Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2019
OR
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
Trading Symbol(s)
PRTS
Name of each exchange on which registered
The NASDAQ Stock Market LLC
(NASDAQ Global Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange
Act.
Large accelerated filer
Non-Accelerated filer
Emerging growth company
☐
☒
☐
Accelerated filer
Smaller reporting company
☐
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b‑2). Yes ☐ No ☒
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2019 was approximately $28.3 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 5, 2020, there were 36,621,447 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our proxy statement for the 2020 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.
Table of Contents
U.S. AUTO PARTS NETWORK, INC.
ANNUAL REPORT ON FORM 10‑K
FOR THE FISCAL YEAR ENDED December 28, 2019
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
1
5
24
24
25
25
26
26
26
27
43
43
43
44
44
45
45
45
45
45
46
47
47
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™, 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.
®
®
®
®
®
Table of Contents
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.
Table of Contents
ITEM 1. BUSINESS
Overview
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 1.2 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. 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 after freight per transaction, transaction attachment rate, repeat purchases and conversion. We are in the process of adding
resources to our marketing, user experience and technology teams to drive new investment in organic and paid search, retention marketing
and improvements to our technology infrastructure. We also plan to continue to restructure the organization to focus on our most prominent
e-commerce websites and provide users of our sites with the same or better experience than they would receive on the marketplace sites
such as Amazon and eBay. We will therefore continue to place a significant effort on restructuring our data and catalog methodologies to
enhance the discovery of products and make our catalog a stronger competitive advantage on our e-commerce sites. We expect to start to
receive the benefits from some of these investments towards the end of the year. We are also taking steps to offset some of the freight and
competitive pressure which have impacted our gross margin, including developing exclusive private label parts not readily available to our
competitors, delivering improved customer experience and making changes to our supply chain by getting closer to the customer to realize
freight savings.
Our flagship websites are located at www.carparts.com, www.jcwhitney.com, www.autopartswarehouse.com and our corporate website
is located at www.usautoparts.com.
We report on a 52/53‑week fiscal year, ending on the Saturday nearest the end of December. References to 2019 and 2018 relate to the
52‑week fiscal years ended December 28, 2019 and December 29, 2018.
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
1
Table of Contents
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 market our Kool-Vue products nationwide to auto parts wholesale distributors.
®
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; LaSalle, Illinois or Las Vegas, Nevada. We also
use temporary outside storage and third-party logistics partners from time to time. All products received into our distribution centers are
entered into our inventory management systems, allowing us to closely monitor inventory availability. We consider a number of factors in
determining which items to stock in our distribution centers, including which products can be purchased at a meaningful discount to
domestic prices for similar items, which products have historically sold in high volumes, and which products may be out of stock when we
attempt to fulfill via drop-ship.
Drop-Ship Fulfillment. We have developed relationships with several U.S.-based automobile parts distributors that operate their own
distribution centers and can deliver products directly to our customers. We internally developed a proprietary distributor selection system,
Auto-Vend™, which allows us to electronically select multiple vendors for a
2
Table of Contents
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 58,000 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 28, 2019, two of our drop-ship vendors
accounted for approximately 8% of our total product purchases. We currently have over 700,000 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 508 employees in the Philippines as of December 28, 2019. 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 do-it-yourself (“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;
3
Table of Contents
·
·
·
other online retailers of automotive products and auto repair information websites;
local independent retailers or niche auto parts retailers;
wholesale aftermarket auto parts distributors such as LKQ Corporation; and
· manufacturers, brand suppliers and other distributors selling online directly to consumers.
We believe the principal competitive factors in our market are helping customers easily find their parts, educating consumers on the
service and maintenance of their vehicles, maintaining a proprietary product catalog that maps individual parts to relevant vehicle
applications, broad product selection and availability, price, knowledgeable customer service, rapid order fulfillment and delivery, and easy
product returns. We believe we compete favorably on the basis of these factors. However, some of our competitors may be larger, may have
stronger brand recognition or may have access to greater financial, technical and marketing resources or may have been operating longer
than we have.
Intellectual Property
Our intellectual property consists of trademarks, service marks, patents, copyrights and trade secrets, and is, in the aggregate,
important to our business. To protect our proprietary rights, we rely on a combination of intellectual property rights in the United States and
other jurisdictions, including trademarks, copyrights, and trade secret laws, together with contractual provisions and technical measures that
we have implemented. To protect our trade secrets, we maintain strict control access to our proprietary systems and technology, including
our platforms and infrastructure environments. We also enter into confidentiality and invention assignment agreements with our employees
and consultants, as well as confidentiality and non-disclosure agreements with third parties that provide products and services to us.
We have trademarks registered in the United States and pending in various countries for some of our core properties, including
“carparts.com”, “JC Whitney”, “Kool Vue”, “Evan Fischer” and “Garage-Pro”, and we have additional trademark applications pending in
the United States and other jurisdictions.
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, results of operations and overall
financial condition. 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.
4
Table of Contents
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 28, 2019, we had 335 employees in the United States and 508 employees in the Philippines for a total of 843
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.com as soon as
reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).
The inclusion of our website address in this report does not include or incorporate by reference into this report any information on our
website.
ITEM 1A. RISK FACTORS
Our business is subject to a number of risks which are discussed below. Other risks are presented elsewhere in this report and in our
other filings with the SEC. You should consider carefully the following risks in addition to the other information contained in this report
and our other filings with the SEC, including our subsequent reports on Forms 10‑Q and 8‑K, and any amendments thereto, before deciding
to buy, sell or hold our common stock. If any of the following known or unknown risks or uncertainties actually occurs with material adverse
effects on us, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In that event, the market
price for our common stock will likely decline and you may lose all or part of your investment.
Risks Related To Our Business
Purchasers of aftermarket auto parts may not choose to shop online, which would prevent us from acquiring new customers who are
necessary to the growth of our business.
The online market for aftermarket auto parts is less developed than the online market for many other business and consumer products,
and currently represents only a small part of the overall aftermarket auto parts market. Our success will depend in part on our ability to
attract new customers and to convert customers who have historically purchased auto parts through traditional retail and wholesale
operations. Specific factors that could discourage or prevent prospective customers from purchasing from us include:
·
·
·
·
concerns about buying auto parts without face-to-face interaction with sales personnel;
the inability to physically handle, examine and compare products;
delivery time associated with Internet orders;
concerns about the security of online transactions and the privacy of personal information;
5
Table of Contents
·
·
·
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. As
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.
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, recent trends indicate 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, our online marketplaces sales grew
from 36.0% of total sales in fiscal 2018 to 42% of total sales during fiscal 2019. Any mix shift in sales to marketplace channels or increase in
associated commissions and costs, could result in lower gross margins, and as a result, our business and financial results may suffer.
6
Table of Contents
We derive a substantial portion of our revenues from third-party marketplaces.
Third-party marketplaces account for a significant portion of our revenues. Our sales on eBay and Amazon represented a combined
42% of total revenues in fiscal 2019. We anticipate that sales of our products on third-party marketplace will continue to account for a
significant portion of our revenues. In the future, the loss of access to these third-party marketplaces could significantly reduce our
revenues, and the success of our business depends partly on continued access to these third-party marketplaces. Our relationships with our
third-party marketplace providers could deteriorate as a result of a variety of factors, such as if they become concerned about our ability to
deliver quality products on a timely basis or to protect a third-party’s intellectual property. In addition, third-party marketplace providers
could prohibit our access to these marketplaces if we are not able to meet the applicable required terms of use. Loss of access to a
marketplace channel could result in lower sales, and as a result, our business and financial results may suffer.
During fiscal 2019, we recorded a net loss, and our net losses may continue in fiscal year 2020.
During fiscal 2019, we incurred a net loss of $31,548, compared to net loss of $4,889 for fiscal 2018, attributable largely to a $21,437
non-cash income tax charge resulting from a change in the valuation allowance. If our net losses continue in fiscal year 2020, 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 net losses were to continue,
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 $30,000 subject to a borrowing base derived from
certain of our receivables, inventory and property and equipment. Our Credit Agreement also provides for an option to increase the
aggregate principal amount from $30,000 to $40,000, subject to lender approval. 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;
7
Table of Contents
·
·
·
enter into new lines of business;
pay or amend our subordinated debt; and
form any joint ventures or subsidiary investments.
In addition, our credit facility is subject to a borrowing base derived from certain of our receivables, inventory, property and equipment.
In the event that components of the borrowing base are adversely affected for any reason, including adverse market conditions or downturns
in general economic conditions, we could be restricted in the amount of funds we can borrow under the credit facility. Furthermore, in the
event that components of the borrowing base decrease to a level below the amount of loans then-outstanding under the credit facility, we
could be required to immediately repay loans to the extent of such shortfall. If any of these events were to occur, it could severely impact
our liquidity and capital resources, limit our ability to operate our business and could have a material adverse effect on our financial
condition and results of operations.
Under certain circumstances, our credit facility may also require us to satisfy a financial covenant, which could limit our ability to react
to market conditions or satisfy extraordinary capital needs and could otherwise impact our liquidity and capital resources, restrict our
financing and have a material adverse effect on our results of operations.
Our ability to comply with the covenants and other terms of our debt obligations will depend on our future operating performance. If we
fail to comply with such covenants and terms, we would be required to obtain waivers from our lenders to maintain compliance with our
debt obligations. In the future, if we are unable to obtain any necessary waivers and our debt is accelerated, a material adverse effect on our
financial condition and future operating performance would result.
While we did not have any outstanding revolver debt under our Credit Agreement as of the end of fiscal 2019, we may have
outstanding revolver debt 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. The Company’s outstanding letters of credit
balance as of December 28, 2019 was $17,638.
8
Table of Contents
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. We may be required to record a significant charge to earnings in our financial
statements during the period in which any impairment of our assets is determined, resulting in an impact on our results of operations.
We are highly dependent upon key suppliers.
Our top ten suppliers represented approximately 54% of our total product purchases during fiscal 2019. 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 2019, our
product purchases from three drop-ship suppliers represented approximately 11% 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.
9
Table of Contents
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;
imposition of duties, taxes, tariffs or other charges on imports;
difficulties in complying with import and export laws, regulatory requirements and restrictions;
natural disasters and public health emergencies, such as the recent outbreak of a novel strain of coronavirus identified in
Wuhan, Hubei Province, China;
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;
imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our product that
may be imported into the U.S. from countries or regions where we do business;
financial or political instability in any of the countries in which our product is manufactured;
potential recalls or cancellations of orders for any product that does not meet our quality standards;
disruption of imports by labor disputes or strikes and local business practices;
political or military conflict involving the U.S. or any country in which our suppliers are located, which could cause a delay
in the transportation of our products, an increase in transportation costs and additional risk to product being damaged and
delivered on time;
heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough
inspections, leading to delays in deliveries or impoundment of goods for extended periods;
inability of our non-U.S. suppliers to obtain adequate credit or access liquidity to finance their operations; and
our ability to enforce any agreements with our foreign suppliers.
For example, during the first quarter of 2018, the United States Customs and Border Protection (“CBP”) imposed an enhanced bonding
requirement on the company at a level equivalent to three times the commercial invoice value of each shipment. While the Company has
been granted relief removing the bonding requirement, CBP may impose other requirements on the Company which would make it more
difficult or more expensive for the Company to import
10
Table of Contents
products. If we were unable to import products from China and Taiwan or were unable to import products from China and Taiwan in a cost-
effective manner, we could suffer irreparable harm to our business and be required to significantly curtail our operations, file for bankruptcy
or cease operations.
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.
Our financial condition and results of operations for fiscal 2020 may be adversely affected by the recent COVID-19 outbreak.
Our financial condition and results of operations for fiscal year 2020 may be adversely affected by the recent COVID-19 (also known
as coronavirus) outbreak. The ongoing coronavirus outbreak emanating from China at the beginning of 2020 has resulted in increased travel
restrictions and extended shutdowns of certain businesses in the region. We acquire a majority of our products from manufacturers and
distributors located in Taiwan and China, and we maintain international business operations in the Philippines. Consequently, we are
susceptible to factors adversely affecting this region. The effects could include restrictions on our ability to travel to support our suppliers
located in Asia, disruptions in our ability to distribute our products in the Asia region, and/or temporary closures of the facilities of our
manufacturers and distributors. Disruption to the operations of our manufacturers and distributors would likely impact our sales and
operating results. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain
and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain
the coronavirus or treat its impact, among others.
Our supply chain may be adversely affected by political events, domestic or international hostilities, international health emergencies,
or complications due to natural, nuclear or other disasters.
The ongoing coronavirus outbreak emanating from China at the beginning of 2020 has resulted in increased travel restrictions and
extended shutdown of certain businesses in the region, including those of some of our suppliers. This or any other governmental
developments or health concerns in China or other countries could result in social or economic instability. These developments could disrupt
our supply chain, and have material adverse effect on our business and or our operating results.
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. Any increased shipping costs could harm our business, prospects, financial condition and results of operations by
increasing our costs of doing business and reducing gross margins which could negatively affect our operating results. In 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.
These outbound freight costs have increased on a year-over-year basis and may continue to increase in the future. 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
11
Table of Contents
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 be negatively impacted.
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
12
Table of Contents
fulfillment operations to larger or other facilities in the future. If we do not successfully expand our fulfillment capabilities in response to
increases in demand, our sales could decline.
In addition, our distribution centers are susceptible to damage or interruption from human error, fire, flood, power loss,
telecommunications failures, terrorist attacks, acts of war, break-ins, earthquakes and similar events. We do not currently maintain back-up
power systems at our fulfillment centers. We do not presently have a formal disaster recovery plan and our business interruption insurance
may be insufficient to compensate us for losses that may occur in the event operations at our fulfillment center are interrupted. In addition,
alternative arrangements may not be available, or if they are available, may increase the cost of fulfillment. Any interruptions in our
fulfillment operations for any significant period of time, including interruptions resulting from the expansion of our existing facilities or the
transfer of operations to a new facility, could damage our reputation and brand and substantially harm our business and results of
operations.
We rely on bandwidth and data center providers and other third parties to provide products to our customers, and any failure or
interruption in the services provided by these third parties could disrupt our business and cause us to lose customers.
We rely on third-party vendors, including data center and bandwidth providers. Any disruption in the network access or co-location
services, which are the services that house and provide Internet access to our servers, provided by these third-party providers or any failure
of these third-party providers to handle current or higher volumes of use could significantly harm our business. Any financial or other
difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise
little control over these third-party vendors, which increases our vulnerability to problems with the services they provide. We also license
technology and related databases from third parties to facilitate elements of our e-commerce platform. We have experienced and expect to
continue to experience interruptions and delays in service and availability for these elements. Any errors, failures, interruptions or delays
experienced in connection with these third-party technologies could negatively impact our relationship with our customers and adversely
affect our business. Our systems also heavily depend on the availability of electricity, which also comes from third-party providers. If we
were to experience a major power outage, we would have to rely on back-up generators. These back-up generators may not operate properly
through a major power outage, and their fuel supply could also be inadequate during a major power outage. Information systems such as
ours may be disrupted by even brief power outages, or by the fluctuations in power resulting from switches to and from backup generators.
This could disrupt our business and cause us to lose customers.
Security threats to our IT infrastructure could expose us to liability, and damage our reputation and business
It is essential to our business strategy that our technology and network infrastructure remain secure and is perceived by our customers
to be secure. Despite security measures, however, any network infrastructure may be vulnerable to cyber-attacks. Information security risks
have significantly increased in recent years in part due to the proliferation of new technologies and the increased sophistication and activities
of organized crime, hackers, terrorists and other external parties, including foreign private parties and state actors. As a leading online
source for automotive aftermarket parts, 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.
13
Table of Contents
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 in 2020. 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.
Failure to comply with privacy laws and regulations and failure to adequately protect customer data could harm our business, damage
our reputation and result in a loss of customers.
Federal and state and regulations may govern the collection, use, sharing and security of data that we receive from our customers. In
addition, we have and post on our websites our own privacy policies and practices concerning the collection, use and disclosure of customer
data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, U.S. Federal
Trade Commission requirements or other federal, state or international privacy-related laws and regulations could result in proceedings or
actions against us by governmental entities or others, which could potentially harm our business. Further, failure or perceived failure to
comply with our policies or applicable requirements related to the collection, use or security of personal information or other privacy-
related matters could damage our reputation and result in a loss of customers.
The regulatory framework is constantly evolving, and privacy concerns could adversely affect our operating results.
The regulatory framework for privacy issues is currently evolving and is likely to remain uncertain for the foreseeable future. The
occurrence of unanticipated events often rapidly drives the adoption of legislation or regulation affecting the use of data and the way we
conduct our business; in fact, there are active discussions among U.S. legislators around adoption of a new U.S. federal privacy law.
Restrictions could be placed upon the collection, management, aggregation and use of information, which could result in a material increase
in the cost of collecting and maintaining certain kinds of data. In June of 2018, California enacted the California Consumer Privacy Act
(the “CCPA”), which took effect on January 1, 2020. The CCPA gives consumers the right to request disclosure of information collected
about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject
to certain exceptions), the right to opt out of the sale of the consumer’s personal information, and the right not to be discriminated against
for exercising these rights. We are required to comply with the CCPA. The CCPA provides for civil penalties for violations, as well as a
private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and
potential liability. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation
in the U.S., which could increase our potential liability and adversely affect our business.
14
Table of Contents
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 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
15
Table of Contents
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 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 patent 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.
In 2018, for example, the CBP alleged that certain repair grilles imported by the Company were counterfeit and infringed on
trademarks registered by OEMs. The Company subsequently settled with CBP, however, to the extent that the OEMs are successful in
obtaining and enforcing other intellectual property 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
new importing requirements, increased port and carrier fees and legal expenses, adverse judgments or settlements or changes to our business
practices required to settle such claims or satisfy any judgments. For example, during fiscal 2018 we incurred approximately $5,046 of port
and carrier fees and legal expenses attributable to CBP’s wrongful seizures and the Company’s litigation with CBP. Litigation or regulatory
enforcement could also 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, or any, 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, and www.jcwhitney.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.
16
Table of Contents
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.
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;
17
Table of Contents
·
·
·
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.
Because we are involved in litigation from time to time and are subject to numerous laws and governmental regulations, we could incur
substantial judgments, fines, legal fees and other costs as well as reputational harm.
We are sometimes the subject of complaints or litigation from customers, employees or other third parties for various reasons. The
damages sought against us in some of these litigation proceedings could be substantial. Although we maintain liability insurance for some
litigation claims, if one or more of the claims were to greatly exceed our insurance coverage limits or if our insurance policies do not cover a
claim, this could have a material adverse effect on our business, financial condition, results of operations and cash flows. For more
information on our ongoing litigation, see the information set forth under the caption “Legal Matters” in “Note 8 Commitments and
Contingencies” of the Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report.
We are in the process of implementing a new enterprise resource planning system, and problems with the design or implementation of
this system could interfere with our business and operations.
We are engaged in a multi-year implementation of a new global enterprise resource planning system (ERP). The ERP is designed to
accurately maintain the company's books and records and provide information to the company's management team important to the
operation of the business. The company's ERP has required, and will continue to require, the investment of significant human and financial
resources. We may not be able to successfully implement the ERP without experiencing delays, increased costs and other difficulties. If we
are unable to successfully design and implement the new ERP system as planned, our financial positions, results of operations and cash
flows could be negatively impacted.
18
Table of Contents
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 28, 2019, 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 $0.88. We have also experienced significant
fluctuations in the trading volume of our common stock. General economic and political conditions unrelated to our performance may also
adversely affect the price of our common stock. In the past, following periods of volatility in the market price of a public company’s
securities, securities class action litigation has often been initiated. Due to the inherent uncertainties of litigation, we cannot predict the
ultimate outcome of any such litigation if it were initiated. The initiation of any such litigation or an unfavorable result could have a material
adverse effect on our financial condition and results of operations.
Our 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
NASDAQ. If our stock trades at bid prices of less than $1.00 for a period in excess of 30 consecutive business days, NASDAQ could send a
deficiency notice to us for not remaining in compliance with the minimum bid listing standards. 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.
19
Table of Contents
Our future operating results may fluctuate and may fail to meet market expectations.
We expect that our revenue and operating results will continue to fluctuate from quarter to quarter due to various factors, many of
which are beyond our control. If our quarterly revenue or operating results fall below the expectations of investors or securities analysts, the
price of our common stock could significantly decline. The factors that could cause our operating results to continue to fluctuate include,
but are not limited to:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
fluctuations in the demand for aftermarket auto parts;
price competition on the Internet or among offline retailers for auto parts;
our ability to attract visitors to our websites and convert those visitors into customers, including to the extent based on our
ability to successfully work with different search engines to drive visitors to our websites;
our ability to successfully sell our products through third-party online marketplaces or the effects of any price increases in
those marketplaces;
competition from companies that have longer operating histories, larger customer bases, greater brand recognition, access to
merchandise at lower costs and significantly greater resources than we do, like third-party online market places and our
suppliers;
our ability to maintain and expand our supplier and distribution relationships without significant price increases or reduced
service levels;
our ability to borrow funds under our credit facility;
the effects of seasonality on the demand for our products;
our ability to accurately forecast demand for our products, price our products at market rates and maintain appropriate
inventory levels;
our ability to build and maintain customer loyalty;
our ability to successfully integrate our acquisitions;
infringement actions that could impact the viability of the auto parts aftermarket or portions thereof;
the success of our brand-building and marketing campaigns;
our ability to accurately project our future revenues, earnings, and results of operations;
government regulations related to use of the Internet for commerce, including the application of existing tax regulations to
Internet commerce and changes in tax regulations;
technical difficulties, system downtime or Internet brownouts;
the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and
infrastructure; and
· macroeconomic conditions that adversely impact the general and automotive retail sales environment.
20
Table of Contents
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 28, 2019, 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;
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
21
Table of Contents
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 will be required to collect and pay more sales taxes, and could become liable for other fees and penalties, which could have an
adverse effect on our business.
We have historically collected sales or other similar taxes only on the shipment of goods to customers in the states of California,
Virginia, Illinois, and Ohio. However, following the Supreme Court decision in South Dakota v. Wayfair, the Company is now required to
collect sales tax in any state which passes legislation requiring out of state retailers to collect sales tax even where they have no physical
nexus. We have historically enjoyed a competitive advantage to the extent our competitors are already subject to those tax obligations. By
collecting sales tax in additional states, we will lose this competitive advantage as total costs to our customers will increase, which could
adversely affect our sales.
Moreover, 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.
22
Table of Contents
Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our
business, cash flow, financial condition or results of operations.
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could adversely
affect our business operations and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be
interpreted, changed, modified or applied adversely to us. For example, legislation enacted in 2017, informally titled the Tax Cuts and Jobs
Act (the “Tax Act”) enacted many significant changes to the U.S. tax laws. Future guidance from the Internal Revenue Service and other tax
authorities with respect to the Tax Act may affect us, and certain aspects of the Tax Act could be repealed or modified in future legislation.
In addition, it is uncertain if and to what extent various states will conform to the Tax Act or any newly enacted federal tax legislation.
Changes in corporate tax rates, the realization of net deferred tax assets relating to our operations, the taxation of foreign earnings, and the
deductibility of expenses under the Tax Act or future reform legislation could have a material impact on the value of our deferred tax assets,
could result in significant one-time charges, and could increase our future U.S. tax expense.
Our ability to use net operating loss carryforwards too offset future income may be limited.
Under the Tax Act, federal net operating losses (“NOL”s) incurred in taxable years ending after December 31, 2017, may be carried
forward indefinitely, but the deductibility of federal NOLs generated in tax years beginning after December 31, 2017, is limited. It is
uncertain if and to what extent various states will conform to the Tax Act. In addition, under Sections 382 and 383 of the Internal Revenue
Code of 1986, as amended (the “Code”), and corresponding provisions of state law, a corporation that undergoes an “ownership change”
(generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period) is subject to limitations on its
ability to utilize its pre-ownership change NOL carryforwards to offset post-ownership change income. We may in the future experience
ownership changes, and thus, our ability to utilize pre-ownership change NOL carryforwards to offset post-ownership change income may
be limited. Such limitations may cause a portion of our NOL carryforwards to expire before we are able to utilize them. In addition, at the
state level, there may be periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or
permanently increase state taxes owed.
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
23
Table of Contents
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, or any, insurance coverage to cover the types of
claims or liabilities that could arise as a result of such regulation.
We may be affected by global climate change or by legal, regulatory, or market responses to such change.
The growing political and scientific sentiment is that global weather patterns are being influenced by increased levels of greenhouse
gases in the earth’s atmosphere. This growing sentiment and the concern over climate change have led to legislative and regulatory
initiatives aimed at reducing greenhouse gas emissions which warm the earth’s atmosphere. These warmer weather conditions could result
in a decrease in demand for auto parts in general. Moreover, proposals that would impose mandatory requirements on greenhouse gas
emissions continue to be considered by policy makers in the United States. Laws enacted that directly or indirectly affect our suppliers
(through an increase in the cost of production or their ability to produce satisfactory products) or our business (through an impact on our
inventory availability, cost of sales, operations or demand for the products we sell) could adversely affect our business, financial condition,
results of operations and cash flows. Significant increases in fuel economy requirements or new federal or state restrictions on emissions of
carbon dioxide that may be imposed on vehicles and automobile fuels could adversely affect demand for vehicles, annual miles driven or the
products we sell or lead to changes in automotive technology. Compliance with any new or more stringent laws or regulations, or stricter
interpretations of existing laws, could require additional expenditures by us or our suppliers. Our inability to respond to such changes could
adversely impact the demand for our products and our business, financial condition, results of operations or cash flows.
Possible new tariffs that might be imposed by the United States government could have a material adverse effect on our results of
operations.
Changes in U.S. and foreign governments’ trade policies have resulted in, and may continue to result in, tariffs on imports into and
exports from the U.S. Throughout 2018 and 2019, the U.S. imposed tariffs on imports from several countries, including China. If further
tariffs are imposed on imports of our products, or retaliatory trade measures are taken by China or other countries in response to existing or
future tariffs, we could be forced to raise prices on all of our imported products or make changes to our operations, any of which could
materially harm our revenue or operating results. Any additional future tariffs or quotas imposed on our products or related materials may
impact our sales, gross margin and profitability if we are unable to pass increased prices onto our customers.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 28, 2019, the total square footage of our leased office and distribution centers was 683,000 square feet. This includes
approximately 640,000 square feet for our corporate headquarters located in Carson, California and distribution centers in LaSalle, Illinois,
Chesapeake, Virginia and Las Vegas, Nevada; and approximately 43,000 square feet of office space in the Philippines. For additional
information regarding our obligations under property leases, see “Note 8‑Commitments and Contingencies” of the Notes to Consolidated
Financial Statements, included in Part IV, Item 15 of this report.
24
Table of Contents
ITEM 3. LEGAL PROCEEDINGS
The information set forth under the caption “Legal Matters” in “Note 8‑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.
25
Table of Contents
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
PART II
Market Information
Our common stock trades on NASDAQ under the symbol “PRTS.”
Holders
As of March 5, 2020, there were approximately 19 registered shareholders of record of our common stock.
Dividend Policy
No dividends on common stock were paid during the fiscal year ended December 28, 2019. We issued approximately $161 in dividends
to our Series A Preferred stockholders during each of the fiscal years ended December 28, 2019 and December 29, 2018, respectively. 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 $30,000 subject to a borrowing base derived from certain of our receivables, inventory and property and
equipment. The Credit Agreement requires us to obtain a prior written consent from JPMorgan Chase Bank when we determine to pay any
dividends on or make any distribution with respect to our common stock. Under the Second Amendment to Credit Agreement dated
March 25, 2013, we obtained written consent from JPMorgan Chase Bank to pay dividends on our Series A Preferred Shares. See
“Liquidity and Capital Resources” in Item 7 of Part II included in this report for further information on the covenants under the secured
Credit Agreement. Any future determination to pay cash dividends on our common stock will be subject to the above restriction, as well as
restrictions under any other existing indebtedness, at the discretion of our Board of Directors and will be dependent upon our financial
condition, results of operations, capital requirements, and other factors the Board of Directors deems relevant.
Recent Sales of Unregistered Securities
None.
Use of Proceeds from Sales of Registered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information under this
item.
26
Table of Contents
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.carparts.com, www.jcwhitney.com, www.autopartswarehouse.com and our corporate website is located at
www.usautoparts.com. The inclusion of our website addresses in this report does not include or incorporate by reference into this report any
information on our websites.
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:
Number of SKUs required to serve the market. The number of automotive SKUs has grown dramatically over the last
1.
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
1.2 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.
U.S. vehicle fleet expanding and aging. The average age of U.S. light vehicles, an indicator of auto parts demand,
2.
remained near record-highs at 11.8 years during 2019, according to the U.S. Auto Care Association, up from 11.7 years during
2018. In addition, IHS, a market analytics firm, 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 2020. 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
27
Table of Contents
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.
Growth of online sales. The U.S. Auto Care Association estimated that overall revenue from online sales of auto parts
3.
and accessories would reach 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 508 employees in the Philippines as of December 28, 2019. 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.
Key Metrics. To understand revenue generation through our network of e-commerce websites and online marketplaces, we monitor
several key business metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions,
including the following:
(1)
Unique Visitors (millions)
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
(1)
Revenue Capture
Conversion
(1)
52 Weeks Ended
December 28, 2019
52 Weeks Ended
December 29, 2018
59.5
1,705
1,707
3,412
$
90
$
69
$
80
88.7 %
2.87 %
69.3
1,760
1,573
3,333
98
73
86
87.5 %
2.54 %
$
$
$
1
Excludes online marketplaces.
Unique Visitors: A unique visitor to a particular website represents a user with a distinct IP address that visits that particular website.
We define the total number of unique visitors in a given month as the sum of unique visitors to each of our websites during that month. We
measure unique visitors to understand the volume of traffic to our websites and to track the effectiveness of our online marketing efforts.
The number of unique visitors has historically varied based on a number of factors, including our marketing activities and seasonality.
Included in the unique visitors are mobile device based customers, who are becoming an increasing part of our business. Shifting consumer
behavior and technology enhancements indicates that customers are becoming more inclined to purchase auto parts through their mobile
devices. User sophistication and technological advances have increased consumer expectations around the user experience on mobile
devices, including speed of response, functionality, product availability, security, and ease of use. We believe enhancements to online
solutions specifically catering to mobile based shopping can result in an increase in the number of orders and revenues. We believe an
increase in unique visitors to our websites will result in an increase in the number
28
Table of Contents
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 2019, our unique visitors decreased by 14.1% compared to the
fiscal year 2018 primarily due to our focus on private label sales, which led us to proactively reduce marketing spend for branded product
sales.
Total Number of Orders: We monitor the total number of orders as an indicator of future revenue trends. During the fiscal year 2019,
the total number of orders increased by 2.4% compared to the fiscal year 2018, with e-commerce and online marketplace orders decreasing
by 3.1% and increasing by 8.5%, respectively. We believe total number of orders increased primarily due to improved conversion, driven by
enhanced customer experience as well as increased marketing and inventory optimization efforts.
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 2019, our average order value decreased by 7.0%
when compared to the fiscal year 2018 primarily driven by decreases in e-commerce order value as well as a shift in product mix toward
private label products which are priced lower than branded products, yet have higher gross margins. 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 online competition.
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 2019, our revenue capture increased by 1.4% to 88.7% compared to 87.5% in fiscal year 2018
primarily due to an improved fill rate resulting from higher inventory levels on hand during the year.
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 2019, our conversion increased by 13.0% to 2.9% in fiscal year 2019 compared to
2.5% in fiscal year 2018 as a result of initiatives designed to improve the overall customer experience as well as shifts in channel mix and
declines in traffic.
Executive Summary
For fiscal 2019, the Company’s continuing operations generated net sales of $280,657, compared with $289,467 for fiscal year 2018,
representing a decrease of 3.0% compared to the prior year. Our continuing operations incurred a net loss for fiscal 2019 of $31,548,
compared to a net loss of $4,889 for fiscal 2018, attributable largely to a $21,437 non-cash income tax charge resulting from a change in the
valuation allowance. Our continuing operations incurred a loss before interest expense, net, income tax provision, depreciation and
amortization expense, amortization of intangible assets, share-based compensation expense and costs related to our customs issues and
employee transition costs ("Adjusted EBITDA"), of $4,532 in fiscal 2019 compared to $10,379 in fiscal 2018. 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 decreased in fiscal 2019 compared to fiscal 2018 primarily due to a decline in our offline sales, and to a lesser extent,
due to a decrease in our online sales. Our offline sales, which consist of our Kool-Vue and wholesale
®
29
Table of Contents
operations, contributed 8.8% of total revenues and our online sales, which include our e-commerce, online marketplace sales channels and
online advertising, contributed 91.2% of total revenues. Our offline sales decreased by $6,853, or 21.8%, to $24,607 compared to the same
period last year primarily due to a decrease in revenue from our wholesale operations. Our online sales for fiscal year 2019 decreased by
$1,957 or 0.8%, to $256,050 due to a decrease in total online orders of 2.4% and a lower average order value. The decreases were primarily
attributable to decreases in marketplace sales with one of our channel partners, as well as due to a decrease in e-commerce sales attributable
to a reduction of traffic and a shift in our focus to private label sales vs. branded sales.
Like most e-commerce retailers, our success depends on our ability to attract online consumers to our websites and convert them into
customers in a cost-effective manner. Historically, marketing through search engines provided the most efficient opportunity to reach
millions of online auto part buyers. We are included in search results through paid search listings, where we purchase specific search terms
that will result in the inclusion of our listing, and algorithmic searches that depend upon the searchable content on our websites. Algorithmic
listings cannot be purchased and instead are determined and displayed solely by a set of formulas utilized by the search engine. We have had
a history of success with our search engine marketing techniques, which gave our different websites preferred positions in search results.
Search engines, like Google, revise their algorithms from time to time in an attempt to optimize their search results. During the last
few years, Google has changed its search results ranking algorithm. In some cases our unique visitor count, and therefore our financial
results, were negatively impacted by these changes. We continue to address the ongoing changes to the Google methodology, but during the
fiscal year 2019, our unique visitor count decreased by 9,800 or 14.1%, to 59,500 unique visitors compared to 69,300 unique visitors in
fiscal 2018 primarily driven by our focus on private label sales, which led us to proactively reduce marketing spend for branded product
sales. 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 2019 compared to the same
period in 2018. Components of our cost of sales and operating costs are described in further detail under — “Basis of Presentation” below.
We continue to pursue strategies to improve sales growth and 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 are intended to 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.
30
Table of Contents
· We continue to increase product selection by being the first to market with many new SKUs. We currently have over 58,000
private label SKUs and over 700,000 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.
Non-GAAP measures
Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” and other provisions of the Securities Exchange Act of 1934,
as amended, define and prescribe the conditions for use of certain non-GAAP financial information. We provide EBITDA and Adjusted
EBITDA, which are non-GAAP financial measures. EBITDA consists of net income (loss) before (a) interest expense, net; (b) income tax
provision; (c) depreciation and amortization expense; and (d) amortization of intangible assets; while Adjusted EBITDA consists of
EBITDA before share-based compensation expense, costs related to our customs issues and employee transition costs.
The Company believes that these non-GAAP financial measures provide important supplemental information to management and
investors. These non-GAAP financial measures reflect an additional way of viewing aspects of the Company’s operations that, when viewed
with the GAAP results and the accompanying reconciliation to corresponding GAAP financial measures, provide a more complete
understanding of factors and trends affecting the Company’s business and results of operations.
Management uses Adjusted EBITDA as one measure of the Company’s operating performance because it assists in comparing the
Company’s operating performance on a consistent basis by removing the impact of stock compensation expense and costs associated with
our customs issues, as well as other items that allow for a more meaningful comparison of our core business results and those of other
companies. 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.
This non-GAAP financial measure is used in addition to and in conjunction with results presented in accordance with GAAP and
should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review the
Company’s consolidated financial statements in their entirety and to not rely on any single financial measure. Because non-GAAP financial
measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial
measures having the same or similar names. In addition, the Company expects to continue to incur expenses similar to the non-GAAP
adjustments described above, and exclusion of these items from the Company’s non-GAAP measures should not be construed as an
inference that these costs are unusual, infrequent or non-recurring.
31
Table of Contents
The table below reconciles net loss from continuing operations to Adjusted EBITDA for the periods presented (in thousands):
Net loss from continuing operations
Depreciation & amortization
Amortization of intangible assets
Interest expense, net
Taxes
EBITDA
Stock compensation expense
Employee transition costs
Customs Costs
Proceeds from AutoMD sale
Adjusted EBITDA
(2)
(1)
Fifty-two weeks ended
December 28, 2019
December 29, 2018
(31,548)
6,252
100
1,897
21,437
(1,862)
3,656
2,274
464
—
4,532
$
$
$
$
$
$
(4,889)
5,802
185
1,595
(329)
2,364
3,595
774
5,046
(1,400)
10,379
(1) We incurred employee transition costs related to the transition of our executive management team including severance, recruiting,
hiring bonus and relocation costs.
(2) We incurred port and carrier fees and legal costs associated with our customs related issues. Refer to “Note 8 —Commitments and
Contingencies” of our Notes to Consolidated Financial Statements for additional details.
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 marketplace websites, where we sell through storefronts that we maintain on third-party
owned websites. Prior to March 2019, we sold 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.
®
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.
32
Table of Contents
General and Administrative Expense. General and administrative expense consists primarily of administrative payroll and related
expenses, merchant processing fees, legal and professional fees and other administrative costs. General and administrative expense also
includes depreciation and amortization expense and share-based compensation expense.
Fulfillment Expense. Fulfillment expense consists primarily of payroll and related costs associated with our warehouse employees and
our purchasing group, facilities rent, building maintenance, depreciation and other costs associated with inventory management and our
wholesale operations. Fulfillment expense also includes share-based compensation expense.
Technology Expense. Technology expense consists primarily of payroll and related expenses of our information technology personnel,
the cost of hosting our servers, communications expenses and Internet connectivity costs, computer support and software development
amortization expense. Technology expense also includes share-based compensation expense.
Amortization of Intangible Assets. Amortization of intangibles consists of the amortization expense associated with our definite-lived
intangible assets.
Impairment Loss. Impairment loss is recorded as a result of impairment testing performed for goodwill and indefinite-lived intangible
assets in accordance with Accounting Standards Update (“ASC”) 350 Intangibles – Goodwill and Other, and long-lived assets (“ASC
350”), including intangible assets subject to amortization, in accordance with ASC 360 Property, Plant and Equipment (“ASC 360”).
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.
33
Table of Contents
Results of Continuing Operations
The following table sets forth selected statement of operations data for the periods indicated, expressed as a percentage of net sales:
Net sales
Cost of sales
Gross profit
Operating expenses:
Marketing
General and administrative
Fulfillment
Technology
Amortization of intangible assets
Total operating expenses
Loss from operations
Other income (expense):
Other income, net
Interest expense
Total other expense, net
Loss before income taxes
Income tax provision (benefit)
Net loss
Fiscal Year Ended
December 28, 2019 December 29, 2018
100.0 %
70.0
30.0
15.8
6.3
8.9
1.9
0.0
32.9
(2.9)
0.0
(0.7)
(0.7)
(3.6)
7.6
(11.2)%
100.0 %
72.8
27.2
13.2
6.9
7.4
1.4
0.1
28.9
(1.7)
0.5
(0.6)
(0.1)
(1.8)
(0.1)
(1.7)%
Fifty-Two Weeks Ended December 28, 2019 Compared to the Fifty-Two Weeks Ended December 29, 2018
Net Sales and Gross Margin
Net sales
Cost of sales
Gross profit
Gross margin
Fiscal Year Ended
December 28, 2019 December 29, 2018 $ Change % Change
$
$
(in thousands)
280,657 $
196,434
84,223 $
30.0 %
289,467 $ (8,810)
(14,312)
210,746
5,502
78,721 $
27.2 %
(3.0)%
(6.8)%
7.0 %
2.8 %
Net sales decreased $8,810 for fiscal year 2019 compared to fiscal year 2018. Our net sales consisted of online sales, which include our
e-commerce sites, online marketplace sales channels and online advertising, representing 91.2% of the total for fiscal year 2019 (compared
to 89.1% in fiscal year 2018), and offline sales, representing 8.8% of the total for fiscal year 2019 (compared to 10.9% in fiscal year 2018).
The net sales decrease was due to a decrease of $1,957, or 0.8%, in online sales, and a decrease of $6,853, or 21.8%, in offline sales. Offline
sales decreased primarily due to decreased revenue from wholesale operations. Our online sales decreased primarily due to a decrease in
total online orders of 2.4%, as well as a decrease in average order value of 7.0%. The decrease in total orders was primarily attributable to a
decrease in marketplace sales with one of our channel partners, as well as due to a decrease in e-commerce sales attributable to a reduction
of traffic and a shift in our focus to private label sales vs. branded sales.
Gross profit increased $5,502, or 7.0%, in fiscal year 2019 compared to fiscal year 2018. Gross margin increased 280 basis points to
30.0% in fiscal year 2019 compared to 27.2% in fiscal year 2018. Gross margin increased in fiscal year 2019 compared to fiscal year 2018
primarily due to a shift towards higher margin private label sales.
34
Table of Contents
Marketing Expense
Marketing expense
Percent of net sales
Fiscal Year Ended
December 28, 2019 December 29, 2018
(in thousands)
$ Change % Change
$
44,341
$
15.8 %
38,081
$
13.2 %
6,260
16.4
2.6 %
Total marketing expense increased $6,260, or 16.4%, for fiscal year 2019 compared to fiscal year 2018. As a percent to net sales, total
marketing expense was 15.8% for fiscal 2019 compared to 13.2% for fiscal year 2018. Online advertising expense, which includes catalog
costs, was $25,691, or 10.0%, of online sales for fiscal year 2019, compared to $20,942, or 8.1%, of online sales for fiscal year 2018.
Online advertising expense increased primarily due to an increase in paid search advertising. Marketing expense, excluding online
advertising, was $18,649, or 6.6%, of net sales for fiscal year 2019, compared to $17,181, or 5.9%, of net sales for fiscal year 2018. The
increase was primarily due to an increase in overhead driven by investments in marketing platforms and employees.
General and Administrative Expense
General and administrative expense
Percent of net sales
Fiscal Year Ended
December 28, 2019 December 29, 2018
(in thousands)
$ Change % Change
$
17,744
$
6.3 %
19,964
$ (2,220)
6.9 %
(11.1)%
(0.6)%
General and administrative expense decreased $2,220, or 11.1%, for fiscal year 2019 compared to fiscal year 2018 primarily due to
decreased depreciation and amortization. General and administrative expense decreased as a percentage of net sales compared to 2018
primarily due to a decrease in stock based compensation expense as well as lower legal fees resulting from customs issues in 2018.
Fulfillment Expense
Fulfillment expense
Percent of net sales
Fiscal Year Ended
December 28, 2019 December 29, 2018
(in thousands)
$ Change % Change
$
24,946
$
8.9 %
21,310
$
7.4 %
3,636
17.1 %
1.5
Fulfillment expense increased $3,636, or 17.1%, for fiscal year 2019 compared to fiscal year 2018 primarily due to an increase in
overhead and employee costs. Fulfillment expense increased as a percentage of net sales compared to 2018 due primarily to an increased
number of orders shipped out of our distribution centers as well as the opening of the third warehouse in Las Vegas, Nevada.
Technology Expense
Technology expense
Percent of net sales
Fiscal Year Ended
December 28, 2019 December 29, 2018
(in thousands)
$ Change % Change
$
5,342
$
1.9 %
4,188
$
1.4 %
1,154
27.6 %
0.5 %
Technology expense increased $1,154, or 27.6%, for fiscal year 2019 compared to fiscal year 2018 primarily due to increased overhead
driven by employee costs. Technology expense increased as a percentage of net sales compared to 2018 primarily due to PCI compliance
costs and increased headcount.
35
Table of Contents
Total Other Expense, Net
Other expense, net
Percent of net sales
Fiscal Year Ended
December 28, 2019 December 29, 2018 $ Change % Change
$
(in thousands)
(1,861)
$
(0.7)%
(211)
(0.1)%
$ (1,650)
782.0 %
(0.6)
Total other expense, net increased $1,650, or 782.0%, for fiscal year 2019 compared to fiscal year 2018. Total other expense increased
during fiscal year 2019 compared to fiscal year 2018 primarily due to interest expense compared to the prior year, as well as the sale of
AutoMD assets for $1,400 in 2018.
Income Tax Provision
Income tax (benefit) provision
Percent of net sales
Fiscal Year Ended
December 28, 2019 December 29, 2018
$ Change % Change
$
(in thousands)
21,437
$
7.6 %
(329)
(0.1)%
$ 21,766
(6,615.8) %
7.8 %
The Company accounts for income taxes in accordance with ASC 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 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
difference. 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 28, 2019, when revaluating all available
evidence, including (1) recent history of operating losses, (2) inability to objectively estimate future income and (3) lack of (i) tax planning
strategies, (ii) income in carryback periods and (iii) reversing existing temporary differences, management considered it appropriate to
record an additional valuation allowance of approximately $23,015 against our deferred tax assets. As of December, 29, 2018, the
Company maintained a valuation allowance in the amount of $29,791 against deferred tax assets that were nor more likely than not to be
realized.
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 we continue to assess our operations, to the extent our results
and expectations of core earnings continue, we may be in a position to release additional valuation allowance in the future.
As of December 28, 2019, the Company had no material unrecognized tax benefits, interest or penalties related to federal and state
income tax matters. At December 28, 2019, the Company’s federal and state net operating loss (“NOL”) carryforwards were $85,830 and
$79,643, respectively. Federal NOL carryforwards of $2,106 were acquired in the acquisition of WAG which are subject to Section 382 of
the Internal Revenue Code of 1986, as amended (the “Code”) and limited to an annual usage limitation of $135. The Company’s federal
NOL carryforwards begin to expire in 2029, while the Company’s state NOL carryforwards being to expire in 2020.
Liquidity and Capital Resources
Sources of Liquidity
During the fifty-two weeks ended December 28, 2019, 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 $2,273 as of
December 28, 2019, representing a $242 increase from $2,031 of cash and cash equivalents as of December 29, 2018. Based on our current
operating plan, we believe that our existing cash and cash equivalents,
36
Table of Contents
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 28, 2019, 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 28, 2019 and December 29, 2018, our working capital was $2,472 and $10,466, 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 decrease in working capital is primarily due to an increase in accounts payable.
Cash Flows
The following table summarizes the key cash flow metrics from our consolidated statements of cash flows for fiscal year 2019, and
2018, respectively (in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Effect of exchange rate changes on cash
Net change in cash and cash equivalents
Operating Activities
Fiscal Year Ended
December 28, 2019 December 29, 2018
$
$
6,877 $
(6,160)
(465)
(10)
242 $
6,181
(5,688)
(1,283)
(29)
(819)
Cash provided by operating activities is primarily comprised of net loss, adjusted for non-cash activities such as deferred income tax,
depreciation and amortization expense, amortization of intangible assets 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
$(233) (adjusted for non-cash charges primarily consisting of deferred income tax of 21,287, depreciation and amortization expense of
$6,252 and share-based compensation expense of $3,656) for the period ended December 28, 2019 compared to $4,267 (adjusted for non-
cash charges primarily consisting of depreciation and amortization expense of $5,802 and share-based compensation expense of $3,595) for
the period ended December 29, 2018. 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 $2,669 at December 28, 2019 from $3,727 at December 29, 2018, resulting in a decrease in
operating assets and reflecting a cash inflow of $1,058 for the fiscal year ended December 28, 2019. Accounts receivable
increased primarily due to the timing of payments at the end of the year.
Inventory increased to $52,500 at December 28, 2019 from $49,626 at December 29, 2018, resulting in an increase in
operating assets and reflecting a cash outflow of $2,874 for the fiscal year ended December 28, 2019.
Accounts payable and accrued expenses increased to $53,952 at December 28, 2019 compared to $44,286 at
December 29, 2018 resulting in an increase in operating liabilities and reflecting a cash inflow of $9,666
37
Table of Contents
for the fiscal year ended December 28, 2019. Accounts payable and accrued expenses increased primarily due to an increase
in accounts payable of $10,394.
Investing Activities
For the fiscal years ended December 28, 2019 and December 29, 2018, net cash used in investing activities was primarily the result of
increases in property and equipment ($6,160, and $5,689 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.
Financing Activities
For the fiscal years ended December 28, 2019 December 29, 2018, net cash used in financing activities was primarily due to payments
made on capital leases (see further discussion in “Note 8 — Commitments and Contingencies” below).
Debt and Available Borrowing Resources
Total debt was $11,056 as of December 28, 2019 compared to $9,153 as of December 29, 2018. Total debt as of December 28, 2019
consisted of Right-of-use ("ROU") obligation financing totaling $9,267 and a financing arrangement with a third-party financial institution
related to the development of the Company’s warehouse located in Las Vegas totaling $1,789. Of this total debt, $1,369 was included in
current liabilities and $9,687 was included in non-current liabilities (see further discussion in “Note 8 — Commitments and Contingencies”
below).
The Company maintains an asset-based revolving credit facility ("Credit Facility") that provides for, among other things a revolving
commitment in an aggregate principal amount of up to $30,000, which is subject to a borrowing base derived from certain receivables,
inventory and property and equipment. Our Credit Facility also provides for an option to increase the aggregate principal amount from
$30,000 to $40,000 subject to lender approval. At December 28, 2019, our outstanding revolving loan balance was $0. The customary
events of default under the credit facility (discussed below) include certain subjective acceleration clauses, which management has
determined the likelihood of such acceleration is more than remote, considering the recurring losses experienced by the Company, therefore
a current classification of our revolving loan payable was required.
On December 18, 2019, the Company and JPMorgan Chase Bank, N.A. (“JPMorgan”) entered into the Eleventh Amendment (the
“Amendment”) which amended the Credit Agreement previously entered into by the Company, certain of its domestic subsidiaries and
JPMorgan on April 26, 2012 and the Pledge and Security Agreement previously entered into by the Company, certain of its domestic
subsidiaries and JPMorgan on April 26, 2012. Pursuant to the Amendment, among other changes, the maturity date of the Credit Agreement
was extended from April 26, 2020 to December 16, 2022, the net orderly liquidation value inventory advance rate was increased from 90%
to 95% for a six-month period following the effective date of the Amendment, and the Company’s $5,000 basket for sales and dispositions
of property in connection with Permitted Acquisitions (as defined in the Credit Agreement) was made available in full following the
effective date of the Amendment.
On January 17, 2020, the Company and JPMorgan entered into the Twelfth Amendment to Credit Agreement and Fifth Amendment
to Pledge and Security Agreement (the “Twelfth Amendment”), which amended the Credit Agreement previously entered into by the
Company, certain of its domestic subsidiaries and JPMorgan on April 26, 2012 and the Pledge and Security Agreement previously entered
into by the Company, certain of its domestic subsidiaries and JPMorgan on April 26, 2012. Pursuant to the Twelfth Amendment, letters of
credit will be made available to the Company, subject to certain customary restrictions and conditions, in an aggregate amount not to
exceed $25,000, an increase from $20,000. As of December 28, 2019, our outstanding letters of credit balance was $17,638.
38
Table of Contents
The other amendments to the Credit Agreement made under the Twelfth
Amendment were as follows:
·
·
·
Solely until March 31, 2020 and for purposes of the covenant testing and cash dominion triggers in the Credit Agreement, the
facility will incorporate elements of the borrowing base above the $30,000 available to borrow.
Until March 31, 2020, the Company will be subject to reporting on a weekly basis with respect to the borrowing base and other
metrics.
Customary LIBOR successor provisions were added to the Credit Agreement.
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 “alternate 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 28, 2019, the Company’s LIBOR based interest rate was 3.56% (on $0 principal) and the Company’s prime based rate
was 5.0% (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 Credit 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 45 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 $3,000 for the period commencing on any day that
excess availability is less than $3,000 for three consecutive business days, and continuing until excess availability has been greater than or
equal to $3,000 at all times for 45 consecutive days (with the trigger subject to adjustment based on the Company’s revolving commitment).
The Company’s excess availability was $6,622 at December 28, 2019. The credit facility matures on December 16, 2022. As of
December 28, 2019, our outstanding letters of credit balance was $17,638 of which $13,011 was utilized and included in accounts payable
in our consolidated balance sheet.
Certain of the Company’s domestic subsidiaries are co-borrowers (together with the Company, the “Borrowers”) under the Credit
Agreement, and certain other domestic subsidiaries are guarantors (the “Guarantors” and, together with the Borrowers, the “Loan Parties”)
under the Credit Agreement. The Borrowers and the Guarantors are jointly and severally liable for the Borrowers’ obligations under the
Credit Agreement. The Loan Parties’ obligations under the Credit Agreement are secured, subject to customary permitted liens and certain
exclusions, by a perfected security interest in (a) all tangible and intangible assets and (b) all of the capital stock owned by the Loan Parties
(limited, in the case of foreign subsidiaries, to 65% of the capital stock of such foreign subsidiaries). The Borrowers may voluntarily prepay
the loans at any time. The Borrowers are required to make mandatory prepayments of the loans (without payment of a premium) with net
cash proceeds received upon the occurrence of certain “prepayment events,” which include certain sales or other dispositions of collateral,
certain casualty or condemnation events, certain equity issuances or capital contributions, and the incurrence of certain debt.
The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable
to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, fundamental changes, investments,
dispositions, prepayment of other indebtedness, mergers, and dividends and other distributions.
Events of default under the Credit Agreement include: failure to timely make payments due under the Credit Agreement; material
misrepresentations or misstatements under the Credit Agreement and other related agreements; failure to comply with covenants under the
Credit Agreement and other related agreements; certain defaults in respect of other material indebtedness; insolvency or other related
events; certain defaulted judgments; certain ERISA-related events; certain security interests or liens under the loan documents cease to be,
or are challenged by the Company or any of its subsidiaries as not being, in full force and effect; any loan document or any material
provision of the same ceases
39
Table of Contents
to be in full force and effect; and certain criminal indictments or convictions of any Loan Party. As of December 28, 2019, 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.
See additional information in “Note 4 – 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.
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.
40
Table of Contents
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 five revenue recognition criteria are met: a contract has been identified, separate performance obligations
are identified, the transaction price is determined, the transaction price is allocated to separate performance obligations and revenue is
recognized upon satisfying each performance obligation. The Company transfers the risk of loss or damage upon shipment, therefore,
revenue from product sales is recognized when it is shipped 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 evaluated the criteria of ASC 606 - 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
primarily responsible for fulfilling the promise to provide a specified good or service, the Company is subject to inventory risk before the
good or service has been transferred to a customer and the Company has discretion in establishing the price, 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.
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 2019. 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.
41
Table of Contents
Inventory is accounted for using the first-in first-out (“FIFO”) method and valued at the lower of cost or net realizable 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
carryforwards, 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 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;
Tax-planning strategies.
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
42
Table of Contents
measure the tax benefit as the largest amount which is more than 50% likely to be 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.
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 (“ASC 505-50”). 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. Forfeitures are accounted for as they occur.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information under
this item.
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
43
Table of Contents
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 28, 2019 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 28, 2019, based on the “Internal Control — Integrated Framework (2013)” issued by the Committee of
Sponsoring Organizations of the Treadway Commission. This assessment was conducted utilizing our documentation of policies and
procedures, risk control matrices, gap analysis, key process walk-throughs and management’s knowledge of and interaction with its controls
and testing of our key controls.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of
any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is
reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a
timely basis. Based on such assessment and criteria, management has concluded that the internal controls over financial reporting were
effective as of December 28, 2019.
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 28, 2019 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.
44
Table of Contents
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
(a)
(b)
Identification of Directors. The information under the caption “Election of Directors,” appearing in the Proxy Statement to be
filed in connection with our 2020 Annual Meeting of Stockholders (“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 2019.
Identification of Executive Officers and Certain Significant Employees. The information under the caption “Delinquent Section
16(a) Reports,” 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 2019.
(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 2019.
(d) We have adopted a Code of Ethics and Business Conduct which applies to all directors, officers (including our principal
executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions)
and employees. The full text of our Code of Ethics and Business Conduct is available on the Investor Relations section of our
website at www.usautoparts.net which can be directly accessed at http://investor.usautoparts.net/. We intend to disclose future
amendments to certain provisions of the Code of Ethics and Business Conduct, and any waivers of provisions of the Code of
Ethics and Business Conduct required to be disclosed under the rules of the SEC, at the same location on our website.
(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 2019.
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 2019.
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 2019.
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 2019.
45
Table of Contents
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 2019.
46
Table of Contents
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
PART IV
(1) Financial Statements. The following financial statements of U.S. Auto Parts Network, Inc. are included in a separate section
of this Annual Report on Form 10‑K commencing on the pages referenced below:
Report of RSM US LLP, independent registered public accounting firm
Consolidated Balance Sheets as of December 28, 2019 and December 29, 2018
Consolidated Statements of Operations and Comprehensive Operations for each of the two years in the period ended December
28, 2019
Consolidated Statements of Stockholders’ Equity for each of the two years in the period ended December 28, 2019
Consolidated Statements of Cash Flows for each of the two years in the period ended December 28, 2019
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
Page
F-1
F-2
F-3
F-4
F-5
F-6
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:
47
Table of Contents
Exhibit No.
EXHIBIT INDEX
Description
2.1
3.1
3.2
3.3
3.4
4.1*
4.2
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).
Specimen common stock certificate.
Description of Common Stock of the Company.
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+
2019 Independent Director Compensation Plan (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form
10 Q filed with the Securities and Exchange Commission on August 9, 2018).
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 15, 2019 between U.S. Auto Parts Network, Inc. and David Meniane (incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8 K filed with the Securities and Exchange Commission on
March 15, 2019).
10.9+
Employment Agreement dated February 7, 2019 between the Company and Houman Akhavan.
10.10+
10.11
10.12
Employment Agreement dated November 27, 2018 between the Company and Lev Peker (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8 K filed with the Securities and Exchange Commission on November 28,
2018).
Board Candidate Agreement dated May 31, 2018 by and among the Company, Mehran Nia, and the Nia Living Trust
Established September 2, 2004 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8 K filed with the
Securities and Exchange Commission on June 1, 2018).
Letter Agreement, dated May 31, 2018, by and U.S. Auto Parts Network, Inc., Mina Khazani, and the Mina Khazani
Living Trust, Dated May 30, 2007 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8 K filed with
the Securities and Exchange Commission on June 1, 2018).
48
Table of Contents
Exhibit No.
10.13+
10.14+
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
Description
Form of Notice of Grant of Restricted Stock Units to Directors under the U.S. Auto Parts Network, Inc. 2016 Equity
Incentive Plan (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10 Q filed with the Securities
and Exchange Commission on August 9, 2018).
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).
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).
Eleventh Amendment to Credit Agreement and Fifth Amendment to Pledge and Security Agreement, dated December 18,
2019 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 December 20, 2019).
Twelfth Amendment to Credit Agreement and Fifth Amendment to Pledge and Security Agreement, dated January 17,
2020 by and among U.S. Auto Parts Network Inc., certain of its domestic subsidiaries and JPMorgan Chase Bank, N.A.
Form of 2019 Performance Restricted Stock Unit Award Agreement under the U.S. Auto Parts Network, Inc. 2016 Equity
Incentive Plan (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10‑Q filed on August 8, 2019)).
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).
49
Table of Contents
Exhibit No.
10.28
10.29
10.30
10.31
10.32
10.33
10.34
21.1
23.1
31.1
31.2
32.1
32.2
Description
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).
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).
Board Candidate Agreement dated January 18, 2019 by and among the Company, David Kanen, Kanen Wealth
Management LLC, and Philotimo Fund, LP. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8 K
filed with the Securities and Exchange Commission on January 23, 2019) .
Amendment to Board Candidate Agreement dated January 17, 2019 by and among the Company, Mehran Nia, and the Nia
Living Trust Established September 2, 2004. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8 K
filed with the Securities and Exchange Commission on January 23, 2019) .
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.
50
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of RSM US LLP, independent registered public accounting firm
Consolidated Balance Sheets as of December 28, 2019 and December 29, 2018
Consolidated Statements of Operations and Comprehensive Operations for each of the two years in the period ended
December 28, 2019
Consolidated Statements of Stockholders’ Equity for each of the two years in the period ended December 28, 2019
Consolidated Statements of Cash Flows for each of the two years in the period ended December 28, 2019
Notes to Consolidated Financial Statements
F- 1
F- 2
F- 3
F- 4
F- 5
F- 6
Table of Contents
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 28, 2019 and December 29, 2018, the related consolidated statements of operations and comprehensive operations, stockholders’
equity and cash flows for the years then ended, and the 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 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
We have served as the Company’s auditor since 2015.
/s/ RSM US LLP
Los Angeles, CA
March 9, 2020
F-1
Table of Contents
U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par and Per Share Liquidation Value)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventory
Other current assets
Total current assets
Deferred income taxes
Property and equipment, net
Right-of-use - assets - operating leases, net
Right-of-use - assets - financing leases, net
Other non-current assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Current portion of capital leases payable
Customer deposits
Notes payable, current
Right-of-use - obligation - operating, current
Right-of-use - obligation - finance, current
Other current liabilities
Total current liabilities
Capital leases payable, net of current
Notes payable, non-current
Right-of-use - obligation - operating, non-current
Right-of-use - obligation - finance, non-current
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 shares issued and outstanding at both December 28, 2019 and
December 29, 2018
Common stock, $0.001 par value; 100,000 shares authorized; 36,167 and 34,992 shares issued and outstanding
at December 28, 2019 and December 29, 2018 (of which 2,525 are treasury stock)
Treasury stock
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
F-2
December 28,
2019
December 29,
2018
$
$
$
$
$
$
$
2,273
2,669
52,500
4,931
62,373
—
9,650
4,544
9,011
2,368
87,946
44,433
9,519
—
652
729
1,368
640
2,605
59,946
0
1,060
3,419
8,627
2,514
75,566
2,031
3,727
49,626
3,401
58,785
21,833
15,184
—
—
2,163
97,965
34,039
10,247
594
521
—
—
—
2,918
48,319
8,559
—
—
—
2,265
59,143
3
3
38
(7,146)
187,147
214
(167,876)
12,380
87,946
$
38
(7,146)
183,139
579
(137,791)
38,822
97,965
Table of Contents
U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(In Thousands, Except Per Share Data)
(1)
Net sales
Cost of sales
Gross profit
Operating expenses:
Marketing
General and administrative
Fulfillment
Technology
Amortization of intangible assets
Total operating expenses
Loss from operations
Other income (expense):
Other, net
Interest expense
Total other expense, net
Loss before income taxes
Income tax (benefit) provision
Net loss
Other comprehensive income:
Foreign currency translation adjustments
Actuarial loss on defined benefit plan
Total other comprehensive income
Comprehensive loss
Loss per share:
Basic and diluted net loss per share
Weighted average common shares outstanding:
Shares used in computation of basic and diluted net loss per share
Fiscal Year Ended
December 28,
2019
December 29,
2018
$
$
280,657
196,434
84,223
289,467
210,746
78,721
44,341
17,744
24,946
5,342
100
92,473
(8,250)
36
(1,897)
(1,861)
(10,111)
21,437
(31,548)
(52)
(313)
(365)
(31,913)
(0.89)
35,720
$
$
$
$
38,081
19,964
21,310
4,188
185
83,728
(5,007)
1,387
(1,598)
(211)
(5,218)
(329)
(4,889)
22
—
22
(4,867)
(0.14)
34,941
(1) Excludes depreciation and amortization expense which is included in marketing, general and administrative and fulfillment
expense as described in “Note 1 – Summary of Significant Accounting Policies and Nature of Operations”.
See accompanying notes to consolidated financial statements.
F-3
Table of Contents
U.S AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)
Preferred Stock
Common Stock
Amount
Additional
Paid-in-
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Shares
Amount
Balance as originally stated at December 30, 2017
Effect of new accounting adoption
Balance as currently stated at December 30, 2017
Net loss
Issuance of shares in connection with stock option exercises
Issuance of shares in connection with restricted stock units
vesting
Minimum tax withholding on RSU’s
Issuance of shares in connection with BOD fees
Share-based compensation
Cash dividends on preferred stock
Effect of changes in foreign currencies
Balance, December 29, 2018
Balance as originally reported at December 29, 2018
Effect of new accounting adoption
Balance as currently stated at, December 29, 2018
Net loss
Issuance of shares in connection with stock option exercise
Issuance of shares in connection with restricted stock units
vesting
Issuance of shares in connection with BOD fees
Share-based compensation
Dividend on preferred stock
Actuarial loss on defined benefit plan
Effect of changes in foreign currencies
$
2,771
—
2,771
—
—
—
—
—
—
—
—
2,771
$
2,771
$
—
2,771
—
—
—
—
—
—
—
—
Balance, December 28, 2019
2,771
$
3
—
3
—
—
—
—
—
—
—
—
3
3
—
3
—
—
—
—
—
—
—
—
3
Shares
34,666 $
—
34,666
—
6
479
(166)
7
—
—
—
34,992
$
34,992
$
—
34,992
—
305
795
16
—
59
—
—
36,167
$
37 $
—
37
—
—
1
—
—
—
—
—
38
38
—
38
—
—
—
—
—
—
—
—
38
$
$
$
179,906 $
—
179,906
—
6
—
(430)
14
3,643
—
—
183,139 $
183,139 $
—
183,139
—
460
(302)
19
3,710
121
—
—
187,147 $
(7,146) $
—
(7,146)
—
—
—
—
—
—
—
—
(7,146)
(7,146)
—
(7,146)
—
—
—
—
—
—
—
—
(7,146)
$
$
$
Accumulated
Deficit
(132,996) $
255
(132,741)
(4,889)
—
$
$
—
—
—
—
(161)
—
(137,791)
(137,791)
1,623
(136,168)
(31,548)
—
—
—
—
(160)
—
—
Total
Stockholders’
Equity
40,361
255
40,616
(4,889)
6
1
(430)
14
3,643
(161)
22
38,822
38,822
1,623
40,445
(31,548)
460
(302)
19
3,710
(39)
(313)
(52)
12,380
557 $
—
557
—
—
—
—
—
—
—
22
579
$
$
579
—
579
—
—
—
—
—
—
(313)
(52)
214
$
(167,876) $
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Operating activities
Net loss
Adjustments to reconcile net income to net cash 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
Amortization of deferred financing costs
Loss 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
Right-of-Use Obligation - Operating Leases - Current
Right-of-Use Obligation - Operating Leases - Long-term
Other non-current liabilities
Net cash provided by operating activities
Investing activities
Additions to property and equipment
Proceeds from sale of property and equipment
Net cash used in investing activities
Financing activities
Borrowings from revolving loan payable
Payments made on revolving loan payable
Proceeds from notes payable
Payment of notes payable
Payments on capital leases
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 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:
Right-of-use operating asset acquired
Right-of-use financed asset acquired
Accrued asset purchases
Fixed asset purchased through note payable
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes
Cash paid during the period for interest
See accompanying notes to consolidated financial statements.
F-5
Fiscal Year Ended
December 28,
December 29,
2019
2018
$
(31,548)
$
(4,889)
6,252
100
21,287
3,656
19
1
—
1,058
(2,874)
(1,527)
166
9,953
(99)
1,364
(1,121)
190
6,877
(6,160)
—
(6,160)
14,626
(14,626)
257
(130)
(670)
(302)
460
—
(80)
(465)
(10)
242
2,031
2,273
1,098
947
720
1,919
95
1,896
$
$
$
$
$
$
$
5,802
185
(446)
3,595
14
4
1
(1,257)
4,605
(1,326)
150
742
(1,135)
—
—
136
6,181
(5,689)
1
(5,688)
3,316
(3,316)
—
—
(598)
(430)
6
(100)
(161)
(1,283)
(29)
(819)
2,850
2,031
—
—
1,008
—
81
1,606
$
$
$
$
$
$
$
Table of Contents
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.carparts.com, www.jcwhitney.com,
www.autopartswarehouse.com and our corporate website is located at www.usautoparts.com.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 28, 2019 (fiscal year 2019) and December 29, 2018 (fiscal year 2018) are both 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
In fiscal year 2019, the Company incurred a net loss of $31,548, compared to net loss of $4,889 in fiscal year 2018. $23,015 of the net
loss for fiscal 2019 was related to a valuation allowance recorded on the Company’s deferred tax assets. 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 2020, 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
F-6
Table of Contents
acceptable terms, or at all. If revenues were to decline and we incur net losses because our strategies to return to consistent profitability are
not successful or otherwise, and if we are not able to raise adequate additional financing or proceeds from asset sales to continue to fund our
ongoing operations, we will need to defer, reduce or eliminate significant planned expenditures, restructure or significantly curtail our
operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include, but are
not limited to, those related to revenue recognition, uncollectible receivables, the valuation of short-term investments, valuation of
inventory, valuation of deferred tax assets and liabilities, valuation of intangible and other long-lived assets, recoverability of software
development costs, contingencies and share-based compensation expense that results from estimated grant date fair values and vesting of
issued equity awards. Actual results could differ from these estimates.
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 2 –
Fair Value Measurements” for additional fair value information. If the Company’s revolving loan payable (see “Note 4 – 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.
Inventory
Inventories consist of finished goods available-for-sale and are stated at the lower of cost or net realizable 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 net realizable value,
adjusted for slow moving, obsolete or scrap product. Inventory at December 28, 2019 and December 29, 2018 included items in-transit to
our warehouses, in the amount of $14,502 and $9,701, respectively.
F-7
Table of Contents
Website and Software Development Costs
The Company capitalizes certain costs associated with website and software developed for internal use according to ASC 350‑50 -
Intangibles – Goodwill and Other – Website Development Costs and ASC 350‑40 Intangibles – Goodwill and Other – Internal-Use
Software, when both the preliminary project design and testing stage are completed and management has authorized further funding for the
project, which it deems probable of completion and to be used for the function intended. Capitalized costs include amounts directly related
to website and software development such as payroll and payroll-related costs for employees who are directly associated with, and who
devote time to, the internal-use software project. Capitalization of such costs ceases when the project is substantially complete and ready for
its intended use. These amounts are amortized on a straight-line basis over two to three years once the software is placed into service. The
Company capitalized website and software development costs of $4,907 and $3,883 during fiscal year 2019 and 2018, respectively. At
December 28, 2019 and December 29, 2018, our internally developed website and software costs amounted to $24,142 and $19,234,
respectively, and the related accumulated amortization and impairment amounted to $20,740 and $16,425, 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. At December 28, 2019 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 2019.
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: a contract has been identified, separate performance obligations are identified, the
transaction price is determined, the transaction price is allocated to separate performance obligations and revenue is recognized upon
satisfying each performance obligation. The Company transfers the risk of loss or damage upon shipment, therefore, revenue from product
sales is recognized when it is shipped 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.
For each of the fiscal years ended 2019, and 2018, the advertising revenue represented less than 1% of our total revenue.
The Company evaluates the criteria of ASC 606 - 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 primarily responsible for fulfilling the promise to provide a
F-8
Table of Contents
specified good or service, the Company is subject to inventory risk before the good or service has been transferred to a customer and the
Company has discretion in establishing the price, revenue is recorded at gross.
Payments received prior to the delivery of goods to customers are recorded as deferred revenue.
The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount
offers, such as percentage discounts off current purchases and other similar offers. Current discount offers, when accepted by the
Company’s customers, are treated as a reduction to the purchase price of the related transaction.
Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are estimated based on
historical amounts and are recorded upon recognizing the related sales. Credits are issued to customers for returned products. Credits for
returned products amounted to $18,436 and $19,691 for fiscal year 2019, and 2018, 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):
Charged to
Revenue,
Cost or
Balance at
Beginning
End of
of Period Expenses Deductions Period
Balance at
Fifty-Two Weeks Ended December 28, 2019
Allowance for sales returns
Allowance for doubtful accounts
Fifty-Two Weeks Ended December 29, 2018
Allowance for sales returns
Allowance for doubtful accounts
Cost of Sales
$
$
1,297 $ 18,436 $ (18,539) $
28
(43)
21
861 $ 19,691 $ (19,255) $
66
(46)
1
1,194
6
1,297
21
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 2019 and 2018 was
$47,140, and $43,674, respectively. Depreciation and amortization expenses are excluded from cost of sales and included in marketing,
general and administrative and fulfillment expenses.
F-9
Table of Contents
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 2019 and 2018, 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
Marketing Expense
December 28, 2019 December 29, 2018
1,410
1,420 $
$
597
690
(587)
(698)
1,420
1,412 $
$
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 2019 and 2018, the Company recognized advertising costs of $25,691
and $20,942, 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 depreciation and amortization expense, and 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 depreciation and amortization expense, and 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
F-10
Table of Contents
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. 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. Forfeitures are accounted for as they occur.
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
F-11
Table of Contents
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 to be 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 28, 2019, 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
On January 1, 2019, the Company adopted ASC 842 – Leases (“ASC 842”), which requires lessees to record right-of-use assets and
related lease obligations on the balance sheet, as well as disclose key information regarding leasing arrangements. The Company adopted the
standard by applying the modified retrospective method without the restatement of comparative periods. Adoption of the standard resulted in
the recognition of $1,623 to the opening balance of retained earnings as of the adoption date and the recognition of ROU assets and related
lease obligations as of January 1, 2019. The standard did not have a significant impact on the Company's operating results or cash flows.
The Company elected the package of practical expedients, which permits a lessee to not reassess under the new standard its prior
conclusions regarding lease identification, lease classification and initial direct costs. The Company did not elect the practical expedient
which permits the use of hindsight when determining the lease term and assessing right-of-use assets for impairment.
As permitted by the transition guidance, the Company used the remaining lease term as of the date of adoption of the standard to
estimate discount rates. As permitted by the standard, the Company elected, for all asset classes, the short-term lease exemption. A short-
term lease is a lease that, at the commencement date, has a term of twelve months or less and does not include an option to purchase the
underlying asset.
The Company determines if an arrangement contains a lease at inception. The Company elected the practical expedient, for all asset
classes, to account for each lease component of a contract and its associated non-lease components as a single lease component, rather than
allocating a standalone value to each component of a lease.
For purposes of calculating operating lease obligations under the standard, the Company's lease terms may include options to extend or
terminate the lease when it is reasonably certain that the Company will exercise such option. The Company's leases do not contain material
residual value guarantees or material restrictive covenants.
Operating lease expense is recognized on a straight-line basis over the lease terms.
The discount rate used to measure a lease obligation should be the rate implicit in the lease; however, the Company’s operating leases
generally do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to
determine the present value of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest
a lessee would pay to borrow on a collateralized basis over a similar term with similar payments.
F-12
Table of Contents
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 (“ASC 220”). 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, of actuarial gains and losses on the Company’s defined benefit plan in the
Philippines. The Company presents the components of net income or loss and other comprehensive income or loss in its consolidated
statements of comprehensive operations.
Recent Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40)”
(“ASU 2018-15”). The objective of this update is to align the requirements for capitalizing implementation costs incurred in a hosting
arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption to have a significant impact on
its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments, and other subsequent amendments including ASU 2019-04 Codification Improvements to Topic 326, Financial
Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, collectively referred to as (“ASC
326”), which provides a new impairment model that require measurement and recognition of expected credit losses for most financial assets
and certain other instruments, including but not limited to accounts receivable, contract assets, available for sale securities and certain
financial guarantees. The new standard is effective for fiscal years beginning after December 15, 2019. The Company does not expect the
adoption to have a significant impact on its consolidated financial statements and related disclosures.
In February 2020, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes. The
update is intended to simplify the current rules regarding the accounting for income taxes and addresses several technical topics including
accounting for franchise taxes, allocating income taxes between a loss in continuing operations and in other categories such as discontinued
operations, reporting income taxes for legal entities that are not subject to income taxes, and interim accounting for enacted changes in tax
laws. The new standard is effective for fiscal years beginning after December 15, 2020. The Company is currently evaluating the effect that
ASU 2019-12 will have on the consolidated financial statements.
F-13
Table of Contents
Note 2 – 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 28, 2019 and December 29, 2018, the Company held certain assets that are required to be measured at fair value on a
recurring basis. These included the Company’s cash and cash equivalents which consist primarily of money market funds and short-term
investments with original maturity dates of three months or less at the date of purchase. The Company determines fair value of these assets
through quoted market prices and as such they are considered Level 1 assets. Level 1 cash and cash equivalents were valued at $2,273 and
$2,031 as of December 28, 2019 and December 29, 2018, respectively. During fiscal year 2019 and 2018 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 28, 2019
the Company determined long-lived assets, including intangible assets, were not impaired, as such, they were not measured at fair value.
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.
F-14
Table of Contents
Note 3 – 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 2019 and 2018 was $6,252 and $5,802, respectively, which
included amortization expense of $8 and $475 in 2019 and 2018, respectively, 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.
Repairs and maintenance are expensed as incurred.
Property and equipment consisted of the following at December 28, 2019 and December 29, 2018:
Land
Building
Machinery and equipment
Computer software (purchased and developed) and equipment
Vehicles
Leasehold improvements
Furniture and fixtures
Construction in process
Less accumulated depreciation and amortization
Property and equipment, net
December 28, 2019 December 29, 2018
630
— $
$
—
8,877
12,683
12,766
23,596
28,437
121
95
996
1,161
723
744
3,211
3,091
50,837
46,294
(35,653)
(36,644)
15,184
9,650 $
$
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. Upon the adoption of ASC
842, this capital lease was revalued and included in Right-of-use-assets-financing leases, on the balance sheet. Any capital lease with less
than twelve month remaining life as of the adoption of ASC 842 will continue to be treated as a capital lease. Accordingly, as of
December 28, 2019, the gross carrying value, the accumulated depreciation and net carrying value of all capital leased assets included in
property, plant and equipment were $100, $100 and $0, respectively. As of December 29, 2018, 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, $3,969 and $7,337,
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 28, 2019 and December 29, 2018, in the amount of $88 and $129, respectively.
F-15
Table of Contents
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
Years
2 - 5
2 - 3
2 - 5
3 - 5
3 - 5
3 - 7
*
The estimated useful life is the lesser of 3‑5 years or the lease term, whichever is shorter.
Refer to “Note 8 - Commitments and Contingencies” for additional lease information.
Note 4 – Borrowings
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 28, 2019, our outstanding revolving loan balance was $0. The customary events of default under the credit
facility (discussed below) include certain subjective acceleration clauses, which management has determined the likelihood of such
acceleration is more than remote, considering the recurring losses experienced by the Company, therefore a current classification of our
revolving loan payable was required.
On December 18, 2019, the Company and JPMorgan Chase Bank, N.A. (“JPMorgan”) entered into the Eleventh Amendment (the
“Amendment”) which amended the Credit Agreement previously entered into by the Company, certain of its domestic subsidiaries and
JPMorgan on April 26, 2012 (as amended, the “Credit Agreement”) and the Pledge and Security Agreement previously entered into by the
Company, certain of its domestic subsidiaries and JPMorgan on April 26, 2012. Pursuant to the Amendment, among other changes, the
maturity date of the Credit Agreement was extended from April 26, 2020 to December 16, 2022, the net orderly liquidation value inventory
advance rate was increased from 90% to 95% for a six-month period following the effective date of the Amendment, and the Company’s
$5,000,000 basket for sales and dispositions of property in connection with Permitted Acquisitions (as defined in the Credit Agreement) was
made available in full following the effective date of the Amendment.
On January 17, 2020, the Company and JPMorgan entered into the Twelfth Amendment to Credit Agreement and Fifth Amendment
to Pledge and Security Agreement (the “Twelfth Amendment”). Pursuant to the Twelfth Amendment, letters of credit will be made available
to the Company, subject to certain customary restrictions and conditions, in an aggregate amount not to exceed $25,000, an increase from
$20,000. As of December 28, 2019, our outstanding letters of credit balance was $17,638.
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 “an alternate prime 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 28, 2019, the Company’s LIBOR based interest rate was 3.56% (on $0 principal) and the Company’s prime
based rate was 5.00% (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 terms of the agreement with JP Morgan, 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 45 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
F-16
Table of Contents
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 $3,000 for the period commencing on any day that excess availability is less than
$3,000 for three consecutive business days, and continuing until excess availability has been greater than or equal to $3,000 at all times for
45 consecutive days (with the trigger subject to adjustment based on the Company’s revolving commitment). As of December 28, 2019, our
outstanding letters of credit balance was $17,638 of which $13,011 was utilized and included in accounts payable in our consolidated
balance sheet.
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. The Credit Agreement requires us to obtain
a prior written consent from JPMorgan when we determine to pay any dividends on or make any distribution with respect to our common
stock. The credit facility matures on December 16, 2022.
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.
Under the Twelfth Amendment, if JPMorgan determines that LIBOR is unavailable or that the syndicated loan market is using a
different standard, it can at its discretion amend the loan agreement to utilize a different rate. The new rate may be the facility’s existing
ABR rate or a new SOFR-based rate, and will incorporate a spread determined by market conditions and agreement between Chase and
USAP.
Note 5 – Stockholders’ Equity and Share-Based Compensation
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 expired on May 16, 2018.
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. No shares were repurchased during 2019 and 2018.
F-17
Table of Contents
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.
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 4 – Borrowings” of our Notes to Consolidated Financial Statements for additional details). For the fiscal year ended
December 29, 2018, the Company recorded dividends of $161. The Company did not issue any shares of common stock in payment of the
fiscal 2018 dividends. There were $41 dividends accrued as of December 29, 2018. For the fiscal year ended December 28, 2019, the
Company recorded dividends of $160. The Company issued 59 shares of common stock in payment of the fiscal 2019 dividends. There
were $41 dividends accrued as of December 28, 2019. As of December 28, 2019, 2,771 shares of Series A Preferred shares were
outstanding.
F-18
Table of Contents
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 of all option grants must be equal to 100% of the fair market value on the date of grant.
As of December 28, 2019, 5,291 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 28, 2019, and December 29, 2018:
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
(1)
Options outstanding, December 29, 2018
Granted
Exercised
Cancelled:
Forfeited
Expired
Options outstanding, December 28, 2019
Vested and expected to vest at December 28, 2019
Options exercisable, December 28, 2019
6,097 $
4,460 $
(304) $
(1,613) $
(1,417) $
7,223 $
7,223 $
3,080 $
2.69
1.19
1.51
2.48
3.08
2.76
1.78
2.51
6.57 $
6.57 $
2.97 $
4,494
4,494
747
F-19
Table of Contents
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
(1)
Options outstanding, December 30, 2017
Granted
Exercised
Cancelled:
Forfeited
Expired
Options outstanding, December 29, 2018
Vested and expected to vest at December 29, 2018
Options exercisable, December 29, 2018
5,933 $
1,174 $
(6) $
(188) $
(816) $
6,097 $
6,097 $
3,956 $
2.91
2.02
0.99
3.10
3.21
2.69
2.69
2.77
4.42 $
4.40 $
3.90 $
—
—
—
(1) These amounts represent the difference between the exercise price and the closing price of U.S. Auto Parts Network, Inc. common
stock at the end of the respective fiscal year 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 2019 and 2018 was $0.63 and $1.11, 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 2019 2018, the total intrinsic value of the exercised options was $96 and $1, respectively. The Company had
$2,379 of unrecognized share-based compensation expense related to stock options outstanding as of December 28, 2019, which expense is
expected to be recognized over a weighted-average period of 2.93 years.
Options exercised under all share-based compensation plans are granted net of the minimum statutory withholding requirements that we
pay in cash to the appropriate taxing authorities on behalf of our employees. For those employees who do not receive shares net of the
minimum statutory withholding requirements, the appropriate taxes are paid directly by the employee. During fiscal 2019 and 2018, we
withheld 0 shares to satisfy $0 of employees’ tax obligations related to the net settlement of the stock options.
Included in the total 2019 grants were 600 shares to a board member under a consulting agreement.
Restricted Stock Units
During 2019 and 2018 the Company granted an aggregate of 1,867 and 1,212 RSUs, respectively, to certain employees of the
Company. The restricted stock units ("RSUs") were granted under the 2016 Equity Incentive Plan and reduced the pool of equity
instruments available under that plan.
The vesting of each RSU is subject to the employee’s continued employment through applicable vesting dates. Some RSUs granted to
certain executives may vest on an accelerated basis in part or in full upon the occurrence of certain events. The RSUs are accounted for as
equity awards and are measured at fair value based upon the grant date price of the Company’s common stock. The closing price of the
Company’s common stock on each grant date during 2019 ranged from $0.97 to $2.41. The closing price of the Company’s common stock
on each grant during 2018 ranged from $1.54 to $2.62. Compensation expense is recognized on a straight-line basis over the requisite
service period of one-to-three years. Compensation expense for performance-based RSUs (“PSUs”) 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.
During 2019 there were 315 RSUs granted that were time-based and 1,552 granted that were performance-based. As of
December 28, 2019, the performance criteria established to trigger vesting of PSUs was met, but still subject to certification by the
Compensation Committee.
F-20
Table of Contents
During 2018 there were 510 RSUs granted that were time-based and 702 granted that were performance-based. As of December 29,
2018, none of the performance criteria established to trigger vesting of the PSU’s granted in 2018 was met.
For the fiscal year ended December 28, 2019, we recorded compensation expense of $2,753 related to RSU’s. As
of December 28, 2019, there was unrecognized compensation expense of $483 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 0.26 years.
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
Fiscal Year Ended
December 28, 2019 December 29, 2018
5.62 - 5.73 years
2% - 3%
58%
—%
5.65 - 5.74 years
1% - 3%
54% - 58%
—%
Share-based compensation from options and RSUs, is included in our consolidated statements of comprehensive operations, as follows:
Fiscal Year Ended
Marketing expense
General and administrative expense
Fulfillment expense
Technology expense
Total share-based compensation expense
December 28, 2019 December 29, 2018
185
551 $
$
2,984
284
142
3,595
1,605
1,250
250
3,656 $
$
The share-based compensation expense is net of amounts capitalized to internally-developed software of $55 and $49 during the
fiscal years 2019 2018, respectively. No tax benefit was recognized for fiscal years 2019 and 2018 due to the valuation allowance position.
Under ASC 718, we recognize forfeitures as they occur.
F-21
Table of Contents
Note 6 – Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share:
Net loss per share:
Numerator:
Net Loss
Dividends on Series A Convertible Preferred Stock
Net loss allocable to common shares
Denominator:
Weighted-average common shares outstanding (basic)
Common equivalent shares from common stock options, restricted stock, preferred stock and
warrants
Weighted-average common shares outstanding (diluted)
Basic and diluted net loss per share
Fiscal Year Ended
December 28, 2019 December 29, 2018
$
$
(31,548) $
(161)
(31,709) $
35,720
—
35,720
$
(0.89) $
(4,889)
(161)
(5,050)
34,941
—
34,941
(0.14)
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):
Performance stock units
Restricted stock units
Series A Convertible Preferred Stock
Options to purchase common stock
Total
F-22
Fiscal Year Ended
December 28, 2019 December 29, 2018
204
1
760
43
2,771
2,771
6,123
6,532
9,858
9,347
Table of Contents
Note 7 – Income Taxes
The components of income (loss) from continuing operations before income tax provision consist of the following:
Fiscal Year Ended
Domestic operations
Foreign operations
Total (loss) income before income taxes
Income tax (benefit) provision for fiscal year 2019 and 2018 consists of the following:
December 28, 2019 December 29, 2018
(5,697)
$
479
(5,218)
(10,618) $
507
(10,111) $
$
Current:
State tax
Foreign tax
Total current taxes
Deferred:
Federal tax
State tax
Total deferred taxes
Change in federal tax rate - deferred tax impact
Valuation allowance
Income tax (benefit) provision
Fiscal Year Ended
December 28, 2019 December 29, 2018
$
$
6 $
144
150
(1,311)
(417)
(1,728)
23,015
21,437 $
6
111
117
(490)
537
47
—
(493)
(329)
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
Tax attributes written off
Share-based compensation
State income tax, net of federal tax effect
Foreign tax
Other
Change in valuation allowance
Effective tax (benefit) provision
December 28, 2019 December 29, 2018
(1,096)
$
522
727
(66)
68
9
(493)
(329)
(2,123) $
—
729
(325)
106
35
23,015
21,437 $
$
For fiscal years 2019 and 2018 the effective tax rate for the Company was (212.0)% and 6.3%, respectively. The Company’s effective
tax rate for fiscal years 2019 differs from the U.S. federal rate primarily as a result of non-deductible share-based compensation, the write-
off of expired state net operating loss carryforwards, and the change in the valuation allowance maintained against the Company’s deferred
tax assets.
F-23
Table of Contents
Deferred tax assets and deferred tax liabilities consisted of the following:
Deferred tax assets:
Inventory and inventory related allowance
Share-based compensation
Intangibles
Sales and bad debt allowances
Vacation accrual
Book over tax amortization on property and equipment
Net operating loss
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 28, 2019 December 29, 2018
$
529 $
1,836
1,577
712
200
—
25,322
1
30,177
(29,731)
446
398
48
446
— $
$
639
2,119
2,415
718
202
193
21,345
86
27,717
(5,816)
21,901
—
68
68
21,833
At December 28, 2019, federal and state net operating loss (“NOL”) carryforwards were $85,830 and $79,644, respectively. Federal
NOL carryforwards of $2,106 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. The state NOL carryforwards expire in the
respective tax years as follows:
2020
2021
2022
2023
2024
Thereafter
$
$
539
5,345
975
3,028
2,358
67,399
79,644
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 28, 2019,
in part because in the year then ended the Company reached three years of cumulative pre-tax loss in the U.S federal tax jurisdiction,
management considered it appropriate to record additional valuation allowance of approximately $23,015 against our deferred tax assets. As
of December 28, 2019 the Company maintained a valuation allowance in the amount of $29,731 against deferred tax assets that were not
more likely than not of being realized.
We are subject to U.S. federal income tax as well as income tax of foreign and state tax jurisdictions. The tax years 2015‑2019 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 2016‑2019 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 $33 and $23 for the fiscal year 2019 and 2018 respectively, consisting
primarily of current foreign taxes. Included in other non-current liabilities are income taxes payable of $662 and $614 for the fiscal year
2019 and 2018, respectively, relating to future foreign withholding taxes.
F-24
Table of Contents
Note 8 – 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 January 2020. The Company also leases warehouse space in LaSalle, Illinois, Chesapeake, Virginia and Las Vegas, Nevada. The
Company’s Philippines subsidiary leases office space under an agreement through April 2020. The Company is moving its corporate office
from Carson, California to Torrance, California; the move is expected to be completed by the end of March 2020.
On April 25, 2019, the Company entered into a lease for its distribution center located in Las Vegas, Nevada. The Lease between the
Company and Prologis Sunrise Industrial Park is for approximately 124,546 square feet. The initial sixty three-month term of the Lease
commenced on July 1, 2019 and is set to expire in September of 2024. The Company is obligated to pay approximately $687 in annual base
rent, which shall increase by approximately 3.0% each year. The Company is also obligated to pay certain operating expenses set forth in
the Lease.
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 and expired in June of 2019. The extended three-year term of the Lease commenced on July 1, 2019 and is set
to expire in June of 2022. 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. During 2019, the Company reduced
the square footage rented from 159,294 square feet to approximately 116,000 square feet which reduced the annual base rent to $574.
In February 2020, the Company’s Philippines subsidiary entered into a new lease agreement. The lease renewed for a ten year term
upon mutual agreement of both parties during 2020 and expires in 2030. The company is obligated to pay approximately $500 in annual
base rent which shall increase by 5% beginning on the second year of the lease term and by 4% beginning on the sixth year of the lease
term.
As described in detail under “Note 3 – Property and Equipment Net”, 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 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. Upon the adoption of ASC 842, this capital lease was
revalued and included in Right-of-use-assets-financing leases, on the balance sheet.
Facility rent expense for fiscal year ended 2019 and 2018 was $2,275, and $1,752, respectively. The Company’s facility rent expense
did not include any amounts charged from a related party during fiscal years 2019 and 2018.
F-25
Table of Contents
Quantitative information regarding the Company’s leases as of December 28, 2019 is as follows (in thousands):
Fiscal Year ended
December 28, 2019
Components of lease cost
Finance lease cost components
Amortization of finance lease assets
Interest on finance lease liabilities
Total finance lease costs
Operating lease components
Operating lease cost
Short-term lease cost
Total operating lease costs
Total lease cost
Supplemental cash flow information related to our operating leases is as follows for the period ended
December 28, 2019:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases
Operating cash outflow from financing leases
Financing cash outflow from financing leases
Weighted-average remaining lease term-finance leases (in years)
Weighted-average remaining lease term-operating leases (in years)
Weighted-average discount rate-finance leases
Weighted-average discount rate-operating leases
$
$
$
$
$
$
Minimum lease commitments under non-cancelable operating leases as of December 28, 2019 are as follows:
Lease commitments as of December 28, 2019 were as follows:
2020
2021
2022
2023
2024
Thereafter
Total minimum payments required
Less portion representing interest
Present value of lease obligations
Less current portion of lease obligations
Long-term portion of lease obligations
Finance Leases Operating Leases
1,609 $
$
1,339
1,045
763
586
—
5,342
555
4,787 $
1,368
3,419 $
1,334 $
1,166
1,175
1,189
1,121
8,767
14,752
5,485
9,267 $
640
8,627 $
$
$
1,007
692
1,699
1,409
—
1,409
3,108
1,297
692
654
12.3
3.7
7.69
5.59
Total
2,943
2,505
2,220
1,952
1,707
8,767
20,094
6,040
14,054
2,008
12,046
On August 8, 2019, the Company entered into a financing arrangement with a third-party financial institution related to the
development of the Company’s third warehouse which is located in Las Vegas, Nevada. The financing arrangement matures in April 2022
and has an effective interest rate of approximately 7.70% per annum. The total
F-26
Table of Contents
borrowings under the financing arrangement shall not exceed $2,000. The arrangement also required a 25% deposit. The Company received
proceeds of $257 from the note payable for the period ended December 28, 2019. A deposit of $470 was recorded as of December 28,
2019. At December 28, 2019, the total outstanding balance of the note payable was $1,790, of which $729 is recorded as current liability
and $1,060 is recorded as non-current liability in the consolidated balance sheet. Total principal payments made towards the financing
arrangement during 2021 and 2022 will be $792 and $268, respectively.
Legal Matters
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.
Customs Issues. On April 2, 2018, the Company filed a complaint against the United States of America, the United States Department
of Homeland Security (“DHS”), in the United States Court of International Trade (the “Court”) (Case No. 1:18-cv-00068) seeking (i) relief
from a single entry bonding requirement set by the United States Customs and Border Protection (“CBP”), at a level equivalent to three
times the commercial invoice value of each shipment (the “Bonding Requirement”), (ii) a declaration that the Bonding Requirement is
unlawful, (iii) an injunction prohibiting additional delayed entry for all of the Company’s currently-held goods being denied entry into the
United States. The genesis for the action is CBP’s wrongful seizure of aftermarket vehicle grilles and associated parts being imported by
the Company (“Repair Grilles”) on the basis that the Repair Grilles allegedly bear counterfeit trademarks of the original automobile
manufacturers (i.e., original-equipment manufacturers, or “OEMs”). Generally, these trademarks, as applied against the Company, purport
to cover the shape of the grilles themselves, or the OEM’s logo or name. However, the Repair Grilles are not counterfeit and do not cause a
likelihood of confusion amongst purchasers or the relevant consuming public which are prerequisites for seizures under the pertinent
provision of the Tariff Act being relied upon by CBP to seize the Repair Grilles.
On May 25, 2018, the Court granted the Company’s motion for preliminary injunction and ordered, among other things, that the
Defendants are restrained from enforcing the 3X Bonding Requirement. On July 24, 2019, the Company further reached confidential terms
with CBP to settle these matters. As part of the settlement: (i) Customs will release to the Company certain inventory mistakenly seized, (ii)
the Company and CBP enter into mutual releases, and (iii) without admitting liability, the Company will forfeit to CBP certain goods which
CBP deems to be violative. All outstanding CBP enforcement issues are resolved, and the Company has no outstanding damage or duty
claims from CBP.
Ordinary course litigation. 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.
Related Party Matters
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-27
Table of Contents
Note 9 – 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 $332 and $292 for fiscal year 2019 and 2018, 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 mutual funds, held by a rabbi trust. 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. As
of December 28, 2019, the assets and associated liabilities of the Deferred Compensation Plan were $671 and $674, respectively, and were
$533 and $662, respectively, as of December 29, 2018 and are included in other non-current assets, other current liabilities and other non-
current liabilities in our consolidated balance sheets. The interest dividend and realized/unrealized gain/loss for fiscal year 2019 and 2018
was immaterial.
F-28
Table of Contents
Note 10 – Quarterly Information (Unaudited)
The following quarterly information (in thousands, except per share data) includes all adjustments which management considers
necessary for a fair presentation of such information. For interim quarterly financial statements, the provision for income taxes is estimated
using the best available information for projected results for the entire year.
Consolidated Statement of Income Data:
Net sales
Gross profit
Income (loss) from operations
Income (loss) before income taxes
Net income (loss)
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
Consolidated Statement of Income Data:
Net sales
Gross profit
Income (loss) from operations
Income (loss) before income taxes
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
Note 11 – Product Information
Quarter Ended
March 30,
2019
June 29,
2019
Sept. 28,
2019
Dec. 28,
2019
$
$
$
$
$
$
$
$
74,739
20,129
(3,446)
(3,861)
(3,581)
(0.10)
(0.10)
35,365
35,365
$
$
$
$
73,687
21,763
(1,205)
(1,643)
(1,457)
(0.04)
(0.04)
35,632
35,632
69,273
21,143
(1,458)
(1,976)
(1,424)
(0.04)
(0.04)
35,856
35,856
$
$
$
$
62,958
21,188
(2,141)
(2,631)
(25,086)
(0.70)
(0.70)
36,013
36,013
Quarter Ended
March 31,
2018
June 30,
2018
Sept. 29,
2018
Dec. 29,
2018
$
$
$
$
$
$
$
$
78,385
23,459
1,609
1,177
735
0.02
0.02
34,821
38,066
$
$
$
$
76,973
21,485
487
59
(485)
(0.02)
(0.02)
34,972
34,972
$
$
$
$
69,463
19,045
(579)
459
438
0.01
0.01
34,983
35,201
64,646
16,566
(4,689)
(5,078)
(4,480)
(0.13)
(0.13)
34,989
34,989
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
2019
2018
62 %
20 %
1 %
1 %
9 %
7 %
57 %
18 %
1 %
1 %
11 %
12 %
100 %
100 %
F-29
Table of Contents
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.
Date: March 9, 2020
U.S. AUTO PARTS NETWORK, INC.
SIGNATURES
By:
/s/ Lev Peker
Lev Peker
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of U.S. Auto Parts Network, Inc., do hereby constitute and appoint Lev Peker and David
Meniane, 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
Date
/s/ Lev Peker
Lev Peker
/s/ David Meniane
David Meniane
/s/ Warren B. Phelps III
Warren B. Phelps III
/s/ Joshua L. Berman
Joshua L. Berman
/s/ Jay K. Greyson
Jay K. Greyson
/s/ David Kanen
David Kanen
/s/ Sol Khazani
Sol Khazani
/s/ Mehran Nia
Mehran Nia
/s/ Jim Barnes
Jim Barnes
Chief Executive Officer and Director
March 9, 2020
(principal executive officer)
Chief Financial Officer and Chief Operating Officer
March 9, 2020
(principal financial and accounting officer)
Chairman of the Board
March 9, 2020
Director
Director
Director
Director
Director
Director
F-30
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
DESCRIPTION OF COMMON STOCK
Exhibit 4.2
General
The following description summarizes the terms of our common stock. Because it is only a summary, it does not contain all the information that may
be important to you. For a complete description of the matters set forth in this “Description of Common Stock,” you should refer to our second amended
and restated certificate of incorporation, our amended and restated bylaws, as amended, and our certificate of designation, preferences and rights of the
Series A Convertible Preferred Stock, which are included as exhibits to our Annual Report on Form 10-K, and to the applicable provisions of the Delaware
General Corporation Law. Our second amended and restated certificate of incorporation authorizes us to issue 100,000,000 shares of common stock, par
value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share. Our board of directors is authorized, without stockholder
approval except as required by the listing standards of The Nasdaq Stock Market LLC, to issue additional shares of our capital stock. In addition, our board
of directors may, without further action by our stockholders, designate the rights, preferences, privileges, and restrictions of our preferred stock in one or
more series. Any preferred stock that is designated and issued in the future may have voting or conversion rights that could have the effect of restricting
dividends on our shares of common stock, diluting the voting power of our shares of common stock, impairing the rights of our shares of common stock in
the event of our dissolution, liquidation or winding-up or otherwise adversely affect the rights of holders of our shares of common stock. In March 2013,
our board of directors established our Series A Convertible Preferred, or Series A Preferred, which has various rights, preferences and privileges senior to
the shares of our common stock, as discussed below.
Voting Rights
Common stockholders are entitled to one vote per share for the election of directors and on all other matters that require stockholder approval, and do
not have cumulative voting rights.
Dividends
Subject to any preferential rights of outstanding preferred stock, including the Series A Preferred discussed below, holders of our common stock are
entitled to share ratably in any dividends declared by our board of directors on the common stock and paid out of funds legally available for such dividends.
Distribution on Dissolution
Subject to any preferential rights of outstanding preferred stock, including the Series A Preferred discussed below, in the event of our liquidation,
dissolution or winding up, holders of our common stock are entitled to share ratably in any assets remaining after payment of liabilities and the liquidation
preferences of any outstanding preferred stock.
Rights and Preferences
Our common stock does not carry any preemptive rights enabling a holder to subscribe for, or receive shares of, our common stock or any other
securities convertible into shares of our common stock. There are no redemption rights or sinking fund provisions applicable to our common stock. The
rights, preferences and privileges of the holders of our common stock are subject to and are adversely affected by the rights of the holders of shares of
Series A Preferred as discussed below, and may be subject to and adversely affected by any series of our preferred stock that we may designate and issue in
the future.
Series A Convertible Preferred Stock
Conversion. 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.
Liquidation or Change of Control. 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. 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 our 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 Exchange Act, (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 of the Securities Act (subject to
certain exceptions).
Voting. The Series A Preferred are 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 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 (i) any amendment, alteration or repeal of any provision of our second amended and restated certificate of
incorporation or our amended and restated bylaws, as amended, as to adversely affect the preferences, rights or voting power of the Series A Preferred, or
(ii) 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.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare Limited.
Stock Exchange Listing
Our common stock is listed on the Nasdaq Global Market under the symbol “PRTS”.
Anti-Takeover Provisions
Delaware Law. We are subject to the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a publicly held Delaware corporation
from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person
became an interested stockholder. Generally, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to
the stockholder. An “interested stockholder” is a person who either owns 15% or more of our outstanding voting stock or, together with affiliates and
associates, owns or, within three prior years, did own, 15% or more of our outstanding voting stock. These restrictions do not apply if:
·
·
before the date that the person became an “interested stockholder,” our board of directors approved either the “business combination” or the
transaction which makes the person an “interested stockholder”;
the “interested stockholder” owned at least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the number of shares outstanding (i) shares owned by persons who are directors
and also officers and (ii) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange offer; or
·
on or after the date that the person became an “interested stockholder,” the business combination is approved by (i) our board of directors and
(ii) authorized at an annual or special meeting of our stockholders by the affirmative vote of at least 66 2/3% of our outstanding voting stock that
is not owned by the “interested stockholder.”
The statute could have the effect of delaying, deferring, or preventing a change in control.
Bylaw and Certificate of Incorporation Provisions. Our amended and restated bylaws, as amended, provide that special meetings of our stockholders
may be called exclusively by a majority of our board of directors or the chairman of our board of directors. Our second amended and restated certificate of
incorporation (i) provides for a board comprised of three classes of directors with each class serving a staggered three-year term, (ii) authorizes our board of
directors to issue preferred stock from time to time, in one or more classes or series, without stockholder approval (subject to the rights of our Series A
Preferred), (iii) requires the approval of at least two-thirds of the outstanding voting stock to amend certain provisions of our second amended and restated
certificate of incorporation and our amended and restated bylaws, as amended, and (iv) does not include a provision for cumulative voting for directors.
Under cumulative voting, a minority stockholder holding a sufficient percentage of a class of shares may be able to ensure the election of one or more
directors.
Additionally, our amended and restated bylaws, as amended, provide that the Court of Chancery of the State of Delaware will be the sole and
exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any
of our directors or officers to our company or our stockholders, (iii) any action asserting a claim against our company arising pursuant to any provision of
the Delaware General Corporation Law or our amended and restated certificate of incorporation or our amended and restated bylaws, as amended, or (iv)
any action asserting a claim against our company governed by the internal affairs doctrine; provided that this choice of forum provision does not apply to
suits brought to enforce a duty or liability created by the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or any
other claim for which the federal courts have exclusive jurisdiction.
These and other provisions contained in our second amended and restated certificate of incorporation and amended and restated bylaws, as amended,
could delay or discourage transactions involving an actual or potential change in control of us or our management, including transactions in which
stockholders might otherwise receive a premium for their shares over then current prices. Such provisions could also limit the ability of stockholders to
remove current management or approve transactions that stockholders may deem to be in their best interests and could adversely affect the price of our
common stock.
EMPLOYMENT AGREEMENT
Exhibit 10.9
THIS EMPLOYMENT AGREEMENT (the “Agreement”) is entered into February 7, 2019 (the “Effective Date”)
by and between U.S. Auto Parts Network, Inc., a Delaware corporation (the “Company”), and Houman Akhavan, an
individual (the “Executive”).
WHEREAS, the parties hereto desire to enter into a written agreement documenting the terms of Executive’s
employment with the Company.
1. Duties and Responsibilities.
A. Executive shall serve as the Company’s Chief Marketing Officer commencing on February 11, 2019 (the “ Start
Date”), reporting directly to the Company’s Chief Executive Officer. Executive shall have the duties and powers at the
Company that are customary for an individual holding such position.
B. Executive agrees to use his best efforts to advance the business and welfare of the Company, to render his services
under this Agreement faithfully, diligently and to the best of his ability.
C. Executive shall be based at the Company’s office located at Carson, California, or at such other offices of the
Company located within 30 miles of such offices.
2. Employment Period. Following the Start Date, Executive’s employment with the Company shall be governed by the
provisions of this Agreement for the period commencing as of the date hereof and continuing until Executive’s termination of
employment with the Company for any reason (the “Employment Period”).
3. Cash Compensation.
A . Annual Salary. Executive’s base salary shall be $300,000 per year (the “Annual Salary”), which shall be
payable in accordance with the Company’s standard payroll schedule (but in no event less frequent than on a monthly basis),
and may be increased from time to time at the discretion of the Compensation Committee of the Company’s Board of
Directors (the “Compensation Committee”). The Compensation Committee shall review Executive’s Annual Salary at least
annually and may increase the Annual Salary from time to time at its sole discretion. Any increased Annual Salary shall
thereupon be the “Annual Salary” for the purposes hereof. Executive’s Annual Salary shall not be decreased without his prior
written consent at any time during the Employment Period.
B. Annual Target Bonus. Executive shall also be entitled to receive an annual target incentive bonus of up to 50%
of the Executive’s current salary. The annual bonus shall be based upon the Company achieving the annual goals determined
by the Compensation Committee. The amount of the annual target bonus payable to Executive with respect to any given year
shall be determined by the Compensation Committee. The annual bonus shall be paid no later than the end of March
following the year for which such bonus is being paid.
1
C. Applicable Withholdings. The Company shall deduct and withhold from the compensation payable to Executive
hereunder any and all applicable federal, state and local income and employment withholding taxes and any other amounts
required to be deducted or withheld by the Company under applicable statutes, regulations, ordinances or orders governing or
requiring the withholding or deduction of amounts otherwise payable as compensation or wages to employees.
4. Equity Compensation.
A . Initial Grant. As of the close of business on the date of the Executive’s first day of employment with the
Company or promptly thereafter, the Company’s Compensation Committee shall grant Executive stock options (the “ Initial
Option”) to purchase up to 350,000 shares of the Company’s common stock which shall vest over four years as follows: 25%
of the shares shall vest on the first anniversary of the grant date and the balance shall vest in 36 equal monthly installments
thereafter. The Initial Option will be granted pursuant to the Company’s 2016 Equity Incentive Plan (the “ Plan”), and will be
subject to the terms and conditions of the Plan in effect as of the grant date and the related stock option agreements. The
exercise price for the options shall be equal to the closing sales price of the Company’s common stock as reported by
NASDAQ on the date of grant of the options.
B. Other Equity Compensation. Executive shall also be entitled to participate in any other equity incentive plans
of the Company. All such other options or other equity awards will be made at the discretion of the Company’s Compensation
Committee of the Board of Directors pursuant and subject to the terms and conditions of the applicable equity incentive plan,
including any provisions for repurchase thereof. The option exercise price or value of any equity award granted to Executive
will be established by the Company’s Board of Directors as of the date such interests are granted but shall not be less than the
fair market value of the class of equity underlying such award. Except with respect to any restricted stock unit awards granted
to Executive (the “RSUs”) (the terms of which shall be governed by the applicable award agreements), within the period
beginning three months before and ending twelve months following a Change in Control (as defined in the Company’s 2016
Equity Incentive Plan (the “Plan”)) the vesting of all stock options and other equity compensation awards (both time-based
vesting and performance-based vesting at target level) granted to Executive shall accelerate in full in the event that the
Executive’s employment is terminated without Cause (as defined herein) or Executive resigns for Good Reason (as defined
herein). Within the period beginning three months before and ending twelve months following a Change in Control (as
defined in the Plan) all stock options shall remain exercisable until the earlier of (i) the expiration date set forth in the
applicable stock option agreement or (ii) the expiration of one (1) year measured from the date that Executive’s employment
is terminated without Cause (as defined herein) or Executive resigns for Good Reason (as defined herein) and this provision
shall supersede any provisions to the contrary contained in any of Executive’s stock option agreements. For the purposes of
this Agreement, “Good Reason” shall mean Executive’s voluntary resignation following a Change in Control (as defined the
Plan), for any of the following events that results in a material negative change to the Executive: (i) a reduction without
Executive’s prior written consent in either his level of Annual Salary or his target annual bonus as a percentage of Annual
Salary; (ii) a relocation of Executive more than thirty (30) miles from the
2
Company’s current corporate headquarters as of the date hereof, (iii) a material breach of any provision of this Agreement by
the Company, (iv) the failure of the Company to have a successor entity specifically assume this Agreement, (v) a material
negative change in authority, duties or responsibilities resulting from the Executive no longer being an executive officer of a
publicly-traded company, and (vi) the Company’s chief executive officer (immediately prior the Change in Control) no longer
being the chief executive officer of the successor publicly-traded company. Notwithstanding the foregoing, the Executive
shall be entitled to benefits described in this Section 4 due to a resignation resulting from (v) or (vi) of the preceding sentence
only if such resignation occurs more than six months after the Change in Control. Notwithstanding the foregoing, “Good
Reason” shall only be found to exist if prior to Executive’s resignation for Good Reason, the Executive has provided, not more
than 90 days following the initial occurrence thereof, written notice to the Company of such Good Reason event indicating and
describing the event resulting in such Good Reason, and the Company does not cure such event within 90 days following the
receipt of such notice from Executive.
C. Bonus Eligibility. Executive shall also be eligible to receive an annual target incentive bonus, additionally or in
the alternative to the annual cash target incentive bonus described in Section 3B of this Agreement, in the form of stock or
restricted stock unit awards as determined by the Compensation Committee.
5. Expense Reimbursement. In addition to the compensation specified in Section 3, Executive shall be entitled to receive
reimbursement from the Company for all reasonable business expenses incurred by Executive in the performance of
Executive’s duties hereunder, provided that Executive furnishes the Company, not later than the August 31 of the year
following the year in which the expense was incurred, with vouchers, receipts and other details of such expenses in the form
reasonably required by the Company to substantiate a deduction for such business expenses under all applicable rules and
regulations of federal and state taxing authorities.
6. Fringe Benefits.
A. Group Plans. Executive shall, throughout the Employment Period, continue to be eligible to participate in all of
the group term life insurance plans, group health plans, accidental death and dismemberment plans, short-term disability
programs, retirement plans, profit sharing plans or other plans (for which Executive qualifies) that are available to the
executive officers of the Company. During the Employment Period, the Company will pay for coverage for Executive and his
spouse and dependents residing in Executive’s household (collectively, the “ Dependents”) under the Company’s health plan,
and coverage for Executive under the Company’s accidental death and dismemberment plan and for short-term disability. In
the event Executive elects not to participate in the Company’s health plan, the Company shall reimburse Executive for the cost
of alternative health care coverage of his choosing for Executive and his Dependents in an amount up to $2,000 per month.
Payment for all other benefit plans will be paid in accordance with the Company’s policy in effect for similar executive
positions.
B. Vacation. Executive shall continue to be entitled to at least four weeks paid vacation per year. Vacation shall
accrue pursuant to the Company’s vacation benefit policies.
3
C . Indemnification. The Company and Executive shall enter into the Company’s standard indemnification
agreement for its key executives.
D . Auto Allowance. During the Employment Period, Executive shall be entitled to an auto allowance for one
vehicle for Executive’s use up to $1,000 per month.
7. Termination of Employment. Executive’s employment with the Company continues to be “at-will.” This means that
it is not for any specified period of time and can be terminated by Executive or the Company at any time, with or without
advance notice, and for any or no particular reason or cause. Upon such termination, Executive (or, in the case of Executive’s
death, Executive’s estate and beneficiaries) shall have no further rights to any other compensation or benefits from the
Company on or after the termination of employment except as follows:
A. Termination For Cause. In the event the Company terminates Executive’s employment with the Company prior
to expiration of the Employment Period for Cause (as defined below), the Company shall pay to Executive the following:
(i) Executive’s unpaid Annual Salary that has been earned through the termination date of his employment; (ii) Executive’s
accrued but unused vacation; (iii) any accrued expenses pursuant to Section 5 above, and (iv) any other payments as may be
required under applicable law (subsections (i) through (iv) above shall collectively be referred to herein as the “Required
Payments”). For purposes of this Agreement, “Cause” shall mean that Executive has engaged in any one of the following:
(i) misconduct involving the Company or its assets, including, without limitation, misappropriation of the Company’s funds or
property; (ii) reckless or willful misconduct in the performance of Executive’s duties in the event such conduct continues after
the Company has provided 30 days written notice to Executive and a reasonable opportunity to cure; (iii) conviction of, or plea
of nolo contendere to, any felony or misdemeanor involving dishonesty or fraud; (iv) the violation of any of the Company’s
policies, including without limitation, the Company’s policies on equal employment opportunity and the prohibition against
unlawful harassment; (v) the material breach of any provision of this Agreement after 30 days written notice to Executive of
such breach and a reasonable opportunity to cure such breach; or (vi) any other misconduct that has a material adverse effect
on the business or reputation of the Company.
B . Termination Upon Death or Disability. If Executive dies during the Employment Period, the Executive’s
employment with the Company shall be deemed terminated as of the date of death, and the obligations of the Company to or
with respect to Executive shall terminate in their entirety upon such date except as otherwise provided under this
Section 7B. If Executive becomes Disabled (as defined below), then the Company shall have the right, to the extent permitted
by law, to terminate the employment of Executive upon 30 days prior written notice in writing to Executive. Upon termination
of employment due to the death or Disability of Executive, Executive (or Executive’s estate or beneficiaries in the case of the
death of Executive) shall be entitled to receive the Required Payments. Additionally, upon termination of employment due to
the Executive’s death, or due to the Company’s involuntary termination of Executive’s employment due to the Executive’s
Disability, Executive (or Executive’s estate or beneficiaries in the case of the death of Executive) shall also be entitled to the
following: (i) any unpaid annual target bonus under Section 3B for the year immediately prior to the year of such termination
(in an amount equal to the bonus percentage accrued by the Company, pursuant to GAAP, through
4
the last closed accounting month prior to the time of such termination) and a pro-rated share of Executive’s annual target
bonus under Section 3B for the year of such termination (in an amount equal to the bonus percentage accrued by the
Company, pursuant to GAAP, through the last closed accounting month prior to the time of such termination), which bonus
amounts shall be paid at the earlier of (A) such time as the Company regularly pays bonuses, or (B) no later than 2 ½ months
following the calendar year in which the termination occurs; and (ii) continuation of his Annual Salary following such
termination for a period of six months, which shall be payable in accordance with the Company’s standard pay schedules; and
(iii) in the case of termination due to Disability, the Company shall reimburse Executive’s COBRA payments for Executive’s
health insurance benefits for a period of six months. For the purposes of this Agreement, “Disability” shall mean a physical or
mental impairment which, the Board of Directors determines, after consideration and implementation of reasonable
accommodations, precludes the Executive from performing his essential job functions for a period longer than three
consecutive months or a total of one hundred twenty (120) days in any twelve month period.
C. Termination for Any Other Reason. Should the Company terminate Executive’s employment (other than for
Cause or as a result of Executive’s Death or Disability) then Executive shall also be entitled to the following upon the
execution of a general release by the Executive in the form reasonably requested by the Company: (i) the Company shall pay
Executive the Required Payments; (ii) any unpaid annual target bonus under Section 3B for the year immediately prior to the
year of such termination or expiration (in an amount equal to the bonus percentage accrued by the Company, pursuant to
GAAP, through the last closed accounting month prior to the time of such termination or expiration) and a pro-rated share of
Executive’s annual target bonus under Section 3B for the year of such termination or expiration (in an amount equal to the
bonus percentage accrued by the Company, pursuant to GAAP, through the last closed accounting month prior to the time of
such termination or expiration), which bonus amounts shall be paid at such time as the Company regularly pays bonuses and
solely to the extent that such bonuses are paid to a majority of the Company’s other bonus eligible employees;
(iii) continuation of Executive’s Annual Salary, which shall be payable in accordance with the Company’s standard pay
schedules for a period of six months; and (iv) the Company shall also reimburse Executive’s actual COBRA payments for
Executive’s health insurance benefits for a period of six months. This Section 7C is intended to qualify as an involuntary
separation pay arrangement that is exempt from application of Section 409A of the Internal Revenue Code of 1986, as
amended (the “Code”) because certain severance payments are treated as paid on account of an involuntary separation
(including a separation for Good Reason) and paid in a lump sum within the “short-term deferral” period following the time
the Executive obtains a vested right to such payments.
In the event Executive resigns for Good Reason (as defined in Section 4) within the period beginning three months
before and ending twelve months following a Change in Control (as defined in the Plan) then the Company shall pay
Executive the Required Payments.
D . Health Care Reform Compliance. Notwithstanding the foregoing, if the Company determines, in its sole
discretion, that the Company cannot provide the health insurance premium reimbursement benefits under this Section 7
without potentially incurring financial costs or penalties under applicable law (including, without limitation, Section 2716 of
the Public Health
5
Service Act), the Company shall in lieu thereof pay Executive a taxable cash amount, which payment shall be made regardless
of whether Executive elects or pays for health insurance benefits following termination (the “Health Care Benefit
Payment”). The Health Care Benefit Payment shall be paid in monthly installments on the same schedule that the health
insurance premium reimbursement amounts would otherwise have been paid. The Health Care Benefit Payment shall be equal
to the amount that the Executive would have otherwise paid for health insurance premiums (which amount shall be calculated
based on the premium for the first month of coverage), and shall be paid until the expiration of twelve months following
Executive’s termination.
8 . Non-Competition During the Employment Period. Executive acknowledges and agrees that given the extent and
nature of the confidential and proprietary information he will obtain during the course of his employment with the Company,
it would be inevitable that such confidential information would be disclosed or utilized by the Executive should he obtain
employment from, or otherwise become associated with, an entity or person that is engaged in a business or enterprise that
directly competes with the Company. Consequently, during any period for which Executive is receiving payments from the
Company, either as wages or as a severance benefit, Executive shall not directly or indirectly own, manage, operate, control or
participate in the ownership, management, operation or control of, or be employed by or provide advice to, any enterprise that
is engaged in any business directly competitive to that of the Company in the aftermarket auto parts market in the United
States; provided, however, that such restriction shall not apply to any passive investment representing an interest of less than
1% of an outstanding class of publicly-traded securities of any company or other enterprise where Executive does not provide
any management, consulting or other services to such company or enterprise.
9 . Proprietary Information. On the Start Date, Executive shall execute the Company’s standard Confidential
Information and Assignment of Inventions Agreement (the “ Confidentiality Agreement”), which is hereby incorporated by
this reference as if set forth fully herein. Executive’s obligations pursuant to the Confidentiality Agreement will survive
termination of Executive’s employment with the Company. Executive agrees that he will not use or disclose to the Company
any confidential or proprietary information from any of his prior employers.
10. Successors and Assigns . This Agreement is personal in its nature and the Executive shall not assign or transfer his
rights under this Agreement. The provisions of this Agreement shall inure to the benefit of, and shall be binding on, each
successor of the Company whether by merger, consolidation, transfer of all or substantially all assets, or otherwise, and the
heirs and legal representatives of Executive.
11. Notices. Any notices, demands or other communications required or desired to be given by any party shall be in
writing and shall be validly given to another party if served either personally or via overnight delivery service such as Federal
Express, postage prepaid, return receipt requested. If such notice, demand or other communication shall be served personally,
service shall be conclusively deemed made at the time of such personal service. If such notice, demand or other
communication is given by overnight delivery, such notice shall be conclusively deemed given two business days after the
deposit thereof addressed to the party to whom such notice, demand or other communication is to be given as hereinafter set
forth:
6
To the Company:
U.S. Auto Parts Network, Inc.
16941 Keegan Avenue
Carson, California 90746
Attn: General Counsel
To Executive:
At Executive’s last residence as provided by
Executive to the Company for payroll records.
Any party may change such party’s address for the purpose of receiving notices, demands and other communications by
providing written notice to the other party in the manner described in this Section 11.
1 2 . Governing Documents. This Agreement, along with the documents expressly referenced in this Agreement,
constitute the entire agreement and understanding of the Company and Executive with respect to the terms and conditions of
Executive’s employment and/or consulting with the Company and the payment of severance benefits, and supersedes all prior
and contemporaneous written or verbal agreements and understandings between Executive and the Company relating to such
subject matter. For avoidance of doubt, the parties agree that the Professional Services Agreement dated January 17, 2019, and
any related schedule thereto, between the Company and Idea Launch, Inc. shall hereby be terminated on the Start Date without
any further obligation of the Company following the Start Date with the exception of any unpaid invoices for services
performed by Idea Launch, Inc. prior to the Start Date. This Agreement may only be amended by written instrument signed
by Executive and an authorized officer of the Company. Any and all prior agreements, understandings or representations
relating to the Executive’s employment with the Company are terminated and cancelled in their entirety and are of no further
force or effect.
13. Governing Law. The provisions of this letter agreement will be construed and interpreted under the laws of the State
of California. If any provision of this Agreement as applied to any party or to any circumstance should be adjudged by a court
of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision shall in no way affect (to
the maximum extent permissible by law) the application of such provision under circumstances different from those
adjudicated by the court, the application of any other provision of this Agreement, or the enforceability or invalidity of this
Agreement as a whole. Should any provision of this Agreement become or be deemed invalid, illegal or unenforceable in any
jurisdiction by reason of the scope, extent or duration of its coverage, then such provision shall be deemed amended to the
extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended
without materially altering the intention of the parties, then such provision will be stricken and the remainder of this
Agreement shall continue in full force and effect.
14. Remedies. All rights and remedies provided pursuant to this Agreement or by law shall be cumulative, and no such
right or remedy shall be exclusive of any other. A party may pursue any one or more rights or remedies hereunder, or may
seek damages or specific performance in
7
the event of another party’s breach hereunder, or may pursue any other remedy by law or equity, whether or not stated in this
Agreement.
15. No Waiver . The waiver by either party of a breach of any provision of this Agreement shall not operate as, or be
construed as, a waiver of any later breach of that provision.
16. Counterparts. This Agreement may be executed in more than one counterpart, each of which shall be deemed an
original, but all of which together shall constitute but one and the same instrument.
17. Section 409A.
(a) Notwithstanding anything to the contrary herein, the following provisions apply to the extent severance benefits
provided herein are subject to Section 409A of Code and the regulations and other guidance thereunder and any state law of
similar effect (collectively “Section 409A”). Severance benefits shall not commence until Executive has a “separation from
service” for purposes of Section 409A. Each installment of severance benefits is a separate “payment” for purposes of Treas.
Reg. Section 1.409A-2(b)(2)(i), and the severance benefits are intended to satisfy the exemptions from application of
Section 409A provided under Treasury Regulations Sections 1.409A-1(b)(4) and 1.409A-1(b)(5) to the maximum extent such
exemptions are available. However, to the extent such exemptions are not available and Executive is, upon separation from
service, a “specified employee” for purposes of Section 409A, then, solely to the extent necessary to avoid adverse personal
tax consequences under Section 409A, the timing of the severance benefits payments shall be delayed until the earlier of
(i) six (6) months and one day after Executive’s separation from service, or (ii) Executive’s death. The parties acknowledge
that the exemptions from application of Section 409A to severance benefits are fact specific, and any later amendment of this
Agreement to alter the timing, amount or conditions that will trigger payment of severance benefits may preclude the ability of
severance benefits provided under this Agreement to qualify for an exemption.
(b) It is intended that this Agreement shall comply with the requirements of Section 409A, and any ambiguity
contained herein shall be interpreted in such manner so as to avoid adverse personal tax consequences under
Section 409A. Notwithstanding the foregoing, the Company shall in no event be obligated to indemnify the Executive for any
taxes or interest that may be assessed by the IRS pursuant to Section 409A of the Code to payments made pursuant to this
Agreement. To the extent that any severance benefit payments are delayed as required by this Agreement due to the
application of Section 409A, all suspended payments shall earn and accrue interest at the prevailing “Prime Rate” of interest
as published by The Wall Street Journal at the time the payment is made, and any suspended payment when so made, shall be
made as a lump sum payment, including accrued interest.
18. Section 280G.
(a) If any payment or benefit Executive will or may receive from the Company or otherwise (a “280G Payment”)
would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be
subject to the excise tax imposed by
8
Section 4999 of the Code (the “Excise Tax”), then any such 280G Payment pursuant to this Agreement (a “Payment”) shall
be equal to the Reduced Amount. The “Reduced Amount” shall be either (x) the largest portion of the Payment that would
result in no portion of the Payment (after reduction) being subject to the Excise Tax or (y) the largest portion, up to and
including the total, of the Payment, whichever amount (i.e., the amount determined by clause (x) or by clause (y)), after taking
into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the
highest applicable marginal rate), results in Executive’s receipt, on an after-tax basis, of the greater economic benefit
notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in a Payment is
required pursuant to the preceding sentence and the Reduced Amount is determined pursuant to clause (x) of the preceding
sentence, the reduction shall occur in the manner (the “Reduction Method”) that results in the greatest economic benefit for
Executive. If more than one method of reduction will result in the same economic benefit, the items so reduced will be
reduced pro rata (the “Pro Rata Reduction Method”).
( b ) Notwithstanding any provision of Section 18(a) to the contrary, if the Reduction Method or the Pro Rata
Reduction Method would result in any portion of the Payment being subject to taxes pursuant to Section 409A of the Code
that would not otherwise be subject to taxes pursuant to Section 409A of the Code, then the Reduction Method and/or the Pro
Rata Reduction Method, as the case may be, shall be modified so as to avoid the imposition of taxes pursuant to Section 409A
of the Code as follows: (A) as a first priority, the modification shall preserve to the greatest extent possible, the
greatest economic benefit for Executive as determined on an after-tax basis; (B) as a second priority, Payments that are
contingent on future events (e.g., being terminated without Cause), shall be reduced (or eliminated) before Payments that are
not contingent on future events; and (C) as a third priority, Payments that are “deferred compensation” within the meaning of
Section 409A of the Code shall be reduced (or eliminated) before Payments that are not deferred compensation within the
meaning of Section 409A of the Code.
(c) Unless Executive and the Company agree on an alternative accounting firm or law firm, the accounting firm
engaged by the Company for general tax compliance purposes as of the day prior to the effective date of the Change in
Control shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant
or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint a nationally
recognized accounting or law firm to make the determinations required hereunder. The Company shall bear all expenses with
respect to the determinations by such accounting or law firm required to be made hereunder. The Company shall use
commercially reasonable efforts to cause the accounting or law firm engaged to make the determinations hereunder to provide
its calculations, together with detailed supporting documentation, to Executive and the Company within fifteen (15) calendar
days after the date on which Executive’s right to a 280G Payment becomes reasonably likely to occur (if requested at that time
by Executive or the Company) or such other time as requested by Executive or the Company.
(d) If Executive receives a Payment for which the Reduced Amount was determined pursuant to clause (x) of Section
18(a) and the Internal Revenue Service determines thereafter that some portion of the Payment is subject to the Excise Tax,
Executive shall promptly return to the
9
Company a sufficient amount of the Payment (after reduction pursuant to clause (x) of Section 18(a)) so that no portion of the
remaining Payment is subject to the Excise Tax. For the avoidance of doubt, if the Reduced Amount was determined pursuant
to clause (y) of Section 18(a), Executive shall have no obligation to return any portion of the Payment pursuant to the
preceding sentence.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
U.S. AUTO PARTS NETWORK, INC.
/s/ Neil Watanabe
By:
Print
Neil Watanabe
Name:
Title:
Chief Financial Officer
Address: 16941 Keegan Avenue
Carson, CA 90746
EXECUTIVE
/s/ Houman Akhavan
HOUMAN AKHAVAN
10
Exhibit 10.20
TWELFTH AMENDMENT TO CREDIT AGREEMENT AND FIFTH AMENDMENT TO PLEDGE AND SECURITY
AGREEMENT
THIS TWELFTH AMENDMENT TO CREDIT AGREEMENT AND FIFTH AMENDMENT TO PLEDGE AND
SECURITY AGREEMENT (this “Amendment”), dated as of January 17, 2020, is entered into by and among U.S. AUTO PARTS
NETWORK, INC., a Delaware corporation (“Company”), PARTSBIN, INC., a Delaware corporation (“ PartsBin”), LOCAL BODY
SHOPS, INC., a Delaware corporation (“Local Body Shops”), PRIVATE LABEL PARTS, INC., a Delaware corporation (“ Private
Label Parts”), WHITNEY AUTOMOTIVE GROUP, INC., a Delaware corporation (“ Whitney Auto”, and together with the Company,
PartsBin, Local Body Shops and Private Label Parts, collectively, “Borrowers” and each individually a “ Borrower”), the other Loan
Parties party hereto, the Lenders (as defined below) party hereto, and JPMORGAN CHASE BANK, N.A., as administrative agent for
the Lenders (in such capacity, “Administrative Agent”).
RECITALS
A. Borrowers, the other parties signatory thereto as “Loan Parties” (each individually, a “ Loan Party” and collectively, the “ Loan
Parties”), Administrative Agent, and the financial institutions party thereto as lenders (each individually, a “ Lender” and
collectively, the “Lenders”) have previously entered into that certain Credit Agreement, dated as of April 26, 2012 (as amended,
restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), pursuant to which the Lenders have
made certain loans and financial accommodations available to Borrowers. Terms used herein without definition shall have the
meanings ascribed to them in the Credit Agreement (as amended by this Amendment).
B. Borrowers, the other Loan Parties and Administrative Agent have previously entered into that certain Pledge and Security
Agreement, dated as of April 26, 2012 (as amended, restated, supplemented or otherwise modified from time to time, the
“Security Agreement”).
C. Borrowers and the other Loan Parties have further requested that Administrative Agent and the Lenders amend the Credit
Agreement and the Security Agreement, and Administrative Agent and the Lenders are willing to amend the Credit Agreement
and the Security Agreement pursuant to the terms and conditions set forth herein.
D. Each Borrower and each other Loan Party is entering into this Amendment with the understanding and agreement that, except as
specifically provided herein, none of Administrative Agent’s or any Lender’s rights or remedies as set forth in the Credit
Agreement and the other Loan Documents are being waived or modified by the terms of this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:
1. Amendments to Credit Agreement.
a. The following definitions in Section 1.01 of the Credit Agreement are hereby amended and restated in their respective
entirety to read as follows:
“Alternate Base Rate” means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect
on such day, (b) the NYFRB Rate in effect on such day plus ½ of 1%, and (c) the Adjusted LIBO Rate for a one-month
Interest Period on such day (or if such day is not a Business Day, the immediately preceding Business Day) plus 1%,
provided that, for the purpose of this definition, the Adjusted LIBO Rate for any day shall be based on the LIBO Screen
Rate (or if the LIBO Screen Rate is not available for such one month Interest Period, the Interpolated Rate) at
approximately 11:00 a.m. London time on such day. Any change in the Alternate Base Rate due to a change in the
Prime Rate, the NYFRB Rate or the Adjusted LIBO Rate shall be effective from and including the effective date of such
change in the Prime Rate, the NYFRB Rate or the Adjusted LIBO Rate, respectively. If the Alternate Base Rate is being
used as an alternate rate of interest pursuant to Section 2.14 (for the avoidance of doubt, only until any amendment has
become effective pursuant to Section 2.14(c)), then the Alternate Base Rate shall be the greater of clause (a) and (b)
above and shall be determined without reference to clause (c) above. For the avoidance of doubt, if the Alternate Base
Rate as determined pursuant to the foregoing would be less than 1.00%, such rate shall be deemed to be 1.00% for
purposes of this Agreement.
“Covenant Testing Trigger Period ” means the period (a) commencing on any day that Excess Availability (or
solely during the Temporary Period, Modified Excess Availability) is less than 10% of the aggregate amount of the
Lenders’ Revolving Commitments for any three (3) consecutive Business Days, and (b) continuing until Excess
Availability (or solely during the Temporary Period, Modified Excess Availability) has been greater than or equal to
10% of the aggregate amount of the Lenders’ Revolving Commitments at all times for 45 consecutive calendar days.
“Federal Funds Effective Rate” means, for any day, the rate calculated by the NYFRB based on such day’s
federal funds transactions by depositary institutions, as determined in such manner as shall be set forth on the Federal
Reserve Bank of New York’s Website from time to time, and published on the next succeeding Business Day by the
NYFRB as the effective federal funds rate, provided that, if the Federal Funds Effective Rate as so determined would be
less than zero, such rate shall be deemed to be zero for the purposes of this Agreement.
“Overnight Bank Funding Rate” means, for any day, the rate comprised of both overnight federal funds and
overnight Eurodollar borrowings by U.S.-managed banking offices of depository institutions (as such composite rate
shall be determined by the NYFRB as set forth on the Federal Reserve Bank of New York’s Website from time to time)
and published on the next succeeding Business Day by the NYFRB as an overnight bank funding rate.
b. The following definitions are hereby added to Section 1.01 of the Credit Agreement in their proper alphabetical order:
“Benchmark Replacement” means the sum of: (a) the alternate benchmark rate (which may be a SOFR-Based
Rate) that has been selected by the Administrative Agent and the Borrower giving due consideration to (i) any selection
or recommendation of a replacement rate or the mechanism for determining such a rate by the Relevant Governmental
Body and/or (ii) any evolving or then-prevailing market convention for determining a rate of interest as a replacement to
the LIBO Rate for U.S. dollar-denominated syndicated credit facilities and (b) the Benchmark Replacement
2
Adjustment; provided that, if the Benchmark Replacement as so determined would be less than zero, the Benchmark
Replacement will be deemed to be zero for the purposes of this Agreement; provided further that any such Benchmark
Replacement shall be administratively feasible as determined by the Administrative Agent in its sole discretion.
“Benchmark Replacement Adjustment” means the spread adjustment, or method for calculating or determining
such spread adjustment, (which may be a positive or negative value or zero) that has been selected by the Administrative
Agent and the Borrower giving due consideration to (i) any selection or recommendation of a spread adjustment, or
method for calculating or determining such spread adjustment, for the replacement of the LIBO Rate with the applicable
Unadjusted Benchmark Replacement by the Relevant Governmental Body and/or (ii) any evolving or then-prevailing
market convention for determining a spread adjustment, or method for calculating or determining such spread
adjustment, for the replacement of the LIBO Rate with the applicable Unadjusted Benchmark Replacement for U.S.
dollar-denominated syndicated credit facilities at such time (for the avoidance of doubt, such Benchmark Replacement
Adjustment shall not be in the form of a reduction to the Applicable Rate).
“Benchmark Replacement Conforming Changes” means, with respect to any Benchmark Replacement, any
technical, administrative or operational changes (including changes to the definition of “Alternate Base Rate,” the
definition of “Interest Period,” timing and frequency of determining rates and making payments of interest and other
administrative matters) that the Administrative Agent decides in its reasonable discretion may be appropriate to reflect
the adoption and implementation of such Benchmark Replacement and to permit the administration thereof by the
Administrative Agent in a manner substantially consistent with market practice (or, if the Administrative Agent decides
that adoption of any portion of such market practice is not administratively feasible or if the Administrative Agent
determines that no market practice for the administration of the Benchmark Replacement exists, in such other manner of
administration as the Administrative Agent decides is reasonably necessary in connection with the administration of this
Agreement).
“Benchmark Replacement Date” means the earlier to occur of the following events with respect to the LIBO
Rate:
(1) in the case of clause (1) or (2) of the definition of “Benchmark Transition Event,” the later of (a) the date of the
public statement or publication of information referenced therein and (b) the date on which the administrator of the
LIBO Screen Rate permanently or indefinitely ceases to provide the LIBO Screen Rate; or
(2) in the case of clause (3) of the definition of “Benchmark Transition Event,” the date of the public statement or
publication of information referenced therein.
“Benchmark Transition Event” means the occurrence of one or more of the following events with respect to the
LIBO Rate:
(1) a public statement or publication of information by or on behalf of the administrator of the LIBO Screen Rate
announcing that such administrator has ceased or will cease to provide the LIBO Screen Rate, permanently or
indefinitely, provided that, at the time of such statement or publication, there is no successor administrator that will
continue to provide the LIBO Screen Rate;
3
(2) a public statement or publication of information by the regulatory supervisor for the administrator of the LIBO
Screen Rate, the U.S. Federal Reserve System, an insolvency official with jurisdiction over the administrator for the
LIBO Screen Rate, a resolution authority with jurisdiction over the administrator for the LIBO Screen Rate or a court or
an entity with similar insolvency or resolution authority over the administrator for the LIBO Screen Rate, in each case
which states that the administrator of the LIBO Screen Rate has ceased or will cease to provide the LIBO Screen Rate
permanently or indefinitely, provided that, at the time of such statement or publication, there is no successor
administrator that will continue to provide the LIBO Screen Rate; and/or
(3) a public statement or publication of information by the regulatory supervisor for the administrator of the LIBO
Screen Rate announcing that the LIBO Screen Rate is no longer representative.
“Benchmark Transition Start Date” means (a) in the case of a Benchmark Transition Event, the earlier of (i) the
applicable Benchmark Replacement Date and (ii) if such Benchmark Transition Event is a public statement or
publication of information of a prospective event, the 90th day prior to the expected date of such event as of such public
statement or publication of information (or if the expected date of such prospective event is fewer than 90 days after
such statement or publication, the date of such statement or publication) and (b) in the case of an Early Opt-in Election,
the date specified by the Administrative Agent or the Required Lenders, as applicable, by notice to the Borrower
Representative, the Administrative Agent (in the case of such notice by the Required Lenders) and the Lenders.
“Benchmark Unavailability Period” means, if a Benchmark Transition Event and its related Benchmark
Replacement Date have occurred with respect to the LIBO Rate and solely to the extent that the LIBO Rate has not been
replaced with a Benchmark Replacement, the period (x) beginning at the time that such Benchmark Replacement Date
has occurred if, at such time, no Benchmark Replacement has replaced the LIBO Rate for all purposes hereunder in
accordance with Section 2.14 and (y) ending at the time that a Benchmark Replacement has replaced the LIBO Rate for
all purposes hereunder pursuant to Section 2.14.
“Compounded SOFR” means the compounded average of SOFRs for the applicable Corresponding Tenor, with
the rate, or methodology for this rate, and conventions for this rate (which may include compounding in arrears with a
lookback and/or suspension period as a mechanism to determine the interest amount payable prior to the end of each
Interest Period) being established by the Administrative Agent in accordance with:
(1) the rate, or methodology for this rate, and conventions for this rate selected or recommended by the Relevant
Governmental Body for determining compounded SOFR; provided that:
(2) if, and to the extent that, the Administrative Agent determines that Compounded SOFR cannot be determined in
accordance with clause (1) above, then the rate, or methodology for this rate, and conventions for this rate that the
Administrative Agent determines in its reasonable discretion are substantially consistent with any evolving or then-
prevailing market convention for determining compounded SOFR for U.S. dollar-denominated syndicated credit
facilities at such time;
4
provided, further, that if the Administrative Agent decides that any such rate, methodology or convention determined in
accordance with clause (1) or clause (2) is not administratively feasible for the Administrative Agent, then Compounded
SOFR will be deemed unable to be determined for purposes of the definition of “Benchmark Replacement.”
“Corresponding Tenor” with respect to a Benchmark Replacement means a tenor (including overnight) having
approximately the same length (disregarding business day adjustment) as the applicable tenor for the applicable Interest
Period with respect to the LIBO Rate.
“Early Opt-in Election” means the occurrence of:
(1) (i) a determination by the Administrative Agent or (ii) a notification by the Required Lenders to the Administrative
Agent (with a copy to the Borrower Representative) that the Required Lenders have determined that U.S. dollar-
denominated syndicated credit facilities being executed at such time, or that include language similar to that contained in
Section 2.14 are being executed or amended, as applicable, to incorporate or adopt a new benchmark interest rate to
replace the LIBO Rate, and
(2) (i) the election by the Administrative Agent or (ii) the election by the Required Lenders to declare that an Early Opt-
in Election has occurred and the provision, as applicable, by the Administrative Agent of written notice of such election
to the Borrower Representative and the Lenders or by the Required Lenders of written notice of such election to the
Administrative Agent.
“Federal Reserve Bank of New York’s Website ”
means
the website of
the NYFRB at
http://www.newyorkfed.org, or any successor source.
“Modified Excess Availability ” shall mean, at any time, (a) an amount equal to (i) the Borrowing Base minus
(ii) the Aggregate Revolving Exposure (calculated, with respect to any Defaulting Lender, as if such Defaulting Lender
had funded its Applicable Percentage of all outstanding Borrowings), minus (b) the aggregate amount of all outstanding
trade payables of the Borrowers which have been unpaid for more than 45 days after the due date therefor (other than
trade payables being contested or disputed by the Borrowers in good faith), as determined by the Administrative Agent
in its Permitted Discretion.
“Relevant Governmental Body” means the Federal Reserve Board and/or the NYFRB, or a committee officially
endorsed or convened by the Federal Reserve Board and/or the NYFRB or, in each case, any successor thereto.
“SOFR” with respect to any day means the secured overnight financing rate published for such day by the
NYFRB, as the administrator of the benchmark (or a successor administrator), on the Federal Reserve Bank of New
York’s Website.
“SOFR-Based Rate” means SOFR, Compounded SOFR or Term SOFR.
“Temporary Period ” means the period commencing on the Twelfth Amendment Effective Date and
continuing through and including March 31, 2020.
5
“Term SOFR” means the forward-looking term rate based on SOFR that has been selected or recommended by
the Relevant Governmental Body.
“Twelfth Amendment Effective Date” means January 17, 2020.
“Unadjusted Benchmark Replacement” means the Benchmark Replacement excluding the Benchmark
Replacement Adjustment; provided that, if the Unadjusted Benchmark Replacement as so determined would be less than
zero, the Unadjusted Benchmark Replacement will be deemed to be zero for the purposes of this Agreement.
c. Section 1.05 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
“Section 1.05. Interest Rates; LIBOR Notification. The interest rate on Eurodollar Loans is determined by reference to
the LIBO Rate, which is derived from the London interbank offered rate. The London interbank offered rate is intended
to represent the rate at which contributing banks may obtain short-term borrowings from each other in the London
interbank market. In July 2017, the U.K. Financial Conduct Authority announced that, after the end of 2021, it would
no longer persuade or compel contributing banks to make rate submissions to the ICE Benchmark Administration
(together with any successor to the ICE Benchmark Administrator, the “ IBA”) for purposes of the IBA setting the
London interbank offered rate. As a result, it is possible that commencing in 2022, the London interbank offered rate
may no longer be available or may no longer be deemed an appropriate reference rate upon which to determine the
interest rate on Eurodollar Loans. In light of this eventuality, public and private sector industry initiatives are currently
underway to identify new or alternative reference rates to be used in place of the London interbank offered rate. Upon
the occurrence of a Benchmark Transition Event or an Early Opt-In Election, Section 2.14(c) provides a mechanism for
determining an alternative rate of interest. The Administrative Agent will promptly notify the Borrower, pursuant to
Section 2.14(e), of any change to the reference rate upon which the interest rate on Eurodollar Loans is based. However,
the Administrative Agent does not warrant or accept any responsibility for, and shall not have any liability with respect
to, the administration, submission or any other matter related to the London interbank offered rate or other rates in the
definition of “LIBO Rate” or with respect to any alternative or successor rate thereto, or replacement rate thereof
(including, without limitation, (i) any such alternative, successor or replacement rate implemented pursuant to Section
2.14(c), whether upon the occurrence of a Benchmark Transition Event or an Early Opt-in Election, and (ii) the
implementation of any Benchmark Replacement Conforming Changes pursuant to Section 2.14(d)), including without
limitation, whether the composition or characteristics of any such alternative, successor or replacement reference rate
will be similar to, or produce the same value or economic equivalence of, the LIBO Rate or have the same volume or
liquidity as did the London interbank offered rate prior to its discontinuance or unavailability.”
d. Clause (i) of the last sentence in Section 2.06(b) of the Credit Agreement is hereby amended and restated to read in its
entirety as follows:
“(i) the LC Exposure shall not exceed $25,000,000 and”
e. Section 2.14 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
6
“SECTION 2.14. Alternate Rate of Interest; Illegality.
(a) If prior to the commencement of any Interest Period for a Eurodollar Borrowing:
(i) the Administrative Agent determines (which determination shall be conclusive and binding
absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the
LIBO Rate, as applicable (including, without limitation, by means of an Interpolated Rate or because the LIBO Screen
Rate is not available or published on a current basis) for such Interest Period; provided that no Benchmark Transition
Event shall have occurred at such time; or
(ii) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate or
the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or
Lender) of making or maintaining their Loans (or Loan) included in such Borrowing for such Interest Period;
then the Administrative Agent shall give notice thereof to the Borrower Representative and the Lenders as promptly as
practicable thereafter and, until the Administrative Agent notifies the Borrower Representative and the Lenders that the
circumstances giving rise to such notice no longer exist, (A) any Interest Election Request that requests the conversion
of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and any such
Eurodollar Borrowing shall be repaid or converted into an ABR Borrowing on the last day of the then current Interest
Period applicable thereto, and (B) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be
made as an ABR Borrowing.
(b) If any Lender determines that any Requirement of Law has made it unlawful, or if any Governmental
Authority has asserted that it is unlawful, for any Lender or its applicable lending office to make, maintain, fund or
continue any Eurodollar Borrowing, or any Governmental Authority has imposed material restrictions on the authority
of such Lender to purchase or sell, or to take deposits of, dollars in the London interbank market, then, on notice thereof
by such Lender to the Borrower Representative through the Administrative Agent, any obligations of such Lender to
make, maintain, fund or continue Eurodollar Loans or to convert ABR Borrowings to Eurodollar Borrowings will be
suspended until such Lender notifies the Administrative Agent and the Borrower Representative that the circumstances
giving rise to such determination no longer exist. Upon receipt of such notice, the Borrower Representative will upon
demand from such Lender (with a copy to the Administrative Agent), either prepay or convert all Eurodollar Borrowings
of such Lender to ABR Borrowings, either on the last day of the Interest Period therefor, if such Lender may lawfully
continue to maintain such Eurodollar Borrowings to such day, or immediately, if such Lender may not lawfully continue
to maintain such Loans. Upon any such prepayment or conversion, the Borrower Representative will also pay accrued
interest on the amount so prepaid or converted.
(c) Notwithstanding anything to the contrary herein or in any other Loan Document, upon the occurrence of
a Benchmark Transition Event or an Early Opt-in Election, as applicable, the Administrative Agent and the Borrowers
may amend this Agreement to replace the LIBO Rate with a Benchmark Replacement. Any such amendment with
respect to a Benchmark Transition Event will become effective at 5:00
7
p.m. on the fifth (5th) Business Day after the Administrative Agent has posted such proposed amendment to all Lenders
and the Borrower Representative, so long as the Administrative Agent has not received, by such time, written notice of
objection to such proposed amendment from Lenders comprising the Required Lenders; provided that, with respect to
any proposed amendment containing any SOFR-Based Rate, the Lenders shall be entitled to object only to the
Benchmark Replacement Adjustment contained therein. Any such amendment with respect to an Early Opt-in Election
will become effective on the date that Lenders comprising the Required Lenders have delivered to the Administrative
Agent written notice that such Required Lenders accept such amendment. No replacement of LIBO Rate with a
Benchmark Replacement will occur prior to the applicable Benchmark Transition Start Date.
(d) In connection with the implementation of a Benchmark Replacement, the Administrative Agent will
have the right to make Benchmark Replacement Conforming Changes from time to time and, notwithstanding anything
to the contrary herein or in any other Loan Document, any amendments implementing such Benchmark Replacement
Conforming Changes will become effective without any further action or consent of any other party to this Agreement.
(e) The Administrative Agent will promptly notify the Borrower Representative and the Lenders of (i) any
occurrence of a Benchmark Transition Event or an Early Opt-in Election, as applicable, (ii) the implementation of any
Benchmark Replacement, (iii) the effectiveness of any Benchmark Replacement Conforming Changes and (iv) the
commencement or conclusion of any Benchmark Unavailability Period. Any determination, decision or election that
may be made by the Administrative Agent or Lenders pursuant to this Section 2.14, including any determination with
respect to a tenor, rate or adjustment or of the occurrence or non-occurrence of an event, circumstance or date and any
decision to take or refrain from taking any action, will be conclusive and binding absent manifest error and may be made
in its or their sole discretion and without consent from any other party hereto, except, in each case, as expressly required
pursuant to this Section 2.14.
(f) Upon the Borrower Representative’s receipt of notice of the commencement of a Benchmark
Unavailability Period, (i) any Interest Election Request that requests the conversion of any Borrowing to, or
continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and any such Eurodollar Borrowing shall
be repaid or converted into an ABR Borrowing on the last day of the then current Interest Period applicable thereto, and
(ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an ABR Borrowing.”
f. The parenthetical in Section 5.01(f) of the Credit Agreement is hereby deleted and replaced with the following:
“(and for any week ending (x) in a Reporting Trigger Period, or (y) during the Temporary Period, in each case, within 3
Business Days of the end of each such calendar week)”
g. The first parenthetical in Section 5.01(g) of the Credit Agreement is hereby deleted and replaced with the following:
“(and for any week ending (x) in a Reporting Trigger Period, or (y) during the Temporary Period, in each case, within 3
Business Days of the end of each such calendar week)”
8
h. In the first line of Section 9.02(b) of the Credit Agreement, the text “Neither” is hereby deleted and replaced with the
text “Subject to Section 2.14(c) and (d), neither”.
2. Amendment to Security Agreement.
a. The following definition set forth in Article I of the Security Agreement is hereby amended and restated to read in its
entirety as follows:
“ ‘Dominion Trigger Period ’ means the period (a) commencing on the date that (i) an Event of Default occurs or (ii)
Excess Availability (or solely during the Temporary Period, Modified Excess Availability) is less than 12% of the
aggregate amount of the Lenders’ Revolving Commitments for any three (3) consecutive Business Days and (b)
continuing until, during the preceding sixty (60) consecutive days, no Event of Default existed and Excess Availability
(or solely during the Temporary Period, Modified Excess Availability) has been greater than 12% of the aggregate
amount of the Lenders’ Revolving Commitments at all times.”
3. Conditions Precedent to Effectiveness of this Amendment . The following shall have occurred before this Amendment
is effective:
a . Amendment. Administrative Agent shall have received this Amendment fully executed in a sufficient number of
counterparts for distribution to all parties.
b . Representations and Warranties . The representations and warranties set forth herein, and in the Credit Agreement and
the Security Agreement (other than any such representations or warranties that, by their terms, are specifically made as
of a date other than the date hereof), must be true and correct in all material respects without duplication of any
materiality qualifier contained therein.
4. Representations and Warranties. Each Borrower and each other Loan Party represents and warrants as follows:
a . Authority. Each Borrower and each other Loan Party has the requisite corporate power and authority to execute and
deliver this Amendment, and to perform its obligations hereunder and under the Loan Documents (as amended or
modified hereby) to which it is a party. The execution, delivery, and performance by each Borrower and each other
Loan Party of this Amendment have been duly approved by all necessary corporate action, have received all necessary
governmental approval, if any, and do not contravene any law or any contractual restriction binding on such Borrower or
such Loan Party.
b . Enforceability. This Amendment has been duly executed and delivered by each Borrower and each other Loan
Party. This Amendment and each Loan Document (as amended or modified hereby) is the legal, valid, and binding
obligation of each Borrower and each other Loan Party, enforceable against each Borrower and each other Loan Party in
accordance with its terms, and is in full force and effect.
c. Representations and Warranties. The representations and warranties contained in the Credit Agreement and the Security
Agreement (other than any such representations or warranties that, by their terms, are specifically made as of a date
other than the date hereof) are correct on and as of the date hereof in all material respects without duplication of any
materiality qualifier contained therein as though made on and as of the
9
date hereof.
d. No Default. No event has occurred and is continuing that constitutes a Default or Event of Default.
5 . Choice of Law. The validity of this Amendment, its construction, interpretation and enforcement, the rights of the
parties hereunder, shall be determined under, governed by, and construed in accordance with the laws of the State of New York, but
without giving effect to any federal laws applicable to national banks.
6 . Counterparts. This Amendment may be executed in any number of counterparts and by different parties and separate
counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall
constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by telefacsimile or
other electronic transmission shall be effective as delivery of a manually executed counterpart of the Amendment.
7. Reference to and Effect on the Loan Documents .
a. Upon and after the effectiveness of this Amendment, each reference in the Credit Agreement to “this Agreement”,
“hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the other Loan
Documents to “the Credit Agreement”, “thereof” or words of like import referring to the Credit Agreement, shall mean
and be a reference to the Credit Agreement as modified and amended hereby.
b. Upon and after the effectiveness of this Amendment, each reference in the Security Agreement to “this Agreement”,
“hereunder”, “hereof” or words of like import referring to the Security Agreement, and each reference in the other Loan
Documents to “the Security Agreement”, “thereof” or words of like import referring to the Security Agreement, shall
mean and be a reference to the Security Agreement as modified and amended hereby.
c. Except as specifically set forth in this Amendment, the Credit Agreement, the Security Agreement and all other Loan
Documents, are and shall continue to be in full force and effect and are hereby in all respects ratified, and confirmed and
shall constitute the legal, valid, binding, and enforceable obligations of each Borrower and the other Loan Parties to
Administrative Agent and the Lenders without defense, offset, claim, or contribution.
d. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a
waiver of any right, power, or remedy of Administrative Agent or any Lender under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
8. Ratification. Each Borrower and each other Loan Party hereby restates, ratifies and reaffirms each and every term and
condition set forth in the Credit Agreement and Security Agreement, as amended hereby, and the Loan Documents effective as of the
date hereof.
9 . Estoppel. To induce Administrative Agent and Lenders to enter into this Amendment and to induce Administrative
Agent and the Lenders to continue to make advances to Borrowers under the Credit Agreement, each Borrower and each other Loan
Party hereby acknowledges and agrees that, after giving effect to this Amendment, as of the date hereof, there exists no Default or
Event of Default and no
10
right of offset, defense, counterclaim, or objection in favor of any Borrower or any other Loan Party as against Administrative Agent or
any Lender with respect to the Obligations.
1 0 . Integration. This Amendment, together with the other Loan Documents, incorporates all negotiations of the parties
hereto with respect to the subject matter hereof and is the final expression and agreement of the parties hereto with respect to the
subject matter hereof.
11. Severability. In case any provision in this Amendment shall be invalid, illegal, or unenforceable, such provision shall
be severable from the remainder of this Amendment and the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
1 2 . Submission of Amendment. The submission of this Amendment to the parties or their agents or attorneys for review
or signature does not constitute a commitment by Administrative Agent or any Lender to waive any of their respective rights and
remedies under the Loan Documents, and this Amendment shall have no binding force or effect until all of the conditions to the
effectiveness of this Amendment have been satisfied as set forth herein.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
11
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their
duly authorized officers as of the day and year first above written.
BORROWERS:
U.S. AUTO PARTS NETWORK, INC.,
a Delaware corporation
By /s/ Alfredo Gomez
Name: Alfredo Gomez
Title: General Counsel
PARTSBIN, INC.,
a Delaware corporation
By /s/ Alfredo Gomez
Name: Alfredo Gomez
Title: General Counsel
LOCAL BODY SHOPS, INC.,
a Delaware corporation
By /s/ Alfredo Gomez
Name: Alfredo Gomez
Title: General Counsel
PRIVATE LABEL PARTS, INC.,
a Delaware corporation
By /s/ Alfredo Gomez
Name: Alfredo Gomez
Title: General Counsel
WHITNEY AUTOMOTIVE GROUP, INC.,
a Delaware corporation
By /s/ Alfredo Gomez
Name: Alfredo Gomez
Title: General Counsel
OTHER LOAN PARTIES:
LOBO MARKETING, INC.,
a Texas corporation
By /s/ Alfredo Gomez
Name: Alfredo Gomez
Title: General Counsel
PACIFIC 3PL, INC.,
a Delaware corporation
By /s/ Alfredo Gomez
Name: Alfredo Gomez
Title: General Counsel
GO FIDO, INC.,
a Delaware corporation
By /s/ Alfredo Gomez
Name: Alfredo Gomez
Title: General Counsel
AUTOMOTIVE SPECIALTY ACCESSORIES AND PARTS, INC.,
a Delaware corporation
By /s/ Alfredo Gomez
Name: Alfredo Gomez
Title: General Counsel
ADMINISTRATIVE AGENT AND LENDER
JPMORGAN CHASE BANK, N.A.,
individually as a Lender and as Administrative Agent
By /s/Nathan Shay
Name: /s/ Nathan Shay
Title: Authorized Officer
Name
Jurisdiction
DBA
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21.1
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
We consent to the incorporation by reference in Registration Statements (Nos. 333-143179, 333-149973, 333-158224,
333-165493, 333-173851, 333-204096, 333-212256, 333-210093, 333‑216671 and 333-226736) on Form S-8 and
Registration Statements (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 9, 2020, relating to our audit of the consolidated financial
statements which appear in this Annual Report on Form 10-K of U.S. Auto Parts Network, Inc. and subsidiaries for the
year ended December 28, 2019.
EXHIBIT 23.1
/s/ RSM US LLP
Los Angeles, CA
March 9, 2020
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, Lev Peker, 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 9, 2020
/s/ LEV PEKER
Lev Peker
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 9, 2020
/s/ DAVID MENIANE
David Meniane
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 28, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lev Peker,
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 9, 2020
/s/ LEV PEKER
Lev Peker
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 28, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David Meniane, 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 9, 2020
/s/ DAVID MENIANE
David Meniane
Chief Financial Officer