MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are a leading online provider of aftermarket auto parts, including collision parts, engine 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 prospectus supplement does not include or incorporate by reference into this prospectus supplement 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 830,000 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 of U.S. light vehicles, an indicator of auto
parts demand, remained near record-highs at 11.8 years during 2019, according to the U.S. Auto Care Association. In addition, IHS, a market analytics firm, found that the total number of light vehicles in operation in the U.S. has increased to record
levels, and should continue to rise through 2020. We believe an increasing vehicle base and rising average age of vehicles will have a positive impact on overall aftermarket parts demand because older vehicles generally require more repairs. In many
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 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 on the United States and global economy increased significantly in March and some challenges continued through the second 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 continue to adhere to, and follow, the COVID-19 safety guidelines recommended from the Centers for Disease Control and Prevention (“CDC”).
COVID-19 had only minimal disruptions on our business as sales for the twenty-six weeks ended June 27, 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 in this prospectus supplement, the accompanying prospectus and the documents incorporated by reference herein and therein.
Cybersecurity Matters
On June 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 second quarter of 2020, our operations generated net sales of $118,930, compared with $73,687 for the second quarter of 2019, representing an increase of 61.4%. Our operations incurred net income of $1,568 for
the second quarter of 2020 compared to a net loss of $1,457 for the second 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 $5,557 in the second quarter of 2020 compared to $1,425 in the second 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 second quarter of 2020 compared to the second quarter of 2019 primarily due to an increase in our online sales offset slightly by a decrease in our offline sales. Our online sales, which include
our e-commerce and online marketplace sales channels, contributed 94.7% of total net sales and our offline sales, which consist of our Kool-Vue® and wholesale operations, contributed 5.3% of total net sales. Our online sales increased by
$45,912, or 68.8%, to $112,623 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 decreased by $669, or 9.6%, to $6,307
compared to the same period last year primarily due to a decrease in sales from our wholesale operations. Gross profit increased by 87.6% to $40,829. The increase in gross profit was primarily due to improved product mix, as well as supply chain
optimizations.
Total expenses, which primarily consisted of cost of sales and operating expense, increased in the second 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.
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 private label 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 over 60,000 private label SKUs and over 770,000 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.
We believe 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 our 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 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.
The table below reconciles net income (loss) from operations to Adjusted EBITDA for the periods presented (in thousands):
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
June 27, 2020
|
|
|
June 29, 2019
|
|
|
June 27, 2020
|
|
|
June 29, 2019
|
|
Net income (loss)
|
|
$
|
1,568
|
|
|
$
|
(1,457
|
)
|
|
$
|
590
|
|
|
$
|
(5,038
|
)
|
Depreciation & amortization
|
|
|
1,634
|
|
|
|
1,511
|
|
|
|
3,532
|
|
|
|
3,040
|
|
Amortization of intangible assets
|
|
|
25
|
|
|
|
25
|
|
|
|
50
|
|
|
|
50
|
|
Interest expense, net
|
|
|
490
|
|
|
|
487
|
|
|
|
1,149
|
|
|
|
894
|
|
Taxes
|
|
|
118
|
|
|
|
(186
|
)
|
|
|
154
|
|
|
|
(465
|
)
|
EBITDA
|
|
$
|
3,835
|
|
|
$
|
380
|
|
|
$
|
5,475
|
|
|
$
|
(1,519
|
)
|
Stock compensation expense
|
|
$
|
1,722
|
|
|
$
|
613
|
|
|
$
|
4,385
|
|
|
$
|
1,163
|
|
Employee transition costs(1)
|
|
|
—
|
|
|
|
283
|
|
|
|
—
|
|
|
|
1,269
|
|
Customs costs(2)
|
|
|
—
|
|
|
|
149
|
|
|
|
—
|
|
|
|
415
|
|
Adjusted EBITDA
|
|
$
|
5,557
|
|
|
$
|
1,425
|
|
|
$
|
9,860
|
|
|
$
|
1,328
|
|
(1)
|
We incurred employee transition costs related to the transition of our executive management team including severance, recruiting, hiring bonus and relocation costs.
|
(2)
|
We incurred port and carrier fees and legal costs associated with our customs related issues.
|
The table below reconciles net loss from continuing operations to Adjusted EBITDA for the periods presented (in thousands):
|
|
Fifty-two weeks ended
|
|
|
|
December 28, 2019
|
|
|
December 29, 2018
|
|
Net loss from continuing operations
|
|
|
(31,548
|
)
|
|
|
(4,889
|
)
|
Depreciation & amortization
|
|
|
6,252
|
|
|
|
5,802
|
|
Amortization of intangible assets
|
|
|
100
|
|
|
|
185
|
|
Interest expense, net
|
|
|
1,897
|
|
|
|
1,595
|
|
Taxes
|
|
|
21,437
|
|
|
|
(329
|
)
|
EBITDA
|
|
$
|
(1,862
|
)
|
|
$
|
2,364
|
|
Stock compensation expense
|
|
$
|
3,656
|
|
|
$
|
3,595
|
|
Employee transition costs(1)
|
|
|
2,274
|
|
|
|
774
|
|
Customs Costs(2)
|
|
|
464
|
|
|
|
5,046
|
|
Proceeds from AutoMD sale
|
|
|
—
|
|
|
|
(1,400
|
)
|
Adjusted EBITDA
|
|
$
|
4,532
|
|
|
$
|
10,379
|
|
(1)
|
We incurred employee transition costs related to the transition of our executive management team including severance, recruiting, hiring bonus and relocation costs.
|
(2)
|
We incurred port and carrier fees and legal costs associated with our customs related issues.
|
Results of Operations
Operating Results for the Thirteen and Twenty-Six Weeks Ended June 27, 2020 Compared to the Thirteen and Twenty-Six Weeks Ended June 29, 2019
The following table sets forth selected statement of operations data for the periods indicated, expressed as a percentage of net sales:
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
June 27, 2020
|
|
|
June 29, 2019
|
|
|
June 27, 2020
|
|
|
June 29, 2019
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
65.7
|
|
|
|
70.5
|
|
|
|
65.8
|
|
|
|
71.8
|
|
Gross profit
|
|
|
34.3
|
|
|
|
29.5
|
|
|
|
34.2
|
|
|
|
28.2
|
|
Operating expense
|
|
|
32.5
|
|
|
|
31.2
|
|
|
|
33.3
|
|
|
|
31.4
|
|
Income (loss) from operations
|
|
|
1.8
|
|
|
|
(1.6
|
)
|
|
|
0.9
|
|
|
|
(3.1
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Interest expense
|
|
|
(0.4
|
)
|
|
|
(0.7
|
)
|
|
|
(0.6
|
)
|
|
|
(0.6
|
)
|
Total other expense, net
|
|
|
(0.4
|
)
|
|
|
(0.6
|
)
|
|
|
(0.6
|
)
|
|
|
(0.6
|
)
|
Income (loss) before income taxes
|
|
|
1.4
|
|
|
|
(2.2
|
)
|
|
|
0.4
|
|
|
|
(3.7
|
)
|
Income tax provision (benefit)
|
|
|
0.1
|
|
|
|
(0.3
|
)
|
|
|
0.1
|
|
|
|
(0.3
|
)
|
Net income (loss)
|
|
|
1.3
|
%
|
|
|
(2.0
|
)%
|
|
|
0.3
|
%
|
|
|
(3.4
|
)%
|
Thirteen and Twenty-Six Weeks Ended June 27, 2020 Compared to the Thirteen and Twenty-Six Weeks Ended June 29, 2019
Net Sales and Gross Margin
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
June 27, 2020
|
|
June 29, 2019
|
|
June 27, 2020
|
|
June 29, 2019
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Net sales
|
|
$
|
118,930
|
|
|
$
|
73,687
|
|
|
$
|
206,748
|
|
|
$
|
148,425
|
|
Cost of sales
|
|
|
78,101
|
|
|
|
51,924
|
|
|
|
136,140
|
|
|
|
106,533
|
|
Gross profit
|
|
$
|
40,829
|
|
|
$
|
21,763
|
|
|
$
|
70,608
|
|
|
$
|
41,892
|
|
Gross margin
|
|
|
34.3
|
%
|
|
|
29.5
|
%
|
|
|
34.2
|
%
|
|
|
28.2
|
%
|
Net sales increased $45,243, or 61.4%, for the second quarter of 2020 compared to the second quarter of 2019. Our net sales consisted of online sales, representing 94.7% of the total for the second quarter of 2020
(compared to 90.5% in the second quarter of 2019), and offline sales, representing 5.3% of the total for the second quarter of 2020 (compared to 9.5% in the second quarter of 2019). The net sales increase was due to an increase in online sales of
$45,912, or 68.8%, offset slightly by a decrease in offline sales of $669, or 9.6%. 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 decreased primarily due to decreased sales to our wholesale customers.
Net sales increased $58,323, or 39.3%, for the twenty-six weeks ended June 27, 2020 (“YTD Q2 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 Q2 2020 (compared to 90.6% and 9.4%, respectively, for the same period in 2019). The net sales increase was drive by an increase of $59,770, or 44.5%, in online sales. Our online sales channel increased
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 $19,066 or 87.6%, for the second quarter of 2020 compared to the same period of 2019 and increased $28,716, or 68.5%, in YTD Q2 2020 compared to YTD Q2 2019. Gross margin increased 480 basis
points to 34.3% in the second quarter of 2020 compared to 29.5% in the second quarter of 2019. Gross margin increased 600 basis points to 34.2% for YTD Q2 2020 compared to 28.2% in the same period of 2019. The increase in gross profit and gross
margin was primarily due to improved product mix, as well as supply chain optimizations.
Operating Expense
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
June 27, 2020
|
|
June 29, 2019
|
|
June 27, 2020
|
|
June 29, 2019
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Operating expense
|
|
$
|
38,653
|
|
|
$
|
22,968
|
|
|
$
|
68,785
|
|
|
$
|
46,543
|
|
Percent of net sales
|
|
|
32.5
|
%
|
|
|
31.2
|
%
|
|
|
33.3
|
%
|
|
|
31.4
|
%
|
Operating expense increased $15,685, or 68.3%, and increased $22,242, or 47.8%, for the second quarter of 2020 and YTD Q2 2020, respectively, compared to the same periods in 2019 primarily due to an increase in
fulfillment expense as well as an increase in marketing expense. 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. The increase in marketing expense was primarily due to an increase in marketing spend.
Total Other Expense, Net
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
June 27, 2020
|
|
June 29, 2019
|
|
June 27, 2020
|
|
June 29, 2019
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Other expense, net
|
|
$
|
(490
|
)
|
|
$
|
(438
|
)
|
|
$
|
(1,079
|
)
|
|
$
|
(852
|
)
|
Percent of net sales
|
|
|
(0.4
|
)%
|
|
|
(0.6
|
)%
|
|
|
(0.5
|
)%
|
|
|
(0.6
|
)%
|
Total other expense, net, increased $52, or 11.9%, and increased $227, or 26.6%, for the second quarter and YTD Q2 2020, respectively, compared to the same periods in 2019. This increase was primarily due to an
increase in interest expense attributable to an increase in capital assets for the distribution centers.
Income Tax Provision (Benefit)
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
June 27, 2020
|
|
June 29, 2019
|
|
June 27, 2020
|
|
June 29, 2019
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Income tax provision (benefit)
|
|
$
|
118
|
|
|
$
|
(186
|
)
|
|
$
|
154
|
|
|
$
|
(465
|
)
|
Percent of net sales
|
|
|
0.1
|
%
|
|
|
(0.3
|
)%
|
|
|
0.1
|
%
|
|
|
(0.3
|
)%
|
For the thirteen and twenty-six weeks ended June 27, 2020, the effective tax rate for the Company’s operations was 7.0% and 20.7%, 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 twenty-six weeks ended June 29, 2019, the effective tax rate for the Company’s operations was 11.3% and 8.4%, 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.
We account 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 twenty-six weeks ended June 27, 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 us, 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 the Philippines and sales of our products in Canada and was not material to our operations.
Operating Results for the Fifty-Two Weeks Ended December 28, 2019 Compared to the Fifty-Two Weeks Ended December 29, 2018
The following table sets forth selected statement of operations data for the periods indicated, expressed as a percentage of net sales:
|
|
Fiscal Year Ended
|
|
|
|
December 28, 2019
|
|
|
December 29, 2018
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
70.0
|
|
|
|
72.8
|
|
Gross profit
|
|
|
30.0
|
|
|
|
27.2
|
|
Operating expense
|
|
|
32.9
|
|
|
|
28.9
|
|
Loss from operations
|
|
|
(2.9
|
)
|
|
|
(1.7
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
0.0
|
|
|
|
0.5
|
|
Interest expense
|
|
|
(0.7
|
)
|
|
|
(0.6
|
)
|
Total other expense, net
|
|
|
(0.7
|
)
|
|
|
(0.1
|
)
|
Loss before income taxes
|
|
|
(3.6
|
)
|
|
|
(1.8
|
)
|
Income tax provision (benefit)
|
|
|
7.6
|
|
|
|
(0.1
|
)
|
Net loss
|
|
|
(11.2
|
)%
|
|
|
(1.7
|
)%
|
Fifty-Two Weeks Ended December 28, 2019 Compared to the Fifty-Two Weeks Ended December 29, 2018
Net Sales and Gross Margin
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
|
December 29, 2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
280,657
|
|
|
$
|
289,467
|
|
|
$
|
(8,810
|
)
|
|
|
(3.0
|
)%
|
Cost of sales
|
|
|
196,434
|
|
|
|
210,746
|
|
|
|
(14,312
|
)
|
|
|
(6.8
|
)%
|
Gross profit
|
|
$
|
84,223
|
|
|
$
|
78,721
|
|
|
$
|
5,502
|
|
|
|
7.0
|
%
|
Gross margin
|
|
|
30.0
|
%
|
|
|
27.2
|
%
|
|
|
|
|
|
|
2.8
|
%
|
Net sales decreased $8,810 for fiscal year 2019 compared to fiscal year 2018. Our net sales consisted of online sales, which include our e-commerce sites, online marketplace sales channels and online advertising,
representing 91.2% of the total for fiscal year 2019 (compared to 89.1% in fiscal year 2018), and offline sales, representing 8.8% of the total for fiscal year 2019 (compared to 10.9% in fiscal year 2018). The net sales decrease was due to a decrease
of $1,957, or 0.8%, in online sales, and a decrease of $6,853, or 21.8%, in offline sales. Offline sales decreased primarily due to decreased revenue from wholesale operations. Our online sales decreased primarily due to a decrease in total online
orders of 2.4%, as well as a decrease in average order value of 7.0%. The decrease in total orders was primarily attributable to a decrease in marketplace sales with one of our channel partners, as well as due to a decrease in e-commerce sales
attributable to a reduction of traffic and a shift in our focus to private label sales vs. branded sales.
Gross profit increased $5,502, or 7.0%, in fiscal year 2019 compared to fiscal year 2018. Gross margin increased 280 basis points to 30.0% in fiscal year 2019 compared to 27.2% in fiscal year 2018. Gross margin increased
in fiscal year 2019 compared to fiscal year 2018 primarily due to a shift towards higher margin private label sales.
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
|
December 29, 2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Operating expense
|
|
$
|
92,473
|
|
|
$
|
83,728
|
|
|
$
|
8,745
|
|
|
|
10.4
|
%
|
Percent of net sales
|
|
|
32.9
|
%
|
|
|
28.9
|
%
|
|
|
|
|
|
|
4.0
|
%
|
Operating expense increased $8,745, or 10.4%, for fiscal year 2019 compared to fiscal year 2018 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 and overhead driven by investments in marketing platforms and employees. 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
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
$ Change
|
|
|
% Change
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Other expense, net
|
|
$
|
(1,861
|
)
|
|
$
|
(211
|
)
|
|
$
|
(1,650
|
)
|
|
|
782.0
|
%
|
Percent of net sales
|
|
|
(0.7
|
)%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
(0.6
|
)
|
Total other expense, net increased $1,650, or 782.0%, for fiscal year 2019 compared to fiscal year 2018. Total other expense increased during fiscal year 2019 compared to fiscal year 2018 primarily due to interest
expense compared to the prior year, as well as the sale of AutoMD assets for $1,400 in 2018.
Income Tax Provision
|
Fiscal Year Ended
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Income tax (benefit) provision
|
|
$
|
21,437
|
|
|
$
|
(329
|
)
|
|
$
|
21,766
|
|
|
|
(6,615.8
|
)%
|
Percent of net sales
|
|
|
7.6
|
%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
7.8
|
%
|
The Company accounts for income taxes in accordance with ASC 740 - Income Taxes (“ASC 740”). Under the provisions of ASC 740, management is required to evaluate whether a
valuation allowance should be established against its deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. Realization of deferred tax assets is dependent upon taxable income in prior
carryback years, estimates of future taxable income, tax planning strategies, and reversal of existing taxable temporary difference. ASC 740 provides that forming a conclusion that a valuation allowance is not needed is difficult when there is
negative evidence such as cumulative losses in recent years or losses expected in early future years. As of December 28, 2019, when revaluating all available evidence, including (1) recent history of operating losses, (2) inability to objectively
estimate future income and (3) lack of (i) tax planning strategies, (ii) income in carryback periods and (iii) reversing existing temporary differences, management considered it appropriate to record an additional valuation allowance of approximately
$23,015 against our deferred tax assets. As of December, 29, 2018, we maintained a valuation allowance in the amount of $29,791 against deferred tax assets that were nor more likely than not to be realized.
As of each reporting date, our management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. As we continue to assess our
operations, to the extent our results and expectations of core earnings continue, we may be in a position to release additional valuation allowance in the future.
As of December 28, 2019, we had no material unrecognized tax benefits, interest or penalties related to federal and state income tax matters. At December 28, 2019, the Company’s federal and state net operating loss
(“NOL”) carryforwards were $85,830 and $79,643, respectively. Federal NOL carryforwards of $2,106 were acquired in the acquisition of WAG which are subject to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) and limited to an
annual usage limitation of $135. Our federal NOL carryforwards begin to expire in 2029, while the Company’s state NOL carryforwards being to expire in 2020.
Liquidity and Capital Resources
Sources of Liquidity
During the twenty-six weeks ended June 27, 2020 and June 29, 2019, we primarily funded our operations with cash and cash equivalents generated from operations as well as through borrowing under our credit facility. We
had cash and cash equivalents of $24,860 as of June 27, 2020, representing a $22,587 increase from $2,273 of cash as of December 28, 2019. The cash increase was primarily the result of the increase in net cash provided by operating activities. 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 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 June 27, 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 of June 27, 2020 and December 28, 2019, our working capital was $8,616 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 twenty-six weeks ended June 27, 2020 and June 29, 2019 (in thousands):
|
|
Twenty-Six Weeks Ended
|
|
|
|
June 27, 2020
|
|
|
June 29, 2019
|
|
Net cash provided by operating activities
|
|
$
|
25,168
|
|
|
$
|
2,950
|
|
Net cash used in investing activities
|
|
|
(3,840
|
)
|
|
|
(3,431
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,267
|
|
|
|
(668
|
)
|
Effect of exchange rate changes on cash
|
|
|
(8
|
)
|
|
|
1
|
|
Net change in cash and cash equivalents
|
|
$
|
22,587
|
|
|
$
|
(1,148
|
)
|
Operating Activities
Net cash provided by operating activities for the twenty-six weeks ended June 27, 2020 and June 29, 2019 was $25,168 and $2,950, respectively. The increase was primarily due to the higher balance of accounts payable
because of timing of payments and temporary, favorable payment terms granted by our top vendors and improvements in other working capital.
Investing Activities
For the twenty-six weeks ended June 27, 2020 and June 29, 2019, net cash used in investing activities was the result of additions to property and equipment ($3,840 and $3,431, respectively), which are mainly related to
capitalized website and software development costs.
Financing Activities
Net cash provided by (used in) financing activities was $1,267 and ($668), respectively, for the twenty-six weeks ended June 27, 2020 and June 29, 2019. The main reason attributable for the shift to net cash provided
was primarily due to proceeds from stock option exercises that occurred during the second quarter of 2020.
Debt and Available Borrowing Resources
Total debt was $9,337 as of June 27, 2020 compared to $11,056 as of December 28, 2019 and primarily consists of right-of-use obligations - finance. During the twenty-six weeks ended June 27, 2020, the Company paid off
the notes payable associated with the development of the Las Vegas, Nevada distribution center. Therefore, the notes payable balance was $0 as of June 27, 2020.
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 June 27, 2020,
our outstanding revolving loan balance was $0. The outstanding letters of credit balance as of June 27, 2020 was $13,609, of which $11,900 was utilized and included in accounts payable in our consolidated balance sheet. We use 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 our fixed charge coverage ratio, or (b) an “alternate
prime base rate” subject to an increase or reduction by up to 0.25% per annum based on the Company’s fixed charge coverage ratio. As of June 27, 2020, the Company’s LIBOR based interest rate was 1.94% (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). 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 $11,452 as of June 27, 2020. The Credit Facility matures on December 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. Engine parts and performance parts and accessories have historically experienced higher sales in the summer months when consumers have more time to undertake elective projects to maintain and enhance the performance of their
automobiles and the warmer weather during that time is conducive for such projects. We expect the historical seasonality trends to continue, and such trends may have a material impact on our financial condition and results of operations in subsequent
periods.
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 in the United States. The preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, net sales, costs and expenses, as well as the disclosure of contingent assets and liabilities and other related disclosures. On an ongoing basis, we evaluate our estimates,
including, but not limited to, those related to revenue recognition, uncollectible receivables, inventory, valuation of deferred tax assets and liabilities, intangible and other long-lived assets and contingencies. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of our assets and liabilities that are not readily apparent from
other sources. Actual results could differ from those estimates, and we include any revisions to our estimates in our results for the period in which the actual amounts become known.
There were no significant changes to our critical accounting policies during the thirteen weeks ended June 27, 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 the SEC on March 10, 2020):
|
•
|
Website and Software Development Costs;
|
|
•
|
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 in our Quarterly
Report on Form 10-Q for the Twenty-Six Weeks Ended June 27, 2020 filed with the SEC on August 11, 2020.
Except as set forth herein, or incorporated by reference into this prospectus supplement or the accompanying prospectus, the selling stockholder do not have, and within the past three years have not had, any material
relationship with us or any of our affiliates.
Mehran Nia
Mehran Nia has served as our director since May 2018 and was appointed as a Class I director pursuant to the Nia Agreement (as defined below). Mr. Nia is one of our co-founders and previously served as our Chief
Executive Officer and President and a director from 1995 until 2007.
On May 31, 2018, we entered into a Board Candidate Agreement (the “Nia Agreement”) with Mehran Nia and the Nia Living Trust Established September 2, 2004 (the “Nia Trust” and together with Mr. Nia, “Nia”).
Under the Nia Agreement, we have appointed Mr. Nia to the Board as a Class I Director, effective May 31, 2018 and agreed to appoint a second director to the Board as a Class II Director (the “Second Director”) at such
later date as mutually agreed by us and Nia. The Second Director shall be mutually agreeable to us and Nia and shall be considered “independent” as defined under the listing standards of the Nasdaq Stock Market. We have agreed that the Board would
expand the size of the Board to nine directors to appoint the Second Director.
If at any point in time Nia fails to beneficially own more than 5% of our outstanding voting capital stock or Nia breaches any provision of the Nia Agreement (each, a “Termination Event”), Mr. Nia and/or the Second
Director shall promptly resign from the Board upon request. In addition, in the event Mr. Nia or the Second Director, as the case may be, resigns or otherwise ceases to serve as a director, other than due to a Termination Event, prior to the
expiration of the Nia Voting Period (as defined below), we and Mr. Nia agree to work collaboratively to appoint a replacement candidate (a “Replacement Candidate”) through a process conducted, and based on criteria established, by the Nominating and
Corporate Governance Committee of the Board.
Additionally, at each annual or special meeting of our stockholders, Nia has agreed to vote all shares of the our capital stock beneficially owned by Nia (the “Nia Shares”) on each director nominee or other matter
presented for a vote which has been recommended by the Board and has agreed not to provide assistance with any vote to be taken by our stockholders that has not been formally recommended by the Board (collectively, the “Nia Obligations”). Pursuant to
the Nia Agreement, the Nia Obligations begin on the date of the Nia Agreement and shall end on the earliest to occur of (i) the date that we notify Nia in writing that we do not intend to re-nominate Mr. Nia as a director at its 2019 Annual Meeting
of Stockholders or such subsequent annual meeting at which Mr. Nia would be up for re-election; and (ii) the date on which Mr. Nia ceases to serve as a director unless Mr. Nia (a) ceases to serve as a director due to a Termination Event or (b) we and
Mr. Nia are working to appoint a Replacement Candidate (such period, the “Nia Voting Period”). In connection with the Nia Obligations, Nia has also granted to us an irrevocable proxy with respect to the Nia Shares during the Nia Voting Period. The
terms of the Nia Agreement also contain a mutual non-disparagement provision.
On January 17, 2019 and March 25, 2019, we and Nia entered into amendments to the Nia Agreement (the “Amendments”). Under the Amendments, Nia has agreed to defer the right to designate a Second Director, provided that
we agree to use commercially reasonable efforts to appoint the Second Director to the Board at a later date through one of the following methods at our sole discretion: (i) the Board nominates the Second Director to serve as a Class II director at
the our 2020 Annual Stockholder Meeting; (ii) we seek stockholder approval at our 2020 Annual Stockholder Meeting to amend our Second Amended and Restated Certificate of Incorporation to expand the size of the Board to ten (10) directors and at a
mutually agreeable time thereafter appoints the Second Director to serve on the Board as a Class III director; or (iii) to the extent there is an open vacancy on the Board at or prior to our 2020 Annual Stockholder Meeting, the Board shall appoint
the Second Director to serve on the Board and fill such vacancy. On October 3, 2019, in connection with the Nia Agreement, as amended, and upon its own review and consideration of Mr. Barnes’ qualifications and independence, the Board agreed to
appoint Mr. Barnes as a Class II director of the Company in accordance with the Nia Agreement, as amended by the Amendments.
On March 25, 2019, the Board appointed Mehran Nia as a Special Advisor to the Company. In connection with Mr. Nia’s appointment as a Special Advisor, Mr. Nia entered into a Consulting Agreement with us (the “Consulting
Agreement”), pursuant to which Mr. Nia will perform such duties prescribed by our Chief Executive Officer including without limitation the following: analysis of our data and catalog and merchandising operations, real estate negotiation, vendor
negotiation, and other ad hoc projects assigned to him by our Chief Executive Officer. Mr. Nia will work an average of twenty (20) hours per week during the term of the Consulting Agreement with at least eight (8) weeks of service in Manila,
Philippines. As consideration for Mr. Nia’s services, Mr. Nia was granted a stock option to purchase 600,000 shares of our common stock (the “Option”) pursuant to our 2016 Equity Incentive Plan. The exercise price for the Option was $1.03, the
closing sales price of our common stock as reported by Nasdaq on the date of grant. The Option vests in equal installments over a two year period, with such vesting commencing on the first month anniversary of the grant date, and the remainder of
which vests and becomes exercisable in twenty-three equal monthly installments thereafter, subject to Mr. Nia’s continued service with us through such vesting dates. Mr. Nia was also granted a performance stock option to purchase 600,000 shares of
our common stock on March 10, 2020 so long as we meet certain EBITDA targets for fiscal 2020.
The proceeds the selling stockholder will receive in connection with the sale of his shares offered under this prospectus supplement will be transferred to such selling stockholder’s former spouse in connection with a
divorce settlement (the “Settlement”). In connection with the Settlement, the selling stockholder will also transfer 500,000 shares of common stock to his former spouse, however, such shares of common stock are not covered by this prospectus
supplement.
The table below, including the footnotes, sets forth the selling stockholder and other information regarding the beneficial ownership of the shares of common stock held by the selling stockholder based on information
provided to us by the selling stockholder. Generally, a person “beneficially owns” shares of our common stock if the person has or shares with others the right to vote those shares or to dispose of them, or if the person has the right to acquire
voting or disposition rights within 60 days. The percent of shares beneficially owned prior to the offering is based on 42,411,000 shares of our common stock issued and outstanding as of June 27, 2020.
|
|
Shares Beneficially
Owned Prior to
Offering
|
|
Number
of
Shares
to be
Sold
in the
offering
|
|
Shares
Beneficially
Owned After
Offering
|
|
Number
of
Shares
to be
Sold
in the
offering
|
|
Shares Beneficially
Owned After
Offering
|
Name of Selling
Stockholder
|
|
Shares
|
|
Percentage
|
|
|
Shares
|
|
Percentage
|
|
|
Shares
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
(1)
|
Consists of (i) 4,763,341 shares of common stock owned directly by the Nia Living Trust Established September 2, 2004 (the “Living Trust”), of which Mehran Nia and his spouse, Fariba Nia, are co-trustees, (ii) 38,764 shares of common stock
owned directly by Mr. Nia, and (iii) 211,436 shares of common stock held by Mr. Nia’s domestic partner. Mehran Nia disclaims beneficial interest in the Living Trust except to the extent of his pecuniary interest therein.
|
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a summary of the material U.S. federal income tax consequences to non-U.S. holders (as defined below) of the acquisition, ownership and disposition of our common stock acquired pursuant to this offering.
This discussion is not a complete analysis of all potential U.S. federal income tax consequences relating thereto, does not address the potential application of the Medicare contribution tax and does not address any estate or gift tax consequences or
any tax consequences arising under any state, local or foreign tax laws, or any other U.S. federal tax laws. This discussion is based on the Internal Revenue Code of 1986, as amended, or the Code, Treasury Regulations promulgated thereunder, judicial
decisions and published rulings and administrative pronouncements of the Internal Revenue Service, or IRS, all as in effect as of the date of this prospectus supplement. These authorities may change, possibly retroactively, resulting in U.S. federal
income tax consequences different from those discussed below. We have not requested a ruling from the IRS with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS will agree
with such statements and conclusions.
This discussion is limited to non-U.S. holders who purchase our common stock pursuant to this offering and who hold our common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally,
property held for investment). This discussion does not address all of the U.S. federal income tax consequences that may be relevant to a particular holder in light of such holder’s particular circumstances. This discussion also does not consider any
specific facts or circumstances that may be relevant to holders subject to special rules under the U.S. federal income tax laws, including, without limitation, certain former citizens or long-term residents of the United States, partnerships or other
pass-through entities or arrangements and the equity holders therein, S corporations, “controlled foreign corporations,” “passive foreign investment companies,” corporations that accumulate earnings to avoid U.S. federal income tax, banks, financial
institutions, investment funds, insurance companies, brokers, dealers or traders in securities, tax-exempt organizations, tax-qualified retirement plans, persons subject to the alternative minimum tax, persons that own, or have owned, actually or
constructively, more than 5% of our common stock, persons subject to special tax accounting rules as a result of any item of gross income with respect to our common stock being taken into account in an applicable financial statement, and persons
holding our common stock as part of a hedging or conversion transaction or straddle, or a constructive sale, or other risk reduction strategy.
If an entity or arrangement that is treated as a partnership for U.S. federal income tax purposes holds our common stock, the U.S. federal income tax treatment of a partner will generally depend on the status of the
partner and the activities of the partnership. Partnerships holding our common stock and the partners in such partnerships are urged to consult their tax advisors as to particular U.S. federal income tax consequences to them of holding and disposing
of our common stock.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF OUR COMMON STOCK, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN TAX LAWS AND ANY OTHER U.S. FEDERAL TAX LAWS.
Definition of non-U.S. holder
For purposes of this discussion, a non-U.S. holder is any beneficial owner of our common stock that is not a “U.S. person” or a partnership (including any entity or arrangement treated as a partnership and the equity
holders therein) for U.S. federal income tax purposes. A U.S. person is any of the following:
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an individual who is a citizen or resident of the United States;
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a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof or the District of Columbia;
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an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
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a trust (1) whose administration is subject to the primary supervision of a U.S. court and which has one or more United States persons (within the meaning of Section 7701(a)(30) of the Code who have the
authority to control all substantial decisions of the trust, or (2) that has a valid election in effect under applicable Treasury Regulations to be treated as a United States person for U.S. federal income tax purposes.
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Distributions on Our Common Stock
If we make cash or other property distributions on our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and
profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and will first be applied against and reduce a holder’s tax basis in our common
stock, but not below zero. Any excess will be treated as gain realized on the sale or other taxable disposition of our common stock and will be treated as described under the section of this prospectus supplement titled “—Gain on Disposition of Our
Common Stock” below.
Subject to the discussion below regarding backup withholding and FATCA, dividends paid to a non-U.S. holder of our common stock generally will be subject to U.S. federal withholding tax at a rate of 30% of the gross
amount of the dividends, or such lower rate specified by an applicable income tax treaty. To receive the benefit of a reduced treaty rate, a non-U.S. holder must generally furnish to us or our paying agent or any other withholding agent a valid IRS
Form W-8BEN or IRS Form W-8BEN-E (or applicable successor form) including a U.S. taxpayer identification number and certifying such holder’s qualification for the reduced rate. This certification must be provided to us or our paying agent or any
other withholding agent prior to the payment of dividends and must be updated periodically. If the non-U.S. holder holds the stock through a financial institution or other agent acting on the non-U.S. holder’s behalf, the non-U.S. holder will be
required to provide appropriate documentation to the agent, which then will be required to provide certification to us or our paying agent or any other withholding agent, either directly or through other intermediaries.
Non-U.S. holders that do not timely provide the required certification, but that qualify for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with
the IRS.
If a non-U.S. holder holds our common stock in connection with the conduct of a trade or business in the United States, and dividends paid on our common stock are effectively connected with such holder’s U.S. trade or
business (and are attributable to such holder’s permanent establishment in the United States if required by an applicable tax treaty), the non-U.S. holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption,
the non-U.S. holder must generally furnish a properly executed IRS Form W-8ECI (or applicable successor form).
Any dividends paid on our common stock that are effectively connected with a non-U.S. holder’s U.S. trade or business (and if required by an applicable income tax treaty, are attributable to a permanent establishment
maintained by the non-U.S. holder in the United States) generally will be subject to U.S. federal income tax on a net income basis at the regular U.S. federal income tax rates in the same manner as if such holder were a resident of the United States.
A non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable
year, as adjusted for certain items. Non-U.S. holders should consult their tax advisors regarding any applicable income tax treaties that may provide for different rules.
Gain on Disposition of Our Common Stock
Subject to the discussion below regarding backup withholding and FATCA, a non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of our
common stock, unless:
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the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States, and if required by an applicable income tax treaty, is attributable to a permanent establishment maintained by the non-U.S.
holder in the United States;
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the non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition, and certain other requirements are met; or
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our common stock constitutes a “United States real property interest” by reason of our status as a United States real property holding corporation, or USRPHC, for U.S. federal income tax purposes at any time within the shorter of the
five-year period preceding the disposition or the non-U.S. holder’s holding period for our common stock, and our common stock is not regularly traded on an established securities market during the calendar year in which the sale or other
disposition occurs.
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The determination of whether we are a USRPHC depends on the fair market value of our U.S. real property interests relative to the fair market value of our other trade or business assets and our foreign real property
interests. We believe we are not currently and do not anticipate becoming a USRPHC for U.S. federal income tax purposes. However, there can be no assurance that we will not become a USRPHC in the future.
Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the graduated U.S. federal income tax rates in the same manner as if such holder were a
resident of the United States. A non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of its effectively connected
earnings and profits for the taxable year, as adjusted for certain items. Non-U.S. holders should consult their tax advisors regarding any applicable income tax treaties that may provide for different rules. Gain described in the second bullet point
above will be subject to U.S. federal income tax at a flat 30% rate (or such lower rate specified by an applicable income tax treaty), but may be offset by certain U.S.-source capital losses (even though the individual is not considered a resident of
the United States), provided that the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses.
Information Reporting and Backup Withholding
Annual reports are required to be filed with the IRS and provided to each non-U.S. holder indicating the amount of distributions on our common stock paid to such holder and the amount of any tax withheld with respect to
those distributions. These information reporting requirements apply even if no withholding was required because the distributions were effectively connected with the holder’s conduct of a U.S. trade or business, or withholding was reduced or
eliminated by an applicable income tax treaty. This information also may be made available under a specific treaty or agreement with the tax authorities in the country in which the non-U.S. holder resides or is established. Backup withholding,
currently at a 24% rate, generally will not apply to payments to a non-U.S. holder of dividends on or the gross proceeds of a disposition of our common stock provided the non-U.S. holder furnishes the required certification as to its non-U.S. status,
such as by providing a valid IRS Form W-8BEN, IRS Form W-8BEN-E or IRS Form W-8ECI, or certain other requirements are met. Notwithstanding the foregoing, backup withholding may apply if the payor has actual knowledge, or reason to know, that the
holder is a U.S. person who is not an exempt recipient.
Backup withholding is not an additional tax. If any amount is withheld under the backup withholding rules, the non-U.S. holder should consult with its U.S. tax advisor regarding the possibility of and procedure for
obtaining a refund or a credit against the non-U.S. holder’s U.S. federal income tax liability, if any.
Withholding Tax on Payments Made to Foreign Accounts
Withholding taxes may be imposed under Sections 1471 to 1474 of the Code, the Treasury Regulations promulgated thereunder and other official guidance (commonly referred to as “FATCA”) on certain types of payments made to
non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on, or (subject to the proposed Treasury Regulations discussed below) gross proceeds from the sale or other
disposition of, our common stock paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (1) the foreign financial institution undertakes certain diligence, reporting and withholding
obligations, (2) the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the
foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence, reporting and withholding requirements in (1) above,
it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States-owned foreign entities” (each as
defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Accordingly, the entity through which our common
stock is held will affect the determination of whether such withholding is required. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different
rules. Future Treasury Regulations or other official guidance may modify these requirements.
Under the applicable Treasury Regulations, withholding under FATCA generally applies to payments of dividends on our common stock. While withholding under FATCA would have also applied to payments of gross proceeds from
the sale or other disposition of our common stock on or after January 1, 2019, proposed Treasury Regulations eliminate FATCA withholding on payments of gross proceeds. The preamble to these proposed regulations indicates that taxpayers may rely on
them pending their finalization. The FATCA withholding tax will apply to all withholdable payments without regard to whether the beneficial owner of the payment would otherwise be entitled to an exemption from imposition of withholding tax pursuant
to an applicable income tax treaty with the United States or U.S. domestic law. We will not pay additional amounts to holders of our common stock in respect of amounts withheld.
Prospective investors should consult with their tax advisors regarding the possible implications of FATCA withholding on their investment in our common stock.
RBC Capital Markets, LLC is acting as book-running manager of this offering and representative of the underwriters named below. Under the terms of an underwriting agreement, which we will file as an exhibit to our
current report on Form 8-K and incorporate by reference in this prospectus supplement and the accompanying prospectus, each of the underwriters named below has severally agreed to purchase from us and the selling stockholder the respective number of
shares of common stock shown opposite its name below:
Underwriters
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Number of
Shares
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Craig-Hallum Capital Group LLC
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Roth Capital Markets, LLC
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The underwriting agreement provides that the underwriters’ obligation to purchase shares of common stock depends on the satisfaction of the conditions contained in the underwriting agreement including:
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the obligation to purchase all of the shares of common stock offered hereby (other than those shares of common stock covered by their option to purchase additional shares as described below), if any of the shares are purchased;
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the representations and warranties made by us and the selling stockholder to the underwriters are true;
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there is no material change in our business or the financial markets; and
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we and the selling stockholder deliver customary closing documents to the underwriters.
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Commissions and Expenses
The following table summarizes the underwriting discounts and commissions we and the selling stockholder will pay to the underwriters. The amounts with respect to us are shown assuming both no exercise and full exercise
of the underwriters’ option to purchase additional shares from certain us. The underwriting fee is the difference between the initial price to the public and the amount the underwriters pay to us and the selling stockholder for the shares.
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Us
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Selling stockholder
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No Exercise
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Full Exercise
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$
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Total
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$
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$
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$
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The representative has advised us that the underwriters propose to offer the shares of common stock directly to the public at the public offering price on the cover of this prospectus supplement and to selected dealers,
which may include the underwriters, at such offering price less a selling concession not in excess of $ per share. After the offering, the representative may change the offering price and other selling terms.
The expenses of the offering to be incurred by us and the selling stockholder are estimated to be approximately $ million (excluding underwriting discounts and commissions). We have agreed to pay expenses incurred by the
selling stockholder in connection with the offering, other than the underwriting discounts and commissions.
Option to Purchase Additional Shares
We have granted the underwriters an option exercisable for 30 days after the date of this prospectus supplement to purchase, from time to time, in whole or in part, up to an aggregate of shares at the public offering
price less underwriting discounts and commissions. To the extent that this option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase its pro rata portion of these additional shares based on the underwriter’s
percentage underwriting commitment in the offering as indicated in the table at the beginning of this Underwriting section.
Lock-Up Agreements1
We have agreed that, without the prior written consent of RBC Capital Markets, LLC on behalf of the underwriters, we will not, during the period ending 90
days after the date of this prospectus supplement, or the restricted period, offer, sell, contract to sell, pledge, or otherwise dispose of, or enter into any transaction which is designed to, or might reasonably be expected to, result in the
disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by us or any of our affiliates or any subsidiary, directly or indirectly, including the filing (or participation in the filing) of a
registration statement with the SEC in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 17 of the Exchange Act, any other shares of our common stock
or any securities convertible into, or exercisable, or exchangeable for, shares of our common stock or shares of any class of our capital stock or any securities convertible into, or exercisable, or exchangeable for, any of the foregoing; or
publicly announce an intention to effect any such transaction.
The restrictions described in the immediately preceding paragraph do not apply to: (1) the sale of shares of our common stock to the underwriters; (2) the
issuance of shares of our common stock upon the exercise or conversion of a security outstanding at the time the Underwriting Agreement is executed; or (3) the issuance of shares of common stock pursuant to any equity incentive plan, stock
ownership plan, or dividend reinvestment plan in effect at the time the Underwriting Agreement is executed.
In addition, all of our directors and executive officers and the selling stockholder have agreed that, without the prior written consent of RBC Capital
Markets, LLC on behalf of the underwriters, they will not, for a period of 60 days after the date of this prospectus supplement, other than in connection with a divorce settlement offer, sell, contract to sell, pledge or otherwise dispose of, (or
enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the undersigned or any
affiliate of the undersigned or any person in privity with the undersigned, directly or indirectly, including the filing (or participation in the filing) of a registration statement with the Securities and Exchange Commission (the “SEC”) in
respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act, and the rules and regulations of the SEC promulgated thereunder with respect
to, any shares of capital stock of the Company or any securities convertible into, or exercisable or exchangeable for such capital stock, or publicly announce an intention to effect any such transaction. In the case of transfers pursuant to
1 NTD: Lock-up section to be conformed to final Lock-Up agreement once it is in agreed form.
The restrictions described in the immediately preceding paragraph do not apply to transfers: (1) pursuant to the terms of the underwriting agreement;
(2) as bona fide gifts; (3) by will, other testamentary document or intestate succession to the legal representative, heir, beneficiary or a member of the immediate family of the undersigned; (4) by operation of law, such as pursuant to a qualified
domestic order or as required by a divorce settlement;(5) to entities where the undersigned is the sole beneficial owner of all capital stock of the Company held by such entities; (6) transfers to the Company in connection with the “net” or
“cashless” exercise of stock options or other rights, or in satisfaction of any tax withholding obligations through cashless surrender or otherwise; (7) to the extent acquired in open market transactions after the completion of the offering; or (8)
the establishment of a trading plan pursuant to Rule 10b5-1 promulgated under the Exchange Act, provided that such plan does not provide for the transfer of capital stock of the Company during the 60-day period after the date of this prospectus
supplement.
RBC Capital Markets, LLC, in its sole discretion, may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time. When determining whether or not to
release common stock and other securities from lock-up agreements, RBC Capital Markets, LLC will consider, among other factors, the holder’s reasons for requesting the release, the number of shares of common stock and other securities for which the
release is being requested and market conditions at the time.
Indemnification
We and the selling stockholder have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to
make for these liabilities.
Stabilization, Short Positions and Penalty Bids
The representative may engage in stabilizing transactions, short sales and purchases to cover positions created by short sales, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of
the common stock, in accordance with Regulation M under the Exchange Act:
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Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
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A short position involves a sale by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase in the offering, which creates the syndicate short position. This short position may be either a
covered short position or a naked short position. In a covered short position, the number of shares involved in the sales made by the underwriters in excess of the number of shares they are obligated to purchase is not greater than the number
of shares that they may purchase by exercising their option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The
underwriters may close out any short position by either exercising their option to purchase additional shares and/or purchasing shares in the open market. In determining the source of shares to close out the short position, the underwriters
will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through their option to purchase additional shares. A naked short position is more
likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.
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Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions.
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Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate
short positions.
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These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price
of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq Global Market or otherwise and, if commenced, may be
discontinued at any time.
Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition,
neither we nor any of the underwriters make any representation that the representative will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.
Passive Market Making
In connection with the offering, underwriters and selling group members may engage in passive market making transactions in the common stock on the Nasdaq Global Market in accordance with Rule 103 of Regulation M under
the Exchange Act during the period before the commencement of offers or sales of common stock and extending through the completion of distribution. A passive market maker must display its bids at a price not in excess of the highest independent bid
of the security. However, if all independent bids are lowered below the passive market maker’s bid that bid must be lowered when specified purchase limits are exceeded.
Electronic Distribution
A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by one or more of the underwriters and/or selling group members participating in this offering, or
by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree
with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the representative on the same basis as other allocations.
Other than the prospectus in electronic format, the information on any underwriter’s or selling group member’s web site and any information contained in any other web site maintained by an underwriter or selling group
member is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter or selling group member in its capacity as underwriter or selling group member
and should not be relied upon by investors.
Listing on the Nasdaq Global Market
Our common stock is on the Nasdaq Global Market under the symbol “PRTS.”
Stamp Taxes
If you purchase shares of common stock offered in this prospectus supplement, you may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering
price listed on the cover page of this prospectus supplement.
Other Relationships
The underwriters and certain of their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory,
investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriters and certain of their affiliates have, from time to time, performed, and may in the future perform, various commercial and
investment banking and financial advisory services for the issuer and its affiliates, for which they received or may in the future receive customary fees and expenses.
In the ordinary course of their various business activities, the underwriters and certain of their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related
derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of the issuer or its
affiliates. The underwriters and certain of their affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such securities or instruments
and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
Selling Restrictions
This prospectus supplement does not constitute an offer to sell to, or a solicitation of an offer to buy from, anyone in any country or jurisdiction (i) in which such an offer or solicitation is not authorized, (ii) in
which any person making such offer or solicitation is not qualified to do so or (iii) in which any such offer or solicitation would otherwise be unlawful. No action has been taken that would, or is intended to, permit a public offer of the shares of
common stock or possession or distribution of this prospectus supplement or any other offering or publicity material relating to the shares of common stock in any country or jurisdiction (other than the United States) where any such action for that
purpose is required. Accordingly, each underwriter has undertaken that it will not, directly or indirectly, offer or sell any shares of common stock or have in its possession, distribute or publish any prospectus, form of application, advertisement
or other document or information in any country or jurisdiction except under circumstances that will, to the best of its knowledge and belief, result in compliance with any applicable laws and regulations and all offers and sales of shares of common
stock by it will be made on the same terms.
European Economic Area and United Kingdom
In relation to each Member State of the European Economic Area and the United Kingdom (each a “Relevant State”), no shares of common stock have been offered or will be offered pursuant to the offering of our common
stock to the public in that Relevant State prior to the publication of a prospectus in relation to the shares of common stock which has been approved by the competent authority in that Relevant State or, where appropriate, approved in another
Relevant State and notified to the competent authority in that Relevant State (all in accordance with the Prospectus Regulation), except that offers of shares of common stock may be made to the public in that Relevant State at any time under the
following exemptions under the Prospectus Regulation:
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to any legal entity which is a qualified investor as defined under the Prospectus Regulation;
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to fewer than 150 natural or legal persons (other than qualified investors as defined under the Prospectus Regulation); or
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in any other circumstances falling within Article 1(4) of the Prospectus Regulation,
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provided that no such offer of shares of common stock shall require the Issuer or any Manager to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement a prospectus
pursuant to Article 23 of the Prospectus Regulation.
For the purposes of this provision, the expression an “offer to the public” in relation to any shares of common stock in any Relevant State means the communication in any form and by any means of
sufficient information on the terms of the offer and any shares of common stock to be offered so as to enable an investor to decide to purchase or subscribe for any shares of common stock, and the expression “Prospectus Regulation” means Regulation
(EU) 2017/1129.
United Kingdom
Each underwriter has represented and agreed that:
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it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and
Markets Act 2000 (“FSMA”) received by it in connection with the issue or sale of the shares of our common stock in circumstances in which Section 21(1) of the FSMA does not apply to us; and
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it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares of our common stock in, from or otherwise involving the United Kingdom.
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Notice to Residents of Canada
The shares of common stock may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection
73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares of common stock must be made in accordance
with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus supplement or the accompanying prospectus (including any
amendments thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser's province or territory. The
purchaser should refer to any applicable provisions of the securities legislation of the purchaser's province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 (or, in the case of securities issued or guaranteed by the government of a non-Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the
underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.