CarParts.com, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Stockholders' Equity and Share-Based Compensation

Stockholders' Equity and Share-Based Compensation

9 Months Ended

Sep. 27, 2014

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

Stockholders' Equity and Share-Based Compensation

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 thirty-nine weeks ended September 27, 2014:


•	The Company issued 129 shares of common stock from option exercises under its various share-based compensation plans, as discussed below.


•	The Company issued 24 shares of common stock in payment of the quarterly dividend on the Series A Preferred on the dividend payment date of December 31, 2013 in the aggregate amount of $60.


•	The Company issued 19 shares of common stock in payment of the quarterly dividend on the Series A Preferred on the dividend payment date of March 31, 2014 in the aggregate amount of $59.


•	The Company issued 16 shares of common stock in payment of the quarterly dividend on the Series A Preferred on the dividend payment date of June 30, 2014 in the aggregate amount of $60.

Share-Based Compensation Plan Information

The following table summarizes the Company’s stock option activity for the thirty-nine weeks ended September 27, 2014, and details regarding the options outstanding and exercisable at September 27, 2014:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (1)
Options outstanding, December 28, 2013	5,320		$	2.97
Granted	840		$	2.32
Exercised	(129	)	$	2.06
Expired	(204	)	$	7.20
Forfeited	(383	)	$	1.80
Options outstanding, September 27, 2014	5,444		$	2.81	6.52	$	3,320
Vested and expected to vest at September 27, 2014	4,871		$	2.91	6.21	$	2,876
Options exercisable, September 27, 2014	3,242		$	3.36	4.79	$	1,592


(1)	These amounts represent the difference between the exercise price and the closing price of U.S. Auto Parts Network, Inc. stock on September 27, 2014 as reported on the NASDAQ National Market, for all options outstanding that have an exercise price currently below the closing price.

The weighted-average fair value of options granted during the thirty-nine weeks ended September 27, 2014 and September 28, 2013 was $1.34 and $0.68, 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 the thirty-nine weeks ended September 27, 2014 and September 28, 2013, the total intrinsic value of the exercised options was $147 and $4, respectively. The Company had $1,866 of unrecognized share-based compensation expense related to stock options outstanding as of September 27, 2014, which expense is expected to be recognized over a weighted-average period of 2.91 years.

Restricted Stock Units

During 2014, we granted an aggregate of 1,015 RSUs 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.

Of the 1,015 RSU’s, 738 are time-based, which vest upon the completion of a pre-defined period of employment, ranging from one- to- two years. The remaining 277 RSUs are performance-based RSUs, the number of which that vest, if any, will be determined upon the achievement of certain pre-defined financial goals in fiscal year 2014. All awards are subject to the employee’s continued employment through applicable vesting dates. Some awards 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 our common stock. The closing price of our common stock on February 14, 2014, April 3, 2014 and August 1, 2014, the date of each grant, was $2.03, $2.93 and $3.17 per share, respectively. Compensation expense is recognized on a straight-line basis over the requisite service period of one-to-two 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. As of September 27, 2014, the Company believes that it is probable that the performance criteria will be met on 171 RSUs of the 277 RSUs that are performance-based RSUs. As of September 27, 2014, 94 performance based RSUs were forfeited, resulting in a reduction in compensation expense by $107 for each of the thirteen and thirty-nine weeks ended September 27, 2014.

For the thirteen and thirty-nine weeks ended September 27, 2014, we recorded compensation expense of $382 and $926, respectively. As of September 27, 2014, there was unrecognized compensation expense of $1,205 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 1.0 years.

Stock Option Exchange Program

In July 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. In August 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 years contractual term. The offer period for the stock option exchange ended in September 2013.

In September 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 4 years 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

As of September 27, 2014, warrants to purchase 50 shares of common stock were outstanding and exercisable, 30 of which have an exercise price of $2.14 per share and expire on May 5, 2016, and 20 of which have an exercise price of $8.32 per share and expire on April 27, 2017. The warrants were issued in connection with the financial advisory services provided by a consultant to the Company. All warrants became fully vested in fiscal year 2012, and no warrants were exercised during the thirty-nine weeks ended September 27, 2014. The aggregate intrinsic value of outstanding and exercisable warrants was $15 as of September 27, 2014, 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.

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:



	Thirteen Weeks Ended		Thirty-Nine Weeks Ended
	September 27, 2014	September 28, 2013	September 27, 2014	September 28, 2013
Expected life	5.37 years	5.21 – 5.73 years	5.30 – 5.37 years	5.21 – 5.73 years
Risk-free interest rate	1.7%	1.4% – 1.8%	1.5% – 1.8%	1.0% – 1.8%
Expected volatility	62%	67% – 73%	62% – 68%	67% – 73%
Expected dividend yield	—%	—%	—%	—%

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



	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 27, 2014		September 28, 2013		September 27, 2014		September 28, 2013
Marketing expense	$	157	$	77	$	374	$	230
General and administrative expense	424		191		1,051		693
Fulfillment expense	72		25		170		81
Technology expense	34		22		96		61
Total share-based compensation expense	$	687	$	315	$	1,691	$	1,065

The share-based compensation expense is net of amounts capitalized to internally-developed software of $65 and $40 during the thirteen weeks ended September 27, 2014 and September 28, 2013, respectively, and $142 and $188 during the thirty-nine weeks ended September 27, 2014 and September 28, 2013, respectively.

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 16% to 34% for the thirty-nine weeks ended September 27, 2014 and September 28, 2013, respectively.