CarParts.com, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Stockholders' Equity and Share-Based Compensation

Stockholders' Equity and Share-Based Compensation

12 Months Ended

Dec. 31, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stockholders' Equity and Share-Based Compensation

Stockholders’ Equity and Share-Based Compensation

Non-Controlling Interest

Non-controlling interests represent equity interests in consolidated subsidiaries that are not attributable, either directly or indirectly, to the Company (i.e., minority interests). Non-controlling interests include the minority equity holders' proportionate share of the equity of AutoMD. As of March 6, 2017, all of the non-controlling interests of AutoMD were repurchased by the Company.

Ownership interests in subsidiaries held by parties other than the Company are presented as non-controlling interests within stockholders' equity, separately from the equity held by the Company. Revenues, expenses, net loss and other comprehensive income are reported in the consolidated financial statements at the consolidated amounts, which includes amounts attributable to both the Company's interest and the non-controlling interests in AutoMD. Net loss and other comprehensive income is then attributed to the Company's interest and the non-controlling interests. Net loss to non-controlling interests is deducted from net loss in the consolidated statements of comprehensive operations to determine net loss attributable to the Company's common stockholders.

The table below presents the changes in the Company's ownership interest in AutoMD on the Company's equity as of the dates indicated:



	Fiscal Year Ended
	December 31, 2016		January 2, 2016			January 3, 2015
Net income (loss) attributable to U.S. Auto Parts stockholders'	$	731	$	(1,281	)	$	(6,879	)
Transfers (to) from the noncontrolling interest:
Increase in U.S. Auto Parts paid-in-capital from sale of AutoMD common stock	—		—			2,512
Changes from net income (loss) attributable to U.S. Auto Parts stockholders' and transfers to noncontrolling interest	$	731	$	(1,281	)	$	(4,367	)

Common Stock

The Company has 100,000 shares of common stock authorized. We have never paid cash dividends on our common stock. The following issuances of common stock were made during the fiscal year ended December 31, 2016:


•	The Company issued 442 shares of common stock from option exercises under its various share-based compensation plans.


•	The Company issued 439 shares of common stock from restricted stock units that vested during the period.


•	The Company issued 10 shares of common stock for advisory services previously provided by a consultant.


•	37 shares of common stock were issued as stock dividends on the Series A Preferred.


•	The Company issued 3 shares of common stock to one non-employee member of the Board of Directors for service fees earned during the period.

Treasury Stock

On November 15, 2016, our Board of Directors approved a share repurchase program which authorizes the Company to purchase up to $5,000 of its outstanding shares of common stock. Purchases under the Company’s repurchase program may be made from time to time in the open market, in negotiated transactions off the market, or in such other manner as determined by the Company, including through plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. The share repurchase program will expire on March 4, 2017, unless extended or shortened by the Board of Directors.

As of December 31, 2016, the Company repurchased 445 shares of common stock at an average price of $3.09, for an aggregate purchase price of approximately $1,376, net of costs.

Series A Convertible Preferred Stock

On March 25, 2013, the Company authorized the issuance of 4,150 shares of Series A Preferred and entered into a Securities Purchase Agreement pursuant to which the Company agreed to sell up to an aggregate of 4,150 shares of our Series A Preferred, $0.001 par value per share at a purchase price per share of $1.45 for aggregate proceeds to the Company of approximately $6,017. On March 25, 2013, we sold 4,000 shares of Series A Preferred for aggregate proceeds of $5,800. On April 5, 2013, we sold the remaining 150 shares of Series A Preferred for aggregate proceeds of $217. The Company incurred issuance costs of $847 and used the net proceeds from the sale of the Series A Preferred to reduce its revolving loan payable.

Each share of Series A Preferred is convertible into shares of our common stock at the initial conversion rate of one share of common stock for each share of Series A Preferred. The conversion will be adjusted for certain non-price based events, such as dividends and distributions on the common stock, stock splits, combinations, recapitalizations, reclassifications, mergers, or consolidations. If not previously converted by the holder, the Series A Preferred will automatically convert to common stock if the volume weighted average price for the common stock for any 30 consecutive trading days is equal to or exceeds $4.35 per share. The shares that would be issued if the contingently convertible Series A Preferred were converted are not excluded from the calculation of diluted earnings per share for the fiscal year ended December 31, 2016 (refer to “Note 8 – Net Loss Per Share” for anti-dilutive securities).

In the event of any liquidation event, which includes changes of control of the Company and sales or other dispositions by the Company of more than 50% of its assets, the Series A Preferred is entitled to receive, prior and in preference to any distribution to the common stock, an amount per share equal to $1.45 per share of Series A Preferred, plus all then accrued but unpaid dividends on such Series A Preferred. Following this distribution, if assets or surplus funds remain, the holders of the common stock shall share ratably in all remaining assets of the Company, based on the number of shares of common stock then outstanding. Notwithstanding the foregoing, if, in connection with any liquidation event, a holder of Series A Preferred would receive an amount greater than $1.45 per share of Series A Preferred by converting such shares held by such holder into shares of common stock, then such holder shall be treated as though such holder had converted such shares of Series A Preferred into shares of common stock immediately prior to such liquidation event, whether or not such holder had elected to so convert.

Dividends on the Series A Preferred are payable quarterly at a rate of $0.058 per share per annum in cash, in shares of common stock or in any combination of cash and common stock as determined by the Company’s Board of Directors. Certain conditions are required to be satisfied in order for the Company to pay dividends on the Series A Preferred in shares of common stock, including (i) the common stock being registered pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934, as amended, (ii) the common stock being issued having been approved for listing on a trading market and (iii) the common stock being issued either being covered by an effective registration statement or being freely tradable without restriction under Rule 144 (subject to certain exceptions). The Series A Preferred shall each be entitled to one vote per share for each share of common stock issuable upon conversion thereof (excluding from any such calculation any dividends accrued on such shares) and shall vote together with the holders of common stock as a single class on any matter on which the holders of common stock are entitled to vote. In addition, the Company must obtain the consent of holders of at least a majority of the then outstanding Series A Preferred in connection with (a) any amendment, alteration or repeal of any provision of the certificate of incorporation or bylaws of the Company as to adversely affect the preferences, rights or voting power of the Series A Preferred, or (b) the creation, authorization or issuance of any additional Series A Preferred or any other class or series of capital stock of the Company ranking senior to or on parity with the Series A Preferred or any security convertible into, or exchangeable or exercisable for Series A Preferred or any other class or series of capital stock of the Company ranking senior to or on parity with the Series A Preferred. Concurrent with the Company’s issuance of Series A Preferred, the Company, certain of its domestic subsidiaries and JPMorgan entered into a Second Amended Credit Agreement to allow the Company to pay cash dividends on the Series A Preferred in an aggregate amount of up to $400 per year and pay cash in lieu of issuing fractional shares upon conversion of or in payment of dividends on the Series A Preferred (refer to “Note 6 – Borrowings” of our Notes to Consolidated Financial Statements for additional details). For the fiscal year ended January 3, 2015, the Company recorded dividends of $240. The Company issued 83 shares of common stock in payment of the fiscal 2014 dividends. There were no accrued dividends outstanding as of January 3, 2015. For the fiscal year ended January 2, 2016, the Company recorded dividends of $241. The Company issued 103 shares of common stock in payment of the fiscal 2015 dividends. There were no accrued dividends outstanding as of January 2, 2016. For the fiscal year ended December 31, 2016, the Company recorded dividends of $241. The Company issued 37 shares of common stock in payment of the fiscal 2016 dividends. There were $61 dividends accrued as of December 31, 2016.

Share-Based Compensation Plan Information

The Company adopted the 2016 Equity Incentive Plan ("2016 Equity Plan") on March 9, 2016, which became effective on May 31, 2016, following stockholder approval. Subject to adjustment for certain changes in the Company’s capitalization, the aggregate number of shares of the Company’s common stock that may be issued under the 2016 Equity Plan will not exceed the sum of (i) two million five hundred thousand (2,500) new shares, (ii) the number of unallocated shares remaining available for the grant of new awards under the Company’s prior equity plans described below (the “Prior Equity Plans”) as of the effective date of the 2016 Plan (which was equal to 3,894 shares as of May 31, 2016) and (iii) any shares subject to a stock award under the Prior Equity Plans that are not issued because such stock award expires or otherwise terminates without all of the shares covered by such stock award having been issued, that are not issued because such stock award is settled in cash, that are forfeited back to or repurchased by the Company because of the failure to meet a contingency or condition required for the vesting of such shares, or that are reacquired, withheld (or not issued) to satisfy a tax withholding obligation in connection with an award or to satisfy the purchase price or exercise price of a stock award. In addition, the share reserve will automatically increase on January 1st of each year, for a period of nine years, commencing on January 1, 2017 and ending on (and including) January 1, 2026, in an amount equal to one million five hundred thousand (1,500) shares per year; however the Board of Directors of the Company may act prior to January 1st of a given year to provide that there will be no January 1st increase in the share reserve for such year or that the increase in the share reserve for such year will be a lesser number of shares of common stock than would otherwise occur pursuant the automatic increase. Options granted under the 2016 Equity 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. As of December 31, 2016, 6,307 shares were available for future grants under the 2016 Equity Plan.

The Company adopted the 2007 Omnibus Incentive Plan (the “2007 Omnibus Plan”) in January 2007, which became effective on February 8, 2007, the effective date of the registration statement filed in connection with the Company’s initial public offering. Under the 2007 Omnibus Plan, the Company was previously authorized to issue 2,400 shares of common stock, under various instruments to eligible employees and non-employees of the Company, 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 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 also allows for the grant of options to purchase common stock and common stock awards to non-employee directors. As of December 31, 2016, 0 shares were available for future grants under the 2007 Omnibus Plan.

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 was authorized to issue 2,000 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 December 31, 2016, 0 shares were available for future grants under the 2007 New Employee Plan.

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 year 2008, no shares have been available for future grants under the 2006 Plan.

The following tables summarizes the Company’s stock option activity for the fiscal years ended, and details regarding the options outstanding and exercisable at December 31, 2016, and January 2, 2016:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value⁽¹⁾
Options outstanding, January 2, 2016	5,841		$	2.80
Granted	1,000		$	3.03
Exercised	(442	)	$	2.06
Cancelled:
Forfeited	(149	)	$	2.47
Expired	(122	)	$	7.66
Options outstanding, December 31, 2016	6,128		$	2.81	5.74	$	6,561
Vested and expected to vest at December 31, 2016	5,658		$	2.82	5.49	$	6,111
Options exercisable, December 31, 2016	4,220		$	2.92	4.49	$	4,618



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value⁽¹⁾
Options outstanding, January 3, 2015	5,281		$	2.85
Granted	1,315		$	2.24
Exercised	(301	)	$	1.45
Cancelled:
Forfeited	(256	)	$	2.06
Expired	(198	)	$	3.31
Options outstanding, January 2, 2016	5,841		$	2.80	6.03	$	4,333
Vested and expected to vest at January 2, 2016	5,285		$	2.88	5.74	$	3,853
Options exercisable, January 2, 2016	3,735		$	3.21	4.54	$	2,479


(1)	These amounts represent the difference between the exercise price and the closing price of U.S. Auto Parts Network, Inc. common stock on December 31, 2016 as reported on the NASDAQ Stock Market, for all options outstanding that have an exercise price currently below the closing price.

The weighted-average fair value of options granted during fiscal year 2016, 2015 and 2014 was $1.65, $1.19 and $1.34, 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 year 2016, 2015 and 2014, the total intrinsic value of the exercised options was $599, $346 and $153, respectively. The Company had $1,344 of unrecognized share-based compensation expense related to stock options outstanding as of December 31, 2016, which expense is expected to be recognized over a weighted-average period of 2.34 years.

The following tables summarize the Company’s stock option activity under the AutoMD 2014 Equity Incentive Plan (the "AMD Plan") for the fiscal years ended, and details regarding the options outstanding and exercisable at December 31, 2016 and January 2, 2016:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Options outstanding, January 2, 2016	1,430		$	1.00
Granted	10		$	1.00
Exercised	—		$	—
Cancelled:
Forfeited	(35	)	$	1.00
Expired	—		$	—
Options outstanding, December 31, 2016	1,405		$	1.00	8.20
Vested and expected to vest at December 31, 2016	1,044		$	1.00	8.19
Options exercisable, December 31, 2016	632		$	1.00	8.14



	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Options outstanding, January 3, 2015	180	$	1.00
Granted	1,250	$	1.00
Exercised	—	$	—
Cancelled:
Forfeited	—	$	—
Expired	—	$	—
Options outstanding, January 2, 2016	1,430	$	1.00	9.19	$	—
Vested and expected to vest at January 2, 2016	1,061	$	1.00	9.19	$	—
Options exercisable, January 2, 2016	49	$	1.00	8.92	$	—

At December 31, 2016 520 shares were available for future grants under the AMD Plan.

The weighted-average fair value of options granted during fiscal year 2016, 2015 and 2014 was $0.55, $0.55 and $0.56, 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. The Company had $224 of unrecognized share-based compensation expense related to stock options outstanding as of December 31, 2016, which expense is expected to be recognized over a weighted-average period of 2.20 years.

Options exercised under all share-based compensation plans are granted net of the minimum statutory withholding

requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. For those employees who

elect not to receive shares net of the minimum statutory withholding requirements, the appropriate taxes are paid directly by the

employee. During fiscal 2016, we withheld 0 shares to satisfy $0 of employees' tax obligations and 0 shares related to the net settlement of the stock options. During fiscal 2015, we withheld 27 shares to satisfy $80 of employees' tax obligations and 112 shares related to the net settlement of the stock options.

Restricted Stock Units

During 2016 and 2015 the Company granted an aggregate of 954 and 435 RSUs, respectively, to certain employees of the Company. The RSUs were granted under the 2007 Omnibus Plan, and reduced the pool of equity instruments available under that plan.

During 2016 there were 382 RSUs granted that were time-based and 572 were performance-based. All of the RSUs granted during 2015 were time-based. As of March 3, 2017, 525 of the performance-based RSUs met the maximum performance criteria upon certification by the Compensation Committee and 47 PSUs were forfeited. Of the RSUs granted during 2015, 348 vested, 30 remain unvested, and 57 were forfeited during 2016. The vesting of each RSU is subject to the employee’s continued employment through applicable vesting dates. Some RSUs granted to certain executives may vest on an accelerated basis in part or in full upon the occurrence of certain events. The RSUs are accounted for as equity awards and are measured at fair value based upon the grant date price of the Company's common stock. The closing price of the Company's common stock on January 21, 2016 and February 29, 2016, the date of each grant was $2.64 and $2.75, respectively. The closing price of the Company's common stock on January 29, 2015, March 23, 2015, May 20, 2015, June 23, 2015 and July 28, 2015, the date of each grant, was $2.29, $2.18, $2.33, $2.23, and $2.18 per share, respectively. Compensation expense is recognized on a straight-line basis over the requisite service period of one-to-three years. Compensation expense for performance-based awards is measured based on the amount of shares ultimately expected to vest, estimated at each reporting date based on management’s expectations regarding the relevant performance criteria.

For the fiscal year ended December 31, 2016, we recorded compensation expense of $1,626 related to RSU's. As of December 31, 2016, there was unrecognized compensation expense of $600 related to unvested RSUs based on awards that are expected to vest. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 0.63 years.

Stock Option Exchange Program

On July 9, 2013, the Company’s stockholders approved a proposed stock option exchange program for the exchange of certain outstanding stock options held by eligible employees for new options to purchase fewer shares. On August 12, 2013, the Company commenced an offering to eligible employees to voluntarily exchange certain vested and unvested stock options with exercise prices above $4.00 per share at an exchange ratio of 3.5 to 1 to be granted following the expiration of the tender offer with exercise prices equal to the fair market value of one share of the Company’s common stock on the day the new options were issued. Stock options to purchase an aggregate of 3,733 shares with exercise prices ranging from $4.01 to $11.68 were eligible for tender at the commencement of the program. The Company’s non-employee directors were not eligible to participate in the program. The terms and conditions of the new options are subject to an entirely new four year vesting schedule where 25% will vest on the first anniversary, and the remaining 75% will vest monthly over the following 36 months. All new options have a ten year contractual term. The offer period for the stock option exchange ended on September 9, 2013. There were no modifications or exchanges to share based payment awards in fiscal 2015 or 2016.

On September 10, 2013, the Company accepted for exchange 3,475 eligible options to purchase common stock, with a weighted average exercise price of $6.65 for 45 eligible employees, and issued 993 unvested options to purchase shares of the Company’s common stock with an exercise price of $0.9866, the closing price of the Company’s common stock on that day. Using the Black-Scholes option pricing model, the Company determined that the fair value of the surrendered stock options on a grant-by-grant basis was lower than the fair value of the new stock options, as of the date of the exchange, resulting in incremental fair value of $422. The incremental fair value as a result of the stock option exchange and the remaining compensation expense associated with the surrendered stock options will be recorded as compensation expense over the four year vesting period of the new options.

The fair value of the surrendered stock options and the new stock options was estimated on the date of the exchange using the Black-Scholes option pricing model with the following assumptions:



	Surrendered Stock Options	New Stock Options
Expected life	1.93 – 6.87 years	5.84 years
Risk-free interest rate	0.5% – 2.4%	2.0%
Expected volatility	55% – 73%	72%
Expected dividend yield	—%	—%

Warrants

On May 5, 2009, the Company issued warrants to purchase up to 30 shares of common stock at an exercise price of $2.14 per share. On April 27, 2010, the Company issued additional warrants to purchase up to 20 shares of common stock at an exercise price of $8.32 per share. Both issuances of 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. On August 8, 2016 10 shares of common stock were issued in settlement of the May 5, 2009 warrants. As of December 31, 2016, warrants to purchase 20 shares of common stock were outstanding and exercisable. The aggregate intrinsic value of outstanding and exercisable warrants was $0 as of December 31, 2016, which was calculated as the difference between the exercise price of underlying awards and the closing price of the Company’s common stock for warrants that were in-the-money. No warrants share-based compensation expense was recognized during the fiscal years 2016, 2015 and 2014. The Company had no unrecognized share-based compensation expense related to warrants outstanding as of December 31, 2016.

Share-Based Compensation Expense

The fair value of each option grant, excluding those options issued from the stock option exchange program as discussed above, was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for each of the periods ended:



	Fiscal Year Ended
	December 31, 2016	January 2, 2016	January 3, 2015
Expected life	5.57 - 5.61 years	5.34 - 5.52 years	5.30 - 5.37 years
Risk-free interest rate	1% - 2%	1% - 2%	2% - 2%
Expected volatility	60% - 61%	59% - 60%	62% - 68%
Expected dividend yield	—%	—%	—%

Share-based compensation from options and RSUs, is included in our consolidated statements of comprehensive operations, as follows:



	Fiscal Year Ended
	December 31, 2016		January 2, 2016		January 3, 2015
Marketing expense	$	433	$	518	$	540
General and administrative expense	2,111		1,614		1,476
Fulfillment expense	450		241		220
Technology expense	137		46		135
Total share-based compensation expense	$	3,131	$	2,419	$	2,371

The share-based compensation expense is net of amounts capitalized to internally-developed software of $83, $146 and $196 during the fiscal year 2016, 2015, and 2014, respectively. No tax benefit was recognized for fiscal years 2016, 2015, and 2014 due to the valuation allowance position.

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. The Company’s estimated forfeiture rates are calculated based on actual historical forfeitures experienced under our equity plans. The Company's forfeiture rates were 10%-34% for fiscal years 2016, 2015, and 2014.