CarParts.com(PRTS) - 2023 Q3 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section cautions readers about forward-looking statements, highlighting inherent risks and the company's non-obligation to update them - The report contains forward-looking statements based on management's beliefs and assumptions, identified by terms like 'anticipates,' 'believes,' 'estimates,' 'expects,' and 'intends' These statements are subject to known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially[11] - Readers are cautioned not to place undue reliance on forward-looking statements and should review the 'Risk Factors' section for a detailed discussion of potential risks The company assumes no obligation to update these statements publicly unless required by law[11] PART I. Financial Information ITEM 1. Financial Statements This section presents CarParts.com's unaudited consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, with detailed notes Consolidated Balance Sheets (Unaudited) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity as of September 30, 2023, and December 31, 2022 Consolidated Balance Sheet Highlights (In Thousands) | Metric | September 30, 2023 | December 31, 2022 | Change | % Change | | :-------------------------------- | :------------------- | :------------------ | :----- | :------- | | Cash and cash equivalents | $66,679 | $18,767 | $47,912 | 255.3% | | Total current assets | $206,763 | $167,871 | $38,892 | 23.2% | | Total assets | $270,822 | $238,399 | $32,423 | 13.6% | | Total current liabilities | $119,571 | $88,028 | $31,543 | 35.8% | | Total liabilities | $153,157 | $128,327 | $24,830 | 19.3% | | Total stockholders' equity | $117,665 | $110,072 | $7,593 | 6.9% | Consolidated Statements of Operations and Comprehensive Operations (Unaudited) This section presents the company's unaudited financial performance, including net sales, gross profit, and net (loss) income for the thirteen and thirty-nine weeks ended September 30, 2023 Consolidated Statements of Operations Highlights (In Thousands, Except Per Share Data) | Metric (Thirteen Weeks Ended) | Sep 30, 2023 | Oct 1, 2022 | Change | % Change | | :------------------------------ | :----------- | :---------- | :----- | :------- | | Net sales | $166,864 | $164,807 | $2,057 | 1.2% | | Gross profit | $54,817 | $56,148 | $(1,331) | -2.4% | | (Loss) income from operations | $(2,917) | $(281) | $(2,636) | -938.1% | | Net (loss) income | $(2,517) | $(948) | $(1,569) | -165.5% | | Basic net (loss) income per share | $(0.04) | $(0.02) | $(0.02) | -100.0% | | Diluted net (loss) income per share | $(0.04) | $(0.02) | $(0.02) | -100.0% | | Metric (Thirty-Nine Weeks Ended) | Sep 30, 2023 | Oct 1, 2022 | Change | % Change | | :------------------------------- | :----------- | :---------- | :----- | :------- | | Net sales | $519,334 | $507,080 | $12,254 | 2.4% | | Gross profit | $177,810 | $179,245 | $(1,435) | -0.8% | | (Loss) income from operations | $(3,125) | $6,101 | $(9,226) | -151.2% | | Net (loss) income | $(2,137) | $5,273 | $(7,410) | -140.5% | | Basic net (loss) income per share | $(0.04) | $0.10 | $(0.14) | -140.0% | | Diluted net (loss) income per share | $(0.04) | $0.09 | $(0.13) | -144.4% | Consolidated Statements of Stockholders' Equity (Unaudited) This section details changes in stockholders' equity, including common stock, additional paid-in capital, treasury stock, and accumulated deficit, for the periods presented Stockholders' Equity Highlights (In Thousands) | Metric | September 30, 2023 | December 31, 2022 | Change | % Change | | :-------------------------- | :------------------- | :------------------ | :----- | :------- | | Common Stock (Amount) | $60 | $57 | $3 | 5.3% | | Additional Paid-in Capital | $309,106 | $297,265 | $11,841 | 4.0% | | Treasury Stock | $(9,766) | $(7,625) | $(2,141) | 28.1% | | Accumulated Deficit | $(182,888) | $(180,751) | $(2,137) | 1.2% | | Total Stockholders' Equity | $117,665 | $110,072 | $7,593 | 6.9% | - The company repurchased 495 thousand shares of common stock for a total cost of $2,141 thousand during the thirty-nine weeks ended September 30, 2023[23] Consolidated Statements of Cash Flows (Unaudited) This section outlines the company's cash inflows and outflows from operating, investing, and financing activities for the thirty-nine weeks ended September 30, 2023 Consolidated Statements of Cash Flows Highlights (Thirty-Nine Weeks Ended, In Thousands) | Metric | Sep 30, 2023 | Oct 1, 2022 | Change | % Change | | :------------------------------------ | :----------- | :---------- | :----- | :------- | | Net cash provided by operating activities | $57,865 | $5,702 | $52,163 | 914.8% | | Net cash used in investing activities | $(7,297) | $(10,502) | $3,205 | 30.5% | | Net cash (used in) provided by financing activities | $(2,656) | $3,808 | $(6,464) | -169.8% | | Net change in cash and cash equivalents | $47,912 | $(1,490) | $49,402 | -3315.6% | | Cash and cash equivalents, end of period | $66,679 | $16,654 | $50,025 | 300.4% | Notes to Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures for the consolidated financial statements, covering accounting policies, borrowings, equity, and contingencies Note 1 – Basis of Presentation and Description of Company This note describes CarParts.com as an online auto parts retailer, its product categories, and the change in functional currency for its Philippines subsidiary - CarParts.com, Inc. is an online provider of aftermarket auto parts and accessories, selling through its flagship website and online marketplaces[27] - Product categories include replacement parts (e.g., body parts, Kool-Vue® mirrors), hard parts (e.g., engine components, Evan Fischer® catalytic converters), and performance parts/accessories (e.g., JC Whitney®)[28] - Effective July 3, 2022, the functional currency of the Philippines subsidiary changed from local currency to the U.S. dollar, impacting foreign currency gains and losses to be included in net (loss) income prospectively[31] Note 2 – Borrowings This note details the company's $75 million asset-based revolving credit facility, its terms, interest rates, and outstanding balances - The company has an asset-based revolving credit facility of $75,000 thousand, with an uncommitted ability to increase to $150,000 thousand, maturing on June 17, 2027[34] Revolving Loan and Letters of Credit (In Thousands) | Metric | September 30, 2023 | December 31, 2022 | | :----------------------------- | :------------------- | :------------------ | | Outstanding revolving loan balance | $0 | $0 | | Outstanding standby letters of credit | $1,100 | $620 | - Interest rates are based on Adjusted SOFR (6.92% as of Sep 30, 2023) or an alternate prime base rate (8.50% as of Sep 30, 2023), plus applicable margins[35] Note 3 – Stockholders' Equity and Share-Based Compensation This note outlines common stock option and RSU activity, including grants, exercises, and forfeitures, alongside the company's stock repurchase program Stock Option Activity (Thirty-Nine Weeks Ended September 30, 2023) | Activity | Common Shares | | :-------------------------------- | :-------------- | | Granted options | 0 | | Exercise of options | 1,655 | | Forfeiture of options | 68 | | Expiration of options | 9 | Restricted Stock Unit (RSU) Activity (Thirty-Nine Weeks Ended September 30, 2023, In Thousands) | Metric | Shares | | :------------------------------------ | :----- | | Vested and expected to vest (Dec 31, 2022) | 3,132 | | Awarded | 2,239 | | Vested | (1,032) | | Forfeited | (724) | | Awards outstanding (Sep 30, 2023) | 3,615 | - The company repurchased 495 thousand shares of common stock for $2,141 thousand during the thirty-nine weeks ended September 30, 2023, at an average price of $4.33 per share Approximately $27,379 thousand remains authorized under the stock repurchase program[39] Note 4 – Net (Loss) Income Per Share This note presents the computation of basic and diluted net (loss) income per share, explaining the exclusion of anti-dilutive securities Net (Loss) Income Per Share (In Thousands, Except Per Share Data) | Metric | Thirteen Weeks Ended Sep 30, 2023 | Thirteen Weeks Ended Oct 1, 2022 | Thirty-Nine Weeks Ended Sep 30, 2023 | Thirty-Nine Weeks Ended Oct 1, 2022 | | :------------------------------------ | :-------------------------------- | :------------------------------- | :----------------------------------- | :---------------------------------- | | Net (loss) income allocable to common shares | $(2,517) | $(948) | $(2,137) | $5,273 | | Weighted-average common shares outstanding (basic) | 57,179 | 54,481 | 56,252 | 54,009 | | Basic net (loss) income per share | $(0.04) | $(0.02) | $(0.04) | $0.10 | | Diluted net (loss) income per share | $(0.04) | $(0.02) | $(0.04) | $0.09 | - For the thirteen and thirty-nine weeks ended September 30, 2023, and the thirteen weeks ended October 1, 2022, all outstanding potentially dilutive securities were excluded from diluted net loss per share calculation because their effect would have been anti-dilutive[41] Note 5 – Income Taxes This note discusses the company's income tax provision, effective tax rates, and the full valuation allowance against deferred tax assets Effective Tax Rates | Period | Effective Tax Rate | | :------------------------------------ | :----------------- | | Thirteen Weeks Ended Sep 30, 2023 | (4.7)% | | Thirty-Nine Weeks Ended Sep 30, 2023 | (22.7)% | | Thirteen Weeks Ended Oct 1, 2022 | (5.5)% | | Thirty-Nine Weeks Ended Oct 1, 2022 | 2.2% | - The effective tax rate differed from the U.S. federal statutory rate due to state income taxes, Philippines subsidiary income, share-based compensation, and changes in the valuation allowance[43][44] - The company maintains a full valuation allowance against its deferred tax assets, with no material change in the amount of deferred tax assets not considered more likely than not to be realized[45] Note 6 – Commitments and Contingencies This note details legal matters, including asbestos-related lawsuits and ordinary course litigation, and management's assessment of their financial impact - A wholly-owned subsidiary, WAG, is a defendant in several asbestos-related lawsuits, but maintains liability insurance coverage and is not expected to incur significant out-of-pocket costs[47] - The company is subject to ordinary course litigation, including a negligence claim for a workplace injury in Texas, which is in the discovery stage with trial scheduled for 2024 The company intends to vigorously defend itself[48] - Management believes the final disposition of legal matters will not have a material adverse effect on the company's financial position, results of operations, or cash flow[48] Note 7 – Product Information This note summarizes the company's revenue distribution by product type, categorizing sales into House Brands and Branded products across Replacement Parts, Hard Parts, and Performance categories Revenue Distribution by Product Type | Product Type | Thirteen Weeks Ended Sep 30, 2023 | Thirteen Weeks Ended Oct 1, 2022 | Thirty-Nine Weeks Ended Sep 30, 2023 | Thirty-Nine Weeks Ended Oct 1, 2022 | | :---------------- | :-------------------------------- | :------------------------------- | :----------------------------------- | :---------------------------------- | | House Brands: | | | | | | Replacement Parts | 64 % | 68 % | 65 % | 67 % | | Hard Parts | 19 % | 18 % | 19 % | 20 % | | Performance | 1 % | 1 % | 1 % | 1 % | | Branded: | | | | | | Replacement Parts | 1 % | 1 % | 1 % | 1 % | | Hard Parts | 9 % | 7 % | 8 % | 7 % | | Performance | 6 % | 5 % | 6 % | 4 % | | Total | 100 % | 100 % | 100 % | 100 % | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of CarParts.com's financial performance, liquidity, and capital resources for the reported periods, including key trends and accounting policies Cautionary Statement This statement advises readers that the section contains forward-looking statements subject to risks and uncertainties, and historical results are not indicative of future performance - This section contains forward-looking statements regarding business strategies, operations, financial condition, and prospects, which are subject to risks and uncertainties detailed in the 'Risk Factors' section[51][52] - Readers are advised not to place undue reliance on these statements, as actual results may differ materially from expectations, and historical results are not indicative of future performance[52] Overview This section describes CarParts.com's business as an online auto parts provider, its strategic pillars, and supporting industry trends like an aging U.S. vehicle fleet - CarParts.com is a leading online provider of aftermarket auto parts, selling through its website and online marketplaces, utilizing a proprietary product database with approximately 1,020,000 SKUs[53][60] - The company's strategy is built on four pillars: outstanding customer service (extensive assortment, competitive pricing, digital-first experience), operational excellence (continuous improvement, process optimization), financial discipline (cost optimization, cash flow management), and innovation (evolving products/services)[54][55][56][57][58] - Key industry trends supporting growth include the increasing number of automotive SKUs, the expanding and aging U.S. vehicle fleet (average age 12.5 years in 2023), and the projected growth of online auto parts sales to $21 billion by 2025[60][61][62] Executive Summary This summary highlights CarParts.com's Q3 2023 financial performance, including net sales growth, increased net loss, and decreased gross profit and Adjusted EBITDA Q3 2023 Executive Summary Financial Highlights (In Thousands) | Metric | Q3 2023 | Q3 2022 | Change | % Change | | :------------- | :----------- | :----------- | :--------- | :------- | | Net sales | $166,864 | $164,807 | $2,057 | 1.2% | | Net loss | $(2,517) | $(948) | $(1,569) | -165.5% | | Gross profit | $54,817 | $56,148 | $(1,331) | -2.4% | | Gross margin | 32.9% | 34.1% | -120 bps | -3.5% | | Adjusted EBITDA | $3,048 | $6,254 | $(3,206) | -51.3% | - The decrease in gross margin was primarily driven by unfavorable freight costs and a shift in product mix[65] - Total expenses, including cost of sales and operating expense, increased in Q3 2023 compared to Q3 2022[66] Non-GAAP Measures This section defines and reconciles non-GAAP measures like EBITDA and Adjusted EBITDA to net (loss) income, explaining their use in evaluating operating performance - EBITDA is defined as net (loss) income before interest (income) expense, net, income tax provision, depreciation and amortization expense, and amortization of intangible assets[67][68] - Adjusted EBITDA is defined as EBITDA before share-based compensation expense[68] Adjusted EBITDA Reconciliation (In Thousands) | Metric | Thirteen Weeks Ended Sep 30, 2023 | Thirteen Weeks Ended Oct 1, 2022 | Thirty-Nine Weeks Ended Sep 30, 2023 | Thirty-Nine Weeks Ended Oct 1, 2022 | | :-------------------------- | :-------------------------------- | :------------------------------- | :----------------------------------- | :---------------------------------- | | Net (loss) income | $(2,517) | $(948) | $(2,137) | $5,273 | | Depreciation & amortization | $4,430 | $3,406 | $12,596 | $9,671 | | Amortization of intangible assets | $8 | $26 | $28 | $81 | | Interest (income) expense, net | $(449) | $433 | $(323) | $1,066 | | Taxes | $114 | $49 | $396 | $118 | | EBITDA | $1,586 | $2,966 | $10,560 | $16,209 | | Stock compensation expense | $1,462 | $3,288 | $8,158 | $7,786 | | Adjusted EBITDA | $3,048 | $6,254 | $18,718 | $23,995 | Results of Operations This section provides a detailed analysis of CarParts.com's net sales, gross margin, operating expenses, and other income/expense for the reported periods Net Sales and Gross Margin This section analyzes changes in net sales and gross margin, attributing shifts to demand, freight costs, and product mix for the reported periods Net Sales and Gross Margin Performance (In Thousands) | Metric | Thirteen Weeks Ended Sep 30, 2023 | Thirteen Weeks Ended Oct 1, 2022 | Thirty-Nine Weeks Ended Sep 30, 2023 | Thirty-Nine Weeks Ended Oct 1, 2022 | | :---------- | :-------------------------------- | :------------------------------- | :----------------------------------- | :---------------------------------- | | Net sales | $166,864 | $164,807 | $519,334 | $507,080 | | Cost of sales | $112,047 | $108,659 | $341,524 | $327,835 | | Gross profit | $54,817 | $56,148 | $177,810 | $179,245 | | Gross margin | 32.9 % | 34.1 % | 34.2 % | 35.3 % | - Net sales increased by 1.2% for Q3 2023 and 2.4% for YTD Q3 2023, primarily driven by continued demand[73] - Gross margin decreased by 120 basis points in Q3 2023 and 110 basis points in YTD Q3 2023, mainly due to unfavorable freight costs and a shift in product mix[74] Operating Expense This section details the increase in operating expenses, driven by business investments and advertising, partially offset by improved distribution center efficiency Operating Expense (In Thousands) | Metric | Thirteen Weeks Ended Sep 30, 2023 | Thirteen Weeks Ended Oct 1, 2022 | Thirty-Nine Weeks Ended Sep 30, 2023 | Thirty-Nine Weeks Ended Oct 1, 2022 | | :---------------- | :-------------------------------- | :------------------------------- | :----------------------------------- | :---------------------------------- | | Operating expense | $57,734 | $56,729 | $180,935 | $173,144 | | Percent of net sales | 34.6 % | 34.4 % | 34.8 % | 34.1 % | - Operating expense increased by 1.8% for Q3 2023 and 4.5% for YTD Q3 2023, driven by business investments and higher advertising expense, partially offset by improved distribution center fulfillment costs[75] Total Other Income (Expense), Net This section explains the significant increase in other income (expense), net, primarily due to higher interest income from increased cash balances and interest rates Total Other Income (Expense), Net (In Thousands) | Metric | Thirteen Weeks Ended Sep 30, 2023 | Thirteen Weeks Ended Oct 1, 2022 | Thirty-Nine Weeks Ended Sep 30, 2023 | Thirty-Nine Weeks Ended Oct 1, 2022 | | :-------------------------- | :-------------------------------- | :------------------------------- | :----------------------------------- | :---------------------------------- | | Other income (expense), net | $514 | $(318) | $1,384 | $(710) | | Percent of net sales | 0.3 % | (0.2)% | 0.3 % | (0.1)% | - Total other income (expense), net, increased significantly by 261.6% for Q3 2023 and 294.9% for YTD Q3 2023, primarily due to higher interest income from increased interest rates and cash balance[77] Income Tax Provision This section discusses the income tax provision and effective tax rates, noting factors like state taxes, Philippines subsidiary income, and valuation allowance changes Income Tax Provision (In Thousands) | Metric | Thirteen Weeks Ended Sep 30, 2023 | Thirteen Weeks Ended Oct 1, 2022 | Thirty-Nine Weeks Ended Sep 30, 2023 | Thirty-Nine Weeks Ended Oct 1, 2022 | | :------------------ | :-------------------------------- | :------------------------------- | :----------------------------------- | :---------------------------------- | | Income tax provision | $114 | $49 | $396 | $118 | | Percent of net sales | 0.1 % | 0.0 % | 0.1 % | 0.0 % | - Effective tax rates for Q3 2023 and YTD Q3 2023 were (4.7)% and (22.7)%, respectively, differing from the U.S. federal statutory rate due to state taxes, Philippines subsidiary income, share-based compensation, and valuation allowance changes[78][79] - The company maintains a full valuation allowance against deferred tax assets, with no material change in the assessment of realizability[80] Foreign Currency This section states that the impact of foreign currency fluctuations on the company's operations, primarily from the Philippines and Canada, was not material - The impact of foreign currency fluctuations, primarily related to offshore operations in the Philippines and sales in Canada, was not material to the company's operations[81] Liquidity and Capital Resources This section details the company's liquidity position, cash flow activities, and debt structure, affirming sufficient resources for the next twelve months Sources of Liquidity This section identifies cash and cash equivalents from operations and available debt financing as primary liquidity sources, sufficient for near-term operational needs - The company primarily funded operations with cash and cash equivalents generated from operations during the thirty-nine weeks ended September 30, 2023[82] Cash and Cash Equivalents (In Thousands) | Metric | September 30, 2023 | December 31, 2022 | Change | % Change | | :-------------------------- | :------------------- | :------------------ | :----- | :------- | | Cash and cash equivalents | $66,679 | $18,767 | $47,912 | 255.3% | - Management believes existing cash, investments, cash flows from operations, and available debt financing will be sufficient to finance operational cash needs for at least the next twelve months[82] Working Capital This section presents the company's working capital and notes its fluctuations due to historical business seasonality affecting cash, inventory, and accounts payable Working Capital (In Thousands) | Metric | September 30, 2023 | December 31, 2022 | Change | % Change | | :------------- | :------------------- | :------------------ | :----- | :------- | | Working capital | $87,192 | $79,843 | $7,349 | 9.2% | - Working capital fluctuates due to historical seasonality in the business, affecting cash, inventory, and accounts payable[84] Cash Flows This section provides a summary of cash flow activities, including significant increases in operating cash flow and changes in investing and financing activities Key Cash Flow Metrics (Thirty-Nine Weeks Ended, In Thousands) | Metric | Sep 30, 2023 | Oct 1, 2022 | Change | % Change | | :------------------------------------ | :----------- | :---------- | :----- | :------- | | Net cash provided by operating activities | $57,865 | $5,702 | $52,163 | 914.8% | | Net cash used in investing activities | $(7,297) | $(10,502) | $3,205 | 30.5% | | Net cash (used in) provided by financing activities | $(2,656) | $3,808 | $(6,464) | -169.8% | | Net change in cash and cash equivalents | $47,912 | $(1,490) | $49,402 | -3315.6% | | Cash and cash equivalents, end of period | $66,679 | $16,654 | $50,025 | 300.4% | Operating Activities This section highlights the substantial increase in net cash provided by operating activities, primarily driven by improved working capital management - Net cash provided by operating activities increased significantly to $57,865 thousand for the thirty-nine weeks ended September 30, 2023, from $5,702 thousand in the prior year, primarily due to a higher net cash inflow from changes in working capital[86] Investing Activities This section details net cash used in investing activities, primarily for additions to property and equipment, including capitalized website and software development costs - Net cash used in investing activities was $7,297 thousand for the thirty-nine weeks ended September 30, 2023, primarily for additions to property and equipment, mainly capitalized website and software development costs[87] Financing Activities This section outlines net cash used in financing activities, driven by finance lease payments and stock repurchases, partially offset by stock option exercises - Net cash used in financing activities was $2,656 thousand for the thirty-nine weeks ended September 30, 2023, driven by payments on finance leases ($3,592 thousand) and treasury stock repurchases ($2,151 thousand), partially offset by proceeds from stock option exercises ($2,604 thousand)[88] Debt and Available Borrowing Resources This section details the company's debt, including its undrawn revolving credit facility, and discusses restrictive covenants and borrowing base limitations Total Debt (In Thousands) | Metric | September 30, 2023 | December 31, 2022 | Change | % Change | | :------------- | :------------------- | :------------------ | :----- | :------- | | Total debt | $17,774 | $20,669 | $(2,895) | -14.0% | - The company's Credit Facility provides a revolving commitment of up to $75,000 thousand, with an option to increase to $150,000 thousand, maturing on June 17, 2027 No revolving loan balance was outstanding as of September 30, 2023[90] - The Credit Agreement includes restrictive covenants and a borrowing base, which could limit financing and operational flexibility or require immediate loan repayment if conditions are not met[91][92] Funding Requirements This section assesses the sufficiency of current funding for the next twelve months, while acknowledging potential future capital needs and adverse event impacts - Based on the current operating plan, existing cash, investments, cash flows from operations, and available debt financing are believed to be sufficient for operational cash needs for at least the next twelve months[93] - Future capital requirements may vary, and adverse events could necessitate additional debt or equity financings, asset sales, or a reduction in planned expenditures[93] Seasonality This section notes the seasonal nature of the business, influenced by external factors, which is expected to continue impacting financial results - The business is seasonal, with demand and product mix affected by external factors and historical trends, which may materially impact financial results[94] Critical Accounting Policies and Estimates This section discusses management's critical accounting estimates and assumptions, highlighting inventory valuation and confirming no significant policy changes in the quarter - Financial statements require estimates and assumptions for revenue recognition, receivables, inventory, deferred tax assets, long-lived assets, and contingencies[95][96] - No significant changes to critical accounting policies occurred during the thirteen weeks ended September 30, 2023[98] - The valuation of inventory, specifically the inventory reserve, is identified as a critical accounting policy[98] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section assesses the company's exposure to interest rate and foreign currency risks, concluding that hypothetical changes would not materially impact financial statements Interest Rate Risk This section discusses the company's exposure to interest rate risk from its revolving credit facility, noting no material impact with a zero outstanding balance - The company is exposed to interest rate risk from its revolving loan under the Credit Facility, which bears interest based on SOFR or a prime rate[100] - As of September 30, 2023, with a $0 outstanding balance on the revolving loan, a hypothetical 100 basis point change in interest rates would not materially affect interest expense and cash flows[100] Foreign Currency Risk This section addresses foreign currency risk from international operations, concluding that a 10% exchange rate change would not materially impact financial statements - Purchases from Asian suppliers are U.S. dollar-denominated, but exchange rate changes could impact product costs Operating expenses from the Philippines subsidiary are paid in Philippine Pesos, making them susceptible to exchange rate fluctuations[101] - A hypothetical 10% change in foreign currency exchange rates would not have a material impact on the consolidated financial statements[101] - The company does not currently use derivative financial instruments to manage foreign currency risk[101] ITEM 4. Controls and Procedures This section details the evaluation of disclosure controls and procedures, confirming their effectiveness and reporting no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures at a reasonable assurance level, ensuring timely and accurate financial reporting - The principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of the end of the reporting period[102] - They concluded that the disclosure controls and procedures are designed at a reasonable assurance level and are effective in ensuring timely and accurate reporting of information required under the Exchange Act[104] Changes in Internal Control Over Financial Reporting This section states that no material changes occurred in internal control over financial reporting during the most recent fiscal quarter - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[106] Inherent Limitations on Internal Controls This section acknowledges the inherent limitations of internal controls, which provide reasonable, not absolute, assurance against error and fraud - Disclosure controls and procedures are designed to provide reasonable, not absolute, assurance of achieving their objectives, and management does not expect them to prevent or detect all error and fraud[107] PART II. Other Information ITEM 1. Legal Proceedings This section incorporates legal proceedings information from Note 6 of the financial statements and refers to the 'Risk Factors' section for related risks - Information on legal proceedings is incorporated by reference from 'Note 6 – Commitments and Contingencies' in Part I, Item 1 of this report[109] - Additional risks associated with legal proceedings are discussed in the 'Risk Factors' section in Part II, Item 1A[109] ITEM 1A. Risk Factors This section outlines various risks, including operational, regulatory, technological, and capital stock-related factors, that could materially affect the company's business and financial performance Risk Factors Summary This summary categorizes key risks facing the company, covering operational, regulatory, technology, and capital stock aspects that could impact financial results - The company's business is subject to risks related to operations, including dependence on suppliers in Taiwan and China, reliance on third-party delivery services, higher wage costs, and commodity price increases[111] - Regulatory and litigation risks include potential for continued net losses, restrictions from the Credit Agreement, asset impairment, product liability lawsuits, and challenges from OEMs regarding intellectual property[115] - Technology-related risks involve dependence on search engines, bandwidth/data center providers, security threats (e.g., ransomware), open-source software, system failures, and the need to respond to technological change[117][118] - Risks related to capital stock include stock price volatility, fluctuating operating results, potential failure of internal controls, anti-takeover provisions in charter documents, and dilution from future capital raises[118] Risks Related To Our Operations This section details operational risks, including supplier dependence, delivery service reliance, wage and commodity cost increases, and intense market competition - Dependence on suppliers in Taiwan and China for the majority of products exposes the company to complex regulatory regimes, logistical challenges, and risks from political instability, currency fluctuations, and tariffs[119][121][124] - Reliance on third-party delivery services for inbound and outbound shipping means increased fees or service interruptions could harm reputation and financial condition[126][129][130] - Higher wage costs (due to minimum wage laws, inflation) and increased commodity prices (fuel, plastic, steel) could negatively impact margins and profitability[131][132] - The online market for aftermarket auto parts is less developed; failure to attract new online customers or adapt to shifting mobile and marketplace shopping behaviors could adversely impact sales and financial results[133][136][137][138] - Loss of access to third-party marketplaces (e.g., eBay, Amazon), which account for a significant portion of revenues (35.3% in YTD Q3 2023), or increased operating costs on these platforms, could substantially reduce revenues[139] - Continued net losses could severely impact liquidity, potentially requiring additional financing, asset sales, or curtailment of operations[141] - The Credit Agreement imposes restrictive covenants and a borrowing base, which could limit financial and operational flexibility, and failure to meet covenants could severely impact liquidity[142][143][147] - Dependence on key suppliers (top ten suppliers represented ~52% of purchases in YTD Q3 2023) and drop-ship suppliers (three represented ~12% of purchases) means interruptions or difficulties could lead to product shortages, higher costs, and declining sales[151][155] - Challenges with international operations in the Philippines, including staffing, regulatory changes, political instability, and currency fluctuations, could limit business growth[157] - Interruptions in fulfillment operations or inability to accommodate increased demand could lead to sales declines and reputational harm[159][160] - Intense competition from online and offline retailers, large marketplaces, and direct-selling suppliers, coupled with low barriers to entry, could result in reduced sales, lower margins, and loss of market share[161][162][163][165] - Failure to offer a broad selection of competitively priced products or maintain sufficient inventory could lead to revenue decline[166] - Loss of key personnel or inability to attract qualified employees could harm business and operations[167] - Foreign exchange risk from international operations, particularly in the Philippines, could impact product costs and operating results[168] - The proprietary product catalog database is a competitive advantage; if stolen, damaged, or replicated by competitors, this advantage could be lost[169] - Adverse economic conditions (unemployment, inflation, rising interest rates) can reduce demand for aftermarket auto parts, impacting sales and operating results[171] - Seasonality in the business can strain operations, leading to potential overstocking or understocking issues[172] - Decreased vehicle miles driven or accident rates could reduce demand for auto parts, negatively affecting revenues[173] - Increased sales tax collection requirements in more states will eliminate a competitive advantage and could adversely affect sales[174][175] - The ability to use net operating loss (NOL) carryforwards to offset future income may be limited by ownership changes or state-level restrictions[176][178] - Inaccurate estimates of the addressable market size could mean lower future growth than anticipated[179] Regulatory And Litigation Risks This section outlines risks from new tariffs, product liability, privacy laws, OEM intellectual property challenges, and evolving environmental and ESG regulations - New tariffs imposed by the U.S. government could force price increases or operational changes, materially harming revenue or operating results[180] - Exposure to product liability lawsuits, especially for defective or malfunctioning parts, could lead to substantial damages, exceeding insurance limits, and harm reputation[181] - Failure to comply with evolving privacy laws (e.g., CCPA) and regulations, or to adequately protect customer data, could result in legal actions, fines, reputational damage, and loss of customers[182][184][185] - Challenges by OEMs to the aftermarket auto parts industry, including claims of intellectual property infringement, could restrict or prohibit sales of certain products and increase costs[186][187][188] - Inability to protect intellectual property rights (trademarks, trade secrets, domain names) could impair brand and lead to customer loss[190] - Involvement in litigation and compliance with numerous laws and regulations could result in substantial judgments, fines, legal fees, and reputational harm[191] - Changes in tax laws or regulations (e.g., Tax Cuts and Jobs Act) could adversely affect business operations and financial performance[192] - Existing or future government regulations related to e-commerce, consumer protection, or environmental laws could expose the company to liabilities and costly operational changes[193][195] - Global climate change or regulatory responses to it could decrease demand for auto parts or increase operational costs[196] - Increased public attention and new regulatory initiatives related to ESG matters may expose the company to negative public perception and additional costs[197] Risks Related To Our Use Of Technology This section addresses technology risks, including dependence on search engines, cybersecurity threats, system failures, and the need to adapt to rapid technological change - Dependence on search engines and other online sources to attract visitors means changes in algorithms, increased competition for ads, or fee increases could harm customer acquisition and results[198][199][200][201] - Reliance on bandwidth, data center providers, and other third parties means any service failure or interruption could disrupt business and lead to customer loss[202] - Security threats, including cyber-attacks like ransomware, could expose the company to liability, business interruption, significant damages, and reputational harm (e.g., June 2020 ransomware attack incurred $100,000 in expenses)[203][206][207] - Dependence on open-source software exposes the company to uncertainty, potential liability for intellectual property infringement, and the risk of being forced to release proprietary source code[208] - System failures due to natural disasters, power loss, or cyber threats could prevent website access, reduce sales, and harm reputation[209][211] - Problems with the design, integration, or implementation of IT systems, including the recently implemented ERP system, could interfere with business operations and financial reporting[212] - Failure to respond to rapid technological change could render websites obsolete and adversely affect financial results[213] - Use of social media platforms carries risks of negative commentary harming reputation and potential fines or penalties due to evolving regulations[214][216] Risks Related To Our Capital Stock This section discusses risks related to the company's capital stock, including price volatility, fluctuating operating results, internal control failures, and potential dilution - The common stock price has been and may continue to be volatile due to various factors, including company performance, market expectations, and industry trends, potentially leading to losses for stockholders[217][218] - Future operating results are expected to fluctuate quarterly due to factors beyond control, such as demand, competition, supplier relationships, and macroeconomic conditions[219][223] - Failure to maintain an effective system of internal control over financial reporting or comply with Section 404 of Sarbanes-Oxley could impact financial reporting accuracy, prevent fraud, and cause stock price decline[222] - Provisions in charter documents, such as a classified Board of Directors and restrictions on stockholder actions, could deter takeover efforts and inhibit stockholders from receiving an acquisition premium[223][224] - The company does not intend to pay cash dividends on its common stock for the foreseeable future[227] - The share repurchase program, authorized up to $30 million in July 2021, does not guarantee enhanced shareholder value and could affect stock price and cash reserves[228] - Future capital raises through equity issuance may dilute existing stockholders' ownership[229] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section summarizes common stock repurchases during Q3 2023, detailing shares bought, average price, and remaining authorization under the program Common Stock Repurchases (Thirteen Weeks Ended September 30, 2023, In Thousands) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | | :-------------------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------------- | | July 2, 2023 to July 29, 2023 | — | $— | $28,473 | | July 30, 2023 to August 26, 2023 | 245 | $4.47 | $27,379 | | August 27, 2023 to September 30, 2023 | — | $— | $27,379 | | Total | 245 | $4.47 | | ITEM 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[231] ITEM 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable to the company[232] ITEM 5. Other Information This section reports that no directors or executive officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements in Q3 2023 - No directors or executive officers adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the thirteen weeks ended September 30, 2023[233] ITEM 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, XBRL instance documents, and taxonomy extension documents - Exhibits include certifications (31.1, 31.2, 32.1, 32.2) from the Principal Executive Officer and Principal Financial Officer[235] - XBRL-related documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104) are filed or incorporated by reference[235]