SecProbe.io

CORRESP
1
filename1.htm

    seccommentletter.htm

    17150 S. Margay Ave., Carson, CA 90746

    Phone & Fax (310)
735-0085

      Mr.
H. Christopher Owings, Assistant Director

      Mr.
Scott Anderegg

      Mr.
William Thompson, Accounting Branch Chief

      Division
of Corporation Finance

      Securities
and Exchange Commission

      100 F
Street N.E.

      Washington,
D.C. 20549-3561

      July
21, 2010

        Re:  U.S. Auto Parts Network, Inc. (“USAP” or the
“Company”)

                Form 10-K
for Fiscal Year Ended January 2, 2010

                Filed
March 15, 2010

                Definitive
Proxy Statement on Schedule 14A

                Filed
April 6, 2010

                File No.
001-33264

          Dear
Messrs. Owings, Anderegg and Thompson:

                 Thank you for
your letter of June 25, 2010 asking USAP to clarify several items contained in
the above-referenced SEC filings made by USAP.

                 We are
pleased to provide our responses below. For your convenience, we have numbered
the responses to correspond to the comments in your letter and we have
incorporated your comments in bold typeface before each of the Company’s
responses.  In the following discussion, the words “we,” “us” and
“our” refer to the Company. We believe that all responses and any changes in
approach can be applied prospectively and will incorporate these into our future
filings.

                 Thank you for
the opportunity to review our filings and we are available at your convenience
to discuss any additional questions you might have.

                    1.

                    Please
      delete the fourth and fifth sentences in the first paragraph in which you
      state that additional risks and uncertainties may also affect your
      business. All material risks should be described in your disclosure. If
      risks are not deemed material, you should not reference
    them.

          We will
delete the fourth and fifth sentences in our future filings.

                    2.

                    Please
      include a discussion of the most important matters on which management
      focuses in evaluating financial condition and operating performance in the
      introductory section. Such discussion would help provide a context for the
      discussion and analysis of your financial condition and operating results.
      Refer to Item 303(a)(3) of Regulation S-K and the Commission Guidance
      Regarding Management's Discussion and Analysis of Financial Condition and
      Results of Operations, SEC Release No.
33-8350.

          In future
filings our introductory section will be titled “Executive Summary” where we
will insert a paragraph discussing key metrics that management focuses on to
evaluate financial condition and operating performance. Specifically, we will
discuss Unique Visitors, Number of Orders, Average Order Value, Adjusted EBITDA
(Earnings before Interest, Taxes, Depreciation, and Amortization) and by adding
current year’s stock compensation expense to EBITDA for the year. Additionally,
we will also discuss other key variables and qualitative and quantitative
factors that materially affected our financial condition and operating
performance in such period as guided in the Item 303(a)(3) of Regulation S-K and
the Commission Guidance.

          Considering
the above, for example, our “Executive Summary” section is expected to include
disclosure similar to the following for the future periods:

          We achieved a double digit
sales growth in the fiscal year ended January 2, 2010 (“fiscal 2009”),
delivering record net sales of $176.3 million, an increase of 14.9% from
$153.4 million in the fiscal year ended December 31, 2008 (“fiscal 2008”). The
Company completed fiscal 2009 with quarterly adjusted EBITDA of at least $3.0
million in every quarter and added to our cash balances despite significantly
investing in our back office, launching an upgraded order management platform
and opening a new East Coast distribution facility. Annual adjusted EBITDA
increased by $7.9 million in fiscal 2009 from $5.2 million in fiscal 2008 to
$13.1 million in fiscal 2009 primarily due to the strong sales growth, improved
margin and   leveraging of G&A expenses in fiscal 2009.In
evaluating financial condition and operating performance, the Company also
focuses on the following key metrics:

          Unique
Visitors - A unique visitor to a particular website represents a user with a
distinct IP address that visits that particular website. We define the total
number of unique visitors in a given month as the sum of unique visitors to
each of our websites during that month. We measure unique visitors to understand
the volume of traffic to our websites and to track the effectiveness of our
online marketing efforts. The number of unique visitors has historically varied
based on a number of factors, including our marketing activities and
seasonality. We believe an increase in unique visitors to our websites will
result in an increase in the number of orders. We seek to increase the number of
unique visitors to our websites by attracting repeat customers and improving
search engine marketing and other Internet marketing activities.

          Total
Number of Orders - We monitor the total number of orders as an indicator of
revenue trends. We recognize revenue associated with an order when the products
have been shipped, consistent with our revenue recognition policy.

          Average
Order Value - Average order value represents our net sales on a placed orders
basis for a given period of time divided by the total number of orders recorded
during the same period of time. We seek to increase the average order value as a
means of increasing net sales. Average order values vary depending upon a number
of factors, including the components of our product offering, the order volume
in certain online sales channels, macro-economic conditions, and the general
level of competition online.

                    3.

                    Please
      discuss the percentage of sales fulfilled on a drop-ship and stock-and
      ship basis for each year, and explain how period to period shifts in the
      use of these order fulfillment methods impact your results of operations
      and liquidity.

          The
percentage to total sales fulfilled by drop ship and stock ship were the
following:

                    ·

                    Fiscal
      2009 – Stock ship – 54%, Drop ship –
46%

                    ·

                    Fiscal
      2008 – Stock ship – 58%, Drop ship –
42%

          We have
not experienced a significant change in stock ship and drop ship as a percentage
of total sales for the past two fiscal years, but recognize that the mix between
fulfillment methods will inherently vary from period to period as it is driven
to some extent on the location of our customers and the nature of the specific
product ordered.  Our drop ship sales increased from 42% in fiscal
2008 to 46% in fiscal 2009.  Although we added more stock keeping
units in our distribution centers the percentage of stock ship dropped from 58%
in fiscal 2008 to 54% for fiscal 2009, which was primarily due to the growth of
our drop ship product selection. We expect our overall results will improve
because the flexibility of fulfilling orders using two different fulfillment
methods allows us to offer a broader product selection, helps optimize product
inventory and enhances our profitability. Our profitability has not historically
been materially impacted by changes in method of fulfillment. The lower product
costs for stock ship orders is typically offset by the carrying cost of
inventory, and costs related to packing and shipping the product to our
customers. Because the profitability and liquidity related to these fulfillment
methods have typically been similar, the period to period shifts in fulfillment
mix have historically been immaterial. We will continue to monitor stock ship
and drop ship performance and, if the impact of mix shift on profitability and
working capital becomes material, we will provide additional disclosure at that
time.

                    4.

                    Please
      include a discussion and analysis of operating, investing and financing
      cash flows for each year presented. In addition, please address material
      changes in the underlying drivers of cash flows, rather than merely
      reciting items identified on the statements of cash flows. For example,
      please explain the reasons for significant changes in operating cash flows
      related to working capital items, such as inventory and accounts payable
      and accrued liability balances: Refer to Item 303(a)(1) of Regulation S-K
      and the Commission Guidance Regarding Management's Discussion and Analysis
      of Financial Condition and Results of operations, SEC Release No.
      33-8350.

          In our
future filings we will include a discussion and analysis of our operating,
investing and financing cash flows for each year presented.  We will
discuss and explain material changes in working capital and the primary drivers
of those changes. For example, our discussion of changes in our cash flow is
expected to include similar disclosure to the following:

          Liquidity
and Capital Resources

          We
have historically funded our operations from cash generated from operations,
credit facilities, bank and stockholder loans, and equity financing and capital
lease financings.  We had no balance outstanding under our bank line
of credit during fiscal 2008 and in connection with the transition of our
commercial banking relationship in the fourth quarter of 2008 we cancelled our
line of credit effective December 31, 2008 and did not establish a new line of
credit during fiscal 2009.

          We
had cash and cash equivalents of $26.3 million as of January 2, 2010,
representing a $6.2 million decrease from $32.5 million as of December 31,
2008.  The decrease of our cash and cash equivalents was primarily due
to short term investments in municipal bonds, certificates of deposit and United
States treasuries for a total of $11.1 million as of January 2,
2010.

          Net
cash provided from operating activities increased by $8.6 million to $11.6
million from $3.0 million for fiscal 2009 and fiscal 2008,
respectively.  The change in cash from operating activities was
primarily due to the increase in our accounts payable, accrued expenses and net
income partially offset by an increase in inventory and accounts receivable
driven by the 15% increase in net sales and the opening of our new East Coast
distribution center  which opened in first quarter of
2009.

          Net
cash flows used in investing activities were $18.1 million for fiscal 2009 and
$11.1 million provided by investing activities for fiscal
2008.  Investing activities for the fiscal 2009 was primarily for
capital expenditures of $8.4 million and short term investments of $11.1
million, partially offset by the sale of marketable securities. Capital
expenditures during fiscal 2009 included investments in the new East Coast
distribution center and continued investment in supporting our technology
infrastructure. For fiscal 2008, net cash flows provided by investing activities
was primarily due to the sale of marketable securities, partially offset by
capital expenditures for supporting technology infrastructure.

                    5.

                    On
      April 22, 2009 you filed a Form 8-K concerning the settlement of your
      litigation with Ford Global Technologies, LLC. In connection with that
      settlement you entered into a distribution agreement with LKQ Corporation;
      however, it appears that this agreement has not been filed on EDGAR.
      Please tell us whether this is a material contract required to be filed in
      accordance with Item 601(b)(l0) of Regulation S-K. If so, please confirm
      that you will file the agreement with your next periodic
      report.

          We do not
believe the distribution agreement entered into with LKQ Corporation is a
material contract required to be filed in accordance with item 601(b) (10) of
Regulation S-K. It meets neither the “outside the ordinary course of business”
threshold under 601(b)(10)(i) nor the financial threshold under
601(b)(10)ii(B).

                    6.

                    Please
      present a separate line item for goodwill impairment losses. Refer to ASC
      350-20-45-2.

          In our
future filings, we will present on a separate line item the goodwill impairment
loss before the subtotal income from continuing operations unless a goodwill
impairment loss is associated with a discontinued operation.

                    7.

                    Please
      tell us what inventory reserves represent. A reduction in the carrying
      amount of an inventory item from cost to market value represents a new
      cost basis for that item. The write-down can be recovered only through
      sale or disposition of the item and cannot be restored if the market value
      recovers prior to sale or disposition. Thus, it is unclear what your
      inventory reserves relate to and why you have utilized a contra-asset
      account to capture the credit balance. Please explain in detail. Also
      explain the year over year variance in inventory write-downs/reserves and
      what the deductions represent.

          The
inventory reserves are for slow moving, obsolete, scrap product and shrinkage.
Management reviews product inventory at a stock keeping unit (“SKU”) level and
makes a determination of the marketability of the product and records a
reduction in inventory value based upon the SKU inventory on hand, item movement
and the age of the inventory.  Due to inventory system limitations and
quantity of SKUs carried in our distribution centers, we have not marked down
each SKU to reflect this new market cost.  The adjusted inventory
balance equals the total inventory value as if we did mark each SKU down to the
lower cost.  Through this inventory process we also have marked up
some of our inventory when the specific SKU begins to sell. We acknowledge due
to our inventory system limitations the cost adjustment should not mark up
previously written down inventory SKU’s.  We recalculated the cost
adjustment by SKU without any mark ups and compared the difference to our
current inventory reserve balance. As a result, we noted that the inventory
balance was overstated by $74,000 and $45,000 as of December 31, 2008 and 2009,
respectively. Such differences were immaterial for both fiscal
years.

          The
deductions against the reserve are for actual product that is written off as
lost, damaged or scrapped.  For example, SKUs that may have been
marked down to zero cost in our inventory system are written off and disposed of
against the reserve account.

          Beginning
with our next interim report we will allocate the inventory reserve and adjust
the actual inventory cost by SKU for those items identified as previously
reserved.  We will no longer make any write-up adjustments (based on
sales) to the SKU cost and expect to only recover the item cost upon sale or
disposition. This should eliminate the inventory reserve account.

                    8.

                    Please
      disclose your revenue recognition policy for sales of online advertising
      services. Please also clarify whether your policy disclosure with respect
      to product sales and shipping revenues is applicable to both your online
      and offline sales channels and to both drop-ship and stock-and ship
      orders.

          The
Company receives revenue from sales of advertising on our websites and is
recognized when earned based upon meeting the performance requirements of the
advertising program agreement. Advertising revenues have historicall