UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2016
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-33264
U.S. AUTO PARTS NETWORK, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
68-0623433
(I.R.S. Employer
Identification No.)
16941 Keegan Avenue, Carson, CA 90746
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (310) 735-0085
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value per share
Name of each exchange on which registered
The NASDAQ Stock Market LLC
(NASDAQ Global Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes
No
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-Accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes
No
The aggregate market value of the common stock held by non-affiliates of the registrant as of July 2, 2016 was approximately $63.5 million (based on the closing
sales price of the registrant’s common stock on that date). For the purposes of this calculation, shares owned by officers, directors and 10% stockholders known to the
registrant have been deemed to be owned by affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 2, 2017, there were 34,556,623 shares of the registrant’s common stock outstanding.
Portions of our proxy statement for the 2017 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference in Part III hereof. Except with
respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part hereof.
DOCUMENTS INCORPORATED BY REFERENCE
U.S. AUTO PARTS NETWORK, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Legal Proceedings
Item 3.
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits, Financial Statement Schedules
PART IV
Page
1
5
19
19
19
19
20
23
24
46
47
47
47
48
49
49
49
49
49
50
Unless the context requires otherwise, as used in this report, the terms “U.S. Auto Parts,” the “Company,” “we,” “us” and “our”
refer to U.S. Auto Parts Network, Inc. and its subsidiaries. Unless otherwise stated, all amounts are presented in thousands.
U.S. Auto Parts®, U.S. Auto Parts Network™, AutoMD®, AutoMD Insta-Quotes!®, Kool-Vue™, JC Whitney® , and
Stylintrucks™, amongst others, are our United States trademarks. All other trademarks and trade names appearing in this report
are the property of their respective owners.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements included in this report, other than statements or characterizations of historical or current fact, are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”)
and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we intend that such forward-
looking statements be subject to the safe harbors created thereby. Any forward-looking statements included herein are based on
management’s beliefs and assumptions and on information currently available to management. We have attempted to identify
forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would”, “will likely continue,” “will likely result” and
variations of these words or similar expressions. These forward-looking statements include, but are not limited to, statements
regarding future events, our future operating and financial results, financial expectations, expected growth and strategies,
current business indicators, capital needs, financing plans, capital deployment, liquidity, contracts, litigation, product
offerings, customers, acquisitions, competition and the status of our facilities. Forward-looking statements, no matter where
they occur in this document or in other statements attributable to the Company involve known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the forward-looking statements. We discuss many of these risks
in greater detail under the heading “Risk Factors” in Part I, Item 1A of this report. Given these uncertainties, you should not
place undue reliance on these forward-looking statements. You should read this report and the documents that we reference in
this report and have filed as exhibits to the report completely and with the understanding that our actual future results may be
materially different from what we expect. Also, forward-looking statements represent our management’s beliefs and
assumptions only as of the date of this report. Except as required by law, we assume no obligation to update these forward-
looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these
forward-looking statements, even if new information becomes available in the future.
ITEM 1.
Overview
BUSINESS
PART I
We are a leading online provider of automotive aftermarket parts and repair information. Our vision is that vehicle repairs
and upgrades are easy and affordable. Our mission is to provide an exceptionally easy experience for our customers. Our
mantra is "make it easy for our customers." Our five core values are: customer focus, teamwork, integrity, quality, and
continuous improvement.
We have historically operated under two reportable operating segments. The criteria we use to identify operating
segments are primarily the nature of the products we sell or services we provide and the consolidated operating results that are
regularly reviewed by our chief operating decision maker to assess performance and make operating decisions. The two
reportable operating segments we identified are the core auto parts business (“Base USAP”) and AutoMD, Inc., an online
automotive repair information source which, subsequent to year end, has closed down its Insta-Quotes! program described
below (“AutoMD”).
We principally sell our products, identified as stock keeping units (“SKUs”), to individual consumers through our
network of websites and online marketplaces. Our user-friendly websites provide customers with a comprehensive selection of
over 1.0 million SKUs with detailed product descriptions, attributes and photographs. We have developed a proprietary product
database that maps our SKUs to product applications based on vehicle makes, models and years.
Our online sales channel and relationships with suppliers enable us to eliminate intermediaries in the traditional auto parts
supply chain and to offer a broader selection of SKUs than can easily be offered by offline competition.
We were incorporated in California in 1995 as a distributor of aftermarket auto parts and launched our first website in
2000. We reincorporated in Delaware in 2006 and expanded our online operations, increasing the number of SKUs sold through
our e-commerce network, adding additional websites, improving our internet marketing proficiency, and commencing sales on
online marketplaces. Like most e-commerce retailers, our success depends on our ability to attract online consumers to our
websites and convert them into customers in a cost-effective manner. Historically, marketing through search engine
optimization provided the most efficient opportunity to reach online auto part buyers. In order to improve our business, we
worked towards enhancing the process of consolidation and implementing improvements to our multiple websites in order to
improve our search ranking through the increased use of paid search advertising and pursued opportunities in third-party online
marketplaces. Our efforts to improve the website purchase experience for our online customers have included our efforts to:
(1) help our customers find the parts they want to buy through a customized and guided shopping experience specific to key
part names; (2) increase order size across our sites through improved recommendation engines; and (3) provide leading
customer service and product support.
We intend to continue to implement strategies designed to build and increase our customer lifetime value by focusing on
increasing gross profit per transaction, transaction attachment rate, repeat purchases and conversion.
In October 2008, we acquired AutoMD for the purpose of developing content and a user community to educate
consumers on maintenance and service of their vehicles. The AutoMD.com site provides auto information, with tools for
diagnosing car troubles, locating repair shops, estimating the cost of repairs, accessing recalls and technical service bulletins,
reading do-it-yourself (“DIY”) repair guides, and getting questions answered in the automotive enthusiast community forum. In
2013, AutoMD launched its Insta-Quotes! program which used real time data to estimate auto repair costs for consumers, and
in 2014, we sold a non-controlling interest in AutoMD to outside investors and certain of our existing shareholders. In the first
quarter of 2017, AutoMD repurchased the non-controlling interests and closed down the Insta-Quotes! program. Following the
redemptions, AutoMD filed for dissolution and all of the remaining assets of AutoMD will be distributed to the Company
except for certain cash reserved for creditors of AutoMD. We intend to utilize the AutoMD assets as part our media business
going forward.
In August 2010, we acquired all of the issued and outstanding shares of Automotive Specialty Accessories and Parts, Inc.
and its wholly-owned subsidiary Whitney Automotive Group, Inc. (referred to herein as “WAG”), at the time, the nation’s
leading catalog and internet direct marketer of automotive aftermarket performance parts and accessories. The acquisition of
WAG allowed us to expand of our product line, which increased our ability to reach customers in the DIY automobile and off-
road accessories market.
Our flagship websites are located at www.autopartswarehouse.com, www.carparts.com, www.jcwhitney.com and
www.AutoMD.com and our corporate website is located at www.usautoparts.net.
We report on a 52/53-week fiscal year, ending on the Saturday nearest the end of December. References to 2016 and
2015 relate to the 52-week fiscal years ended December 31, 2016 and January 2, 2016. References to 2014 relate to the 53-
week fiscal year ended January 3, 2015.
Our Products
We offer a broad selection of aftermarket auto parts. We continually refine our product offering by introducing new
brands and parts categories, while discontinuing low-selling brands and SKUs. We broadly classify our products into three
subcategories by function: collision parts serving the body repair segment, engine parts to serve the replacement/wear parts
market and performance parts and accessories.
Collision Parts. The collision parts category is primarily comprised of parts for the exterior of an automobile. Our parts
in this category are typically replacement parts for original body parts that have been damaged as a result of a collision or
through general wear and tear. The majority of these products are sold through our websites. In addition, we sell an extensive
line of mirror products, including our own private-label brand called Kool-Vue™, which are marketed and sold as aftermarket
replacement parts and as upgrades to existing parts.
Engine Parts. The engine parts category is comprised of engine and chassis components as well as other mechanical and
electrical parts. These parts serve as replacement parts for existing engine parts and are generally used by professionals and do-
it-yourselfers for engine and mechanical maintenance and repair.
Performance Parts and Accessories. We offer performance versions of many parts sold in each of the above categories.
Performance parts and accessories generally consist of parts that enhance the performance of the automobile, upgrade existing
functionality of a specific part or improve the physical appearance or comfort of the automobile.
Our Sales Channels
Our sales channels include the online channel and the offline channel.
Online Sales Channel. Our online sales channel consists of our e-commerce websites, online marketplaces and online
advertising. Our e-commerce channel includes a network of e-commerce websites, supported by our call-center sales agents.
We also sell our products through online marketplaces, including third-party auction sites and shopping portals, which provide
us with access to additional consumer segments. The majority of our online sales are to individual consumers. We sell online
advertising and sponsorship positions on our e-commerce websites to highlight vendor brands and offer complementary
2
products and services that benefit our customers. Advertising is targeted to specific sections of the websites and can also be
targeted to specific users based on the vehicles they drive. Advertising partners primarily include part vendors, national
automotive aftermarket brands, and automobile manufacturers.
Offline Sales Channel. We sell and deliver to collision repair shops from our Chesapeake, Virginia warehouse facility. We
also market our Kool-Vue™ products nationwide to auto parts wholesale distributors and serve consumers by operating a retail
outlet store in LaSalle, Illinois.
Our Fulfillment Operations
We fulfill customer orders using two primary methods: (1) stock-and-ship, where we take physical delivery of
merchandise and store it in one of our distribution centers until it is shipped to a customer, and (2) drop-ship, where
merchandise is shipped directly to customers from our suppliers. We believe that the flexibility of fulfilling orders using two
different fulfillment methods allows us to offer a broader product selection, helps optimize product inventory and enhances our
overall business profitability.
Stock-and-Ship Fulfillment. Our stock-and-ship products are sourced primarily from manufacturers and other suppliers
located in Asia and in the U.S. and are stored in one of our distribution centers in Chesapeake, Virginia or LaSalle, Illinois. All
products received into our distribution centers are entered into our inventory management systems, allowing us to closely
monitor inventory availability. We consider a number of factors in determining which items to stock in our distribution centers,
including which products can be purchased at a meaningful discount to domestic prices for similar items, which products have
historically sold in high volumes, and which products may be out of stock when we attempt to fulfill via drop-ship.
Drop-Ship Fulfillment. We have developed relationships with several U.S.-based automobile parts distributors that
operate their own distribution centers and can deliver products directly to our customers. We internally developed a proprietary
distributor selection system, Auto-Vend™, which allows us to electronically select multiple vendors for a given order. Auto-
Vend™ will attempt to first direct an order to one of our warehouses. If the product is not in stock, Auto-Vend™ will process
the order to the next appropriate vendor based on customer location, cost, contractual agreements, and service level history.
Suppliers
We source our products from two primary regions: (1) our private label product sourced primarily through manufacturers
and distributors in the Asia-Pacific region, and (2) our branded product sourced primarily through drop-ship manufacturers and
distributors located in the United States.
Private Label Product. Our private label suppliers offer products which are generally less expensive and we believe
provide better value for our consumers. As a result, our mix shift towards private label product has continued to increase on a
year-over-year basis. We stock-and-ship our private label products in our distribution centers. We currently have over 55,000
private label SKUs in our product selection.
Branded Product. We have developed and implemented application programming interfaces with the majority of our
branded, drop ship suppliers that allow us to electronically transmit orders, check inventory availability, and receive the
shipment tracking information which is easily passed on to our customers. We are a significant customer for many of our drop-
ship vendors and have long standing relationships and contracts with many of these suppliers. For the fiscal year ended
December 31, 2016, three of our drop-ship vendors accounted for approximately 9% of our total product purchases. We
currently have over 1.0 million branded SKUs in our product selection.
Marketing
Our online marketing efforts are designed to attract visitors to our websites, convert visitors into purchasing customers
and encourage repeat purchases among our existing customer base. We use a variety of marketing methods, including online
marketing methods to attract visitors, which include paid search advertising, search engine optimization, affiliate programs, e-
mail marketing, print catalogues and inclusion in online shopping engines. To convert visitors into paying customers, we
periodically run promotions for discounted products. We seek to create cross-selling opportunities by displaying
complementary and related products available for sale throughout the purchasing process. We utilize several marketing
techniques, including targeted e-mails about specific vehicle promotions, to increase customer awareness of our products.
3
International Operations
In April 2007, we established offshore operations in the Philippines. Our offshore operations allow us to access a
workforce with the necessary technical skills at a significantly lower cost than comparably experienced U.S.-based
professionals. Our offshore operations are responsible for a majority of our website development, catalog management, and
back office support. Our offshore operations also house our main call center. We had 748 employees in the Philippines as of
December 31, 2016. In addition to our operations in the Philippines, we have a Canadian subsidiary; the subsidiary currently
has no operations or employees. We primarily source our private label product from suppliers in the Asia-Pacific region.
Competition
The auto repair information and parts industry is competitive and highly fragmented, with products distributed through
multi-tiered and overlapping channels. We compete with both online and offline retailers who offer original equipment
manufacturer (“OEM”), aftermarket and private label parts to either the DIY or do-it-for-me (“DIFM”) customer segments.
Current or potential competitors include the following:
•
•
•
•
•
•
national auto parts retailers such as Advance Auto Parts, AutoZone, Napa Auto Parts, CarQuest, O’Reilly
Automotive and Pep Boys;
large online marketplaces such as Amazon.com and sellers on eBay;
other online retailers of automotive products and auto repair information websites;
local independent retailers or niche auto parts retailers;
wholesale aftermarket auto parts distributors such as LKQ Corporation; and
manufacturers, brand suppliers and other distributors selling online directly to consumers.
We believe the principal competitive factors in our market are helping customers easily find their parts, educating
consumers on the service and maintenance of their vehicles, maintaining a proprietary product catalog that maps individual
parts to relevant vehicle applications, broad product selection and availability, price, knowledgeable customer service, rapid
order fulfillment and delivery, and easy product returns. We believe we compete favorably on the basis of these factors.
However, some of our competitors may be larger, may have stronger brand recognition or may have access to greater financial,
technical and marketing resources or may have been operating longer than we have.
Government Regulation
We are subject to federal and state consumer protection laws, including laws protecting the privacy of customer non-
public information and the handling of customer complaints and regulations prohibiting unfair and deceptive trade practices.
The growth and demand for online commerce has and may continue to result in more stringent consumer protection laws that
impose additional compliance burdens on online companies. These laws may cover issues such as user privacy, spyware and
the tracking of consumer activities, marketing e-mails and communications, other advertising and promotional practices,
money transfers, pricing, product safety, content and quality of products and services, taxation, electronic contracts and other
communications and information security. In addition, most states have passed laws that prohibit or limit the use of aftermarket
auto parts in collision repair work and/or require enhanced disclosure or vehicle owner consent before using aftermarket auto
parts in such repair work and additional legislation of this kind may be introduced in the future.
There is also great uncertainty over whether or how existing laws governing issues such as sales and other taxes,
auctions, libel and personal privacy apply to the Internet and commercial online services. These issues may take years to
resolve. For example, tax authorities in a number of states, as well as a Congressional advisory commission, are currently
reviewing the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject
us to additional state sales and income taxes. New legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the
Internet and commercial online services could result in significant additional taxes or regulatory restrictions on our business.
These taxes or restrictions could have an adverse effect on our cash flows and results of operations. Furthermore, there is a
possibility that we may be subject to significant fines or other payments for any past failures to comply with
these requirements.
Seasonality
We believe our business is subject to seasonal fluctuations. We have historically experienced higher sales of body parts in
winter months when inclement weather and hazardous road conditions typically result in more automobile collisions. Engine
parts and performance parts and accessories have historically experienced higher sales in the summer months when consumers
4
have more time to undertake elective projects to maintain and enhance the performance of their automobiles and the warmer
weather during that time is conducive for such projects. We expect the historical seasonality trends to continue, and such trends
may have a material impact on our financial condition and results of operations in subsequent periods.
Employees
As of December 31, 2016, we had 332 employees in the United States and 748 employees in the Philippines for a total of
1,080 employees. None of our employees are represented by a labor union, and we have never experienced a work stoppage.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to
those reports are available free of charge on the Investor Relations section of our corporate website located at
www.usautoparts.net as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the
Securities and Exchange Commission (“SEC”). The inclusion of our website address in this report does not include or
incorporate by reference into this report any information on our website.
ITEM 1A.
RISK FACTORS
Our business is subject to a number of risks which are discussed below. Other risks are presented elsewhere in this report
and in our other filings with the SEC. You should consider carefully the following risks in addition to the other information
contained in this report and our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K, and any
amendments thereto, before deciding to buy, sell or hold our common stock. If any of the following known or unknown risks or
uncertainties actually occurs with material adverse effects on us, our business, financial condition, results of operations and/or
liquidity could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose
all or part of your investment.
Risks Related To Our Business
Purchasers of aftermarket auto parts may not choose to shop online, which would prevent us from acquiring new customers
who are necessary to the growth of our business.
The online market for aftermarket auto parts is less developed than the online market for many other business and
consumer products, and currently represents only a small part of the overall aftermarket auto parts market. Our success will
depend in part on our ability to attract new customers and to convert customers who have historically purchased auto parts
through traditional retail and wholesale operations. Specific factors that could discourage or prevent prospective customers
from purchasing from us include:
•
•
•
•
•
•
•
concerns about buying auto parts without face-to-face interaction with sales personnel;
the inability to physically handle, examine and compare products;
delivery time associated with Internet orders;
concerns about the security of online transactions and the privacy of personal information;
delayed shipments or shipments of incorrect or damaged products;
increased shipping costs; and
the inconvenience associated with returning or exchanging items purchased online.
If the online market for auto parts does not gain widespread acceptance, our sales may decline and our business and
financial results may suffer.
We depend on search engines and other online sources to attract visitors to our websites, and if we are unable to attract
these visitors and convert them into customers in a cost-effective manner, our business and results of operations will be
harmed.
Our success depends on our ability to attract online consumers to our websites and convert them into customers in a cost-
effective manner. We are significantly dependent upon search engines, shopping comparison sites and other online sources for
our website traffic. We are included in search results as a result of both paid search listings, where we purchase specific search
terms that will result in the inclusion of our listing, and algorithmic searches that depend upon the searchable content on our
sites.
5
Algorithmic listings cannot be purchased and instead are determined and displayed solely by a set of formulas utilized by
the search engine. Search engines, shopping comparison sites and other online sources have in the past, and will continue to
revise their algorithms from time to time in an attempt to optimize their search results. For example, search engines, like
Google, revise their algorithms regularly in an attempt to optimize their search results. During the past few years, we have been
negatively impacted by the changes in methodology for how Google displayed or selected our different websites for customer
search results, which has reduced our unique visitor count and adversely affected our financial results. We continue to address
these ongoing challenges, and during fiscal 2016 our unique visitor count increased by 1.2 million, or 1.0%, to 117.9 million
unique visitors compared to 116.7 million unique visitors in 2015 primarily due to an increase in paid traffic, partially offset by
a decrease in organic traffic. While we have been able to offset the decrease in our organic traffic through increases in paid
search traffic, there is no guarantee we will be able to continue to increase our paid traffic at the same levels in the future. In
addition, if other search engines, shopping comparison sites or similar online sources on which we rely for website traffic were
to modify their general methodology for how they display or select our websites in a manner similar to the changes made by
Google, or if Google continues to make changes to its search results ranking algorithms that cause those algorithms to interact
with our platform in a manner that continues to reduce our unique visitors count, fewer consumers may click through to our
websites, and our financial results could be further adversely affected.
Similarly, if any free search engine or shopping comparison site on which we rely begins charging fees for listing or
placement, or if one or more of the search engines, shopping comparison sites and other online sources on which we rely for
purchased listings, increases their fees, modifies or terminates its relationship with us, our expenses could rise, we could lose
customers and traffic to our websites could decrease.
Shifting online consumer behavior for purchasers of aftermarket auto parts may shift from desktop based to mobile device
based online shopping, which could impact the growth of our business and our financial results could suffer.
Mobile device based online shopping represents an increasing part of our business. Shifting consumer behavior indicates
that our customers may become more inclined to shop for aftermarket auto parts through their mobile devices. Mobile
customers exhibit different behaviors than our more traditional desktop based e-commerce customers. User sophistication and
technological advances have increased consumer expectations around the user experience on mobile devices, including speed
of response, functionality, product availability, security, and ease of use. If we are unable to continue to adapt our mobile device
shopping experience from desktop based online shopping in ways that improve our customer’s mobile experience and increase
the engagement of our mobile customers our sales may decline and our business and financial results may suffer.
During fiscal 2016, we recorded net income, but we have a history of net losses which could continue in fiscal year 2017.
During fiscal 2016, we achieved net income of $731, compared to a net loss of $1,281 for fiscal 2015. While we achieved
net income during fiscal 2016, if our prior net losses continue in fiscal year 2017 they could severely impact our liquidity, as we
may not be able to provide positive cash flows from operations in order to meet our working capital requirements. We may
need to borrow additional funds from our credit facility, which under certain circumstances may not be available, sell additional
assets or seek additional equity or additional debt financing in the future. In such case, there can be no assurance that we would
be able to raise such additional financing or engage in such asset sales on acceptable terms, or at all. If the net losses we have
experienced in previous years occur in the future for longer than we expect because our strategies to return to positive sales
growth and profitability are not successful, and if we are not able to raise adequate additional financing or proceeds from asset
sales to continue to fund our ongoing operations, we will need to defer, reduce or eliminate significant planned expenditures,
restructure or significantly curtail our operations, file for bankruptcy or cease operations.
Our operations are restricted by our credit agreement, and our ability to borrow funds under our credit facility is subject to a
borrowing base.
We maintain an asset-based revolving credit facility with JPMorgan Chase Bank, N.A. (the “Credit Agreement”) that
provides for, among other things, a revolving commitment in an aggregate principal amount of up to $30 million subject to a
borrowing base derived from certain of our receivables, inventory and property and equipment. Our Credit Agreement includes
a number of restrictive covenants. These covenants could impair our financing and operational flexibility and make it difficult
for us to react to market conditions and satisfy our ongoing capital needs and unanticipated cash requirements. Specifically,
such covenants restrict our ability and, if applicable, the ability of our subsidiaries to, among other things:
•
incur additional debt;
• make certain investments and acquisitions;
•
•
enter into certain types of transactions with affiliates;
use assets as security in other transactions;
6
•
•
•
•
•
•
pay dividends on our capital stock or repurchase our equity interests, excluding payments of preferred stock
dividends which are specifically permitted under our credit facility;
sell certain assets or merge with or into other companies;
guarantee the debts of others;
enter into new lines of business;
pay or amend our subordinated debt; and
form any joint ventures or subsidiary investments.
In addition, our credit facility is subject to a borrowing base derived from certain of our receivables, inventory, property
and equipment. In the event that components of the borrowing base are adversely affected for any reason, including adverse
market conditions or downturns in general economic conditions, we could be restricted in the amount of funds we can borrow
under the credit facility. Furthermore, in the event that components of the borrowing base decrease to a level below the amount
of loans then-outstanding under the credit facility, we could be required to immediately repay loans to the extent of such
shortfall. If any of these events were to occur, it could severely impact our liquidity and capital resources, limit our ability to
operate our business and could have a material adverse effect on our financial condition and results of operations.
Under certain circumstances, our credit facility may also require us to satisfy a financial covenant, which could limit our
ability to react to market conditions or satisfy extraordinary capital needs and could otherwise impact our liquidity and capital
resources, restrict our financing and have a material adverse effect on our results of operations.
Our ability to comply with the covenants and other terms of our debt obligations will depend on our future operating
performance. If we fail to comply with such covenants and terms, we would be required to obtain waivers from our lenders to
maintain compliance with our debt obligations. In the future, if we are unable to obtain any necessary waivers and our debt is
accelerated, a material adverse effect on our financial condition and future operating performance would result.
While we did not have any outstanding indebtedness under our Credit Agreement as of the end of fiscal 2016, we may
have outstanding indebtedness in the future. Any outstanding indebtedness would have important consequences, including the
following:
• we would have to dedicate a portion of our cash flow to making payments on our indebtedness, thereby reducing
the availability of our cash flow to fund working capital, capital expenditures, acquisitions or other general
corporate purposes;
•
•
•
certain levels of indebtedness may make us less attractive to potential acquirers or acquisition targets;
certain levels of indebtedness may limit our flexibility to adjust to changing business and market conditions, and
make us more vulnerable to downturns in general economic conditions as compared to competitors that may be
less leveraged; and
as described in more detail above, the documents providing for our indebtedness contain restrictive covenants
that may limit our financing and operational flexibility.
Furthermore, our ability to satisfy our debt service obligations depends, among other things, upon fluctuations in interest
rates, our future operating performance and ability to refinance indebtedness when and if necessary. These factors depend partly
on economic, financial, competitive and other factors beyond our control. We may not be able to generate sufficient cash from
operations to meet our debt service obligations as well as fund necessary capital expenditures and general operating expenses.
In addition, if we need to refinance our debt, or obtain additional debt financing or sell assets or equity to satisfy our debt
service obligations, we may not be able to do so on commercially reasonable terms, if at all. If this were to occur, we may need
to defer, reduce or eliminate significant planned expenditures, restructure or significantly curtail our operations, file for
bankruptcy or cease operations.
We face exposure to product liability lawsuits.
The automotive industry in general has been subject to a large number of product liability claims due to the nature of
personal injuries that result from car accidents or malfunctions. As a distributor of auto parts, including parts obtained overseas,
we could be held liable for the injury or damage caused if the products we sell are defective or malfunction regardless of
whether the product manufacturer is the party at fault. While we carry insurance against product liability claims, if the damages
in any given action were high or we were subject to multiple lawsuits, the damages and costs could exceed the limits of our
insurance coverage or prevent us from obtaining coverage in the future. If we were required to pay substantial damages as a
result of these lawsuits, it may seriously harm our business and financial condition. Even defending against unsuccessful claims
could cause us to incur significant expenses and result in a diversion of management’s attention. In addition, even if the money
7
damages themselves did not cause substantial harm to our business, the damage to our reputation and the brands offered on our
websites could adversely affect our future reputation and our brand, and could result in a decline in our net sales and
profitability.
If our assets become impaired we may be required to record a significant charge to earnings.
We review our long-lived assets for impairment annually, or when events or changes in circumstances indicate the
carrying value may not be recoverable. Factors that may be considered are changes in circumstances indicating that the carrying
value of our assets may not be recoverable include a decrease in future cash flows. For fiscal 2016, we recorded a non-cash
impairment charge of $1,130 relating to the impairment of certain AutoMD software. We may be required to record a
significant charge to earnings in our financial statements during the period in which any impairment of our assets is determined,
resulting in an impact on our results of operations.
We are highly dependent upon key suppliers.
Our top ten suppliers represented approximately 44% of our total product purchases during fiscal 2016. Our ability to
acquire products from our suppliers in amounts and on terms acceptable to us is dependent upon a number of factors that could
affect our suppliers and which are beyond our control. For example, financial or operational difficulties that some of our
suppliers may face could result in an increase in the cost of the products we purchase from them. If we do not maintain our
relationships with our existing suppliers or develop relationships with new suppliers on acceptable commercial terms, we may
not be able to continue to offer a broad selection of merchandise at competitive prices and, as a result, we could lose customers
and our sales could decline.
For a number of the products that we sell, we outsource the distribution and fulfillment operation and are dependent on
certain drop-ship suppliers to manage inventory, process orders and distribute those products to our customers in a timely
manner. For fiscal 2016, our product purchases from three drop-ship suppliers represented approximately 9% of our total
product purchases. Because we outsource to suppliers a number of these traditional retail functions relating to those products,
we have limited control over how and when orders are fulfilled. We also have limited control over the products that our
suppliers purchase or keep in stock. Our suppliers may not accurately forecast the products that will be in high demand or they
may allocate popular products to other resellers, resulting in the unavailability of certain products for delivery to our customers.
Any inability to offer a broad array of products at competitive prices and any failure to deliver those products to our customers
in a timely and accurate manner may damage our reputation and brand and could cause us to lose customers and our sales could
decline.
In addition, the increasing consolidation among auto parts suppliers may disrupt or end our relationship with some
suppliers, result in product shortages and/or lead to less competition and, consequently, higher prices. Furthermore, as part of
our routine business, suppliers extend credit to us in connection with our purchase of their products. In the future, our suppliers
may limit the amount of credit they are willing to extend to us in connection with our purchase of their products. If this were to
occur, it could impair our ability to acquire the types and quantities of products that we desire from the applicable suppliers on
acceptable terms, severely impact our liquidity and capital resources, limit our ability to operate our business and could have a
material adverse effect on our financial condition and results of operations.
We are dependent upon relationships with suppliers in Taiwan and China for the majority of our products.
We acquire a majority of our products from manufacturers and distributors located in Taiwan and China. We do not have
any long-term contracts or exclusive agreements with our foreign suppliers that would ensure our ability to acquire the types
and quantities of products we desire at acceptable prices and in a timely manner or that would allow us to rely on customary
indemnification protection with respect to any third party claims similar to some of our U.S. suppliers.
In addition, because many of our suppliers are outside of the United States, additional factors could interrupt our
relationships or affect our ability to acquire the necessary products on acceptable terms, including:
•
•
•
•
•
•
political, social and economic instability and the risk of war or other international incidents in Asia or abroad;
fluctuations in foreign currency exchange rates that may increase our cost of products;
tariffs and protectionist laws and business practices that favor local businesses;
difficulties in complying with import and export laws, regulatory requirements and restrictions;
natural disasters and public health emergencies;
import shipping delays resulting from foreign or domestic labor shortages, slow downs, or stoppage; and
8
•
the failure of local laws to provide a sufficient degree of protection against infringement of our intellectual
property.
From time to time, we may also have to resort to administrative and court proceedings to enforce our legal rights with
foreign suppliers. However, it may be more difficult to evaluate the level of legal protection we enjoy in Taiwan and China and
the corresponding outcome of any administrative or court proceedings than in comparison to our suppliers in the United States.
We depend on third-party delivery services to deliver our products to our customers on a timely and consistent basis, and any
deterioration in our relationship with any one of these third parties or increases in the fees that they charge could harm our
reputation and adversely affect our business and financial condition.
We rely on third parties for the shipment of our products and we cannot be sure that these relationships will continue on
terms favorable to us, or at all. Shipping costs have increased from time to time, and may continue to increase, and we may not
be able to pass these costs directly to our customers. These increased shipping costs could harm our business, prospects,
financial condition and results of operations by increasing our costs of doing business and reducing gross margins which could
negatively affect our operating results. In particular, we utilize a variety of shipping methods for both inbound and outbound
logistics. For inbound logistics, we rely on trucking and ocean carriers and any increases in fees that they charge could
adversely affect our business and financial condition. For outbound logistics, we rely on ‘‘Less-than-Truckload’’ (‘‘LTL’’) and
parcel freight based upon the product and quantities being shipped and customer delivery requirements. Any increases in fees
or any increased use of LTL would increase our shipping costs which could negatively affect our operating results.
In addition, if our relationships with these third parties are terminated or impaired, or if these third parties are unable to
deliver products for us, whether due to labor shortage, slow down or stoppage, deteriorating financial or business condition,
responses to terrorist attacks or for any other reason, we would be required to use alternative carriers for the shipment of
products to our customers. Changing carriers could have a negative effect on our business and operating results due to reduced
visibility of order status and package tracking and delays in order processing and product delivery, and we may be unable to
engage alternative carriers on a timely basis, upon terms favorable to us, or at all.
If commodity prices such as fuel, plastic and steel increase, our margins may reduce.
Our third party delivery services have increased fuel surcharges from time to time, and such increases negatively impact
our margins, as we are generally unable to pass all of these costs directly to consumers. Increasing prices in the component
materials for the parts we sell may impact the availability, the quality and the price of our products, as suppliers search for
alternatives to existing materials and increase the prices they charge. We cannot ensure that we can recover all the increased
costs through price increases, and our suppliers may not continue to provide the consistent quality of product as they may
substitute lower cost materials to maintain pricing levels, all of which may have a negative impact on our business and results
of operations.
If we are unable to manage the challenges associated with our international operations, the growth of our business could be
limited and our business could suffer.
We maintain international business operations in the Philippines. This international operation includes development and
maintenance of our websites, our main call center, and sales and back office support services. We are subject to a number of
risks and challenges that specifically relate to our international operations. Our international operations may not be successful if
we are unable to meet and overcome these challenges, which could limit the growth of our business and may have an adverse
effect on our business and operating results. These risks and challenges include:
•
•
•
•
•
•
•
•
•
difficulties and costs of staffing and managing foreign operations, including any impairment to our relationship
with employees caused by a reduction in force;
restrictions imposed by local labor practices and laws on our business and operations;
exposure to different business practices and legal standards;
unexpected changes in regulatory requirements;
the imposition of government controls and restrictions;
political, social and economic instability and the risk of war, terrorist activities or other international incidents;
the failure of telecommunications and connectivity infrastructure;
natural disasters and public health emergencies;
potentially adverse tax consequences; and
9
•
fluctuations in foreign currency exchange rates and relative weakness in the U.S. dollar.
If our fulfillment operations are interrupted for any significant period of time or are not sufficient to accommodate
increased demand, our sales could decline and our reputation could be harmed.
Our success depends on our ability to successfully receive and fulfill orders and to promptly deliver our products to our
customers. The majority of orders for our auto collision parts products are filled from our inventory in our distribution centers,
where all our inventory management, packaging, labeling and product return processes are performed. Increased demand and
other considerations may require us to expand our distribution centers or transfer our fulfillment operations to larger or other
facilities in the future. If we do not successfully expand our fulfillment capabilities in response to increases in demand, our
sales could decline.
In addition, our distribution centers are susceptible to damage or interruption from human error, fire, flood, power loss,
telecommunications failures, terrorist attacks, acts of war, break-ins, earthquakes and similar events. We do not currently
maintain back-up power systems at our fulfillment centers. We do not presently have a formal disaster recovery plan and our
business interruption insurance may be insufficient to compensate us for losses that may occur in the event operations at our
fulfillment center are interrupted. In addition, alternative arrangements may not be available, or if they are available, may
increase the cost of fulfillment. Any interruptions in our fulfillment operations for any significant period of time, including
interruptions resulting from the expansion of our existing facilities or the transfer of operations to a new facility, could damage
our reputation and brand and substantially harm our business and results of operations.
We rely on bandwidth and data center providers and other third parties to provide products to our customers, and any
failure or interruption in the services provided by these third parties could disrupt our business and cause us to lose
customers.
We rely on third-party vendors, including data center and bandwidth providers. Any disruption in the network access or
co-location services, which are the services that house and provide Internet access to our servers, provided by these third-party
providers or any failure of these third-party providers to handle current or higher volumes of use could significantly harm our
business. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent
of which we cannot predict. We exercise little control over these third-party vendors, which increases our vulnerability to
problems with the services they provide. We also license technology and related databases from third parties to facilitate
elements of our e-commerce platform. We have experienced and expect to continue to experience interruptions and delays in
service and availability for these elements. Any errors, failures, interruptions or delays experienced in connection with these
third-party technologies could negatively impact our relationship with our customers and adversely affect our business. Our
systems also heavily depend on the availability of electricity, which also comes from third-party providers. If we were to
experience a major power outage, we would have to rely on back-up generators. These back-up generators may not operate
properly through a major power outage, and their fuel supply could also be inadequate during a major power outage.
Information systems such as ours may be disrupted by even brief power outages, or by the fluctuations in power resulting from
switches to and from backup generators. This could disrupt our business and cause us to lose customers.
Security threats to our IT infrastructure could expose us to liability, and damage our reputation and business
It is essential to our business strategy that our technology and network infrastructure remain secure and is perceived by
our customers to be secure. Despite security measures, however, any network infrastructure may be vulnerable to cyber-attacks
by hackers and other security threats. As a leading online source for automotive aftermarket parts and repair information, we
may face cyber-attacks that attempt to penetrate our network security, including our data centers, to sabotage or otherwise
disable our network of websites and online marketplaces, misappropriate our or our customers’ proprietary information, which
may include personally identifiable information, or cause interruptions of our internal systems and services. If successful, any
of these attacks could negatively affect our reputation, damage our network infrastructure and our ability to sell our products,
harm our relationship with customers that are affected and expose us to financial liability.
In addition, any failure by us to comply with applicable privacy and information security laws and regulations could
cause us to incur significant costs to protect any customers whose personal data was compromised and to restore customer
confidence in us and to make changes to our information systems and administrative processes to address security issues and
compliance with applicable laws and regulations. In addition, our customers could lose confidence in our ability to protect their
personal information, which could cause them to stop shopping on our sites altogether. Such events could lead to lost sales and
adversely affect our results of operations. We also could be exposed to government enforcement actions and private litigation.
Moreover, we are subject to the Payment Card Industry Data Security Standard ("PCI DSS"), issued by the PCI Council.
PCI DSS contains compliance guidelines and standards with regard to our security surrounding the physical and electronic
storage, processing and transmission of individual cardholder data. We cannot be certain that all of our information technology
10
systems are able to prevent, contain or detect any cyber-attacks, cyber terrorism, or security breaches from known malware or
malware that may be developed in the future. To the extent that any disruption results in the loss, damage or misappropriation
of information, we may be materially adversely affected by claims from customers, financial institutions, regulatory authorities,
payment card associations and others. In addition, the cost of complying with stricter privacy and information security laws
and standards could be significant to us. For example, we were recently required to transition from PCI Data Security Standard
2.0 to PCI Data Security Standard 3.2. We are in the process of conforming to the new standards which we expect to be
completed by the third quarter of 2017. There is no guarantee that we will be able to conform to these new standards, and if we
fail to meet these standards, we could become subject to fines and other penalties and experience a significant increase in
payment card transaction costs. In addition, such failure could damage our reputation, inhibit sales, and adversely affect our
business.
We face intense competition and operate in an industry with limited barriers to entry, and some of our competitors may have
greater resources than us and may be better positioned to capitalize on the growing e-commerce auto parts market.
The auto parts industry is competitive and highly fragmented, with products distributed through multi-tiered and
overlapping channels. We compete with both online and offline retailers who offer original equipment manufacturer (“OEM”)
and aftermarket auto parts to either the DIY or do-it-for-me customer segments. Current or potential competitors include the
following:
•
•
•
•
national auto parts retailers such as Advance Auto Parts, AutoZone, Napa Auto Parts, CarQuest, O’Reilly
Automotive and Pep Boys;
large online marketplaces such as Amazon.com and eBay;
other online retailers of automotive products and auto repair information websites;
local independent retailers or niche auto parts online retailers;
• wholesale aftermarket auto parts distributors such as LKQ Corporation; and
• manufacturers, brand suppliers and other distributors selling online directly to customers.
Barriers to entry are low, and current and new competitors can launch websites at a relatively low cost. Many of our
current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing, technical, management and other resources than we do. For example, in the event that
online marketplace companies such as Amazon or eBay, who have larger customer bases, greater brand recognition and
significantly greater resources than we do, focus more of their resources on competing in the aftermarket auto parts market, it
could have a material adverse effect on our business and results of operations. In addition, some of our competitors have used
and may continue to use aggressive pricing tactics and devote substantially more financial resources to website and system
development than we do. We expect that competition will further intensify in the future as Internet use and online commerce
continue to grow worldwide. Increased competition may result in reduced sales, lower operating margins, reduced profitability,
loss of market share and diminished brand recognition.
Additionally, we have experienced significant competitive pressure from certain of our suppliers who are now selling
their products directly to customers. Since our suppliers have access to merchandise at very low costs, they can sell products at
lower prices and maintain higher gross margins on their product sales than we can. Our financial results have been negatively
impacted by direct sales from our suppliers to our current and potential customers, and our total number of orders and average
order value may decline due to increased competition. Continued competition from our suppliers may also continue to
negatively impact our business and results of operations, including through reduced sales, lower operating margins, reduced
profitability, loss of market share and diminished brand recognition. We have implemented and will continue to implement
several strategies to attempt to overcome the challenges created by our suppliers selling directly to our customers and potential
customers, including optimizing our pricing, continuing to increase our mix of private label products and improving our
websites, which may not be successful. If these strategies are not successful, our operating results and financial conditions
could be materially and adversely affected.
If we fail to offer a broad selection of products at competitive prices or fail to maintain sufficient inventory to meet customer
demands, our revenue could decline.
In order to expand our business, we must successfully offer, on a continuous basis, a broad selection of auto parts that
meet the needs of our customers, including by being the first to market with new SKUs. Our auto parts are used by consumers
for a variety of purposes, including repair, performance, improved aesthetics and functionality. In addition, to be successful, our
product offerings must be broad and deep in scope, competitively priced, well-made, innovative and attractive to a wide range
of consumers. We cannot predict with certainty that we will be successful in offering products that meet all of these
11
requirements. Moreover, even if we offer a broad selection of products at competitive prices, we must maintain sufficient in-
stock inventory to meet consumer demand. If our product offerings fail to satisfy our customers’ requirements or respond to
changes in customer preferences or we otherwise fail to maintain sufficient in-stock inventory, our revenue could decline.
Challenges by OEMs to the validity of the aftermarket auto parts industry and claims of intellectual property infringement
could adversely affect our business and the viability of the aftermarket auto parts industry.
OEMs have attempted to use claims of intellectual property infringement against manufacturers and distributors of
aftermarket products to restrict or eliminate the sale of aftermarket products that are the subject of the claims. The OEMs have
brought such claims in federal court and with the United States International Trade Commission. We have received in the past,
and we anticipate we may in the future receive, communications alleging that certain products we sell infringe the patents,
copyrights, trademarks and trade names or other intellectual property rights of OEMs or other third parties. For instance, after
approximately three and a half years of litigation and related costs and expenses, on April 16, 2009, we entered into a
settlement agreement with Ford Motor Company and Ford Global Technologies, LLC that ended the two legal actions that were
initiated by Ford against us related to claims of intellectual property infringement. The United States Patent and Trademark
Office records indicate that OEMs are seeking and obtaining more design patents then they have in the past. To the extent that
the OEMs are successful with intellectual property infringement claims, we could be restricted or prohibited from selling
certain aftermarket products which could have an adverse effect on our business. Infringement claims could also result in
increased costs of doing business arising from increased legal expenses, adverse judgments or settlements or changes to our
business practices required to settle such claims or satisfy any judgments. Litigation could result in interpretations of the law
that require us to change our business practices or otherwise increase our costs and harm our business. We may not maintain
sufficient insurance coverage to cover the types of claims that could be asserted. If a successful claim were brought against us,
it could expose us to significant liability.
If we are unable to protect our intellectual property rights, our reputation and brand could be impaired and we could lose
customers.
We regard our trademarks, trade secrets and similar intellectual property such as our proprietary back-end order
processing and fulfillment code and process as important to our success. We rely on trademark and copyright law, and trade
secret protection, and confidentiality and/or license agreements with employees, customers, partners and others to protect our
proprietary rights. We cannot be certain that we have taken adequate steps to protect our proprietary rights, especially in
countries where the laws may not protect our rights as fully as in the United States. In addition, our proprietary rights may be
infringed or misappropriated, and we could be required to incur significant expenses to preserve them. In the past we have filed
litigation to protect our intellectual property rights. The outcome of such litigation can be uncertain, and the cost of prosecuting
such litigation may have an adverse impact on our earnings. We have common law trademarks, as well as pending federal
trademark registrations for several marks and several registered marks. However, any registrations may not adequately cover
our intellectual property or protect us against infringement by others. Effective trademark, service mark, copyright, patent and
trade secret protection may not be available in every country in which our products and services may be made available online.
We also currently own or control a number of Internet domain names, including www.usautoparts.net, www.carparts.com,
www.autopartswarehouse.com, www.jcwhitney.com and www.AutoMD.com, and have invested time and money in the
purchase of domain names and other intellectual property, which may be impaired if we cannot protect such intellectual
property. We may be unable to protect these domain names or acquire or maintain relevant domain names in the United States
and in other countries. If we are not able to protect our trademarks, domain names or other intellectual property, we may
experience difficulties in achieving and maintaining brand recognition and customer loyalty.
We rely on key personnel and may need additional personnel for the success and growth of our business.
Our business is largely dependent on the personal efforts and abilities of highly skilled executive, technical, managerial,
merchandising, marketing, and call center personnel. Competition for such personnel is intense, and we cannot assure that we
will be successful in attracting and retaining such personnel. The loss of any key employee or our inability to attract or retain
other qualified employees could harm our business and results of operations.
As a result of our international operations, we have foreign exchange risk.
Our purchases of auto parts from our Asian suppliers are denominated in U.S. dollars; however, a change in the foreign
currency exchange rates could impact our product costs over time. Our financial reporting currency is the U.S. dollar and
changes in exchange rates significantly affect our reported results and consolidated trends. For example, if the U.S. dollar
weakens year-over-year relative to currencies in our international locations, our consolidated gross profit and operating
expenses would be higher than if currencies had remained constant. Similarly, our operating expenses in the Philippines are
generally paid in Philippine Pesos, and as the exchange rate fluctuates, it could adversely impact our operating results.
12
If our product catalog database is stolen, misappropriated or damaged, or if a competitor is able to create a substantially
similar catalog without infringing our rights, then we may lose an important competitive advantage.
We have invested significant resources and time to build and maintain our product catalog, which is maintained in the
form of an electronic database, which maps SKUs to relevant product applications based on vehicle makes, models and years.
We believe that our product catalog provides us with an important competitive advantage in both driving traffic to our websites
and converting that traffic to revenue by enabling customers to quickly locate the products they require. We cannot assure you
that we will be able to protect our product catalog from unauthorized copying or theft or that our product catalog will continue
to operate adequately, without any technological challenges. In addition, it is possible that a competitor could develop a catalog
or database that is similar to or more comprehensive than ours, without infringing our rights. In the event our product catalog is
damaged or is stolen, copied or otherwise replicated to compete with us, whether lawfully or not, we may lose an important
competitive advantage and our business could be harmed.
Our e-commerce system is dependent on open-source software, which exposes us to uncertainty and potential liability.
We utilize open-source software such as Linux, Apache, MySQL, PHP, Fedora and Perl throughout our web properties
and supporting infrastructure although we have created proprietary programs. Open-source software is maintained and
upgraded by a general community of software developers under various open-source licenses, including the GNU General
Public License (“GPL”). These developers are under no obligation to maintain, enhance or provide any fixes or updates to this
software in the future. Additionally, under the terms of the GPL and other open-source licenses, we may be forced to release to
the public source-code internally developed by us pursuant to such licenses. Furthermore, if any of these developers contribute
any code of others to any of the software that we use, we may be exposed to claims and liability for intellectual property
infringement and may also be forced to implement changes to the code-base for this software or replace this software with
internally developed or commercially licensed software.
System failures, including failures due to natural disasters or other catastrophic events, could prevent access to our
websites, which could reduce our net sales and harm our reputation.
Our sales would decline and we could lose existing or potential customers if they are not able to access our websites or if
our websites, transactions processing systems or network infrastructure do not perform to our customers’ satisfaction. Any
Internet network interruptions or problems with our websites could:
•
•
•
•
•
prevent customers from accessing our websites;
reduce our ability to fulfill orders or bill customers;
reduce the number of products that we sell;
cause customer dissatisfaction; or
damage our brand and reputation.
We have experienced brief computer system interruptions in the past, and we believe they may continue to occur from
time to time in the future. Our systems and operations are also vulnerable to damage or interruption from a number of sources,
including a natural disaster or other catastrophic event such as an earthquake, typhoon, volcanic eruption, fire, flood, terrorist
attack, computer viruses, power loss, telecommunications failure, physical and electronic break-ins and other similar events.
For example, our headquarters and the majority of our infrastructure, including some of our servers, are located in Southern
California, a seismically active region. We also maintain offshore and outsourced operations in the Philippines, an area that has
been subjected to a typhoon and a volcanic eruption in the past. In addition, California has in the past experienced power
outages as a result of limited electrical power supplies and due to recent fires in the southern part of the state. Such outages,
natural disasters and similar events may recur in the future and could disrupt the operation of our business. Our technology
infrastructure is also vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. Although the
critical portions of our systems are redundant and backup copies are maintained offsite, not all of our systems and data are fully
redundant. We do not presently have a formal disaster recovery plan in effect and may not have sufficient insurance for losses
that may occur from natural disasters or catastrophic events. Any substantial disruption of our technology infrastructure could
cause interruptions or delays in our business and loss of data or render us unable to accept and fulfill customer orders or operate
our websites in a timely manner, or at all.
Risks Related To Our Capital Stock
Our common stock price has been and may continue to be volatile, which may result in losses to our stockholders.
The market prices of technology and e-commerce companies generally have been extremely volatile and have recently
experienced sharp share price and trading volume changes. The trading price of our common stock is likely to be volatile and
13
could fluctuate widely in response to, among other things, the risk factors described in this report and other factors beyond our
control such as fluctuations in the operations or valuations of companies perceived by investors to be comparable to us, our
ability to meet analysts’ expectations, our trading volume, activities of activist investors, the impact of any stock repurchase
program or conditions or trends in the Internet or auto parts industries.
Since the completion of our initial public offering in February 2007 through December 31, 2016, the trading price of our
common stock has been volatile, ranging from a high of $12.61 per share to a low per share of $0.91. We have also experienced
significant fluctuations in the trading volume of our common stock. General economic and political conditions unrelated to our
performance may also adversely affect the price of our common stock. In the past, following periods of volatility in the market
price of a public company’s securities, securities class action litigation has often been initiated. Due to the inherent
uncertainties of litigation, we cannot predict the ultimate outcome of any such litigation if it were initiated. The initiation of any
such litigation or an unfavorable result could have a material adverse effect on our financial condition and results of operations.
Our executive officers, directors and certain related parties and entities that are affiliated with them have registered the
resale of a significant portion of our total outstanding shares of common stock, and any sale of such shares into the market
in the future could cause the market price of our common stock to drop significantly, even if our business is doing well.
Our executive officers, directors and certain related parties and entities that are affiliated with them have registered the
resale of up to 12,023,656 shares of our common stock that they currently hold, which represents approximately 35.2% of our
total outstanding shares of common stock as of December 31, 2016. Sales of a substantial number of shares of our common
stock in the public market by these selling stockholders, or the perception that these sales might occur, could depress the market
price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are
unable to predict the effect that sales or perceived sales by these stockholders may have on the prevailing market price of our
common stock.
Our common stock may be delisted from the NASDAQ Global Market (“NASDAQ”) if we are unable to maintain
compliance with Nasdaq’s continued listing standards.
NASDAQ imposes, among other requirements, continued listing standards including minimum bid and public float
requirements. The price of our common stock must trade at or above $1.00 to comply with NASDAQ's minimum bid
requirement for continued listing on the NASDAQ. If our stock trades at bid prices of less than $1.00 for a period in excess of
30 consecutive business days, the NASDAQ could send a deficiency notice to us for not remaining in compliance with the
minimum bid listing standards. During the fiscal 2016 and fiscal 2015, our common stock never traded below $1.00. However,
if the closing bid price of our common stock fails to meet NASDAQ's minimum closing bid price requirement, or if we
otherwise fail to meet any other applicable requirements of the NASDAQ and we are unable to regain compliance, NASDAQ
may make a determination to delist our common stock.
Any delisting of our common stock could adversely affect the market liquidity of our common stock and the market price
of our common stock could decrease. Furthermore, if our common stock were delisted it could adversely affect our ability to
obtain financing for the continuation of our operations and/or result in the loss of confidence by investors, customers, suppliers
and employees.
Our executive officers and directors and certain related parties own a significant percentage of our stock.
As of December 31, 2016, our executive officers and directors and certain related parties and entities that are affiliated
with them beneficially owned in the aggregate approximately 43% of our outstanding shares of stock. This significant
concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive
disadvantages in owning stock in companies with controlling stockholders. In addition, the significant concentration of share
ownership may provide for less trading volume of our common stock. These stockholders, acting together, also will be able to
significantly influence our management and affairs and control matters requiring stockholder approval including the election of
our entire Board of Directors and certain significant corporate actions such as mergers, consolidations or the sale of
substantially all of our assets. As a result, this concentration of ownership could delay, defer or prevent others from initiating a
potential merger, takeover or other change in our control, even if these actions would benefit our other stockholders and us.
The rights, preferences and privileges of our existing preferred stock may restrict our financial and operational flexibility
and may dilute our common stockholders.
In March 2013, our Board of Directors, under the authority granted by our Certificate of Incorporation, established a
series of preferred stock, our Series A Convertible Preferred, which has various rights, preferences and privileges senior to the
shares of our common stock. Dividends on the Series A Convertible Preferred are payable quarterly, subject to the satisfaction
of certain conditions, at a rate of $0.058 per share per annum in cash, in shares of common stock or in any combination of cash
and common stock as determined by our Board of Directors. While we may, at our election, subject to the satisfaction of certain
14
conditions, pay any accrued but unpaid dividends on the Series A Convertible Preferred in either cash or in common stock, we
may be unable to satisfy the requisite conditions for paying dividends in common stock and, under such circumstances, we will
be required to pay such accrued but unpaid dividends in cash. In such circumstances, we will be required to use cash that would
otherwise be used to fund our ongoing operations to pay such accrued but unpaid dividends. To the extent we do pay dividends
in common stock as we have done in certain prior periods, the ownership percentage of our common stockholders who are not
holders of the Series A Convertible Preferred will be diluted. Our Series A Convertible Preferred is initially convertible for
4,149,997 shares of common stock, and to the extent that the Series A Convertible Preferred is converted, the common stock
ownership percentage of our common stockholders who are not converting holders of the Series A Convertible Preferred will be
diluted.
Our future operating results may fluctuate and may fail to meet market expectations.
We expect that our revenue and operating results will continue to fluctuate from quarter to quarter due to various factors,
many of which are beyond our control. If our quarterly revenue or operating results fall below the expectations of investors or
securities analysts, the price of our common stock could significantly decline. The factors that could cause our operating results
to continue to fluctuate include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
fluctuations in the demand for aftermarket auto parts;
price competition on the Internet or among offline retailers for auto parts;
our ability to attract visitors to our websites and convert those visitors into customers, including to the extent
based on our ability to successfully work with different search engines to drive visitors to our websites;
our ability to successfully sell our products through third-party online marketplaces or the effects of any price
increases in those marketplaces;
competition from companies that have longer operating histories, larger customer bases, greater brand
recognition, access to merchandise at lower costs and significantly greater resources than we do, like third-party
online market places and our suppliers;
our ability to maintain and expand our supplier and distribution relationships without significant price increases
or reduced service levels;
our ability to borrow funds under our credit facility;
the effects of seasonality on the demand for our products;
our ability to accurately forecast demand for our products, price our products at market rates and maintain
appropriate inventory levels;
our ability to build and maintain customer loyalty;
our ability to successfully integrate our acquisitions;
infringement actions that could impact the viability of the auto parts aftermarket or portions thereof;
the success of our brand-building and marketing campaigns;
our ability to accurately project our future revenues, earnings, and results of operations;
government regulations related to use of the Internet for commerce, including the application of existing tax
regulations to Internet commerce and changes in tax regulations;
technical difficulties, system downtime or Internet brownouts;
the amount and timing of operating costs and capital expenditures relating to expansion of our business,
operations and infrastructure; and
• macroeconomic conditions that adversely impact the general and automotive retail sales environment.
If we fail to maintain an effective system of internal control over financial reporting or comply with Section 404 of the
Sarbanes-Oxley Act of 2002, we may not be able to accurately report our financial results or prevent fraud, and our stock
price could decline.
While management has concluded that our internal controls over financial reporting were effective as of December 31,
2016, we have in the past, and could in the future, have a significant deficiency or material weakness in internal control over
financial reporting or fail to comply with Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to properly maintain an
effective system of internal control over financial reporting, it could impact our ability to prevent fraud or to issue our financial
15
statements in a timely manner that presents fairly our financial condition and results of operations. The existence of any such
deficiencies or weaknesses, even if remediated, may also lead to the loss of investor confidence in the reliability of our
financial statements, could harm our business and negatively impact the trading price of our common stock. Such deficiencies
or material weaknesses may also subject us to lawsuits, regulatory investigations and other penalties.
Our charter documents could deter a takeover effort, which could inhibit your ability to receive an acquisition premium for
your shares.
Provisions in our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders. Such provisions include the following:
•
•
•
•
•
•
•
our Board of Directors are authorized, without prior stockholder approval, to create and issue preferred stock
which could be used to implement anti-takeover devices;
advance notice is required for director nominations or for proposals that can be acted upon at stockholder
meetings;
our Board of Directors is classified such that not all members of our board are elected at one time, which may
make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace
all or a majority of our directors;
stockholder action by written consent is prohibited except with regards to an action that has been approved by
the Board;
special meetings of the stockholders are permitted to be called only by the chairman of our Board of Directors,
our chief executive officer or by a majority of our Board of Directors;
stockholders are not permitted to cumulate their votes for the election of directors; and
stockholders are permitted to amend certain provisions of our bylaws only upon receiving at least 66 2/3% of the
votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of
directors, voting together as a single class.
We do not intend to pay dividends on our common stock.
We currently do not expect to pay any cash dividends on our common stock for the foreseeable future.
General Market and Industry Risk
Economic conditions have had, and may continue to have an adverse effect on the demand for aftermarket auto parts and
could adversely affect our sales and operating results.
We sell aftermarket auto parts consisting of collision and engine parts used for repair and maintenance, performance parts
used to enhance performance or improve aesthetics and accessories that increase functionality or enhance a vehicle’s features.
Demand for our products has been and may continue to be adversely affected by general economic conditions. In declining
economies, consumers often defer regular vehicle maintenance and may forego purchases of nonessential performance and
accessories products, which can result in a decrease in demand for auto parts in general. Consumers also defer purchases of
new vehicles, which immediately impacts performance parts and accessories, which are generally purchased in the first six
months of a vehicle’s lifespan. In addition, during economic downturns some competitors may become more aggressive in their
pricing practices, which would adversely impact our gross margin and could cause large fluctuations in our stock price. Certain
suppliers may exit the industry which may impact our ability to procure parts and may adversely impact gross margin as the
remaining suppliers increase prices to take advantage of limited competition.
The seasonality of our business places increased strain on our operations.
We have historically experienced higher sales of collision parts in winter months when inclement weather and hazardous
road conditions typically result in more automobile collisions. Engine parts and performance parts and accessories have
historically experienced higher sales in the summer months when consumers have more time to undertake elective projects to
maintain and enhance the performance of their automobiles and the warmer weather during that time is conducive for such
projects. We also have experienced increased demand following the issuance of tax rebates by the government. If we do not
stock or restock popular products in sufficient amounts such that we fail to meet increased customer demand, it could
significantly affect our revenue and our future growth. Likewise, if we overstock products in anticipation of increased demand,
we may be required to take significant inventory markdowns or write-offs and incur commitment costs, which could reduce
profitability.
16
Vehicle miles driven, vehicle accident rates and insurance companies’ willingness to accept a variety of types of replacement
parts in the repair process have fluctuated and may decrease, which could result in a decline of our revenues and negatively
affect our results of operations.
We and our industry depend on the number of vehicle miles driven, vehicle accident rates and insurance companies’
willingness to accept a variety of types of replacement parts in the repair process. Decreased miles driven reduce the number of
accidents and corresponding demand for crash parts, and reduce the wear and tear on vehicles with a corresponding reduction
in demand for vehicle repairs and replacement or engine parts. If consumers were to drive less in the future and/or accident
rates were to decline, as a result of higher gas prices, increased use of ride-shares, the advancement of driver assistance
technologies, or otherwise, our sales may decline and our business and financial results may suffer.
We may become liable for collecting and paying more sales taxes, and other fees and penalties, which could have an adverse
effect on our business.
We currently collect sales or other similar taxes only on the shipment of goods to customers in the states of California,
Virginia, Illinois, and Ohio. Other states or jurisdictions could seek to impose or enforce sales tax collection or other tax
obligations on us because we engage in and facilitate online commerce.
To the extent we are not subject to certain tax obligations, we enjoy a competitive advantage to the extent our competitors
are subject to those obligations. Several states have enacted, and a number of states and the U.S. Congress have been
considering, various initiatives that could impose broad sales and use tax collection obligations on Internet retailers. Federal,
state and local governments could accelerate efforts to pass Internet sales tax initiatives in response to pressure to make up
budgetary shortfalls resulting from recessionary economic conditions and the failure to collect sales and use taxes on Internet
purchases under current self-assessment regimes. Any of these initiatives would increase total costs to our customers, which
could adversely affect our sales.
We are closely monitoring developments in this area. The imposition by national, state and local governments of various
tax obligations upon Internet commerce could create significant administrative burdens for us as well as substantially impair the
growth of our e-commerce business, which could adversely affect our sales and profitability. Because our consumer websites
and product deliveries are available in all 50 states, some or all of those jurisdictions may require us to register or qualify to do
business in their jurisdictions. If we fail to collect and remit or pay required sales or other taxes in a jurisdiction, or qualify or
register to do business in a jurisdiction that requires us to do so or if we have failed to do so in the past, we could face material
liabilities for taxes, fees, interest and penalties. If various jurisdictions impose new tax obligations on our business activities,
our sales and net income in those jurisdictions could decrease significantly, which could harm our business.
If we do not respond to technological change, our websites could become obsolete and our financial results and conditions
could be adversely affected.
We maintain a network of websites which requires substantial development and maintenance efforts, and entails
significant technical and business risks. To remain competitive, we must continue to enhance and improve the responsiveness,
functionality and features of our websites. The Internet and the e-commerce industry are characterized by rapid technological
change, the emergence of new industry standards and practices and changes in customer requirements and preferences.
Therefore, we may be required to license emerging technologies, enhance our existing websites, develop new services and
technology that address the increasingly sophisticated and varied needs of our current and prospective customers, and adapt to
technological advances and emerging industry and regulatory standards and practices in a cost-effective and timely manner.
Our ability to remain technologically competitive may require substantial expenditures and lead time and our failure to do so
may harm our business and results of operations.
Existing or future government regulation could expose us to liabilities and costly changes in our business operations and
could reduce customer demand for our products and services.
We are subject to federal and state consumer protection laws and regulations, including laws protecting the privacy of
customer non-public information and regulations prohibiting unfair and deceptive trade practices, as well as laws and
regulations governing businesses in general and the Internet and e-commerce and certain environmental laws. Additional laws
and regulations may be adopted with respect to the Internet, the effect of which on e-commerce is uncertain. These laws may
cover issues such as user privacy, spyware and the tracking of consumer activities, marketing e-mails and communications,
other advertising and promotional practices, money transfers, pricing, content and quality of products and services, taxation,
electronic contracts and other communications, intellectual property rights, and information security. Furthermore, it is not clear
how existing laws such as those governing issues such as property ownership, sales and other taxes, trespass, data mining and
collection, and personal privacy apply to the Internet and e-commerce. To the extent we expand into international markets, we
will be faced with complying with local laws and regulations, some of which may be materially different than U.S. laws and
17
regulations. Any such foreign law or regulation, any new U.S. law or regulation, or the interpretation or application of existing
laws and regulations to the Internet or other online services or our business in general, may have a material adverse effect on
our business, prospects, financial condition and results of operations by, among other things, impeding the growth of the
Internet, subjecting us to fines, penalties, damages or other liabilities, requiring costly changes in our business operations and
practices, and reducing customer demand for our products and services. We may not maintain sufficient insurance coverage to
cover the types of claims or liabilities that could arise as a result of such regulation.
We may be affected by global climate change or by legal, regulatory, or market responses to such change.
The growing political and scientific sentiment is that global weather patterns are being influenced by increased levels of
greenhouse gases in the earth’s atmosphere. This growing sentiment and the concern over climate change have led to legislative
and regulatory initiatives aimed at reducing greenhouse gas emissions which warm the earth's atmosphere. These warmer
weather conditions could result in a decrease in demand for auto parts in general. Moreover, proposals that would impose
mandatory requirements on greenhouse gas emissions continue to be considered by policy makers in the United States. Laws
enacted that directly or indirectly affect our suppliers (through an increase in the cost of production or their ability to produce
satisfactory products) or our business (through an impact on our inventory availability, cost of sales, operations or demand for
the products we sell) could adversely affect our business, financial condition, results of operations and cash flows. Significant
increases in fuel economy requirements or new federal or state restrictions on emissions of carbon dioxide that may be imposed
on vehicles and automobile fuels could adversely affect demand for vehicles, annual miles driven or the products we sell or
lead to changes in automotive technology. Compliance with any new or more stringent laws or regulations, or stricter
interpretations of existing laws, could require additional expenditures by us or our suppliers. Our inability to respond to such
changes could adversely impact the demand for our products and our business, financial condition, results of operations or cash
flows.
The United States government may substantially increase border controls and impose restrictions on cross-border commerce
that may substantially harm our business.
We purchase a substantial portion of our products from foreign manufacturers and other suppliers who source products
internationally. Restrictions on shipping goods into the United States from other countries pose a substantial risk to our
business. Particularly since the terrorist attacks on September 11, 2001, the United States government has substantially
increased border surveillance and controls. In addition, President Trump has indicated he supports the implementation of tariffs
on goods exported from overseas and it is possible he will introduce legislation supporting his position. If the United States
were to impose further border controls and restrictions, impose quotas, tariffs or import duties, increase the documentation
requirements applicable to cross border shipments or take other actions that have the effect of restricting the flow of goods from
other countries to the United States, we may have greater difficulty acquiring our inventory in a timely manner, experience
shipping delays, or incur increased costs and expenses, all of which would substantially harm our business and results of
operations.
18
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
As of December 31, 2016, the total square footage of our leased office and distribution centers was 574,000 square feet.
This includes approximately 531,000 square feet for our corporate headquarters located in Carson, California and distribution
centers in LaSalle, Illinois and Chesapeake, Virginia; and approximately 43,000 square feet of office space in the Philippines.
For additional information regarding our obligations under property leases, see “Note 10-Commitments and Contingencies” of
the Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report.
ITEM 3.
LEGAL PROCEEDINGS
The information set forth under the caption “Legal Matters” in “Note 10-Commitments and Contingencies” of the Notes
to Consolidated Financial Statements, included in Part IV, Item 15 of this report, and is incorporated herein by reference. For an
additional discussion of certain risks associated with legal proceedings, see the section entitled “Risk Factors” in Item 1A of
this report.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
19
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is being trading on the Nasdaq under the symbol “PRTS.” The table below sets forth the high and low
sales prices of our common stock for the periods indicated:
2016:
Quarter ended April 2, 2016
Quarter ended July 2, 2016
Quarter ended October 1, 2016
Quarter ended December 31, 2016
2015:
Quarter ended April 4, 2015
Quarter ended July 4, 2015
Quarter ended October 3, 2015
Quarter ended January 2, 2016
$
$
High
Low
$
$
3.28
4.39
4.49
3.66
3.34
2.71
2.43
2.99
2.35
2.58
3.21
2.40
2.07
1.50
1.87
1.92
On March 2, 2017, the last reported sale price of our common stock on the Nasdaq was $3.40 per share.
Holders
As of March 2, 2017, there were approximately 2,020 holders of record of our common stock.
Stock Performance Graph
The material in this section is not “soliciting material,” is not deemed “filed” with the SEC, and shall not be deemed to
be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended.
The following graph shows a quarterly comparison of the total cumulative returns of an investment of $100 in cash on
December 31, 2011, in (i) our common stock, (ii) the Morgan Stanley Technology Index, (iii) the S&P 500 Retail Index and
(iv) NASDAQ Composite Index, in each case through December 31, 2016. The performance of our stock, the Morgan Stanley
Technology Index, the S&P 500 Retail Index and the NASDAQ Composite Index have been obtained from online data
available. We have used the available prices at the end of the week closest to the end of the period for the purposes of the graph.
The comparisons in the graph are required by the SEC and are not intended to forecast or be indicative of the possible future
performance of our common stock. The graph assumes that all common stock dividends have been reinvested (to date, we have
not declared dividends on our common stock).
20
Dividend Policy
No dividends on common stock were paid during the fiscal year ended December 31, 2016. We issued approximately
$241,000 in common stock to our Series A Preferred shareholders during each of the fiscal years ended December 31, 2016 and
January 2, 2016. We do not anticipate that we will declare or pay any cash dividends on our common stock in the foreseeable
future; however, we will have to pay dividends to our preferred shareholders until such shares are redeemed or converted. We
maintain an asset-based revolving credit facility with JPMorgan Chase Bank (the "Credit Agreement") that provides for, among
other things, a revolving commitment in an aggregate principal amount of up to $30 million subject to a borrowing base
derived from certain of our receivables, inventory and property and equipment. The Credit Agreement requires us to obtain a
prior written consent from JPMorgan Chase Bank when we determine to pay any dividends on or make any distribution with
respect to our common stock. Under the Second Amendment to Credit Agreement dated March 25, 2013, we obtained written
consent from JPMorgan Chase Bank to pay dividends on our Series A Preferred Shares. See “Liquidity and Capital Resources”
in Item 7 of Part II included in this report for further information on the covenants under the secured Credit Agreement. Any
future determination to pay cash dividends on our common stock will be subject to the above restriction, as well as restrictions
under any other existing indebtedness, at the discretion of our Board of Directors and will be dependent upon our financial
condition, results of operations, capital requirements, and other factors the Board of Directors deems relevant.
Recent Sales of Unregistered Securities
None.
Use of Proceeds from Sales of Registered Securities
None.
21
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We purchased the following shares of common stock for the fourth quarter of fiscal 2016, all of which were made as part
of publicly announced plans or programs:
Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet be Purchased
Under the Plans or
Programs
Average Price
Paid per Share
—
2.89
3.14
—
87,820
357,259
—
—
—
Total Number of
Shares Purchased (1)
—
87,820
357,259
$
$
Period
Oct 2 - Oct 29, 2016
Oct 30 - Nov 26, 2016
Nov 27 - Dec 31, 2016
(1) Stock repurchases were made pursuant to a stock repurchase program authorized by our Board of Directors on November
15, 2016. The program allows for the repurchase of up to $5.0 million of its common stock. All repurchases were made
using cash resources. Stock repurchases may occur through open market purchases or pursuant to a 10b5-1 trading plan.
22
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial information as of and for the dates and periods indicated have been derived from our
audited consolidated financial statements. The information set forth below is not necessarily indicative of results of future
operations, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in Part II, Item 7 of this report and our consolidated financial statements and related notes included elsewhere in
this report (in thousands, except per share data).
52 Weeks
Ended
December 31,
2016
(“fiscal year
2016”)
52 Weeks
Ended
53 Weeks
Ended
January 3,
January 2,
2015
2016
(“fiscal year
(“fiscal year
2014”) (1)
2015”)
(In thousands, except per share data)
52 Weeks
Ended
December 28,
2013
(“fiscal year
2013”) (2)
$
303,571
$
291,091
$
283,508
$
254,753
$
211,289
92,282
207,657
83,434
205,058
78,450
180,620
74,133
43,555
17,907
22,975
5,843
482
—
—
1,130
91,892
390
(1,192)
(802)
(199)
(603)
43,279
16,509
20,237
5,000
464
—
—
—
85,489
(2,055)
(1,180)
(3,235)
(811)
(2,424)
42,008
16,701
20,368
4,863
422
—
—
—
84,362
(5,912)
(1,036)
(6,948)
138
(7,086)
41,045
17,567
18,702
5,128
381
—
4,832
1,245
88,900
(14,767)
(824)
(15,591)
43
(15,634)
52 Weeks
Ended
December 29,
2012
(“fiscal year
2012”) (3)
304,017
212,379
91,638
51,416
19,857
22,265
6,274
1,189
18,854
1,960
5,613
127,428
(35,790)
(1,125)
(36,915)
(937)
(35,978)
(1,334)
(1,143)
(207)
—
—
$
$
$
731
$
0.01
0.01
(1,281) $
(0.04) $
(0.04) $
(6,879) $
(0.21) $
(0.21) $
(15,634) $
(0.48) $
(0.48) $
34,765
36,207
33,946
33,946
33,489
33,489
32,697
32,697
(35,978)
(1.17)
(1.17)
30,818
30,818
Consolidated Statements of
Operations Data:
Net sales
Cost of sales
Gross profit
Operating expenses:
Marketing
General and administrative
Fulfillment
Technology
Amortization of intangible assets
Impairment loss on goodwill
Impairment loss on property and
equipment
Impairment loss on intangible assets
Total operating expenses
Income (loss) from operations
Other expense, net
Income (loss) before income taxes
Income tax (benefit) provision
Net income (loss)
Net loss attributable to noncontrolling
interests
Net income (loss) attributable to U.S.
Auto Parts
Basic net income (loss) per share
Diluted net income (loss) per share
Shares used in computation of basic net
loss per share
Shares used in computation of diluted
net loss per share
(1)
(2)
(3)
Fiscal year 2014 included restructuring charges of $1.1 million and inventory write-downs of $0.9 million incurred
due to the closure of our warehouse in Carson, California.
Fiscal year 2013 included severance charges of $0.7 million incurred due to a reduction in workforce during the first
half of 2013.
Fiscal year 2012 included restructuring costs of $0.6 million related to severance charges incurred due to a reduction
in workforce from the closure of our call center in La Salle, Illinois.
23
Consolidated Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Revolving loan payable
Current portion of long-term debt and
capital leases
Long-term debt including capital leases,
net of current portion
U.S. Auto Parts stockholders’ equity
Noncontrolling interests
December 31,
2016
January 2,
2016
January 3, 2015
(In thousands, except per share data)
December 28,
2013
December 29,
2012
$
6,643
$
5,537
$
7,653
$
818
$
16,869
82,134
—
542
9,770
22,853
469
13,605
83,756
11,759
521
10,168
20,340
1,803
14,645
82,907
11,022
269
9,270
19,277
2,946
9,761
69,182
6,774
269
9,502
20,866
—
1,030
(4,027)
88,877
16,222
70
70
27,644
—
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Dollar Amounts in Thousands, Except Per Share Data, or as Otherwise Noted)
Cautionary Statement
You should read the following discussion and analysis in conjunction with our consolidated financial statements and the
related notes thereto contained in Part IV, Item 15 of this report. Certain statements in this report, including statements
regarding our business strategies, operations, financial condition, and prospects are forward-looking statements. Use of the
words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,”
“should,” “will,” “would,” “will likely continue,” “will likely result” and similar expressions that contemplate future events
may identify forward-looking statements.
The information contained in this section is not a complete description of our business or the risks associated with an
investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this
report and in our other reports filed with the SEC, which are available on the SEC’s website at http://www.sec.gov. The section
entitled “Risk Factors” set forth in Part I, Item 1A of this report, and similar discussions in our other SEC filings, describe
some of the important factors, risks and uncertainties that may affect our business, results of operations and financial condition
and could cause actual results to differ materially from those expressed or implied by these or any other forward-looking
statements made by us or on our behalf. You are cautioned not to place undue reliance on these forward-looking statements,
which are based on current expectations and reflect management’s opinions only as of the date thereof. We do not assume any
obligation to revise or update forward-looking statements. Finally, our historic results should not be viewed as indicative of
future performance.
Overview
We are a leading online provider of aftermarket auto parts, including collision parts, engine parts, and performance parts
and accessories. Our user-friendly websites provide customers with a broad selection of SKUs, with detailed product
descriptions and photographs. Our proprietary product database maps our SKUs to product applications based on vehicle
makes, models and years. We principally sell our products to individual consumers through our network of websites and online
marketplaces. Through AutoMD.com, the Company also educates consumers on the maintenance and service of their vehicles.
Our flagship consumer websites are located at www.autopartswarehouse.com, www.carparts.com, www.jcwhitney.com and
www.AutoMD.com and our corporate website is located at www.usautoparts.net.
We believe our strategy of disintermediating the traditional auto parts supply chain and selling products directly to
customers over the Internet allows us to efficiently deliver products to our customers. Industry-wide trends that support our
strategy include:
1.
Number of SKUs required to serve the market. The number of automotive SKUs has grown dramatically
over the last several years. In today's market, unless the consumer is driving a high volume produced vehicle and needs
a simple maintenance item, the part they need is not typically on the shelf at a brick-and-mortar store. We believe our
user-friendly websites provide customers with a favorable alternative to the brick-and-mortar shopping experience by
24
offering a comprehensive selection of over 1.0 million SKUs with detailed product descriptions, attributes and
photographs combined with the flexibility of fulfilling orders using both drop-ship and stock-and-ship methods.
2.
U.S. vehicle fleet expanding and aging. The average age of U.S. vehicles, an indicator of auto parts demand,
rose to a record-high 11.5 years as of January 2016, according to IHS Automotive, a market analytics firm that expects
the average age to remain at, or near record-highs through 2020. IHS expects the number of vehicles that are 12 years or
older to increase by 15% by 2020. IHS found that the total number of light vehicles in operation in the U.S. has
increased to record levels, with new vehicle registrations outpacing scrappage rates. We believe an increasing vehicle
base and rising average age of vehicles will have a positive impact on overall aftermarket parts demand because older
vehicles generally require more repairs. In many cases we believe these older vehicles are driven by do-it-yourself
("DIY") car owners who are more likely to handle any necessary repairs themselves rather than taking their car to the
professional repair shop.
3.
Growth of online sales. Management estimates that overall revenue from online sales of auto parts and
accessories is projected to increase from approximately $5.5 billion in 2015 to $9.7 billion in 2018. Improved product
availability, lower prices and consumers' growing comfort with digital platforms are driving the shift to online sales. We
believe that we are well positioned for the shift to online sales due to our history of being a leading source for
aftermarket automotive parts through online marketplaces and our network of websites.
Our History. We were formed in California in 1995 as a distributor of aftermarket auto parts and launched our first
website in 2000. We reincorporated in Delaware in 2006 and expanded our online operations, increasing the number of SKUs
sold through our e-commerce network, adding additional websites, improving our Internet marketing proficiency and
commencing sales in online marketplaces. Additionally, in August 2010, through our acquisition of Whitney Automotive
Group, Inc. (referred to herein as “WAG”), we expanded our product-lines and increased our customer reach in the DIY
automobile and off-road accessories market.
International Operations. In April 2007, we established offshore operations in the Philippines. Our offshore operations
allow us to access a workforce with the necessary technical skills at a significantly lower cost than comparably experienced
U.S.-based professionals. Our offshore operations are responsible for a majority of our website development, catalog
management, and back office support. Our offshore operations also house our main call center. We had 768 employees in the
Philippines as of January 2, 2016. We had 748 employees in the Philippines as of December 31, 2016. We believe that the cost
advantages of our offshore operations provide us with the ability to grow our business in a cost-effective manner.
AutoMD. In October 2008, we acquired AutoMD for the purpose of developing content and a user community to educate
consumers on maintenance and service of their vehicles. The AutoMD.com site provides auto information, with tools for
diagnosing car troubles, locating repair shops, estimating the cost of repairs, accessing recalls and technical service bulletins,
reading do-it-yourself (“DIY”) repair guides, and getting questions answered in the automotive enthusiast community forum. In
2013, AutoMD launched its Insta-Quotes! program which used real time data to estimate auto repair costs for consumers, and
in 2014, we sold a non-controlling interest in AutoMD to outside investors and certain of our existing shareholders. In the first
quarter of 2017, AutoMD repurchased the non-controlling interests and closed down the Insta-Quotes! program. Following the
redemptions, AutoMD filed for dissolution and all of the remaining assets of AutoMD will be distributed to the Company
except for certain cash reserved for creditors of AutoMD. We intend to utilize the AutoMD assets as part our media business
going forward.
Key Metrics. To understand revenue generation through our network of e-commerce websites and online marketplaces,
we monitor several key business metrics, including the following:
Unique Visitors (millions) 1
E-commerce Orders (thousands)
Online Marketplace Orders (thousands)
Total Online Orders (thousands)
E-commerce Average Order Value
Online Marketplace Average Order Value
Total Online Average Order Value
Revenue Capture 1
Conversion 1
52 Weeks Ended
December 31, 2016
52 Weeks Ended
January 2, 2016
53 Weeks Ended
January 3, 2015
117.9
2,161
1,265
3,426
104
69
91
84.8%
1.83%
$
$
$
116.7
2,043
1,061
3,104
109
71
96
85.6%
1.75%
$
$
$
119.8
2,010
1,049
3,059
111
66
96
85.0%
1.68%
$
$
$
25
1
Excludes online marketplaces and media properties (e.g. AutoMD).
Unique Visitors: A unique visitor to a particular website represents a user with a distinct IP address that visits that
particular website. We define the total number of unique visitors in a given month as the sum of unique visitors to each of our
websites during that month. We measure unique visitors to understand the volume of traffic to our websites and to track the
effectiveness of our online marketing efforts. The number of unique visitors has historically varied based on a number of
factors, including our marketing activities and seasonality. Included in the unique visitors are mobile device based customers,
who are becoming an increasing part of our business. Shifting consumer behavior and technology enhancements indicates that
customers are becoming more inclined to purchase auto parts through their mobile devices. User sophistication and
technological advances have increased consumer expectations around the user experience on mobile devices, including speed
of response, functionality, product availability, security, and ease of use. We believe enhancements to online solutions
specifically catering to mobile based shopping can result in an increase in the number of orders and revenues. We believe an
increase in unique visitors to our websites will result in an increase in the number of orders. We seek to increase the number of
unique visitors to our websites by attracting repeat customers and improving search engine marketing and other internet
marketing activities. During fiscal year 2016, our unique visitors increased by 1.0% compared to the fiscal year 2015 primarily
due to an increase in paid traffic, partially offset by a decrease in organic traffic, as described in further detail under “—
Executive Summary” below.
Total Number of Orders: We monitor the total number of orders as an indicator of future revenue trends. During the fiscal
year 2016, the total number of orders was up by 10.4% compared to the fiscal year 2015, with e-commerce and online
marketplace orders up by 5.8% and 19.2%, respectively. We believe e-commerce and online marketplace orders improved
through an enhanced customer experience, greater product selection and certain strategic pricing initiatives. We recognize
revenue associated with an order when the products have been delivered, consistent with our revenue recognition policy.
Average Order Value: Average order value represents our net sales on a placed orders basis for a given period of time
divided by the total number of orders recorded during the same period of time. During the fiscal year 2016, our average order
value decreased by 5.2% when compared to the fiscal year 2015 primarily due to a mix shift towards more private label sales.
We seek to increase the average order value as a means of increasing net sales. Average order values vary depending upon a
number of factors, including the components of our product offering, the order volume in certain online sales channels, mix
changes between private label and branded, macro-economic conditions, and the competition online.
Revenue Capture: Revenue capture is the amount of actual dollars retained after taking into consideration returns, credit
card declines and product fulfillment. During the fiscal year 2016, our revenue capture decreased by 0.9% to 84.8% compared
to 85.6% in fiscal year 2015.
Conversion: Conversion is the number of orders as a rate to the total number of unique visitors. This rate indicates how
well we convert a visitor to a customer sales order. During fiscal year 2016, our conversion improved by 4.6% to 1.83% in
fiscal year 2016 compared to 1.75% in fiscal year 2015.
Executive Summary
For fiscal 2016, Base USAP (which excludes AutoMD) generated net sales of $303,324, compared with $290,833 for
fiscal year 2015, representing an increase of 4.3%. Base USAP net income for fiscal 2016 was $2,973, compared to a net loss
of $136 for fiscal 2015. We generated Adjusted EBITDA, or net income before net interest expense, income tax provision,
depreciation and amortization expense and amortization of intangible assets, plus share-based compensation expense,
impairment loss and restructuring costs ("Adjusted EBITDA"), of $14,024 in fiscal 2016 compared to $10,029 in fiscal
2015. Adjusted EBITDA, which is not a Generally Accepted Accounting Principle (GAAP) measure, is presented because
management uses it as one measure of the Company’s operating performance, as it assists in comparing the Company’s
operating performance on a consistent basis by removing the impact of stock compensation expense, as well as items that are
not expected to be recurring. Internally, this non-GAAP measure is also used by management for planning purposes, including
the preparation of internal budgets; for allocating resources to enhance financial performance; and for evaluating the
effectiveness of operational strategies. The Company also believes that such measure is used by rating agencies, securities
analysts, investors and other parties in evaluating the Company. It should not be considered, however, as an alternative to
operating income, or as an alternative to cash flows as a measure of the Company’s overall liquidity, as presented in the
Company’s consolidated financial statements. Further, the Adjusted EBITDA measure shown may not be comparable to
similarly titled measures used by other companies. Refer to the table presented below for reconciliation of net loss to Adjusted
EBITDA.
For fiscal 2016, AutoMD generated net sales of $247 compared to $258 in fiscal 2015. AutoMD's net loss was $3,576
for fiscal 2016, which included a non-cash impairment charge of $1,130 relating to the impairment of certain AutoMD
26
software, compared to a net loss of $2,288 for fiscal 2015. AutoMD's Adjusted EBITDA was negative $1,354 in fiscal 2016
compared to negative $1,663 in fiscal 2015.
Total revenues increased in fiscal 2016 compared to fiscal 2015 primarily due to growth in our online sales. Our online
sales, which include our e-commerce, online marketplace sales channels and online advertising, contributed 91.0% of total
revenues, and our offline sales, which consist of our Kool-Vue™ and wholesale operations, contributed 9.0% of total revenues.
Our online sales for fiscal year 2016 increased by $11,395, or 4.3%, to $276,116 compared to $264,721 in fiscal 2015 primarily
due to an increase in unique visitors as well as conversion, resulting in a 10.4% increase in the total number of orders. Our
offline sales increased by $1,080, or 4.1%, to $27,451 compared to the same period last year due to an expanded drop ship
customer base.
Like most e-commerce retailers, our success depends on our ability to attract online consumers to our websites and
convert them into customers in a cost-effective manner. Historically, marketing through search engines provided the most
efficient opportunity to reach millions of online auto part buyers. We are included in search results through paid search listings,
where we purchase specific search terms that will result in the inclusion of our listing, and algorithmic searches that depend
upon the searchable content on our websites. Algorithmic listings cannot be purchased and instead are determined and
displayed solely by a set of formulas utilized by the search engine. We have had a history of success with our search engine
marketing techniques, which gave our different websites preferred positions in search results. Search engines, like Google,
revise their algorithms from time to time in an attempt to optimize their search results. During the last few years, Google has
changed its search results ranking algorithm. In some cases our unique visitor count, and therefore our financial results, were
negatively impacted by these changes. We continue to address the ongoing changes to the Google methodology, and during the
fiscal year 2016, our unique visitor count increased by 1.2 million, or 1.0%, to 117.9 million unique visitors compared to 116.7
million unique visitors in fiscal 2015 primarily due to an increase in paid traffic, partially offset by lower organic traffic. As in
the past we expect Google will continue to make changes in their search engine algorithms to improve their user experience. As
we are significantly dependent upon search engines for our website traffic, if we are unable to address these ongoing changes
and attract unique visitors, our business and results of operations will be harmed.
Total expenses, which primarily consisted of cost of sales and operating costs, increased in fiscal year 2016 compared to
the same period in 2015. Components of our cost of sales and operating costs are described in further detail under — “Basis of
Presentation” below.
In 2016, we made positive strides towards achieving our strategic goals and in 2017 we will continue to pursue these
strategies to continue our positive sales growth, improve gross profit while reducing operating costs as percent of sales:
•
•
•
•
We expect to continue positive e-commerce growth by providing unique catalog content and providing better
content on our websites with the goal of improving our ranking on the search results. In addition, we intend
to improve mobile enabled websites to take advantage of shifting consumer behaviors. We expect revenue
trends to remain positive in 2017.
We continue to work to improve the website purchase experience for our customers by (1) helping our
customers find the parts they want to buy by reducing failed searches and increasing user purchase
confidence; (2) implementing guided navigation and custom buying experiences specific to strategic part
names; and (3) increasing order size across our sites through improved recommendation engines. In addition,
we intend to build mobile enabled features to take advantage of shifting consumer behaviors. These efforts
may increase the conversion rate of our visitors to customers, the total number of orders and average order
value, and the number of repeat purchases, as well as contribute to our revenue growth.
We continue to work towards becoming one of the preferred low price options in the market for aftermarket
auto parts and accessories. We also continue to offer lower prices by increasing foreign sourced private label
products as they are generally less expensive and we believe provide better value for the consumer. We
believe our product offering can improve the conversion rate of visitors to our websites, grow our revenues
and improve our margins.
We continue to increase product selection by being the first to market with many new SKUs. We currently
have over 55,000 private label SKUs and over 1.0 million branded SKUs in our product selection. We will
continue to seek to add new categories and expand our existing specialty categories. We believe continued
product expansion will increase the total number of orders and contribute to our revenue growth.
Additionally, we plan to continue to maintain certain in-stock inventory throughout the year to provide
consistent service levels and improve customer experience.
•
We continue to implement cost saving measures.
27
Overall, we expect revenue growth and increased net income in 2017 compared to 2016, due to the above initiatives we
expect to continue to follow in 2017.
We have redesigned our approach to attracting customers through search engines with increased paid advertising which
has helped us offset some of the decline in organic traffic to our e-commerce sites. We have also continued to pursue revenue
opportunities in third-party online marketplaces, a number of which continue to grow each year. Auto parts buyers are finding
third-party online marketplaces to be a very attractive environment, for many reasons, the top five being: (1) the security of
their personal information; (2) the ability to easily compare product offerings from multiple sellers; (3) transparency
(consumers can leave positive or negative feedback about their experience); (4) favorable pricing; and (5) the availability of
products not found in stock at brick-and-mortar stores. Successful selling in these third-party online marketplaces depends on
product innovation, and strong relationships with suppliers, both of which we believe to be our core competencies.
Adjusted EBITDA, which is not a Generally Accepted Accounting Principle measure, is presented because management uses it
as one measure of the Company’s operating performance, as it assists in comparing the Company’s operating performance on a
consistent basis by removing the impact of stock compensation expense, as well as items that are not expected to be recurring.
Internally, this non-GAAP measure is also used by management for planning purposes, including the preparation of internal
budgets; for allocating resources to enhance financial performance; and for evaluating the effectiveness of operational
strategies. The Company also believes that analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate
the ongoing operations of companies in our industry. It should not be considered, however, as an alternative to operating
income, or as an alternative to cash flows as a measure of the Company's overall liquidity. Further, the Adjusted EBITDA
measure shown may not be comparable to similarly titled measures used by other companies. The table below reconciles net
28
income loss to Adjusted EBITDA for the periods presented (in thousands):
Fifty-two weeks ended December 31, 2016
AMD
Base USAP
Consolidated
Net sales
Cost of sales
Gross profit
Operating expenses:
Marketing
General and administrative
Fulfillment
Technology
Amortization of intangible assets
Impairment loss on intangible assets
Total operating expenses
Income (loss) from operations
Other income (expense):
Other income, net
Interest expense
Total other expense
Income (loss) before income taxes
Income tax (benefit) provision
Net income (loss)
Net income (loss)
Depreciation & amortization
Amortization of intangible assets
Interest expense, net
Taxes
EBITDA
Stock comp expense
Impairment loss on intangible assets
Adjusted EBITDA
Capital expenditures
Total assets, net of accumulated depreciation
(In thousands)
$
303,324
$
211,277
92,047
247
$
12
235
303,571
211,289
92,282
41,104
17,629
22,975
5,625
449
—
87,782
4,265
46
(1,238)
(1,192)
3,073
100
2,973
2,973
6,351
449
1,219
100
11,092
2,932
—
14,024
5,414
78,094
$
$
$
$
$
2,451
278
—
218
33
1,130
4,110
(3,875)
—
—
—
(3,875)
(299)
(3,576) $
(3,576) $
1,159
33
—
(299)
(2,683) $
$
199
1,130
(1,354) $
939
4,040
43,555
17,907
22,975
5,843
482
1,130
91,892
390
46
(1,238)
(1,192)
(802)
(199)
(603)
(603)
7,510
482
1,219
(199)
8,409
3,131
1,130
12,670
6,353
82,134
$
$
$
$
$
29
Fifty-two weeks ended January 2, 2016
AMD
Base USAP
Consolidated
Net sales
Cost of sales
Gross profit
Operating expenses:
Marketing
General and administrative
Fulfillment
Technology
Amortization of intangible assets
Total operating expenses
Income (loss) from operations
Other income (expense):
Other income, net
Interest expense
Total other expense
Loss before income taxes
Income tax provision (benefit)
Net loss
Net loss
Depreciation & amortization
Amortization of intangible assets
Interest expense, net
Taxes
EBITDA
Stock comp expense
Adjusted EBITDA
Capital expenditures
Total assets, net of accumulated depreciation
(In thousands)
258
$
—
258
291,091
207,657
83,434
3,061
184
—
167
33
3,445
(3,187)
—
—
—
(3,187)
(899)
(2,288) $
(2,288) $
1,369
33
—
(899)
(1,785) $
$
122
(1,663)
1,079
5,664
43,279
16,509
20,237
5,000
464
85,489
(2,055)
36
(1,216)
(1,180)
(3,235)
(811)
(2,424)
(2,424)
7,510
464
1,208
(811)
5,947
2,419
8,366
7,780
83,756
$
290,833
$
207,657
83,176
40,218
16,325
20,237
4,833
431
82,044
1,132
36
(1,216)
(1,180)
(48)
88
(136) $
(136) $
6,141
$
$
431
1,208
88
7,732
2,297
10,029
6,701
78,092
$
$
$
$
30
Fifty-three weeks ended January 3, 2015
AMD
Base USAP
Consolidated
Net sales
Cost of sales
Gross profit
Operating expenses:
Marketing
General and administrative
Fulfillment
Technology
Amortization of intangible assets
Total operating expenses
Loss from operations
Other income (expense):
Other income, net
Interest expense
Total other expense
Loss before income taxes
Income tax provision
Net loss
Net loss
Depreciation & amortization
Amortization of intangible assets
Interest expense, net
Taxes
EBITDA
Stock comp expense
Inventory write-down related to Carson closure (1)
Restructuring costs (2)
Adjusted EBITDA
Capital expenditures
Total assets, net of accumulated depreciation
$
283,211
$
205,058
78,153
39,574
16,697
20,368
4,826
422
81,887
(3,734)
65
(1,101)
(1,036)
(4,770)
137
(4,907) $
(4,907) $
7,230
422
1,101
137
3,983
2,367
897
1,137
$
$
8,384
$
4,237
74,414
$
$
$
$
$
(In thousands)
297
$
—
297
283,508
205,058
78,450
2,434
4
—
37
—
2,475
(2,178)
—
—
—
(2,178)
1
(2,179) $
(2,179) $
1,693
—
—
1
(485) $
$
4
—
—
(481) $
1,319
8,493
42,008
16,701
20,368
4,863
422
84,362
(5,912)
65
(1,101)
(1,036)
(6,948)
138
(7,086)
(7,086)
8,923
422
1,101
138
3,498
2,371
897
1,137
7,903
5,556
82,907
(1) As a result of the closure of the Carson warehouse, the Company reduced the sales price of certain inventory in an effort
to reduce inventory levels. Additional charges were incurred related to inventory that was not deemed economical to
transfer to the remaining warehouses. Refer to “Note 12 – Restructuring Costs” of our Notes to Consolidated Financial
Statements for additional details.
(2) We incurred restructuring costs related to our initiatives to reduce labor costs and improve operating efficiencies in
response to the challenges in the marketplace and general market conditions. Refer to “Note 12 – Restructuring Costs”
of our Notes to Consolidated Financial Statements for additional details.
31
Basis of Presentation
Net Sales. Online and offline sales represent two different sales channels for our products. We generate online net sales
primarily through the sale of auto parts to individual consumers through our network of e-commerce websites, online
marketplace sales channels and online advertising. E-commerce sales are derived from our network of websites, which we own
and operate. E-commerce and online marketplace sales also include inbound telephone sales through our call center that
supports these sales channels. Online marketplaces consist primarily of sales of our products on online auction websites, where
we sell through auctions as well as through storefronts that we maintain on third-party owned websites. We sell advertising and
sponsorship positions on our e-commerce websites to highlight vendor brands and offer complementary products and services
that benefit our customers. Advertising is targeted to specific sections of the websites and can also be targeted to specific users
based on the vehicles they drive. Advertising partners primarily include part vendors, national automotive aftermarket brands
and automobile manufacturers. Our offline sales channel represents our distribution of products directly to commercial
customers by selling auto parts to collision repair shops. Our offline sales channel also includes both stock ship distribution as
well as drop ship programs for automotive warehouse distributors and other online resellers. The product mix includes the
majority of our private labeled stock ship items, which include the replacement collision parts and our Kool-Vue™ mirror line.
We also serve consumers by operating a retail outlet store in LaSalle, Illinois.
Cost of Sales. Cost of sales consists of the direct costs associated with procuring parts from suppliers and delivering
products to customers. These costs include direct product costs, outbound freight and shipping costs, warehouse supplies and
warranty costs, partially offset by purchase discounts and cooperative advertising. Depreciation and amortization expenses are
excluded from cost of sales and included in marketing, general and administrative and fulfillment expenses as noted below.
Marketing Expense. Marketing expense consists of online advertising spend, internet commerce facilitator fees and other
advertising costs, as well as payroll and related expenses associated with our marketing catalog, customer service and sales
personnel. These costs are generally variable and are typically a function of net sales. Marketing expense also includes
depreciation and amortization expense and share-based compensation expense.
General and Administrative Expense. General and administrative expense consists primarily of administrative payroll and
related expenses, merchant processing fees, legal and professional fees and other administrative costs. General and
administrative expense also includes depreciation and amortization expense and share-based compensation expense.
Fulfillment Expense. Fulfillment expense consists primarily of payroll and related costs associated with our warehouse
employees and our purchasing group, facilities rent, building maintenance, depreciation and other costs associated with
inventory management and our wholesale operations. Fulfillment expense also includes share-based compensation expense.
Technology Expense. Technology expense consists primarily of payroll and related expenses of our information
technology personnel, the cost of hosting our servers, communications expenses and Internet connectivity costs, computer
support and software development amortization expense. Technology expense also includes share-based compensation expense.
Amortization of Intangible Assets. Amortization of intangibles consists of the amortization expense associated with our
definite-lived intangible assets.
Impairment Loss. Impairment loss is recorded as a result of impairment testing performed for goodwill and indefinite-
lived intangible assets in accordance with ASC 350 Intangibles – Goodwill and Other, and long-lived assets, including
intangible assets subject to amortization, in accordance with ASC 360 Property, Plant and Equipment.
Other Income, Net. Other income, net consists of miscellaneous income or expense such as gains/losses from disposition
of assets, and interest income comprised primarily of interest income on investments.
Interest Expense. Interest expense consists primarily of interest expense on our outstanding loan balance, deferred
financing cost amortization and capital lease interest.
Segment Data
The Company operates in two reportable segments identified as Base USAP, which is the core auto parts business, and
AutoMD, an online automotive repair source which has closed down its Insta-Quotes! program subsequent to year end.
Segment information is prepared on the same basis that our chief executive officer, who is our chief operating decision maker,
manages the segments, evaluates financial results, and makes key operating decisions. Management evaluates the performance
of its operating segments based on net sales, gross profit and loss from operations. The accounting policies of the operating
segments are the same as those described in “Note 1 - Summary of Significant Accounting Policies” of our Notes to
32
Consolidated Financial Statements. Operating income represents earnings before other income, interest expense and income
taxes. The identifiable assets by segment disclosed in this note are those assets specifically identifiable within each segment.
Results of Operations
The following table sets forth selected statement of operations data for the periods indicated, expressed as a percentage of
net sales:
Net sales
Cost of sales
Gross profit
Operating expenses:
Marketing
General and administrative
Fulfillment
Technology
Amortization of intangible assets
Impairment loss on intangible assets
Total operating expenses
Income (loss) from operations
Other income (expense):
Interest expense
Total other expense
Loss before income taxes
Income tax (benefit) provision
Net loss
Fiscal Year Ended
December 31, 2016
January 2, 2016
January 3, 2015
100.0 %
69.6
30.4
14.3
5.9
7.6
1.9
0.2
0.4
30.3
0.1
(0.4)
(0.4)
(0.3)
(0.1)
(0.2)%
100.0 %
71.3
28.7
14.9
5.7
7.0
1.7
0.2
—
29.5
(0.8)
(0.4)
(0.4)
(1.2)
(0.3)
(0.9)%
100.0 %
72.3
27.7
14.8
5.9
7.2
1.7
0.1
—
29.7
(2.0)
(0.4)
(0.4)
(2.4)
—
(2.4)%
Fifty-Two Weeks Ended December 31, 2016 Compared to the Fifty-Two Weeks Ended January 2, 2016
Net Sales and Gross Margin
Net sales
Cost of sales
Gross profit
Gross margin
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
(in thousands)
303,571
211,289
92,282
$
$
$
$
291,091
207,657
83,434
$
$
12,480
3,632
8,848
30.4%
28.7%
4.3%
1.7%
10.6%
1.7%
Net sales increased $12,480, or 4.3%, for fiscal year 2016 compared to fiscal year 2015. Our net sales consisted of online
sales, which include our e-commerce sites, online marketplace sales channels and online advertising, representing 91.0% of the
total for fiscal year 2016 (compared to 90.9% in fiscal year 2015), and offline sales, representing 9.0% of the total for fiscal
year 2016 (compared to 9.1% in fiscal year 2015). The net sales increase was due to an increase of $11,395, or 4.3%, in online
sales and a $1,080, or 4.1%, increase in offline sales. Online sales increased primarily due to an increase in unique visitors,
resulting in an increase in the number of orders.
Gross profit increased $8,848, or 10.6%, in fiscal year 2016 compared to fiscal year 2015. Gross margin increased 1.7%
to 30.4% in fiscal year 2016 compared to 28.7% in fiscal year 2015. Gross margin increased in fiscal year 2016 compared to
fiscal year 2015 primarily due to a favorable mix shift of private label sales compared to last year as well as strategic pricing
initiatives, freight efficiencies and lower shipping supply costs.
33
Marketing Expense
Marketing expense
Percent of net sales
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
(in thousands)
$
43,555
$
43,279
$
276
14.3%
14.9%
0.6 %
(0.6)%
Total marketing expense increased $276, or 0.6%, for fiscal year 2016 compared to fiscal year 2015. As a percent to net
sales, total marketing expense was 14.3% for fiscal 2016 compared to 14.9% for fiscal year 2015. Online advertising expense,
which includes catalog costs, was $22,616, or 8.2%, of online sales for fiscal year 2016, compared to $20,251, or 7.7%, of
online sales for fiscal year 2015. Online advertising expense increased primarily due to increases in our non-catalog online
advertising costs to $21,198 or 7.0% of net sales for fiscal 2016 compared to $18,524, or 6.4% of net sales for fiscal 2015. This
increase relates primarily to the increase in the proportion of paid traffic compared to organic traffic. Marketing expense,
excluding online advertising, was $20,935, or 6.9%, of net sales for fiscal year 2016, compared to $23,028, or 7.9%, of net
sales for fiscal year 2015. The decrease was primarily due to a decrease in depreciation and amortization, overhead and labor
cost.
General and Administrative Expense
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
(in thousands)
General and administrative expense
$
17,907
$
16,509
$
1,398
Percent of net sales
5.9%
5.7%
8.5%
0.2%
General and administrative expense increased $1,398, or 8.5%, for fiscal year 2016 compared to fiscal year 2015. The
increase for fiscal year 2016 as compared to fiscal year 2015 was primarily due to increased depreciation and amortization.
Fulfillment Expense
Fulfillment expense
Percent of net sales
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
(in thousands)
$
22,975
$
20,237
$
2,738
7.6%
7.0%
13.5%
0.6
Fulfillment expense increased $2,738, or 13.5%, for fiscal year 2016 compared to fiscal year 2015 and increased as a
percent of sales primarily due to increased fixed and variable wages as well as increased depreciation and amortization.
Technology Expense
Technology expense
Percent of net sales
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
(in thousands)
$
5,843
$
5,000
$
843
1.9%
1.7%
16.9%
0.2%
Technology expense increased $843, or 16.9%, for fiscal year 2016 compared to fiscal year 2015. The increase was
primarily due to higher computer support costs to support increased sales, as well as increased overhead.
Amortization of Intangible Assets
34
Amortization of intangible assets
Percent of net sales
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
$
(in thousands)
482
$
0.2%
464
$
0.2%
18
3.9%
—%
Amortization of intangibles increased $18, or 3.9% for fiscal 2016 compared to fiscal 2015. Amortization of intangible
assets remained flat as a percent of net sales during fiscal 2016.
Impairment loss on Intangible Assets
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
(in thousands)
Impairment loss on intangible assets
$
1,130
$
— $
1,130
Percent of net sales
0.4%
—%
100.0%
0.4%
Impairment loss on intangible assets consists of a non-cash impairment charge during fiscal year 2016 in the amount of
$1,130, related to AutoMD Software. During fiscal 2015 there was no impairment loss on intangible assets. See further detail in
"Note 1- Summary of Significant Accounting Policies and Nature of Operations”, “Note 3 – Fair Value Measurements” and
“Note 5- Intangible Assets, net” of the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this report
and under “Critical Accounting Policies and Estimates” section below.
Total Other Expense, Net
Other expense, net
Percent of net sales
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
(in thousands)
$
(1,192)
$
(1,180)
$
12
(0.4)%
(0.4)%
1.0%
—
Total other expense, net increased $12, or 1.0%, for fiscal year 2016 compared to fiscal year 2015. Total other expense
increased during fiscal year 2016 compared to fiscal year 2015 primarily due to increased costs due to a higher letters of credit
balance. (See further detail in “Note 6 – Borrowings” of the Notes to Consolidated Financial Statements, included in Part IV,
Item 15 of this report).
Income Tax Provision
Income tax provision
Percent of net sales
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
$
(in thousands)
$
(199)
(0.1)%
$
(811)
(0.3)%
612
(75.5)%
0.2 %
We have a full valuation allowance against our net deferred income tax assets due to our past history of operating losses.
In fiscal years 2016 and 2015, we recorded an addition of $579 and $329, respectively, to our valuation allowance. Income tax
benefit in 2016 and 2015 relate primarily to the change in the outside basis difference of the Company's investment in AutoMD
(see below).
Income tax (benefit) provision differs from the amount that would result from applying the federal statutory rate
as follows (in thousands):
35
Income tax at U.S. federal statutory rate
Share-based compensation
State income tax, net of federal tax effect
Foreign tax
Basis difference in subsidiary equity
Other
Change in valuation allowance
Effective income tax provision
Fiscal Year Ended
December 31, 2016
January 2, 2016
$
$
(273) $
316
(559)
20
(267)
(15)
579
(199) $
(1,100)
50
672
(18)
(820)
76
329
(811)
Prior to 2012, the Company treated earnings of the foreign subsidiaries as permanently invested in that jurisdiction. As a
result, no additional income tax withholding was provided on the possible future repatriation of these earnings to the parent
company in prior years. During fiscal year 2012, based on current year operating and future cash flow needs the Company
decided that it could no longer represent that these funds would be indefinitely reinvested in the foreign jurisdictions but that
such funds may be needed for general corporate purposes. As a result, the Company recorded future withholding taxes which
would be due if the funds are required to be repatriated. The Company intends to continue to pursue all reasonable means to
increase its investment in the foreign jurisdictions as dictated by future growth in general business activities or as allowed by
the foreign jurisdictions to avoid incurring the income tax withholding expense.
As of December 31, 2016, the Company had no material unrecognized tax benefits, interest or penalties related to federal
and state income tax matters. At December 31, 2016, federal and state net operating loss (“NOL”) carryforwards were $75,261
and $83,027, respectively. Federal NOL carryforwards of $2,690 were acquired in the acquisition of WAG which are subject to
Internal Revenue Code section 382 and limited to an annual usage limitation of $135. Additionally, the tax benefit of $41 of the
federal and state NOL carryforwards which was created by the exercise of stock options will be credited to additional paid-in-
capital once recognized. Federal NOL carryforwards began to expire in 2029, while state NOL carryforwards begin to expire in
2016. The amounts of State NOL's expiring in the next five years and thereafter are disclosed under Income Taxes in the
Critical Accounting Policies and Estimates section below.
As a result of the October 8, 2014 sale of equity, AutoMD was not included in the consolidated state and federal tax
filings of the Company for fiscal year 2016. For the fiscal year ended December 31, 2016, the effective tax rate for AutoMD
was (7.7%). AutoMD's effective tax rate differs from the U.S. federal statutory rate primarily as a result of the recording of a
$1,183 valuation allowance against the Company's net deferred tax assets. At December 31, 2016, AutoMD had NOLs of
approximately $7,506 for federal tax purposes that begin to expire in 2031. These amounts are included in the consolidated
figures presented above. AutoMD state NOLs were not material as of December 31, 2016.
Fifty-Two Weeks Ended January 2, 2016 Compared to the Fifty-Three Weeks Ended January 3, 2015
Net Sales and Gross Margin
Net sales
Cost of sales
Gross profit
Gross margin
Fiscal Year Ended
January 2, 2016
January 3, 2015
$ Change
% Change
(in thousands)
291,091
207,657
83,434
$
$
$
$
283,508
205,058
78,450
$
$
7,583
2,599
4,984
28.7%
27.7%
2.7%
1.3%
6.4%
1.0%
Net sales increased $7,583, or 2.7%, for fiscal year 2015 compared to fiscal year 2014. Our net sales consisted of online
sales, representing 90.9% of the total for fiscal year 2015 (compared to 90.7% in fiscal year 2014), and offline sales,
representing 9.1% of the total for fiscal year 2015 (compared to 9.3% in fiscal year 2014). The net sales increase was due to an
increase of $7,561, or 2.9%, in online sales, and a $21, or 0.1%, increase in offline sales. Online sales increased primarily due
to improvement in conversion, resulting in a 1.5% increase in number of orders.
Gross profit increased $4,984, or 6.4%, in fiscal year 2015 compared to fiscal year 2014. Gross margin increased 1.0% to
28.7% in fiscal year 2015 compared to 27.7% in fiscal year 2014. Gross margin primarily increased in fiscal year 2015
36
compared to fiscal year 2014 due a favorable mix shift of private label sales compared to last year as well as strategic pricing
initiatives, freight efficiencies and lower shipping supply costs, partially offset by lower margin in our offline revenue. In
addition, gross margin improved due to the unfavorable impact to fiscal 2014's margin as a result of the restructuring charges
related to the distribution facility closure in Carson, California.
Marketing Expense
Marketing expense
Percent of net sales
Fiscal Year Ended
January 2, 2016
January 3, 2015
$ Change
% Change
(in thousands)
$
43,279
$
42,008
$
1,271
14.9%
14.8%
3.0%
0.1%
Total marketing expense increased $1,271, or 3.0%, for fiscal year 2015 compared to fiscal year 2014. As a percent to
net sales, total marketing expense was 14.9% for fiscal 2015 compared to 14.8% for fiscal year 2014. Online advertising
expense, which includes catalog costs, was $20,251, or 7.7%, of online sales for fiscal year 2015, compared to $18,485, or
7.2%, of online sales for fiscal year 2014. Online advertising expense increased primarily due to increases in our non-catalog
online advertising costs to $18,524 or 6.4% of net sales for fiscal 2015 compared to $16,327, or 5.8% of net sales for fiscal
2014. This increase relates primarily to the increase in the proportion of paid traffic compared to organic traffic. Marketing
expense, excluding online advertising, was $23,028, or 7.9%, of net sales for fiscal year 2015, compared to $23,523, or 8.3%,
of net sales for fiscal year 2014. The decrease was primarily due to a decrease in depreciation and amortization, partially offset
by increased overhead and labor cost.
General and Administrative Expense
Fiscal Year Ended
January 2, 2016
January 3, 2015
$ Change
% Change
(in thousands)
General and administrative expense
Percent of net sales
$
16,509
$
16,701
$
(192)
5.7%
5.9%
(1.1)%
(0.2)%
General and administrative expense decreased $192, or 1.1%, for fiscal year 2015 compared to fiscal year 2014. The
decrease for fiscal year 2015 as compared to fiscal year 2014 was primarily due to lower overhead costs.
Fulfillment Expense
Fulfillment expense
Percent of net sales
Fiscal Year Ended
January 2, 2016
January 3, 2015
$ Change
% Change
(in thousands)
$
20,237
$
20,368
$
(131)
7.0%
7.2%
(0.6)%
(0.2)%
Fulfillment expense decreased $131, or 0.6%, for fiscal year 2015 compared to fiscal year 2014 and declined as a percent
of sales primarily because 2014 included severance costs of $414 and labor related and other restructuring charges of
approximately $145 associated with the closure of our Carson warehouse in 2014.
Technology Expense
Technology expense
Percent of net sales
Fiscal Year Ended
January 2, 2016
January 3, 2015
$ Change
% Change
(in thousands)
$
5,000
$
4,863
$
137
1.7%
1.7%
2.8%
—%
37
Technology expense increased $137, or 2.8%, for fiscal year 2015 compared to fiscal year 2014. The increase was
primarily due to higher computer support costs to support increased sales, while technology expense remained flat to last year
as a percent of sales.
Amortization of Intangible Assets
Amortization of intangible assets
Percent of net sales
Fiscal Year Ended
January 2, 2016
January 3, 2015
$ Change
% Change
$
(in thousands)
464
0.2%
$
$
422
0.1%
42
10.0%
0.1%
Amortization of intangible assets increased by $42, or 10.0%, for fiscal 2015 compared to fiscal 2014. The increase was
primarily due to the purchase of intangible assets during fiscal 2015.
Total Other Expense, Net
Other expense, net
Percent of net sales
Fiscal Year Ended
January 2, 2016
January 3, 2015
$ Change
% Change
(in thousands)
$
(1,180)
$
(1,036)
$
144
(0.4)%
(0.4)%
13.9%
—%
Total other expense, net increased $144, or 13.9%, for fiscal year 2015 compared to fiscal year 2014. Total other expense
increased during fiscal year 2015 compared to fiscal year 2014 primarily due to increased interest expense in respect of the
borrowings under our credit facility. (See further detail in “ Note 6 – Borrowings” of the Notes to Consolidated Financial
Statements, included in Part IV, Item 15 of this report).
Income Tax Provision
Income tax provision
Percent of net sales
Fiscal Year Ended
January 2, 2016
January 3, 2015
$ Change
% Change
$
(in thousands)
(811)
$
(0.3)%
138
$
—%
(949)
(687.7)%
(0.3)%
We have a full valuation allowance against our net deferred income tax assets. In fiscal year 2015 and fiscal 2014, we
recorded an addition of $329 and $2,366, respectively, to our income valuation allowance. Income tax benefit in 2015 is
primarily due to federal statutory rate basis difference in subsidiary equity, partially offset by state income tax and change in
valuation allowance.
Liquidity and Capital Resources
Sources of Liquidity
During the fifty-two weeks ended December 31, 2016, we primarily funded our Base USAP operations with cash and
cash equivalents generated from operations as well as through borrowing under our credit facility, and primarily funded our
AutoMD operating segment using the cash investment from third-party investors. We had cash and cash equivalents of $6,643
as of December 31, 2016, representing a $1,106 increase from $5,537 of cash and cash equivalents as of January 2, 2016. The
cash increase was primarily due to cash provided by operating activities.
As of December 31, 2016, the Company had $6,643 of cash and cash equivalents, including $3,972 that was restricted to
be used only for general operating purposes of AutoMD unless otherwise approved by AutoMD’s Board of Directors. Based on
our current operating plan, we believe that our existing cash and cash equivalents, investments, cash flows from operations and
available funds under our credit facility will be sufficient to finance both our Base USAP and AutoMD operating segments
through at least the next twelve months (see “Debt and Available Borrowing Resources” and “Funding Requirements” below).
38
As of December 31, 2016, our credit facility provided for a revolving commitment of up to $30,000 subject to a
borrowing base derived from certain of our receivables, inventory and property and equipment. (see “Debt and Available
Borrowing Resources” below).
In August 2014, we filed a shelf registration statement covering the offer and sale of up to $100,000 of common stock
with the SEC. The shelf registration was declared effective by the SEC on August 20, 2014. The terms of any offering under
our shelf registration statement will be determined at the time of the offering and disclosed in a prospectus supplement filed
with the SEC. The shelf registration expires on August 20, 2017. Refer to “Note 7 – Stockholders’ Equity and Share-Based
Compensation “ of our Notes to Consolidated Financial Statements included in Part I, Item 1 of this report for additional
details.
On October 8, 2014, AutoMD entered into a common stock purchase agreement to sell seven million shares of AutoMD
common stock at a purchase price of $1.00 per share to third party investors. On October 19, 2016, the Company
purchased two million shares of AutoMD common stock at a purchase price of $1.00 per share pursuant to its funding
milestone obligation under the common stock purchase agreement. In addition, on January 26, 2017, AutoMD entered into a
redemption agreement with third-party investors to redeem an aggregate of 5.0 million shares of AutoMD common stock for a
purchase price of $1,292. On March 6, 2017, following a review of various business and strategic options, AutoMD entered
into a dissolution agreement with its two remaining minority stockholders pursuant to which the Company repurchased the
remaining shares of common stock from minority stockholders for a purchase price of $1,194 in consideration for terminating
the prior investor agreements. Following the redemptions, AutoMD filed for dissolution and all of the remaining assets of
AutoMD will be distributed to the Company, except for certain cash reserved for creditors of AutoMD. The Company estimates
that AutoMD will incur approximately $2.1 million in charges related to severance and other contractual obligations that could
impact cash during the first quarter of fiscal 2017.
Working Capital
As of December 31, 2016 and January 2, 2016, our working capital was $16,869 and $13,605, respectively. Our
revolving loan does not require principal payments, however it is classified as current due to certain U.S. GAAP requirements
(see “Debt and Available Borrowing Resources” below for further details). The historical seasonality in our business during the
year can cause cash and cash equivalents, inventory and accounts payable to fluctuate, resulting in changes in our working
capital.
Cash Flows
The following table summarizes the key cash flow metrics from our consolidated statements of cash flows for fiscal year
2016, 2015 and 2014, respectively (in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Operating Activities
December 31, 2016
January 2, 2016
January 3, 2015
Fiscal Year Ended
$
$
21,571
(6,477)
(13,954)
(34)
1,106
$
$
$
5,745
(7,792)
(105)
36
(2,116) $
1,243
(5,730)
11,311
11
6,835
Cash provided by operating activities is primarily comprised of net loss, adjusted for non-cash activities such as
depreciation and amortization expense, amortization of intangible assets, impairment losses and share-based compensation
expense. These non-cash adjustments represent charges reflected in net income and, therefore, to the extent that non-cash items
increase or decrease our operating results, there will be no corresponding impact on our cash flows. Net loss adjusted for non-
cash adjustments to operating activities was $10,891 (adjusted for non-cash charges primarily consisting of depreciation and
amortization expense of $7,510) for the period ended December 31, 2016 compared to $7,134 (adjusted for non-cash charges
primarily consisting of depreciation and amortization expense of $7,510) for the period ended January 2, 2016. After excluding
the effects of the non-cash charges, the primary changes in cash flows relating to operating activities resulted from changes in
operating assets and liabilities.
39
•
•
•
•
Accounts receivable increased to $3,266 at December 31, 2016 from $3,236 at January 2, 2016, resulting in
an increase in operating assets and reflecting a cash outflow of $30 for the fiscal year ended December 31,
2016. Accounts receivable increased primarily due to decreases in trade and credit card receivables due
related to timing of collections during the year end holiday season. Accounts receivable decreased to $3,236
at January 2, 2016 from $3,804 at January 3, 2015, resulting in a decrease in operating assets and reflecting a
cash inflow of $568 for the fiscal year ended January 2, 2016. Accounts receivable decreased primarily due to
decreases in trade and credit card receivables due related to timing of collections during the year end holiday
season.
Inventory decreased to $50,904 at December 31, 2016 from $51,216 at January 2, 2016, resulting in a
decrease in operating assets and reflecting a cash inflow of $312 for the fiscal year ended December 31, 2016.
Inventory increased to $51,216 at January 2, 2016 from $48,362 at January 3, 2015, resulting in an increase
in operating assets and reflecting a cash outflow of $2,854 for the fiscal year ended January 2, 2016.
Accounts payable and accrued expenses increased to $40,557 at December 31, 2016 compared to $32,790 at
January 2, 2016 resulting in an increase in operating liabilities and reflecting a cash inflow of $7,767 for the
fiscal year ended December 31, 2016. Accounts payable and accrued expenses increased primarily due to an
increase in accounts payable of $8,174, partially offset by a decrease in accrued expenses of $407. Accounts
payable and accrued expenses decreased to $32,790 at January 2, 2016 compared to $33,109 at January 3,
2015 resulting in a decrease in operating liabilities and reflecting a cash outflow of $319 for the fiscal year
ended January 2, 2016. Accounts payable and accrued expenses decreased primarily due to the decrease in
accrued expenses of $480, partially offset by an increase in accounts payable of $161.
Other current liabilities increased to $1,972 at December 31, 2016 compared to $1,276 at January 2, 2016,
resulting in an increase in operating liabilities and reflecting a cash inflow of $696 for the fiscal year ended
December 31, 2016. Other current liabilities increased primarily due to an increase in deferred warranty
revenues. Other current liabilities increased to $1,276 at January 2, 2016 compared to $3,505 at January 3,
2015, resulting in an increase in operating liabilities and reflecting a cash inflow of $349 for the fiscal year
ended January 2, 2016. Other current liabilities increased due to an increase in customer deposits.
Investing Activities
For the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015, net cash used in investing activities
was primarily the result of increases in property and equipment ($6,353, $7,780 and $5,556 respectively). Property and
equipment is primarily internally developed software. Capitalized costs include amounts directly related to website and
software development, primarily payroll and payroll related costs for employees and outside contractors who are directly
associated with and devote time to the internal use software project. We expect our capital expenditures to be flat or slightly
higher in fiscal 2017 compared to fiscal 2016.
Financing Activities
For the fiscal year ended December 31, 2016, net cash used in financing activities was primarily due to the net payments
made on debt, totaling $11,758. For the fiscal year ended January 2, 2016, net cash used in financing activities was primarily
due to primarily due to the payments made on debt, totaling $14,900. (see further discussion in “Debt and Available Borrowing
Resources” below).
For the fiscal year ended January 3, 2015, net cash provided by financing activities was primarily due to gross proceeds of
$7,000 received from the sale of 35.9% of AutoMD's outstanding common stock and the net draws made on debt, totaling
$4,248.
Debt and Available Borrowing Resources
Total debt was $10,312 as of December 31, 2016 (comprised of capital lease payable), compared to $22,448 (comprised
of capital lease payable and revolving loan payable) as of January 2, 2016. The decrease was primarily due to a reduction in the
amount outstanding under our credit facility from January 2, 2016 to December 31, 2016, as further described below.
The Company maintains an asset-based revolving credit facility ("Credit Facility") that provides for, among other things,
a revolving commitment in an aggregate principal amount of up to $30,000, which is subject to a borrowing base derived from
certain receivables, inventory and property and equipment. At December 31, 2016, our outstanding revolving loan balance was
$0. The customary events of default under the Credit Facility (discussed below) include certain subjective acceleration clauses.
Management has determined the likelihood of an acceleration is more than remote, considering the recurring losses experienced
by the Company. As a result, any outstanding borrowings under the Credit Facility would be classified as a current liability.
40
On November 15, 2016, the Company and JPMorgan Chase Bank, N.A. (“JPMorgan”) entered into the Tenth Amendment
to Credit Agreement and Third Amendment to Pledge and Security Agreement (the “Amendment”), which amended the Credit
Agreement previously entered into by the Company, certain of its domestic subsidiaries and JPMorgan on April 26, 2012 (as
amended, the “Credit Agreement”) and the Pledge and Security Agreement previously entered into by the Company, certain of
its domestic subsidiaries and JPMorgan on April 26, 2012. Pursuant to the Amendment, letters of credit can be issued if after
giving effect to such issuance, the letters of credit exposure shall not exceed $20,000, which was an increase from the
previously agreed upon $15,000. As of December 31, 2016, our outstanding letters of credit balance was $11,658.
The following amendments to the Credit Agreement and Security Agreement were also made under the Tenth
Amendment:
• The aggregate principal amount of indebtedness that is permitted related to capital leases was increased from $2,000 to
$3,500.
• The Company’s letters of credit exposure was increased from $15,000 to $20,000.
• Under the terms of the Security Agreement, cash receipts are deposited into a lock-box, which are at the Company’s
discretion unless the “cash dominion period” is in effect, during which cash receipts will be used to reduce amounts
owing under the Credit Agreement. The cash dominion period is triggered in an event of default or if excess availability
is less than the $3,600 for three consecutive business days, and will continue until, during the preceding 60 consecutive
days, no event of default existed and excess availability has been greater than $3,600 at all times (with the trigger subject
to adjustment based on the Company’s revolving commitment).
• The Company’s required excess availability related to the “Covenant Testing Trigger Period” (as defined under the
Credit Agreement) under the revolving commitment under the Credit Agreement is less than $2,400 for the period
commencing on any day that excess availability is less than $2,400 for three consecutive business days, and continuing
until excess availability has been greater than or equal to $2,400 at all times for 45 consecutive days (with the trigger
subject to adjustment based on the Company’s revolving commitment).
• The trigger, requiring the Company to provide certain reports under the Credit Agreement, relating to excess
availability under the revolving commitment under the Credit Agreement is less than $3,600 for the period commencing
on any day that excess availability is less than $3,600 for three consecutive business days, and continuing until excess
availability has been greater than or equal to $3,600 at all times for 45 consecutive days (with the trigger subject to
adjustment based on the Company’s revolving commitment).
Loans drawn under the credit facility bear interest at a per annum rate equal to either (a) LIBOR plus an applicable
margin of 1.25%, or (b) a “base rate” subject to an increase or reduction by up to 0.25% per annum based on the Company's
fixed charge coverage ratio. At December 31, 2016, the Company’s LIBOR based interest rate was 2.06% (on $0 principal) and
the Company’s prime based rate was 3.50% (on $0 principal). A commitment fee, based upon undrawn availability under the
Credit Facility bearing interest at a rate of 0.25% per annum, is payable monthly.
Certain of the Company’s domestic subsidiaries are co-borrowers (together with the Company, the “Borrowers”) under
the Credit Agreement, and certain other domestic subsidiaries are guarantors (the “Guarantors” and, together with the
Borrowers, the “Loan Parties”) under the Credit Agreement. The Borrowers and the Guarantors are jointly and severally liable
for the Borrowers’ obligations under the Credit Agreement. The Loan Parties’ obligations under the Credit Agreement are
secured, subject to customary permitted liens and certain exclusions, by a perfected security interest in (a) all tangible and
intangible assets and (b) all of the capital stock owned by the Loan Parties (limited, in the case of foreign subsidiaries, to 65%
of the capital stock of such foreign subsidiaries). The Borrowers may voluntarily prepay the loans at any time. The Borrowers
are required to make mandatory prepayments of the loans (without payment of a premium) with net cash proceeds received
upon the occurrence of certain “prepayment events,” which include certain sales or other dispositions of collateral, certain
casualty or condemnation events, certain equity issuances or capital contributions, and the incurrence of certain debt.
The Credit Agreement contains customary representations and warranties and customary affirmative and negative
covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens,
fundamental changes, investments, dispositions, prepayment of other indebtedness, mergers, and dividends and other
distributions.
Events of default under the Credit Agreement include: failure to timely make payments due under the Credit Agreement;
material misrepresentations or misstatements under the Credit Agreement and other related agreements; failure to comply with
covenants under the Credit Agreement and other related agreements; certain defaults in respect of other material indebtedness;
insolvency or other related events; certain defaulted judgments; certain ERISA-related events; certain security interests or liens
under the loan documents cease to be, or are challenged by the Company or any of its subsidiaries as not being, in full force and
41
effect; any loan document or any material provision of the same ceases to be in full force and effect; and certain criminal
indictments or convictions of any Loan Party. As of December 31, 2016, the Company was in compliance with all covenants
under the Credit Agreement.
Our Credit Facility requires us to satisfy certain financial covenants which could limit our ability to react to market
conditions or satisfy extraordinary capital needs and could otherwise restrict our financing and operations. If we are unable to
satisfy the financial covenants and tests at any time, we may as a result cease being able to borrow under the Credit Facility or
be required to immediately repay loans under the Credit Facility, and our liquidity and capital resources and ability to operate
our business could be severely impacted, which would have a material adverse effect on our financial condition and results of
operations. In those events, we may need to sell additional assets or seek additional equity or additional debt financing or
attempt to modify our existing Credit Agreement. There can be no assurance that we would be able to raise such additional
financing or engage in such asset sales on acceptable terms, or at all, or that we would be able to modify our existing Credit
Agreement.
As of December 31, 2016, the Company had total capital leases payable of $10,312. The present value of the net
minimum payments on capital leases as of December 31, 2016 is as follows:
Total minimum lease payments
Less amount representing interest
Present value of net minimum lease payments
Current portion of capital leases payable
Capital leases payable, net of current portion
$
$
17,947
(7,635)
10,312
542
9,770
See additional information in “Note 6 – Borrowings” of the Notes to Consolidated Financial Statements included in Part
IV, Item 15 of this report.
Funding Requirements
Based on our current operating plan, we believe that our existing cash, cash equivalents, investments, cash flows from
operations and available debt financing will be sufficient to finance our operational cash needs through at least the next twelve
months. Our future capital requirements may, however, vary materially from those now planned or anticipated. Changes in our
operating plans, lower than anticipated net sales or gross margins, increased expenses, continued or worsened economic
conditions, worsening operating performance by us, or other events, including those described in “Risk Factors” included in
Part II, Item 1A may force us to sell additional assets and seek additional debt or equity financing in the future. We may need to
issue additional common stock under our shelf registration, discussed above. There can be no assurance that we would be able
to raise such additional financing or engage in such additional asset sales on acceptable terms, or at all. If we are not able to
raise adequate additional financing or proceeds from additional asset sales, we will need to defer, reduce or eliminate
significant planned expenditures, restructure or significantly curtail our operations.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements.
Contractual Obligations
The following table sets forth our contractual cash obligations and commercial commitments as of December 31, 2016:
Contractual Obligations:
Operating lease obligations (1)
Capital lease obligations (2)
Payment Due By Period (in thousands)
Total
4,696
17,947
Less than
1 year
1,453
1,285
1-3 years
3-5 years
2,693
2,623
550
2,091
More than
5 years
—
11,948
(1)
(2)
Commitments under operating leases relate primarily to our leases on our principal facility in Carson, California,
our distribution centers in Chesapeake, Virginia and La Salle, Illinois, and our call center in the Philippines.
Commitments under capital leases include the lease for our LaSalle distribution facility and equipment lease
agreements which include interest.
42
Seasonality
We believe our business is subject to seasonal fluctuations. We have historically experienced higher sales of collision
parts in winter months when inclement weather and hazardous road conditions typically result in more automobile collisions.
Engine parts and performance parts and accessories have historically experienced higher sales in the summer months when
consumers have more time to undertake elective projects to maintain and enhance the performance of their automobiles and the
warmer weather during that time is conducive for such projects. We expect the historical seasonality trends to continue to have
a material impact on our financial condition and results of operations during the reporting periods in any given year.
Inflation
Inflation has not had a material impact upon our operating results, and we do not expect it to have such an impact in the
near future. We cannot assure you that our business will not be affected by inflation in the future.
Recent Accounting Pronouncements
See “Note 1 – Summary of Significant Accounting Policies and Nature of Operations” of the Notes to Consolidated
Financial Statements, included in Part IV, Item 15 of this report.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of our financial statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, net sales, costs and expenses, as well as the disclosure of contingent assets and liabilities
and other related disclosures. On an ongoing basis, we evaluate our estimates, including, but not limited to, those related to
revenue recognition, uncollectible receivables, inventory, valuation of deferred tax assets and liabilities, intangible and other
long-lived assets and contingencies. We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying
values of our assets and liabilities that are not readily apparent from other sources. Actual results could differ from those
estimates, and we include any revisions to our estimates in our results for the period in which the actual amounts become
known.
We believe the critical accounting policies described below affect the more significant judgments and estimates used in
the preparation of our consolidated financial statements. Accordingly, these are the policies we believe are the most critical to
aid in fully understanding and evaluating our historical consolidated financial condition and results of operations:
Revenue Recognition. We recognize revenue from product sales and shipping revenues, net of promotional discounts and
return allowances, when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists,
both title and risk of loss or damage have transferred, the selling price is fixed or determinable, and collectability is reasonably
assured. The Company retains the risk of loss or damage during transit, therefore, revenue from product sales is recognized at
the delivery date to the customer. Return allowances, which reduce product revenue by the Company’s best estimate of
expected product returns, are estimated using historical experience.
Revenue from sales of advertising is recorded when performance requirements of the related advertising program
agreement are met.
We evaluate the criteria of ASC 605-45 Revenue Recognition Principal Agent Considerations in determining whether it is
appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally,
when the Company is the primary party obligated in a transaction, the Company is subject to inventory risk, has latitude in
establishing prices and selecting suppliers, or has several but not all of these indicators, revenue is recorded at gross.
Payments received prior to the delivery of goods to customers are recorded as deferred revenue.
We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount
offers, such as percentage discounts off of current purchases and other similar offers. Current discount offers, when accepted by
our customers, are treated as a reduction to the sales price of the related transaction.
Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are estimated
based on historical amounts and are recorded upon recognizing the related sales. Credits are issued to customers for returned
products.
43
Fair Value Measurements. We account for fair value measurements in accordance with ASC Topic 820 - Fair Value
Measurements and Disclosures (“ASC 820”), which defines fair value, provides a framework for measuring fair value and
provides the disclosure requirements for fair value measurements. ASC 820 also establishes a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value. These tiers include: Level 1 - defined as observable inputs such as
quoted prices in active markets; Level 2 - defined as inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring
an entity to develop its own assumptions.
Inventory. Inventory consists of finished goods available-for-sale. We purchase inventory from suppliers both
domestically and internationally, primarily in Taiwan and China. We believe that our products are generally available from
more than one supplier, and we maintain multiple sources for many of our products, both internationally and domestically. We
offer a broad line of auto parts for automobiles, trucks, motorcycles and recreational vehicles from model years 1965 to 2016.
Because of the continued demand for our products, we primarily purchase products in bulk quantities to take advantage of
quantity discounts and to ensure inventory availability.
Inventory is accounted for using the first-in first-out (“FIFO”) method and valued at the lower of cost or market value.
During this valuation, we are required to make judgments about expected disposition of inventory, generally, through sales,
returns to product vendors, or liquidations of obsolete or scrap products, and expected recoverable values of each disposition
category based on currently-available information. If actual market conditions are less favorable than those anticipated by
management, additional write-down of the value of our inventory may be required.
Website and Software Development Costs. We capitalize certain costs associated with software developed for internal use
according to ASC Topic 350-40- Intangibles – Goodwill and Other – Internal-Use Software (“ASC 350-40”), and ASC Topic
350-50- Intangibles – Goodwill and Other – Website Development Costs (“ASC 350-50”). Under these provisions, we
capitalize costs associated with website development and software developed for internal use when both the preliminary project
design and testing stage are completed and management has authorized further funding for the project, which it deems probable
of completion and to be used for the function intended. Capitalized costs include amounts directly related to website
development and software development such as payroll and payroll-related costs for employees who are directly associated
with, and who devote time to, the internal-use software project. Capitalization of these costs ceases when the project is
substantially complete and ready for its intended use. These amounts are amortized on a straight-line basis over two to three
years once the software is placed into service.
Long-Lived Assets and Intangibles. We acquire tangible and intangible assets in the normal course of business. We
evaluate the recoverability of the carrying amount of these long-lived assets whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable in accordance with ASC Topic 360- Property, Plant, and
Equipment (“ASC 360”). Management assesses potential impairments whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. An impairment loss will result when the carrying value exceeds the
undiscounted cash flows estimated to result from the use and eventual disposition of the asset. We continually use judgment
when applying these impairment rules to determine the timing of the impairment tests, undiscounted cash flows used to assess
impairments, and the fair value of a potentially impaired asset. The reasonableness of our judgments could significantly affect
the carrying value of our long-lived assets. During the fourth quarter of 2016, the Company recognized an impairment loss on
intangible assets of $1,130 related to the impairment of AutoMD Software. During fiscal years 2015 and 2014 no adverse
events related to the Company's financial performance were identified which would have indicated property and equipment and
intangibles subject to amortization may not be recoverable.
Income Taxes. The Company accounts for income taxes in accordance with ASC Topic 740 - Income Taxes (“ASC 740”).
Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary
differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases.
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. When appropriate, a valuation reserve is established
to reduce deferred tax assets, which include tax credits and loss carry forwards, to the amount that is more likely than not to be
realized. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the
carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. We consider the following
possible sources of taxable income when assessing the realization of our deferred tax assets:
•
•
•
•
Future reversals of existing taxable temporary differences;
Future taxable income exclusive of reversing temporary differences and carryforwards;
Taxable income in prior carryback years; and
Tax-planning strategies.
44
The assessment regarding whether a valuation allowance is required or should be adjusted also considers, among other
matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory
carryforward periods, our experience with tax attributes expiring unused and tax planning alternatives. In making such
judgments, significant weight is given to evidence that can be objectively verified.
Concluding that a valuation allowance is not required is difficult when there is significant negative evidence that is
objective and verifiable, such as cumulative losses in recent years. We utilized a three-year analysis of actual results as the
primary measure of cumulative losses in recent years. However, because a substantial portion of those cumulative losses relate
to impairment of intangible assets and goodwill, those three-year cumulative results are adjusted for the effect of these items. In
addition, the near- and medium-term financial outlook is considered when assessing the need for a valuation allowance.
The valuation of deferred tax assets requires judgment and assessment of the future tax consequences of events that have
been recorded in the financial statements or in the tax returns, and our future profitability represents our best estimate of those
future events. Changes in our current estimates, due to unanticipated events or otherwise, could have a material effect on our
financial condition and results of operations. Due to our combined cumulative three-year adjusted loss position, it was
determined that it was not more likely than not that we would realize our net deferred tax assets. As of January 3, 2015, the
valuation allowance was $45,867, after recording an additional valuation allowance of $2,358 in fiscal year 2014. As of
January 2, 2016, the valuation allowance was $46,196, after recording an additional valuation allowance of $329 in fiscal year
2015. As of December 31, 2016, the valuation allowance was $46,775, after recording an additional valuation allowance of
$579 in fiscal year 2016.
Over the past twelve quarters the Company has been in a position of overall cumulative losses however, there is a
possibility that sometime next year we will be able to demonstrate overall cumulative income in the trailing twelve quarters.
While this factor does not in and of itself indicate that the valuation allowance or a portion of the allowance should be removed,
it is an indicator that needs to be considered in the evaluation of the valuation allowance. Other factors will also need to be
assessed including the future projections of taxable income and the Company’s ability to accurately project such taxable
income. As such, the Company will be continuously reassessing the appropriateness of releasing the valuation allowance.
As of December 31, 2016, federal and state NOL carryforwards were $75,261 and $83,027, respectively. Federal NOL
carryforwards of $2,690 were acquired in the acquisition of WAG which are subject to Internal Revenue Code section 382 and
limited to an annual usage limitation of $135. Federal NOL carryforwards begin to expire in 2029, while state NOL
carryforwards begin to expire in 2017. The state NOL carryforwards expire in the respective tax years as follows (in
thousands):
2017
2018
2019
2020
2021
Thereafter
$
$
6,930
1,132
7,646
2,121
4,050
61,148
83,027
We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position
will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax
benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many
factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which
may not accurately forecast actual outcomes. As of December 31, 2016, we had no material unrecognized tax benefits, interest
or penalties related to federal and state income tax matters. The Company’s policy is to record interest and penalties as income
tax expense.
We are subject to U.S. federal income tax as well as income tax of foreign and state tax jurisdictions. The tax years
2012-2015 remain open to examination by the major taxing jurisdictions to which the Company is subject, except the Internal
Revenue Service for which the tax years 2013-2015 remain open. The Company does not anticipate a significant change to the
amount of unrecognized tax benefits within the next twelve months.
Share-Based Compensation. We account for share-based compensation in accordance with ASC Topic 718-
Compensation – Stock Compensation (“ASC 718”). ASC 718 requires that all share-based compensation to employees,
including grants of employee stock options, be recognized in our financial statements based on their respective grant date fair
45
values. Under this standard, the fair value of each share-based payment award is estimated on the date of grant using an option
pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to estimate the fair
value of our share-based payment awards. The Black-Scholes valuation models require extensive use of accounting judgment
and financial estimates, including estimates of the expected term participants will retain their vested stock options before
exercising them, the estimated volatility of our common stock price over the expected term and the number of options that will
be forfeited prior to the completion of their vesting requirements. Application of alternative assumptions could produce
significantly different estimates of the fair value of share-based compensation and, consequently, the related amount of share-
based compensation expense recognized in the Consolidated Statements of Comprehensive Operations could have been
significantly different than the amounts recorded.
The Company has incorporated its own historical volatility into the grant-date fair value calculations. The Company’s
historical volatility was not materially different than the estimates applied to past award fair value calculations. The expected
term of an award is based on combining historical exercise data with expected weighted time outstanding. Expected weighted
time outstanding is calculated by assuming the settlement of outstanding awards is at the midpoint between the remaining
weighted average vesting date and the expiration date. Forfeitures are estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures significantly differ from those estimates. The Company considers many factors when
estimating expected forfeitures, including employee class, economic environment, and historical experience.
The Company accounts for equity instruments issued in exchange for the receipt of services from non-employee directors
in accordance with the provisions of ASC 718. The Company accounts for equity instruments issued in exchange for the receipt
of goods or services from other than employees in accordance with ASC 505-50 - Equity-Based Payments to Non-Employees.
Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity
instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than
employee services is determined on the earlier of a performance commitment or completion of performance by the provider of
goods or services. Equity instruments awarded to non-employees are periodically re-measured as the underlying awards vest
unless the instruments are fully vested, immediately exercisable and non-forfeitable on the date of grant.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk. Market risk represents the risk of loss that may impact our financial position, results of operations or cash
flows due to adverse changes in financial commodity market prices and rates. We are exposed to market risk primarily in the
area of changes in U.S. interest rates and conditions in the credit markets. We also have some exposure related to foreign
currency fluctuations. Under our current policies, we do not use interest rate derivative instruments to manage exposure to
interest rate changes. We do not have any derivative financial instruments as of December 31, 2016. We attempt to increase the
safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate
default risk by investing in investment grade securities and mutual funds that hold debt securities.
Interest Rate Risk. Our investment securities generally consist of mutual funds. As of December 31, 2016, our
investments were comprised of $30 of investments in mutual funds that primarily hold debt securities.
As of December 31, 2016, we had a $0 outstanding balance under a revolving loan under our credit facility. The interest
rate on this loan is computed based on a LIBOR and Prime loan rate, adjusted by features specified in our loan agreement. At
our debt level as of December 31, 2016, a 100 basis point increase in interest rates would not materially affect our earnings and
cash flows. If, however, we are unable to meet the covenants in our loan agreement, we would be required to renegotiate the
terms of credit under the loan agreement, including the interest rate. There can be no assurance that any renegotiated terms of
credit would not materially impact our earnings. At December 31, 2016, our LIBOR based interest rate was 2.06% per annum
(on $0 principal) and our Prime based rate was 3.50% per annum (on $0 principal). Refer to additional discussion in Item 7,
under the caption “Liquidity and Capital Resources – Debt and Available Borrowing Resources” and in “Note 6 – Borrowings”
of the Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report.
Foreign Currency Risk. Our purchases of auto parts from our Asian suppliers are denominated in U.S. dollars; however, a
change in the foreign currency exchange rates could impact our product costs over time. Our financial reporting currency is the
U.S. dollar and changes in exchange rates significantly affect our reported results and consolidated trends. For example, if the
U.S. dollar weakens year-over-year relative to currencies in our international locations, our consolidated gross profit would be
lower and operating expenses would be higher than if currencies had remained constant. Likewise, if the U.S. dollar
strengthens year-over-year relative to currencies in our international locations, our consolidated gross profit would be higher
and operating expenses would be lower than if currencies had remained constant. Our operating expenses in the Philippines are
generally paid in Philippine Pesos, and as the exchange rate fluctuates, it adversely or favorably impacts our operating results.
In light of the above, a fluctuation of 10% in the Peso/U.S. dollar exchange rate would have approximately a $1.0 million
impact on our Philippine operating expenses for the fifty-two weeks ended December 31, 2016. During fiscal 2014 we hedged
46
a portion of our forecasted foreign currency exposure associated with operating expenses incurred in the Philippines. The use of
such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in
foreign exchange rates over the limited time the hedges are in place. As of December 31, 2016, we had no hedges in place. We
are evaluating our options on how to manage this risk and considering various methods to mitigate such risk. Our Canadian
website sales are denominated in Canadian dollars; however, fluctuations in exchange rates from these operations are only
expected to have a nominal impact on our operating results due to the relatively small number of sales generated in Canada. We
believe it is important to evaluate our operating results and growth rates before and after the effect of currency changes.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item 8 are set forth in Part IV, Item 15 of this report and are hereby incorporated
into this Item 8 by reference.
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be
disclosed in reports filed with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is
recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016
pursuant to Rule 13a-15 and 15d-15 of the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective to meet the
objectives for which they were designed and operated at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). We assessed the effectiveness of our
internal control over financial reporting as of December 31, 2016, based on the “Internal Control — Integrated Framework
(2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. This assessment was conducted
utilizing our documentation of policies and procedures, risk control matrices, gap analysis, key process walk-throughs and
management’s knowledge of and interaction with its controls and testing of our key controls.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that
there is reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis. Based on such assessment and criteria, management has concluded that the internal controls over
financial reporting were effective, and were operating at the reasonable assurance level as of December 31, 2016.
Changes in Internal Control Over Financial Reporting
The Company monitors and evaluates on an ongoing basis its internal control over financial reporting in order to improve
its overall effectiveness. In the course of these evaluations, the Company modifies and refines its internal processes as
conditions warrant. As required by Rule 13a-15(d), the Company’s management, including the Chief Executive Officer and the
Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine
whether any changes occurred during the quarter ended December 31, 2016 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no
such change during the period covered by this report.
47
ITEM 9B.
OTHER INFORMATION
On March 6, 2017, AutoMD entered into a dissolution agreement with each of Oak Investment Partners XI, Limited
Partnership (“Oak”) and the Sol Khazani Living Trust (the “Trust”), pursuant to which AutoMD redeemed 1.5 million and 0.5
million shares of its common stock, respectively, for a purchase price of $895 and $299, respectively. In connection with the
dissolution agreement, each of the prior investor agreements entered into between AutoMD, on the one hand, and Oak and the
Trust, on the other, were terminated. Fredric W. Harman and Sol Khazani, each a current director of the Company and
AutoMD, are affiliated with Oak and the Trust, respectively. The foregoing description of the terms of the dissolution
agreement are qualified in their entirety by reference to the dissolution agreement, which is attached hereto as Exhibit 10.55.
48
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(a) Identification of Directors. The information under the caption “Election of Directors,” appearing in the Proxy
Statement (“Proxy Statement”), is hereby incorporated by reference. The Proxy Statement will be filed with the SEC
within 120 days from the end of fiscal year 2016.
(b) Identification of Executive Officers and Certain Significant Employees. The information under the caption “Executive
Compensation and Other Information—Executive Officers,” appearing in the Proxy Statement, is hereby incorporated by
reference. The Proxy Statement will be filed with the SEC within 120 days from the end of fiscal year 2016.
(c) Compliance with Section 16(a) of the Exchange Act. The information under the caption “Section 16(a) Beneficial
Ownership Reporting Compliance,” appearing in the Proxy Statement, is hereby incorporated by reference. The Proxy
Statement will be filed with the SEC within 120 days from the end of fiscal year 2016.
(d) Code of Ethics. The information under the caption “Corporate Governance – Code of Ethics and Business Conduct,”
appearing in the Proxy Statement, is hereby incorporated by reference. The Proxy Statement will be filed with the SEC
within 120 days from the end of fiscal year 2016.
(e) Board Committees. The information under the caption “Corporate Governance — Board Committees and Meetings,”
appearing in the Proxy Statement, is hereby incorporated by reference. The Proxy Statement will be filed with the SEC
within 120 days from the end of fiscal year 2016.
ITEM 11.
EXECUTIVE COMPENSATION
The information under the caption “Executive Compensation and Other Information”, appearing in the Proxy Statement,
is incorporated herein by reference. The Proxy Statement will be filed with the SEC within 120 days from the end of fiscal year
2016.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information under the captions “Securities Authorized for Issuance Under Equity Compensation Plans” and
“Ownership of Securities by Certain Beneficial Owners and Management,” appearing in the Proxy Statement, is incorporated
herein by reference. The Proxy Statement will be filed with the SEC within 120 days from the end of fiscal year 2016.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information under the captions “Corporate Governance — Director Independence” and “Certain Relationships and
Related Transactions,” appearing in the Proxy Statement, is incorporated herein by reference. The Proxy Statement will be filed
with the SEC within 120 days from the end of fiscal year 2016.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information under the caption “Fees Paid to Independent Registered Public Accounting Firm,” appearing in the
Proxy Statement, is incorporated herein by reference. The Proxy Statement will be filed with the SEC within 120 days from the
end of fiscal year 2016.
49
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
(1) Financial Statements. The following financial statements of U.S. Auto Parts Network, Inc. are included in a
separate section of this Annual Report on Form 10-K commencing on the pages referenced below:
Report of RSM US LLP, independent registered public accounting firm
Report of Deloitte & Touche LLP, independent registered public accounting firm
Consolidated Balance Sheets as of December 31, 2016 and January 2, 2016
Consolidated Statements of Operations and Comprehensive Operations for each of the three years in the period ended
December 31, 2016
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2016
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2016
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
Page
F- 1
F- 2
F- 3
F- 4
F- 5
F- 7
F- 8
All schedules have been omitted because they are not required or the required information is included in our
consolidated financial statements and notes thereto.
(3) Exhibits.
The following exhibits are filed herewith or incorporated by reference to the location indicated below:
50
Exhibit
No.
2.1
3.1
3.2
3.3
3.4
EXHIBIT INDEX
Description
Stock Purchase Agreement executed August 2, 2010 among the Acquisition Sub, WAG, Riverside and the other
stockholders of WAG (incorporated by reference to Exhibit 10.57 to the Company’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on August 4, 2010)
Second Amended and Restated Certificate of Incorporation of U.S. Auto Parts Network, Inc. as filed with the
Delaware Secretary of State on February 14, 2007 (incorporated by reference to Exhibit 3.1 to the Annual Report
on Form 10-K filed with the Securities and Exchange Commission on April 2, 2007)
Amended and Restated Bylaws of U.S. Auto Parts Network, Inc. (incorporated by reference to Exhibit 3.2 to the
Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2007)
Certificate of Designation, Preferences and Rights of the Series A Convertible Preferred Stock of U.S. Auto Parts
Network, Inc. (incorporated by reference to the Current Report on Form 8-K filed on March 25, 2013)
Amendment to Amended and Restated Bylaws of U.S. Auto Parts Network, Inc. (incorporated by reference to
Exhibit 3.4 to the Annual Report on Form 10-K file with the Securities and Exchange Commission on March 11,
2016)
4.1*
Specimen common stock certificate
10.1+*
U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan
10.2+*
Form of Stock Option Agreement under the U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan.
10.3+*
Form of Notice of Grant of Stock Option under the U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan.
10.4+*
Form of Acceleration Addendum to Stock Option Agreement under the U.S. Auto Parts Network, Inc. 2006
Equity Incentive Plan.
10.5+*
U.S. Auto Parts Network, Inc. 2007 Omnibus Plan and Form of Award Agreements
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15+
2016 Independent Director Compensation Plan
Form of Indemnification Agreement for Officers and Directors (incorporated by reference to Exhibit 10.7 to the
Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2016)
Employment Agreement dated March 23, 2015 between U.S. Auto Parts Network, Inc. and Neil Watanabe
(incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 24, 2015).
Employment Agreement dated May 20, 2015 between U.S. Auto Parts Network, Inc. and David Eisler
(incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 11, 2016)
Employment Agreement dated February 14, 2014 between U.S. Auto Parts Network, Inc. and Shane Evangelist
(incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 18, 2014)
Non-Qualified Stock Option Agreement dated October 15, 2007 between U.S. Auto Parts Network, Inc. and
Shane Evangelist (incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 17, 2007)
Non-Qualified Stock Option Agreement dated October 15, 2007 (performance grant) between U.S. Auto Parts
Network, Inc. and Shane Evangelist (incorporated by reference to Exhibit 99.4 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 17, 2007)
2007 New Employee Incentive Plan (incorporated by reference to Exhibit 99.5 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 17, 2007)
Employment Agreement dated February 14, 2014, between the Company and Aaron Coleman (incorporated by
reference to Exhibit 99.5 to the Current Report on Form 8-K filed with the Securities and Exchange Commission
on February 18, 2014)
Non-Qualified Stock Option Agreement, dated May 15, 2008, by and between the Company and Shane Evangelist
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 15, 2008)
51
Exhibit
No.
10.16
10.17
10.18
10.19+
10.20
10.21
10.22
10.23
10.24
10.25+
10.26+
10.27
10.28
10.29
10.30
10.31
10.32
Description
Contract of Lease dated January 7, 2010 by and between U.S. Autoparts Network Philippines Corporation and
Robinsons Land Corporation (incorporated by reference to Exhibit 10.56 to the Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 15, 2010)
Agreement of Sublease dated September 22, 2011 by and between the Company and Timec Company Inc.
((incorporated by reference to Exhibit 10.61 to the Company’s Quarterly Report on Form 10-Q filed with the
Securities Exchange and Commission on November 9, 2011)
First Amendment to Agreement of Sublease, dated June 1, 2016, between the Company and Broadspectrum
Downstream Services, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
with the Securities and Exchange Commission on June 2, 2016)
U.S. Auto Parts Network Inc. Director Payment Election Plan (incorporated by reference to Exhibit 10.68 to the
Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9,
2011)
Credit Agreement, dated April 26, 2012, by and between U.S. Auto Parts Network, Inc., certain of its domestic
subsidiaries and JP Morgan Chase Bank, N.A. (incorporated by reference to Exhibit 99.1 to the Current Report on
Form 8-K filed with the Securities and Exchange Commission on April 30, 2012)
First Amended Credit Agreement, effective as of March 12, 2013, by and between U.S. Auto Parts Network, Inc.,
certain of its domestic subsidiaries and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.78
to the Annual Report on Form 10-K for the fiscal year ended December 29, 2012 filed with the Securities
Exchange Commission on March 25, 2013)
Second Amended Credit Agreement, effective as of March 25, 2013, by and between U.S. Auto Parts Network,
Inc., certain of its domestic subsidiaries and JPMorgan Chase Bank, N.A. (incorporated by reference to exhibit
10.79 to the Current Report on Form 8-k filed with the Securities and Exchange Commission on March 25, 2013)
Purchase and Sale Agreement dated April 17, 2013 by and among Whitney Automotive Group, Inc. and STORE
Capital Acquisitions, LLC (incorporated by reference to the Current Report on Form 8-K filed on April 23, 2013)
Lease Agreement dated April 17, 2013 by and among U.S. Auto Parts Network, Inc. and STORE Master Funding
III, LLC (incorporated by reference to the Current Report on Form 8-K filed on April 23, 2013)
Form of Stock Unit Award Agreement (incorporated by reference to Exhibit 99.2 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on February 18, 2014)
Form of Stock Unit Award Agreement under the U.S. Auto Parts Network, Inc. 2007 Omnibus Incentive Plan
(incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-k filed with the Securities and
Exchange Commission on February 18, 2014)
Third Amendment to Credit Agreement dated as of August 2, 2013 by and between U.S. Auto Parts Network, Inc.,
certain of its domestic subsidiaries and JPMorgan Chase Bank, N.A. (incorporated by reference to the Quarterly
Report on Form 10-Q for the quarterly period ended June 29, 2013)
Fourth Amendment to Credit Agreement dated August 4, 2014 by and between U.S. Auto Parts Network, Inc.,
certain of its wholly-owned domestic subsidiaries and JPMorgan Chase Bank, N.A. (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August
5, 2014)
Common Stock Purchase Agreement, dated October 8, 2014, by and among AutoMD, Inc., U.S. Auto Parts
Network, Inc., Muzzy-Lyon Auto Parts, Inc., Manheim Investments, Inc., Oak Investment Partners XI, L.P. and
the Sol Khazani Living Trust (incorporated by reference to the Current Report on Form 8-K filed on October 9,
2014)
Investor Rights Agreement, dated October 8, 2014, by and among AutoMD, Inc., U.S. Auto Parts Network, Inc.,
Muzzy-Lyon Auto Parts, Inc., Manheim Investments, Inc., Oak Investment Partners XI, L.P. and the Sol Khazani
Living Trust (incorporated by reference to the Current Report on Form 8-K filed on October 9, 2014)
Voting Agreement, dated October 8, 2014, by and among AutoMD, Inc., U.S. Auto Parts Network, Inc., Muzzy-
Lyon Auto Parts, Inc., Manheim Investments, Inc., Oak Investment Partners XI, L.P. and the Sol Khazani Living
Trust (incorporated by reference to the Current Report on Form 8-K filed on October 9, 2014)
Right of First Refusal and Co-Sale Agreement, dated October 8, 2014, by and among AutoMD, Inc., U.S. Auto
Parts Network, Inc., Muzzy-Lyon Auto Parts, Inc., Manheim Investments, Inc., Oak Investment Partners XI, L.P.
and the Sol Khazani Living Trust (incorporated by reference to the Current Report on Form 8-K filed on October
9, 2014)
52
Exhibit
No.
10.33
10.34
10.35
10.36
10.37
10.38
10.39+
10.40+
10.41+
10.42+
10.43
10.44+
10.45+
10.46+
10.47+
10.48+
10.49+
Description
Fifth Amendment to Credit Agreement and First Amendment to Pledge and Security Agreement, dated October 8,
2014, by and among U.S. Auto Parts Network, Inc., certain of its domestic subsidiaries and JPMorgan Chase
Bank, N.A (incorporated by reference to the Current Report on Form 8-K filed on October 9, 2014)
Sixth Amendment to Credit Agreement and First Amendment to Pledge and Security Agreement, dated January 2,
2015, by and among U.S. Auto Parts Network, Inc., certain of its domestic subsidiaries and JPMorgan Chase
Bank, N.A (incorporated by reference to the Current Report on Form 8-K filed on January 5, 2015)
Seventh Amendment to Credit Agreement and Second Amendment to Pledge and Security Agreement, dated
March 24, 2015, by and among U.S. Auto Parts Network, Inc., certain of its domestic subsidiaries and JPMorgan
Chase Bank, N.A (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed on May
13, 2015)
Eighth Amendment to Credit Agreement and Third Amendment to Pledge and Security Agreement, dated
February 5, 2016, by and among U.S. Auto Parts Network, Inc., certain of its domestic subsidiaries and JPMorgan
Chase Bank, N.A (incorporated by reference to Exhibit 10.38 to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 11, 2016)
Ninth Amendment to Credit Agreement, dated May 6, 2016, by and among U.S. Auto Parts Network, Inc., certain
of its domestic subsidiaries and JPMorgan Chase Bank, N.A (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q filed on May 10, 2016)
Tenth Amendment to Credit Agreement and Fourth Amendment to Pledge and Security Agreement, dated
November 15, 2016, by and among U.S. Auto Parts Network, Inc., certain of its domestic subsidiaries and
JPMorgan Chase Bank, N.A (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
on November 15, 2016)
Form of Performance Restricted Stock Unit Award Agreement under the U.S. Auto Parts Network, Inc. 2007
Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 26, 2016)
Form of Performance Cash Bonus Award Agreement under the U.S. Auto Parts Network, Inc. 2007 Omnibus
Incentive Plan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 26, 2016)
AutoMD, Inc. 2014 Equity Incentive Plan (incorporated by reference to Exhibit 10.41 to the Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 11, 2016)
AutoMD, Inc. Stock Option Grant Notice and Option Agreement, dated January 29, 2015, between AutoMD, Inc.
and Shane Evangelist (incorporated by reference to Exhibit 10.42 to the Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 11, 2016)
Deed of Lease dated February 4, 2016 by and between U.S. Auto Parts Network, Inc. and Liberty Property
Limited Partnership (incorporated by reference to Exhibit 10.43 to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 11, 2016)
U.S. Auto Parts Network, Inc. 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K filed with the Securities and Exchange Commission on June 2, 2016)
Form of Employee Option Agreement under the U.S. Auto Parts Network, Inc. 2016 Equity Incentive Plan
(incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 2, 2016)
Form of Director Option Agreement under the U.S. Auto Parts Network, Inc. 2016 Equity Incentive Plan
(incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 2, 2016)
Form of Restricted Stock Unit Agreement under the U.S. Auto Parts Network, Inc. 2016 Equity Incentive Plan
(incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 2, 2016)
Form of Performance Restricted Stock Unit Award Agreement under the U.S. Auto Parts Network, Inc. 2016
Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 26, 2017)
Form of Performance Cash Bonus Award Agreement under the U.S. Auto Parts Network, Inc. 2016 Equity
Incentive Plan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 26, 2017)
53
Exhibit
No.
10.50+
10.51+
10.52+
10.53+
Description
Form of Director and Section 16 Officer Restricted Stock Unit Agreement under the U.S. Auto Parts Network,
Inc. 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 26, 2017)
Redemption Agreement, dated January 26, 2017 by and among AutoMD, Inc., Federal-Mogul Motorparts
Corporation, and Muzzy-Lyon Auto Parts, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed with the Securities and Exchange Commission on January 30, 2017)
Redemption Agreement, dated January 26, 2017 by and among AutoMD, Inc. and Manheim Investments, Inc.
(incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 30, 2017)
Release Agreement, dated January 26, 2017 by and among AutoMD, Inc., U.S. Auto Parts Network, Inc., Muzzy-
Lyon Auto Parts, Inc., Federal-Mogul Motorparts Corporation, Manheim Investments, Inc., Oak Investment
Partners XI, L.P. and the Sol Khazani Living Trust (incorporated by reference to Exhibit 10.3 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission on January 30, 2017)
10.54+
Deferred Compensation Plan
10.55
Dissolution Agreement, dated March 6, 2017, by and among AutoMD, Inc., Oak Investment Partners XI, L.P. and
the Sol Khazani Living Trust.
21.1
23.1
23.2
31.1
31.2
32.1
32.2
Subsidiaries of U.S. Auto Parts Network, Inc.
Consent of Independent Registered Public Accounting Firm
Consent of Independent Registered Public Accounting Firm
Certification of the Principal Executive Officer required by Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as amended
Certification of the Principal Financial Officer required by Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as amended
Certification of the Chief Executive Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
*
+
Incorporated by reference to the exhibit of the same number from the registration statement on Form S-1 of U.S. Auto
Parts Network, Inc. (File No. 333-138379) initially filed with the Securities and Exchange Commission on
November 2, 2006, as amended.
Indicates a management contract or compensatory plan or arrangement.
54
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 7, 2017
U.S. AUTO PARTS NETWORK, INC.
By:
/s/ Shane Evangelist
Shane Evangelist
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of U.S. Auto Parts Network, Inc., do hereby constitute and appoint Shane
Evangelist and Neil Watanabe, and each of them, our true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all
amendments to this report, and to file the same, with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby, ratifying and confirming all that each of said attorneys-in-
fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by
the following persons on behalf of the registrant in the capacities and on the dates indicated:
Signature
/s/ Shane Evangelist
Shane Evangelist
/s/ Neil Watanabe
Neil Watanabe
/s/ Robert J. Majteles
Robert J. Majteles
/s/ Joshua L. Berman
Joshua L. Berman
/s/ Fredric W. Harman
Fredric W. Harman
/s/ Jay K. Greyson
Jay K. Greyson
/s/ Sol Khazani
Sol Khazani
/s/ Warren B. Phelps III
Warren B. Phelps III
/s/ Barbara Palmer
Barbara Palmer
/s/ Bradley E. Wilson
Bradley E. Wilson
Title
Chief Executive Officer and Director
(principal executive officer)
Chief Financial Officer
(principal financial and accounting officer)
Chairman of the Board
Director
Director
Director
Director
Director
Director
Director
55
Date
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of RSM US LLP, independent registered public accounting firm
Report of Deloitte & Touche LLP, independent registered public accounting firm
Consolidated Balance Sheets as of December 31, 2016 and January 2, 2016
Consolidated Statements of Operations and Comprehensive Operations for each of the three years in the period ended
December 31, 2016
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2016
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2016
Notes to Consolidated Financial Statements
F- 1
F- 2
F- 3
F- 4
F- 5
F- 7
F- 8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
U.S. Auto Parts Network, Inc.
We have audited the accompanying consolidated balance sheets of U.S. Auto Parts Network, Inc. and subsidiaries (the
Company) as of December 31, 2016 and January 2, 2016, and the related consolidated statements of operations and other
comprehensive operations, stockholders’ equity and cash flows for each of the two fiscal years in the period ended December
31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of U.S. Auto Parts Network, Inc. and subsidiaries as of December 31, 2016 and January 2, 2016, and the results of
their operations and their cash flows each of the two fiscal years in the period ended December 31, 2016, in conformity with
U.S. generally accepted accounting principles.
/s/ RSM US LLP
Los Angeles, CA
March 6, 2017
F- 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
U.S. Auto Parts Network, Inc.
Carson, CA
We have audited the accompanying consolidated statements of operations and comprehensive operations, stockholders’
equity, and cash flows for the year ended January 3, 2015 of U.S. Auto Parts Network, Inc. and subsidiaries (the Company).
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, 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. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of U.S. Auto Parts
Network, Inc. and subsidiaries operations and cash flows for the year ended January 3, 2015, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, CA
March 19, 2015 (March 9, 2016, as to the disclosure of the approximate distribution of Base USAP online revenue by product
type for fiscal year 2014 included in Note 15 - Segment Information)
F- 2
U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par and Per Share Liquidation Value)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $36 and $17 at December 31, 2016 and
January 2, 2016, respectively
Inventory
Other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Other non-current assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Revolving loan payable
Current portion of capital leases payable
Customer deposits
Other current liabilities
Total current liabilities
Capital leases payable, net of current portion
Deferred income taxes
Other non-current liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Series A convertible preferred stock, $0.001 par value; $1.45 per share liquidation value
or aggregate of $6,017; 4,150 shares authorized; 4,150 and 4,150 shares issued and
outstanding at December 31, 2016 and January 2, 2016, respectively
Common stock, $0.001 par value; 100,000 shares authorized; 35,068 and 34,137 shares
issued and outstanding at December 31, 2016 and January 2, 2016, respectively (445 of
which are treasury stock)
Treasury stock
Additional paid-in-capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Noncontrolling interest
Total equity
December 31,
2016
January 2,
2016
$
6,643
$
30
3,266
50,904
2,815
63,658
16,478
969
1,029
5,537
65
3,236
51,216
2,475
62,529
18,431
1,476
1,320
82,134
$
83,756
$
$
33,697
$
6,860
—
542
3,718
1,972
46,789
9,770
156
2,097
58,812
4
35
(1,376)
180,153
557
(156,520)
22,853
469
23,322
25,523
7,267
11,759
521
2,578
1,276
48,924
10,168
944
1,577
61,613
4
34
—
176,873
440
(157,011)
20,340
1,803
22,143
83,756
Total liabilities and equity
$
82,134
$
See accompanying notes to consolidated financial statements.
F- 3
U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(In Thousands, Except Per Share Data)
Net sales
Cost of sales (1)
Gross profit
Operating expenses:
Marketing
General and administrative
Fulfillment
Technology
Amortization of intangible assets
Impairment loss on intangibles
Total operating expenses
Income (loss) from operations
Other income (expense):
Other income, net
Interest expense
Total other expense, net
Loss before income taxes
Income tax (benefit) provision
Net loss including noncontrolling interests
Net loss attributable to noncontrolling interests
Net income (loss) attributable to U.S. Auto Parts
Other comprehensive income attributable to U.S. Auto Parts, net of tax:
Foreign currency translation adjustments
Actuarial gain (loss) on defined benefit plan
Unrealized loss on investments
Total other comprehensive income (loss) attributable to U.S. Auto Parts
Comprehensive income (loss) attributable to U.S. Auto Parts
Basic net income (loss) per share
$
$
Diluted net income (loss) per share
Shares used in computation of basic net income (loss) per share
Shares used in computation of diluted net income (loss) per share
Fiscal Year Ended
December 31,
2016
January 2,
2016
January 3,
2015
$
303,571
$
291,091
$
211,289
92,282
207,657
83,434
283,508
205,058
78,450
43,555
17,907
22,975
5,843
482
1,130
91,892
390
46
(1,238)
(1,192)
(802)
(199)
(603)
(1,334)
731
9
110
(2)
117
848
0.01
0.01
$
$
34,765
36,207
43,279
16,509
20,237
5,000
464
—
85,489
(2,055)
36
(1,216)
(1,180)
(3,235)
(811)
(2,424)
(1,143)
(1,281)
36
44
—
80
(1,201) $
(0.04) $
(0.04)
33,946
33,946
42,008
16,701
20,368
4,863
422
—
84,362
(5,912)
65
(1,101)
(1,036)
(6,948)
138
(7,086)
(207)
(6,879)
20
(106)
—
(86)
(6,965)
(0.21)
(0.21)
33,489
33,489
(1)
Excludes depreciation and amortization expense which is included in marketing, general and administrative and
fulfillment expense as described in “Note 1 – Summary of Significant Accounting Policies and Nature of Operations”.
See accompanying notes to consolidated financial statements.
F- 4
U.S AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-in-
Capital
Treasury
Stock
Preferred
Stock
Dividend
Distributable
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
Noncontrolling
Interest
Total
Balance, December 28, 2013
4,150
Issuance of shares of Auto MD
common stock
Net loss
Issuance of common stock in
connection with preferred stock
dividends
Issuance of shares in connection
with stock option exercises
Issuance of shares in connection
with restricted stock units vesting
Share-based compensation
Common stock dividend
distributable on Series A Preferred
Stock
F
-
5
Actuarial loss on defined benefit
plan
Effect of changes in foreign
currencies
Balance, January 3, 2015
Net loss
Issuance of common stock in
connection with preferred stock
dividends
Issuance of shares in connection
with stock option exercises
Issuance of shares in connection
with restricted stock units vesting
Minimum tax withholding on
RSU's
Minimum tax withholdings on
Options exercised
Share-based compensation
Issuance of shares in connection
with BOD fees
Common stock dividend
distributable on Series A Preferred
Stock
—
—
—
—
—
—
—
—
—
4,150
—
—
—
—
—
—
—
—
—
4
—
—
—
—
—
—
—
—
—
4
—
—
—
—
—
—
—
—
—
33,352
$
33
$ 168,693
$
—
—
107
144
21
—
—
—
—
33,624
—
103
301
397
(151)
(139)
—
2
—
—
—
—
—
—
—
—
—
—
33
—
—
—
—
1
—
—
—
—
2,512
—
300
295
—
2,569
—
—
—
174,369
—
241
135
(809)
450
(80)
2,565
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
60
$
446
(148,370) $
20,866
—
20,866
—
—
(300)
—
—
—
240
—
—
—
—
(241)
—
—
—
—
—
—
241
—
—
—
—
—
—
(106)
20
360
—
—
—
—
—
—
—
—
—
(6,879)
2,512
(6,879)
3,153
(207)
5,665
(7,086)
—
—
—
—
(240)
—
—
(155,489)
(1,281)
—
—
—
—
—
—
—
(241)
—
295
—
2,569
—
(106)
20
19,277
(1,281)
—
135
(809)
451
(80)
2,565
2
—
—
—
—
—
—
—
—
2,946
(1,143)
—
—
—
—
—
—
—
—
—
295
—
2,569
—
(106)
20
22,223
(2,424)
—
135
(809)
451
(80)
2,565
2
—
Actuarial loss on defined benefit
plan
Effect of changes in foreign
currencies
Balance, January 2, 2016
Net income (loss)
Issuance of common stock in
connection with preferred stock
dividends
Issuance of shares in connection
with stock option exercises
Issuance of shares in connection
with restricted stock units vesting
Minimum tax withholding on
RSU's
Issuance of shares in connection
with BOD Fees
Issuance of stock awards
Share-based compensation
Cash Dividend on preferred stock
Treasury Stock
Common stock dividend
distributable on Series A Preferred
Stock
Actuarial gain on defined benefit
plan
Unrealized (loss) gain on
investments, net of tax
Effect of changes in foreign
currencies
—
—
4,150
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance, December 31, 2016
4,150
$
—
—
4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4
—
—
34,137
—
37
442
774
(335)
3
10
—
—
—
—
—
—
—
35,068
$
—
—
34
—
—
—
1
—
—
—
—
—
—
—
—
—
—
35
F
-
6
—
—
176,873
—
120
908
(1,897)
927
9
—
3,213
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,376)
—
—
—
—
—
—
—
(120)
—
—
—
—
—
—
—
—
120
—
—
—
44
36
440
—
—
—
—
—
—
—
—
—
—
110
(2)
9
—
—
(157,011)
731
—
—
—
—
—
—
—
(120)
—
(120)
—
—
—
44
36
20,340
731
—
908
(1,896)
927
9
—
3,213
(120)
(1,376)
—
110
(2)
9
—
—
44
36
1,803
(1,334)
22,143
(603)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
908
(1,896)
927
9
—
3,213
(120)
(1,376)
—
110
(2)
9
$ 180,153
$ (1,376) $
— $
557
$
(156,520) $
22,853
$
469
$
23,322
See accompanying notes to consolidated financial statements.
U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Operating activities
Net loss including noncontrolling interests
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
December 31,
2016
Fiscal Year Ended
January 2,
2016
January 3,
2015
$
(603) $
(2,424) $
(7,086)
Depreciation and amortization expense
Amortization of intangible assets
Deferred income taxes
Share-based compensation expense
Stock awards issued for non-employee director service
Impairment loss on intangible assets
Amortization of deferred financing costs
Gain from disposition of assets
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Other current assets
Other non-current assets
Accounts payable and accrued expenses
Other current liabilities
Other non-current liabilities
Net cash provided by operating activities
Investing activities
Additions to property and equipment
Proceeds from sale of property and equipment
Cash paid for intangibles
Proceeds from sale of marketable securities and investments
Purchases of marketable securities and investments
Net cash used in investing activities
Financing activities
Proceeds from revolving loan payable
Payments made on revolving loan payable
Proceeds from sale of equity in subsidiary
Payments on capital leases
Treasury stock purchases
Statutory tax withholding payment for share-based compensation
Proceeds from exercise of stock options
Payment of liabilities related to financing activities
Preferred stock dividends paid
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of non-cash investing and financing activities:
Accrued asset purchases
Accrued intangible asset purchases
Property acquired under capital lease
Preferred stock dividends declared and not paid
Unrealized loss on investments
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes
Cash paid during the period for interest
7,510
482
(838)
3,131
9
1,130
70
—
(30)
312
(255)
203
7,906
1,775
769
21,571
(6,353)
—
(125)
1
—
(6,477)
13,727
(25,485)
—
(587)
(1,387)
(969)
908
(100)
(61)
(13,954)
(34)
1,106
5,537
6,643
744
—
211
60
(2)
89
1,077
$
$
$
7,510
464
(906)
2,419
2
—
82
(13)
568
(2,854)
262
225
119
475
(184)
5,745
(7,780)
13
(25)
—
—
(7,792)
15,637
(14,900)
—
(438)
—
(438)
134
(100)
—
(105)
36
(2,116)
7,653
5,537
708
125
1,588
—
—
104
1,145
$
$
$
8,923
422
74
2,371
—
—
81
(96)
1,105
(11,412)
471
(39)
6,992
(302)
(261)
1,243
(5,556)
27
(200)
745
(746)
(5,730)
19,506
(15,258)
7,000
(232)
—
—
295
—
—
11,311
11
6,835
818
7,653
1,232
—
—
—
—
60
1,029
$
$
$
See accompanying notes to consolidated financial statements.
F- 7
U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
Note 1 – Summary of Significant Accounting Policies and Nature of Operations
U.S. Auto Parts Network, Inc. (including its subsidiaries) is a leading online provider of aftermarket auto parts and
accessories and was established in 1995. The Company entered the e-commerce sector by launching its first website in 2000
and currently derives the majority of its revenues from online sales channels. The Company sells its products to individual
consumers through a network of websites and online marketplaces. Through AutoMD.com, the Company educates consumers
on maintenance and service of their vehicles. The site provides auto information, with tools for diagnosing car troubles,
locating repair shops and do-it-yourself (“DIY”) repair guides. Our flagship websites are located at
www.autopartswarehouse.com, www.carparts.com, www.jcwhitney.com and www.AutoMD.com and our corporate website is
located at www.usautoparts.net. References to the “Company,” “we,” “us,” or “our” refer to U.S. Auto Parts Network, Inc. and
its consolidated subsidiaries.
The Company’s products consist of collision parts serving the body repair market, engine parts to serve the replacement
parts market, and performance parts and accessories. The collision parts category is primarily comprised of body parts for the
exterior of an automobile. Our parts in this category are typically replacement parts for original body parts that have been
damaged as a result of a collision or through general wear and tear. The majority of these products are sold through our
websites. In addition, we sell an extensive line of mirror products, including our own private-label brand called Kool-Vue™,
which are marketed and sold as aftermarket replacement parts and as upgrades to existing parts. The engine parts category is
comprised of engine components and other mechanical and electrical parts. These parts serve as replacement parts for existing
engine parts and are generally used by professionals and do-it-yourselfers for engine and mechanical maintenance and repair.
We offer performance versions of many parts sold in each of the above categories. Performance parts and accessories generally
consist of parts that enhance the performance of the automobile, upgrade existing functionality of a specific part or improve the
physical appearance or comfort of the automobile.
The Company is a Delaware C corporation and is headquartered in Carson, California. The Company has employees
located in both the United States and the Philippines.
Fiscal Year
The Company’s fiscal year is based on a 52/53 week fiscal year ending on the Saturday closest to December 31. The
fiscal years ended December 31, 2016 (fiscal year 2016) and January 2, 2016 (fiscal year 2015) are both 52 week periods. The
fiscal year ended January 3, 2015 (fiscal year 2014) is a 53 week period.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its
subsidiaries in which it has a controlling interest. On October 8, 2014, AutoMD, Inc. ("AutoMD") sold seven million shares of
its common stock to third-party investors, reducing the Company’s ownership interest in AutoMD to 64.1%. In October 2016,
the Company purchased an additional two million shares of AutoMD common stock pursuant to its funding milestone
obligations under the common stock purchase agreement, increasing the Company's ownership interest in AutoMD to 67.4%.
On January 26, 2017, AutoMD entered into redemption agreements with certain third-party investors to redeem an aggregate of
five million shares of AutoMD common stock for a purchase price of $1,292. The redemption agreements increased the
Company's ownership interest in AutoMD to 87.9% of AutoMD's outstanding common stock. The remaining 12.1% of
AutoMD controlled by third-party investors was repurchased on March 6, 2017. The Company reports noncontrolling interests
in consolidated entities as a component of equity separate from the Company’s equity. All inter-company transactions between
and among the Company and its consolidated subsidiaries have been eliminated in consolidation.
Basis of Presentation
During fiscal year 2016, the Company’s revenues increased 4.3% from fiscal 2015 after having increased in fiscal year
2015 by 2.7% from fiscal year 2014. In fiscal year 2016, the Company generated net income of $731, after incurring net losses
of $1,281 and $6,879 in fiscal years 2015 and 2014, respectively. Based on our current operating plan, we believe that our
existing cash, cash equivalents, short-term investments, cash flows from operations and available debt financing will be
sufficient to finance our operational cash needs through at least the next twelve months. Should the Company’s operating
results not meet expectations in 2017, it could negatively impact our liquidity as we may not be able to provide positive cash
flows from operations in order to meet our working capital requirements. We may need to borrow additional funds from our
credit facility, which under certain circumstances may not be available, sell assets or seek additional equity or additional debt
F- 8
financing in the future. There can be no assurance that we would be able to raise such additional financing or engage in such
additional asset sales on acceptable terms, or at all. If revenues were to decline and we incur net losses because our strategies to
return to consistent profitability are not successful or otherwise, and if we are not able to raise adequate additional financing or
proceeds from asset sales to continue to fund our ongoing operations, we will need to defer, reduce or eliminate significant
planned expenditures, restructure or significantly curtail our operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant
estimates made by management include, but are not limited to, those related to revenue recognition, uncollectible receivables,
the valuation of short-term investments, valuation of inventory, valuation of deferred tax assets and liabilities, valuation of
intangible and other long-lived assets, recoverability of software development costs, contingencies and share-based
compensation expense that results from estimated grant date fair values and vesting of issued equity awards. Actual results
could differ from these estimates.
Statement of Cash Flows
The net change in the Company’s book overdraft is presented as an operating activity in the consolidated statement of
cash flows. The book overdraft represents a credit balance in the Company’s general ledger but the Company has a positive
bank account balance.
Cash and Cash Equivalents
The Company considers all money market funds and short-term investments purchased with original maturities of ninety
days or less to be cash equivalents.
Fair Value of Financial Instruments
Financial instruments that are not measured at fair value include accounts receivable, accounts payable and debt. Refer to
“Note 3 – Fair Value Measurements” for additional fair value information. If the Company’s revolving loan payable (see
“Note 6 – Borrowings”) had been measured at fair value, it would be categorized in Level 2 of the fair value hierarchy, as the
estimated value would be based on the quoted market prices for the same or similar issues or on the current rates available to
the Company for debt of the same or similar terms. The carrying values of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to their short-term maturities. Short-term investments are carried at fair value.
Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the
fair value of our revolving loan payable, classified as current liability in our consolidated balance sheet, approximates its
carrying amount because the interest rate is variable.
Accounts Receivable and Concentration of Credit Risk
Accounts receivable are stated net of allowance for doubtful accounts. The allowance for doubtful accounts is determined
primarily on the basis of past collection experience and general economic conditions. The Company determines terms and
conditions for its customers primarily based on the volume purchased by the customer, customer creditworthiness and past
transaction history.
Concentrations of credit risk are limited to the customer base to which the Company’s products are sold. The Company
does not believe significant concentrations of credit risk exist.
Investments
Short-term investments are comprised of closed-end funds primarily invested in mutual funds that hold government
bonds and stock and short-term money market funds. Mutual funds are classified as short-term investments available-for-sale
and recorded at fair market value, based on quoted prices of identical assets that are trading in active markets as of the end of
the period for which the values are determined. All of the Company’s marketable securities and investments are subject to a
periodic impairment review. The Company recognizes an impairment charge when a decline in the fair value of its investments
below the cost basis is judged to be other-than-temporary. The Company considers various factors in determining whether to
recognize an impairment charge, including the length of time and extent to which the fair value has been less than the
Company’s cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to
hold the investment for a period of time sufficient to allow for any anticipated recovery in the market value. No other-than-
temporary impairment charges were recorded on any investments during fiscal years presented.
F- 9
Inventory
Inventories consist of finished goods available-for-sale and are stated at the lower of cost or market value, determined
using the first-in first-out (“FIFO”) method. The Company purchases inventory from suppliers both domestically and
internationally, and routinely enters into supply agreements with Asia-Pacific based suppliers of private label products and
U.S.–based suppliers who are primarily drop-ship vendors. The Company believes that its products are generally available from
more than one supplier and seeks to maintain multiple sources for its products, both internationally and domestically. The
Company primarily purchases products in bulk quantities to take advantage of quantity discounts and to ensure inventory
availability. Inventory is reported at the lower of cost or market, adjusted for slow moving, obsolete or scrap product. Inventory
at December 31, 2016 and January 2, 2016 included items in-transit to our warehouses, in the amount of $9,767 and $12,241,
respectively.
Website and Software Development Costs
The Company capitalizes certain costs associated with website and software developed for internal use according to ASC
350-50 - Intangibles – Goodwill and Other – Website Development Costs and ASC 350-40 Intangibles – Goodwill and Other –
Internal-Use Software, when both the preliminary project design and testing stage are completed and management has
authorized further funding for the project, which it deems probable of completion and to be used for the function intended.
Capitalized costs include amounts directly related to website and software development such as payroll and payroll-related
costs for employees who are directly associated with, and who devote time to, the internal-use software project. Capitalization
of such costs ceases when the project is substantially complete and ready for its intended use. These amounts are amortized on
a straight-line basis over two to three years once the software is placed into service. The Company capitalized website and
software development costs of $4,977 and $5,664 during fiscal year 2016 and 2015, respectively. At December 31, 2016 and
January 2, 2016, our internally developed website and software costs amounted to $22,366 and $22,745, respectively, and the
related accumulated amortization and impairment amounted to $18,520 and $17,669, respectively.
Long-Lived Assets and Intangibles Subject to Amortization
The Company accounts for the impairment and disposition of long-lived assets, including intangibles subject to
amortization, in accordance with ASC - 360 Property, Plant and Equipment (“ASC 360”). Management assesses potential
impairments whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be
recoverable. An impairment loss will result when the carrying value exceeds the undiscounted cash flows estimated to result
from the use and eventual disposition of the asset or asset group. Impairment losses will be recognized in operating results to
the extent that the carrying value exceeds the discounted future cash flows estimated to result from the use and eventual
disposition of the asset or asset group. The Company continually uses judgment when applying these impairment rules to
determine the timing of the impairment tests, undiscounted cash flows used to assess impairments, and the fair value of a
potentially impaired asset or asset group. The reasonableness of our judgments could significantly affect the carrying value of
our long-lived assets. During the fourth quarter of 2016, the Company recognized an impairment loss on intangible assets of
$1,130 related to the impairment of AutoMD software. As of January 2, 2016 and January 3, 2015, the Company’s long-lived
assets did not indicate a potential impairment under the provisions of ASC 360, therefore no impairment charges were recorded
for either fiscal 2015 of fiscal 2014.
Deferred Catalog Expenses
Deferred catalog expenses consist of third-party direct costs including primarily creative design, paper, printing, postage
and mailing costs for all Company direct response catalogs. Such costs are capitalized as deferred catalog expenses and are
amortized over their expected future benefit period. Each catalog is fully amortized within nine months. Deferred catalog
expenses are included in other current assets and amounted to $160 and $256 at December 31, 2016 and January 2, 2016,
respectively.
Deferred Financing Costs
Deferred financing costs are being amortized over the life of the loan using the straight-line method as it is not
significantly different from the effective interest method.
Revenue Recognition
The Company recognizes revenue from product sales and shipping revenues, net of promotional discounts and return
allowances, when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, both title
and risk of loss or damage have transferred, delivery has occurred, the selling price is fixed or determinable, and collectability
is reasonably assured. The Company retains the risk of loss or damage during transit, therefore, revenue from product sales is
F- 10
recognized at the delivery date to customers. Return allowances, which reduce product revenue by the Company’s best estimate
of expected product returns, are estimated using historical experience.
Revenue from sales of advertising is recorded when performance requirements of the related advertising program
agreement are met. For each of the fiscal years ended 2016, 2015 and 2014, the advertising revenue represented approximately
1%, of our total revenue.
The Company evaluates the criteria of ASC 605-45 - Revenue Recognition Principal Agent Considerations in
determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as
commissions. Generally, when the Company is the primary party obligated in a transaction, the Company is subject to
inventory risk, has latitude in establishing prices and selecting suppliers, or has several but not all of these indicators, revenue is
recorded at gross.
Payments received prior to the delivery of goods to customers are recorded as deferred revenue.
The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current
discount offers, such as percentage discounts off current purchases and other similar offers. Current discount offers, when
accepted by the Company’s customers, are treated as a reduction to the purchase price of the related transaction.
Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are estimated
based on historical amounts and are recorded upon recognizing the related sales. Credits are issued to customers for returned
products. Credits for returned products amounted to $23,876, $23,543, and $24,903 for fiscal year 2016, 2015 and 2014,
respectively.
No customer accounted for more than 10% of the Company’s net sales.
The following table provides an analysis of the allowance for sales returns and the allowance for doubtful accounts (in
thousands):
Fifty-Two Weeks Ended December 31, 2016
Allowance for sales returns
Allowance for doubtful accounts
Fifty-Two Weeks Ended January 2, 2016
Allowance for sales returns
Allowance for doubtful accounts
Fifty-Three Weeks Ended January 3, 2015
Allowance for sales returns
Allowance for doubtful accounts
Cost of Sales
Balance at
Beginning
of Period
Charged to
Revenue,
Cost or
Expenses
Deductions
Balance at
End of
Period
$
$
$
1,009
$
23,804
$
17
254
(23,876) $
(235)
897
$
23,655
$
41
29
(23,543) $
(53)
$
893
213
$
24,907
64
(24,903) $
(236)
937
36
1,009
17
897
41
Cost of sales consists of the direct costs associated with procuring parts from suppliers and delivering products to
customers. These costs include direct product costs, outbound freight and shipping costs, warehouse supplies and warranty
costs, partially offset by purchase discounts and cooperative advertising. Total freight and shipping expense included in cost of
sales for fiscal year 2016, 2015 and 2014 was $41,937, $41,250, and $40,428, respectively. Depreciation and amortization
expenses are excluded from cost of sales and included in marketing, general and administrative and fulfillment expenses.
Warranty Costs
The Company or the vendors supplying its products provide the Company’s customers limited warranties on certain
products that range from 30 days to lifetime. Historically, the Company’s vendors have been the party primarily responsible for
warranty claims. Standard product warranties sold separately by the Company are recorded as deferred revenue and recognized
ratably over the life of the warranty, ranging from one to five years. The Company also offers extended warranties that are
imbedded in the price of selected private label products sold. The product brands that include the extended warranty coverage
are offered at three different service levels: (a) a five year unlimited product replacement, (b) a five year one-time product
F- 11
replacement, and (c) a three year one-time product replacement. Warranty costs relating to merchandise sold under warranty not
covered by vendors are estimated and recorded as warranty obligations at the time of sale based on each product’s historical
return rate and historical warranty cost. The standard and extended warranty obligations are recorded as warranty liabilities and
included in other current liabilities in the consolidated balance sheets. For the fiscal year 2016 and 2015, the activity in the
aggregate warranty liabilities was as follows (in thousands):
Warranty liabilities, beginning of period
Adjustments to preexisting warranty liabilities
Additions to warranty liabilities
Reductions to warranty liabilities
Warranty liabilities, end of period
Marketing Expense
December 31, 2016
January 2, 2016
$
$
110
$
—
918
(139)
889
$
218
(109)
53
(52)
110
Marketing costs, including advertising, are expensed as incurred. The majority of advertising expense is paid to internet
search engine service providers and internet commerce facilitators. For fiscal year 2016, 2015 and 2014, the Company
recognized advertising costs of $22,616, $20,251 and $18,485, respectively. Marketing costs also include depreciation and
amortization expense and share-based compensation expense.
General and Administrative Expense
General and administrative expense consists primarily of administrative payroll and related expenses, merchant
processing fees, legal and professional fees and other administrative costs. General and administrative expense also includes
depreciation and amortization expense and share-based compensation expense.
Fulfillment Expense
Fulfillment expense consists primarily of payroll and related costs associated with warehouse employees and the
Company’s purchasing group, facilities rent, building maintenance, depreciation and other costs associated with inventory
management and wholesale operations. Fulfillment expense also includes share-based compensation expense.
Technology Expense
Technology expense consists primarily of payroll and related expenses of our information technology personnel, the cost
of hosting the Company’s servers, communications expenses and Internet connectivity costs, computer support and software
development amortization expense. Technology expense also includes share-based compensation expense.
Share-Based Compensation
The Company accounts for share-based compensation in accordance with ASC 718 - Compensation – Stock
Compensation (“ASC 718”). All share-based payment awards issued to employees are recognized as share-based compensation
expense in the financial statements based on their respective grant date fair values, and are recognized within the statement of
comprehensive income or loss as marketing, general and administrative, fulfillment or technology expense, based on employee
departmental classifications. Under this standard, compensation expense for both time-based and performance-based restricted
stock units is based on the closing stock price of our common shares on the date of grant, and is recognized on a straight-line
basis over the requisite service period. Compensation expense for performance-based awards is measured based on the amount
of shares ultimately expected to vest, estimated at each reporting date based on management’s expectations regarding the
relevant performance criteria. Compensation expense for stock options is based on the fair value estimated on the date of grant
using an option pricing model, and is recognized over the vesting period of three to four years. The Company currently uses the
Black-Scholes option pricing model to estimate the fair value of share-based payment awards for such stock options, which is
affected by the Company’s stock price and a number of assumptions, including expected volatility, expected life, risk-free
interest rate and expected dividends.
The Company incorporates its own historical volatility into the grant-date fair value calculations for the stock options.
The expected term of an award is based on combining historical exercise data with expected weighted time outstanding.
Expected weighted time outstanding is calculated by assuming the settlement of outstanding awards is at the midpoint between
the remaining weighted average vesting date and the expiration date. The risk-free interest rate assumption is based on
observed interest rates appropriate for the expected life of awards. The dividend yield assumption is based on the Company’s
F- 12
expectation of paying no dividends on its common stock. Forfeitures are estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures significantly differ from those estimates. The Company considers many factors when
estimating expected forfeitures, including employee class, economic environment, and historical experience.
The Company accounts for equity instruments issued in exchange for the receipt of services from non-employee directors
in accordance with the provisions of ASC 718. The Company accounts for equity instruments issued in exchange for the receipt
of goods or services from other than employees in accordance with ASC 505-50 - Equity-Based Payments to Non-Employees.
Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity
instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than
employee services is determined on the earlier of a performance commitment or completion of performance by the provider of
goods or services. Equity instruments awarded to non-employees are periodically re-measured as the underlying awards vest
unless the instruments are fully vested, immediately exercisable and non-forfeitable on the date of grant.
The Company accounts for modifications to its share-based payment awards in accordance with the provisions of ASC
718. Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value
of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors
at that date, and is recognized as compensation cost on the date of modification (for vested awards) or over the remaining
service (vesting) period (for unvested awards). Any unrecognized compensation cost remaining from the original award is
recognized over the vesting period of the modified award.
Other Income, net
Other income, net consists of miscellaneous income or expense such as gains/losses from disposition of assets, and
interest income comprised primarily of interest income on investments.
Interest Expense
Interest expense consists primarily of interest expense on our outstanding loan balance, deferred financing cost
amortization, and capital lease interest.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740 - Income Taxes (“ASC 740”). Under ASC 740,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between
the financial statement carrying amount of existing assets and liabilities and their respective tax bases. 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. When appropriate, a valuation allowance is established to reduce deferred
tax assets, which include tax credits and loss carry forwards, to the amount that is more likely than not to be realized. In making
such determination, the Company considers all available positive and negative evidence, including future reversals of existing
taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable
income in prior carryback years, tax planning strategies and recent financial operations.
The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions. The first step is to
evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not
that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to
measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The
Company considers many factors when evaluating and estimating our tax positions and tax benefits, which may require
periodic adjustments and which may not accurately forecast actual outcomes. As of December 31, 2016, the Company had no
material unrecognized tax benefits, interest or penalties related to federal and state income tax matters. The Company’s policy
is to record interest and penalties as income tax expense.
Taxes Collected from Customers and Remitted to Governmental Authorities
We present taxes collected from customers and remitted to governmental authorities on a net basis in accordance with the
guidance on ASC 605-45-50-3 - Taxes Collected from Customers and Remitted to Governmental Authorities.
Leases
The Company analyzes lease agreements for operating versus capital lease treatment in accordance with ASC 840 Leases.
Rent expense for leases designated as operating leases is expensed on a straight-line basis over the term of the lease. For capital
leases, the present value of future minimum lease payments at the inception of the lease is reflected as a capital lease asset and
F- 13
a capital lease payable in the consolidated balance sheets. Amounts due within one year are classified as current liabilities and
the remaining balance as non-current liabilities.
Foreign Currency Translation
For each of the Company’s foreign subsidiaries, the functional currency is its local currency. Assets and liabilities of
foreign operations are translated into U.S. dollars using the current exchange rates, and revenues and expenses are translated
into U.S. dollars using average exchange rates. The effects of the foreign currency translation adjustments are included as a
component of accumulated other comprehensive income or loss in the Company’s consolidated balance sheets.
Comprehensive Income
The Company reports comprehensive income or loss in accordance with ASC 220 - Comprehensive Income. Accumulated
other comprehensive income or loss, included in the Company’s consolidated balance sheets, includes foreign currency
translation adjustments related to the Company’s foreign operations, actuarial gains and losses on the Company's defined
benefit plan and unrealized holding gains and losses from available-for-sale marketable securities and investments. The
Company presents the components of net income or loss and other comprehensive income or loss in its consolidated statements
of comprehensive operations.
Segment Data
The Company operates in two reportable operating segments. The criteria we use to identify operating segments are
primarily the nature of the products we sell or services we provide and the consolidated operating results that are regularly
reviewed by our chief operating decision maker to assess performance and make operating decisions. We identified two
reportable operating segments, Base USAP, which is the core auto parts business, and AutoMD, an online automotive repair
source, in accordance with ASC 280 - Segment Reporting (“ASC 280”).
Recently Adopted Accounting Pronouncements
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, “Simplifying the Measurement of
Inventory,” (“ASU 2015-11”) which requires an entity to measure inventory at the lower of cost and net realizable value. Net
realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion,
disposal, and transportation. The new standard is effective for fiscal years beginning after December 15, 2016, and interim
periods within fiscal years beginning after December 15, 2017. The amendments in ASU 2015-11 should be applied
prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. This guidance was
adopted by us in the fourth quarter of 2016, and it did not have a material impact on our consolidated financial statements.
In November 2014, the FASB issued Accounting Standards Update No. 2014-16 "Determining Whether the Host
Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity". The objective of
this Update is to eliminate the use of different methods in practice and thereby reduce existing diversity under GAAP in the
accounting for hybrid financial instruments issued in the form of a share. The new standard is effective for fiscal years
beginning after December 15, 2015. Early adoption is permitted. The Company has adopted ASU 2014-16 and it did not have a
material impact on our financial statements.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No.
2016-09, “Compensation - Stock Compensation” (“ASU 2016-09”). The objective of this update is to simplify accounting
related to stock compensation. The new standard is effective for fiscal years beginning after December 15, 2016, and interim
periods within those annual periods. The Company is evaluating the financial impacts that ASU 2016-09 will
have on the consolidated financial statements and related disclosures, and it is not expected to have a material impact.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No.
2016-02, “Leases” (“ASU 2016-02”). The objective of this update is to increase transparency and comparability among
organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing
arrangements. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within
fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is evaluating the effect that ASU
2016-02 will have on the consolidated financial statements and related disclosures. The Company has not yet selected a
transition method, however, due to the limited nature of our lease activity, it is not expected to have a material impact.
F- 14
In May 2014, the FASB issued Accounting Standards Update No. 2014-9, “Revenue from Contracts with
Customers,” (“ASU 2014-9”) which requires an entity to recognize the amount of revenue to which it expects to be entitled for
the transfer of promised goods or services to customers. This guidance will replace most existing revenue recognition guidance
in U.S. GAAP when it becomes effective. The new standard is effective for fiscal years beginning after December 15, 2017.
Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition
method. The Company is evaluating the effect that ASU 2014-9 will have on the consolidated financial statements and related
disclosures. The Company has not yet selected a transition method nor has the effect of the standard on ongoing financial
reporting been determined, however, due to the nature of our revenue streams it is not expected to have a material impact.
Note 2 – Short-term investments
As of December 31, 2016, the Company held the following short-term investments, recorded at fair value:
Mutual funds (1)
Amortized
Cost
Unrealized
Gains
Losses
Fair Value
$
32
$
— $
(2) $
30
As of January 2, 2016, the Company held the following short-term investments, recorded at fair value:
Mutual funds (1)
Amortized
Cost
Unrealized
Gains
Losses
Fair Value
$
65
$
— $
— $
65
(1)
Mutual funds are classified as short-term investments available-for-sale and recorded at fair market value, based on
quoted prices of identical assets that are trading in active markets as of the end of the period for which the values are
determined.
Proceeds from the sale of available-for-sale securities are disclosed separately in the accompanying consolidated
statements of cash flow. For fiscal years 2016 and 2015, the Company recognized no realized gain or loss of from the sale of
mutual funds.
Note 3 – Fair Value Measurements
Fair value is defined as an exit price representing the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should
be determined based on assumptions that market participants would use in pricing an asset or liability.
Provisions of ASC 820 establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair
value. These tiers include:
Level 1 – Observable inputs such as quoted prices in active markets;
Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 – Unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own
assumptions.
We measure our financial assets and liabilities at fair value on a recurring basis using the following valuation techniques:
(a) Market Approach – uses prices and other relevant information generated by market transactions involving identical or
comparable assets or liabilities.
(b) Income Approach – uses valuation techniques to convert future estimated cash flows to a single present amount based on
current market expectations about those future amounts, using present value techniques.
Financial Assets Valued on a Recurring Basis
As of December 31, 2016 and January 2, 2016, the Company held certain assets that are required to be measured at fair
value on a recurring basis. These included the Company’s financial instruments, including cash and cash equivalents and short-
term investments. The following table represents our fair value hierarchy and the valuation techniques used for financial assets
measured at fair value on a recurring basis:
F- 15
December 31, 2016
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents (1)
Short-term investments – mutual funds(2)
$
$
6,643
30
6,673
$
$
6,643
30
6,673
$
$
— $
—
— $
January 2, 2016
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents (1)
Short-term investments – mutual funds (2)
$
$
5,537
65
5,602
$
$
5,537
65
5,602
$
$
— $
—
— $
Valuation
Techniques
(a)
(a)
Valuation
Techniques
(a)
(a)
—
—
—
—
—
—
(1)
(2)
Cash equivalents consist primarily of money market funds and short-term investments with original maturity dates of
three months or less at the date of purchase, for which the Company determines fair value through quoted market
prices.
Short-term investments consist of mutual funds, classified as available-for-sale and recorded at fair market value,
based on quoted prices of identical assets that are trading in active markets as of the end of the period for which the
values are determined.
During fiscal year 2016 and 2015, there were no transfers into or out of Level 1 and Level 2 assets.
Non-Financial Assets Valued on a Non-Recurring Basis
The Company’s long-lived assets, including intangible assets subject to amortization, are measured at fair value on a non-
recurring basis. These assets are measured at cost but are written-down to fair value, if necessary, as a result of impairment.
During the fourth quarter of fiscal 2016 the Company identified a triggering event related to AutoMD, which indicated certain
AutoMD long-lived assets may not be recoverable. As a result, the Company recorded an impairment loss on AutoMD
intangible assets of $1,130. The fair value measurements are categorized as Level 3 of the fair value hierarchy, as the Company
developed its own assumptions and analysis to determine if such assets were impaired.
Note 4 – Property and Equipment, Net
The Company’s fixed assets are stated at cost less accumulated depreciation, amortization and impairment. Depreciation
and amortization expense are provided for in amounts sufficient to relate the cost of depreciable and amortizable assets to
operations over their estimated service lives. Depreciation and amortization expense for fiscal year 2016, 2015 and 2014 was
$7,510, $7,510 and $8,923, respectively, which included amortization expense of $475 in each year for capital leased assets.
The cost and related accumulated depreciation of assets retired or otherwise disposed of are removed from the accounts and the
resultant gain or loss is reflected in earnings.
F- 16
Property and equipment consisted of the following at December 31, 2016 and January 2, 2016:
Land
Building
Machinery and equipment
Computer software (purchased and developed) and equipment
Vehicles
Leasehold improvements
Furniture and fixtures
Construction in process
Less accumulated depreciation and amortization
Property and equipment, net
December 31, 2016
January 2, 2016
$
630
$
8,877
12,368
26,717
98
1,007
1,030
1,539
52,266
(35,788)
16,478
$
$
630
8,877
12,334
27,083
136
1,474
1,039
1,588
53,161
(34,730)
18,431
On April 17, 2013, the Company’s wholly-owned subsidiary, Whitney Automotive Group, Inc. (“WAG”) entered into a
sales leaseback for its facility in LaSalle, Illinois, receiving $9,750 pursuant to a purchase and sale agreement dated April 17,
2013 between WAG and STORE Capital Acquisitions, LLC. The Company used the net proceeds of $9,507 from this sale to
reduce its revolving loan payable. Simultaneously with the execution of the purchase and sale agreement and the closing of the
sale of the property, the Company entered into a lease agreement with STORE Master Funding III, LLC (“STORE”) whereby
we leased back the property for our continued use as an office, retail and warehouse facility for storage, sale and distribution of
automotive parts, accessories and related items for 20 years, terminating on April 30, 2033. The related assets represent the
amounts included in land and building in the summary above. The Company’s initial base annual rent is $853 for the first year
(“Base Rent Amount”), after which the rental amount will increase annually on May 1 by the lesser of 1.5% or 1.25 times the
change in the Consumer Price Index as published by the U.S. Department of Labor’s Bureau of Labor Statistics, except that in
no event will the adjusted annual rental amount fall below the Base Rent Amount. We were not required to pay any security
deposit. Under the terms of the lease, we are required to pay all taxes associated with the lease, pay for any required
maintenance on the property, maintain certain levels of insurance and indemnify STORE for losses incurred that are related to
our use or occupancy of the property. The lease was accounted for as a capital lease and the $376 excess of the net proceeds
over the net carrying amount of the property is amortized in interest expense on a straight-line basis over the lease term of 20
years. As of December 31, 2016, the gross carrying value, the accumulated depreciation and the net carrying value of all capital
leased assets included in property and equipment were $11,306, $2,273 and $9,033, respectively. As of January 2, 2016, the
gross carrying value, the accumulated depreciation and the net carrying value of all capital leased assets included in property
and equipment were $11,543, $1,839 and $9,704, respectively.
Construction in process primarily relates to the Company’s internally developed software. Certain of the Company’s net
property and equipment were located in the Philippines as of December 31, 2016 and January 2, 2016, in the amount of $367
and $302, respectively.
Depreciation of property and equipment is provided using the straight-line method for financial reporting purposes, at
rates based on the following estimated useful lives:
Machinery and equipment
Computer software (purchased and developed)
Computer equipment
Vehicles
Leasehold improvements*
Furniture and fixtures
Facility subject to capital lease
*
The estimated useful life is the lesser of 3-5 years or the lease term, whichever is shorter.
F- 17
Years
2 - 5
2 - 3
2 - 5
3 - 5
3 - 5
3 - 7
20
Note 5 – Intangible Assets, Net
Intangible assets consisted of the following at December 31, 2016 and January 2, 2016:
December 31, 2016
January 2, 2016
Useful Life
Gross
Carrying
Amount
Accumulated
Amort. and
Impairment
Net
Carrying
Amount
Gross
Carrying
Amount
Accum.
Amort. and
Impairment
Net
Carrying
Amount
Intangible assets
subject to amortization:
Product design
intellectual property
Patent license
agreements
Domain and trade
names
Total
4 years
2,750
(2,620)
3 - 5 years
562
(368)
10 years
1,407
$
4,719
$
(762)
(3,750) $
130
194
645
969
2,750
(2,361)
562
(219)
389
343
1,407
$
4,719
$
(663)
(3,243) $
744
1,476
Intangible assets subject to amortization are amortized on a straight-line basis. Amortization expense relating to
intangibles totaled $507, $464 and $422 for fiscal year 2016, 2015 and 2014, respectively.
The following table summarizes the future estimated annual amortization expense for these assets over the next five years
and thereafter:
2017
2018
2019
2020
2021
Thereafter
Total
Note 6 – Borrowings
$
$
319
185
100
100
100
165
969
The Company maintains an asset-based revolving credit facility that provides for, among other things a revolving
commitment in an aggregate principal amount of up to $30,000, which is subject to a borrowing base derived from certain
receivables, inventory and property and equipment. At December 31, 2016, our outstanding revolving loan balance was $0.
The customary events of default under the credit facility (discussed below) include certain subjective acceleration clauses,
which management has determined the likelihood of such acceleration is more than remote, considering the recurring losses
experienced by the Company, therefore a current classification of our revolving loan payable was required.
On November 15, 2016, the Company and JPMorgan Chase Bank, N.A. (“JPMorgan”) entered into the Tenth
Amendment to Credit Agreement and Third Amendment to Pledge and Security Agreement (the “Amendment”), which
amended the Credit Agreement previously entered into by the Company, certain of its domestic subsidiaries and JPMorgan on
April 26, 2012 (as amended, the “Credit Agreement”) and the Pledge and Security Agreement previously entered into by the
Company, certain of its domestic subsidiaries and JPMorgan on April 26, 2012. Pursuant to the Amendment, letters of credit
can be issued if after giving effect to such issuance, the letters of credit exposure shall not exceed $20,000, which was an
increase from the previously agreed upon $15,000. As of December 31, 2016, our outstanding letters of credit balance was
$11,658.
The following amendments to the Credit Agreement and Security Agreement were also made under the Tenth
Amendment:
• The aggregate additional principal amount of indebtedness that is permitted related to capital leases was increased
from $2,000 to $3,500.
F- 18
• The Company’s letters of credit exposure was increased from $15,000 to $20,000.
• Under the terms of the Security Agreement, cash receipts are deposited into a lock-box, which are at the Company’s
discretion unless the “cash dominion period” is in effect, during which cash receipts will be used to reduce amounts
owing under the Credit Agreement. The cash dominion period is triggered in an event of default or if excess availability
is less than the $3,600 for three consecutive business days, and will continue until, during the preceding 60 consecutive
days, no event of default existed and excess availability has been greater than $3,600 at all times (with the trigger subject
to adjustment based on the Company’s revolving commitment).
• The Company’s required excess availability related to the “Covenant Testing Trigger Period” (as defined under the
Credit Agreement) under the revolving commitment under the Credit Agreement is less than $2,400 for the period
commencing on any day that excess availability is less than $2,400 for three consecutive business days, and continuing
until excess availability has been greater than or equal to $2,400 at all times for 45 consecutive days (with the trigger
subject to adjustment based on the Company’s revolving commitment).
• The trigger, requiring the Company to provide certain reports under the Credit Agreement, relating to excess
availability under the revolving commitment under the Credit Agreement is less than $3,600 for the period commencing
on any day that excess availability is less than $3,600 for three consecutive business days, and continuing until excess
availability has been greater than or equal to $3,600 at all times for 45 consecutive days (with the trigger subject to
adjustment based on the Company’s revolving commitment).
Loans drawn under the credit facility bear interest at a per annum rate equal to either (a) LIBOR plus an applicable
margin of 1.25%, or (b) a “base rate” subject to an increase or reduction by up to 0.25% per annum based on the Company's
fixed charge coverage ratio. At December 31, 2016, the Company’s LIBOR based interest rate was 2.06% (on $0 principal) and
the Company’s prime based rate was 3.50% (on $0 principal). A commitment fee, based upon undrawn availability under the
Credit Facility bearing interest at a rate of 0.25% per annum, is payable monthly.
Certain of the Company’s domestic subsidiaries are co-borrowers (together with the Company, the “Borrowers”) under
the Credit Agreement, and certain other domestic subsidiaries are guarantors (the “Guarantors” and, together with the
Borrowers, the “Loan Parties”) under the Credit Agreement. The Borrowers and the Guarantors are jointly and severally liable
for the Borrowers’ obligations under the Credit Agreement. The Loan Parties’ obligations under the Credit Agreement are
secured, subject to customary permitted liens and certain exclusions, by a perfected security interest in (a) all tangible and
intangible assets and (b) all of the capital stock owned by the Loan Parties (limited, in the case of foreign subsidiaries, to 65%
of the capital stock of such foreign subsidiaries). The Borrowers may voluntarily prepay the loans at any time. The Borrowers
are required to make mandatory prepayments of the loans (without payment of a premium) with net cash proceeds received
upon the occurrence of certain “prepayment events,” which include certain sales or other dispositions of collateral, certain
casualty or condemnation events, certain equity issuances or capital contributions, and the incurrence of certain debt.
The Credit Agreement contains customary representations and warranties and customary affirmative and negative
covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens,
fundamental changes, investments, dispositions, prepayment of other indebtedness, mergers, and dividends and other
distributions.
Events of default under the Credit Agreement include: failure to timely make payments due under the Credit Agreement;
material misrepresentations or misstatements under the Credit Agreement and other related agreements; failure to comply with
covenants under the Credit Agreement and other related agreements; certain defaults in respect of other material indebtedness;
insolvency or other related events; certain defaulted judgments; certain ERISA-related events; certain security interests or liens
under the loan documents cease to be, or are challenged by the Company or any of its subsidiaries as not being, in full force
and effect; any loan document or any material provision of the same ceases to be in full force and effect; and certain criminal
indictments or convictions of any Loan Party.
As of December 31, 2016, the Company had capital leases payable of $10,312. The present value of the net minimum
payments on capital leases as of December 31, 2016 is as follows:
Total minimum lease payments
Less amount representing interest
Present value of net minimum lease payments
Current portion of capital leases payable
Capital leases payable, net of current portion
F- 19
$
$
$
17,947
(7,635)
10,312
(542)
9,770
Note 7 – Stockholders’ Equity and Share-Based Compensation
Non-Controlling Interest
Non-controlling interests represent equity interests in consolidated subsidiaries that are not attributable, either directly or
indirectly, to the Company (i.e., minority interests). Non-controlling interests include the minority equity holders' proportionate
share of the equity of AutoMD. As of March 6, 2017, all of the non-controlling interests of AutoMD were repurchased by the
Company.
Ownership interests in subsidiaries held by parties other than the Company are presented as non-controlling interests
within stockholders' equity, separately from the equity held by the Company. Revenues, expenses, net loss and other
comprehensive income are reported in the consolidated financial statements at the consolidated amounts, which includes
amounts attributable to both the Company's interest and the non-controlling interests in AutoMD. Net loss and other
comprehensive income is then attributed to the Company's interest and the non-controlling interests. Net loss to non-controlling
interests is deducted from net loss in the consolidated statements of comprehensive operations to determine net loss attributable
to the Company's common stockholders.
The table below presents the changes in the Company's ownership interest in AutoMD on the Company's equity as of the
dates indicated:
December 31, 2016
Fiscal Year Ended
January 2, 2016
January 3, 2015
Net income (loss) attributable to U.S. Auto Parts
stockholders'
Transfers (to) from the noncontrolling interest:
Increase in U.S. Auto Parts paid-in-capital from sale
of AutoMD common stock
Changes from net income (loss) attributable to U.S. Auto
Parts stockholders' and transfers to noncontrolling interest
$
$
Common Stock
731
$
(1,281) $
(6,879)
—
—
2,512
731
$
(1,281) $
(4,367)
The Company has 100,000 shares of common stock authorized. We have never paid cash dividends on our common
stock. The following issuances of common stock were made during the fiscal year ended December 31, 2016:
•
•
•
•
•
The Company issued 442 shares of common stock from option exercises under its various share-based
compensation plans.
The Company issued 439 shares of common stock from restricted stock units that vested during the period.
The Company issued 10 shares of common stock for advisory services previously provided by a consultant.
37 shares of common stock were issued as stock dividends on the Series A Preferred.
The Company issued 3 shares of common stock to one non-employee member of the Board of Directors for
service fees earned during the period.
Treasury Stock
On November 15, 2016, our Board of Directors approved a share repurchase program which authorizes the Company to
purchase up to $5,000 of its outstanding shares of common stock. Purchases under the Company’s repurchase program may be
made from time to time in the open market, in negotiated transactions off the market, or in such other manner as determined by
the Company, including through plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
The share repurchase program will expire on March 4, 2017, unless extended or shortened by the Board of Directors.
As of December 31, 2016, the Company repurchased 445 shares of common stock at an average price of $3.09, for an
aggregate purchase price of approximately $1,376, net of costs.
Series A Convertible Preferred Stock
On March 25, 2013, the Company authorized the issuance of 4,150 shares of Series A Preferred and entered into a
Securities Purchase Agreement pursuant to which the Company agreed to sell up to an aggregate of 4,150 shares of our Series
A Preferred, $0.001 par value per share at a purchase price per share of $1.45 for aggregate proceeds to the Company of
approximately $6,017. On March 25, 2013, we sold 4,000 shares of Series A Preferred for aggregate proceeds of $5,800. On
April 5, 2013, we sold the remaining 150 shares of Series A Preferred for aggregate proceeds of $217. The Company incurred
issuance costs of $847 and used the net proceeds from the sale of the Series A Preferred to reduce its revolving loan payable.
F- 20
Each share of Series A Preferred is convertible into shares of our common stock at the initial conversion rate of one share
of common stock for each share of Series A Preferred. The conversion will be adjusted for certain non-price based events, such
as dividends and distributions on the common stock, stock splits, combinations, recapitalizations, reclassifications, mergers, or
consolidations. If not previously converted by the holder, the Series A Preferred will automatically convert to common stock if
the volume weighted average price for the common stock for any 30 consecutive trading days is equal to or exceeds $4.35 per
share. The shares that would be issued if the contingently convertible Series A Preferred were converted are not excluded from
the calculation of diluted earnings per share for the fiscal year ended December 31, 2016 (refer to “Note 8 – Net Loss Per
Share” for anti-dilutive securities).
In the event of any liquidation event, which includes changes of control of the Company and sales or other dispositions
by the Company of more than 50% of its assets, the Series A Preferred is entitled to receive, prior and in preference to any
distribution to the common stock, an amount per share equal to $1.45 per share of Series A Preferred, plus all then accrued but
unpaid dividends on such Series A Preferred. Following this distribution, if assets or surplus funds remain, the holders of the
common stock shall share ratably in all remaining assets of the Company, based on the number of shares of common stock then
outstanding. Notwithstanding the foregoing, if, in connection with any liquidation event, a holder of Series A Preferred would
receive an amount greater than $1.45 per share of Series A Preferred by converting such shares held by such holder into shares
of common stock, then such holder shall be treated as though such holder had converted such shares of Series A Preferred into
shares of common stock immediately prior to such liquidation event, whether or not such holder had elected to so convert.
Dividends on the Series A Preferred are payable quarterly at a rate of $0.058 per share per annum in cash, in shares of
common stock or in any combination of cash and common stock as determined by the Company’s Board of Directors. Certain
conditions are required to be satisfied in order for the Company to pay dividends on the Series A Preferred in shares of common
stock, including (i) the common stock being registered pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934,
as amended, (ii) the common stock being issued having been approved for listing on a trading market and (iii) the common
stock being issued either being covered by an effective registration statement or being freely tradable without restriction under
Rule 144 (subject to certain exceptions). The Series A Preferred shall each be entitled to one vote per share for each share of
common stock issuable upon conversion thereof (excluding from any such calculation any dividends accrued on such shares)
and shall vote together with the holders of common stock as a single class on any matter on which the holders of common stock
are entitled to vote. In addition, the Company must obtain the consent of holders of at least a majority of the then outstanding
Series A Preferred in connection with (a) any amendment, alteration or repeal of any provision of the certificate of
incorporation or bylaws of the Company as to adversely affect the preferences, rights or voting power of the Series A Preferred,
or (b) the creation, authorization or issuance of any additional Series A Preferred or any other class or series of capital stock of
the Company ranking senior to or on parity with the Series A Preferred or any security convertible into, or exchangeable or
exercisable for Series A Preferred or any other class or series of capital stock of the Company ranking senior to or on parity
with the Series A Preferred. Concurrent with the Company’s issuance of Series A Preferred, the Company, certain of its
domestic subsidiaries and JPMorgan entered into a Second Amended Credit Agreement to allow the Company to pay cash
dividends on the Series A Preferred in an aggregate amount of up to $400 per year and pay cash in lieu of issuing fractional
shares upon conversion of or in payment of dividends on the Series A Preferred (refer to “Note 6 – Borrowings” of our Notes
to Consolidated Financial Statements for additional details). For the fiscal year ended January 3, 2015, the Company recorded
dividends of $240. The Company issued 83 shares of common stock in payment of the fiscal 2014 dividends. There were no
accrued dividends outstanding as of January 3, 2015. For the fiscal year ended January 2, 2016, the Company recorded
dividends of $241. The Company issued 103 shares of common stock in payment of the fiscal 2015 dividends. There were no
accrued dividends outstanding as of January 2, 2016. For the fiscal year ended December 31, 2016, the Company recorded
dividends of $241. The Company issued 37 shares of common stock in payment of the fiscal 2016 dividends. There were $61
dividends accrued as of December 31, 2016.
Share-Based Compensation Plan Information
The Company adopted the 2016 Equity Incentive Plan ("2016 Equity Plan") on March 9, 2016, which became effective
on May 31, 2016, following stockholder approval. Subject to adjustment for certain changes in the Company’s capitalization,
the aggregate number of shares of the Company’s common stock that may be issued under the 2016 Equity Plan will not exceed
the sum of (i) two million five hundred thousand (2,500) new shares, (ii) the number of unallocated shares remaining available
for the grant of new awards under the Company’s prior equity plans described below (the “Prior Equity Plans”) as of the
effective date of the 2016 Plan (which was equal to 3,894 shares as of May 31, 2016) and (iii) any shares subject to a stock
award under the Prior Equity Plans that are not issued because such stock award expires or otherwise terminates without all of
the shares covered by such stock award having been issued, that are not issued because such stock award is settled in cash, that
are forfeited back to or repurchased by the Company because of the failure to meet a contingency or condition required for the
vesting of such shares, or that are reacquired, withheld (or not issued) to satisfy a tax withholding obligation in connection with
an award or to satisfy the purchase price or exercise price of a stock award. In addition, the share reserve will automatically
F- 21
increase on January 1st of each year, for a period of nine years, commencing on January 1, 2017 and ending on (and including)
January 1, 2026, in an amount equal to one million five hundred thousand (1,500) shares per year; however the Board of
Directors of the Company may act prior to January 1st of a given year to provide that there will be no January 1st increase in
the share reserve for such year or that the increase in the share reserve for such year will be a lesser number of shares of
common stock than would otherwise occur pursuant the automatic increase. Options granted under the 2016 Equity Plan
generally expire no later than ten years from the date of grant and generally vest over a period of four years. The exercise price
of all option grants must be equal to 100% of the fair market value on the date of grant. As of December 31, 2016, 6,307 shares
were available for future grants under the 2016 Equity Plan.
The Company adopted the 2007 Omnibus Incentive Plan (the “2007 Omnibus Plan”) in January 2007, which became
effective on February 8, 2007, the effective date of the registration statement filed in connection with the Company’s initial
public offering. Under the 2007 Omnibus Plan, the Company was previously authorized to issue 2,400 shares of common stock,
under various instruments to eligible employees and non-employees of the Company, plus an automatic annual increase on the
first day of each of the Company’s fiscal years beginning on January 1, 2008 and ending on January 1, 2017 equal to (i) the
lesser of (A) 1,500 shares of common stock or (B) five percent (5)% of the number of shares of common stock outstanding on
the last day of the immediately preceding fiscal year or (ii) such lesser number of shares of common stock as determined by the
Company’s Board of Directors. Options granted under the 2007 Omnibus Plan generally expire no later than ten years from the
date of grant and generally vest over a period of four years. The exercise price of all option grants must be equal to 100% of the
fair market value on the date of grant. The 2007 Omnibus Plan also allows for the grant of options to purchase common stock
and common stock awards to non-employee directors. As of December 31, 2016, 0 shares were available for future grants
under the 2007 Omnibus Plan.
The Company adopted the 2007 New Employee Incentive Plan (the “2007 New Employee Plan”) in October 2007. Under
the 2007 New Employee Plan, the Company was authorized to issue 2,000 shares of common stock under various instruments
solely to new employees. Options granted under the 2007 New Employee Plan generally expire no later than ten years from the
date of grant and generally vest over a period of four years. The exercise price of all option grants must not be less than 100%
of the fair market value on the date of grant. As of December 31, 2016, 0 shares were available for future grants under the 2007
New Employee Plan.
The Company adopted the U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan (the “2006 Plan”) in March 2006.
All stock options to purchase common stock granted to employees in 2006 were granted under the 2006 Plan and had exercise
prices equal to the fair value of the underlying stock, as determined by the Company’s Board of Directors on the applicable
option grant date. After fiscal year 2008, no shares have been available for future grants under the 2006 Plan.
The following tables summarizes the Company’s stock option activity for the fiscal years ended, and details regarding the
options outstanding and exercisable at December 31, 2016, and January 2, 2016:
Weighted
Average
Exercise Price
Weighted Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic Value
(1)
Shares
Options outstanding, January 2, 2016
Granted
Exercised
Cancelled:
Forfeited
Expired
Options outstanding, December 31, 2016
Vested and expected to vest at December 31, 2016
Options exercisable, December 31, 2016
5,841
$
1,000
$
(442) $
(149) $
(122) $
$
6,128
5,658
4,220
$
$
2.80
3.03
2.06
2.47
7.66
2.81
2.82
2.92
5.74
5.49
4.49
$
$
$
6,561
6,111
4,618
F- 22
Weighted
Average
Exercise Price
Weighted Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic Value
(1)
Shares
Options outstanding, January 3, 2015
Granted
Exercised
Cancelled:
Forfeited
Expired
Options outstanding, January 2, 2016
Vested and expected to vest at January 2, 2016
Options exercisable, January 2, 2016
5,281
$
1,315
$
(301) $
(256) $
(198) $
$
5,841
5,285
3,735
$
$
2.85
2.24
1.45
2.06
3.31
2.80
2.88
3.21
6.03
5.74
4.54
$
$
$
4,333
3,853
2,479
(1)
These amounts represent the difference between the exercise price and the closing price of U.S. Auto Parts Network,
Inc. common stock on December 31, 2016 as reported on the NASDAQ Stock Market, for all options outstanding that
have an exercise price currently below the closing price.
The weighted-average fair value of options granted during fiscal year 2016, 2015 and 2014 was $1.65, $1.19 and $1.34,
respectively. The intrinsic value of stock options at the date of the exercise is the difference between the fair value of the stock
at the date of exercise and the exercise price. During fiscal year 2016, 2015 and 2014, the total intrinsic value of the exercised
options was $599, $346 and $153, respectively. The Company had $1,344 of unrecognized share-based compensation expense
related to stock options outstanding as of December 31, 2016, which expense is expected to be recognized over a weighted-
average period of 2.34 years.
The following tables summarize the Company’s stock option activity under the AutoMD 2014 Equity Incentive Plan (the
"AMD Plan") for the fiscal years ended, and details regarding the options outstanding and exercisable at December 31, 2016
and January 2, 2016:
Weighted
Average
Exercise Price
Weighted Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic Value
Shares
Options outstanding, January 2, 2016
Granted
Exercised
Cancelled:
Forfeited
Expired
Options outstanding, December 31, 2016
Vested and expected to vest at December 31, 2016
Options exercisable, December 31, 2016
1,430
10
$
$
— $
(35) $
— $
$
1,405
1,044
632
$
$
1.00
1.00
—
1.00
—
1.00
1.00
1.00
8.20
8.19
8.14
F- 23
Weighted
Average
Exercise Price
Weighted Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic Value
Shares
Options outstanding, January 3, 2015
Granted
Exercised
Cancelled:
Forfeited
Expired
Options outstanding, January 2, 2016
Vested and expected to vest at January 2, 2016
Options exercisable, January 2, 2016
180
1,250
$
$
— $
— $
— $
1,430
1,061
49
$
$
$
1.00
1.00
—
—
—
1.00
1.00
1.00
9.19
9.19
8.92
$
$
$
—
—
—
At December 31, 2016 520 shares were available for future grants under the AMD Plan.
The weighted-average fair value of options granted during fiscal year 2016, 2015 and 2014 was $0.55, $0.55 and $0.56,
respectively. The intrinsic value of stock options at the date of the exercise is the difference between the fair value of the stock
at the date of exercise and the exercise price. The Company had $224 of unrecognized share-based compensation expense
related to stock options outstanding as of December 31, 2016, which expense is expected to be recognized over a weighted-
average period of 2.20 years.
Options exercised under all share-based compensation plans are granted net of the minimum statutory withholding
requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. For those employees who
elect not to receive shares net of the minimum statutory withholding requirements, the appropriate taxes are paid directly by the
employee. During fiscal 2016, we withheld 0 shares to satisfy $0 of employees' tax obligations and 0 shares related to the net
settlement of the stock options. During fiscal 2015, we withheld 27 shares to satisfy $80 of employees' tax obligations and 112
shares related to the net settlement of the stock options.
Restricted Stock Units
During 2016 and 2015 the Company granted an aggregate of 954 and 435 RSUs, respectively, to certain employees of the
Company. The RSUs were granted under the 2007 Omnibus Plan, and reduced the pool of equity instruments available under
that plan.
During 2016 there were 382 RSUs granted that were time-based and 572 were performance-based. All of the RSUs
granted during 2015 were time-based. As of March 3, 2017, 525 of the performance-based RSUs met the maximum
performance criteria upon certification by the Compensation Committee and 47 PSUs were forfeited. Of the RSUs granted
during 2015, 348 vested, 30 remain unvested, and 57 were forfeited during 2016. The vesting of each RSU is subject to the
employee’s continued employment through applicable vesting dates. Some RSUs granted to certain executives may vest on an
accelerated basis in part or in full upon the occurrence of certain events. The RSUs are accounted for as equity awards and are
measured at fair value based upon the grant date price of the Company's common stock. The closing price of the Company's
common stock on January 21, 2016 and February 29, 2016, the date of each grant was $2.64 and $2.75, respectively. The
closing price of the Company's common stock on January 29, 2015, March 23, 2015, May 20, 2015, June 23, 2015 and July 28,
2015, the date of each grant, was $2.29, $2.18, $2.33, $2.23, and $2.18 per share, respectively. Compensation expense is
recognized on a straight-line basis over the requisite service period of one-to-three years. Compensation expense for
performance-based awards is measured based on the amount of shares ultimately expected to vest, estimated at each reporting
date based on management’s expectations regarding the relevant performance criteria.
For the fiscal year ended December 31, 2016, we recorded compensation expense of $1,626 related to RSU's. As
of December 31, 2016, there was unrecognized compensation expense of $600 related to unvested RSUs based on awards that
are expected to vest. The unrecognized compensation expense is expected to be recognized over a weighted-average period
of 0.63 years.
Stock Option Exchange Program
F- 24
On July 9, 2013, the Company’s stockholders approved a proposed stock option exchange program for the exchange of
certain outstanding stock options held by eligible employees for new options to purchase fewer shares. On August 12, 2013, the
Company commenced an offering to eligible employees to voluntarily exchange certain vested and unvested stock options with
exercise prices above $4.00 per share at an exchange ratio of 3.5 to 1 to be granted following the expiration of the tender offer
with exercise prices equal to the fair market value of one share of the Company’s common stock on the day the new options
were issued. Stock options to purchase an aggregate of 3,733 shares with exercise prices ranging from $4.01 to $11.68 were
eligible for tender at the commencement of the program. The Company’s non-employee directors were not eligible to
participate in the program. The terms and conditions of the new options are subject to an entirely new four year vesting
schedule where 25% will vest on the first anniversary, and the remaining 75% will vest monthly over the following 36 months.
All new options have a ten year contractual term. The offer period for the stock option exchange ended on September 9, 2013.
There were no modifications or exchanges to share based payment awards in fiscal 2015 or 2016.
On September 10, 2013, the Company accepted for exchange 3,475 eligible options to purchase common stock, with a
weighted average exercise price of $6.65 for 45 eligible employees, and issued 993 unvested options to purchase shares of the
Company’s common stock with an exercise price of $0.9866, the closing price of the Company’s common stock on that day.
Using the Black-Scholes option pricing model, the Company determined that the fair value of the surrendered stock options on
a grant-by-grant basis was lower than the fair value of the new stock options, as of the date of the exchange, resulting in
incremental fair value of $422. The incremental fair value as a result of the stock option exchange and the remaining
compensation expense associated with the surrendered stock options will be recorded as compensation expense over the four
year vesting period of the new options.
The fair value of the surrendered stock options and the new stock options was estimated on the date of the exchange
using the Black-Scholes option pricing model with the following assumptions:
Expected life
Risk-free interest rate
Expected volatility
Expected dividend yield
Warrants
Surrendered
Stock Options
New
Stock Options
1.93 – 6.87 years
5.84 years
0.5% – 2.4%
55% – 73%
—%
2.0%
72%
—%
On May 5, 2009, the Company issued warrants to purchase up to 30 shares of common stock at an exercise price of $2.14
per share. On April 27, 2010, the Company issued additional warrants to purchase up to 20 shares of common stock at an
exercise price of $8.32 per share. Both issuances of warrants terminate seven years after their grant date. The warrants were
issued in connection with the financial advisory services provided by a consultant to the Company. On August 8, 2016 10
shares of common stock were issued in settlement of the May 5, 2009 warrants. As of December 31, 2016, warrants to purchase
20 shares of common stock were outstanding and exercisable. The aggregate intrinsic value of outstanding and exercisable
warrants was $0 as of December 31, 2016, which was calculated as the difference between the exercise price of underlying
awards and the closing price of the Company’s common stock for warrants that were in-the-money. No warrants share-based
compensation expense was recognized during the fiscal years 2016, 2015 and 2014. The Company had no unrecognized share-
based compensation expense related to warrants outstanding as of December 31, 2016.
Share-Based Compensation Expense
The fair value of each option grant, excluding those options issued from the stock option exchange program as discussed
above, was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for
each of the periods ended:
Expected life
Risk-free interest rate
Expected volatility
Expected dividend yield
December 31, 2016
5.57 - 5.61 years
1% - 2%
60% - 61%
—%
Fiscal Year Ended
January 2, 2016
5.34 - 5.52 years
1% - 2%
59% - 60%
—%
January 3, 2015
5.30 - 5.37 years
2% - 2%
62% - 68%
—%
F- 25
Share-based compensation from options and RSUs, is included in our consolidated statements of comprehensive
operations, as follows:
Marketing expense
General and administrative expense
Fulfillment expense
Technology expense
Total share-based compensation expense
December 31, 2016
January 2, 2016
January 3, 2015
Fiscal Year Ended
$
$
433
$
518
$
2,111
450
137
1,614
241
46
3,131
$
2,419
$
540
1,476
220
135
2,371
The share-based compensation expense is net of amounts capitalized to internally-developed software of $83, $146 and
$196 during the fiscal year 2016, 2015, and 2014, respectively. No tax benefit was recognized for fiscal years 2016, 2015, and
2014 due to the valuation allowance position.
Under ASC 718, forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures significantly differ from those estimates. The Company’s estimated forfeiture rates are calculated based on actual
historical forfeitures experienced under our equity plans. The Company's forfeiture rates were 10%-34% for fiscal years 2016,
2015, and 2014.
Note 8 – Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share:
Net income (loss) per share:
Numerator:
Net income (loss) attributable to U.S. Auto Parts
Dividends on Series A Convertible Preferred Stock
Net income (loss) available to common shares
Denominator:
Weighted-average common shares outstanding (basic)
Common equivalent shares from common stock options,
preferred stock and warrants
Weighted-average common shares outstanding (diluted)
Basic net income (loss) per share
Diluted net income (loss) per share
December 31, 2016
January 2, 2016
January 3, 2015
Fiscal Year Ended
$
$
$
$
731
(241)
490
$
$
(1,281) $
(241)
(1,522) $
34,765
1,442
36,207
33,946
—
33,946
0.01
0.01
$
$
(0.04) $
(0.04) $
(6,879)
(240)
(7,119)
33,489
—
33,489
(0.21)
(0.21)
The anti-dilutive securities, which are excluded from the calculation of diluted earnings per share due to the Company’s
net loss position for the periods then ended (including securities that would otherwise be excluded from the calculation of
diluted earnings per share due the Company’s stock price), are as follows (in thousands):
Common stock warrants
Series A Convertible Preferred Stock
Options to purchase common stock
Restricted Stock Units
Total
Note 9 – Income Taxes
F- 26
December 31, 2016
January 2, 2016
January 3, 2015
Fiscal Year
20
4,150
2,142
—
6,312
50
4,150
5,941
839
10,980
50
4,150
5,467
796
10,463
The components of loss before income tax provision consist of the following:
Domestic operations
Foreign operations
Total loss before income taxes
Fiscal Year Ended
December 31, 2016
January 2, 2016
January 3, 2015
$
$
(1,305) $
503
(802) $
(3,718) $
483
(3,235) $
(7,424)
476
(6,948)
Income tax (benefit) provision for fiscal year 2016, 2015 and 2014 consists of the following:
December 31, 2016
January 2, 2016
January 3, 2015
Fiscal Year Ended
Current:
Federal tax
State tax
Foreign tax
Total current taxes
Deferred:
Federal tax
State tax
Foreign tax
Total deferred taxes
Valuation allowance
$
— $
— $
7
162
169
(331)
(616)
—
(947)
579
(199) $
7
88
95
(1,887)
591
61
(1,235)
329
(811) $
—
(15)
78
63
(2,232)
(125)
74
(2,283)
2,358
138
Income tax (benefit) provision
$
Income tax (benefit) provision differs from the amount that would result from applying the federal statutory rate
as follows:
Income tax at U.S. federal statutory rate
Share-based compensation
State income tax, net of federal tax effect
Foreign tax
Basis difference in subsidiary equity
Other
Change in valuation allowance
Effective tax (benefit) provision
December 31, 2016
January 2, 2016
January 3, 2015
$
$
(273) $
316
(559)
20
(267)
(15)
579
(199) $
(1,100) $
50
672
(18)
(820)
76
329
(811) $
(2,362)
33
(143)
117
—
127
2,366
138
For fiscal year 2016, 2015 and 2014, the effective tax rate for the Company was 24.8%, 25.1% and (2.0)%, respectively.
The Company’s effective tax rate for fiscal years 2016 and 2015 differs from the U.S. federal rate primarily as a result of the
recording of the basis difference in the Company’s subsidiary and the recording of valuation allowances against the Company’s
deferred tax assets. The Company’s effective tax rate for fiscal year 2014 differs from the U.S. federal rate primarily as a result
of the recording of valuation allowances against the Company’s deferred tax assets.
F- 27
Deferred tax assets and deferred tax liabilities consisted of the following:
Deferred tax assets:
Inventory and inventory related allowance
Share-based compensation
Amortization
Sales and bad debt allowances
Vacation accrual
Book over tax amortization
Net operating loss and AMT credit carry-forwards
Other
Total deferred tax assets
Valuation Allowance
Net deferred tax assets
Deferred tax liabilities:
Investment in subsidiary
Tax over book depreciation
Foreign tax withholdings
Prepaid catalog expenses
Total deferred tax liabilities
Net deferred tax liabilities
December 31,
2016
January 2, 2016
$
839
$
5,083
7,636
749
224
—
33,026
800
48,357
(46,775)
1,582
—
1,518
—
64
1,582
$
— $
976
4,924
9,244
443
220
31
30,254
843
46,935
(46,196)
739
368
639
470
100
1,577
(838)
At December 31, 2016, federal and state net operating loss (“NOL”) carryforwards were $75,261 and $83,027,
respectively. Federal NOL carryforwards of $2,690 were acquired in the acquisition of WAG which are subject to Internal
Revenue Code section 382 and limited to an annual usage limitation of $135. Federal NOL carryforwards begin to expire in
2029, while state NOL carryforwards begin to expire in 2017. The state NOL carryforwards expire in the respective tax years as
follows:
2017
2018
2019
2020
2021
Thereafter
$
$
6,930
1,132
7,646
2,121
4,050
61,148
83,027
On October 8, 2014, AutoMD sold seven million shares of its common stock to third-party investors, reducing the
Company’s ownership interest in AutoMD to 64.1%. As a result, AutoMD was excluded from the consolidated state and federal
tax filings of the Company for fiscal year 2016. As a result of the investment a deferred tax liability of $1,335 was created
which reduced the increase in additional paid-in-capital which was created as a result of the investment. At December 31, 2016,
AutoMD had net operating loss carryforwards (NOLs) of approximately $7,506 for federal tax purposes that begin to expire in
2031. AutoMD state NOLs were not material as of December 31, 2016.
Under the provisions of ASC 740, management is required to evaluate whether a valuation allowance should be
established against its deferred tax assets based on the consideration of all available evidence using a “more likely than not”
standard. Realization of deferred tax assets is dependent upon taxable income in prior carryback years, estimates of future
taxable income, tax planning strategies, and reversal of existing taxable temporary differences. ASC 740 provides that forming
a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in
recent years or losses expected in early future years. Based on this evaluation, as of December 31, 2016, a valuation allowance
of $46,775 has been recorded against our deferred tax assets.
F- 28
We are subject to U.S. federal income tax as well as income tax of foreign and state tax jurisdictions. During fiscal 2010,
the Company was audited by the Internal Revenue Service for the year ended December 31, 2008. The audit was concluded
with no change. The tax years 2012-2015 remain open to examination by the major taxing jurisdictions to which the Company
is subject, except the Internal Revenue Service for which the tax years 2013-2015 remain open. The Company does not
anticipate a significant change to the amount of unrecognized tax benefits within the next twelve months.
Included in accrued expenses are income taxes payable of $35 and $12 for the fiscal year 2016 and 2015 respectively,
consisting primarily of current foreign taxes. Included in other non-current liabilities are income taxes payable of $525, $470
and $409 for the fiscal year 2016, 2015 and 2014 respectively relating to future foreign withholding taxes.
Note 10 – Commitments and Contingencies
Facilities Leases
The Company’s corporate headquarters is located in Carson, California. The Company’s corporate headquarters has a
lease term through October 2020, which was renewed in June 2016. The Company also leases warehouse space in LaSalle,
Illinois and in Chesapeake, Virginia. The Company’s Philippines subsidiary leases office space under an agreement through
April 2020.
Facility rent expense for fiscal year ended 2016, 2015 and 2014 was $1,670, $1,555 and $1,895, respectively. The
Company’s facility rent expense did not include any amounts charged from a related party during fiscal years 2016 and 2015,
and was inclusive of amounts charged from a related party of $378 for fiscal 2014.
On February 4, 2016, the Company entered into a new lease for its distribution center located in Chesapeake, Virginia.
The Lease between the Company and Liberty Property Limited Partnership is for approximately 159,294 square feet. The
initial three-year term of the Lease commenced on July 1, 2016. The Company is obligated to pay approximately $640 in
annual base rent, which shall increase by approximately 2.5% each year. The Company is also obligated to pay certain
operating expenses set forth in the Lease. Pursuant to the Lease, the Company has the option to extend the Lease for an
additional three-year term, with certain increases in base rent. The monthly base rent commitment was $53 as of December 31,
2016.
In January 2010, the Company’s Philippines subsidiary entered into a new lease agreement that accommodates the
Company’s Philippines workforce into one office building. Under the terms of the lease agreement, effective March 1, 2010,
the monthly rent was approximately $25, and became subject to 5% annual escalation beginning on the 3rd year of the lease
term. The lease renewed for a sixty month term upon mutual agreement of both parties during 2015.
As described in detail under “Note 4 – Property and Equipment Net”, on April 17, 2013, the Company entered into a sale
lease-back agreement with STORE Master Funding III, LLC (“STORE”) whereby we leased back our facility located in
LaSalle, Illinois for our continued use as an office, retail and warehouse facility for storage, sale and distribution of automotive
parts, accessories and related items for 20 years commencing upon the execution of the lease and terminating on April 30,
2033. The related assets for the sale lease-back land and building is represented by the amount included in leased facility in the
summary above. The Company’s initial base annual rent is $853 for the first year (“Base Rent Amount”), after which the rental
amount will increase annually on May 1 by the lesser of 1.5% or 1.25 times the change in the Consumer Price Index as
published by the U.S. Department of Labor’s Bureau of Labor Statistics, except that in no event will the adjusted annual rental
amount fall below the Base Rent Amount. We were not required to pay any security deposit. Under the terms of the lease, we
are required to pay all taxes associated with the lease, pay for any required maintenance on the property, maintain certain levels
of insurance and indemnify STORE for losses incurred that are related to our use or occupancy of the property. The lease was
accounted for as a capital lease and the $376 excess of the net proceeds over the net carrying amount of the property is
amortized in interest expense on a straight-line basis over the lease term of 20 years. As of December 31, 2016, the net carrying
value of all capital leased assets included in property and equipment was $9,033.
Minimum lease commitments under non-cancelable operating leases as of December 31, 2016 are as follows:
2017
2018
2019
2020
2021
Total
$
1,453
1,493
1,200
550
—
4,696
F- 29
Capital lease commitments as of December 31, 2016 were as follows:
2017
2018
2019
2020
2021
2022 onwards
Total
Legal Matters
Capital Lease
Commitments
Less: Interest
Payments
Principal
Obligations
$
1,285
$
1,319
1,304
1,129
962
11,948
$
743
721
690
657
630
4,194
$
17,947
$
7,635
$
542
598
614
472
332
7,754
10,312
Asbestos. A wholly-owned subsidiary of the Company, Automotive Specialty Accessories and Parts, Inc. and its wholly-
owned subsidiary WAG, are named defendants in several lawsuits involving claims for damages caused by installation of
brakes during the late 1960’s and early 1970’s that contained asbestos. WAG marketed certain brakes, but did not manufacture
any brakes. WAG maintains liability insurance coverage to protect its and the Company’s assets from losses arising from the
litigation and coverage is provided on an occurrence rather than a claims made basis, and the Company is not expected to incur
significant out-of-pocket costs in connection with this matter that would be material to its consolidated financial statements.
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. As of the date
hereof, the Company believes that the final disposition of such matters will not have a material adverse effect on the financial
position, results of operations or cash flow of the Company. The Company maintains liability insurance coverage to protect the
Company’s assets from losses arising out of or involving activities associated with ongoing and normal business operations.
Note 11 – Employee Retirement Plan and Deferred Compensation Plan
Effective February 17, 2006, the Company adopted a 401(k) defined contribution retirement plan covering all full time
employees who have completed one month of service. The Company may, at its sole discretion, match fifty cents per dollar up
to 6% of each participating employee’s salary. The Company’s contributions vest in annual installments over three years.
Discretionary contributions made by the Company totaled $289, $280 and $256 for fiscal year 2016, 2015 and 2014,
respectively.
In January 2010, the Company adopted the U.S. Auto Parts Network, Inc. Management Deferred Compensation Plan (the
“Deferred Compensation Plan”), for the purpose of providing highly compensated employees a program to meet their financial
planning needs. The Deferred Compensation Plan provides participants with the opportunity to defer up to 90% of their base
salary and up to 100% of their annual earned bonus, all of which, together with the associated investment returns, are 100%
vested from the outset. The Deferred Compensation Plan, which is designed to be exempt from most provisions of the
Employee Retirement Security Act of 1974, is informally funded by the Company through the purchase of Company-owned
life insurance policies with the Company (employer) as the owner and beneficiary, in order to preserve the tax-deferred savings
advantages of a non-qualified plan. The plan assets are the cash surrender value of the Company-owned life insurance policies
and not associated with the deferred compensation liability. The deferred compensation liabilities (consisting of employer
contributions, employee deferrals and associated earnings and losses) are general unsecured obligations of the Company.
Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of
participants’ selected investments. The Company may at its discretion contribute certain amounts to eligible employee
accounts. In January 2010, the Company began to contribute 50% of the first 2% of participants’ eligible contributions into
their Deferred Compensation Plan accounts. In September 2010, the Company established and transferred its ownership to a
rabbi trust to hold the Company-owned life insurance policies. As of December 31, 2016, the assets and associated liabilities of
the Deferred Compensation Plan were $676 and $688, respectively, and were $781 and $558, respectively, as of January 2,
2016 and are included in other non-current assets, other current liabilities and other non-current liabilities in our consolidated
balance sheets. For fiscal year 2016, the change in the associated liabilities include the employee contributions of $156, the
Company contributions of $69, offset by unrealized earnings of $41 and distributions of $23. For fiscal year 2015, the
associated liabilities primarily include the employee contributions of $102 and the Company contributions of $27 offset by
unrealized losses of $13 and distributions of $307. For fiscal year 2016, included in other income, the Company recorded a net
loss of $2 for the change in the cash surrender value of the Company-owned life insurance policies. For fiscal year 2015,
included in other income, the Company recorded a net loss of $73 for the change in the cash surrender value of the Company-
owned life insurance policies.
F- 30
Note 12 – Restructuring Costs
Fiscal 2014
On June 25, 2014, the Company committed to a plan to permanently close its distribution facility located in Carson,
California (the “Carson Distribution Facility”) effective July 25, 2014. The Company consolidated the Carson Distribution
Facility’s distribution and warehousing operations into the Company’s existing distribution facilities located in LaSalle, Illinois
and Chesapeake, Virginia. This consolidation was part of the Company’s continued efforts for simplification and improved
efficiencies. The closure of the Carson Distribution Facility resulted in a head count reduction of approximately 77 employees.
The following table summarizes the charges related to the restructure recognized during the fiscal year ended January 3,
2015:
Employee severance
Accounts receivable allowance
Relocation costs (employee and equipment)
Inventory transfers
Total restructuring costs
$
526
73
127
411
$
1,137
Substantially all of the unsold inventory in the Carson Distribution Facility on the date of closure was moved to the
remaining two warehouses. Costs related to inventory transfers were recorded to cost of sales. A charge for $130 was taken for
inventory that was not deemed economical to transfer. Additionally, due to expected future capacity constraints, the Company
reduced the sales price of certain inventory resulting in a charge of $767. The aggregate charge of $897 was recorded to cost of
sales. The severance charges and relocation costs were included in fulfillment expense. Severance charges were reduced by
$26 in the fourth quarter of 2014 as certain employees were able to find employment before they became eligible for severance
benefits. As of January 3, 2015, there was no severance payable.
Note 13 – Related-Party Transactions
The Company leased its Carson warehouse from Nia Chloe, LLC (“Nia Chloe”), a member of which, Sol Khazani, is one
of our board of directors. Lease payments and expenses associated with this related party arrangement totaled $378 for fiscal
year 2014. The lease expired during fiscal 2014 and was not renewed.
On October 8, 2014, Oak Investment Partners XI, L.P. ("Oak") and the Sol Khazani Living Trust ("Trust") purchased 1.5
million and 0.5 million shares of AutoMD common stock, respectively, at a purchase price of $1.00 per share. Fredric W.
Harman and Sol Khazani, each a current director of the Company, are affiliated with Oak and the Trust, respectively.
On March 6, 2017, AutoMD entered into a dissolution agreement with each of Oak Investment Partners XI, Limited
Partnership (“Oak”) and the Sol Khazani Living Trust (the “Trust”), pursuant to which AutoMD redeemed 1.5 million and 0.5
million shares of its common stock, respectively, for a purchase price of $895 and $299, respectively. In connection with the
dissolution agreement, each of the prior investor agreements entered into between AutoMD, on the one hand, and Oak and the
Trust, on the other, were terminated. Fredric W. Harman and Sol Khazani, each a current director of the Company and
AutoMD, are affiliated with Oak and the Trust, respectively.
The Company has entered into indemnification agreements with the Company’s directors and executive officers. These
agreements require the Company to indemnify these individuals to the fullest extent permitted under law against liabilities that
may arise by reason of their service to the Company, and to advance expenses incurred as a result of any proceeding against
them as to which they could be indemnified.
F- 31
Note 14 – Quarterly Information (Unaudited)
The following quarterly information (in thousands, except per share data) includes all adjustments which management
considers necessary for a fair presentation of such information. For interim quarterly financial statements, the provision for
income taxes is estimated using the best available information for projected results for the entire year.
Consolidated Statement of
Income Data:
Net sales
Gross profit
Income (loss)
from operations
Income (loss) before
income taxes
Net income (loss)
Net loss attributable to
noncontrolling interests
Net income (loss)
attributable to U.S. Auto
Parts
Basic net income (loss)
per share as reported and
adjusted
Diluted net income (loss)
per share as reported and
adjusted
Shares used in computation
of basic net income (loss)
per share as reported and
adjusted
Shares used in computation
of diluted net income (loss)
per share as reported and
adjusted
Quarter Ended
Quarter Ended
April 2,
2016
July 2,
2016
Oct. 1,
2016
Dec. 31,
2016
April 4,
2015
July 4,
2015
Oct. 3,
2015
Jan. 2,
2016
$ 80,806
$ 78,055
$ 73,515
$ 71,195
$ 76,388
$ 76,462
$ 70,648
$ 67,593
24,592
23,754
22,414
21,522
21,478
20,868
21,042
20,046
1,182
841
990
865
625
681
(84)
(1,573)
(18)
(1,107)
(367)
(360)
(1,901)
(1,914)
(368)
(316)
(1,369)
(1,022)
(222)
(491)
(288)
(708)
(1,007)
(798)
(262)
(253)
(258)
(561)
(256)
(247)
(296)
(344)
$
1,252
$
934
$
(102) $ (1,353) $
(60) $
(775) $
8
$
(454)
$
$
0.03
$
0.03
$
0.00
$
(0.04) $
0.00
$
(0.02) $
0.00
$
(0.01)
0.03
$
0.02
$
0.00
$
(0.04) $
0.00
$
(0.02) $
0.00
$
(0.01)
34,497
34,753
34,932
34,878
33,720
33,963
34,018
34,084
39,359
40,007
34,932
34,878
33,720
33,963
34,018
34,084
Note 15 – Segment Information
As described in Note 1 above, the Company operates in two reportable segments identified as Base USAP, which is the
core auto parts business, and AutoMD, an online automotive repair source. Segment information is prepared on the same basis
that our chief executive officer, who is our chief operating decision maker, manages the segments, evaluates financial results,
and makes key operating decisions. Management evaluates the performance of its operating segments based on net sales, gross
profit and loss from operations. The accounting policies of the operating segments are the same as those described in Note 1.
Operating income represents earnings before other income, interest expense and income taxes. The identifiable assets by
segment disclosed in this note are those assets specifically identifiable within each segment.
Summarized segment information for our continuing operations from the two reportable segments for the periods
presented is as follows (in thousands):
F- 32
Fiscal year ended December 31, 2016
Net sales
Gross profit
Operating costs (1)
Income (loss) from operations
Capital expenditures
Depreciation and amortization
Total assets, net of accumulated depreciation
Fiscal year ended January 2, 2016
Net sales
Gross profit
Operating costs (1)
Loss from operations
Capital expenditures
Depreciation and amortization
Total assets, net of accumulated depreciation
Fiscal year ended January 3, 2015
Net sales
Gross profit
Operating costs (1)
Loss from operations
Capital expenditures
Depreciation and amortization
Total assets, net of accumulated depreciation
Base USAP
AutoMD
Consolidated
$
303,324
$
92,047
87,782
4,265
5,414
6,351
78,094
$
290,833
$
83,176
82,044
1,132
6,701
6,141
78,092
$
283,211
$
78,153
81,887
(3,734)
4,237
7,230
74,414
247
235
4,110
(3,875)
939
1,159
4,040
258
258
3,445
(3,187)
1,079
1,369
5,664
297
297
2,475
(2,178)
1,319
1,693
8,493
$
303,571
92,282
91,892
390
6,353
7,510
82,134
$
291,091
83,434
85,489
(2,055)
7,780
7,510
83,756
$
283,508
78,450
84,362
(5,912)
5,556
8,923
82,907
(1)
Operating costs for AutoMD primarily consist of depreciation on fixed assets and personnel costs.
The following table summarizes the approximate distribution of Base USAP revenue by product type.
Private Label
Collision
Engine
Performance
Branded
Collision
Engine
Performance
Total
2016
51%
15%
1%
2%
12%
19%
2015
48%
14%
1%
2%
14%
21%
2014
43%
13%
1%
2%
16%
25%
100%
100%
100%
F- 33
Note 16 – AutoMD
On October 8, 2014, AutoMD entered into a Common Stock Purchase Agreement ("Purchase Agreement") to sell an
aggregate of seven million shares of AutoMD common stock at a purchase price of $1.00 per share to third-party investors and
investors that are affiliated with two of our board members. On October 19, 2016, the Company purchased two million shares
of AutoMD common stock at a purchase price of $1.00 per share pursuant to its funding milestone obligation under the
Purchase Agreement. On January 26, 2017, AutoMD entered into a redemption agreement with third-party investors to redeem
an aggregate of five million shares of AutoMD common stock for a purchase price of $1,292. On March 6, 2017, following a
review of various business and strategic options, AutoMD entered into a dissolution agreement with its two remaining minority
stockholders pursuant to which the Company repurchased the remaining shares of common stock from minority stockholders
for a purchase price of $1,194 in consideration for terminating the prior investor agreements. Following the redemptions,
AutoMD filed for dissolution and all of the remaining assets of AutoMD will be distributed to the Company, except for certain
cash reserved for creditors of AutoMD. These actions will likely result in the Company presenting AutoMD as discontinued
operations.
The Company estimates that we will incur charges related to severance, other contractual obligations and premium
charges related to repurchasing shares from minority stockholders that will impact cash during the first quarter of fiscal 2017.
AutoMD intends to continue to operate its media business, and accordingly, the Company anticipates continued revenue
associated with the media business.
F- 34
[This page intentionally left blank]
[This page intentionally left blank]
BR90343C-0416-10K