CARPARTS.COM, INC. 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 theSEC , which are available on theSEC'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 otherSEC 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 replacement parts, hard parts, and performance parts and accessories. 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 flagship website at www.carparts.com and online marketplaces. Our corporate website is located at www.carparts.com/investor. 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 by disintermediating the traditional auto parts supply chain and selling products directly to customers online allows us to efficiently deliver products to our customers. Our mission is changing the way people repair their cars and getting them back on the road, and our strategy consists of the Right Part, Right Time,Right Place . Industry-wide trends that support our strategy and future growth include: 1.Number of SKUs required to serve the market. The number of automotive SKUs has grown dramatically over the last several years. In today's market, unless the consumer is driving a high volume produced vehicle and needs a simple maintenance item, the part they need is not typically on the shelf at a brick-and-mortar store. We believe our user-friendly flagship website provides customers with a favorable alternative to the brick-and-mortar shopping experience by offering a comprehensive selection of approximately 731,000 SKUs with detailed product descriptions, attributes and photographs combined with the flexibility of fulfilling orders using both drop-ship and stock-and-ship methods. 2.U.S. vehicle fleet expanding and aging. The average age ofU.S. light vehicles, an indicator of auto parts demand, remained at near record-highs at 12.1 years during 2021, according to theU.S. Auto Care Association . We believe an increasing vehicle base and rising average age of vehicles will have a positive impact on overall aftermarket parts demand because older vehicles generally require more repairs. In many cases we believe these older vehicles are driven by DIY car owners who are more likely to handle any necessary repairs themselves rather than taking their car to the professional repair shop. 31
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3.Growth of online sales.The U.S. Auto Care Association estimated that overall revenue from online sales of auto parts and accessories would reach almost$23 billion by 2024. 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 being a leading source for aftermarket automotive parts through our flagship website and online marketplaces. Impact of COVID-19 The COVID-19 pandemic created uncertainty and challenges onthe United States ,the Philippines , and global economies and some challenges continued through the end of fiscal year 2021. Since the onset of the pandemic, our top priority remains the health and safety of our employees as most have continued to work from home, in addition to ensuring our customers continue receiving our high-quality, personalized service. Our distribution centers continue to remain operational while our safety protocols direct employees onsite to continue to adhere to, and follow, the COVID-19 safety guidelines recommended from theCenters for Disease Control and Prevention (CDC ). We continue to monitor and proactively mitigate risks in our supply chain because of the global supply chain disruption and port congestion. We have incurred, and may in the future incur, additional freight and container costs and may also continue to incur increased costs relating to workforce shortages, overtime charges, and detention costs at one or more of our distribution centers due to the continued effects of the COVID-19 pandemic. However, the ultimate extent of the effects from the COVID-19 pandemic on the Company, our financial condition, results of operations, liquidity, and cash flows will be dependent on evolving developments which are uncertain and cannot be predicted at this time. See the "Risk Factors" section set forth in Part I, Item 1A for further discussion of risks related to COVID-19.
Factors Affecting Our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the "Risk Factors" section set forth in Part I, Item 1A. Acquiring New Customers We believe there is substantial opportunity to continue acquiring new customers. The automotive aftermarket parts industry is still very underpenetrated online compared to other verticals and industries. We believe consumers are becoming more comfortable buying auto parts online and we anticipate continued growth acceleration. Our ability to attract and acquire new customers will depend on a number of factors, including the effectiveness and pricing of our products, increasing and optimizing our product catalog, technological improvements to our website, and the effectiveness of our marketing efforts. However, with the right tools and solutions, and by leveraging our core competencies, we see this as a great opportunity to disrupt the automotive aftermarket parts industry.
Supply Chain And Shipping Optimization
Over the last two years, we have added new distribution centers in order to shorten the customer order delivery time to meet our customers' evolving delivery expectations and in turn optimizing our outbound freight costs. As we navigate the current global supply chain landscape, our ability to optimize our supply chain sourcing will be key in managing the rising costs of importing parts from overseas. While we seek to continue to optimize our supply chain for both inbound and outbound shipping, we may incur increased freight expenses due to the current global supply chain disruption.
Executive Summary
For fiscal year 2021, the Company's operations generated net sales of$582,440 , compared to$443,884 for fiscal year 2020, representing an increase of 31.2%. The Company incurred a net loss of$10,339 for fiscal year 2021 compared to a net loss of$1,513 for fiscal year 2020. The Company incurred a net loss before interest expense, net, income tax provision, depreciation and amortization expense, amortization of intangible assets, share-based compensation expense, and in 2019, costs related to our customs issues and employee transition costs ("Adjusted 32 Table of Contents
EBITDA"), of
Net sales increased in fiscal year 2021 compared to fiscal year 2020 primarily driven by continued strong demand and the expanded capacity from ourGrand Prairie distribution center. Gross profit increased by 27.0% to$197,283 . Gross margin decreased 110 basis points to 33.9% in fiscal year 2021 compared to 35.0% in fiscal year 2020. The decrease in gross margin was primarily driven by unfavorable inbound and outbound freight costs in 2021 as well as a lack of certain favorable one-time items in the prior year. Total expenses, which primarily consisted of cost of sales and operating expense, increased in fiscal year 2021 compared to the same period in 2020. The components of cost of sales and operating costs are described in further detail under "Components of Results of Operations" below.
Non-GAAP measures
Regulation G, "Conditions for Use of Non-GAAP Financial Measures," and other
provisions of the Exchange Act, 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
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, and in 2019, 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
in 2019, the costs associated with the customs issue, as well as other items
that we do not believe are representative of our ongoing operating performance.
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.
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The table below reconciles net loss to Adjusted EBITDA for the periods presented
(in thousands):
Fiscal Year Ended
January 1, 2022 January 2, 2021 December 28, 2019
Net loss $ (10,339) (1,513) (31,548)
Depreciation & amortization 9,895 7,657 6,252Amortization of intangible assets 110 102
100
Interest expense, net 1,089 1,694 1,897
Taxes 351 307 21,437
EBITDA $ 1,106 $ 8,247 $ (1,862)
Stock compensation expense $ 15,685 $ 7,778 $ 3,656
Employee transition costs(1) - - 2,274
Customs costs(2) - - 464
Adjusted EBITDA $ 16,791 $ 16,025 $ 4,532
We incurred employee transition costs related to the transition of our (1) 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.
Components of Results of Operations
Net Sales . Online and offline sales represent two different sales channels for our products. Online is our primary sales channel as we generate net sales primarily from e-commerce sales of auto parts to individual consumers through our flagship website www.carparts.com, and online marketplaces. Online marketplaces consist primarily of sales of our products on online marketplace websites, where we sell through online storefronts that we maintain on third-party owned websites such as eBay and Amazon. 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 house brands stock ship parts, 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. Depreciation and amortization expenses are excluded from cost of sales and included in operating expense. Operating Expense. Operating expense consists of marketing, general and administrative, fulfillment, and technology expense. We also include share-based compensation expense in the applicable operating expense category based on the respective equity award recipient's function. Marketing expense consists of online advertising spend, television advertising, internet commerce facilitator fees and other advertising costs, as well as payroll and related expenses associated with our customer service and marketing personnel. General and administrative expense consists primarily of administrative payroll and related expenses, merchant processing fees, legal and professional fees and other administrative costs. 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. 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. Marketing expense, general and administrative expense, and fulfillment expense also includes depreciation and amortization expense.
Other Income, Net. Other income, net primarily consists of miscellaneous income or expense and interest income comprised primarily of interest income on investments.
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Interest Expense. Interest expense consists primarily of interest expense on our
outstanding revolving loan and letters of credit balances, deferred financing
cost amortization and finance lease interest.
Presentation of Results of Operations and Liquidity and Capital Resources
The following discussion and analysis of our Results of Operations and Liquidity and Capital Resources includes a comparison of fiscal year 2021 to fiscal year 2020. A similar discussion and analysis which compares fiscal year 2020 to fiscal year 2019 may be found in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report filed with theSEC pursuant to Section 13 or 15(d) under the Exchange Act onMarch 16, 2021 . Results of Operations
The following table sets forth our results of operations for the fiscal years presented, expressed as a percentage of net sales:
Fiscal Year Ended
January 1, 2022 January 2, 2021 December 28, 2019
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 66.1 65.0 70.0
Gross profit 33.9 35.0 30.0
Operating expense 35.4 34.9 32.9(Loss) income from operations (1.5) 0.1 (2.9) Other income (expense): Other income, net 0.0 0.0 0.0 Interest expense (0.2) (0.3) (0.7) Total other expense, net (0.2) (0.3) (0.7) Loss before income taxes (1.7) (0.2) (3.6) Income tax provision 0.1
0.1 7.6 Net loss (1.8) % (0.3) % (11.2) %
Fifty-Two Weeks Ended
Net Sales and Gross Margin Fiscal Year Ended January 1, 2022 January 2, 2021 $ Change % Change (in thousands) Net sales $ 582,440 $ 443,884$ 138,556 31.2 % Cost of sales 385,157 288,518 96,639 33.5 % Gross profit $ 197,283 $ 155,366$ 41,917 27.0 % Gross margin 33.9 % 35.0 % (1.1) % Net sales increased$138,556 , or 31.2%, for fiscal year 2021 compared to fiscal year 2020 primarily driven by continued strong demand and the expanded capacity from ourGrand Prairie distribution center. Gross profit increased$41,917 , or 27.0%, in fiscal year 2021 compared to fiscal year 2020. Gross margin decreased 110 basis points to 33.9% in fiscal year 2021 compared to 35.0% in fiscal year 2020. The decrease in gross margin was primarily driven by unfavorable inbound and outbound freight costs in 2021 as well as a lack of certain favorable one-time items in the prior year. 35 Table of Contents Operating Expense Fiscal Year Ended January 1, 2022 January 2, 2021 $ Change % Change (in thousands) Operating expense $ 206,394 $ 155,071$ 51,323 33.1 % Percent of net sales 35.4 % 34.9 % 0.5 % Operating expense increased$51,323 , or 33.1%, for fiscal year 2021 compared to fiscal year 2020 primarily due to an increase in fulfillment expense as well as an increase in payroll related expenses. The increase in fulfillment expense was primarily due to a higher number of inventory receipts and fulfilled orders processed as well as additional expenses incurred from ourGrand Prairie distribution center that opened in the fourth quarter of 2020. The increase in payroll related expenses was primarily due to an increase in foundational investments in our business to support our current and future growth.
Total Other Expense, Net
Fiscal Year Ended
January 1, 2022 January 2, 2021 $ Change % Change
(in thousands)
Other expense, net $ (877) $ (1,501) $ 624 (41.6) %
Percent of net sales (0.2) % (0.3) % 0.1 %
Total other expense, net decreased $624 , or 41.6%, for fiscal year 2021 compared
to fiscal year 2020. Total other expense decreased during fiscal year 2021
compared to fiscal year 2020 primarily due to a decrease in interest expense
attributable to the lower utilization of our revolving loan and trade letters of
credit.
Income Tax Provision
Fiscal Year Ended
January 1, 2022 January 2, 2021 $ Change % Change
(in thousands)
Income tax provision $ 351 $ 307 $ 44 14.3 %
Percent of net sales 0.1 % 0.1 % - %
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 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 January 1, 2022 , due to
cumulative losses in recent years, the Company maintained a valuation allowance
in the amount of $37,637 against deferred tax assets that were not more likely
than not to be realized.
As of January 1, 2022 , the Company had no material unrecognized tax benefits,
interest or penalties related to federal and state income tax matters. As of
January 1, 2022 , the Company's federal and state NOL carryforwards were $116,705
and $85,964 , respectively. Federal NOL carryforwards of $1,295 were acquired in
the acquisition of WAG which are subject to Section 382 of the Code and limited
to an annual usage limitation of $135 . The Company's federal NOL carryforwards
begin to expire in 2029, while state NOL carryforwards began to expire in 2022.
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Liquidity and Capital Resources
Sources of Liquidity
During the fifty-two weeks endedJanuary 1, 2022 , we primarily funded our operations with cash and cash equivalents generated from operations and borrowings under our credit facility. We had cash and cash equivalents of$18,144 as ofJanuary 1, 2022 , representing a$17,658 decrease from$35,802 of cash and cash equivalents as ofJanuary 2, 2021 . Based on our current operating plan, we believe that our existing cash and cash equivalents, investments, cash flows from operations and available funds under our credit facility will be sufficient to finance our operations through at least the next twelve months (see "Debt and Available Borrowing Resources" and "Funding Requirements" below).
As of
As ofJanuary 1, 2022 andJanuary 2, 2021 , our working capital was$71,808 and$67,396 , respectively. Cash Flows Fiscal Year EndedJanuary 1, 2022
6,877
Net cash used in investing activities (11,551) (9,758) (6,160)
Net cash provided by (used in) financing activities 902 62,361 (465)
Effect of exchange rate changes on cash (21) (6) (10)
Net change in cash and cash equivalents $ (17,658) $ 33,529 $ 242 Operating Activities
Net cash used in operating activities for the fiscal year endedJanuary 1, 2022 andJanuary 2, 2021 was ($6,988 ) and ($19,068 ), respectively. The decrease in net cash used in operating activities was primarily due to lower working capital usage in 2021 Investing Activities
For the fiscal years ended
Financing Activities
Net cash provided by financing activities was
Debt and Available Borrowing Resources
Total debt was
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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. As of
January 1, 2022 , our outstanding revolving loan balance was $0 . The outstanding
standby letters of credit balance as of January 1, 2022 was $1,435 , and we had
$0 of our trade letters of credit outstanding in accounts payable in our
consolidated balance sheet. We used the trade letters of credit in the ordinary
course of business to satisfy certain vendor obligations.
On December 18, 2019 , the Company and 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 .
The other amendments to the Credit Agreement made under the Twelfth Amendment were as follows:
Solely until
? dominion triggers in the Credit Agreement, the facility will incorporate
elements of the borrowing base above the
? Until
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 1.25% to 1.75% per annum based on the Company's fixed charge coverage ratio, or (b) a "alternate base rate" subject to a reduction by 0.25% to 0.75% per annum based on the Company's fixed charge coverage ratio. As ofJanuary 1, 2022 , the Company's LIBOR based interest rate was 1.88% (on$0 principal) and the Company's prime based rate was 3.50% (on$0 principal). A commitment fee, based upon undrawn availability under the Credit Facility bearing interest at a rate of 0.25% per annum, is payable monthly. 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 credit facility matures onDecember 16, 2022 . 38 Table of Contents Certain of the Company's domestic subsidiaries are co-borrowers (together with the Company, the "Borrowers") under the Credit Agreement, and certain other domestic subsidiaries are guarantors (the "Guarantors" and, together with the Borrowers, the "Loan Parties") under the Credit Agreement. The Borrowers and the Guarantors are jointly and severally liable for the Borrowers' obligations under the Credit Agreement. The Loan Parties' obligations under the Credit Agreement are secured, subject to customary permitted liens and certain exclusions, by a perfected security interest in (a) all tangible and intangible assets and (b) all of the capital stock owned by the Loan Parties (limited, in the case of foreign subsidiaries, to 65% of the capital stock of such foreign subsidiaries). The Borrowers may voluntarily prepay the loans at any time. The Borrowers are required to make mandatory prepayments of the loans (without payment of a premium) with net cash proceeds received upon the occurrence of certain "prepayment events," which include certain sales or other dispositions of collateral, certain casualty or condemnation events, certain equity issuances or capital contributions, and the incurrence of certain debt.
The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, fundamental changes, investments, dispositions, prepayment of other indebtedness, mergers, and dividends and other distributions.
Events of default under the Credit Agreement include: failure to timely make payments due under the Credit Agreement; material misrepresentations or misstatements under the Credit Agreement and other related agreements; failure to comply with covenants under the Credit Agreement and other related agreements; certain defaults in respect of other material indebtedness; insolvency or other related events; certain defaulted judgments; certain ERISA-related events; certain security interests or liens under the loan documents cease to be, or are challenged by the Company or any of its subsidiaries as not being, in full force and effect; any loan document or any material provision of the same ceases to be in full force and effect; and certain criminal indictments or convictions of anyLoan Party . As ofJanuary 1, 2022 , 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" in the Notes to the Consolidated Financial Statements included in Part II, Item 8, 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 or equity 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 margin, 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.
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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.
Recent Accounting Pronouncements
See "Note 1 - Summary of Significant Accounting Policies and Nature of Operations" of the Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Actual results could differ from those estimates under different assumptions and conditions. We believe that of our significant accounting policies, which are described in Note 1 - Summary of Significant Accounting Policies and Nature of Operations" of the Notes to Consolidated Financial Statements, the following accounting policies and estimates set forth below involve a greater degree of judgment or complexity. Valuation of Inventory - Inventory Reserves. Inventory primarily consists of finished goods. We purchase inventory from suppliers both domestically and internationally, primarily inTaiwan andChina . Inventory is accounted for using the first-in first-out ("FIFO") method and valued at the lower of cost or net realizable value. We recognize provisions for obsolete and slow-moving inventory primarily based on judgments about expected disposition of inventory, generally, through sales, or liquidations of obsolete inventory, and expected recoverable values based on currently-available or historical information. If actual market conditions are less favorable than those anticipated by management, additional write-offs to reduce the value of our inventory may be required. Income Taxes - Realization of Deferred Tax Assets. The Company accounts for income taxes in accordance with 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 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 primarily 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/released also considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration
of
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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 release of our valuation allowance. The valuation of deferred tax assets requires judgment and assessment of the future tax consequences of events that have been recorded in the financial statements or in the tax returns, and our future profitability represents our best estimate of those future events. Changes in our current estimates, due to unanticipated events or otherwise, could have a material effect on our financial condition and results of operations. We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely 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.
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