Note 7 – Stockholders’ Equity and Share-Based Compensation

Common Stock

The Company has 100,000,000 shares of common stock authorized. The Company has never paid cash dividends on its common stock. The following issuances of common stock were made during the twenty-six weeks ended June 30, 2012:

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 is authorized to issue shares of common stock under various instruments to eligible employees and non-employees of the Company. 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 also provides for automatic grant of options to purchase common stock and common stock awards to non-employee directors. At June 30, 2012, 1,865,895 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 for the twenty-six weeks ended June 30, 2012:

The weighted-average fair value of options granted during the twenty-six weeks ended June 30, 2012 was $2.65 per share.

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 the twenty-six weeks ended June 30, 2012, the total intrinsic value of the exercised options was $52,000. Aggregate Intrinsic Value (in the table above) 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 June 30, 2012.

Under the 2007 Omnibus Plan, the Company had $2.8 million of unrecognized share-based compensation expense related to stock options outstanding as of June 30, 2012, which expense is expected to be recognized over a weighted-average period of 2.79 years.

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. As of June 30, 2012, 1,183,333 options were outstanding and exercisable, and 816,667 shares were available for future grants, under the 2007 New Employee Plan. During the twenty-six weeks ended June 30, 2012, 66,667 options were forfeited under the 2007 New Employee Plan. Under the 2007 New Employee Plan, the Company had no unrecognized share-based compensation expense related to stock options outstanding as of June 30, 2012.

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. After fiscal 2008, no shares have been available for future grants under the 2006 Plan. As of June 30, 2012, 672,628 options were outstanding and exercisable under the 2006 Plan. During the twenty-six weeks ended June 30, 2012, 6,000 options expired under the 2006 Plan. Under the 2006 Plan, the Company has fully recognized share-based compensation expense related to the 2006 Plan stock options outstanding as of June 30, 2012.

Warrants

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 per share, 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 vested 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 were re-measured as they vested over the requisite service period. These warrants became fully vested during the quarter ended June 30, 2012, in which the final re-measured fair value was $3.14 per share.

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 per share, to the same consultant in connection with the financial advisory services provided to the Company. The warrants terminate seven years after their grant date. The warrants vested 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 were re-measured as they vested over the requisite service period. These warrants became fully vested during the quarter ended March 31, 2012, in which the final re-measured fair value was $1.42 per share.

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 during the twenty-six weeks ended June 30, 2012. As of June 30, 2012, warrants to purchase 50,000 shares of common stock were outstanding and exercisable. Aggregate intrinsic value of outstanding and exercisable warrants was $61,000 as of June 30, 2012, which was 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. Total warrants share-based compensation expense recognized during the thirteen weeks ended June 30, 2012 and July 2, 2011 amounted to $5,000 and $17,000, respectively. Total warrants share-based compensation expense recognized during the twenty-six weeks ended June 30, 2012 and July 2, 2011 amounted to $16,000 and $43,000, respectively. The Company had no unrecognized share-based compensation expense related to warrants outstanding as of June 30, 2012.

Performance Stock Options

During the twenty-six weeks ended June 30, 2012, under the 2007 Omnibus Plan, the Board of Directors approved performance options to purchase 125,000 shares of common stock for certain employees of the Company that vest over a four-year period based on the achievement of operational goals. Certain performance options contain vesting acceleration clauses. 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. One previously granted performance option was forfeited in connection with the performance goals not being met at the end of the requisite service period. Accordingly, $105,000 of previously recognized share-based compensation expense was reversed during the twenty-six weeks ended June 30, 2012.

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 twenty-six week periods ended:

Share-based compensation from options, warrants and stock awards, is included in our consolidated statements of comprehensive loss as follows (in thousands):

Share-based compensation expense (in the table above) is net of amounts capitalized to internally-developed software, including $85,000 and $58,000 during the thirteen weeks ended June 30, 2012 and July 2, 2011, respectively, and $136,000 and $111,000 during the twenty-six weeks ended June 30, 2012 and July 2, 2011, respectively. The table above excludes the expense from issuing stock awards to one non-employee director for services rendered, in the amount of $10,625 and $21,250, for the thirteen and twenty-six weeks ended June 30, 2012, respectively; no such expenses were incurred in fiscal 2011.

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 rates are calculated based on actual historical forfeitures experienced under our equity plans. In the first quarter of fiscal 2012, the Company performed a periodic review of the estimated forfeiture rates and determined an increase to the existing forfeiture rates was necessary. This increase was primarily attributed to higher terminations in the non-executive employee group than was previously expected. Accordingly, the Company updated the forfeiture rates from 10% to 18%, to 16% to 34% and has applied such revised rates during the twenty-six weeks ended June 30, 2012.

There was $2.8 million, net of estimated forfeitures of approximately $3.2 million, of unrecognized compensation expense related to stock options and warrants as of June 30, 2012, which expense is expected to be recognized over a weighted-average period of 2.79 years.