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 I, Item 1 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 II, 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. We sell our products to individual consumers through www.carparts.com, online marketplaces and offline to wholesale distributors. Our user friendly and flagship website, www.carparts.com, provides 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. 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 our strategy of disintermediating the traditional auto parts supply chain and selling products directly to customers over the Internet allows us to efficiently deliver products to our customers. Industry-wide trends that support our strategy include: 1.Number of SKUs required to serve the market. The number of automotive SKUs has grown dramatically over the last several years. In today's market, unless the consumer is driving a high volume produced vehicle and needs a simple maintenance item, the part they need is not typically on the shelf at a brick-and-mortar store. We believe our user-friendly websites provide customers with a favorable alternative to the brick-and-mortar shopping experience by offering a comprehensive selection of approximately 825,000 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 near record-highs at 11.8 years during 2019, according to theU.S. Auto Care Association . In addition, IHS, a market analytics firm, found that the total number of light vehicles in operation in theU.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 cases we believe these older vehicles are driven by do-it-yourself ("DIY") car owners who are more likely to handle any necessary repairs themselves rather than taking their car to the professional repair shop. 3.Growth of online sales.The U.S. Auto Care Association estimated that overall revenue from online sales of auto parts and accessories would reach almost$20 billion by 2022. Improved product availability, lower prices and consumers' growing comfort with digital platforms are driving the shift to online sales. We believe that 14
--------------------------------------------------------------------------------
Table of Contents
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. Impact of COVID-19 The challenges posed by the COVID-19 pandemic onthe United States and global economy increased significantly in March and some challenges continued through the third quarter of 2020. 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 had no significant disruptions and 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"). COVID-19 had only minimal disruptions on our business as sales for the thirty-nine weeks endedSeptember 26, 2020 were unfavorably impacted primarily in mid to late March during the initial stages of COVID-19 stay-at-home orders. 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 II, Item 1A for further discussion of risks related to COVID-19.
Cybersecurity Matters
OnJune 28, 2020 , we detected a ransomware attack on our network that disrupted access to some of our systems. We immediately took steps to isolate the affected systems and contain the disruption to our information technology infrastructure, including taking some systems offline as a precautionary measure. Our internal IT team subsequently restored and recovered the affected IT systems to full functionality. We engaged third party consultants and law enforcement to investigate the incident, and we internally have found no evidence that sensitive customer data was compromised or stolen from the IT systems, although our investigation is continuing. We believe there has not been any, current or expected future, material impact to our business, results of operations or financial condition because of this ransomware attack. In order to mitigate the likelihood of similar future events, we have implemented enhanced security features and monitoring procedures.
Executive Summary
For the third quarter of 2020, the Company's operations generated net sales of$117,406 , compared with$69,273 for the third quarter of 2019, representing an increase of 69.5%. Our operations generated net income of$1,385 for the third quarter of 2020 compared to a net loss of$1,424 for the third quarter of 2019. Our operations generated a net income (loss) before interest expense, net, income tax provision (benefit), depreciation and amortization expense, amortization of intangible assets, plus share-based compensation expense, and in 2019, costs related to our customs issues and employee transition costs ("Adjusted EBITDA") of$5,131 in the third quarter of 2020 compared to$1,316 in the third quarter of 2019. Adjusted EBITDA, which is not a Generally Accepted Accounting Principle ("GAAP") measure. See the section below titled "Non-GAAP measures" for information regarding our use of Adjusted EBTIDA and a reconciliation from net income (loss). Net sales increased in the third quarter of 2020 compared to the third quarter of 2019 primarily due to an increase in our online sales as well as a slight increase in our offline sales. Our online sales, which include our e-commerce and online marketplace sales channels, contributed 93.9% of total net sales and our offline sales, which consist of our Kool-Vue® and wholesale operations, contributed 6.1% of total net sales. Our online sales increased by$47,309 , or 75.1%, to$110,299 compared to the same period last year due to an increase in e-commerce sales, primarily driven by our sales growth from our flagship website,CarParts.com . Our offline sales increased by$824 , or 13.1%, to$7,107 compared to the same period last year primarily due to an increase in sales from our wholesale operations. Gross profit increased by 103.9% to$43,121 . The increase in gross profit was primarily due to improved product mix, channel mix, and logistics optimization. Total expenses, which primarily consisted of cost of sales and operating expense, increased in the third quarter of 2020 compared to the same period in 2019. The changes in both cost of sales and operating expense are described in further detail under - "Results of Operations" below. 15
--------------------------------------------------------------------------------
Table of Contents
We continue to pursue the following strategies in order to improve our operating performance:
We have returned 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 websites to take advantage of shifting
consumer behaviors. These efforts are intended to increase the number of repeat
purchases, as well as contribute to our sales 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 house brand products as they
are generally less expensive and we believe provide better value for the
consumer. We believe our product offering will grow our sales and improve our
margins.
We continue to increase product selection by being the first to market with
many new SKUs. We currently have approximately 65,000 house brand SKUs and over
760,000 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 sales 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 (benefit); (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
16--------------------------------------------------------------------------------
Table of Contents
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.
The table below reconciles net income (loss) from operations to Adjusted EBITDA for the periods presented (in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 26, 2020 September
28, 2019
$ 1,385 $ (1,424) $ 1,975 $ (6,461)
Depreciation & amortization 1,766 1,531 5,298 4,572
Amortization of intangible assets 25 25 75 75
Interest expense, net 304 516 1,453 1,410
Taxes 45 (552) 199 (1,018)
EBITDA $ 3,525 $ 96 $ 9,000 $ (1,422)
Stock compensation expense $ 1,606 $ 792 $ 5,991 $ 1,955
Employee transition costs(1) - 425 - 1,695
Customs costs(2) - 3 - 418
Adjusted EBITDA $ 5,131 $ 1,316 $ 14,991 $ 2,646
--------------------------------------------------------------------------------
We incurred employee transition costs related to the transition of our (1) executive management team including severance, recruiting, hiring bonus and
relocation costs.
We incurred port and carrier fees and legal costs associated with our customs (2) related issues. Refer to "Note 6 - Commitments and Contingencies" of our
Notes to Consolidated Financial Statements for additional details.
Results of Operations
The following table sets forth selected statement of operations data for the periods indicated, expressed as a percentage of net sales:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 63.3 69.5 64.9 71.0
Gross profit 36.7 30.5 35.1 29.0
Operating expense 35.3 32.5 34.0 31.8
Income (loss) from operations 1.5 (2.0) 1.1 (2.8)
Other income (expense):
Other income, net 0.0 (0.0) 0.0 0.0
Interest expense (0.3) (0.7) (0.4) (0.6)
Total other expense, net (0.3) (0.7) (0.4) (0.6)
Income (loss) before income taxes 1.2 (2.7) 0.7 (3.4)
Income tax provision (benefit) 0.0 (0.8) 0.1 (0.5)
Net income (loss) 1.2 % (1.9) % 0.6 % (2.9) %
17
--------------------------------------------------------------------------------
Table of Contents
Thirteen and Thirty-Nine Weeks Ended
Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019
(in thousands) (in thousands)
Net sales $ 117,406 $ 69,273 $ 324,154 $ 217,698
Cost of sales 74,285 48,130 210,425 154,663
Gross profit $ 43,121 $ 21,143 $ 113,729 $ 63,035
Gross margin 36.7 % 30.5 % 35.1 % 29.0 %
Net sales increased $48,133 , or 69.5%, for the third quarter of 2020 compared to
the third quarter of 2019. Our net sales consisted of online sales, representing
93.9% of the total for the third quarter of 2020 (compared to 90.9% in the third
quarter of 2019), and offline sales, representing 6.1% of the total for the
third quarter of 2020 (compared to 9.1% in the third quarter of 2019). The
net sales increase was due to an increase in online sales of $47,309 , or 75.1%,
as well as an increase in offline sales of $824 , or 13.1%. Our online sales
channels increase was driven by an increase in e-commerce sales primarily driven
by our sales growth from our flagship website, CarParts.com . The offline sales
channel increased primarily due to increased sales to our wholesale customers.
Net sales increased $106,456 , or 48.9%, for the thirty-nine weeks ended
September 26, 2020 ("YTD Q3 2020") compared to the same period in 2019. Our net
sales consisted of online and offline sales, representing 93.9% and 6.1%,
respectively, of the total net sales for YTD Q3 2020 (compared to 90.7% and
9.3%, respectively, for the same period in 2019). The net sales increase was
driven by an increase of $107,080 , or 54.2%, in online sales, offset by a
decrease in offline sales of $624 , or 3.0%. Our online sales channel increase
was driven by an increase in ecommerce sales primarily driven by our sales
growth from our flagship website, CarParts.com . The offline sales channel
decreased primarily due to decreased sales to our wholesale customers.
Gross profit increased $21,978 or 103.9%, for the third quarter of 2020 compared
to the same period of 2019 and increased $50,694 , or 80.4%, in YTD Q3 2020
compared to YTD Q3 2019. Gross margin increased 620 basis points to 36.7% in the
third quarter of 2020 compared to 30.5% in the third quarter of 2019. Gross
margin increased 610 basis points to 35.1% for YTD Q3 2020 compared to 29.0% in
the same period of 2019. The increase in gross profit and gross margin was
primarily due to improved product mix, channel mix, and logistics optimization.
Operating Expense
Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019
(in thousands) (in thousands)
Operating expense $ 41,389 $ 22,601 $ 110,174 $ 69,144
Percent of net sales 35.3 % 32.6 % 34.0 % 31.8 %
Operating expense increased $18,788 , or 83.1%, and increased $41,030 , or 59.3%,
for the third quarter of 2020 and YTD Q3 2020, respectively, compared to the
same periods in 2019 primarily due to an increase in marketing expense as well
as an increase in fulfillment expense. The increase in marketing expense was
primarily due to an increase in marketing spend. The increase in fulfillment
expense was primarily due to a higher number of fulfilled orders as well as
additional expenses incurred from our Las Vegas, Nevada distribution center that
opened in the third quarter of 2019.
Total Other Expense, Net
Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019
(in thousands) (in thousands)
Other expense, net $ (302) $ (518) $ (1,381) $ (1,370)
Percent of net sales (0.3) % (0.7) % (0.4) % (0.6) %
18
--------------------------------------------------------------------------------
Table of Contents
Total other expense, net, decreased$216 , or 41.8%, and for the third quarter compared to the same period in 2019 primarily due to a decrease in interest expense attributable to paying off the trade letters of credit balances during the third quarter of 2020. Total other expense, net, increased$11 , or 0.8%, for YTD Q3 2020 primarily due to an increase in interest expense attributable to an increase in capital assets for the distribution centers, offset by a decrease in interest expense attributable to paying off the trade letters of credit balances during the third quarter of 2020.
Income Tax Provision (Benefit)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019
(in thousands) (in thousands)
Income tax provision (benefit) $ 45 $ (552) $ 199 $ (1,018)
Percent of net sales 0.0 % (0.8) % 0.1 % (0.5) %
For the thirteen and thirty-nine weeks ended September 26, 2020 , the effective
tax rate for the Company's operations was 3.2% and 9.2%, respectively. The
effective tax rate differed from the U.S. federal statutory rate primarily due
to state income taxes, income of our Philippines subsidiary that is subject to
different effective tax rates, share-based compensation that is either not
deductible for tax purposes or for which the tax deductible amount is different
than the financial reporting amount, and a change in the valuation allowance
that offset the tax on the current period pre-tax income.
For the thirteen and thirty-nine weeks ended September 28, 2019 , the effective
tax rate for the Company's operations was 27.9% and 13.6%, respectively. The
effective tax rate differed from the U.S. federal statutory rate primarily due
to state income taxes, income of our Philippines subsidiary that is subject to
different effective tax rates, and share-based compensation that is either
non-deductible for tax purposes or for which the tax deductible amount is
different than the financial reporting amount.
The Company accounts for income taxes in accordance with ASC Topic 740 - Income
Taxes ("ASC 740"). Under the provisions of ASC 740, management is required to
evaluate whether a valuation allowance should be established against its
deferred tax assets. We currently have a full valuation allowance against our
deferred tax assets. 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. For
the thirty-nine weeks ended September 26, 2020 , there was no material change
from fiscal year ended 2019 in the amount of the Company's deferred tax assets
that are not more likely than not to be realized in future years.
On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act
("CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act
contains numerous income tax provisions, such as relaxing limitations on the
deductibility of interest and the use of net operating losses arising in taxable
years beginning after December 31, 2017 . Due to the existence of previously
incurred losses, the NOL carryback provisions of the CARES Act did not result in
a cash benefit to the Company, however, we do anticipate increased interest
expense deductions for tax purposes in 2020 and 2021 as a result of the
relaxation of the limitations on the deductibility of interest.
Foreign Currency
The impact of foreign currency is related to our offshore operations in
Liquidity and Capital Resources
Sources of Liquidity
During the thirty-nine weeks endedSeptember 26, 2020 andSeptember 28, 2019 , we primarily funded our operations with cash and cash equivalents generated from operations and proceeds from our public equity offering. As ofSeptember 26, 2020 , our outstanding revolving loan balance under our credit facility was$0 . We had cash and cash equivalents of$58,971 as ofSeptember 26, 2020 , representing a$56,698 increase from$2,273 of cash as ofDecember 28, 2019 . The cash increase was primarily attributable to proceeds from the issuance of common stock from theAugust 2020 public equity offering. Based on our current operating plan, and despite the current uncertainty resulting from the COVID-19 pandemic, we believe that our existing cash and cash equivalents, investments, cash flows from 19
--------------------------------------------------------------------------------
Table of Contents
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 ofSeptember 26, 2020 , 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 ofSeptember 26, 2020 andDecember 28, 2019 , our working capital was$70,663 and$2,427 , respectively. The historical seasonality in our business during the year can cause cash and cash equivalents, inventory and accounts payable to fluctuate, resulting in changes in our working capital.
Cash Flows
The following table summarizes the key cash flow metrics from our consolidated statements of cash flows for the thirty-nine weeks endedSeptember 26, 2020 andSeptember 28, 2019 (in thousands):
Thirty-Nine Weeks Ended
September 26, 2020 September 28, 2019
Net cash provided by operating activities $ 1,610 $ 4,327
Net cash used in investing activities (6,936) (4,686)
Net cash provided by (used in) financing activities 62,019 (562)
Effect of exchange rate changes on cash 5 (2)
Net change in cash and cash equivalents $ 56,698 $ (923)
Operating Activities
Net cash provided by operating activities for the thirty-nine weeks ended
September 26, 2020 and September 28, 2019 was $1,610 and $4,327 , respectively.
The decrease was primarily due to an increase in inventory from higher demand
for online auto parts to support higher revenues and to supply our new
distribution center in Texas opening in the fourth quarter of 2020, offset by a
higher balance in accrued expense and accounts payable because of an increase in
inventory purchases and timing of payments, further offset by net income.
Investing Activities
For the thirty-nine weeks endedSeptember 26, 2020 andSeptember 28, 2019 , net cash used in investing activities was the result of additions to property and equipment ($6,936 and$4,686 , respectively), which are mainly related to capitalized website and software development costs.
Financing Activities
Net cash provided by (used in) financing activities was$62,019 and ($562 ) for the thirty-nine weeks endedSeptember 26, 2020 andSeptember 28, 2019 . The main reason attributable for the shift to net cash provided was primarily due to common stock issuances from theAugust 2020 public equity offering.
Debt and Available Borrowing Resources
Total debt was
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
September 26, 2020 , our outstanding revolving loan balance was $0 . The
outstanding standby letters of credit balance as of September 26, 2020 was
$1,550 , and we had $0 of our trade letters of credit outstanding in accounts
payable in our
20
--------------------------------------------------------------------------------
Table of Contents
consolidated balance sheet. We used the trade letters of credit in the ordinary course of business to satisfy certain vendor obligations.
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) an "alternate prime base rate" subject to a reduction by 0.25% to 0.75% per annum based on the Company's fixed charge coverage ratio. As ofSeptember 26, 2020 , the Company's LIBOR based interest rate was 1.44% (on$0 principal) and the Company's prime based rate was 3.00% (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 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). In addition, in the event that "excess availability," as defined under the Credit Agreement, is less than$3,000 the Company shall be required to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0. The Company's excess availability was$22,519 as ofSeptember 26, 2020 . The Credit Facility matures onDecember 16, 2022 . Our Credit Agreement 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.
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. As such, 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 off-balance sheet arrangements.
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. Hard 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.
21--------------------------------------------------------------------------------
Table of Contents
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.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe 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. There were no significant changes to our critical accounting policies during the thirteen weeks endedSeptember 26, 2020 . We believe our critical accounting policies 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 (for further detail refer to our Annual Report on Form 10-K that we filed with theSEC onMarch 10, 2020 ): ? Revenue Recognition; ? Inventory;
? Website and Software Development Costs;
? Income Taxes; and ? Share-Based Compensation.
Recent Accounting Pronouncements
See "Note 1 - Summary of Significant Accounting Policies and Nature of Operations" of the Notes to Consolidated Financial Statements (Unaudited), included above in Part I, Item 1 of this report.
© Edgar Online, source
