UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2017
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: (424) 702-1455
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 ý
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 ý
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 ý 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 ý 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
Emerging growth company
¨
¨ (Do not check if a smaller reporting company)
¨
Accelerated filer
Smaller reporting company
x
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No ý
The aggregate market value of the common stock held by non-affiliates of the registrant as of July 1, 2017 was approximately $91.4 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 9, 2018, there were 34,858,147 shares of the registrant’s common stock outstanding.
Portions of our proxy statement for the 2018 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 30, 2017
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
PART IV
Page
1
5
19
19
19
19
20
23
24
41
42
42
42
43
44
44
44
44
44
45
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®, Kool-Vue®, JC Whitney®, Carparts.com®, and Evan Fischer®, 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. 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 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.
1
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, and www.jcwhitney.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 2017, 2016 and 2015
relate to the 52-week fiscal years ended December 30, 2017 and December 31, 2016 and January 2, 2016.
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, including our own private label brand of aftermarket catalytic converters called Evan Fischer®. 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 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
2
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 30, 2017, three of our drop-ship vendors
accounted for approximately 8% 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 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,
including bundled kits and sets. We utilize several marketing techniques, including targeted e-mails about specific vehicle promotions, to
increase customer awareness of our products.
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 703 employees in the Philippines as of December 30, 2017 and conduct limited sales in Canada. We also
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;
3
•
•
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 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 30, 2017, we had 366 employees in the United States and 703 employees in the Philippines for a total of 1,069
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.
4
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 marketplace channels, 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 customers in a cost-effective manner. Our investments in marketing may not effectively
reach potential consumers or those consumers may not decide to buy from us or the volume of consumers that purchase from us may not
yield the intended return on investment. With respect to our marketing channels, we rely on relationships with providers of online services,
search engines, shopping comparison sites and e-commerce businesses to provide content, advertising banners and other links that direct
customers to our websites. We rely on these relationships as significant sources of traffic to our websites. In particular, we rely on Google
as an important marketing channel, and if Google changes its algorithms or if competition increases for advertisements on Google or on our
marketplace channels, we may be unable to cost-effectively attract customers to our products.
Our agreements with our marketing providers generally have terms of one year or less. If we are unable to develop or maintain these
relationships on acceptable terms, our ability to attract new customers would be harmed. In addition, many of the parties with whom we
have online-advertising arrangements could provide advertising services to other companies, including retailers with whom we compete. A
s competition for online advertising has increased, the cost for these services has also increased. A significant increase in the cost of the
marketing vehicles upon which we rely could adversely impact our ability to attract customers in a cost-effective manner and harm our
business and results of operations. Further, we use promotions as a way to drive sales, these promotional activities may not drive sales and
may adversely affect our gross margins.
Similarly, if any free search engine, shopping comparison site, or marketplace site on which we rely begins charging fees for listing
or placement, or if one or more of the search engines, shopping comparison sites, marketplace sites and other online sources on which we
rely for purchased listings, increases their fees, or modifies or terminates its relationship with us, our expenses could rise, we could lose
customers and traffic to our websites could decrease.
5
Shifting online consumer behavior of purchasers of aftermarket auto parts could adversely impact our financial results and the growth
of our business.
Shifting consumer behavior indicates that our customers are becoming 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.
In addition, shifting consumer behavior indicates that customers may be more inclined to shop for aftermarket auto parts through
marketplace websites such as Amazon and eBay as opposed to purchasing parts through e-commerce channels. For example, during fiscl
2017, the online marketplaces sales grew from 26.5% of total sales to 35.0% of total sales over the prior year. Any mix shift in sales to
marketplace channels could result in lower gross margins, and as a result, our business and financial results may suffer.
During fiscal 2017, we recorded net income, but we have a history of net losses and there can be no assurance that net income will
continue in fiscal year 2018.
During fiscal 2017, we achieved net income of $24,015, compared to a net loss of $603 for fiscal 2016, in part due to a $21,540
income tax benefit due to the change in valuation allowance, in addition to the impact of the Tax Cuts and Jobs Act. While we achieved net
income during fiscal 2017, if our historical net losses continue in fiscal year 2018 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 our historical net losses were to return, 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;
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
6
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 2017, 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 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 example, during 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.
7
We are highly dependent upon key suppliers.
Our top ten suppliers represented approximately 48% of our total product purchases during fiscal 2017. 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 2017, our
product purchases from three drop-ship suppliers represented approximately 8% 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
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. For example, shipping costs have recently increased on larger items such as bumpers and hoods. Any
increased shipping costs could harm our business, prospects, financial condition and results of
8
operations by increasing our costs of doing business and reducing gross margins which could negatively affect our operating results. In
addition, 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. We also ship a number of oversized auto parts which may trigger additional shipping costs by third party delivery services.
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
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.
9
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 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 this year. 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.
10
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 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
11
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 and trademarks then they have in the past. To the extent that the OEMs are successful with
obtaining and enforcing their intellectual proprtry rights, 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 or regulatory enforcement 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.
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.
12
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 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 30, 2017, 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.
13
In May 2017, Oak Investment Partners XI, L.P., our then largest stockholder, distributed approximately 28% of our outstanding shares
of common stock on an as converted basis to its limited partners,, 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.
In May 2017, Oak Investment Partners XI, L.P., our then largest stockholder, distributed approximately 28% of our outstanding
shares of common stock on an as converted basis to its limited partners. Sales of a substantial number of shares of our common stock in the
public market by Oak’s limited partners, 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. While our common stock has not
recently traded below $1.00, if the closing bid price of our common stock were to fail 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.
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 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 2,770,687 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;
14
•
•
•
•
•
•
•
•
•
•
•
•
•
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 30, 2017, 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 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;
15
•
•
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.
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
16
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
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
17
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 30, 2017, 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:
2017:
Quarter ended April 1, 2017
Quarter ended July 1, 2017
Quarter ended September 30, 2017
Quarter ended December 30, 2017
2016:
Quarter ended April 2, 2016
Quarter ended July 2, 2016
Quarter ended October 1, 2016
Quarter ended December 31, 2016
$
$
High
Low
$
3.74
4.13
3.34
3.14
3.28 $
4.39
4.49
3.66
3.06
2.85
2.49
2.01
2.35
2.58
3.21
2.40
On March 9, 2018, the last reported sale price of our common stock on the Nasdaq was $2.19 per share.
Holders
As of March 9, 2018, there were approximately 20 registered shareholders 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,
2012, 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, 2017. 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 30, 2017. We issued approximately $189,000 in
cash dividends to our Series A Preferred stockholders during the fiscal year ended December 30, 2017 and issued approximately $241,000
in dividends to our Series A Preferred stockholders during the fiscal year ended December 31, 2016 consisting of approximately $121,000
in cash and $120,000 in common stock. 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 stockholders 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.
21
Use of Proceeds from Sales of Registered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We purchased the following shares of common stock for the fourth quarter of fiscal 2017, all of which were made as part of publicly
announced plans or programs:
Total Number of
Shares Purchased (1)
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced
Plans or Programs
—
769,463 $
93,250 $
—
2.32
2.10
—
769,463
93,250
Maximum Number (or
Approximate Dollar
Value) of Shares that May
Yet be Purchased Under
the Plans or Programs
—
—
3,595,050
Period
Oct 1 - Oct 28, 2017
Oct 29 - Nov 25, 2017
Nov 26 - Dec 30, 2017
(1) Stock repurchases were made pursuant to a stock repurchase program authorized by our Board of Directors on May 17, 2017. 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 30, 2017
(“fiscal year
2017”)
52 Weeks
Ended
December 31, 2016
(“fiscal year
2016”)
52 Weeks
Ended
January 2, 2016
(“fiscal year
2015”)
(In thousands, except per share data)
53 Weeks
Ended
January 3, 2015
(“fiscal year
2014”) (1)
52 Weeks
Ended
December 28,
2013
(“fiscal year
2013”) (2)
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 property and
equipment
Impairment loss on intangible assets
Total operating expenses
Income (loss) from operations
Other expense, net
Income (loss) from operations before
income taxes
Income tax (benefit) provision
Income (loss) from continuing operations
Net loss from discontinued operations
Net income (loss)
Basic income (loss) from continuing
operations per share
Diluted income (loss) from continuing
operations per share
Shares used in computation of basic
income (loss) from continuing operations
per share
Shares used in computation of diluted
income (loss) from continuing operations
per share
$
303,366 $
213,706
89,660
303,324 $
211,277
92,047
290,833 $
207,657
83,176
283,211 $
205,058
78,153
39,293
17,612
23,090
4,711
319
—
—
85,025
4,635
(1,601)
3,034
(21,540)
24,574
(559)
24,015 $
41,104
17,629
22,975
5,625
449
—
—
87,782
4,265
(1,192)
3,073
100
2,973
(3,576)
(603) $
40,218
16,325
20,237
4,833
431
—
—
82,044
1,132
(1,180)
(48)
88
(136)
(2,288)
(2,424) $
39,574
16,697
20,368
4,826
422
—
—
81,887
(3,734)
(1,036)
(4,770)
137
(4,907)
(2,179)
(7,086) $
0.69
0.08 $
(0.01) $
(0.15) $
0.62
0.08 $
(0.01) $
(0.15) $
$
$
$
254,422
180,620
73,802
38,929
17,508
18,702
4,982
381
4,832
1,245
86,579
(12,777)
(824)
(13,601)
43
(13,644)
(1,990)
(15,634)
(0.42)
(0.42)
35,192
34,765
33,946
33,489
32,697
39,634
36,207
33,946
33,489
32,697
(1)
(2)
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.
23
December 30,
2017
December 31,
2016
December 28,
2013
(In thousands, except per share data)
January 2, 2016
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
$
2,850 $
13,634
100,698
—
6,643 $
16,869
82,134
—
5,537 $
13,605
83,756
11,759
7,653 $
14,645
82,907
11,022
579
542
521
269
9,173
40,361
9,770
22,853
10,168
20,340
9,270
19,277
December 29,
2012
818
9,761
69,182
6,774
269
9,502
20,866
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. Our flagship consumer
websites are located at www.autopartswarehouse.com, www.carparts.com and www.jcwhitney.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 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.
24
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 rise to
11.8 years by 2019. IHS expects the number of vehicles that are 12 years or older to increase by 15% through 2019. IHS found that the
total number of light vehicles in operation in the U.S. has increased to record levels, and should continue to rise through 2019. 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. The U.S. Auto Care Association estimates that overall revenue from online sales of auto parts and
accessories is projected to increase to approximately $13.2 billion in 2018 and more than double by 2023. 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 703 employees in the Philippines as of December 30, 2017. We believe that the
cost advantages of our offshore operations provide us with the ability to grow our business in a more cost-effective manner than using U.S.-
based resources.
AutoMD. In March of 2017, AutoMD, a majority owned subsidiary focused on auto repairs, filed for dissolution. The AutoMD
operating segment has been classified as discontinued operations and its results of operations are reflected under loss from discontinued
operations in our consolidated financial statements. The dissolution of AutoMD has a material impact on the Company's operations and
financial results given it was previously reported under a separate operating segment. The Company continues to operate AutoMD.com as a
media business and includes the results of operations under continuing operations.
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 30, 2017
52 Weeks Ended
December 31, 2016
52 Weeks Ended
January 2, 2016
96.9
1,892
1,740
3,632
101
66
82
$
$
$
117.9
2,161
1,265
3,426
104
69
91
$
$
$
85.5 %
1.95 %
84.8 %
1.83 %
116.7
2,043
1,061
3,104
109
71
96
85.6 %
1.75 %
$
$
$
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
25
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 2017, our unique visitors decreased by 17.8%
compared to the fiscal year 2016 primarily due to a shift in traffic from our e-commerce sites to online marketplaces, 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 2017,
the total number of orders was up by 6.0% compared to the fiscal year 2016, with e-commerce and online marketplace orders decreasing by
12.4% and increasing by 37.5%, respectively. We believe that total orders improved through greater product selection and certain strategic
pricing initiatives on online marketplaces.
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 2017, our average order value decreased by 9.9%
when compared to the fiscal year 2016 primarily due to a mix shift towards more private label sales and a channel shift to online
marketplaces. 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 2017, our revenue capture increased by 0.8% to 85.5% compared to 84.8% in fiscal year
2016.
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 2017, our conversion improved by 6.6% to 1.95% in fiscal year 2017
compared to 1.83% in fiscal year 2016.
Executive Summary
For fiscal 2017, our continuing operations generated net sales of $303,366, compared with $303,324 for fiscal year 2016, representing
a slight increase over prior year. Our continuing operations generated income for fiscal 2017 of $24,574, compared to $2,973 for fiscal
2016. Our continuing operations 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 $14,213 in fiscal 2017 compared to $14,024 in fiscal 2016. 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.
Total revenues increased in fiscal 2017 compared to fiscal 2016 primarily due to growth in our offline sales. Our online sales, which
include our e-commerce, online marketplace sales channels and online advertising, contributed 90.4% of total revenues, and our offline
sales, which consist of our Kool-Vue® and wholesale operations, contributed 9.6% of total revenues. Our online sales for fiscal year 2017
decreased by $1,560, or 0.6%, to $274,308 compared to $275,868 in fiscal 2016 primarily due to a decrease in average order value of 9.9%
partially offset by an increase in total online orders of 6.0%. Our offline sales increased by $1,608, or 5.9%, to $29,059 compared to the
same period last year primarily due to increased offline sales of our Kool-Vue® product.
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
26
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, but during the fiscal year 2017, our
unique visitor count decreased by 21 million, or 17.8%, to 96.9 million unique visitors compared to 117.9 million unique visitors in fiscal
2016 primarily due to a shift in traffic from our e-commerce sites to our online marketplaces. 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 2017 compared to the same
period in 2016. Components of our cost of sales and operating costs are described in further detail under — “Basis of Presentation” below.
In 2017, we made positive strides towards achieving our strategic goals and in 2018 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 believe we can return to positive e-commerce growth by continuing to focus on making the auto parts purchasing
process as easy and seamless as possible. We plan to continue to provide unique catalog content and provide better
content on our websites with the goal of improving our ranking on the search results.
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; (3) increasing order size across our sites
through improved recommendation engines; (4) improving our site speed; and (5) creating a frictionless checkout
experience for our customers. In addition, we intend to continue to improve our 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.
Overall, we expect revenue growth in 2018 compared to 2017, due to the above initiatives we expect to continue to follow in 2018.
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.
27
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 income loss to Adjusted EBITDA for the periods presented (in thousands):
December 30, 2017
Fifty-two weeks ended
December 31, 2016
January 2, 2016
$
$
$
$
24,574 $
6,397
319
1,647
(21,540 )
11,397 $
2,816 $
14,213 $
2,973 $
6,351
449
1,219
100
11,092 $
2,932 $
14,024 $
(136 )
6,141
431
1,208
88
7,732
2,297
10,029
Net income (loss)
Depreciation & amortization
Amortization of intangible assets
Interest expense, net
Taxes
EBITDA
Stock comp expense
Adjusted EBITDA
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.
28
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.
Discontinued Operations
The Company historically operated in two reportable operating segments, the core auto parts business ("Base USAP"), and an online
automotive repair information source of which we were a majority stockholder ("AutoMD"). The criteria the Company used to identify
operating segments were primarily the nature of the products we sell or services we provided and the consolidated operating results that
were regularly reviewed by our chief operating decision maker to assess performance and make operating decisions. On March 6, 2017,
AutoMD redeemed its stock from the minority stockholders and subsequently dissolved. The AutoMD operating segment has been
classified as discontinued operations for all periods presented. See "Note 15 - Discontinued Operations" for further discussion. The
Company continues to operate AutoMD.com as a media business and includes its results of operations under continued operations.
Results of Operations
The following table sets forth selected statement of operations data for the periods indicated, expressed as a percentage of net sales:
December 30, 2017
December 31, 2016
January 2, 2016
Fiscal Year Ended
Net sales
Cost of sales
Gross profit
Operating expenses:
Marketing
General and administrative
Fulfillment
Technology
Amortization of intangible assets
Total operating expenses
Income from operations
Other income (expense):
Interest expense
Total other expense
Income from continuing operations before income taxes
Income tax (benefit) provision
Income from continuing operations
100.0 %
70.4
29.6
100.0 %
69.7
30.3
13.0
5.8
7.6
1.6
0.1
28.1
1.5
(0.5)
(0.5)
1.0
(7.1)
8.1 %
13.6
5.8
7.6
1.9
0.1
29.0
1.3
(0.4)
(0.4)
0.9
—
0.9 %
100.0 %
71.4
28.6
13.8
5.6
7.0
1.7
0.1
28.2
0.4
(0.4)
(0.4)
—
—
— %
29
Fifty-Two Weeks Ended December 30, 2017 Compared to the Fifty-Two Weeks Ended December 31, 2016
Net Sales and Gross Margin
Fiscal Year Ended
December 30, 2017
December 31, 2016
$ Change
% Change
Net sales
Cost of sales
Gross profit
Gross margin
$
$
(in thousands)
303,366
213,706
89,660
$
$
29.6%
$
303,324
211,277
92,047
$
30.3%
42
2,429
(2,387)
— %
1.1 %
(2.6)%
(0.7)%
Net sales increased $42 for fiscal year 2017 compared to fiscal year 2016. Our net sales consisted of online sales, which include our e-
commerce sites, online marketplace sales channels and online advertising, representing 90.4% of the total for fiscal year 2017 (compared to
90.9% in fiscal year 2016), and offline sales, representing 9.6% of the total for fiscal year 2017 (compared to 9.1% in fiscal year 2016). The
net sales increase was due to an increase of $1,608, or 5.9%, in offline sales, partially offset by a decrease of $1,560, or 0.6%, in online
sales. Offline sales increased primarily due to increased Kool-Vue® sales, while online sales decreased primarily due to a decrease in
average order value of 9.9% partially offset by an increase in total online orders of 6.0%.
Gross profit decreased $2,387, or 2.6%, in fiscal year 2017 compared to fiscal year 2016. Gross margin decreased 0.7% to 29.6% in
fiscal year 2017 compared to 30.3% in fiscal year 2016. Gross margin decreased in fiscal year 2017 compared to fiscal year 2016 primarily
due to a sales channel mix shift towards online marketplaces, partially offset by a favorable mix shift of private label sales compared to last
year.
Marketing Expense
Marketing expense
Percent of net sales
Fiscal Year Ended
December 30, 2017
December 31, 2016
$ Change
% Change
$
(in thousands)
39,293
$
13.0%
41,104
$
13.6%
(1,811)
(4.4)%
(0.6)%
Total marketing expense decreased $1,811, or 4.4%, for fiscal year 2017 compared to fiscal year 2016. As a percent to net sales, total
marketing expense was 13.0% for fiscal 2017 compared to 13.6% for fiscal year 2016. Online advertising expense, which includes catalog
costs, was $21,055, or 7.7%, of online sales for fiscal year 2017, compared to $22,605, or 8.2%, of online sales for fiscal year 2016. Online
advertising expense decreased primarily due to decreases in our catalog advertising expense. Marketing expense, excluding online
advertising, was $18,238, or 6.0%, of net sales for fiscal year 2017, compared to $18,496, or 6.1%, of net sales for fiscal year 2016. The
decrease was primarily due to a decrease in labor costs.
General and Administrative Expense
Fiscal Year Ended
December 30, 2017
December 31, 2016
$ Change
% Change
(in thousands)
General and administrative expense
Percent of net sales
$
17,612
$
5.8%
17,629
$
5.8%
(17)
(0.1)%
— %
General and administrative expense decreased $17, or 0.1%, for fiscal year 2017 compared to fiscal year 2016 and was consistent as a
percentage of net sales compared to prior year.
Fulfillment Expense
30
Fulfillment expense
Percent of net sales
Fiscal Year Ended
December 30, 2017
December 31, 2016
$ Change
% Change
(in thousands)
$
23,090
$
7.6%
22,975
$
7.6%
115
0.5%
—
Fulfillment expense increased $115, or 0.5%, for fiscal year 2017 compared to fiscal year 2016 and remained flat as a percent of
sales.
Technology Expense
Technology expense
Percent of net sales
Fiscal Year Ended
December 30, 2017
December 31, 2016
$ Change
% Change
$
(in thousands)
4,711
$
1.6%
5,625
$
1.9%
(914)
(16.2)%
(0.3)%
Technology expense decreased $914, or 16.2%, for fiscal year 2017 compared to fiscal year 2016. The decrease was primarily due to
decreased variable wages and overhead.
Amortization of Intangible Assets
Amortization of intangible assets
Percent of net sales
Fiscal Year Ended
December 30, 2017
December 31, 2016
$ Change
% Change
$
(in thousands)
319
0.1%
$
449
$
0.1%
(130)
(29.0)%
— %
Amortization of intangibles decreased $130, or 29.0% for fiscal 2017 compared to fiscal 2016. Amortization of intangible assets
remained flat as a percent of net sales during fiscal 2017.
Total Other Expense, Net
Other expense, net
Percent of net sales
Fiscal Year Ended
December 30, 2017
December 31, 2016
$ Change
% Change
$
(in thousands)
(1,601)
$
(0.5)%
(1,192)
$
(0.4)%
409
34.3 %
(0.1)
Total other expense, net increased $409, or 34.3%, for fiscal year 2017 compared to fiscal year 2016. Total other expense increased
during fiscal year 2017 compared to fiscal year 2016 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 30, 2017
December 31, 2016
$ Change
% Change
(in thousands)
$
(21,540)
$
(7.1)%
100
$
—%
(21,640)
(21,640.0)%
(7.1)%
31
The Company accounts for income taxes in accordance with ASC Topic 740 - Income Taxes (“ASC 740”). Under the provisions of
ASC 740, management is required to evaluate whether a valuation allowance should be established against its deferred tax assets. As of
December 31, 2016, the Company’s deferred tax assets were primarily the result of U.S. federal and state net operating loss carryforwards.
Due to our past history of operating losses, a valuation allowance of $43,877 was recorded against our gross deferred tax asset balance as of
December 31, 2016, as it was anticipated that the operating losses would expire unused. As of the end of the second quarter of 2017, in part
because in the period then ended the Company achieved three years of cumulative pre-tax income in the U.S. federal tax jurisdiction and
positive earnings were projected to occur in the future due to improved operating performance as a result of our focus on expense controls
and private label product sales, management determined that sufficient positive evidence existed to conclude that it was more likely than
not that a portion of the deferred taxes in the amount of $27,248 were realizable, and therefore, reduced the valuation allowance
accordingly.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact
management’s view with regard to future realization of deferred tax assets. As of the end of the third quarter of 2017, there was no material
change in the evidence as it related to the amount of the Company's deferred tax assets that were more likely than not to be realized in
future years. As of the end of the fourth quarter of 2017, due to continued improvements in operating performance and further evidence of
sustainability, management determined that deferred tax assets of $32,153 were more likely than not to be realized in future years, and
therefore, further reduced the valuation allowance accordingly. As we continue to assess our operations, to the extent our results and
expectations of core earnings continue to improve, we may release additional valuation reserves in the future. Conversely, to the extent that
our results deteriorate, we may be required to reverse some, or even all, of the allowance released.
The Tax Cuts and Jobs Act was enacted on December 22, 2017 and reduced the U.S. federal corporate tax rate to 21 percent effective
January 1, 2018. Consequently, we have recorded a decrease in our deferred tax assets, deferred tax liabilities and valuation allowance of
$13,630, $1,459 and $1,494, respectively, with a corresponding net adjustment to reduce deferred income tax benefit of $10,677 for the
year ended December 30, 2017.
Income tax (benefit) provision differs from the amount that would result from applying the federal statutory rate as follows (in
thousands):
Income tax at U.S. federal statutory rate
Change in U.S. federal statutory rate
Tax attributes written off
Share-based compensation
State income tax, net of federal tax effect
Foreign tax
Other
Change in valuation allowance
Effective income tax provision
Fiscal Year Ended
December 30, 2017
December 31, 2016
$
$
1,032 $
12,171
1,110
1,027
231
(77 )
38
(37,072 )
(21,540 ) $
1,044
—
—
316
(261 )
(48 )
(149 )
(802 )
100
As of December 30, 2017, the Company had no material unrecognized tax benefits, interest or penalties related to federal and state
income tax matters. At December 30, 2017, federal and state net operating loss (“NOL”) carryforwards were $67,492 and $72,092,
respectively. Federal NOL carryforwards of $2,475 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 2018.
32
Fifty-Two Weeks Ended December 31, 2016 Compared to the Fifty-Three Weeks Ended January 2, 2016
Net Sales and Gross Margin
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
Net sales
Cost of sales
Gross profit
Gross margin
$
$
(in thousands)
$
303,324
211,277
92,047
$
30.3%
$
290,833
207,657
83,176
$
28.6%
12,491
3,620
8,871
4.3%
1.7%
10.7%
1.7%
Net sales increased $12,491, or 4.3%, for fiscal year 2016 compared to fiscal year 2015. Our net sales consisted of online sales,
representing 90.9% of the total for both fiscal years 2016 and 2015, and offline sales, representing 9.1% of the total for both fiscal years
2016 and 2015. The net sales increase was due to an increase of $11,406, 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 $8,871, or 10.7%, in fiscal year 2016 compared to fiscal year 2015. Gross margin increased 1.7% to 30.3% in
fiscal year 2016 compared to 28.6% in fiscal year 2015. Gross margin primarily increased in fiscal year 2016 compared to fiscal year 2015
due to a favorable mix shift of private label sales compared to last year as well as freight efficiencies and lower shipping supply costs.
Marketing Expense
Marketing expense
Percent of net sales
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
$
(in thousands)
$
41,104
13.6%
40,218
$
13.8%
886
2.2 %
(0.2)%
Total marketing expense increased $886, or 2.2%, for fiscal year 2016 compared to fiscal year 2015. As a percent to
net sales, total marketing expense was 13.6% for fiscal 2016 compared to 13.8% for fiscal year 2015. Online advertising expense, which
includes catalog costs, was $22,605, or 8.2%, of online sales for fiscal year 2016, compared to $20,181, or 7.6%, of online sales for fiscal
year 2015. Online advertising expense increased primarily due to increases in our non-catalog online advertising costs to $21,186, or 7.0%
of net sales for fiscal 2016 compared to $18,454, 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 $18,496, or 6.1%, of net sales
for fiscal year 2016, compared to $20,037, or 6.9%, 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
General and administrative expense
Percent of net sales
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
$
(in thousands)
$
17,629
5.8%
16,325
$
5.6%
1,304
8.0%
0.2%
General and administrative expense increased $1,304, or 8.0%, 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
33
Fulfillment expense
Percent of net sales
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
$
(in thousands)
$
22,975
7.6%
20,237
$
7.0%
2,738
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)
$
5,625
1.9%
4,833
$
1.7%
792
16.4%
0.2%
Technology expense increased $792, or 16.4%, 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
Amortization of intangible assets
Percent of net sales
$
Fiscal Year Ended
December 31, 2016
January 2, 2016
$ Change
% Change
(in thousands)
449
0.1%
$
431
$
0.1%
18
4.2%
—%
Amortization of intangible assets increased by $18, or 4.2%, for fiscal 2016 compared to fiscal 2015. Amortization of intangible
assets remained flat as a percent of net sales during fiscal 2016.
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)
(0.4)%
(1,180)
$
(0.4)%
12
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)
$
100
—%
34
$
88
—%
12
13.6%
—%
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 fiscal 2015, we recorded an addition of $579 and $329, respectively, to our valuation allowance. Income tax benefit in 2016
and 2015 relate primarily due to the change in the outside basis difference of the Company's investment in AutoMD.
35
Liquidity and Capital Resources
Sources of Liquidity
During the fifty-two weeks ended December 30, 2017, we primarily funded our continuing operations with cash and cash equivalents
generated from operations as well as through borrowing under our credit facility. We had cash and cash equivalents of $2,850 as of
December 30, 2017, representing a $3,793 decrease from $6,643 of cash and cash equivalents as of December 31, 2016. The cash decrease
was primarily due to cash used in financing activities. 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 our operations
through at least the next twelve months (see “Debt and Available Borrowing Resources” and “Funding Requirements” below).
As of December 30, 2017, 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).
Working Capital
As of December 30, 2017 and December 31, 2016, our working capital was $13,634 and $16,869, 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 2017, 2016
and 2015, 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 30, 2017
Fiscal Year Ended
December 31, 2016
January 2, 2016
$
$
11,634 $
(4,857)
(10,565)
(5)
(3,793) $
21,571 $
(6,477)
(13,954)
(34)
1,106 $
5,745
(7,792)
(105)
36
(2,116)
Cash provided by operating activities is primarily comprised of net income, 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 income adjusted for non-cash adjustments to operating activities was
$12,130 (adjusted for non-cash charges primarily consisting of deferred income taxes of $21,476, and depreciation and amortization
expense of $6,397) for the period ended December 30, 2017 compared to $10,891 (adjusted for non-cash charges primarily consisting of
depreciation and amortization expense of $7,510) for the period ended December 31, 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.
•
•
Accounts receivable decreased to $2,470 at December 30, 2017 from $3,266 at December 31, 2016, resulting in a decrease
in operating assets and reflecting a cash inflow of $796 for the fiscal year ended December 30, 2017. 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. 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 increases in trade and credit card receivables due related to timing of
collections during the year end holiday season.
Inventory increased to $54,231 at December 30, 2017 from $50,904 at December 31, 2016, resulting in an increase in
operating assets and reflecting a cash outflow of $3,327 for the fiscal year ended December 30,
36
•
•
2017. 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.
Accounts payable and accrued expenses increased to $43,362 at December 30, 2017 compared to $40,557 at
December 31, 2016 resulting in an increase in operating liabilities and reflecting a cash inflow of $2,805 for the fiscal year
ended December 30, 2017. Accounts payable and accrued expenses increased primarily due to an increase in accounts
payable of $2,302. 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.
Other current liabilities increased to $2,457 at December 30, 2017 compared to $1,972 at December 31, 2016, resulting in
an increase in operating liabilities and reflecting a cash inflow of $485 for the fiscal year ended December 30, 2017. Other
current liabilities increased primarily due to an increase in deferred warranty revenues. 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 due to an
increase in deferred warranty revenues.
Investing Activities
For the fiscal years ended December 30, 2017, December 31, 2016 and January 2, 2016, net cash used in investing activities was
primarily the result of increases in property and equipment ($4,896, $6,353 and $7,780 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 lower in fiscal 2018 compared to fiscal 2017.
Financing Activities
For the fiscal year ended December 30, 2017, net cash used in financing activities was primarily due to repurchases of outstanding
shares of common stock, and payments made on our revolving loan payable. For the fiscal year ended December 31, 2016, net cash used in
financing activities was primarily due to 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 the payments made on debt, totaling $14,900. (see further discussion in “Debt and
Available Borrowing Resources” below).
Debt and Available Borrowing Resources
Total debt (comprised of capital lease payable) was $9,752 as of December 30, 2017 compared to $10,312 as of December 31, 2016.
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 30, 2017, 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.
Loans drawn under the credit facility bear interest at a per annum rate equal to either (a) LIBOR plus an applicable margin of 1.75%,
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 30, 2017, the Company’s LIBOR based interest rate was 3.31% (on $0 principal) and the Company’s prime based rate was
4.75% (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
37
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 30, 2017, 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 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 30, 2017, the Company had total capital leases payable of $9,752. The present value of the net minimum payments
on capital leases as of December 30, 2017 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
$
$
16,642
(6,890)
9,752
579
9,173
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 assets or seek additional debt or
equity financings in the future, including the issuance of additional common stock under a registration statement. There can be no
assurance that we would be able to raise such additional financing or engage in asset sales on acceptable terms, or at all. If we are not able
to raise adequate additional financing or proceeds from 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 30, 2017:
38
Contractual Obligations:
Operating lease obligations (1)
Capital lease obligations (2)
Payment Due By Period (in thousands)
Total
3,520
16,642
Less than
1 year
1-3 years
3-5 years
More than
5 years
1,695
1,298
1,825
2,433
—
1,933
—
10,978
(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.
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,
39
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.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" (Topic 606), which was further updated in
March, April, May and December 2016. We will adopt this ASU on December 31, 2017 with a cumulative adjustment to increase retained
earnings rather than retrospectively adjusting prior periods. The cumulative adjustment and related costs, estimated at approximately $340,
will primarily relate to no longer recording a synthetic shipping lag adjustment. We will begin to recognize revenue upon shipment.
Therefore, we do not anticipate a significant effect on future revenue amounts.
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 2017. 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.
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.
40
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. 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.
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. The
Company’s policy is to record interest and penalties as income tax expense.
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 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 30, 2017. 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.
41
Interest Rate Risk. Our investment securities generally consist of mutual funds. As of December 30, 2017, our investments were
comprised of $9 of investments in mutual funds that primarily hold debt securities.
As of December 30, 2017, 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 30, 2017, 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 30, 2017, our LIBOR based interest rate was 3.31% per annum (on $0 principal) and our Prime based rate was 4.75% 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 $960 impact on our Philippine operating expenses for the fifty-two weeks ended December 30, 2017. During fiscal
2014 we hedged 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 30, 2017, 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 30, 2017 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 30, 2017, based on the “Internal Control — Integrated Framework
42
(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 30, 2017.
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 30, 2017 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.
ITEM 9B. OTHER INFORMATION
None.
43
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
PART III
Identification of Directors. The information under the caption “Election of Directors,” appearing in the Proxy Statement (“Proxy
(a)
Statement”), is hereby incorporated by reference. The Proxy Statement will be filed with the SEC within 120 days from the end of
fiscal year 2017.
(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 2017.
(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 2017.
(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 2017.
(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 2017.
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 2017.
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 2017.
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 2017.
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 2017.
44
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
(a) Documents filed as part of this report:
Financial Statements. The following financial statements of U.S. Auto Parts Network, Inc. are included in a separate section
(1)
of this Annual Report on Form 10-K commencing on the pages referenced below:
Reports of RSM US LLP, independent registered public accounting firm
Consolidated Balance Sheets as of December 30, 2017 and December 31, 2016
Consolidated Statements of Operations and Comprehensive Operations for each of the three years in the period ended December
30, 2017
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 30, 2017
Consolidated Statements of Cash Flows for each of the three years in the period ended December 30, 2017
Notes to Consolidated Financial Statements
Page
F- 1
F- 3
F- 4
F- 5
F- 7
F- 8
(2)
Financial Statement Schedules.
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:
45
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)
Exhibit
No.
2.1
3.1
3.2
3.3
3.4
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+
2017 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)
Transition Consulting Services Agreement dated March 30, 2017 between the Company and Shane Evangelist
(incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 31, 2017)
10.14+
Employment Agreement dated March 30, 2017, between the Company and Aaron Coleman (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on March 31, 2017)
46
Exhibit
No.
10.15+
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
Description
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)
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 10.2 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)
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)
47
Exhibit
No.
10.32
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
Description
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 2018 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 11, 2018)
Form of 2018 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 11, 2018)
Form of 2018 Restricted Stock Unit 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 January 11, 2018)
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)
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)
48
Exhibit
No.
10.49
10.50
10.51
21.1
23.1
31.1
31.2
32.1
32.2
Description
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)
Deferred Compensation Plan (incorporated by reference to Exhibit 10.54 to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 7, 2017)
Dissolution Agreement, dated March 6, 2017, by and among AutoMD, Inc., Oak Investment Partners XI, L.P. and the Sol
Khazani Living Trust. (incorporated by reference to Exhibit 10.55 to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 7, 2017)
Subsidiaries of U.S. Auto Parts Network, Inc.
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.
49
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 14, 2018
U.S. AUTO PARTS NETWORK, INC.
By:
/s/ Aaron Coleman
Aaron Coleman
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of U.S. Auto Parts Network, Inc., do hereby constitute and appoint Aaron Coleman 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
Title
/s/ Aaron Coleman
Aaron Coleman
/s/ Neil Watanabe
Neil Watanabe
/s/ Warren B. Phelps III
Warren B. Phelps III
/s/ Joshua L. Berman
Joshua L. Berman
/s/ Jay K. Greyson
Jay K. Greyson
/s/ Sol Khazani
Sol Khazani
/s/ Barbara Palmer
Barbara Palmer
/s/ Bradley E. Wilson
Bradley E. Wilson
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
50
Date
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of RSM US LLP, independent registered public accounting firm
Consolidated Balance Sheets as of December 30, 2017 and December 31, 2016
Consolidated Statements of Operations and Comprehensive Operations for each of the three years in the period ended December
30, 2017
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 30, 2017
Consolidated Statements of Cash Flows for each of the three years in the period ended December 30, 2017
Notes to Consolidated Financial Statements
F- 1
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.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of U.S. Auto Parts Network, Inc. and subsidiaries (the Company) as of
December 30, 2017, and December 31, 2016, the related consolidated statements of operations and other comprehensive operations,
stockholders’ equity and cash flows for each of the three fiscal years in the period ended December 30, 2017, and related notes to the
consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 30, 2017, and December 31, 2016, and the results of its operations
and its cash flows for each of the three fiscal years in the period ended December 30, 2017, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of December 30, 2017, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 13,
2018, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2015.
/s/ RSM US LLP
Los Angeles, CA
March 13, 2018
F- 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
U.S. Auto Parts Network, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited U.S. Auto Parts Network, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of
December 30, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 30, 2017, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s consolidated balance sheets as of December 30, 2017, and December 31, 2016, the related consolidated statements of
operations and other comprehensive operations, stockholders’ equity and cash flows for each of the three fiscal years in the period ended
December 30, 2017, and the related notes to the consolidated financial statements, and our report, dated March 13, 2018, expressed an
unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We
are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Los Angeles, CA
March 13, 2018
F- 2
U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par and Per Share Liquidation Value)
December 30,
2017
December 31,
2016
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventory
Other current assets
Total current assets
Deferred income taxes
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; 2,771 and 4,150 shares issued and outstanding
at December 30, 2017 and December 31, 2016, respectively
Common stock, $0.001 par value; 100,000 shares authorized; 34,666 and 34,623 shares issued
and outstanding at December 30, 2017 and December 31, 2016, respectively (of which 2,525
and 445 are treasury stock, respectively)
Additional paid-in-capital
Treasury stock
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
See accompanying notes to consolidated financial statements.
F- 3
$
$
$
$
2,850 $
9
2,470
54,231
2,972
62,532
21,476
15,085
651
954
100,698 $
35,999 $
7,363
—
579
2,500
2,457
48,898
9,173
—
2,266
60,337
6,643
30
3,266
50,904
2,815
63,658
—
16,478
969
1,029
82,134
33,697
6,860
—
542
3,718
1,972
46,789
9,770
156
2,097
58,812
3
4
37
179,906
(7,146)
557
(132,996)
40,361
—
40,361
100,698 $
35
180,153
(1,376)
557
(156,520)
22,853
469
23,322
82,134
U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(In Thousands, Except Per Share Data)
Fiscal Year Ended
December 30,
2017
December 31,
2016
January 2,
2016
$
303,366 $
213,706
89,660
303,324 $
211,277
92,047
Net sales
Cost of sales (1)
Gross profit
Operating expenses:
Marketing
General and administrative
Fulfillment
Technology
Amortization of intangible assets
Total operating expenses
Income from operations
Other income (expense):
Other income, net
Interest expense
Total other expense, net
Income (loss) from continuing operations before income taxes
Income tax (benefit) provision
Income (loss) from continuing operations
Discontinued operations (2)
Loss from operations and disposal of discontinued AutoMD operation
Income tax (benefit) provision
Loss on discontinued operations
Net income (loss)
Other comprehensive income (loss):
Foreign currency translation adjustments
Actuarial gain (loss) on defined benefit plan
Unrealized loss on investments
Total other comprehensive income (loss)
Comprehensive income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
Weighted average common shares outstanding:
Shares used in computation of basic income (loss) from continuing operations
per share
Shares used in computation of diluted income (loss) from continuing operations
per share
$
$
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)
(3,187)
(899)
(2,288)
(2,424)
36
44
—
80
(2,344)
(0.01)
(0.01)
39,293
17,612
23,090
4,711
319
85,025
4,635
54
(1,655)
(1,601)
3,034
(21,540)
24,574
(558)
1
(559)
24,015
(18)
19
(1)
—
24,015 $
0.69 $
0.62
41,104
17,629
22,975
5,625
449
87,782
4,265
46
(1,238)
(1,192)
3,073
100
2,973
(3,875)
(299)
(3,576)
(603)
9
110
(2)
117
(486) $
0.08 $
0.08
35,192
34,765
33,946
39,634
36,207
33,946
(1)
(2)
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”.
During March 2017, AutoMD filed for dissolution and the AutoMD operating segment has been classified as discontinued
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,
January 3,
2015
Net loss
4,150
—
4 33,624 $
—
—
33 $174,369 $ —
—
—
—
— $
—
360
—
(155,489 ) $
(1,281 )
19,277
(1,281 )
2,946
22,223
(1,143 )
(2,424 )
—
—
—
—
—
Issuance of
common
stock in
connection
with
preferred
stock
dividends
Issuance of
shares in
connection
with stock
option
exercises
Minimum tax
withholding
on RSU's
Minimum tax
withholdings
on options
exercised
Issuance of
shares in
connection
with BOD
fees
Issuance of
shares in
connection
with
restricted
stock units
vesting
Share-based
compensation —
Common
stock
dividend
distributable
on Series A
Preferred
Stock
Actuarial
gain on
defined
benefit plan
Effect of
changes in
foreign
currencies
Balance,
January 2,
2016
Net loss
4,150
—
—
—
—
—
—
103
—
241
—
(241)
—
—
—
—
—
—
301
—
135
—
—
—
—
135
—
135
—
(151)
1
450
—
—
—
—
451
—
451
—
(139)
—
(80)
—
—
—
—
(80)
—
(80)
—
2
—
2
—
—
—
—
2
—
2
—
397
—
(809)
—
—
—
2,565
—
—
—
—
—
—
—
—
(809)
2,565
—
(809)
—
2,565
—
—
—
—
—
241
—
(241)
—
—
—
—
—
—
—
—
—
44
—
44
—
44
—
—
—
—
—
—
36
—
36
—
36
4 34,137
—
—
34 176,873
—
—
—
—
—
—
440
—
(157,011 )
731
20,340
731
1,803
(1,334 )
22,143
(603)
Issuance of
common
stock in
connection
with
preferred
stock
dividends
Issuance of
shares in
connection
with stock
option
—
—
37
—
120
—
(120)
—
—
—
—
—
—
—
—
exercises
Issuance of
shares in
connection
with
restricted
stock units
vesting
Minimum tax
withholding
on RSU's
Share-based
compensation —
Issuance of
shares in
connection
with BOD
fees
Issuance of
stock awards
Common
stock
dividend
distributable
on Series A
Preferred
Stock
—
—
—
—
442
—
908
—
—
—
—
908
—
908
—
774
1
(1,897 )
—
—
—
—
(1,896 )
—
(1,896 )
—
(335)
—
927
—
—
—
3,213
—
—
—
3
—
10
—
—
9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
927
—
927
3,213
—
3,213
9
—
—
—
9
—
—
—
—
—
—
120
—
(120)
—
—
—
F- 5
Cash dividends on
preferred stock
Treasury Stock
— —
— —
— —
(445) —
—
—
(1,376 )
Actuarial gain on
defined benefit plan
Unrealized (loss)
gain on investments,
net of tax
Effect of changes in
foreign currencies
Balance as
originally stated at
December 31, 2016 4,150
Effect of new
accounting adoption
Balance as
currently stated at
December 31, 2016 4,150
Net income
— —
— —
— —
— —
—
—
— —
—
—
— —
—
—
4 34,623
35 180,153
(1,376 )
— —
— —
249
—
4 34,623
35 180,402
—
(1,376 )
—
— —
— —
— —
— —
(2,017 )
—
—
—
—
—
—
—
—
—
—
—
—
—
(120)
—
(120)
(1,376 )
—
—
(120)
(1,376 )
110
—
110
—
110
(2)
9
—
—
(2)
9
—
—
(2)
9
557
(156,520 )
22,853
469 23,322
—
(249)
—
—
—
557
—
(156,769 )
24,015
22,853
24,015
469 23,322
— 24,015
—
—
(2,017 )
(469)
(2,486 )
Redemption of
minority interest
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
Issuance of shares in
connection with
BOD Fees
Share-based
compensation
Cash Dividend on
preferred stock
Conversion of
preferred stock
Treasury Stock
Actuarial gain on
defined benefit plan
Unrealized (loss)
gain on investments,
net of tax
Effect of changes in
foreign currencies
Balance, December
30, 2017
— — 1,074
1
258
—
—
—
—
259
—
259
— —
592
1
—
—
—
—
—
1
—
1
— —
(220) —
(755)
—
—
—
—
(755)
—
(755)
— —
(705)
(1)
(889)
—
—
—
(890)
—
(890)
— —
3 —
9
—
— —
— —
2,898
—
— —
— —
—
—
(1,379 )
(1) 1,379
1
— — (2,080 ) —
—
—
(5,770 )
— —
— —
—
—
— —
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
19
(1)
—
9
—
9
—
2,898
—
2,898
(189)
(189)
—
(189)
—
(53)
—
—
—
(5,823 )
19
(1)
—
—
—
—
—
(5,823 )
19
(1)
— —
— —
—
—
—
(18)
—
(18)
—
(18)
2,771 $
3 34,666 $ 37 $179,906 $(7,146) $
— $
557 $(132,996) $
40,361 $
— $40,361
See accompanying notes to consolidated financial statements.
F- 6
U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Operating activities
Net income (loss)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
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
Net cash used in investing activities
Financing activities
Proceeds from revolving loan payable
Payments made on revolving loan payable
Minority shareholder redemption
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
Fiscal Year Ended
December 30,
2017
December 31,
2016
January 2,
2016
$
24,015 $
(603) $
(2,424 )
6,397
319
(21,476 )
2,842
9
—
32
(8)
796
(3,327 )
(292)
40
2,725
(712)
274
11,634
(4,896 )
39
—
—
(4,857 )
3,835
(3,835 )
(2,486 )
(561)
(5,823 )
(1,644 )
258
(100)
(209)
(10,565 )
(5)
(3,793 )
6,643
2,850 $
831 $
—
—
—
—
78 $
1,536
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
$
$
$
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 and offline to wholesale distributors. Our flagship websites are located at www.autopartswarehouse.com,
www.carparts.com and www.jcwhitney.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 including
our private label brand of catalytic converters called Evan Fischer®. 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 30, 2017 (fiscal year 2017) and December 31, 2016 (fiscal year 2016) and January 2, 2016 (fiscal year 2015)are all 52
week periods.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company
balances and transactions have been eliminated.
Basis of Presentation
During fiscal year 2017, the Company’s revenues increased slightly from fiscal 2016 after having increased in fiscal year 2016 by
4.3% from fiscal year 2015. In fiscal year 2017, the Company generated net income of $24,015, after incurring a net loss of $603 and
$2,424 in fiscal years 2016 and 2015, 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 2018, 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 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
F- 8
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.
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.
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 30, 2017 and December 31, 2016 included items in-transit to our warehouses, in
the amount of $10,164 and $9,767, respectively.
Website and Software Development Costs
F- 9
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 $3,914 and $4,977 during fiscal year 2017 and 2016, respectively. At
December 30, 2017 and December 31, 2016, our internally developed website and software costs amounted to $17,974 and $22,366,
respectively, and the related accumulated amortization and impairment amounted to $14,429 and $18,520, 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 December 30, 2017 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 fiscal 2017.
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 $5 and $160 at December 30, 2017 and December 31, 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 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 2017, 2016 and 2015, 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.
F- 10
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 $21,838, $23,876, and $23,543 for fiscal year 2017, 2016 and 2015, 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 30, 2017
Allowance for sales returns
Allowance for doubtful accounts
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
Cost of Sales
Balance at
Beginning
of Period
Charged to
Revenue,
Cost or
Expenses
Deductions
Balance at
End of
Period
$
$
$
937 $
36
21,837 $
(21,913) $
19
(54)
1,009 $
17
23,877 $
235
(23,949) $
(216)
897 $
41
23,655 $
(23,543) $
29
(53)
861
1
937
36
1,009
17
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 2017, 2016 and 2015 was
$40,565, $41,937, and $41,250, 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 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 2017 and
2016, the activity in the aggregate warranty liabilities was as follows (in thousands):
Warranty liabilities, beginning of period
Additions to warranty liabilities
Reductions to warranty liabilities
Warranty liabilities, end of period
December 30, 2017
December 31, 2016
$
$
889 $
963
(442 )
1,410 $
110
918
(139 )
889
F- 11
Marketing Expense
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 2017, 2016 and 2015, the Company recognized advertising
costs of $21,055, $22,616 and $20,251, 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 expectation of paying no dividends on its common stock.
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.
F- 12
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 30, 2017, 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 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.
Discontinued Operations
F- 13
The Company historically operated in two reportable operating segments, the core auto parts business ("Base USAP"), and an online
automotive repair information source of which we were a majority stockholder ("AutoMD"). The criteria the Company used to identify
operating segments were primarily the nature of the products we sell or services we provided and the consolidated operating results that
were regularly reviewed by our chief operating decision maker to assess performance and make operating decisions. On March 6, 2017,
AutoMD redeemed its stock from the minority stockholders and subsequently dissolved. The AutoMD operating segment has been
classified as discontinued operations for all periods presented. See "Note 9 - Discontinued Operations" for further discussion. The Company
continues to operate AutoMD.com as a media business and includes its results of operations under continued operations.
Recently Adopted 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. Early adoption is permitted. The Company adopted ASU 2016-09 for fiscal 2017. The Company will no longer utilize an
estimated forfeiture rate, and will utilize the actual forfeiture date. The result was a $249 increase in additional paid-in-capital, with a
corresponding decrease in our accumulated deficit.
Recent Accounting Pronouncements
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 operating lease
activity, it is not expected to have a material impact.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" (Topic 606), which was further updated in
March, April, May and December 2016. The guidance in this update supersedes the revenue recognition requirements in Topic 605,
"Revenue Recognition". Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer. An entity should apply the amendments
in the update either retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the
cumulative effect of initially applying this update recognized at the date of initial application (modified retrospective method). On July 9,
2015, the FASB concluded to delay the effective date of the new revenue standard by one year. ASU 2014-09 is effective for the Company
beginning in the first fiscal quarter of 2018.
We will adopt this ASU on December 31, 2017 through the modified retrospective method, with a cumulative adjustment that will
decrease accumulated deficit by approximately $342 rather than retrospectively adjusting prior periods. The cumulative adjustment will
primarily relate to no longer recording a synthetic shipping lag adjustment. We will begin to recognize revenue upon shipment. In addition,
the Company has determined that the presentation of the sales return reserve balances currently shown on a net basis within current
liabilities will be grossed up to reflect the estimated sales return amount and the corresponding inventory balance related to the estimated
sales returns reserve will be presented in the net inventory balance on the balance sheet upon adoption.
Note 2 – Short-term investments
As of December 30, 2017, the Company held the following short-term investments, recorded at fair value:
Mutual funds (1)
$
9 $
— $
— $
9
Amortized
Cost
Unrealized
Gains
Losses
Fair Value
F- 14
As of December 31, 2016, the Company held the following short-term investments, recorded at fair value:
Amortized
Cost
Unrealized
Gains
Losses
Fair Value
Mutual funds (1)
$
32 $
— $
(2) $
30
(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 2017 and 2016, 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 30, 2017 and December 31, 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:
Total
Level 1
Level 2
Level 3
Valuation
Techniques
December 30, 2017
Assets:
Cash and cash equivalents (1)
Short-term investments – mutual funds(2)
$
$
2,850 $
9
2,859 $
2,850 $
9
2,859 $
— $
—
— $
—
—
—
(a)
(a)
F- 15
Assets:
Cash and cash equivalents (1)
Short-term investments – mutual funds (2)
Total
Level 1
Level 2
Level 3
Valuation
Techniques
December 31, 2016
$
$
6,643 $
30
6,673 $
6,643 $
30
6,673 $
— $
—
— $
—
—
—
(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 2017 and 2016, 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. As
of December 30, 2017 the Company determined long-lived assets, including intangible assets, were not impaired, as such, they were not
measured at fair value. 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 2017, 2016 and 2015 was $6,397, $7,510 and $7,510,
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.
Property and equipment consisted of the following at December 30, 2017 and December 31, 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
F- 16
630 $
December 30, 2017 December 31, 2016
630
$
8,877
12,368
26,717
98
1,007
1,030
1,539
52,266
(35,788)
16,478
8,877
12,281
22,389
85
1,033
664
2,082
48,041
(32,956)
15,085 $
$
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 30, 2017,
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, $3,121 and $8,185, respectively. 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.
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 30, 2017 and December 31, 2016, in the amount of $269 and $367, 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.
Note 5 – Intangible Assets, Net
Intangible assets consisted of the following at December 30, 2017 and December 31, 2016:
Years
2 - 5
2 - 3
2 - 5
3 - 5
3 - 5
3 - 7
20
Intangible assets
subject to
amortization:
Product design
intellectual property
Patent license
agreements
Domain and
trade names
Total
December 30, 2017
December 31, 2016
Useful Life
Gross
Carrying
Amount
Accumulated
Amort. and
Impairment
Net
Carrying
Amount
Gross
Carrying
Amount
Accum.
Amort. and
Impairment
Net
Carrying
Amount
4 years
2,750
(2,750)
—
2,750
(2,620)
3 - 5 years
462
(360)
102
562
(368)
10 years
$
1,407
4,619 $
(858)
(3,968) $
549
651 $
1,407
4,719 $
(762)
(3,750) $
130
194
645
969
F- 17
Intangible assets subject to amortization are amortized on a straight-line basis. Amortization expense relating to intangibles totaled
$319, $507 and $464 for fiscal year 2017, 2016 and 2015, respectively.
The following table summarizes the future estimated annual amortization expense for these assets over the next five years and
thereafter:
2018
2019
2020
2021
2022
Thereafter
Total
Note 6 – Borrowings
$
$
185
100
100
100
100
66
651
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 30, 2017, 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.
Loans drawn under the credit facility bear interest at a per annum rate equal to either (a) LIBOR plus an applicable margin of 1.75%,
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 30, 2017, the Company’s LIBOR based interest rate was 3.31% (on $0 principal) and the Company’s prime based rate was
4.75% (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. 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).
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.
F- 18
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 30, 2017, the Company had capital leases payable of $9,752. The present value of the net minimum payments on
capital leases as of December 30, 2017 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
Note 7 – Stockholders’ Equity and Share-Based Compensation
Common Stock
$
$
$
16,642
(6,890)
9,752
(579)
9,173
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 30, 2017:
•
•
•
The Company issued 1,074 shares of common stock from option exercises under its various share-based compensation
plans.
The Company issued 592 shares of common stock from restricted stock units granted during the
period.
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
In November of 2016, our Board of Directors approved a share repurchase program which authorized the Company to purchase up to
$5,000 of its outstanding shares of common stock. That share repurchase program expired on March 4, 2017. In May of 2017 our Board of
Directors approved another share repurchase program which authorized the Company to purchase up to $5,000 of its outstanding shares of
common stock. That share repurchase program will expire on May 16, 2018, unless extended or shortened by the Board of Directors.
Purchases under the Company’s repurchase programs 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.
As of December 30, 2017, the Company repurchased 2,525 shares of common stock at an average price of $2.83, for an aggregate
purchase price of approximately $7,146, 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.
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 30, 2017 (refer to “Note 8 – Net Loss Per Share” for anti-dilutive securities).
F- 19
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 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 a portion of the fiscal 2016
dividends. There were $61 dividends accrued as of December 31, 2016. For the fiscal year ended December 30, 2017, the Company
recorded dividends of $189. The Company did not issue any shares of common stock in payment of the fiscal 2017 dividends. There were
$41 dividends accrued as of December 30, 2017. As of December 30, 2017, 2,771 shares of Series A Preferred shares were outstanding.
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 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
F- 20
of all option grants must be equal to 100% of the fair market value on the date of grant. As of December 30, 2017, 7,065 shares were
available for future grants under the 2016 Equity 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 30, 2017, and December 31, 2016:
Weighted
Average
Exercise Price
Weighted Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic Value(1)
Shares
Options outstanding, December 31, 2016
Granted
Exercised
Cancelled:
Forfeited
Expired
Options outstanding, December 30, 2017
Vested and expected to vest at December 30, 2017
Options exercisable, December 30, 2017
6,129 $
1,445 $
(1,074) $
(161) $
(406) $
5,933 $
5,933 $
3,704 $
2.81
3.34
1.67
2.16
6.50
2.91
2.91
2.78
6.28 $
6.28 $
4.79 $
1,337
1,337
1,236
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) $
(121) $
6,129 $
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
(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 30, 2017 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 2017, 2016 and 2015 was $1.85, $1.65 and $1.19, 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 2017, 2016 and 2015, the total intrinsic value of the exercised options was $1,911, $599 and $346,
respectively. The Company had $3,276 of unrecognized share-based compensation expense related to stock options outstanding as of
December 30, 2017, which expense is expected to be recognized over a weighted-average period of 2.64 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 30, 2017 and December 31,
2016:
F- 21
Weighted
Average
Exercise Price
Weighted Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic Value
Shares
Options outstanding, December 31, 2016
Granted
Exercised
Cancelled:
Forfeited
Expired
Options outstanding, December 30, 2017
Vested and expected to vest at December 30, 2017
Options exercisable, December 30, 2017
1,405 $
— $
— $
(1,405) $
— $
— $
— $
— $
1.00
—
—
1.00
—
—
—
—
0.00 $
0.00 $
0.00 $
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 $
—
—
—
—
—
—
At December 30, 2017, 0 shares were available for future grants under the AMD Plan. The AMD Plan was terminated in connection
with the dissolution of AutoMD.
The weighted-average fair value of options granted during fiscal year 2017, 2016 and 2015 was $0.55, $0.55 and $0.55, 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.
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 2017, we withheld 260 shares to satisfy $900 of employees' tax obligations related to the net settlement of the
stock options. During fiscal 2016, we did not withheld any shares to satisfy employees' tax obligations related to the net settlement of the
stock options.
Restricted Stock Units
During 2017 and 2016 the Company granted an aggregate of 1,671 and 954 RSUs, respectively, to certain employees of the
Company. The restricted stock units ("RSUs") were granted under the 2016 Equity Incentive Plan and 2007 Omnibus Plan, and reduced the
pool of equity instruments available under that plan.
During 2017 there were 1,144 RSUs granted that were time-based and 527 granted that were performance-based. During 2016 there
were 382 RSUs granted that were time-based and 572 granted that were performance-based. As of December 30, 2017, 57.4% of the
performance criteria established to trigger vesting of the performance based RSUs ("PSUs") was met subject to certification by the
Compensation Committee. No PSUs will vest for the Company's named executive officers. 104 PSUs and 799 RSUs granted during 2017
were forfeited during the year. As of March 3, 2017, 525 of the PSUs granted in 2016 met the maximum performance criteria upon
certification by the Compensation Committee and 47 PSUs were forfeited. The
F- 22
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 19, 2017, January 25, 2017, March 30, 2017, May 11, 2017, August 9, 2017 and November 8, 2017, the date of
each grant was $3.61, $3.40, $3.34, $3.93, $2.77, and $2.27, respectively. 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 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 30, 2017, we recorded compensation expense of $1,293 related to RSU's. As of December 30,
2017, there was unrecognized compensation expense of $ 962 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 0.95 years.
Warrants
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 terminated 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. The 20 shares of common stock from the April 27, 2010 expired on April 26, 2017. As of December 30, 2017, no
warrants were outstanding and exercisable. No warrants share-based compensation expense was recognized during the fiscal years 2017,
2016 and 2015.
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 30, 2017
5.54 - 5.70 years
2%
59% - 61%
—%
Fiscal Year Ended
December 31, 2016
5.57 - 5.61 years
1% - 2%
60% - 61%
—%
January 2, 2016
5.34 - 5.52 years
1% - 2%
59% - 60%
—%
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
$
$
Fiscal Year Ended
December 31, 2016
$
December 30, 2017
426
1,906
372
138
2,842 $
433 $
2,111
450
137
3,131 $
January 2, 2016
518
1,614
241
46
2,419
The share-based compensation expense is net of amounts capitalized to internally-developed software of $56, $83 and $146 during
the fiscal year 2017, 2016, and 2015, respectively. No tax benefit was recognized for fiscal years 2017, 2016, and 2015 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
F- 23
historical forfeitures experienced under our equity plans. The Company adopted ASU 2016-09 for fiscal 2017, and therefore did not utilize
an estimated forfeiture rate for fiscal 2017. The Company's forfeiture rates were 10%-34% for fiscal years 2016, 2015, and 2014.
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). The Company's non-controlling interests consisted of the minority equity holders'
proportionate share of the equity of AutoMD. However, during March 2017, AutoMD filed for dissolution, therefore the Company no
longer has any non-controlling interests.
As of December 31, 2016 there were 1,405 stock options outstanding under the AutoMD 2014 Equity Incentive Plan (the "AMD
Plan"). On March 6, 2017, the AMD Plan was terminated upon the dissolution of AutoMD, and all outstanding options were canceled.
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:
Income from continuing operations
Dividends on Series A Convertible Preferred Stock
Income from continuing operations 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) from continuing operations per share
Diluted net income (loss) from continuing operations per share
December 30, 2017
December 31, 2016
January 2, 2016
Fiscal Year Ended
$
$
$
$
24,574 $
(189)
24,385 $
2,973 $
(241)
2,732 $
(136)
(241)
(377)
35,192
34,765
33,946
4,442
39,634
0.69 $
0.62 $
1,442
36,207
0.08 $
0.08 $
—
33,946
(0.01)
(0.01)
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
December 30, 2017
Fiscal Year
December 31, 2016
January 2, 2016
6
—
3,357
383
3,746
20
4,150
2,142
—
6,312
50
4,150
5,941
839
10,980
F- 24
Note 9 – Income Taxes
The components of income (loss)from continuing operations before income tax provision consist of the following:
Domestic operations
Foreign operations
Total income (loss) before income taxes
December 30, 2017
2,553
481
3,034 $
$
$
$
Fiscal Year Ended
December 31, 2016
January 2, 2016
2,570 $
503
3,073 $
(531)
483
(48)
Income tax (benefit) provision for fiscal year 2017, 2016 and 2015 consists of the following:
Current:
Federal tax
State tax
Foreign tax
Total current taxes
Deferred:
Federal tax
State tax
Foreign tax
Total deferred taxes
Change in federal tax rate - deferred tax impact
Valuation allowance
Income tax (benefit) provision
December 30, 2017
Fiscal Year Ended
December 31, 2016
January 2, 2016
$
$
— $
6
115
121
2,118
1,122
—
3,240
12,171
(37,072)
(21,540) $
— $
6
94
100
1,067
(401)
—
666
—
(666)
100 $
—
6
82
88
(84)
866
—
782
—
(782)
88
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
Change in U.S. federal statutory rate
Tax attributes written off
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 30, 2017
1,032
12,171
1,110
1,027
231
(77)
—
38
(37,072)
(21,540) $
$
$
December 31, 2016
January 2, 2016
1,044 $
—
—
316
(261)
(48)
—
(149)
(802)
100 $
(17)
—
—
50
576
(24)
—
51
(548)
88
For fiscal years 2017, 2016 and 2015, the effective tax rate for the Company was (710.0)%, 5.5% and (179.6)%, respectively. The
Company’s effective tax rate for fiscal year 2017 differs from the U.S. federal rate primarily as a result of the release of valuation
allowances against the Companies deferred tax assets. 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.
F- 25
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:
Tax over book depreciation
Prepaid catalog expenses
Total deferred tax liabilities
Net deferred tax assets
December 30, 2017 December 31, 2016
$
537 $
2,281
3,702
603
145
677
19,740
101
27,786
(6,309)
21,477
—
1
1
$
21,476 $
839
4,803
7,602
749
209
—
30,474
792
45,468
(43,877)
1,591
1,527
64
1,591
—
At December 30, 2017, federal and state net operating loss (“NOL”) carryforwards were $67,492 and $72,092, respectively. Federal
NOL carryforwards of $2,475 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 2018. The state NOL carryforwards expire in the respective tax years as follows:
2018
2019
2020
2021
2022
Thereafter
$
$
5,520
917
673
5,474
1,050
58,458
72,092
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. As of December 31,
2016, the Company’s deferred tax assets were primarily the result of U.S. federal and state net operating loss carryforwards. A valuation
allowance of $43,877 was recorded against our gross deferred tax asset balance as of December 31, 2016. As of December 30, 2017 in part
because in the year then ended the Company achieved three years of cumulative pre-tax income in the U.S. federal tax jurisdiction,
management determined that sufficient positive evidence existed to conclude that it was more likely than not that deferred taxes of $32,153
were realizable, and therefore, reduced the valuation allowance accordingly.
The Tax Cuts and Jobs Act was enacted on December 22, 2017 and reduced the U.S. federal corporate tax rate to 21 percent, effective
January 1, 2018. Consequently, we have recorded a decrease in our deferred tax assets, deferred tax liabilities and valuation allowance of
$13,630, $1,459 and $1,494, respectively, with a corresponding net adjustment to deferred income tax expense of $10,677 for the year
ended December 30, 2017. In addition, we recognized a deemed repatriation of $1,123 of
F- 26
deferred foreign income from our Philippines subsidiary, which did not result in any incremental tax cost after application of foreign tax
credits.
We are subject to U.S. federal income tax as well as income tax of foreign and state tax jurisdictions. The tax years 2013-2017 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 2014-2017 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 $3 and $35 for the fiscal year 2017 and 2016 respectively, consisting
primarily of current foreign taxes. Included in other non-current liabilities are income taxes payable of $601 and $525 for the fiscal year
2017 and 2016, 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. 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 2017, 2016 and 2015 was $1,734, $1,670 and $1,555, respectively. The Company’s facility
rent expense did not include any amounts charged from a related party during fiscal years 2017, 2016, and 2015.
On February 4, 2016, the Company entered into a 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 $54 as of December 30, 2017.
In January 2010, the Company’s Philippines subsidiary entered into a lease agreement. 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 30, 2017, the net carrying value of all capital leased assets
included in property and equipment was $8,185.
Minimum lease commitments under non-cancelable operating leases as of December 30, 2017 are as follows:
2018
2019
2020
2021
2022
Total
$
1,695
1,280
545
—
—
3,520
F- 27
Capital lease commitments as of December 30, 2017 were as follows:
2018
2019
2020
2021
2022
2023 onwards
Total
Legal Matters
Capital Lease
Commitments
Less: Interest
Payments
Principal
Obligations
$
$
1,298 $
1,304
1,129
962
971
10,978
16,642 $
720 $
690
657
630
602
3,591
6,890 $
578
614
472
332
369
7,387
9,752
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 $286, $289 and $280 for fiscal year 2017, 2016 and 2015, 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 30, 2017, the assets and associated liabilities of the Deferred Compensation Plan were $579 and $675,
respectively, and were $676 and $688, respectively, as of December 31, 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 2017, the change in the associated liabilities
include the employee contributions of $135, the Company contributions of $26, and unrealized earnings of $110, partially offset by
distributions of $281. For fiscal year 2016, the associated liabilities primarily include the employee contributions of $156 and the Company
contributions of $69 offset by unrealized earnings of $41 and distributions of $23. For fiscal year 2017, included in other income, the
Company recorded a net earnings of $5 for the change in the cash surrender value of the Company-owned life insurance policies. 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.
F- 28
Note 12 – Related-Party Transactions
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, a former director,
and Sol Khazani, 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 and 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.
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- 29
Note 13 – 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) from
continuing operations
before income taxes
Income (loss) from
continuing operations
Loss on discontinued
operations
Net income (loss)
Basic income (loss) from
continuing operations
per share as reported and
adjusted
Diluted income (loss) from
continuing operations
per share as reported and
adjusted
Shares used in computation
of basic income (loss) from
continuing operations per
share as reported and
adjusted
Shares used in computation
of diluted income (loss)
from continuing operations
per share as reported and
adjusted
Quarter Ended
Quarter Ended
April 1, 2017
July 1, 2017
Sept. 30, 2017
Dec. 30,
2017
April 2, 2016 July 2, 2016 Oct. 1, 2016
Dec. 31,
2016
$
80,833
23,787
$
80,208
23,244
$
73,807
21,877
$
68,518 $
20,752
80,746 $
24,532
77,999 $
23,701
73,452 $
22,371 $
71,127
21,443
1,205
1,509
1,332
589
1,911
1,569
639 $
146
843
816
1,059
26,918
947
919
185
1,570
1,329
356 $
(182)
(4,079)
1,537
1,216
358 $
(195)
(559)
257 $
—
26,918 $
—
919 $
—
(4,079) $
(547)
990 $
(535)
681 $
(718) $
(360) $
(1,719)
(1,914)
0.02
$
0.76
$
0.02
$
(0.12) $
0.04 $
0.03 $
0.01 $
(0.01)
0.02 $
0.67 $
0.02 $
(0.12) $
0.04 $
0.03 $
0.01 $
(0.01)
$
$
$
34,510
35,332
35,856
35,070
34,497
34,753
34,932
34,878
39,959
39,933
39,485
35,070
39,359
40,007
40,591
34,878
F- 30
Note 14 – Product Information
As described in Note 1 above, 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 following table summarizes the approximate distribution of the
Company's revenue by product type.
Private Label
Collision
Engine
Performance
Branded
Collision
Engine
Performance
Total
2017
54%
18%
1%
2%
10%
15%
2016
51%
15%
1%
2%
12%
19%
2015
48%
14%
1%
2%
14%
21%
100%
100%
100%
Note 15 – Discontinued Operations
On March 6, 2017, AutoMD filed for dissolution. The AutoMD operating segment has been classified as discontinued operations and
its results of operations are reflected under loss from discontinued operations in our consolidated financial statements. The Company
continues to operate AutoMD.com as a media business and includes its results under continuing operations.
The following table summarizes the results of discontinued operations:
Net sales
Loss from operations and disposal of
discontinued AutoMD operations
Income tax provision (benefit)
Loss from discontinued operations
December 30, 2017
Fiscal Year Ended
December 31, 2016
January 2, 2016
37
(558 )
1
(559 )
247
(3,875 )
(299 )
(3,576 )
258
(3,187 )
(899 )
(2,288 )
Loss from operations and disposal of discontinued AutoMD operations for fiscal 2017 consisted of severance costs of $221, contract
termination costs of $164 as well as loss from operations of $173, and included net loss attributable to noncontrolling interests of $59.
Loss from discontinued operations for fiscal years 2016 and 2015 included net loss attributable to noncontrolling interests of $1,334
and $1,143, respectively.
F- 31
EXHIBIT 6.1
2017 Independent Director Compensation Plan
The compensation and benefits for service as a member of the Board of Directors is determined by our Board of Directors. Directors
employed by us or one of our subsidiaries are not compensated for service on the Board or on any committee of the Board; however, we
reimburse each of our directors for any out-of-pocket expenses in connection with attending meetings of our Board of Directors and
committees of the Board of Directors. Each of our non-employee directors, other than Mr. Khazani, are entitled to a fee of $30,000 per year
for his or her service as a director. Members of the Audit Committee, the Compensation Committee, and the Nominating and Corporate
Governance Committee each receive an additional $7,500, $5,000 and $2,500, respectively, per year for his or her service on such
committee. The chairpersons of the Board, the Audit Committee, the Compensation Committee, and the Nominating and Corporate
Governance Committee receive an additional $25,000, $14,500, $2,500, and $2,500, respectively, per year for his or her service as
chairperson for such committee.
In addition, on the date of each annual stockholders meeting, each person who has served as a non-employee member of the Board of
Directors for at least six months before the date of the stockholder meeting will be granted a stock option to purchase 20,000 shares of our
common stock and our chairman of the Board will be granted an additional stock option to purchase 20,000 shares of our common stock for
his service. These options will have an exercise price per share equal to the fair market value of our common stock on the date of grant and
will vest over an approximate three year period, subject to the director’s continuing service on our Board of Directors. These options will
also immediately vest in full upon a change in control of the Company. The term of each option granted to a non-employee director shall be
ten years. These options are currently granted under our 2016 Equity Incentive Plan.
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21.1
Name
Jurisdiction
DBA
PartsBin, Inc.
U.S. Auto Parts Network (Philippines) Corporation
Lobo Marketing, Inc.
Go Fido, Inc.
Private Label Parts, Inc.
Pacific 3PL, Inc.
Local Body Shops, Inc.
Automotive Specialty Accessories and Parts, Inc. (1)
Whitney Automotive Group, Inc. (2)
(1) Subsidiary of Go Fido, Inc.
(2) Subsidiary of Automotive Specialty Accessories and Parts, Inc.
Delaware
Philippines
Texas
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Kool-Vue
Perfect Fit
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We consent to the incorporation by reference in Registration Statement Nos. 333-143179, 333-149973, 333-158224, 333-165493, 333-
173851, 333-204096, 333-212256, 333-210093 and 333-216671 on Form S-8 and Registration Statement Nos. 333-163811, 333-188492,
333-197903 and 333-213223 on Form S‑3 of U.S. Auto Parts Network, Inc. and subsidiaries of our report dated March 13, 2018, relating to
our audits of the consolidated financial statements and internal control over financial reporting, which appears in this Annual Report on
Form 10-K of U.S. Auto Parts Network, Inc. and subsidiaries for the fiscal year ended December 30, 2017.
/s/ RSM US LLP
Los Angeles, CA
March 13, 2018
EXHIBIT 31.1
CERTIFICATION PURSUANT TO EXCHANGE ACT
RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Aaron Coleman, certify that:
1. I have reviewed this annual report on Form 10-K of U.S. Auto Parts Network, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f), for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 14, 2018
/s/ AARON COLEMAN
Aaron Coleman
Chief Executive Officer
(principal executive officer)
EXHIBIT 31.2
CERTIFICATION PURSUANT TO EXCHANGE ACT
RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Neil Watanabe, certify that:
1. I have reviewed this annual report on Form 10-K of U.S. Auto Parts Network, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f), for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 14, 2018
/s/ NEIL WATANABE
Neil Watanabe
Chief Financial Officer
(principal financial officer)
CERTIFICATION PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of U.S. Auto Parts Network, Inc. (the “Company”) on Form 10-K for the fiscal year ended
December 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Aaron Coleman, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 14, 2018
/s/ AARON COLEMAN
Aaron Coleman
Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of U.S. Auto Parts Network, Inc. (the “Company”) on Form 10-K for the fiscal year ended
December 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Neil Watanabe, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 14, 2018
/s/ NEIL WATANABE
Neil Watanabe
Chief Financial Officer