Note 7 – 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 the thirteen weeks ended March 31, 2012:

 

•

The Company issued 20,000 shares of common stock from option exercises under the 2007 Omnibus Plan, as discussed below.

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. 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 March 31, 2012, 2,100,987 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 for the thirteen weeks ended March 31, 2012:

 

(unaudited)		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value
Options outstanding, December 31, 2011			5,526,090			$	4.51				6.95
Granted			450,000			$	4.54
Exercised			(20,000	)		$	2.14
Expired			(65,000	)		$	7.34
Forfeited			(100,000	)		$	7.80
Options outstanding, March 31, 2012			5,791,090			$	4.43				7.15			$	3,185,000
Options exercisable, March 31, 2012			3,803,537			$	4.02				6.30			$	2,608,000

The weighted-average fair value of options granted during the thirteen weeks ended March 31, 2012 was $2.27 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 thirteen weeks ended March 31, 2012, the total intrinsic value of the exercised options was $52,000. 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 March 31, 2012.

Under the 2007 Omnibus Plan, the Company had $2.6 million of unrecognized share-based compensation expense related to stock options outstanding as of March 31, 2012, which expense is expected to be recognized over a weighted-average period of 2.70 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 March 31, 2012, 1,250,000 options were outstanding, 1,158,333 were exercisable and 750,000 shares were available for future grants, under the 2007 New Employee Plan. There was no activity under the 2007 New Employee Plan during the thirteen weeks ended March 31, 2012. Under the 2007 New Employee Plan, the Company had $19,000 of unrecognized share-based compensation expense related to stock options outstanding as of March 31, 2012, which expense is expected to be recognized over a weighted-average period of 0.88 years.

 

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 March 31, 2012, 672,628 options were outstanding and exercisable, 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 March 31, 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 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 $2.50 per share as of March 31, 2012.

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 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 $1.42 per share as of March 31, 2012.

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 thirteen weeks ended March 31, 2012. As of March 31, 2012, warrants for 50,000 shares of common stock were outstanding, of which, 48,333 were exercisable. Aggregate intrinsic value of exercisable warrants was $42,000 as of March 31, 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 March 31, 2012 and April 2, 2011, amounted to $10,000 and $14,000, respectively. The Company had $4,000 of unrecognized share-based compensation expense related to warrants outstanding as of March 31, 2012, which expense is expected to be recognized during the second quarter of fiscal 2012.

Performance Stock Options

No performance options were granted during the thirteen weeks ended March 31, 2012. One previously granted performance option was adjusted to reflect 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 thirteen weeks ended March 31, 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 thirteen week periods ended:

 

(unaudited)		March 31, 2012		April 2, 2011
Expected life		5.73 years		6.25 years
Risk-free interest rate		1.2%		2.3% – 2.6%
Expected volatility		52%		50%
Expected dividend yield		0%		0%

The Company recognized share-based compensation expense of $0.6 million and $0.7 million during the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively. Share-based compensation, from options, warrants and stock awards, is included in our consolidated statements of comprehensive loss as follows:

 

(unaudited)		Thirteen Weeks Ended March 31, 2012				Thirteen Weeks Ended April 2, 2011
Marketing expense		$	44			$	160
General and administrative expense			422				376
Fulfillment expense			93				85
Technology expense			25				60
Total share-based compensation expense		$	584			$	681

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 required. Accordingly, the Company updated the forfeiture rates from 10% to 18%, to 16% to 34% during quarter ended March 31, 2012. This increase was primarily attributed to higher terminations in the non-executive employee group than was previously expected.

There was $2.6 million, net of estimated forfeitures of approximately $3.1 million, of unrecognized compensation expense related to stock options and warrants as of March 31, 2012, which expense is expected to be recognized over a weighted-average period of 2.62 years.