Note 8 – Stockholders' Equity and Share-Based Compensation

Common Stock

The Company has 100,000,000 shares of common stock authorized. We have never paid cash dividends on our common stock. The following issuances of common stock were made during fiscal 2011:

The Company issued 136,770 shares of common stock from option exercises under the 2007 Omnibus Plan, as discussed below.

Effective in fiscal 2010, the Company's compensation committee awarded 59,618 shares of restricted stock to certain officers of the Company. The shares were issued in February 2011. The compensation expense in the amount of $295,000 was accrued based on the market value of the Company's stock as of the grant date, in fiscal 2010.

Share-Based Compensation Plan Information

The Company adopted the 2007 Omnibus Incentive Plan (the "2007 Omnibus Plan") in January 2007, which became effective on the effective date (February 8, 2007) of the registration statement filed in connection with the Company's initial public offering. Under the 2007 Omnibus Plan, the Company was initially authorized to issue 2.4 million shares of common stock under various instruments plus an automatic annual increase on the first day of each of the Company's fiscal years beginning on January 1, 2008 and ending on January 1, 2017 equal to (i) the lesser of (A) 1,500,000 shares of common stock or (B) five percent (5%) of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or (ii) such lesser number of shares of common stock as determined by the Company's Board of Directors. Options granted under the 2007 Omnibus Plan generally expire no later than ten years from the date of grant and generally vest over a period of four years. The exercise price of all option grants must be equal to 100% of the fair market value on the date of grant. The 2007 Omnibus Plan provides for automatic grant of options to purchase common stock to non-employee directors.

At December 31, 2011, 2,385,987 shares were available for future grants under the 2007 Omnibus Plan.

 

The following table summarizes the Company's stock option activity under the 2007 Omnibus Plan:

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value
Options outstanding, January 1, 2011			4,815,119			$	4.10				7.78
Granted			1,080,000			$	6.57
Exercised			(136,770	)		$	3.02
Expired			(104,365	)		$	6.51
Forfeited			(127,894	)		$	6.18
Options outstanding, December 31, 2011			5,526,090			$	4.51				6.95			$	5,191,000
Vested and expected to vest at December 31, 2011			5,235,860			$	4.42				6.84			$	5,167,000
Options exercisable, December 31, 2011			3,540,908			$	3.97				6.29			$	4,039,000

The weighted-average fair value of options granted during fiscal 2009, fiscal 2010 and fiscal 2011 was $1.40, $3.75 and $3.28, respectively.

The intrinsic value of stock options at the date of the exercise is the difference between the fair value of the stock at the date of exercise and the exercise price. During fiscal 2010 and 2011, the total intrinsic value of the exercised options was $1.4 million and $0.5 million, respectively. There was no intrinsic value for options exercised in fiscal 2009. Aggregate Intrinsic Value (in the table) is calculated as the difference between the exercise price of underlying awards and the fair value price of the Company's common stock for options that were in-the-money as of December 31, 2011.

Under the 2007 Omnibus Plan, the Company had $3.5 million of unrecognized share-based compensation expense related to stock options outstanding as of December 31, 2011, which expense is expected to be recognized over a weighted-average period of 2.47 years.

Additional information with respect to outstanding options under the 2007 Omnibus Plan as of December 31, 2011 is as follows:

 

		Options Outstanding												Options Exercisable
Range of Exercise Prices		Options Outstanding				Weighted Average Remaining Contractual Term (in years)				Weighted- Average Exercise Price				Options Exercisable				Weighted- Average Exercise Price
$1.31			75,000				7.17			$	1.31				51,562			$	1.31
$1.59			725,000				7.01			$	1.59				528,644			$	1.59
$1.74-$2.14			720,693				6.81			$	1.91				547,689			$	1.93
$3.06-$3.24			722,589				6.25			$	3.12				649,665			$	3.12
$3.64-$4.47			567,292				6.57			$	3.90				503,333			$	3.85
$4.64-$5.00			616,602				8.48			$	4.81				226,410			$	4.91
$5.38-$5.81			649,000				6.30			$	5.58				526,081			$	5.62
$5.88-$7.80			598,375				6.56			$	7.13				150,454			$	6.95
$7.99-$8.08			567,500				8.04			$	8.00				117,500			$	8.06
$8.32-$9.41			284,039				6.45			$	8.59				239,570			$	8.65
Totals			5,526,090				6.95			$	4.51				3,540,908			$	3.97

The Company adopted the 2007 New Employee Incentive Plan (the "2007 New Employee Plan") in October 2007. Under the 2007 New Employee Plan, the Company is authorized to issue 2.0 million shares of common stock under various instruments solely to new employees. Options granted under the 2007 New Employee Plan generally expire no later than ten years from the date of grant and generally vest over a period of four years. The exercise price of all option grants must not be less than 100% of the fair market value on the date of grant.

At December 31, 2011, 750,000 shares were available for future grants under the 2007 New Employee Plan.

 

The following table summarizes the Company's stock option activity under the 2007 New Employee Plan:

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value
Options outstanding, January 1, 2011			1,250,000			$	5.65				7.32
Granted			—				—
Exercised			—				—
Expired			—				—
Forfeited			—				—
Options outstanding, December 31, 2011			1,250,000			$	5.65				6.33			$	1,610,000
Vested and expected to vest at December 31, 2011			1,246,348			$	5.66				6.32			$	1,598,000
Options exercisable, December 31, 2011			1,133,333			$	6.11				6.24			$	1,234,000

The weighted-average fair value of options granted during fiscal 2009 was $0.51, there were no new options granted in fiscal 2010 and fiscal 2011.

Aggregate Intrinsic Value (in the table) is calculated as the difference between the exercise price of the underlying awards and the fair value price of the Company's common stock for options that were in-the-money as of December 31, 2011.

Under the 2007 New Employee Plan, the Company had $33,000 of unrecognized share-based compensation expense related to stock options outstanding as of December 31, 2011, which expense is expected to be recognized over a weighted-average period of 1.13 years.

Additional information with respect to outstanding options under the 2007 New Employee Plan as of December 31, 2011 is as follows:

 

		Options Outstanding												Options Exercisable
Range of Exercise Prices		Options Outstanding				Weighted Average Remaining Contractual Term (in years)				Weighted- Average Exercise Price				Options Exercisable				Weighted- Average Exercise Price
$1.15-$1.59			500,000				7.13			$	1.15				383,333			$	1.15
$8.65			750,000				5.79			$	8.65				750,000			$	8.65
Totals			1,250,000				6.33			$	5.65				1,133,333			$	6.11

The Company adopted the U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan (the "2006 Plan") in March 2006. All stock options to purchase common stock granted to employees in 2006 were granted under the 2006 Plan and had exercise prices equal to the fair value of the underlying stock, as determined by the Company's Board of Directors on the applicable option grant date. At the time of grant, the Board of Directors determined the value of the underlying stock by considering a number of factors, including historical and projected financial results, the risks the Company faced, the preferences of the Company's preferred stock holders and the lack of liquidity of the Company's common stock. No stock options were granted by the Company prior to the adoption of the 2006 Plan. As of December 31, 2011, there were no shares available for future grants under the 2006 Plan.

The following table summarizes the Company's stock options activity under the 2006 Plan:

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value
Options outstanding, January 1, 2011			713,304			$	8.28				5.47
Granted			—			$	—
Exercised			—			$	—
Expired			(34,676	)		$	11.45
Forfeited			—			$	—
Options outstanding, December 31, 2011			678,628			$	8.12				4.44			$	—
Vested and expected to vest at December 31, 2011			678,628			$	8.12				4.44			$	—
Options exercisable, December 31, 2011			678,628			$	8.12				4.44			$	—

There were no new options granted during fiscal 2009, fiscal 2010 and fiscal 2011.

Aggregate Intrinsic Value (in the table) is calculated as the difference between the exercise price of underlying awards and the fair value price of the Company's common stock for options that were in-the-money as of December 31, 2011.

The Company has fully recognized share-based compensation expense related to the 2006 Plan stock options outstanding as of December 31, 2011.

Additional information with respect to outstanding options under the 2006 Plan as of December 31, 2011 is as follows:

 

		Options Outstanding												Options Exercisable
Range of Exercise Prices		Options Outstanding				Weighted Average Remaining Contractual Term (in years)				Weighted- Average Exercise Price				Options Exercisable				Weighted- Average Exercise Price
$6.78			480,888				4.24			$	6.78				480,888			$	6.78
$9.17			22,800				4.39			$	9.17				22,800			$	9.17
$$11.68			174,940				4.99			$	11.68				174,940			$	11.68
Total			678,628				4.44			$	8.12				678,628			$	8.12

Warrants

The following table summarizes the outstanding warrants at December 31, 2011:

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value
Warrants outstanding, January 1, 2011			50,000			$	4.61				5.73
Granted			—			$	—
Exercised			—			$	—
Expired			—			$	—
Forfeited			—			$	—
Warrants outstanding, December 31, 2011			50,000			$	4.61				4.74			$	67,000
Warrants exercisable, December 31, 2011			43,333			$	4.64				4.74			$	58,000

On May 5, 2009, the Company issued warrants to purchase up to 30,000 shares of common stock at an exercise price of $2.14, which warrants terminate seven years after their grant date. The warrants were issued in connection with the financial advisory services provided by a consultant to the Company. The warrants vest in thirty-six equal monthly increments of 833 shares each on the last calendar day of each calendar month commencing May 5, 2009. The grant date fair value of these warrants issued on May 5, 2009 was $1.09 per share. Accordingly, these non-employee equity instruments are re-measured as they vest over the requisite service period. The re-measured fair value of these warrants was $2.82 per share as of December 31, 2011. On April 27, 2010, the Company issued additional warrants to purchase up to 20,000 shares of common stock at an exercise price of $8.32, to the same holder in connection with the financial advisory services provided to the Company. The warrants terminate seven years after their grant date. The warrants vest in twenty-four equal monthly increments of 833 shares each on the last calendar day of each calendar month commencing April 27, 2010. The grant date fair value of the additional warrants issued on April 27, 2010 was $2.12 per share. Accordingly, these non-employee equity instruments are re-measured as they vest over the requisite service period. The re-measured fair value of these warrants was $1.20 per share as of December 31, 2011. The Company determined the fair value of the warrants at the date of grant, and upon the re-measurement dates, using the Black-Scholes option pricing model based on the fair value of the underlying common stock, the exercise price, remaining contractual term, risk-free rate and expected volatility. No warrants were exercised in fiscal 2009, 2010 and 2011. Aggregate Intrinsic Value (in the table) is calculated as the difference between the exercise price of underlying awards and the fair value price of the Company's common stock for warrants that were in-the-money as of December 31, 2011. Total warrants share-based compensation expense recognized in fiscal 2009, 2010 and 2011, amounted to $20,154, $81,297 and $65,318, respectively.

Performance Stock Options

In February 2009, the Board approved option grants, which contained market condition requirements. These options will vest based on the achievement of specified stock price appreciation milestones, which represents a market condition, over a five-year period commencing on February 16, 2009. The February 2009 option grants were for 100,000 shares. The fair value of the options were estimated on the date of grant using the Monte Carlo option pricing model with the following weighted-average assumptions for the period ended:

 

		January 2, 2010
Expected life			3.3 years
Risk-free interest rate			1.87	%
Expected volatility			50	%
Expected dividend yield			0	%
Initial stock price		$	1.15

In fiscal 2009, 2010 and 2011, the Board approved 125,000 shares, 200,000 shares and 125,000 shares, respectively, of performance options that vest over a four-year period based on the achievement of operational goals. The performance option grants were valued using the Black-Scholes option pricing model in the same manner as other stock option grants, as discussed below.

Share-Based Compensation Expense

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for each of the periods ended:

 

		January 2, 2010		January 1, 2011		December 31, 2011
Expected life		5.99 – 6.25 years		6 – 6.25 years		6 – 6.25 years
Risk-free interest rate		2% – 3%		2% – 3%		1% – 3%
Expected volatility		50% – 52%		51%		50% – 52%
Expected dividend yield		0%		0%		0%

The Company recognized share-based compensation expense of $3.3 million, $2.7 million and $2.6 million, net of $245,000, $186,000 and $218,000 of expense capitalized as internally-developed software, for each of fiscal 2009, 2010 and 2011, respectively. The Company has recognized an income tax benefit of $1.2 million for fiscal 2009. No tax benefit was recognized for fiscal 2010 and fiscal 2011 due to the valuation allowance position. Share-based compensation is included in our Consolidated Statements of Operations as follows:

 

		52 Weeks Ended January 2, 2010				52 Weeks Ended January 1, 2011				52 Weeks Ended December 31, 2011
Marketing expense		$	436			$	321			$	413
General and administrative expense			2,276				1,869				1,580
Fulfillment expense			213				376				370
Technology expense			345				176				244
Total share-based compensation expense		$	3,270			$	2,742			$	2,607

Under ASC 718, forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures significantly differ from those estimates. Our estimated forfeiture rate was calculated based on actual historical forfeitures experienced under our equity plans. In the fourth quarter of fiscal 2011, the Company performed its periodic review of the estimated forfeiture rate during the last fifty-two weeks and noted no significant forfeitures which would change the estimated forfeiture rate from the previous year. Therefore, the weighted-average forfeiture rate from 10% to 18% was used as consistent with the prior year.

 

There was $3.5 million, net of estimated forfeitures of approximately $1.8 million, of unrecognized compensation expense related to stock options and warrants as of December 31, 2011, which expense is expected to be recognized over a weighted-average period of 2.40 years. The table below sets forth the expected amortization of share-based compensation expense for the next four years for all options and warrants outstanding and unvested as of December 31, 2011, assuming all employees remain employed by the Company for their remaining vesting periods (in thousands):

 

		Fifty-Two Weeks Ending
		Dec. 29, 2012				Dec. 28, 2013				Jan. 3, 2015				Jan. 2, 2016
Future amortization of share-based compensation		$	1,685			$	1,084			$	620			$	153