at the lower of cost or net realizable value. Cost is determined by the average-cost method and includes inbound freight charges. Physical inventories are performed on a regular basis at pet care center locations and cycle counts are performed for inventory at distribution centers. During the period between counts at pet care center locations, the Company accrues for estimated losses related to inventory shrinkage based on historical inventory shrinkage results and current trends in the business. Inventory shrinkage may occur due to theft, loss, or the deterioration of goods, among other reasons. The Company assesses its inventory for estimated obsolescence or unmarketable inventory and writes down the difference between the cost of inventory and the estimated market value based upon historical mark-downs, supply on-hand and assumptions about future sales. Fixed Assets Fixed assets are stated at cost or fair value as of the date of the Acquisition less accumulated depreciation and amortization. Pet care center facilities and equipment under finance leases are recorded at the present value of minimum lease payments at the inception of the lease. Maintenance and minor repairs are expensed as incurred. Buildings, equipment, furniture and fixtures are depreciated using the straight-line method over the estimated useful life of the asset. Leasehold and building improvements are amortized using the straight-line method over the term of the lease or the estimated useful life of the improvement, whichever is shorter. Land is not depreciated. Amortization of fixed assets financed through finance leases is included in depreciation and amortization expense. The Company’s fixed assets are generally depreciated or amortized using the following estimated useful lives: Buildings 30 years Equipment 3 to 7 years Furniture and fixtures 4 to 7 years Leasehold and building improvements 5 to 10 years Costs incurred to develop internal-use software during the application development stage, which include costs to design the software configuration and interfaces, coding, installation and testing, are capitalized and reported at cost, less accumulated amortization. Costs of significant upgrades and enhancements that result in additional functionality are also capitalized, whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred. Software and capitalized development costs are included in the Company’s equipment fixed asset category and are amortized using the straight-line method over the estimated useful life of the asset. The Company assesses its fixed assets, including internal-use software, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The review of recoverability is based on estimates of the undiscounted future cash flows expected to be generated by an asset (or group of assets) at a pet care center level. If impairment exists due to the inability to recover the asset’s carrying value, impairment losses are measured as the amount by which the asset’s carrying value exceeds its fair value using the income approach and are recorded as a reduction of the related asset and charged to the consolidated statements of operations. Goodwill Goodwill represents the excess of the cost of acquired businesses over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. Goodwill is not amortized. The Company performs its annual impairment test during the fourth quarter of each fiscal year, or more frequently when warranted by events or changes in circumstances. The Company has the option to first perform a qualitative assessment of its goodwill to determine whether it is necessary to perform a quantitative impairment test. If the Company concludes it is more likely than not that its goodwill is impaired, management evaluates the recoverability of goodwill by comparing the carrying value of the Company’s reporting unit to the fair value. An impairment charge is recorded for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss recognized not exceeding the total amount of goodwill allocated to that reporting unit. 69 The Company has one reporting unit. In cases where the quantitative test is performed, t he fair value of the Company’s reporting unit is estimated by a third party valuation firm. Fair value estimates used in the quantitative impairment test include calculations using a discounted cash flow analysis and a public company analysis. The discounted cash flow analysis measures the value of an asset by the present value of its future estimated cash flows. The public company analysis analyzes transactional and financial data of publicly traded companies to develop valuation multiples. These multiples are then applied to the Company to develop an indication of fair value. Significant assumptions inherent in the valuation methodologies for goodwill are employed and include, but are not limited to, prospective financial information, growth rates, discount rates and comparable multiples from publicly traded companies in similar industries. Other Intangible Assets Other intangible assets represent the Company’s trade name, educational website content and customer lists. The Company’s trade name has an indefinite life. All other intangibles have finite lives and are amortized using the straight-line method over their estimated useful lives. The Company reviews its amortizable intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying value of its intangible assets may not be recoverable. The amount of impairment, if any, is measured based on fair value, which is determined using future projected discounted operating cash flows. The Company performs its annual impairment test during the fourth quarter of each fiscal year, or more frequently when warranted by events or changes in circumstances. The Company also has the option to first perform a qualitative assessment of its indefinite-lived intangible assets to determine whether it is necessary to perform a quantitative impairment test. In cases where the quantitative test is performed, the fair value of the Company’s indefinite-lived trade name is estimated by a third party valuation firm using the relief from royalty valuation method. Significant assumptions inherent in the valuation methodologies for the indefinite-lived trade name are employed and include, but are not limited to, prospective financial information, royalty rates and discount rates. An impairment charge is recorded for the amount by which the carrying amount of the indefinite-lived trade name exceeds its fair value. Joint Ventures, Equity Method Investments, and Variable Interest Entities Investments for which the Company exercises significant influence but does not have control are accounted for under the equity method. Equity method investment activity is primarily related to a 50% joint venture with Grupo Gigante, S.A.B. de C.V. (the “Mexico joint venture”) to establish Petco locations in Mexico. The Company’s share of the investees results is presented as either income or loss from equity method investees in the accompanying consolidated statements of operations. The equity method of accounting is applicable for the Mexico joint venture as the Company does not own more than 50% of voting power, but has significant influence over the operation and financial policies of the investee. The joint venture is not material to the Company’s consolidated financial statements. The Mexico joint venture purchases certain inventory items and pet care center assets from the Company. The Company also receives royalties from the Mexico joint venture for the use of its trademarks. Revenues generated from these transactions were not material in fiscal 2020, 2019, and 2018. The cumulative unrealized foreign currency adjustment on the translation of the Company’s investment in the joint venture and the foreign currency translation impact of the royalty receivable are recorded in accumulated other comprehensive income (“AOCI”), net of tax. The Company consolidates variable interest entities (“VIEs”) where it has been determined that the Company is the primary beneficiary of those entities’ operations. The Company holds a 50% investment in a joint venture with a domestic partner to build and operate veterinary clinics in Petco locations, which was previously accounted for under the equity method. In March 2019, the Company entered into an amended agreement governing the joint venture’s operations and determined that the Company had the power to direct the activities most important to the VIE. As a result, the joint venture is a VIE for which the Company is now the primary beneficiary. Accordingly, the assets, liabilities, and noncontrolling interest of the VIE, which were not material, were measured at fair value as of the date the Company became the primary beneficiary in accordance with Accounting Standards Codification (“ASC”) 805 – Business Combinations. The results of operations and statements of financial position of the VIE, 70 which are not material , are included in the Company’s consolidated financial statements beginning in March 2019. Under the amended agreement, the domestic partner provides certain management and support services to the joint venture. These services include administrative, financial reporting, compliance, and technology support services in connection with the operation and growth of the joint venture. As compensation for these services, the joint venture pays the domestic partner a quarterly joint venture management fee equal to a portion of clinic revenues, subject to a minimum fixed fee. The Company incurred and recorded $2.0 and $ 1.4 million of joint venture management fees under this agreement in fiscal 2020 and 2019 , respectively, which are included in selling, general and administrative expenses in the consolidated statements of operations . Fair Value Measurements Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which the Company would conduct a transaction, in addition to the assumptions that market participants would use when pricing the related assets or liabilities, including non-performance risk. A three-level hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 — Unobservable inputs for the asset or liability. Refer to Notes 8, 9, 10 and 11 for fair value disclosures for the senior secured term credit facilities, senior notes, derivatives, and other types of assets and liabilities measured at fair value, respectively. Self-Insurance Reserves The Company is self-insured for workers’ compensation, general, auto liability and employee-related health care benefits, a portion of which is paid by the Company’s employees. Additionally, the Company has insurance coverage to limit its exposure above a per occurrence retention limit. These insurance policies have stated maximum coverage limits after which the Company bears the risk of loss. The Company determines the related liabilities using a number of factors including historical experience and trends related to claims and payments, information provided by the Company’s insurance brokers and actuaries, an estimate of incurred but not reported claims and industry experience and trends. Estimates of future claim costs for workers’ compensation, general, auto liability and employee-related health care benefits are recorded on an undiscounted basis. All estimates of ultimate loss and loss adjustment expense and resulting reserves are subject to inherent variability caused by the nature of the insurance process. The potentially long period of time between the reporting of an occurrence of an incident and the final resolution of a claim and the possible effects of changes in the legal, social and economic environments contribute to this variability. The Company reports self-insurance liabilities gross of insurance recoveries. As of January 30, 2021, insurance recoveries of $5.8 million and $17.2 million were recorded in other current assets and other long-term assets, respectively. As of February 1, 2020, insurance recoveries of $6.0 million and $18.4 million were recorded in other current assets and other long-term assets, respectively. 71 Self-insurance reserves are reflected in the consolidated balance sheets as follows (in thousands): January 30, 2021 February 1, 2020 Current: Workers’ compensation and employee-related health care benefits $ 21,834 $ 21,443 General and auto liability reserves 4,737 5,135 $ 26,571 $ 26,578 Non-current: Workers’ compensation reserve $ 45,794 $ 46,834 General and auto liability reserves 12,131 13,188 $ 57,925 $ 60,022 The current portion and non-current portion of self-insurance reserves for workers’ compensation and employee-related health care benefits are included in accrued salaries and employee benefits and other long-term liabilities, respectively, in the consolidated balance sheets. The current portion and non-current portion of self-insurance reserves for general and auto liability costs are included in accrued expenses and other liabilities and other long-term liabilities, respectively, in the consolidated balance sheets. Revenue Recognition The Company recognizes revenue when control of promised goods or services is transferred to customers, in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services. See Note 2 for further discussion on revenue recognition. Cost of Sales Cost of sales includes the following types of expenses: • Direct costs (net of vendor rebates, allowances and discounts for products sold) including inbound freight charges; • Shipping and handling costs associated with sales to customers; • Freight costs associated with moving merchandise inventories; • Inventory shrinkage costs and write-downs; • Payroll costs of pet groomers, trainers, veterinarians and other direct costs of services; and • Costs associated with operating the Company’s distribution centers including payroll, occupancy costs and depreciation Selling, General and Administrative Expenses Selling, general and administrative expenses include the following types of expenses: • Payroll and benefit costs of pet care center and corporate employees; • Occupancy and operating costs of pet care center and corporate facilities; • Depreciation and amortization related to pet care center and corporate assets; • Credit card fees; • Store pre-opening and remodeling costs; • Advertising costs; and • Other administrative costs 72 Advertising Expenses The Company records advertising expense as incurred and classifies advertising costs within selling, general and administrative expenses in the consolidated statements of operations. The Company’s advertising expenses, net of cooperative advertising reimbursements, were $168.4 million, $97.7 million, and $79.6 million for fiscal 2020, 2019, and 2018, respectively. Vendor cooperative advertising reimbursements reduced total advertising expense by $25.7 million, $18.4 million, and $13.3 million for fiscal 2020, 2019, and 2018, respectively. Leases The majority of the Company’s lease liabilities are real estate operating leases from which pet care center, corporate support, and distribution operations are conducted. The Company also leases equipment and certain pet care center locations under finance leases. Lease terms generally do not include options to terminate the lease and only include options to extend the lease, if it is reasonably certain that the option will be exercised. For any lease with an initial term in excess of 12 months, the related lease assets and liabilities are recognized on the consolidated balance sheet as an operating or finance lease at the commencement of the lease agreement. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term. Operating lease assets represent the right to use an underlying asset for the lease term, and operating lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at the commencement date. The Company uses a collateralized incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Operating leases typically require payment of certain non-lease costs, such as real estate taxes, common area maintenance and insurance. These components comprise the majority of the Company’s variable lease costs and are excluded from the present value of lease liabilities unless an event occurs that results in the payments becoming fixed for the remaining term. The remaining lease and non-lease components are accounted for together as a single lease component for all underlying classes of assets. Operating lease assets are adjusted for lease incentives, initial direct costs, impairments, and exit or disposal costs. Operating lease costs are recognized on a straight-line basis from the commencement date to the end of the lease term. Operating lease costs relating to distribution centers are included in cost of sales, and operating lease costs relating to pet care center and corporate support locations are included in selling, general and administrative expenses in the consolidated statements of operations. Amortization on finance lease right-of-use assets relating to distribution centers are included in cost of sales, and amortization on finance lease right-of-use assets relating to pet care center and corporate support locations are included in selling, general and administrative expenses in the consolidated statements of operations. Interest on finance lease right-of-use assets is included in interest expense in the consolidated statements of operations. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company’s sublease portfolio consists mainly of operating leases with a domestic partner to operate dog boarding and daycare facilities, which are not material. The Company records contractual obligations associated with the retirement of long-lived assets at their fair value at the time the obligations are incurred. These obligations arise from certain leases and primarily relate to the cost of removing leasehold improvements and certain fixtures from such lease sites and restoring the sites to their original condition. Upon initial recognition of the liability, that cost is capitalized as part of the related long-lived asset and depreciated on a straight-line basis over the estimated useful life of the asset. Activity related to these obligations in fiscal 2020, 2019, and 2018 was not material. The Company’s asset retirement obligation was $5.8 million and $5.5 million at January 30, 2021 and February 1, 2020, respectively, and is included in other long-term liabilities in the consolidated balance sheets. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. Valuation allowances, if any, are recorded against net deferred tax assets when it is considered more likely than not that some portion or all of a deferred tax asset may not be recoverable. Deferred tax assets and liabilities are recorded as either net non-current assets or net non-current liabilities on the consolidated balance sheets. Refer to Note 14 for further disclosures of the Company’s income taxes. 73 Management regularly evaluates the likelihood of recognizing the benefit for income tax positions it has taken in various federal and state filings by considering relevant facts, circumstances and information available. The authoritative guidance clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold for recognizing benefit of a tax position is that such position is more likely than not to be sustained upon examination by the taxing authority, including resolution of any related appeals or litigation processes, and is based on the technical merits of the position. Equity-Based Compensation Equity-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the vesting period of the award, which is also the requisite service period, based upon the corresponding vesting method and probability of vesting (Note 13). The Company recognizes the effect of pre-vesting forfeitures as they occur. The Company’s equity-based compensation charges relate to (1) partnership unit awards of Scooby LP and (2) restricted stock units and stock options of the Company. Equity Valuation The per unit fair value of equity underlying the partnership unit awards prior to the Company’s initial public offering was determined by the Company’s board of directors based on enterprise valuations performed by management with the assistance of a third-party valuation firm, taking into consideration any recent market transactions involving the Company’s equity. The valuation of the equity of any private company involves various estimates and assumptions that may differ from actual values. In fiscal 2018, the Company’s equity value was determined using a combination of three valuation approaches: Income Approach – estimates the fair value based on the present value of the Company’s future estimated cash flows and the residual value of the Company beyond the forecast period. These future cash flows, including the cash flows beyond the forecast period for the residual value, are discounted to their present values using an appropriate discount rate, to reflect the risks inherent in the Company achieving these estimated cash flows. Market Approach (specifically, the guideline public company method) – estimates fair value based upon the observed valuation multiples of comparable public companies, the equity of which is freely-traded by investors in the public securities markets. Market Transaction Approach – utilizes enterprise value relative to EBITDA ratios of recent acquisitions that involve companies comparable to the Company. Beginning in fiscal 2019, the market transaction approach was not used due to the limited number of recent transactions of comparable companies. Additionally, beginning in the third quarter of fiscal 2020 and prior to its initial public offering, the Company determined its equity value using the probability weighted expected return method (“PWERM”), or the hybrid method. Under the hybrid method, multiple valuation approaches are used and then combined into a single probability weighted valuation using a PWERM, which considers the probability of an initial public offering scenario. The results of the valuation approaches were weighted based on a variety of factors including: current macroeconomic environment, current industry conditions and length of time since arms-length market transaction events. Additionally, a discount for lack of marketability was applied to account for the lack of access to an active public market. The resulting value was then allocated to outstanding equity using an option-pricing model. Pre-Opening Costs Costs incurred in connection with opening new pet care centers are expensed as incurred and are included in selling, general and administrative expenses in the Company’s consolidated statements of operations. Such costs include advertising, payroll, initial pet care center supplies and utilities. 74 Management Services Agreement On January 26, 2016, in connection with the Acquisition, the Company entered into a management services agreement with certain affiliates and/or investment advisors of the Sponsors (the “Sponsor MSA Parties”), pursuant to which the Sponsor MSA Parties agreed to provide certain management and financial services. The services included management, consulting, and financial planning services in connection with the operation and growth of the Company. As compensation for such services, the Company agreed to reimburse the Sponsor MSA Parties’ costs for services rendered, including expenses relating to maintaining the holding company structure through which the Sponsors own the Company indirectly, plus reimbursement of reasonable out-of-pocket expenses incurred in connection with the services rendered. The Company also agreed to provide customary indemnification to the Sponsor MSA Parties. Management fees incurred and recorded by the Company during fiscal 2020, 2019, and 2018 were not material. These fees are included in selling, general and administrative expenses in the consolidated statements of operations. This agreement was terminated on January 19, 2021 in connection with the Company’s initial public offering. Derivative Instruments In March 2016, the Company entered into a series of five interest rate cap agreements with four counterparties totaling $1,950.0 million to limit the maximum interest rate on a portion of the Company’s variable-rate debt and limit its exposure to interest rate variability when three-month LIBOR exceeds 2.25%. The interest rate caps are accounted for as cash flow hedges, and changes in the fair value of the interest rate caps are reported as a component of AOCI. The interest rate caps were settled in accordance with their contractual terms on January 29, 2021. Refer to Note 10 for further disclosures of the Company’s derivative instruments and hedging activities. Recent Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02 – Leases (“ASU 2016-02” or “ASC 842”), which requires leases to be recognized on the balance sheet as assets and liabilities for the rights and obligations created by leased assets. The Company adopted this accounting policy at the beginning of fiscal 2019 and recognized a cumulative effect adjustment to retained earnings, as permitted under Accounting Standards Update No. 2018-11 – Leases: Targeted Improvements. The Company set an accounting policy election not to capitalize leases with a term of twelve months or less. In addition, the Company elected the transition package of practical expedients, which allowed the Company to carry forward for its existing leases: i) the historical lease classification as either operating or finance; ii) the assessment of whether any expired or existing contracts are or contain leases; and iii) capitalization of initial direct costs. Additionally, the Company elected the practical expedients to account for certain leases at a portfolio level and to not separate lease and non-lease components. Previously designated capital leases are now considered finance leases under the new guidance. The designation of operating leases remains substantially unchanged under the new guidance. Adoption of this accounting policy resulted in the recognition of $1.61 billion of operating lease right-of-use assets, along with $1.54 billion of corresponding lease liabilities on February 3, 2019. As part of the adoption, $91.6 million of other long-term liabilities, which included existing deferred rent, tenant improvement allowances, reserves for closed pet care centers, and unfavorable lease rights, were derecognized with a corresponding adjustment to operating lease right-of-use assets. Also, $33.8 million in prepaid rent, previously included within prepaid expenses, was reclassified as a reduction to the current portion of operating lease liabilities. Additionally, $125.2 million of existing favorable lease rights, which were previously recorded within other intangible assets, were also derecognized with a corresponding adjustment to operating lease right-of-use assets. The Company recorded a $22.9 million cumulative-effect adjustment to retained earnings, primarily related to the derecognition of a deferred gain on the sale-leaseback of its corporate headquarters, which was previously being recognized over the initial lease term as a reduction of selling, general, and administrative expenses. The adoption did not have a material impact on the Company’s liquidity. Refer to Note 6, Leases, for additional information regarding the Company’s accounting policy for leases and additional disclosures. 75 In April 2020, the FASB issued clarifying guidance on accounting for certain lease concessions related to the effects of the COVID-19 pandemic under ASC 842. The FASB staff indicated that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, an entity will not need to reassess each existing contract to determine whether enforceable rights and obligations for concessions exist, and an entity can elect to apply or not to apply the lease modification guidance in ASC 842 to those contracts. The election is available for concessions related to the effects of the COVID-19 pandemic that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. In accordance with this guidance, the Company made a policy election to account for such lease concessions related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract as though enforceable rights and obligations to make those concessions existed in the original contract. Consequently, for such lease concessions, the Company did not reassess each existing contract to determine whether enforceable rights and obligations for concessions existed and elected not to apply the lease modification guidance in ASC 842 to those contracts. The Company accounted for COVID-19 lease abatements, which were not material, as reductions to variable lease expense and accounted for lease deferrals as a resolution of a contingency that fixes previously variable lease payments which resulted in a remeasurement of the lease liability with a corresponding adjustment to the right of use asset. In June 2016, the FASB issued Accounting Standards Update No. 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the accounting for recognizing impairments of financial assets. Under the new accounting guidance, credit losses for financial assets held at amortized cost will be estimated based on expected losses rather than the current incurred loss impairment model. The new accounting guidance also modifies the impairment model for available-for-sale debt securities. The Company adopted this accounting policy on February 2, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures. In August 2018, the FASB issued Accounting Standards Update No. 2018-15 – Intangibles— Goodwill and Other—Internal-Use Software (Subtopic 350-40), which amends ASC 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The Company adopted this accounting policy on February 2, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures. 2. Revenue Recognition The Company generates revenue primarily from the sale of products and services. Revenue is recognized when the control of promised goods or services is transferred to customers, in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services. Control refers to the ability of the customer to direct the use of, and obtain substantially all of, the remaining benefits from the goods or services. Net sales by product type and services were as follows (in thousands): Fiscal years ended January 30, 2021 February 1, 2020 February 2, 2019 (52 weeks) (52 weeks) (52 weeks) Dog and cat food $ 2,123,499 $ 2,054,280 $ 2,045,593 Supplies and companion animals 2,328,663 1,938,904 1,967,996 Services and other 468,040 441,330 378,584 Net sales $ 4,920,202 $ 4,434,514 $ 4,392,173 For all contracts with customers, the Company evaluates whether it is the principal (i.e. to report revenue on a gross basis) or agent (i.e. to report revenue on a net basis). Generally, the Company is the principal in its contracts with customers as it controls the related goods or services before they are transferred to the customer. Revenue from product sales and services is reported net of sales refunds, which includes an estimate of future returns based on historical refund rates, with a corresponding reduction to cost of sales. The Company records a 76 refund liability for sales returns, which is included in accrued expenses and other liabilities, and a corresponding asset for anticipated cost recoveries, which is included in other current assets. There is inherent judgment in estimating future refunds as they are susceptible to factors outside of the Company’s influence. The Company has significant experience in estimating the amount of refunds based primarily on historical data. Revenue is recognized net of applicable sales tax in the consolidated statements of operations. Sales tax liability is included in accrued expenses and other liabilities in the consolidated balance sheets. The Company’s contract liabilities primarily relate to product merchandise not yet delivered to customers, unredeemed gift cards, services not yet completed, and options that provide a material right to customers, such as its customer loyalty program. The Company did not have any material contract assets or contract liabilities as of January 30, 2021 and February 1, 2020. The Company does not present certain qualitative and quantitative information relating to its remaining performance obligations, as substantially all of the Company’s remaining performance obligations have an original expected duration of one year or less. The Company’s remaining performance obligations are not material. Product Revenue Product revenue is recognized when control passes, which generally occurs at a point in time when the customer completes a transaction in a pet care center and receives the merchandise. The Company’s payment terms are typically at the point of sale. For transactions initiated online, customers choose whether to have it delivered to them (using third-party parcel delivery companies) or to collect their merchandise from one of the Company’s pet care centers (“buy online, pick up in store,” or “BOPUS”). For items delivered directly to the customer, control passes and revenue is recognized when delivery has been completed to the customer, as title has passed and possession has transferred to the customer. For BOPUS sales, control passes and revenue is recognized once the customer has taken possession of the merchandise. Any fees charged to customers for delivery (such as shipping and handling) are a component of the transaction price and are recognized when delivery has been completed. The Company uses delivery information to determine when to recognize revenue for products and any related delivery fee revenue. Service Revenue The Company recognizes service revenue from pet grooming, veterinary care, and certain other in-store services once the service is completed, as this is when the customer has the ability to direct the use of and obtain the benefits of the service. Payment terms are typically at the point of sale, but may also occur upon completion of the service. The Company’s service contracts are primarily with retail and veterinary customers. The Company recognizes service revenue from dog training ratably over the life of the contract, as this pattern best depicts when customers use the services provided and, accordingly, when delivery of the performance obligation occurs. Gift Cards The Company sells its own gift cards to customers in its pet care centers, online, and through select third parties. The Company recognizes revenue from gift cards when gift cards are redeemed by the customer. The Company also recognizes revenue for the portion of gift card values that is not expected to be redeemed (“breakage”). Breakage is estimated based upon historical redemption patterns and other factors, such as laws and regulations applicable to each jurisdiction. There is judgment in assessing redemption patterns and the ultimate value of gift cards that is not expected to be redeemed. 77 Sales Incentives and Customer Loyalty Program The Company has a customer loyalty program that allows members to earn points for each qualifying purchase. Points earned enable members to receive a certificate that may be redeemed on future purchases within 45 days of the issuance date. The loyalty program points represent customer options that provide a material right and, accordingly, are performance obligations for each applicable contract. The relative standalone selling price of points earned by loyalty program members is deferred and included as part of accrued expenses and other liabilities in the consolidated balance sheets based on the amount of points that are projected to be redeemed, subject to breakage. Revenue is recognized for these performance obligations as actual redemptions occur and the Company updates its estimate of the amount of points that are projected to be redeemed. There is judgment in assessing redemption patterns and the ultimate value of points that is not expected to be redeemed. The Company issues coupons that are not earned in conjunction with a purchase of a product or service, typically as part of targeted marketing activities. Additionally, the Company issues coupons in conjunction with the purchase of products or services. However, these coupons typically do not materially exceed the range of discounts given to similar customers and do not confer a material right. In both of these cases, these are not performance obligations and are instead recognized as a reduction of the transaction price when redeemed by the customer. 3. Sale-Leaseback Transaction In January 2020, the Company sold and leased back its San Antonio, Texas corporate support center for $19.0 million with net cash proceeds of $18.5 million. The transaction qualified for sale-leaseback accounting, in which the Company recognized the sale, resulting in an initial gain of $3.1 million, which is reflected as a reduction of selling, general, and administrative expenses. The lease has been classified as an operating lease and contains a 10 year initial term plus renewal options. 4. Other Acquisitions During fiscal 2019, the Company completed the acquisition of a small, regional veterinary business for total consideration of approximately $3.0 million. Net tangible and identifiable intangible assets acquired and liabilities assumed were not material. The acquisition resulted in the recognition of $3.0 million of goodwill, which is deductible for tax purposes. Pro forma results of operations for the acquisition have not been presented because they are not material to the consolidated results of operations. 5. Composition of Balance Sheet Accounts Fixed Assets, Net Fixed assets, net, consisted of the following (in thousands): January 30, 2021 February 1, 2020 Equipment $ 648,072 $ 578,842 Leasehold improvements 538,841 490,506 Furniture and fixtures 280,948 267,458 Buildings and related improvements 16,872 23,134 Land 3,254 3,904 1,487,987 1,363,844 Less accumulated depreciation (860,440 ) (707,588 ) $ 627,547 $ 656,256 The Company’s depreciation and amortization expense for fixed assets, net was $174.0 million, $172.5 million, and $184.6 million for fiscal 2020, 2019 and 2018, respectively. 78 Other Intangible Assets, Net Components of other intangible assets, net were as follows (dollar amounts in thousands): January 30, 2021 Estimated useful lives (years) Weighted average remaining estimated life (years) Gross amount Accumulated amortization Net amount Customer lists 3-7 2.0 $ 3,944 $ (3,259 ) $ 685 Proprietary technology 5-17 13.8 848 (819 ) 29 Total intangible assets subject to amortization 3-17 2.5 4,792 (4,078 ) 714 Indefinite-lived intangible trade name — — 1,025,000 — 1,025,000 Total intangible assets $ 1,029,792 $ (4,078 ) $ 1,025,714 February 1, 2020 Estimated useful lives (years) Weighted average remaining estimated life (years) Gross amount Accumulated amortization Net amount Customer lists 3-7 2.4 3,944 (2,512 ) 1,432 Proprietary technology 5-17 4.2 848 (727 ) 121 Total intangible assets subject to amortization 3-17 2.5 4,792 (3,239 ) 1,553 Indefinite-lived intangible trade name — — 1,025,000 — 1,025,000 Total intangible assets $ 1,029,792 $ (3,239 ) $ 1,026,553 Refer to Note 11 for further discussion of the results of impairment testing performed on the Company’s trade name. The Company’s amortization expense for other intangible assets was $0.8 million, $1.0 million, and $15.5 million for fiscal 2020, 2019, and 2018, respectively, and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. Amortization expense in fiscal 2018 included the effect of favorable lease rights, which were derecognized as an adjustment to operating lease right-of-use assets in connection with the adoption of ASU 2016-02 in fiscal 2019 (Note 1). At January 30, 2021, the Company’s scheduled intangible asset amortization expense was as follows (in thousands): Fiscal years Amortization expense 2021 $ 344 2022 344 2023 4 2024 2 2025 2 Thereafter 18 Total intangible asset amortization $ 714 79 Accrued Salaries and Employee Benefits Accrued salaries and employee benefits consisted of the following (in thousands): January 30, 2021 February 1, 2020 Accrued compensation $ 83,176 $ 45,209 Accrued paid time-off 24,474 27,033 Self-insurance reserves 21,834 21,443 $ 129,484 $ 93,685 Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consisted of the following (in thousands): January 30, 2021 February 1, 2020 Accrued real estate taxes $ 26,921 $ 29,659 Accrued capital expenditures 19,723 21,962 Sales taxes payable 19,449 16,753 Accrued advertising 13,326 6,164 Accrued income taxes 649 5,701 Other accrued expenses and liabilities 65,778 67,942 $ 145,846 $ 148,181 Other Long-Term Liabilities Other long-term liabilities consisted of the following (in thousands): January 30, 2021 February 1, 2020 Self-insurance reserves $ 57,925 $ 60,022 Other liabilities 76,429 41,629 $ 134,354 $ 101,651 6. Leases Lease assets and liabilities are reflected in the Company’s consolidated balance sheets as follows (in thousands): Leases Balance sheet location January 30, 2021 February 1, 2020 Assets Operating leases Operating lease right-of-use assets $ 1,328,108 $ 1,459,604 Finance leases Fixed assets, net(1) 9,350 11,976 Total lease assets $ 1,337,458 $ 1,471,580 Liabilities Current Operating leases Current portion of operating lease liabilities $ 258,289 $ 278,229 Finance leases Current portion of long-term debt and other lease liabilities 2,203 3,393 Non-current Operating leases Operating lease liabilities, excluding current portion 1,083,575 1,156,742 Finance leases Other long-term liabilities 11,436 13,041 Total lease liabilities $ 1,355,503 $ 1,451,405 80 (1) Finance lease right-of-use assets are recorded net of accumulated amortization of $17.3 million and $13.4 million as of January 30, 2021 and February 1, 2020, respectively. The components of total lease cost are as follows (in thousands): Fiscal years ended January 30, 2021 February 1, 2020 Operating lease cost $ 430,359 $ 441,981 Finance lease cost: Amortization of right-of-use lease assets 3,292 3,919 Interest on lease liabilities 908 973 Variable lease cost 105,859 112,709 Sublease income (5,327 ) (5,450 ) Total lease cost $ 535,091 $ 554,132 Rent expense prior to the adoption of ASU 2016-02 totaled $413.9 million for fiscal 2018. Other information for the Company’s leases is as follows (in thousands): Fiscal year ended January 30, 2021 February 1, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 399,557 $ 408,562 Operating cash flows from finance leases $ 941 $ 973 Financing cash flows from finance leases $ 3,404 $ 3,447 Lease assets obtained in exchange for lease liabilities: Operating leases $ 132,829 $ 133,219 Finance leases $ 613 $ 3,695 January 30, 2021 February 1, 2020 Weighted average remaining lease term: Operating leases 5.9 years 6.3 years Finance leases 6.6 years 6.8 years Weighted average discount rate: Operating leases 10.5 % 10.6 % Finance leases 6.2 % 6.2 % At January 30, 2021, the Company’s future minimum lease payments under non-cancellable operating and finance leases are as follows (in thousands): Fiscal years Operating leases Finance leases 2021 $ 384,873 $ 2,987 2022 346,033 2,764 2023 294,217 2,424 2024 238,136 2,150 2025 180,650 2,124 Thereafter 377,392 4,285 Total minimum payments $ 1,821,301 $ 16,734 Less imputed interest (479,437 ) (3,095 ) Present value of lease payments 1,341,864 13,639 Less current portion (258,289 ) (2,203 ) Lease liabilities, excluding current portion $ 1,083,575 $ 11,436 81 7. Goodwill The changes in the carrying amount of the Company’s goodwill were as follows (in thousands): January 30, 2021 February 1, 2020 Beginning balance: Goodwill $ 2,987,273 $ 2,984,253 Accumulated impairment (807,963 ) (807,963 ) Goodwill, net $ 2,179,310 $ 2,176,290 Additions from acquisitions $ — $ 3,020 Ending balance: Goodwill $ 2,987,273 $ 2,987,273 Accumulated impairment (807,963 ) (807,963 ) Goodwill, net $ 2,179,310 $ 2,179,310 Refer to Note 11 for further discussion of the results of impairment testing performed on the Company’s goodwill. 8. Senior Secured Credit Facilities At January 30, 2021, the Company had a $2,525.0 million senior secured term loan facility maturing on January 26, 2023 (“Term Loan Facility”), which was amended on January 27, 2017 (“Amended Term Loan Facility”) and fully repaid on March 4, 2021, and a senior secured asset-based revolving credit facility (the “Amended Revolving Credit Facility”), providing for senior secured financing of up to $500.0 million expiring on the earlier of 91 days prior to the maturity of the Amended Term Loan Facility (October 27, 2022 or five years from the most recent amendment), subject to a borrowing base. On March 4, 2021, subsequent to fiscal 2020, the Company entered into a $1,700.0 million secured term loan facility maturing on March 4, 2028 (the “First Lien Term Loan”) and a secured asset-based revolving credit facility (the “ABL Revolving Credit Facility”) maturing on March 4, 2026. The Amended Term Loan Facility, the Amended Revolving Credit Facility, the First Lien Term Loan, and the ABL Revolving Credit Facility are collectively referred to as the “Senior Secured Credit Facilities.” On January 19, 2021, the Company repaid $727.0 million of the Amended Term Loan Facility using a portion of the proceeds from its initial public offering , in addition to existing cash on hand. The Company accounted for the repayment as a partial extinguishment and recognized a loss on debt extinguishment of $12.6 million, which represents a portion of previously unamortized debt discount and debt issuance costs and is included in the accompanying consolidated statement of operations. The repayment was applied to the remaining principal payments in order of scheduled payment date and, as a result, no quarterly principal payments remained under the Amended Term Loan Facility, other than the remaining principal balance due at maturity. As such, the entire remaining balance is included in senior secured credit facilities, net, excluding current portion in the consolidated balance sheets as of January 30, 2021. As of January 30, 2021, the outstanding principal balance of the Amended Term Loan Facility was $1,678.1 million ($1,649.4 million, net of the unamortized discount and debt issuance costs). As of February 1, 2020, the outstanding principal balance of the Amended Term Loan Facility was $2,424.0 million ($2,363.4 million, net of the unamortized discount and debt issuance costs). The weighted average interest rate on the borrowings outstanding was 4.3% and 5.1% as of January 30, 2021 and February 1, 2020, respectively. Debt issuance costs were being amortized over the contractual term to interest expense using the effective interest rate in effect at issuance. As of January 30, 2021 and February 1, 2020, the estimated fair value of the Amended Term Loan Facility was approximately $1,673.9 million and $2,011.9 million, respectively, based upon Level 2 fair value hierarchy inputs (Note 1). As of January 30, 2021, no amounts were outstanding under the Amended Revolving Credit Facility. As of February 1, 2020, $29.0 million was outstanding, with a weighted average interest rate of 5.3%, under the Amended Revolving Credit Facility. At January 30, 2021, $387.6 million was available under the Amended Revolving Credit Facility, which is net of $57.8 million of outstanding letters of credit issued in the normal course of business and a $54.6 million borrowing base reduction for a shortfall in qualifying assets, net of reserves. Unamortized debt issuance costs of $3.1 million and $4.9 million relating to the Amended Revolving Credit Facility were outstanding and were being amortized using the straight-line method over the remaining term of the agreement as of January 30, 2021 and February 1, 2020, respectively. 82 The Company’s obligations under the Senior Secured Credit Facilities are secured by substantially all of the personal property assets of the Company with differing priority rights to the various personal property assets ascribed to each facility. The credit facility agreements, while not identical, contain certain affirmative and negative covenants related to indebtedness, liens, fundamental changes in the business, investments, restricted payments and agreements and a fixed charge coverage ratio, among other things. As of January 30, 2021 , the Company was in compliance with its covenants on the agreements. The credit agreements governing the Senior Secured Credit Facilities contain customary default provisions including, among others, the failure to make payments when due, defaults under other material indebtedness, non-compliance with covenants, change of control and bankruptcy, the occurrence of any of which would limit the Company’s ability to draw on the ABL Revolving Credit Facility and could result in the applicable lenders under the Senior Secured Credit Facilities accelerating the maturity of such indebtedness and foreclosing upon the collateral pledged thereunder. Amended Term Loan Facility On June 17, 2016, the Company amended the Term Loan Facility, which consisted of two tranches (“Tranche B-1” and “Tranche B-2”). The covenants of the amended facility were substantially similar to those of the original facility, while the interest rate spread declined. Interest under the amended facility was at the Company’s option , either a base rate or the London Interbank Offered Rate (“LIBOR”), adjusted for statutory reserve requirements (“Adjusted LIBOR”), with Tranche B-1 subject to a 1.00% floor, payable upon maturity of the LIBOR contract, in either case plus the applicable rate. The base rate was the greater of the bank prime rate, federal funds effective rate plus 0.5% or the LIBOR quoted rate plus 1.0% (or 2.0% for Tranche B-1). The applicable rate was 3.00% (previously 3.75%) per annum for Tranche B-1 and 3.25% (previously 4.00%) for Tranche B-2 for a base rate loan or 4.00% (previously 4.75%) per annum for Tranche B-1 and 4.25% (previously 5.00%) for Tranche B-2 for an Adjusted LIBOR loan. Additionally, when the Company’s senior secured first lien net leverage ratio fell below 4.00, each of the applicable rate options was reduced by 0.25%. On January 27, 2017, the Company amended the Amended Term Loan Facility further and consolidated Tranche B-2 into Tranche B-1. The covenants of the amended facility were substantially similar to those of the existing facility, while the interest rate spread declined. Interest under the Amended Term Loan Facility was at the Company’s option, either the base rate or Adjusted LIBOR subject to a 1.00% floor, payable upon maturity of the LIBOR contract, in either case plus the applicable rate. The base rate was the greater of the bank prime rate, federal funds effective rate plus 0.5% or the LIBOR quoted rate plus 2.0%. The applicable rate was 2.25% (previously 3.00%) per annum for a base rate loan or 3.25% (previously 4.00%) per annum for an Adjusted LIBOR loan. Additionally, when the Company’s senior secured first lien net leverage ratio fell below 4.00, each of the applicable rate options was reduced by 0.25%. On March 4, 2021, the Company entered into a $1,700.0 million First Lien Term Loan and repaid all outstanding principal and interest on the Amended Term Loan Facility. Interest under the First Lien Term Loan is at the Company’s option, either a base rate or Adjusted LIBOR, subject to a 0.75% floor, payable upon maturity of the LIBOR contract, in either case plus the applicable rate. The base rate is the greater of the bank prime rate, federal funds effective rate plus 0.5% or Adjusted LIBOR plus 1.0%. The applicable rate is 2.25% per annum for a base rate loan or 3.25% per annum for an Adjusted LIBOR loan. Principal payments are $4.25 million quarterly and commence on June 30, 2021. Amended Revolving Credit Facility On August 23, 2018, the Company amended its Revolving Credit Facility to increase the total availability to $555.0 million and to extend the maturity on $500.0 million of this availability from January 26, 2021 to the earlier of 91 days prior to the maturity of the Amended Term Loan Facility (October 27, 2022) or five years from closing. The remaining $55.0 million of availability was set to expire on the original maturity date of January 26, 2021. All other key terms of the Amended Revolving Credit Facility remained unchanged. Fees relating to the August 23, 2018 amendment consisted of arranger fees and other third party expenses. Approximately $3.1 million of the Amended Revolving Credit Facility fees under the August 23, 2018 amendment were capitalized in the accompanying consolidated balance sheet as a contra-liability, and no loss on debt extinguishment was recognized. The remaining portion of debt issuance costs of the Amended Revolving Credit Facility previously capitalized were set to amortize over the expected remaining term to interest expense using the effective interest rate in effect on the date of issuance. 83 On December 14, 2018, the Company terminated the $55.0 million additional availability relating to the January 26, 2021 tranche of the Amended Revolving Credit Facility. All other key terms of the Amended Revolving Credit Facility remain ed unchanged. The Amended Revolving Credit Facility had availability up to $500.0 million and a $150.0 million letter of credit sub-facility. The availability was limited to a borrowing base, which allows borrowings of up to 90% of eligible accounts receivable plus 90% of the net orderly liquidation value of eligible inventory plus up to $50 million of qualified cash of the Company to which the Company and guarantors have no access, less reserves as determined by the administrative agent. Letters of credit reduced the amount available to borrow under the Amended Revolving Credit Facility by their face value. Interest on the Amended Revolving Credit Facility was based on either the base rate or Adjusted LIBOR subject to a floor of zero percent, in either case, plus an applicable margin. The applicable margin was equal to 25 basis points in the case of base rate loans and 125 basis points in the case of Adjusted LIBOR loans. The applicable margin was adjusted quarterly based on the average historical excess availability as a percentage of the Line Cap, which represents the lesser of the aggregate Amended Revolving Credit Facility and the borrowing base, as follows: Average Historical Excess Availability Applicable Margin for Adjusted LIBOR Loans Applicable Margin for Base Rate Loans Less than 33.3% of the Line Cap 1.75 % 0.75 % Less than 66.7% but greater than or equal to 33.3% of the Line Cap 1.50 % 0.50 % Greater than or equal to 66.7% of the Line Cap 1.25 % 0.25 % The Amended Revolving Credit Facility was subject to an unused commitment fee. If the actual daily utilized portion exceeded 50%, the unused commitment fee was 0.25%. Otherwise, the unused commitment fee was 0.375% and was not dependent upon excess availability. On March 4, 2021, the Company entered into an agreement establishing the ABL Revolving Credit Facility and terminated the Amended Revolving Credit Facility. The ABL Revolving Credit Facility has availability up to $500.0 million, subject to a borrowing base. The terms under the ABL Revolving Credit Facility are substantially similar to those of the Amended Revolving Credit Facility. 9. Senior Notes Floating Rate Senior Notes On January 26, 2016, the Company issued unsecured senior notes maturing on January 26, 2024 in a private offering (the “Floating Rate Senior Notes”). Debt issuance costs of $26.2 million related to the Floating Rate Senior Notes were being amortized over the contractual term to interest expense using the effective interest rate in effect at issuance. The Floating Rate Senior Notes bear interest at a floating rate equal to three-month LIBOR, subject to a 1.00% floor, plus 8.0% per annum (the “Applicable Margin”) payable quarterly in arrears. At February 1, 2020, the outstanding principal balance of the Floating Rate Senior Notes was $750.0 million and the carrying amount was $734.4 million, net of the unamortized debt issuance costs. The weighted average interest rate on the borrowings outstanding was 9.9% as of February 1, 2020. At February 1, 2020 the estimated fair value of the Floating Rate Senior Notes was approximately $701.7 million, based upon Level 2 fair value hierarchy inputs (Note 1) and the expected timing of repayment or settlement as of the reporting date. In January 2021, the holders of the outstanding Floating Rate Senior Notes exchanged $450.0 million of the aggregate principal amount of the Floating Rate Senior Notes for a new series of notes with a principal amount of $450.0 million issued by Scooby Aggregator, LP. Scooby Aggregator, LP, as the new holder of $450.0 million of Floating Rate Senior Notes, contributed the principal balance to the Company. This contribution, offset by approximately $7.4 million of unamortized deferred financing costs associated with the principal balance contributed, was recorded as an adjustment to additional paid-in capital. 84 On January 19, 2021, the Company repaid the remaining $300.0 million principal balance of the Floating Rate Senior Notes using a portion of the proceeds from its initial public offering , in addition to existing cash on hand. The Company accounted for the repayment as an extinguishment of debt and recognized a loss on debt extinguishment of $4.9 million, which represents a write-off of the remaining unamortized debt issuance costs and is included in the accompanying consolidated statement of operations. 3.00% Senior Notes On January 26, 2016, the Company issued senior unsecured notes maturing on January 25, 2019 in a private offering to its members. Interest on the notes was originally 0.75% per annum, payable semi-annually either in cash or by means of capitalizing such interest and adding it to the then outstanding principal amount of the notes. On April 6, 2019, the Company amended the notes to extend their maturity to July 25, 2019. Interest under these notes (the “3.00% Senior Notes”) was 3.00% per annum, payable upon maturity. On July 25, 2019, February 3, 2020, and September 28, 2020, the Company further amended the notes to extend their maturity to January 25, 2020, January 25, 2021, and January 25, 2023, respectively. At February 1, 2020, the outstanding principal balance of the 3.00% Senior Notes was $131.7 million. At February 1, 2020, the estimated fair value of the 3.00% Senior Notes was approximately $121.4 million, based upon debt yields and the redemption option, which are considered Level 2 fair value hierarchy inputs (Note 1), and the expected timing of repayment or settlement as of the reporting date. The borrowings were classified as long-term obligations due to the Company’s intent and ability to refinance these obligations on a long-term basis. On January 19, 2021, the Company repaid $4.0 million of the principal balance of the 3.00% Senior Notes. The remaining $127.7 million of principal and $3.6 million of accrued interest was then contributed to the Company in connection with its initial public offering. This contribution was recorded as an adjustment to additional paid-in-capital. 10. Derivative Instruments In March 2016, the Company entered into a series of five interest rate cap agreements with four counterparties with a total notional value of $1,950.0 million to limit the maximum interest rate on a portion of the Company’s variable-rate debt and limit its exposure to interest rate variability when three-month LIBOR exceeds 2.25%. The total fair value of the net liability on interest rate caps was $5.5 million as of February 1, 2020 and is included in accrued expenses and other liabilities in the consolidated balance sheets. The interest rate caps expired and were settled in accordance with their contractual terms on January 29, 2021. The interest rate caps were accounted for as cash flow hedges because the interest rate caps were expected to be highly effective in hedging variable rate interest payments. Changes in the fair value of the interest rate caps were reported as a component of AOCI. As of February 1, 2020, AOCI included unrealized losses of 10.7 million ($7.9 million, net of tax). There were no amounts remaining in AOCI relating to the interest rate caps as of January 30, 2021. Approximately $10.8 million and $2.8 million of pre-tax losses deferred in AOCI were reclassified to interest expense during fiscal 2020 and 2019, respectively. 85 11 . Fair Value Measurements Assets and Liabilities Measured on a Recurring Basis The following table presents information about assets and liabilities that are measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands): January 30, 2021 Level 1 Level 2 Level 3 Assets (liabilities): Money market mutual funds $ 63,798 $ — $ — Investments of officer’s life insurance $ — $ 14,140 $ — Non-qualified deferred compensation plan $ — $ (15,526 ) $ — February 1, 2020 Level 1 Level 2 Level 3 Assets (liabilities): Money market mutual funds $ 5,919 $ — $ — Investments of officer’s life insurance $ — $ 12,142 $ — Interest rate caps $ — $ (5,511 ) $ — Non-qualified deferred compensation plan $ — $ (12,075 ) $ — The fair value of money market mutual funds is based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Money market mutual funds included in the Company’s cash and cash equivalents were $56.0 million and $0.0 million as of January 30, 2021 and February 1, 2020, respectively. Also included in the Company’s money market mutual funds balances were $7.8 million and $5.9 million as of January 30, 2021 and February 1, 2020, respectively, which relate to the Company’s restricted cash, and are included in other current assets in the consolidated balance sheets. The fair values of the interest rate caps were determined using a discounted cash flow analysis on the expected cash flows of each interest rate cap (Note 10). This analysis reflected the contractual terms, including the period to maturity, and used observable market-based inputs, including interest rate curves. The fair values were determined by netting the discounted future fixed cash receipts payments and the discounted expected variable cash receipts. The variable cash receipts were based on an expectation of future interest rates (forward curves) derived from observable market interest rate yield curves. The Company qualitatively assessed both its own nonperformance risk and the respective counterparties’ nonperformance risk in the fair value measurements. The valuations also considered credit risk adjustments, including nonperformance risk, that are necessary to reflect the probability of default by the counterparties’ or the Company. The interest rate caps expired and were settled in accordance with their contractual terms on January 29, 2021. As of February 1, 2020, the credit risk adjustments were not material. The Company maintains a deferred compensation plan for key executives and other members of management, which is fully funded by investments in officers’ life insurance. The fair value of this obligation is based on participants’ elected investments, which reflect the closing market prices of similar assets. Assets Measured on a Non-Recurring Basis The Company’s non-financial assets, which primarily consist of goodwill, other intangible assets, fixed assets and equity and cost method investments, are reported at carrying value, or at fair value as of the date of the Acquisition, and are not required to be measured at fair value on a recurring basis. However, on a periodic basis (at least annually for goodwill and indefinite-lived intangibles or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable), non-financial assets are assessed for impairment. If impaired, the carrying values of the assets are written down to fair value using Level 3 inputs. In fiscal 2020, the Company determined that the fair value of its reporting unit was greater than its carrying amount, and therefore no goodwill impairment charge was recorded (Note 7). In fiscal 2020, the Company determined that the fair value of its trade name was greater than its carrying amount, and therefore no tradename impairment charge was recorded . There were no indications of impairment of the Company’s other intangible assets or equity and cost method investments in fiscal 2020. 86 In fiscal 2019 , the Company determined that the fair value of its reporting unit was greater than its carrying amount, and therefore no goodwill impairment charge was recorded (Note 7 ). In fiscal 2019 , the Company determined that the carrying amount of its trade name exceeded its fair value, resulting in a trade name impairment charge of $ 19.0 million. The Company recorded impairment charges of $0.7 million on other intangible assets and $3.2 million on its other cost method investments in fiscal 2019. The related losses are included in selling, general, and administrative expenses in the accompanying consolidated statements of operations . There were no other indications of impairment of the Company’s other intangible assets or equity and cost method investments in fiscal 2019 . In fiscal 2018, the Company determined that the carrying amount of its reporting unit and trade name exceeded their fair values, resulting in impairment charges of $290.2 million and $83.0 million, respectively. There were no other indications of impairment of the Company’s other intangible assets or equity and cost method investments in fiscal 2018. The Company recorded fixed asset and right-of-use asset impairment charges of $14.5 million and $13.0 million in fiscal years 2020 and 2019, respectively. Prior to the adoption of ASU 2016-02, the Company recorded fixed asset impairment charges of $15.0 million in fiscal 2018. Impairment charges related to distribution centers are recorded in cost of sales, whereas impairment charges related to pet care center and corporate locations are recorded in selling, general and administrative expense in the accompanying consolidated statements of operations. 12. Employee Benefit Plans The Company has employee savings plans that permits eligible participants to make contributions by salary reduction pursuant to either section 401(k) of the Internal Revenue Code or under the Company’s non-qualified deferred compensation plan. Prior to January 1, 2019, the Company generally matched 50% of the first 6% of compensation that was contributed by each participating employee to the 401(k) plan. Prior to January 1, 2019, eligible participants that held positions as director and above were limited to a matching contribution of 50% of the first 3% of compensation contributed to the plan. Under the 401(k) plan, the Company match was subject to a 5-year vesting schedule. Employees were required to complete twelve months of service with the Company to participate in the plan. On January 1, 2019, the Company amended its 401(k) plan. The Company now generally matches 100% of the first 1% plus 50% of the next 5% of compensation contributed by each participating employee. For eligible participants that hold positions as director and above, the Company matches, at its discretion, 100% of the first 1% plus 50% of the next 2% of compensation that is contributed by each participating employee to the plan. The Company match is subject to a 3-year vesting schedule. Employees are now required to complete six months of service with the Company to participate in the amended plan. Under the Company’s non-qualified deferred compensation plan, the Company matches 50% of the first 6% of compensation contributed by each participating employee to the plan from the date of eligibility until the point of time that the participating employee is eligible to participate in the Company’s 401(k) plan. Once a participating employee is eligible to participate in the 401(k) plan, the Company match is 50% of the first 3% of compensation contributed by the employee to the plan. In connection with the required matches, Company contributions to the plans were $6.6 million, $6.9 million, and $4.9 million for fiscal years 2020, 2019, and 2018, respectively. 13. Stockholders’ Equity In connection with its initial public offering, the Company established a new incentive plan (“the 2021 Incentive Plan”) pursuant to which certain employees and non-employee directors of the Company are eligible to receive restricted stock units (“RSUs”), non-qualified stock options, and other equity compensation awards. The Company has also established an employee stock purchase plan (“ESPP”). The Company issues new shares of Class A common stock upon exercise of stock options and the vesting of restricted stock units. As of January 30, 2021, there were 28.3 million shares of Class A common stock available for issuance pursuant to future equity-based compensation awards under the 2021 Incentive Plan. 87 The ESPP will allow eligible employees to contribute up to 15% of their base earnings towards purchases of Class A common stock, subject to an annual maximum. The purchase price will be 85% of the lower of (i) the fair market value of the stock on the date of enrollment and (ii) the fair market value of the stock on the last day of the related purchase period. As of January 30, 2021, 7.7 million shares of Class A common stock were available for issuance under the ESPP, and employee contributions had not yet commenced. Scooby LP also maintains an incentive plan (“the 2016 Incentive Plan”) under which it has awarded partnership unit awards to employees, consultants, and non-employee directors of the Company. The following table summarizes the Company’s equity-based compensation expense by award type (in thousands): Fiscal years ended January 30, 2021 February 1, 2020 February 2, 2019 (52 weeks) (52 weeks) (52 weeks) Restricted stock units $ 1,991 $ — $ — Options 391 — — Partnership units of Scooby LP under the 2016 Incentive Plan 10,533 9,489 8,452 Total equity-based compensation expense $ 12,915 $ 9,489 $ 8,452 Total related tax benefit $ 329 $ 178 $ — RSUs The Company has both time-vested RSUs and performance-based RSUs. Time-vested RSUs are awarded to eligible employees and non-employee directors and entitle the grantee to receive shares of Class A common stock at the end of a vesting period, subject solely to the individual’s continued employment or service as a director. For the majority of time-vested RSUs, 34% of the units becomes vested on the anniversary of the grant date, followed by 16.5% of the units in four equal semi-annual installments thereafter. Performance-based RSUs are awarded to eligible employees and entitle the grantee to receive shares of Class A common stock if the Company achieves specified performance goals during the performance period and the grantee remains employed through the vesting period. RSU activity under the 2021 Incentive Plan was as follows (in thousands, except per share and contractual life amounts): Shares Weighted average grant date fair value per share Weighted average remaining contractual life (years) Aggregate intrinsic value Nonvested, February 1, 2020 — Granted 3,442 $ 18.00 Vested — Forfeited (28 ) 18.00 Nonvested, January 30, 2021 3,414 $ 18.00 1.7 $ 88,864 No RSUs were granted in fiscal 2019 or 2018. As of January 30, 2021, unrecognized compensation expense related to unvested RSUs was $59.5 million, which is expected to be recognized over a weighted average period of approximately 2.7 years. Options The Company provides stock option grants, which are time-vested, as a form of employee compensation. For each grant, 34% of the options generally becomes vested on the anniversary of the grant date, followed by 16.5% of the options in four equal semi-annual installments thereafter. Stock options generally expire 10 years from the grant date. 88 Stock option activity under the 2021 Incentive Plan was as follows (in thousands, except per share and contractual life amounts): Shares subject to options Weighted average exercise price per share Weighted average remaining contractual life (years) Aggregate intrinsic value Outstanding, February 1, 2020 — Granted 3,504 $ 18.00 Exercised — Expired/forfeited (22 ) 18.00 Outstanding, January 30, 2021 3,482 $ 18.00 10.0 $ 27,962 Exercisable, January 30, 2021 — The fair value of stock option awards granted in fiscal 2020 was estimated at the grant date using the Black-Scholes option pricing model with the following assumptions: Dividend yield 0.0% Expected volatility (1) 40.4% Risk-free interest rate (2) 0.7% Expected term (3) 5.9 years Grant date fair value per share $ 18.00 Estimated fair value per option granted $ 7.00 (1) The expected volatility is estimated based on the historical volatility of a select peer group of similar publicly traded companies for a term that is consistent with the expected term of the stock options. (2) The risk-free interest rates are based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected term of the stock options. (3) The expected term of the stock options represents the estimated period of time until exercise and is calculated using the simplified method. No stock options were granted in fiscal 2019 or 2018. As of January 30, 2021, unrecognized compensation expense related to unvested options was $24.0 million, which is expected to be recognized over a weighted average period of approximately 3.0 years. 2016 Incentive Plan Subsequent to the Acquisition, Scooby LP established the 2016 Incentive Plan, under which eligible employees, consultants, and non-employee directors of the Company have received partnership unit awards (“Series C Units”). Series C Unit awards are restricted profit interests in Scooby LP subject to a distribution threshold and have generally been issued in the form of time-based units that vest in three to five equal annual installments following the grant date. Upon a change in control, these units become fully vested. For the Series C Units granted during fiscal 2020, 2019 and 2018, the weighted average fair value per unit was estimated to be $0.44, $0.25, and $0.35, respectively. The weighted average fair value per Series C Unit was estimated at the grant date using the Black-Scholes option pricing model with the following assumptions: Fiscal years ended January 30, 2021 February 1, 2020 February 2, 2019 (52 weeks) (52 weeks) (52 weeks) Dividend yield 0.0% 0.0% 0.0% Expected volatility (1) 60.0 - 81.9% 60.0% 45.0% - 65.0% Weighted average volatility (1) 81.1% 60.0% 58.5% Risk-free interest rate (2) 0.1% - 1.3% 1.4% - 2.3% 2.5% - 3.0% Expected term (3) 2.0 to 4.0 years 5.0 years 4.0 to 5.5 years (1) The expected volatility was estimated based on the historical volatility of a select peer group of similar publicly traded companies for a term that was consistent with the expected term of the Series C Units. 89 (2) The risk-free interest rates were based on the U.S. Treasury constant maturity interest rate whose term was consistent with the expected term of the Series C Units. (3) The expected term of the Series C Units was based on estimated liquidity event timing. Series C Unit activity under the 2016 Incentive Plan was as follows (in thousands): Units Outstanding, February 1, 2020 183,389 Granted 41,685 Forfeited (11,068 ) Outstanding, January 30, 2021 214,006 Vested, January 30, 2021 85,534 Available for future grant, January 30, 2021 25,355 Charges with respect to awards issued pursuant to the 2016 Incentive Plan are reflected in the Company’s consolidated financial statements. Compensation expense related to Series C Units is generally not tax deductible. In July 2019, 1.4 million Series B Units of Scooby LP were granted to an executive, resulting in $0.7 million of compensation expense and a corresponding income tax benefit of $0.2 million recognized during fiscal 2019. Vested Series B Units and Series C Units of Scooby LP contain provisions whereby the holder may require Scooby LP to repurchase these units upon a termination event due to death or disability. The Company is not required to repurchase its own equity instruments upon the occurrence of such an event. As of January 30, 2021, unrecognized compensation expense related to the unvested portion of Scooby LP’s Series C Units was $25.7 million, which is expected to be recognized over a weighted average period of 3.0 years. Net Loss Per Share Shares of Class A common stock and Class B-1 common stock participate equally in the earnings and losses of the Company and have identical rights in distribution. Basic net loss per Class A and B-1 common share is based on the weighted-average Class A and B-1 common shares outstanding during the relevant period. Diluted net loss per Class A and B-1 common share is based on the weighted-average Class A and B-1 common shares outstanding during the relevant period adjusted for the effect of potentially dilutive securities. Potentially dilutive securities include potential Class A common shares related to outstanding stock options and unvested RSUs, calculated using the treasury stock method. The calculation of diluted shares outstanding excludes options and RSUs where the combination of the exercise price (in the case of options) and the associated unrecognized compensation expense is greater than the average market price of Class A common shares because the inclusion of these securities would be antidilutive. All outstanding stock options and unvested RSUs were excluded from the calculation of diluted loss per Class A and B-1 common share in fiscal 2020, as their effect would be antidilutive in a net loss period. There were no potentially dilutive securities outstanding in fiscal 2019 or 2018. Shares of Class B-2 common stock are not included in the calculation of net loss per share as they only possess voting rights. Unvested RSUs contain forfeitable rights to dividend equivalent units if dividends are paid to holders of Class A and B-1 common stock. Because the dividend equivalent units are forfeitable, unvested RSUs are not considered participating securities. For periods prior to the Company’s conversion to a Delaware corporation, including fiscal 2020 for which a portion of the period preceded the conversion, the Company has retrospectively presented net loss per share as if the conversion had occurred at the beginning of the earliest period presented. The weighted average shares used in computing net loss per Class A and B-1 common share in these periods are based on the number of Common Series A and Common Series B Units held by members. For periods prior to the conversion, these calculations do not include the 55.2 million shares of Class A common stock issued in the Company’s initial public offering. 90 Prior to the conversion, the Company’s Series C Units met the definition of participating securities, as they would have participated in distributions after certain applicable thresholds had been met. However, such thresholds had not been met in the periods presented, and holders of Series C Units were not contractually obligated to participate in losses of the Company. Accordingly, losses were not allocated to participating securities under the two-class method in these periods. Following the conversion, the Company had no Series C Units outstanding. Scooby LP’s own Series C Units (such as those granted under the 2016 Incentive Plan) do not participate in the earnings and losses of the Company and are therefore not participating securities. 14. Income Taxes Income tax benefit consisted of the following (in thousands): Fiscal years ended January 30, 2021 February 1, 2020 February 2, 2019 (52 weeks) (52 weeks) (52 weeks) Current: Federal $ (29,869 ) $ 4,273 $ 2,504 State 984 5,156 3,404 $ (28,885 ) $ 9,429 $ 5,908 Deferred: Federal $ 19,604 $ (34,814 ) $ (43,657 ) State 5,944 (10,273 ) (8,091 ) $ 25,548 $ (45,087 ) $ (51,748 ) Income tax benefit $ (3,337 ) $ (35,658 ) $ (45,840 ) A reconciliation of income tax benefit at the federal statutory rate with the provision for income taxes is as follows (in thousands): Fiscal years ended January 30, 2021 February 1, 2020 February 2, 2019 (52 weeks) (52 weeks) (52 weeks) Income tax benefit at federal statutory rate $ (6,251 ) 21.0 % $ (27,524 ) 21.0 % $ (96,473 ) 21.0 % Non-deductible expenses 986 (3.3 ) 363 (0.3 ) 58,916 (12.9 ) Equity compensation 2,212 (7.4 ) 1,623 (1.2 ) 1,775 (0.4 ) State taxes, net of federal tax benefit 5,473 (18.4 ) (4,073 ) 3.1 (3,662 ) 0.8 U.S. tax reform — — — — (2,252 ) 0.5 Tax credits (1,907 ) 6.4 (4,150 ) 3.2 (3,616 ) 0.8 Uncertain tax positions 4,593 (15.4 ) 2 — (52 ) — CARES Act – carryback rate differential (8,752 ) 29.3 — — — — Other, net 309 (1.0 ) (1,899 ) 1.5 (476 ) 0.1 $ (3,337 ) 11.2 % $ (35,658 ) 27.3 % $ (45,840 ) 9.9 % The effective tax rate is based on expected taxable income, statutory tax rates and tax planning opportunities available to the Company. Reserves are established when positions are “more likely than not” to be challenged and not sustained. Reserves are adjusted at each financial statement date to reflect the impact of audit settlements, expiration of statutes of limitation, developments in the tax law and ongoing discussions with the tax authorities. Accrued interest and penalties associated with uncertain tax positions are recognized as part of the income tax provision. On March 27, 2020, in response to the COVID-19 pandemic, the “Coronavirus Aid, Relief and Economic Security Act” (the “CARES Act”) was signed into law by the President of the United States. The CARES Act includes, among other things, U.S. corporate income tax provisions related to net operating loss carryback periods, alternative minimum tax credits, modifications to interest deduction limitations and technical corrections on tax depreciation methods for qualified improvement property. The Company recognized a benefit of $8.8 million related to the carryback of $67.4 million in net operating losses to the fiscal years before the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted as a result of an extended carryback period included in the CARES Act. This benefit increased the effective tax rate in the fiscal year ended January 30, 2021 when compared to the fiscal year ended February 1, 2020. 91 Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands): January 30, 2021 February 1, 2020 Deferred tax assets: Inventory $ 20,212 $ 17,449 Deferred rent — — Accrued employee benefits 44,437 31,203 Net operating losses, state tax credit carryforwards 5,733 6,539 Interest expense limitation carry-forward under IRC §163(j) 22,726 54,330 Lease-related items 355,321 332,546 Other 3,392 6,339 Total deferred tax assets 451,821 448,406 Valuation allowance (6,149 ) (5,068 ) Net deferred tax assets 445,672 443,338 Deferred tax liabilities: Fixed assets (91,769 ) (73,159 ) Intangible assets (264,720 ) (261,773 ) Debt restructuring (7,493 ) (15,551 ) Lease-related items (345,123 ) (341,278 ) Investments in joint ventures (16,830 ) (14,942 ) Other (657 ) (1,911 ) Total deferred tax liabilities (726,592 ) (708,614 ) $ (280,920 ) $ (265,276 ) Effective fiscal 2018, the Tax Act includes changes to the amount of tax deductible business interest expense available in a taxable year. Generally, the amount of deductible business interest that can be deducted in a current taxable year cannot exceed the sum of 30% of the taxpayer’s adjusted taxable income for the year, plus the taxpayer’s business interest income for the year. Effective fiscal 2020, the CARES Act amended the amount of deductible business interest that can be deducted in a current taxable year to not exceed 50% of the taxpayers adjusted taxable income for tax years 2019 and 2020. The amount of business interest expense disallowed as a deduction in the current year may be carried forward indefinitely. As of January 30, 2021, the Company has recorded a deferred tax asset of $22.7 million reflecting the benefit of $116.6 million in interest limitation carryforwards. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. With the exception to certain state net operating losses discussed below, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences. This is based upon future reversals of existing taxable temporary differences over the periods in which the deferred tax assets are deductible. As of January 30, 2021, the Company has recorded a deferred tax asset of $2.5 million reflecting the benefit of $44.4 million in state income tax net operating loss carryforwards, which will begin to expire in fiscal 2020. The Company does not believe that it is more likely than not that the state net operating loss carryforward will be realized and recorded a valuation allowance of $2.5 million on the deferred tax asset related to these state net operating loss carryforwards as of January 30, 2021. The Company recorded a deferred tax asset of $3.5 million for certain state tax credits as of January 30, 2021. The Company does not believe it is more likely than not that a portion of these credits will be realized and has recorded a $2.8 million valuation allowance related to these credits. If or when recognized, the tax benefits related to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction of income tax expense. The Company has approximately $16.4 million of unrecognized tax benefits as of January 30, 2021, of which $4.9 million, if recognized, would impact the effective tax rate and $12.2 million would result in an adjustment to the net deferred tax liability. 92 Changes in unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands): January 30, 2021 February 1, 2020 Beginning balance $ 74 $ 74 Additions for tax positions taken in prior years 16,421 — Decreases related to lapse of statute limitation (74 ) — Ending balance $ 16,421 $ 74 The Company has approximately $0.8 million accrued for interest and penalties as of January 30, 2021 in the consolidated balance sheets and recorded $0.8 million in interest and penalties during fiscal 2020 in the consolidated statements of operations. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company does not anticipate that unrecognized tax benefits will significantly increase or decrease over the next 12 months. The Company is no longer subject to examination for U.S. federal income tax for periods prior to fiscal 2017. The Company is no longer subject to examination by state tax authorities for tax periods prior to fiscal 2015. The Company is currently under audit by various state jurisdictions for various years. Though the estimated completion dates of these audits are not known, it is possible that these audits will be completed within the next 12 months. In addition, the Company does not foresee other material changes to the federal or state uncertain tax positions affecting income tax expense within the next 12 months. The Company has no material foreign operations. 15. Accumulated Other Comprehensive Income (Loss) Changes in the balances of each component included in AOCI are presented below (net of tax, in thousands): Derivatives Equity securities Foreign currency translation adjustment Total Balance at February 3, 2018 $ 2,572 $ 158 $ (1,020 ) $ 1,710 Other comprehensive loss before reclassifications (3,434 ) — (79 ) (3,513 ) Amounts reclassified from AOCI 1,215 — — 1,215 Other comprehensive loss (2,219 ) — (79 ) (2,298 ) Cumulative effect adjustments (1,226 ) (158 ) (223 ) (1,607 ) Balance at February 2, 2019 $ (873 ) $ — $ (1,322 ) $ (2,195 ) Other comprehensive (loss) income before reclassifications (9,088 ) — 952 (8,136 ) Amounts reclassified from AOCI 2,058 — — 2,058 Other comprehensive (loss) income (7,030 ) — 952 (6,078 ) Balance at February 1, 2020 $ (7,903 ) $ — $ (370 ) $ (8,273 ) Other comprehensive loss before reclassifications (86 ) — (905 ) (991 ) Amounts reclassified from AOCI 7,989 — — 7,989 Other comprehensive income (loss) 7,903 — (905 ) 6,998 Balance at January 30, 2021 $ — $ — $ (1,275 ) $ (1,275 ) 16. Commitments and Contingencies Baseball Stadium Naming Rights Commitment In March 2003, the Company entered into an agreement with San Diego Ballpark Funding LLC and Padres L.P. to name the San Diego Padres’ new stadium Petco Park. The naming rights include signage, advertising and other promotional benefits. The initial agreement term was 22 years and was extended for an additional two years. Pursuant to the agreement, the Company pays an annual contract fee. Fees for fiscal 2020, 2019, and 2018 were $4.1 million, $4.0 million, and $3.8 million, respectively. These fees are included in selling, general and administrative expenses in the consolidated statements of operations, and will be adjusted by the maximum annual change related to the San Diego consumer price index per year through the 2027 Major League Baseball season. 93 COVID-19 The COVID-19 pandemic has been a highly disruptive economic and societal event that has affected the business and has had a significant impact on consumer shopping behavior. To serve pet parents while also providing for the safety of employees, the Company has adapted certain aspects of the business. Throughout the crisis, the Company continues to monitor the rapidly evolving situation and will continue to adapt its operations to address federal, state and local standards, meet the needs of pets and pet parents, and implement standards that the Company believes to be in the best interest of the safety and well-being of its employees. The duration and severity of the pandemic remains uncertain. Litigation The Company is involved in legal proceedings and is subject to other claims and litigation arising in the ordinary course of its business. The Company has made accruals with respect to certain of these matters, where appropriate, which are reflected in the Company’s consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters, the Company has not made accruals because management has not yet determined that a loss is probable or because the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters cannot be determined, the Company currently does not expect that these matters will have a material adverse effect on its consolidated financial statements. The outcome of any litigation is inherently uncertain, however, and if decided adversely to the Company, or if the Company determines that settlement of particular litigation is appropriate, the Company may be subject to liability that could have a material adverse effect on its consolidated financial statements. 94 PETCO HEALTH AND WELLNESS COMPANY, INC. SCHEDULE I – CONDENSED FINANCIAL INFORMATION OF PETCO HEALTH AND WELLNESS COMPANY, INC. (PARENT COMPANY) All operating activities of the Company are conducted by the subsidiaries. Petco Health and Wellness Company, Inc. is a holding company and does not have any material assets or conduct business operations other than investments in subsidiaries. The Amended Term Loan Facility and Amended Revolving Credit Facility of Petco Animal Supplies, Inc., a wholly owned subsidiary of Petco Health and Wellness Company, Inc., contained provisions whereby Petco Animal Supplies, Inc. had restrictions on the ability to pay dividends, loan funds and make other upstream distributions to Petco Health and Wellness Company, Inc. On March 4, 2021, the Amended Term Loan Facility was fully repaid, and the Amended Revolving Credit Facility was terminated. These condensed parent company financial statements have been prepared using the same accounting principles and policies described in the notes to the consolidated financial statements. Refer to the consolidated financial statements and notes presented above for additional information and disclosures with respect to these condensed financial statements. 95 PETCO HEALTH AND WELLNESS COMPANY, INC. SCHEDULE I – CONDENSED FINANCIAL INFORMATION OF PETCO HEALTH AND WELLNESS COMPANY, INC. (PARENT COMPANY) BALANCE SHEETS (In thousands) January 30, 2021 February 1, 2020 ASSETS Cash and cash equivalents $ — $ 100,002 Other current assets 2,264 1,487 Other long-term assets — 139 Investment in subsidiary 2,070,453 599,549 Total assets $ 2,072,717 $ 701,177 LIABILITIES AND EQUITY Current liabilities $ 3,869 $ 17 Senior notes — 131,703 Other liabilities — 66 Total liabilities 3,869 131,786 Stockholders' equity / members’ equity: Members’ interest — 1,358,130 Class A common stock, par value $0.001 per share (1,000,000,000 shares authorized and 226,424,140 shares issued and outstanding as of January 30, 2021) 226 — Class B-1 common stock, par value $0.001 per share (75,000,000 shares authorized and 37,790,781 shares issued and outstanding as of January 30, 2021) 38 — Class B-2 common stock, par value $0.000001 per share (75,000,000 shares authorized and 37,790,781 shares issued and outstanding as of January 30, 2021) — — Preferred stock, par value $0.001 per share (25,000,000 shares authorized and no shares issued or outstanding as of January 30, 2021) — — Additional paid-in-capital 2,092,110 — Accumulated deficit (22,251 ) (780,466 ) Accumulated other comprehensive loss (1,275 ) (8,273 ) Total stockholders' equity / members’ equity 2,068,848 569,391 Total liabilities and equity $ 2,072,717 $ 701,177 96 PETCO HEALTH AND WELLNESS COMPANY, INC. SCHEDULE I – CONDENSED FINANCIAL INFORMATION OF PETCO HEALTH AND WELLNESS COMPANY, INC. (PARENT COMPANY) STATEMENTS OF OPERATIONS (In thousands) Fiscal years ended January 30, 2021 February 1, 2020 February 2, 2019 (52 weeks) (52 weeks) (52 weeks) Equity in loss of subsidiary $ (23,559 ) $ (92,967 ) $ (412,989 ) Selling, general, and administrative expenses (6 ) (4 ) (4 ) Interest expense, net (3,695 ) (3,851 ) (1,008 ) Loss before income taxes (27,260 ) (96,822 ) (414,001 ) Income tax benefit (777 ) (949 ) (213 ) Net loss $ (26,483 ) $ (95,873 ) $ (413,788 ) 97 PETCO HEALTH AND WELLNESS COMPANY, INC. SCHEDULE I – CONDENSED FINANCIAL INFORMATION OF PETCO HEALTH AND WELLNESS COMPANY, INC. (PARENT COMPANY) STATEMENTS OF CASH FLOWS (In thousands) Fiscal years ended January 30, 2021 February 1, 2020 February 2, 2019 (52 weeks) (52 weeks) (52 weeks) Cash flows from operating activities: Net loss $ (26,483 ) $ (95,873 ) $ (413,788 ) Adjustments to reconcile net income to net cash provided in operating activities: Equity in loss of subsidiary 23,559 92,967 412,989 Changes in assets and liabilities 2,924 2,906 799 Net cash provided by operating activities — — — Cash flows from investing activities: Cash contributions to subsidiary, net (1,032,043 ) — — Net cash used in investing activities (1,032,043 ) — — Cash flows from financing activities: Repayments of long-term debt (4,000 ) — — Proceeds from initial public offering, net of issuance costs 936,041 — — Net cash provided by financing activities 932,041 — — Net change in cash and cash equivalents (100,002 ) — — Cash and cash equivalents at beginning of year 100,002 100,002 100,002 Cash and cash equivalents at end of year $ — $ 100,002 $ 100,002 Supplemental non-cash investing and financing activities disclosures: Accrued expenses for issuance costs in initial public offering $ 3,844 $ — $ — Contributions of 3.00% Senior Notes (Note 9) $ 131,324 $ — $ — 98 Item 9. Ch anges in and Disagreements with Accountants on Accounting and Financial Disclosure. None.