Note 8 – Commitments and Contingencies

Facilities Leases

The Company’s corporate headquarters is located in Carson, California. The Company’s corporate headquarters has a lease term through January 2020. The Company also leases warehouse space in LaSalle, Illinois, Chesapeake, Virginia and Las Vegas, Nevada. The Company’s Philippines subsidiary leases office space under an agreement through April 2020. The Company is moving its corporate office from Carson, California to Torrance, California; the move is expected to be completed by the end of March 2020.

 

On April 25, 2019, the Company entered into a lease for its distribution center located in Las Vegas, Nevada. The Lease between the Company and Prologis Sunrise Industrial Park is for approximately 124,546 square feet. The initial sixty three-month term of the Lease commenced on July 1, 2019 and is set to expire in September of 2024. The Company is obligated to pay approximately $687 in annual base rent, which shall increase by approximately 3.0% each year. The Company is also obligated to pay certain operating expenses set forth in the Lease.

On February 4, 2016, the Company entered into a lease for its distribution center located in Chesapeake, Virginia. The Lease between the Company and Liberty Property Limited Partnership is for approximately 159,294 square feet. The initial three-year term of the Lease commenced on July 1, 2016 and expired in June of 2019. The extended three-year term of the Lease commenced on July 1, 2019 and is set to expire in June of 2022. The Company is obligated to pay approximately $640 in annual base rent, which shall increase by approximately 2.5% each year. The Company is also obligated to pay certain operating expenses set forth in the Lease. Pursuant to the Lease, the Company has the option to extend the Lease for an additional three-year term, with certain increases in base rent. During 2019, the Company reduced the square footage rented from 159,294 square feet to approximately 116,000 square feet which reduced the annual base rent to $574.  

In February 2020, the Company’s Philippines subsidiary entered into a new lease agreement. The lease renewed for a ten year term upon mutual agreement of both parties during 2020 and expires in 2030. The company is obligated to pay approximately $500 in annual base rent which shall increase by 5% beginning on the second year of the lease term and by 4% beginning on the sixth year of the lease term.

 

As described in detail under “Note 3 – Property and Equipment Net”, on April 17, 2013, the Company’s wholly-owned subsidiary, Whitney Automotive Group, Inc. (“WAG”) entered into a sales leaseback for its facility in LaSalle, Illinois, receiving $9,750 pursuant to a purchase and sale agreement dated April 17, 2013 between WAG and STORE Capital Acquisitions, LLC. The Company used the net proceeds of $9,507 from this sale to reduce its revolving loan payable. Simultaneously with the execution of the purchase and sale agreement and the closing of the sale of the property, the Company entered into a lease agreement with STORE Master Funding III, LLC (“STORE”) whereby we leased back the property for our continued use as an office, retail and warehouse facility for storage, sale and distribution of automotive parts, accessories and related items for 20 years, terminating on April 30, 2033. The Company’s initial base annual rent is $853 for the first year (“Base Rent Amount”), after which the rental amount will increase annually on May 1 by the lesser of 1.5% or 1.25 times the change in the Consumer Price Index as published by the U.S. Department of Labor’s Bureau of Labor Statistics, except that in no event will the adjusted annual rental amount fall below the Base Rent Amount. We were not required to pay any security deposit. Under the terms of the lease, we are required to pay all taxes associated with the lease, pay for any required maintenance on the property, maintain certain levels of insurance and indemnify STORE for losses incurred that are related to our use or occupancy of the property. The lease was accounted for as a capital lease and the $376 excess of the net proceeds over the net carrying amount of the property is amortized in interest expense on a straight-line basis over the lease term of 20 years. Upon the adoption of ASC 842, this capital lease was revalued and included in Right-of-use-assets-financing leases, on the balance sheet.

 

Facility rent expense for fiscal year ended 2019 and 2018 was $2,275, and $1,752, respectively. The Company’s facility rent expense did not include any amounts charged from a related party during fiscal years 2019 and 2018. 

Quantitative information regarding the Company’s leases as of December 28, 2019 is as follows (in thousands):

 

Minimum lease commitments under non-cancelable operating leases as of December 28, 2019 are as follows:

 

Lease commitments as of December 28, 2019 were as follows:

 

On August 8, 2019, the Company entered into a financing arrangement with a third-party financial institution related to the development of the Company’s third warehouse which is located in Las Vegas, Nevada.  The financing arrangement matures in April 2022 and has an effective interest rate of approximately 7.70% per annum.  The total borrowings under the financing arrangement shall not exceed $2,000. The arrangement also required a 25% deposit.  The Company received proceeds of $257 from the note payable for the period ended December 28, 2019. A deposit of $470 was recorded as of December 28, 2019.  At December 28, 2019, the total outstanding balance of the note payable was $1,790, of which $729 is recorded as current liability and $1,060 is recorded as non-current liability in the consolidated balance sheet. Total principal payments made towards the financing arrangement during 2021 and 2022 will be $792 and $268, respectively.

 

Legal Matters

Asbestos. A wholly-owned subsidiary of the Company, Automotive Specialty Accessories and Parts, Inc. and its wholly-owned subsidiary WAG, are named defendants in several lawsuits involving claims for damages caused by installation of brakes during the late 1960’s and early 1970’s that contained asbestos. WAG marketed certain brakes, but did not manufacture any brakes. WAG maintains liability insurance coverage to protect its and the Company’s assets from losses arising from the litigation and coverage is provided on an occurrence rather than a claims made basis, and the Company is not expected to incur significant out-of-pocket costs in connection with this matter that would be material to its consolidated financial statements.

Customs Issues. On April 2, 2018, the Company filed a complaint against the United States of America, the United States Department of Homeland Security (“DHS”), in the United States Court of International Trade (the “Court”) (Case No. 1:18-cv-00068) seeking (i) relief from a single entry bonding requirement set by the United States Customs and Border Protection (“CBP”), at a level equivalent to three times the commercial invoice value of each shipment (the “Bonding Requirement”), (ii) a declaration that the Bonding Requirement is unlawful, (iii) an injunction prohibiting additional delayed entry for all of the Company’s currently-held goods being denied entry into the United States.   The genesis for the action is CBP’s wrongful seizure of aftermarket vehicle grilles and associated parts being imported by the Company (“Repair Grilles”) on the basis that the Repair Grilles allegedly bear counterfeit trademarks of the original automobile manufacturers (i.e., original-equipment manufacturers, or “OEMs”). Generally, these trademarks, as applied against the Company, purport to cover the shape of the grilles themselves, or the OEM’s logo or name.  However, the Repair Grilles are not counterfeit and do not cause a likelihood of confusion amongst purchasers or the relevant consuming public which are prerequisites for seizures under the pertinent provision of the Tariff Act being relied upon by CBP to seize the Repair Grilles.

On May 25, 2018, the Court granted the Company’s motion for preliminary injunction and ordered, among other things, that the Defendants are restrained from enforcing the 3X Bonding Requirement. On July 24, 2019, the Company further reached confidential terms with CBP to settle these matters.  As part of the settlement: (i) Customs will release to the Company certain inventory mistakenly seized, (ii) the Company and CBP enter into mutual releases, and (iii) without admitting liability, the Company will forfeit to CBP certain goods which CBP deems to be violative. All outstanding CBP enforcement issues are resolved, and the Company has no outstanding damage or duty claims from CBP.

Ordinary course litigation. The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. As of the date hereof, the Company believes that the final disposition of such matters will not have a material adverse effect on the financial position, results of operations or cash flow of the Company. The Company maintains liability insurance coverage to protect the Company’s assets from losses arising out of or involving activities associated with ongoing and normal business operations.

Related Party Matters

The Company has entered into indemnification agreements with the Company’s directors and executive officers. These agreements require the Company to indemnify these individuals to the fullest extent permitted under law against liabilities that may arise by reason of their service to the Company, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified.