U.S. Auto Parts Network, Inc.
U.S. Auto Parts Network, Inc. (Form: 10-Q, Received: 05/13/2015 06:10:34)
Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
                     
 
FORM 10-Q  
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                       to                     
Commission file number: 001-33264
 

 
U.S. AUTO PARTS NETWORK, INC.
(Exact name of registrant as specified in its charter)  
 
Delaware
 
68-0623433
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
16941 Keegan Avenue, Carson, CA 90746
(Address of Principal Executive Office) (Zip Code)
(310) 735-0085
(Registrant’s telephone number, including area code)  
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   ý     No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   ý     No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
o
Accelerated Filer
o
Non-Accelerated Filer
ý (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   o    No   ý
As of May 6, 2015 , the registrant had 33,950,577  shares of common stock outstanding, $0.001 par value.
 


Table of Contents


U.S. AUTO PARTS NETWORK, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED APRIL 4, 2015
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
ITEM 1.
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
 
 
 
 
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
Unless the context requires otherwise, as used in this report, the terms “U.S. Auto Parts,” the “Company,” “we,” “us” and “our” refer to U.S. Auto Parts Network, Inc. and its subsidiaries. Unless otherwise stated, all amounts are presented in thousands.
U.S. Auto Parts ® , U.S. Auto Parts Network™, AutoMD ® , AutoMD Insta-Quotes! ®, Kool-Vue™, JC Whitney ® , and Stylintrucks™, amongst others, are our United States trademarks. All other trademarks and trade names appearing in this report are the property of their respective owners.


Table of Contents


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements included in this report, other than statements or characterizations of historical or current fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we intend that such forward-looking statements be subject to the safe harbors created thereby. Any forward-looking statements included herein are based on management’s beliefs and assumptions and on information currently available to management. We have attempted to identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would”, “will likely continue,” “will likely result” and variations of these words or similar expressions. These forward-looking statements include, but are not limited to, statements regarding future events, our future operating and financial results, financial expectations, expected growth and strategies, current business indicators, capital needs, financing plans, capital deployment, liquidity, contracts, litigation, product offerings, customers, acquisitions, competition and the status of our facilities. Forward-looking statements, no matter where they occur in this document or in other statements attributable to the Company involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” in Part II, Item 1A of this report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. You should read this report and the documents that we reference in this report and have filed as exhibits to the report completely and with the understanding that our actual future results may be materially different from what we expect. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.


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Table of Contents


PART I. FINANCIAL INFORMATION


ITEM 1.     Financial Statements
U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, In Thousands, Except Par Value and Per Share Liquidation Value)
 
April 4,
2015
 
January 3,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
7,917

 
$
7,653

Short-term investments
66

 
62

Accounts receivable, net of allowances of $38 and $41 at April 4, 2015 and January 3, 2015, respectively
4,209

 
3,804

Inventory
48,347

 
48,362

Other current assets
3,321

 
2,669

Total current assets
63,860

 
62,550

Property and equipment, net
16,690

 
16,966

Intangible assets, net
1,617

 
1,707

Other non-current assets
1,672

 
1,684

Total assets
$
83,839

 
$
82,907

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
26,591

 
$
25,362

Accrued expenses
8,498

 
7,747

Revolving loan payable
9,485

 
11,022

Current portion of capital leases payable
276

 
269

Other current liabilities
4,560

 
3,505

Total current liabilities
49,410

 
47,905

Capital leases payable, net of current portion
9,197

 
9,270

Deferred income taxes
1,550

 
1,618

Other non-current liabilities
1,661

 
1,891

Total liabilities
61,818

 
60,684

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Series A convertible preferred stock, $0.001 par value; $1.45 per share liquidation value or aggregate of $6,017; 4,150 shares authorized; 4,150 shares issued and outstanding at April 4, 2015 and January 3, 2015
4

 
4

Common stock, $0.001 par value; 100,000 shares authorized; 33,949 and 33,624 shares issued and outstanding at April 4, 2015 and January 3, 2015, respectively
34

 
33

Additional paid-in capital
174,552

 
174,369

Accumulated other comprehensive income
350

 
360

Accumulated deficit
(155,609
)
 
(155,489
)
Total stockholders’ equity
19,331

 
19,277

Noncontrolling interest
2,690

 
2,946

Total equity
22,021

 
22,223

Total liabilities and stockholders’ equity
$
83,839

 
$
82,907

See accompanying notes to consolidated financial statements (unaudited).

4



U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(Unaudited, in Thousands, Except Per Share Data)
 
 
Thirteen Weeks Ended
 
April 4,
2015
 
March 29,
2014
Net sales
$
76,388

 
$
68,028

Cost of sales (1)
54,910

 
47,327

Gross profit
21,478

 
20,701

Operating expenses:
 
 
 
Marketing
10,852

 
10,115

General and administrative
4,181

 
4,147

Fulfillment
5,060

 
4,712

Technology
1,288

 
1,148

Amortization of intangible assets
115

 
84

Total operating expenses
21,496

 
20,206

(Loss) income from operations
(18
)
 
495

Other income (expense):
 
 
 
Other income (expense), net
23

 
(3
)
Interest expense
(373
)
 
(259
)
Total other expense, net
(350
)
 
(262
)
(Loss) income before income taxes
(368
)
 
233

Income tax (benefit) provision
(52
)
 
32

Net (loss) income including noncontrolling interests
(316
)
 
201

Net loss attributable to noncontrolling interests
(256
)
 

Net (loss) income attributable to U.S. Auto Parts
(60
)
 
201

Other comprehensive income attributable to U.S. Auto Parts, net of tax:
 
 
 
Foreign currency translation adjustments
(10
)
 
8

Total other comprehensive income attributable to U.S. Auto Parts
(10
)
 
8

Comprehensive (loss) income attributable to U.S. Auto Parts
$
(70
)
 
$
209

Net income (loss) attributable to U.S. Auto Parts per share:
 
 
 
Basic
$
0.00

 
$
0.00

Diluted
$
0.00

 
$
0.00

Weighted average common shares outstanding:
 
 
 
Basic
33,720

 
33,384

Diluted
33,720

 
34,158

 
(1)
Excludes depreciation and amortization expense which is included in marketing, general and administrative and fulfillment expense as described in “Note 1 – Summary of Significant Accounting Policies and Nature of Operations” below.
See accompanying notes to consolidated financial statements (unaudited).

5



U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, In Thousands)
 
Thirteen Weeks Ended
 
April 4,
2015
 
March 29,
2014
Operating activities
 
 
 
Net (loss) income including noncontrolling interests
$
(316
)
 
$
201

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
1,934

 
2,368

Amortization of intangible assets
115

 
84

Deferred income taxes
(67
)
 
13

Share-based compensation expense
510

 
376

Amortization of deferred financing costs
20

 
20

Gain from disposition of assets
(13
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(405
)
 
147

Inventory
15

 
374

Other current assets
(506
)
 
282

Other non-current assets
(7
)
 
63

Accounts payable and accrued expenses
2,497

 
2,792

Other current liabilities
904

 
1,702

Other non-current liabilities
(131
)
 
(280
)
Net cash provided by operating activities
4,550

 
8,142

Investing activities
 
 
 
Additions to property and equipment
(2,151
)
 
(1,558
)
Proceeds from sale of property and equipment
13

 

Cash paid for intangible assets
(110
)
 

Net cash used in investing activities
(2,248
)
 
(1,558
)
Financing activities
 
 
 
Borrowings from revolving loan payable
4,314

 
1,826

Payments made on revolving loan payable
(5,850
)
 
(7,850
)
Proceeds from stock options
13

 
74

Payments on capital leases
(66
)
 
(63
)
Statutory tax withholding payment for share-based compensation
(438
)
 

Net cash used in financing activities
(2,027
)
 
(6,013
)
Effect of exchange rate changes on cash
(11
)
 
3

Net change in cash and cash equivalents
264

 
574

Cash and cash equivalents, beginning of period
7,653

 
818

Cash and cash equivalents, end of period
$
7,917

 
$
1,392

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Accrued asset purchases
$
700

 
$
659

Accrued intangible asset
15

 

Supplemental disclosure of cash flow information:
 
 
 
Cash received during the period for income taxes
$
7

 
$
5

Cash paid during the period for interest
303

 
255

See accompanying notes to consolidated financial statements (unaudited).

6


U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In Thousands, Except Per Share Data)
Note 1 – Summary of Significant Accounting Policies and Nature of Operations
U.S. Auto Parts Network, Inc. (including its subsidiaries) is a distributor of aftermarket auto parts and accessories and was established in 1995. The Company entered the e-commerce sector by launching its first website in 2000 and currently derives the majority of its revenues from online sales channels. The Company sells its products to individual consumers through a network of websites and online marketplaces. Through AutoMD.com, the Company educates consumers on maintenance and service of their vehicles. The site provides auto information, with tools for diagnosing car troubles, locating repair shops and do-it-yourself (“DIY”) repair guides. Our flagship websites are located at www.autopartswarehouse.com , www.carparts.com , www.jcwhitney.com and www.AutoMD.com and our corporate website is located at www.usautoparts.net . References to the “Company,” “we,” “us,” or “our” refer to U.S. Auto Parts Network, Inc. and its consolidated subsidiaries.
The Company’s products consist of body parts, hard parts, performance parts and accessories. The body parts category is primarily comprised of parts for the exterior of an automobile. Our parts in this category are typically replacement parts for original body parts that have been damaged as a result of a collision or through general wear and tear. The majority of these products are sold through our websites. In addition, we sell an extensive line of mirror products, including our own private-label brand called Kool-Vue™, which are marketed and sold as aftermarket replacement parts and as upgrades to existing parts. The hard parts category is comprised of engine components and other mechanical and electrical parts. These parts serve as replacement parts for existing engine parts and are generally used by professionals and do-it-yourselfers for engine and mechanical maintenance and repair. We offer performance versions of many parts sold in each of the above categories. Performance parts and accessories generally consist of parts that enhance the performance of the automobile, upgrade existing functionality of a specific part or improve the physical appearance or comfort of the automobile.

The Company is a Delaware C corporation and is headquartered in Carson, California. The Company also has employees located in Virginia, Tennessee, Texas, Arizona, Missouri, and Illinois, as well as in the Philippines.
Basis of Presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to U.S. Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position of the Company as of April 4, 2015 and the consolidated results of operations for the thirteen weeks ended April 4, 2015 and March 29, 2014 , and cash flows for the thirteen weeks ended April 4, 2015 and March 29, 2014 . The Company’s results of operations for the thirteen weeks ended April 4, 2015 are not necessarily indicative of those to be expected for the entire fiscal year. The accompanying consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended January 3, 2015 , which was filed with the SEC on March 20, 2015. We refer to our fiscal year ending January 2, 2016 as fiscal year 2015 and our fiscal year ended January 3, 2015 as fiscal year 2014 .
During the thirteen weeks ended April 4, 2015 , the Company incurred a net loss of $60 , compared to a net income of $201 during the thirteen weeks ended March 29, 2014 . Based on our current operating plan, we believe that our existing cash, cash equivalents, investments, cash flows from operations and available debt financing will be sufficient to finance our operational cash needs through at least the next twelve months. When compared to fiscal year 2014 , we expect our revenues to increase and our net loss to be lower in fiscal year 2015 . Should the Company’s operating results not meet expectations in 2015 , it could negatively impact our liquidity as we may not be able to provide positive cash flows from operations in order to meet our working capital requirements. We may need to borrow additional funds from our credit facility, which under certain circumstances may not be available, sell assets or seek additional equity or additional debt financing in the future. There can be no assurance that we would be able to raise such additional financing or engage in such additional asset sales on acceptable terms, or at all. If revenues were to decline and the net loss is larger or continues for longer than we expect because our strategies to return to profitability are not successful or otherwise, and if we are not able to raise adequate additional financing or proceeds from asset sales to continue to fund our ongoing operations, we will need to defer, reduce or eliminate significant planned expenditures, restructure or significantly curtail our operations.



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Fiscal Periods
The Company’s fiscal year is based on a 52/53 week fiscal year ending on the Saturday closest to December 31. Quarterly periods are based on the thirteen weeks ending on the Saturday closest to the calendar quarter end date except in the case where our fiscal year includes a 53rd week, which was the case for the fiscal quarter ended January 3, 2015 where we had a 14 week fiscal quarter. Our fiscal year 2015 will be 52 weeks ending January 2, 2016.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its subsidiary in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. All inter-company transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation.
Non-Controlling Interests
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, Inc. ("AutoMD").
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 income (loss) and other comprehensive income (loss) 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 income (loss) and other comprehensive income (loss) is then attributed to the Company's interest and the non-controlling interests. Net income (loss) to non-controlling interests is deducted from net income (loss) in the consolidated statements of comprehensive operations to determine net income (loss) attributable to the Company's common stockholders. On October 8, 2014, AutoMD sold 7,000 shares of its common stock to third-party investors, reducing the Company’s ownership interest in AutoMD to 64.1% . The 35.9% of AutoMD controlled by third-party investors is being reported as a noncontrolling interest.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include, but are not limited to, those related to revenue recognition, uncollectible receivables, the valuation of investments, valuation of inventory, valuation of deferred tax assets and liabilities, valuation of intangible assets including goodwill and other long-lived assets, recoverability of software development costs, contingencies and share-based compensation expense that results from estimated grant date fair values and vesting of issued equity awards. Actual results could differ from these estimates.
Statement of Cash Flows
The net change in the Company’s book overdraft is presented as an operating activity in the consolidated statement of cash flows. The book overdraft represents a credit balance in the Company’s general ledger but the Company has a positive bank account balance.
Cash and Cash Equivalents
The Company considers all money market funds and short-term investments purchased with original maturities of ninety days or less to be cash equivalents.
Fair Value of Financial Instruments
Financial instruments that are not measured at fair value include accounts receivable, accounts payable and debt. Refer to “ Note 3 - Fair Value Measurements ” for additional fair value information. If the Company’s revolving loan payable (see “Note 6 - Borrowings” ) had been measured at fair value, it would be categorized in Level 2 of the fair value hierarchy, as the estimated value would be based on the quoted market prices for the same or similar issues or on the current rates available to the Company for debt of the same or similar terms. The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value at April 4, 2015 and January 3, 2015 due to their short-term maturities. Marketable

8


securities and investments are carried at fair value, as discussed below. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of our revolving loan payable, classified as current liability in our consolidated balance sheet, approximates its carrying amount because the interest rate is variable.
Accounts Receivable and Concentration of Credit Risk
Accounts receivable are stated net of allowance for doubtful accounts. The allowance for doubtful accounts is determined primarily on the basis of past collection experience and general economic conditions. The Company determines terms and conditions for its customers primarily based on the volume purchased by the customer, customer creditworthiness and past transaction history.
Concentrations of credit risk are limited to the customer base to which the Company’s products are sold. The Company does not believe significant concentrations of credit risk exist.
Investments
Investments are comprised of closed-end funds primarily invested in mutual funds that hold government bonds and stock and short-term money market funds. Mutual funds are classified as short-term investments available-for-sale and recorded at fair market value, based on quoted prices of identical assets that are trading in active markets as of the end of the period for which the values are determined.
Other-Than-Temporary Impairment
All of the Company’s marketable securities and investments are subject to a periodic impairment review. The Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market value. No other-than-temporary impairment charges were recorded on any investments during the thirteen weeks periods ended April 4, 2015 and March 29, 2014 .
Inventory
Inventories consist of finished goods available-for-sale and are stated at the lower of cost or market value, determined using the first-in first-out (“FIFO”) method. The Company purchases inventory from suppliers both domestically and internationally, and routinely enters into supply agreements with U.S.–based suppliers and its primary drop-ship vendors. The Company believes that its products are generally available from more than one supplier and seeks to maintain multiple sources for its products, both internationally and domestically. The Company primarily purchases products in bulk quantities to take advantage of quantity discounts and to ensure inventory availability. Inventory is reported at the lower of cost or market, adjusted for slow moving, obsolete or scrap product. Inventory at April 4, 2015 and January 3, 2015 was $48,347 and $48,362 , respectively, which included items in-transit to our warehouses, in the amount of $10,669 and $12,155 , respectively.
Website and Software Development Costs
The Company capitalizes certain costs associated with website and software developed for internal use according to ASC 350-50 Intangibles – Goodwill and Other – Website Development Costs and ASC 350-40 Intangibles – Goodwill and Other – Internal-Use Software , when both the preliminary project design and testing stage are completed and management has authorized further funding for the project, which it deems probable of completion and to be used for the function intended. Capitalized costs include amounts directly related to website and software development such as payroll and payroll-related costs for employees who are directly associated with, and who devote time to, the internal-use software project. Capitalization of such costs ceases when the project is substantially complete and ready for its intended use. These amounts are amortized on a straight-line basis over two to three years once the software is placed into service.

Long-Lived Assets and Intangibles Subject to Amortization
The Company accounts for the impairment and disposition of long-lived assets, including intangibles subject to amortization, in accordance with ASC 360 Property, Plant and Equipment (“ASC 360”) . Management assesses potential impairments whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. An impairment loss will result when the carrying value exceeds the undiscounted cash flows estimated to result

9


from the use and eventual disposition of the asset or asset group. Impairment losses will be recognized in operating results to the extent that the carrying value exceeds the discounted future cash flows estimated to result from the use and eventual disposition of the asset or asset group. The Company continually uses judgment when applying these impairment rules to determine the timing of the impairment tests, undiscounted cash flows used to assess impairments, and the fair value of a potentially impaired asset or asset group. The reasonableness of our judgments could significantly affect the carrying value of our long-lived assets.
Deferred Catalog Expenses
Deferred catalog expenses consist of third-party direct costs including creative design, paper, printing, postage and mailing costs for all Company direct response catalogs. Such costs are capitalized as deferred catalog expenses and are amortized over their expected future benefit period. Each catalog is fully amortized within nine months.  Deferred catalog expenses are included in other current assets and amounted to  $516  and  $590  at April 4, 2015 and March 29, 2014, respectively.
Deferred Financing Costs
Deferred financing costs are being amortized over the life of the Company's revolving loan using the straight-line method as it is not significantly different from the effective interest method.
Revenue Recognition
The Company recognizes revenue from product sales and shipping revenues, net of promotional discounts and return allowances, when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, both title and risk of loss or damage have transferred, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured. The Company retains the risk of loss or damage during transit, therefore, revenue from product sales is recognized at the delivery date to customers. Return allowances, which reduce product revenue by the Company’s best estimate of expected product returns, are estimated using historical experience.
Revenue from sales of advertising is recorded when performance requirements of the related advertising program agreement are met.
The Company evaluates the criteria of ASC 605-45 Revenue Recognition Principal Agent Considerations in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally, when the Company is the primary party obligated in a transaction, the Company is subject to inventory risk, has latitude in establishing prices and selecting suppliers, or has several but not all of these indicators, revenue is recorded at gross.
Payments received prior to the delivery of goods to customers are recorded as deferred revenue.
The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers. Current discount offers, when accepted by the Company’s customers, are treated as a reduction to the purchase price of the related transaction.
Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are estimated based on historical amounts and are recorded upon recognizing the related sales. Credits are issued to customers for returned products.
No customer accounted for more than 10% of the Company’s net sales for the thirteen weeks ended April 4, 2015 and March 29, 2014 .
Cost of Sales
Cost of sales consists of the direct costs associated with procuring parts from suppliers and delivering products to customers. These costs include direct product costs, outbound freight and shipping costs, warehouse supplies and warranty costs, partially offset by purchase discounts and cooperative advertising. Depreciation and amortization expenses are excluded from cost of sales and included in marketing, general and administrative and fulfillment expenses as noted below.


10


Warranty Costs
The Company or the vendors supplying its products provide the Company’s customers limited warranties on certain products that range from 30 days to lifetime. In most cases, the Company’s vendors are the party primarily responsible for warranty claims. Standard product warranties sold separately by the Company are recorded as deferred revenue and recognized ratably over the life of the warranty, ranging from one to five years. The Company also offers extended warranties that are imbedded in the price of selected private label products we sell. The product brands that include the extended warranty coverage are offered at three different service levels: (a) a five year unlimited product replacement, (b) a five year one-time product replacement, and (c) a three year one-time product replacement. Warranty costs relating to merchandise sold under warranty not covered by vendors are estimated and recorded as warranty obligations at the time of sale based on each product’s historical return rate and historical warranty cost. The standard and extended warranty obligations are recorded as warranty liabilities and included in other current liabilities in the Consolidated Balance Sheets. For the thirteen weeks ended April 4, 2015 and March 29, 2014 , the activity in our aggregate warranty liabilities was as follows (in thousands):
 
 
April 4, 2015
 
March 29, 2014
Warranty liabilities, beginning of period
$
218

 
$
297

Adjustments to preexisting warranty liabilities
(4
)
 

Additions to warranty liabilities
21

 
38

Reductions to warranty liabilities
(10
)
 
(23
)
Warranty liabilities, end of period
$
225

 
$
312

Marketing Expense
Marketing expense consists of online advertising spend, internet commerce facilitator fees and other advertising costs, as well as payroll and related expenses associated with our marketing catalog, customer service and sales personnel and are expensed as incurred. These costs are generally variable and are typically a function of net sales. Marketing expense also includes depreciation and amortization expense and share-based compensation expense. The majority of advertising expense is paid to internet search engine service providers and internet commerce facilitators. For the thirteen weeks ended April 4, 2015 and March 29, 2014 , the Company recognized advertising costs of $4,977 and $4,390 , respectively.
General and Administrative Expense
General and administrative expense consists primarily of administrative payroll and related expenses, merchant processing fees, legal and professional fees and other administrative costs. General and administrative expense also includes depreciation and amortization expense and share-based compensation expense.
Fulfillment Expense
Fulfillment expense consists primarily of payroll and related costs associated with warehouse employees and the Company’s purchasing group, facilities rent, building maintenance, depreciation and other costs associated with inventory management and wholesale operations. Fulfillment expense also includes share-based compensation expense.
Technology Expense
Technology expense consists primarily of payroll and related expenses of our information technology personnel, the cost of hosting the Company’s servers, communications expenses and Internet connectivity costs, computer support and software development amortization expense. Technology expense also includes share-based compensation expense.
Amortization of Intangible Assets .
Amortization of intangibles consists of the amortization expense associated with our definite-lived intangible assets.
Share-Based Compensation
The Company accounts for share-based compensation in accordance with ASC 718 Compensation – Stock Compensation (“ASC 718”). All share-based payment awards issued to employees are recognized as share-based compensation expense in the

11


financial statements based on their respective grant date fair values, and are recognized within the statement of comprehensive income or loss as marketing, general and administrative, fulfillment or technology expense, based on employee departmental classifications. Under this standard, compensation expense for both time-based and performance-based restricted stock units is based on the closing stock price of our common shares on the date of grant, and is recognized on a straight-line basis over the requisite service period. 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. Compensation expense for stock options is based on the fair value, estimated on the date of grant, using an option pricing model that meets certain requirements, and is recognized over the vesting period of three to four years. The Company uses the Black-Scholes option pricing model to estimate the fair value of share-based payment awards for such stock options, which is affected by the Company’s stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends.
The Company incorporates its own historical volatility into the grant-date fair value calculations for the stock options. The expected term of an award is based on combining historical exercise data with expected weighted time outstanding. Expected weighted time outstanding is calculated by assuming the settlement of outstanding awards is at the midpoint between the remaining weighted average vesting date and the expiration date. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected life of awards. The dividend yield assumption is based on the Company’s expectation of paying no dividends on its common stock. 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 considers many factors when estimating expected forfeitures, including employee class, economic environment, and historical experience.
The Company accounts for equity instruments issued in exchange for the receipt of services from non-employee directors in accordance with the provisions of ASC 718. The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 505-50 Equity-Based Payments to Non-Employees. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. Equity instruments awarded to non-employees are periodically re-measured as the underlying awards vest unless the instruments are fully vested, immediately exercisable and non-forfeitable on the date of grant.
The Company accounts for modifications to its share-based payment awards in accordance with the provisions of ASC 718. Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date, and is recognized as compensation cost on the date of modification (for vested awards) or over the remaining service (vesting) period (for unvested awards). Any unrecognized compensation cost remaining from the original award is recognized over the vesting period of the modified award.
Other Income, net
Other income, net consists of miscellaneous income or expense such as gains/losses from disposition of assets, and interest income comprised primarily of interest income on investments.
Interest Expense
Interest expense consists primarily of interest expense on our outstanding loan balance, deferred financing cost amortization, and capital lease interest.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740 Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When appropriate, a valuation allowance is established to reduce deferred tax assets, which include tax credits and loss carry forwards, to the amount that is more likely than not to be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years, tax planning strategies and recent financial operations.

12


The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. During the periods presented, the Company had no material unrecognized tax benefits, interest or penalties related to federal and state income tax matters. The Company’s policy is to record interest and penalties as income tax expense.

Taxes Collected from Customers and Remitted to Governmental Authorities
We present taxes collected from customers and remitted to governmental authorities on a net basis in accordance with the guidance on ASC 605-45-50-3 Taxes Collected from Customers and Remitted to Governmental Authorities .
Leases
The Company analyzes lease agreements for operating versus capital lease treatment in accordance with ASC 840 Leases . Rent expense for leases designated as operating leases is expensed on a straight-line basis over the term of the lease. For capital leases, the present value of future minimum lease payments at the inception of the lease is reflected as a capital lease asset and a capital lease payable in the consolidated balance sheets. Amounts due within one year are classified as current liabilities and the remaining balance as non-current liabilities.
Foreign Currency Translation
For each of the Company’s foreign subsidiaries, the functional currency is its local currency. Assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates. The effects of the foreign currency translation adjustments are included as a component of accumulated other comprehensive income or loss in the Company’s consolidated balance sheets.
Comprehensive Income
The Company reports comprehensive income or loss in accordance with ASC 220 Comprehensive Income . Accumulated other comprehensive income or loss, included in the Company’s consolidated balance sheets, includes foreign currency translation adjustments related to the Company’s foreign operations and unrealized holding gains and losses from available-for-sale investments. The Company presents the components of net income (loss) and other comprehensive income (loss), in its consolidated statements of comprehensive operations.
Segment Data
The Company operates in two reportable operating segments. The criteria the Company uses to identify operating segments are primarily the nature of the products we sell or services we provide and the consolidated operating results that are regularly reviewed by our chief operating decision maker to assess performance and make operating decisions. We identified two reportable operating segments, the core auto parts business ("Base USAP"), and AutoMD, an online automotive repair source, in accordance with ASC 280 Segment Reporting (“ASC 280”) .
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-9, “Revenue from Contracts with Customers,” (“ASU 2014-9”) which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for fiscal years beginning after December 15, 2016. On April 1, 2015 the FASB agreed to propose the standard take effect for reporting periods beginning after December 15, 2017 and early adoption would be permitted for public companies for reporting periods beginning after December 15, 2016. Early application is not permitted under the current standard. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-9 will have on the consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has the effect of the standard on ongoing financial reporting been determined.


13


On August 27, 2014, the FASB issued ASU 2014-15 "Presentation of Financial Statements—Going Concern," ("ASU 2014-15") which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements (or within one year after the date on which the financial statements are available to be issued, when applicable). Further, an entity must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a going concern.” ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter; early adoption is permitted. The Company is evaluating the impact the adoption of ASU 2014-15 will have on its consolidated financial statements.

Note 2 – Investments
As of April 4, 2015 , the Company held the following investments, recorded at fair value (in thousands):
 
Amortized
Cost
 
Unrealized
 
Fair Value
 
Gains
 
Losses
 
Mutual funds   (1)
$
66

 
$

 
$

 
$
66



As of January 3, 2015 , the Company held the following investments, recorded at fair value (in thousands):
 
Amortized
Cost
 
Unrealized
 
Fair Value
 
Gains
 
Losses
 
Mutual funds   (1)
$
62

 
$

 
$

 
$
62

 
(1)
Mutual funds are classified as short-term investments available-for-sale and recorded at fair market value, based on quoted prices of identical assets that are trading in active markets as of the end of the period for which the values are determined.
Proceeds from the sale of available-for-sale securities are disclosed separately in the accompanying consolidated statements of cash flow. For the thirteen weeks ended April 4, 2015 and March 29, 2014 , there were no sales of available-for-sale securities.
Note 3 – Fair Value Measurements
Fair value is defined as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
Provisions of ASC 820 – Fair Value Measurement establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1 –     Observable inputs such as quoted prices in active markets;
Level 2 –     Inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 –     Unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.
We measure our financial assets and liabilities at fair value on a recurring basis using the following valuation techniques:
(a)
Market Approach – uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
(b)
Income Approach – uses valuation techniques to convert future estimated cash flows to a single present amount based on current market expectations about those future amounts, using present value techniques.

14


Financial Assets Valued on a Recurring Basis
As of April 4, 2015 and January 3, 2015 , the Company held certain assets that are required to be measured at fair value on a recurring basis. These included the Company’s financial instruments, including cash and cash equivalents and investments. The following table represents our fair value hierarchy and the valuation techniques used for financial assets measured at fair value on a recurring basis (in thousands):
 
As of April 4, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Valuation
Techniques
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
7,917

 
$
7,917

 
$

 
$

 
(a)
Investments – mutual funds (2)
66

 
66

 

 

 
(a)
 
$
7,983

 
$
7,983

 
$

 
$

 
 
 
As of January 3, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Valuation
Techniques
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
7,653

 
$
7,653

 
$

 
$

 
(a)
Investments – mutual funds (2)
62

 
62

 

 

 
(a)
 
$
7,715

 
$
7,715

 
$

 
$

 
 
 
(1)
Cash equivalents consist primarily of money market funds and short-term investments with original maturity dates of three months or less at the date of purchase, for which the Company determines fair value through quoted market prices.
(2)
Investments consist of mutual funds, classified as short-term investments available-for-sale and recorded at fair market value, based on quoted prices of identical assets that are trading in active markets as of the end of the period for which the values are determined.
During the thirteen weeks ended April 4, 2015 and March 29, 2014 , there were no transfers into or out of Level 1 and Level 2 assets.
Non-Financial Assets Valued on a Non-Recurring Basis
The Company’s long-lived assets, including intangible assets subject to amortization, are measured at fair value on a non-recurring basis. These assets are measured at cost but are written-down to fair value, if necessary, as a result of impairment. As of April 4, 2015 , the Company reviews for any adverse events related to the Company’s performance, including trends in gross margin, and historical operating losses, which is used to evaluate if certain property and equipment may not be recoverable. The Company performed impairment testing under the provisions of ASC 360 and, after performing Step 1, the Company determined that its property and equipment was not impaired as of April 4, 2015, as such, they were not measured at fair value. If such non-financial assets had been measured at fair value, they would be categorized in Level 3 of the fair value hierarchy, as the Company would be required to develop its own assumptions and analysis to determine if such non-financial assets were impaired.

Note 4 – Property and Equipment, Net
The Company’s fixed assets are stated at cost less accumulated depreciation, amortization and impairment. Depreciation and amortization expense are provided for in amounts sufficient to relate the cost of depreciable and amortizable assets to operations over their estimated service lives. Depreciation and amortization expense for the thirteen weeks ended April 4, 2015 and March 29, 2014 was $1,934 and $2,368 , respectively, including amortization expense of $911 and $436 for the thirteen weeks ended April 4, 2015 and March 29, 2014 , respectively, for capital leased assets related to the LaSalle, Illinois facility (see sale-leaseback discussion below for details). The cost and related accumulated depreciation of assets retired or otherwise disposed of are removed from the accounts and the resultant gain or loss is reflected in earnings.

15


Property and equipment consisted of the following at April 4, 2015 and January 3, 2015 (in thousands):
 
April 4, 2015
 
January 3, 2015
Land
$
630

 
$
630

Building
8,877

 
8,877

Machinery and equipment
10,274

 
9,799

Computer software (purchased and developed) and equipment
45,984

 
45,170

Vehicles
138

 
136

Leasehold improvements
1,762

 
1,761

Furniture and fixtures
1,173

 
1,036

Construction in process
1,681

 
1,904

 
70,519

 
69,313

Less accumulated depreciation, amortization and impairment
(53,829
)
 
(52,347
)
Property and equipment, net
$
16,690

 
$
16,966

On April 17, 2013, the Company’s wholly-owned subsidiary, Whitney Automotive Group, Inc. (“WAG”) entered into a sales leaseback transaction with STORE Master Funding III, LLC ("STORE") for its facility in LaSalle, Illinois. Under the terms of the lease, the Company is required to pay all taxes associated with the lease, pay for any required maintenance on the property, maintain certain levels of insurance and indemnify STORE for losses incurred that are related to the Company’s use or occupancy of the property. The lease was accounted for as a capital lease and the $376 excess of the net proceeds over the net carrying amount of the property is amortized in interest expense on a straight-line basis over the lease term of 20 years. As of April 4, 2015 , the gross carrying value, the accumulated depreciation and the net carrying value of all capital leased assets included in property and equipment were $9,964 , $1,239 and $8,725 , respectively.
Construction in process primarily relates to the Company’s internally developed software (refer to caption “ Website and Software Development Costs ” in “ Note 1 – Summary of Significant Accounting Policies and Nature of Operations” ) subject to depreciation and amortization upon placement into service. Certain of the Company’s net property and equipment were located in the Philippines as of April 4, 2015 and January 3, 2015 , in the amount of $192 and $244 , respectively.

Note 5 –Intangible Assets, Net
Intangible assets consisted of the following at April 4, 2015 and January 3, 2015 (in thousands):
 
 
 
 
April 4, 2015
 
January 3, 2015
 
Useful Life
 
Gross
Carrying
Amount
 
Accumulated
Amort. and
Impairment
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amort. and
Impairment
 
Net
Carrying
Amount
Intangible assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
Product design intellectual property
4 years
 
$
2,750

 
$
(2,167
)
 
$
583

 
$
2,750

 
$
(2,102
)
 
$
648

Patent license agreements
3 - 5 years
 
562

 
(125
)
 
$
437

 
537

 
(94
)
 
$
443

Domain and trade names
10 years
 
1,199

 
(602
)
 
$
597

 
1,199

 
(583
)
 
$
616

Total
 
 
$
4,511

 
$
(2,894
)
 
$
1,617

 
$
4,486

 
$
(2,779
)
 
$
1,707


Intangible assets subject to amortization are amortized on a straight-line basis. Amortization expense relating to intangible assets for the thirteen weeks ended April 4, 2015 and March 29, 2014 was $115 and $84 , respectively.

16


The following table summarizes the future estimated annual amortization expense for these assets over the next five years:
 
2015
$
348

2016
463

2017
326

2018
167

2019
82

Thereafter
231

Total
$
1,617

Note 6 – Borrowings
The Company maintains an asset-based revolving credit facility ("Credit Facility") that provides for, among other things, a revolving commitment in an aggregate principal amount of up to $23,318 , which is subject to a borrowing base derived from certain receivables, inventory and property and equipment. Upon satisfaction of certain conditions, the Company has the right to increase the revolving commitment to up to $40,000 . The Company, to date, has not requested such an increase. The Credit Facility matures on April 26, 2017 . At April 4, 2015 , our outstanding revolving loan balance was $9,485 . The customary events of default under the Credit Facility (discussed below) include certain subjective acceleration clauses, which management has determined the likelihood of such acceleration is more than remote, considering the recurring losses experienced by the Company, therefore a current classification of our revolving loan payable has been reflected.

On March 24, 2015, the Company and JPMorgan Chase Bank, N.A. (“JPMorgan”) entered into a Seventh Amendment to Credit Agreement and Second Amendment to Pledge and Security Agreement (the “Amendment”), which amended the Credit Agreement previously entered into by the Company, certain of its domestic subsidiaries and JPMorgan on April 26, 2012 (as amended, the “Credit Agreement”) and the Pledge and Security Agreement previously entered into by the Company, certain of its domestic subsidiaries and JPMorgan on April 26, 2012. Pursuant to the Amendment, the following amendments to the Credit Agreement were made, among others:

The aggregate principal amount of indebtedness that is permitted related to capital leases was increased from $1,000 to $1,500.
Loans drawn under the Credit Facility bear interest, at the Company’s option, at a per annum rate equal to either (a) one month LIBOR plus an applicable margin of 2.25% , or (b) an “alternate prime base rate” plus an applicable margin of 0.25% . Subsequent to June 30, 2016, each applicable margin as set forth in the prior sentence is subject to reduction by up to 0.50%  per annum based upon the Company’s fixed charge coverage ratio. At April 4, 2015 , the Company’s LIBOR based interest rate was 2.44% (on $9,485 principal) and the Company’s prime based rate was 3.50% (on $0 principal). A commitment fee, based upon undrawn availability under the Credit Facility bearing interest at a rate of 0.25%  per annum, is payable monthly. Under the terms of the Credit Agreement, cash receipts are deposited into a lock-box, which are at the Company’s discretion unless the “cash dominion period” is in effect, during which cash receipts will be used to reduce amounts owing under the Credit Agreement. The cash dominion period is triggered in an event of default or if excess availability is less than $4,000 at any time, as defined and will continue until, during the preceding 45 consecutive days, no event of default existed and, excess availability has to be greater than $4,000 at all times. The Company’s excess availability was $10,833 at April 4, 2015 . As of the date hereof, the cash dominion period has not been in effect; accordingly no principal payments are currently due.
Certain of the Company’s domestic subsidiaries are co-borrowers (together with the Company, the “Borrowers”) under the Credit Agreement, and certain other domestic subsidiaries are guarantors (the “Guarantors” and, together with the Borrowers, the “Loan Parties”) under the Credit Agreement. The Borrowers and the Guarantors are jointly and severally liable for the Borrowers’ obligations under the Credit Agreement. The Loan Parties’ obligations under the Credit Agreement are secured, subject to customary permitted liens and certain exclusions, by a perfected security interest in (a) all tangible and intangible assets and (b) all of the capital stock owned by the Loan Parties (limited, in the case of foreign subsidiaries, to 65% of the capital stock of such foreign subsidiaries). The Borrowers may voluntarily prepay the loans at any time with payment of a premium equal to the aggregate revolving commitments multiplied by 0.5% if such termination of the commitments occurs prior to January 2, 2016. If prepayment occurs after January 2, 2016 no premium is required. The Borrowers are required to make mandatory prepayments of the loans (without payment of a premium) with net cash proceeds received upon the

17


occurrence of certain “prepayment events,” which include certain sales or other dispositions of collateral, certain casualty or condemnation events, certain equity issuances or capital contributions, and the incurrence of certain debt.
The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, fundamental changes, investments, dispositions, prepayment of other indebtedness, mergers, and dividends and other distributions.
The period during which the Company is subject to a fixed charge coverage ratio begins after June 30, 2016 and the applicable testing period would begin for a five month period ending May 31, 2016 or fiscal year 2016 rather than a trailing twelve month period. The full trailing twelve month testing period would begin with the twelve month period ending December 31, 2016. During the period when the Company is not subject to a fixed charge coverage ratio an “Availability Block” (as defined under the Credit Agreement) of $2,000 will be in effect, and thereafter the “Availability Block” will be eliminated. Beginning July 1, 2016, in the event that “excess availability” (as defined under the Credit Agreement) is less than $2,000 , the Company shall be required to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0. Events of default under the Credit Agreement include: failure to timely make payments due under the Credit Agreement; material misrepresentations or misstatements under the Credit Agreement and other related agreements; failure to comply with covenants under the Credit Agreement and other related agreements; certain defaults in respect of other material indebtedness; insolvency or other related events; certain defaulted judgments; certain ERISA-related events; certain security interests or liens under the loan documents cease to be, or are challenged by the Company or any of its subsidiaries as not being, in full force and effect; any loan document or any material provision of the same ceases to be in full force and effect; and certain criminal indictments or convictions of any Loan Party. As of April 4, 2015 , the Company was in compliance with all covenants under the Credit Agreement.
As of April 4, 2015 , the Company had total capital leases payable of $9,473 . The present value of the net minimum payments on capital leases as of April 4, 2015 was as follows (in thousands):
 
Total minimum lease payments
18,270

Less amount representing interest
(8,797
)
Present value of net minimum lease payments
9,473

Current portion of capital leases payable
(276
)
Capital leases payable, net of current portion
$
9,197

Note 7 – 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.
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.

18


The table below presents the changes in the Company's ownership interest in AutoMD on the Company's equity:
 
Common stock amount
 
Preferred stock amount
 
Additional
Paid-in-
Capital
 
Common
Stock
Dividend
Distributable
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated Deficit
 
Total
Stockholders’
Equity
 
Noncontrolling Interest
 
Total
Balance, January 3, 2015
$
33

 
$
4

 
$
174,369

 
$

 
$
360

 
$
(155,489
)
 
$
19,277

 
$
2,946

 
$
22,223

Net loss

 

 

 

 

 
(60
)
 
(60
)
 
(256
)
 
(316
)
Issuance of shares in connection with stock option exercise

 

 
13

 

 

 

 
13

 

 
13

Statutory tax withholding on RSUs
1

 

 
(359
)
 

 

 

 
(358
)
 

 
(358
)
Statutory tax withholding on options exercised

 

 
(80
)
 

 

 

 
(80
)
 

 
(80
)
Share-based compensation

 

 
549

 

 

 

 
549

 

 
549

Issuance of shares related to dividends on preferred stock

 

 
60

 
(60
)
 

 

 

 

 

Common stock dividend distributable on Series A Preferred Stock

 

 

 
60

 

 
(60
)
 

 

 

Effect of changes in foreign currencies

 

 

 

 
(10
)
 

 
(10
)
 

 
(10
)
Balance, April 4, 2015
$
34

 
$
4

 
$
174,552

 
$

 
$
350

 
$
(155,609
)
 
$
19,331

 
$
2,690

 
$
22,021


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 thirteen weeks ended April 4, 2015 :
 
The Company issued 51 shares of common stock from option exercises under its various share-based compensation plans.
The Company issued 247 shares of common stock from restricted stock units that vested during the period.
The Company issued 27 shares of common stock in payment of the quarterly dividend on the Series A Preferred on the dividend payment date of March 31, 2015 in the aggregate amount of $59 .
Share-Based Compensation Plan Information
The following table summarizes the Company’s stock option activity for the thirteen weeks ended April 4, 2015 , and details regarding the options outstanding and exercisable at April 4, 2015 :
 
 
Shares
(in thousands)
 
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
905

 
$2.25
 
 
 
 
Exercised
(142
)
 
$1.44
 
 
 
 
Expired
(15
)
 
$3.75
 
 
 
 
Forfeited
(27
)
 
$2.51
 
 
 
 
Options outstanding, April 4, 2015
6,002

 
$2.79
 
6.54
 
$
1,499

Vested and expected to vest at April 4, 2015
5,205

 
$2.90
 
6.14
 
$
1,317

Options exercisable, April 4, 2015
3,590

 
$3.27
 
4.87
 
$
847

 
 
(1)
These amounts represent the difference between the exercise price and the closing price of U.S. Auto Parts Network, Inc. common stock on April 4, 2015 as reported on the NASDAQ Stock Market, for all options outstanding that have an exercise price currently below the closing price.

19


The weighted-average fair value of options granted during the thirteen weeks ended April 4, 2015 and March 29, 2014 was $1.18 and $1.19 , respectively. The intrinsic value of stock options at the date of 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 April 4, 2015 and March 29, 2014 , the total intrinsic value of the exercised options was $211 and $14 , respectively. The Company had $1,773 of unrecognized share-based compensation expense related to stock options outstanding as of April 4, 2015 , which expense is expected to be recognized over a weighted-average period of 2.91 years.
In November 2014, AutoMD adopted the 2014 Equity Incentive Plan ("AMD Plan") which became effective on November 19, 2014 when approved by the stockholders. Under the AMD Plan, AutoMD is authorized to issue 1,950 shares of common stock under various instruments. Options granted under the AMD 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 following table summarizes the Company’s stock option activity under the AMD Plan for the thirteen weeks ended April 4, 2015 , and details regarding the options outstanding and exercisable at April 4, 2015 :

 
Shares
(in thousands)
 
Weighted
Average
Exercise Price
 
Weighted Average
Remaining
Contractual
Term (in years)
 
Aggregate
Intrinsic Value
Options outstanding, January 3, 2015
180

 
$1.00
 
 
 
 
Granted
990

 
$1.00
 
 
 
 
Exercised

 

 
 
 
 
Expired

 

 
 
 
 
Forfeited

 

 
 
 
 
Options outstanding, April 4, 2015
1,170

 
$1.00
 
9.80
 
$

Vested and expected to vest at April 4, 2015
870

 
$1.00
 
9.81
 
$

Options exercisable, April 4, 2015

 

 
0.00
 
$

At April 4, 2015, 780 shares were available for future grants under the AMD Plan.
The weighted-average fair value of options granted during the thirteen weeks ended April 4, 2015 and March 29, 2014 was $ 0.54 and $ 0 , respectively. The intrinsic value of stock options at the date of 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 April 4, 2015 and March 29, 2014 , the options had $0 intrinsic value as none were exercisable. The Company had $450 of unrecognized share-based compensation expense related to stock options outstanding as of April 4, 2015 , which expense is expected to be recognized over a weighted-average period of 3.8 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 the thirteen weeks ended April 4, 2015 , we withheld 27 shares to satisfy $80 of employees' tax obligations and 64 shares related to the net settlement of the stock options.
Restricted Stock Units
The following table summarizes the Company’s restricted stock unit ("RSU") activity for the thirteen weeks ended April 4, 2015 , and details regarding the awards outstanding and exercisable at April 4, 2015 (in thousands):
 
Shares
 
Weighted
Average
Exercise Price
 
Weighted Average
Remaining
Contractual
Term (in years)
 
Aggregate
Intrinsic Value
Awards outstanding, January 3, 2015
880

 
$

 
 
 
 
Awarded
399

 
$

 
 
 
 
Vested
(398
)
 
$

 
 
 
 
Forfeited
(16
)
 
$

 
 
 
 
Awards outstanding, April 4, 2015
865

 
$

 
0.84
 
$
1,825

Vested and expected to vest at April 4, 2015
785

 
$

 
0.83
 
$
1,657


20


During the first thirteen weeks of 2015, 398 RSUs vested, of which 221 were time-based and 177 were performance-based. For the majority of RSUs awarded, the number of shares issued on the date the RSUs vest is 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 the thirteen weeks ended April 4, 2015 , we withheld 151 shares to satisfy $358 of employees' tax obligations. Although shares withheld are not issued, they are treated as a common stock repurchase in our consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

For the thirteen weeks ended April 4, 2015 , we recorded compensation expense of $237 . As of  April 4, 2015 , there was unrecognized compensation expense of  $1,109  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  0.84 years .
Warrants
As of April 4, 2015 , 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 thirteen weeks ended April 4, 2015 . The aggregate intrinsic value of outstanding and exercisable warrants was $0 as of April 4, 2015 , 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
 
April 4, 2015
 
March 29, 2014
Expected life
5.3 - 5.4 years
 
5.3 years
Risk-free interest rate
1.3% - 1.4%
 
1.5%
Expected volatility
59.1% - 59.5%
 
68.3%
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
 
April 4, 2015
 
March 29, 2014
Marketing expense
$
92

 
$
81

General and administrative expense
315

 
237

Fulfillment expense
63

 
39

Technology expense
40

 
19

Total share-based compensation expense
$
510

 
$
376

The share-based compensation expense is net of amounts capitalized to internally-developed software of $39 during each of the thirteen weeks ended April 4, 2015 and March 29, 2014 .
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 stock options for both the thirteen weeks ended April 4, 2015 and March 29, 2014 , and the rate for stock awards was 10% to 20% for the thirteen weeks ended April 4, 2015 , while no forfeiture rate was applied for thirteen weeks ended March 29, 2014 .

21


Note 8 – Net Income (Loss) Per Share
Net income (loss) per share has been computed in accordance with ASC 260 Earnings per Share. The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):
 
 
Thirteen Weeks Ended
 
April 4, 2015
 
March 29, 2014
Net (loss) income per share:
 
 
 
Numerator:
 
 
 
Net (loss) income attributable to U.S. Auto Parts
$
(60
)
 
$
201

Dividends on Series A Convertible Preferred Stock
60

 
59

Net (loss) income available to common shares
$
(120
)
 
$
142

Denominator:
 
 
 
Weighted-average common shares outstanding (basic)
33,720

 
33,384

Common equivalent shares from common stock options and warrants

 
774

Weighted-average common shares outstanding (diluted)
33,720

 
34,158

Basic net (loss) income per share
$

 
$

Diluted net (loss) income per share
$

 
$


As we incurred a net loss for the thirteen weeks ended April 4, 2015, we have not computed the diluted earnings per share, as the potentially dilutive securities would have an anti-dilutive effect on earnings. For the thirteen weeks ended March 29, 2014, we excluded certain common stock warrants, Series A Convertible Preferred Stock, and stock options from the calculation of diluted income per share as they would have had an anti-dilutive effect on earnings per share. The weighted-average anti-dilutive securities, which are excluded from the calculation of diluted earnings per share, are as follows (in thousands):
 
Thirteen Weeks Ended
 
April 4, 2015
 
March 29, 2014
Common stock warrants
50

 
20

Series A Convertible Preferred Stock
4,150

 
4,150

Restricted stock units
905

 

Options to purchase common stock
5,712

 
3,418

Total
10,817

 
7,588


Note 9 – Income Taxes
As discussed in “Note 1 – Summary of Significant Accounting Policies and Nature of Operations” , the Company applies the current U.S. GAAP on accounting for uncertain tax positions, which prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has greater than 50 percent likelihood of being realized upon ultimate settlement . We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. As of April 4, 2015 , the Company had no material unrecognized tax benefits, interest or penalties related to federal and state income tax matters. The Company’s policy is to record interest and penalties as income tax expense. The Company does not anticipate a significant change to the amount of unrecognized tax benefits within the next twelve months.

22


The Company is subject to U.S. federal income tax as well as income tax of foreign and state tax jurisdictions. The tax years 2010-2014 remain open to examination by the major taxing jurisdictions to which the Company is subject, except the Internal Revenue Service for which the tax years 2011-2014 remain open.
For the thirteen weeks ended April 4, 2015 and March 29, 2014 , the effective tax rate for the Company was 14.1% and 13.7% , respectively. The Company’s effective tax rate for the thirteen weeks ended April 4, 2015 and March 29, 2014 differed from the U.S. federal statutory rate primarily as a result of the recording of valuation allowance against the pre-tax losses. Additionally, for the thirteen weeks ended April 4, 2015 this was offset by the tax benefit resulting from the reduction of excess book basis in the Company’s investment in AutoMD over its tax basis.
Note 10 – Commitments and Contingencies
Facilities Leases
The Company’s corporate headquarters is located in Carson, California. The Company’s corporate headquarters has an initial lease term of five years through October 2016, and optional renewals through January 2020. The Company also leases warehouse space in Chesapeake, Virginia under an agreement scheduled to expire in June 2016. The Company’s Philippines subsidiary leases office space under an agreement through April 2020.
Facility rent expense for the thirteen weeks ended April 4, 2015 and March 29, 2014 was $365 and $462 , respectively. The Company’s facility rent expense was inclusive of amounts charged from a related party during the thirteen weeks ended March 29, 2014 of $94 .
Minimum lease commitments under non-cancellable operating leases as of April 4, 2015 were as follows (in thousands):
 
2015
$
1,134

2016
1,135

2017
393

2018
412

2019
433

2020 onwards
$
184

Total
$
3,691

As described in detail under “Note 4 - Property and Equipment, Net” , on April 17, 2013 , the Company entered into a sale lease-back transaction with STORE whereby we leased back our facility located in LaSalle, Illinois for our continued use as an office, retail and warehouse facility for storage, sale and distribution of automotive parts, accessories and related items for 20 years commencing upon the execution of the lease and terminating on April 30, 2033. The Base Rent Amount was $853 for the first year, after which the rental amount was increased annually on May 1 by the lesser of 1.5% or 1.25 times the change in the Consumer Price Index as published by the U.S. Department of Labor’s Bureau of Labor Statistics, except that in no event will the adjusted annual rental amount fall below the Base Rent Amount. We were not required to pay any security deposit. Under the terms of the lease, we are required to pay all taxes associated with the lease, pay for any required maintenance on the property, maintain certain levels of insurance and indemnify STORE for losses incurred that are related to our use or occupancy of the property. The lease was accounted for as a capital lease and the $376 excess of the net proceeds over the net carrying amount of the property is amortized in interest expense on a straight-line basis over the lease term of 20 years.
Capital lease commitments as of April 4, 2015 were as follows (in thousands):
 

23


2015
$
759

2016
968

2017
909

2018
915

2019
928

2020 onwards
13,791

Total minimum payments required
18,270

Less amount representing interest
(8,797
)
Present value of minimum capital lease payments
$
9,473


Excluded from the financial statements and minimum payments shown above are purchase commitments entered into in March 2015 for certain warehouse equipment for our LaSalle, Illinois facility to be received in July 2015. Such payments total $1,479 , and will commence in July 2015 and end in June 2020.
Legal Matters
Asbestos . A wholly-owned subsidiary of the Company, Automotive Specialty Accessories and Parts, Inc. and its wholly-owned subsidiary WAG, are named defendants in several lawsuits involving claims for damages caused by installation of brakes during the late 1960’s and early 1970’s that contained asbestos. WAG marketed certain brakes, but did not manufacture any brakes. WAG maintains liability insurance coverage to protect its and the Company’s assets from losses arising from the litigation and coverage is provided on an occurrence rather than a claims made basis, and the Company is not expected to incur significant out-of-pocket costs in connection with this matter that would be material to its consolidated financial statements.
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. As of the date hereof, the Company believes that the final disposition of such matters will not have a material adverse effect on the financial position, results of operations or cash flow of the Company. The Company maintains liability insurance coverage to protect the Company’s assets from losses arising out of or involving activities associated with ongoing and normal business operations.

Note 11 – Employee Retirement Plan and Deferred Compensation Plan

Effective February 17, 2006, the Company adopted a 401(k) defined contribution retirement plan covering all full time employees who have completed  one month  of service. The Company may, at its sole discretion, match  fifty  cents per dollar up to  6%  of each participating employee’s salary. The Company’s contributions vest in annual installments over  three years. Discretionary contributions made by the Company totaled  $70  for both the thirteen weeks ended April 4, 2015 and March 29, 2014.

In January 2010, the Company adopted the U.S. Auto Parts Network, Inc. Management Deferred Compensation Plan (the “Deferred Compensation Plan”), for the purpose of providing highly compensated employees a program to meet their financial planning needs. The Deferred Compensation Plan provides participants with the opportunity to defer up to  90%  of their base salary and up to  100%  of their annual earned bonus, all of which, together with the associated investment returns, are  100%  vested from the outset. The Deferred Compensation Plan, which is designed to be exempt from most provisions of the Employee Retirement Security Act of 1974, is informally funded by the Company through the purchase of Company-owned life insurance policies with the Company (employer) as the owner and beneficiary, in order to preserve the tax-deferred savings advantages of a non-qualified plan. The plan assets are the cash surrender value of the Company-owned life insurance policies and not associated with the deferred compensation liability. The deferred compensation liabilities (consisting of employer contributions, employee deferrals and associated earnings and losses) are general unsecured obligations of the Company. Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments. The Company may at its discretion contribute certain amounts to eligible employee accounts. In January 2010, the Company began to contribute  50%  of the first  2%  of participants’ eligible contributions into their Deferred Compensation Plan accounts. In September 2010, the Company established and transferred its ownership to a rabbi trust to hold the Company-owned life insurance policies. As of April 4, 2015, the assets and associated liabilities of the Deferred Compensation Plan were  $858  and  $686 , respectively, and are included in other non-current assets, other current liabilities and other non-current liabilities in our consolidated balance sheets. For the thirteen weeks ended April 4, 2015, the change in the associated liabilities include the employee contributions of $ 27 , the Company contributions of  $7  and earnings of $12 , offset by distributions of  $109 . For the thirteen weeks ended March 29, 2014, the associated liabilities primarily include the employee contributions of $37  and the Company contributions of  $8  and earnings of  $8 , offset by distributions and forfeitures of  $226 . For the thirteen weeks ended April 4, 2015, included in other income, the Company recorded a net loss

24


of  $4  for the change in the cash surrender value of the Company-owned life insurance policies. For the thirteen weeks ended March 29, 2014, the Company did not have a change in the cash surrender value of the Company-owned life insurance policies.

Note 12 – Segment information
As described in Note 1 above, the Company operates in two reportable segments identified as Base USAP, which is the core auto parts business, and AutoMD, an online automotive repair source of which the Company is a majority stockholder. Segment information is prepared on the same basis that our chief executive officer, who is our chief operating decision maker, manages the segments, evaluates financial results, and makes key operating decisions. Management evaluates the performance of its operating segments based on net sales, gross profit and income (loss) from operations. The accounting policies of the operating segments are the same as those described in Note 1. Operating income represents earnings before other income, interest expense and income taxes. The identifiable assets by segment disclosed in this note are those assets specifically identifiable within each segment.
Summarized segment information for our continuing operations from the two reportable segments for the periods presented is as follows (in thousands):
 
Base USAP
 
AutoMD
 
Consolidated
Thirteen weeks ended April 4, 2015
 
 
 
 
 
Net sales
$
76,325

 
$
63

 
$
76,388

Gross profit
$
21,415

 
$
63

 
$
21,478

Operating costs (1)
$
20,720

 
$
776

 
$
21,496

Income (loss) from operations
$
695

 
$
(713
)
 
$
(18
)
Capital expenditures
$
1,966

 
$
185

 
$
2,151

Depreciation and amortization
$
1,549

 
$
385

 
$
1,934

Total assets, net of accumulated depreciation
$
76,172

 
$
7,667

 
$
83,839

Thirteen weeks ended March 29, 2014
 
 
 
 
 
Net sales
$
67,949

 
$
79

 
$
68,028

Gross profit
$
20,622

 
$
79

 
$
20,701

Operating costs (1)
$
19,645

 
$
561

 
$
20,206

Income (loss) from operations
$
977

 
$
(482
)
 
$
495

Capital expenditures
$
1,143

 
$
415

 
$
1,558

Depreciation and amortization
$
1,934

 
$
434

 
$
2,368

Total assets, net of accumulated depreciation
$
65,986

 
$
1,946

 
$
67,932

Fifty-three weeks as of January 3, 2015
 
 
 
 
 
Total assets, net of accumulated depreciation
$
74,414

 
$
8,493

 
$
82,907

 
 
(1)
Operating costs for AutoMD primarily consist of depreciation and amortization on fixed assets and personnel costs. Indirect costs are not allocated to AutoMD.

Note 13 – AutoMD
On October 8, 2014, AutoMD entered into a Common Stock Purchase Agreement ("Purchase Agreement") to sell an aggregate of  7,000  shares of AutoMD common stock at a purchase price of  $1.00  per share to third-party investors and investors that are affiliated with  two  of our board members. The Company retained  64.1%  of AutoMD's outstanding common stock, and will continue to consolidate AutoMD.
In connection with the sale of the shares of AutoMD, the Company recorded an increase to additional paid-in-capital of  $2,534 . This amount is equal to the increase in the Company’s interest in the net assets of AutoMD, resulting from this sale of common shares ($3,847) , less the related deferred tax liability of  $1,313 . Refer to Note 9 - Income Taxes for additional details.
Additionally, pursuant to the terms of the Purchase Agreement, the Company may be required to purchase 2,000  shares of AutoMD common stock at a purchase price of  $1.00  per share, with such purchase to be triggered, if applicable, if as of October 8, 2015 and October 8, 2016, AutoMD does not meet a required minimum number of approved auto repair shops submitting a quotation on AutoMD’s website ("Registered Repair Shops"), or separately if at anytime during the  two  years following the closing date AutoMD fails to meet specified minimum cash balances and minimum numbers of Registered Repair Shops.  The Purchase Agreement also limits the use of the  $7,000  in proceeds from the sale of AutoMD

25


common stock to only general operating purposes of AutoMD.  The Company cannot use or borrow any of the proceeds without the approval of AutoMD's Board of Directors. 
In addition to the Purchase Agreement, AutoMD entered into an Investor Rights Agreement. In addition to certain demand and piggyback registration rights, the agreement includes restrictions on transfers or dilutive transactions involving AutoMD common stock.  Prior to October 8, 2017, the Company shall not transfer shares of AutoMD owned by U.S. Auto Parts or enter into any transaction or arrangement (including, without limitation, any sale, gift, merger or consolidation) that would result in U.S. Auto Parts owning, at any time, less than  50%  of the shares of capital stock of the Company without the prior written consent of shareholders.  In the event of a proposed transfer or dilutive transaction for which any shareholder does not provide its written consent, in the alternative, upon not less than  30  days prior written notice to such non-consenting party, the Company may elect, at its sole option, to purchase all shares of the AutoMD common stock then owned by any non-consenting shareholder at a purchase price equal to  $1.00  per share (as adjusted for any stock combinations, splits, recapitalizations, etc.) plus an annual rate of  10%  thereon, compounded annually.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement
You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this report. Certain statements in this report, including statements regarding our business strategies, operations, financial condition, and prospects are forward-looking statements. Use of the words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would”, “will likely continue,” “will likely result” and similar expressions that contemplate future events may identify forward-looking statements.
The information contained in this section is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC, which are available on the SEC’s website at http://www.sec.gov . The section entitled “ Risk Factors ” set forth in Part II, Item 1A of this report, and similar discussions in our other SEC filings, describe some of the important factors, risks and uncertainties that may affect our business, results of operations and financial condition and could cause actual results to differ materially from those expressed or implied by these or any other forward-looking statements made by us or on our behalf. You are cautioned not to place undue reliance on these forward-looking statements, which are based on current expectations and reflect management’s opinions only as of the date thereof. We do not assume any obligation to revise or update forward-looking statements. Finally, our historic results should not be viewed as indicative of future performance.
Overview
We are one of the largest online providers of aftermarket auto parts, including body parts, hard parts, and performance parts and accessories. Our user-friendly websites provide customers with a broad selection of stock keeping units (“SKUs”), with detailed product descriptions and photographs. Our proprietary product database maps our SKUs to product applications based on vehicle makes, models and years. We principally sell our products to individual consumers through our network of websites and online marketplaces. Our flagship websites are located at www.autopartswarehouse.com , www.carparts.com , www.jcwhitney.com and www.AutoMD.com and our corporate website is located at www.usautoparts.net . We believe our strategy of disintermediating the traditional auto parts supply chain and selling products directly to customers over the Internet allows us to more efficiently deliver products to our customers while generating higher margins. Industry-wide trends that support our strategy include:
1. Number of SKUs required to serve the market. The number of automotive SKUs has grown dramatically over the last several years. In today's market, unless the consumer is driving a high volume vehicle and needs a simple maintenance item, the part they need is not typically on the shelf at a brick-and-mortar store. We believe our user-friendly websites provide customers with a comprehensive selection of approximately 1.6 million SKUs with detailed product descriptions, attributes and photographs paired with the flexibility of fulfilling orders using both drop-ship and stock-and-ship as well as our internally developed distributor selection system provide customers with a favorable alternative to the brick-and-mortar shopping experience.
2. U.S. vehicle fleet expanding and aging. The average age of U.S. vehicles, an indicator of auto parts demand, remained at a record-high 11.4 years as of January 2014, according to IHS Automotive, a market analytics firm that expects the average age to remain at 11.4 years through 2015, and then rise to 11.5 years by 2017 and 11.7 years by

26



2019. IHS expects the number of vehicles that are 12 years or older to increase by 15% by 2019. IHS found that the total number of light vehicles in operation in the U.S. has increased to record levels, with new vehicle registrations outpacing scrappage rates by more than 24%. We believe an increasing vehicle base and rising average age of vehicles will have a positive impact on overall aftermarket parts demand because older vehicles generally require more repairs.
3. Growth of online sales. The overall revenue from online sales of auto parts and accessories is expected to increase from $5.1 billion in 2013 to $16.6 billion in 2020, according to a forecast from Frost and Sullivan. Lower prices and consumers' growing comfort with digital platforms are driving the shift to online sales. We believe that we are well positioned for the shift to online sales due to our history of being a leading source for aftermarket automotive parts through online marketplaces and our network of websites.

Our History . We were formed in Delaware in 1995 as a distributor of aftermarket auto parts and launched our first website in 2000. We rapidly expanded our online operations, increasing the number of SKUs sold through our e-commerce network, adding additional websites, improving our Internet marketing proficiency and commencing sales in online marketplaces. Additionally, in August 2010, through our acquisition of Whitney Automotive Group, Inc. (referred to herein as “WAG”), we expanded our product-lines and increased our customer reach in the do-it-yourself (“DIY”) automobile and off-road accessories market.
International Operations . In April 2007, we established offshore operations in the Philippines. Our offshore operations allow us to access a workforce with the necessary technical skills at a significantly lower cost than comparably experienced U.S.-based professionals. Our offshore operations are responsible for a majority of our website development, catalog management, and back office support. Our offshore operations also house our main call center. We believe that the cost advantages of our offshore operations provide us with the ability to grow our business in a cost-effective manner.
AutoMD . In October 2014, AutoMD entered into a common stock purchase agreement to sell seven million shares of AutoMD common stock at a purchase price of $1.00 per share to third-party investors, reducing the Company’s ownership interest in AutoMD to 64.1%.
AutoMD's mission is to be the repair shop advocate for all vehicle owners, increase their confidence in the repair process and provide the most affordable and high quality options for automobile repair. AutoMD's current focus is on marketing and technology. AutoMD's current marketing strategy involves driving growth in their repair shop network. During the first quarter of 2015, marketing efforts resulted in approximately 140 repair shops joining AutoMD's network, rising from about 2,100 repair shops in December 2014 to approximately 2,240 at the end of the first quarter of 2015. AutoMD now has repair shops participating in 41 states. In addition to marketing, AutoMD continues to refine the online experience, including its mobile presence.
To understand revenue generation through our network of e-commerce websites, we monitor several key business metrics, including the following:  
 
Thirteen Weeks Ended
 
April 4, 2015

March 29, 2014
Unique Visitors (millions) (1)
30.6


30.3

E-commerce Orders (thousands)
516


488

Online Marketplace Orders (thousands)
296


264

Total Online Orders (thousands)
812


752

E-commerce Average Order Value
$
110


$
107

Online Marketplace Average Order Value
$
71


$
65

Total Online Average Order Value
$
96


$
92

Revenue Capture (1)
85.5
%

84.9
%
Conversion (1)
1.69
%

1.61
%

(1) Excludes online marketplaces and media properties (e.g. AutoMD).
Unique Visitors: A unique visitor to a particular website represents a user with a distinct IP address that visits that particular website. We define the total number of unique visitors in a given month as the sum of unique visitors to each of our

27



websites during that month. We measure unique visitors to understand the volume of traffic to our websites and to track the effectiveness of our online marketing efforts. The number of unique visitors has historically varied based on a number of factors, including our marketing activities and seasonality. Included in the unique visitors are mobile device based customers, who are becoming an increasing part of our business. Shifting consumer behavior and technology enhancements indicates that customers are becoming more inclined to purchase auto parts through their mobile devices. User sophistication and technological advances have increased consumer expectations around the user experience on mobile devices, including speed of response, functionality, product availability, security, and ease of use. We believe enhancements to online solutions specifically catering to mobile based shopping can result in an increase in the number of orders and revenues. We believe an increase in unique visitors to our websites will result in an increase in the number of orders. We seek to increase the number of unique visitors to our websites by attracting repeat customers and improving search engine marketing and other internet marketing activities. During the first quarter of 2015 , our unique visitors increased by 1.0% compared to the first quarter of 2014 . We expect the total number of unique visitors in fiscal year 2015 to marginally improve compared to fiscal year 2014.
Total Number of Orders: We monitor the total number of orders as an indicator of future revenue trends. Total orders were up by 8.0% in the first quarter of 2015 compared to the first quarter of 2014 , with e-commerce and online marketplace orders improving by 5.7% and 12.1% , respectively. We believe that e-commerce orders improved through an improved customer experience and pricing strategies. We believe that the increase in online marketplace orders was primarily due to competitive pricing strategies. We expect the total number of orders in fiscal year 2015 to marginally improve over our results for fiscal year 2014. We recognize revenue associated with an order when the products have been delivered, consistent with our revenue recognition policy.
Average Order Value: Average order value represents our net sales on a placed orders basis for a given period of time divided by the total number of orders recorded during the same period of time. Average order value increased by 4.3% in the first quarter of 2015 , compared to the first quarter of 2014 . We seek to increase the average order value as a means of increasing net sales. Average order values vary depending upon a number of factors, including the components of our product offering, the order volume in certain online sales channels, macro-economic conditions, and the online competition.
Revenue Capture: Revenue capture is the amount of actual dollars retained after taking into consideration returns, credit card declines and product fulfillment. During the first quarter of 2015 , our revenue capture increased by 0.6% to 85.5% compared to 84.9% in the first quarter of 2014 . The increase in revenue capture was due to lower returns and credit card declines and improved product fulfillment in the first quarter of 2015 compared to the first quarter of 2014 . We expect our revenue capture level to marginally improve in fiscal year 2015, compared to fiscal year 2014, as we continue to improve our customers’ purchase experience.
Conversion: Conversion is the number of orders as a rate to the total number of unique visitors. This rate indicates how well we convert a visitor to a customer sales order. During the first quarter of 2015 , our conversion improved by 5.0% to 1.69% compared to 1.61% in the first quarter of 2014 .
Executive Summary
For the first quarter of 2015 , Base USAP generated net sales of $76,325 , compared with $67,949 for the first quarter of 2014 , representing an increase of 12.3% . Base USAP net income for the first quarter of 2015 was $187 , compared to net income of $683 for the first quarter of 2014 . We generated income before interest expense, net, income tax provision, depreciation and amortization expense, amortization of intangible assets, plus share-based compensation expense, impairment losses and restructuring costs (“Adjusted EBITDA”) of $2,851 in the first quarter of 2015 compared to $3,368 in the first quarter of 2014 . Adjusted EBITDA, which is not a Generally Accepted Accounting Principle measure, is presented because such measure is used by rating agencies, securities analysts, investors and other parties in evaluating the Company. It should not be considered, however, as an alternative to operating income, as an indicator of the Company’s operating performance, or as an alternative to cash flows, as measures of the Company’s overall liquidity, as presented in the Company’s consolidated financial statements. Further, the Adjusted EBITDA measure shown may not be comparable to similarly titled measures used by other companies. Refer to the table presented below for reconciliation of net loss to Adjusted EBITDA.
For the first quarter of 2015, AutoMD generated net sales of $63 compared to $79 in the same period last year. AutoMD's net loss was $503 for the first quarter of 2015 compared to a net loss of $482 for the first quarter of 2014 . AutoMD's adjusted EBITDA was negative $287 compared to negative $48 in the same period last year.
Our Q1 2015 net sales consisted of online sales, representing  90.4% of the total (compared to 89.4% in Q1 2014 ), and offline sales, representing 9.6% of the total (compared to 10.6% in Q1 2014 ). The net sales increase was due to an increase of $8,158 , or 13.4% , in online sales and an increase in offline sales by $201 , or 2.8% . The online sales channels growth is

28



primarily the result of a $4,404 , or 10.0% , increase  in our e-commerce sales channels and a $3,488 , or 22.2% , increase in our online marketplaces. The $4,404 increase in our e-commerce sales channels was driven by a 5.0% increase in conversion, increase in traffic by 1.0% and 2.8% increase in average order value. The $3,488 increase in our online marketplaces was driven by a 12.1% increase in orders. Our offline sales for the first quarter of 2015 increased by $201 , or 2.8% , to $7,358 compared to the first quarter of 2014 .
Revenues increased during the first quarter of 2015 , when compared to the first quarter of 2014 , and we expect our revenues to continue to improve in fiscal year 2015 when compared to fiscal year 2014 . The Company has shown 5 consecutive quarters of positive year over year revenue growth. The table below presents quarterly revenues (in thousands) and the change in quarterly year-over-year revenues for the last six quarters. All quarters presented below represent thirteen week periods with the exception of the quarter ended January 3, 2015, which is a fourteen week period.
 
Thirteen weeks ended
Net sales
 
Year over year quarterly sales
Thirteen weeks ended
 
Net sales
 
% increase  (decline)
Dec 28, 2013
$
59,735

 
Dec 29, 2012
 
$
62,848

 
(5.0
)%
Mar 29, 2014
$
68,028

 
Mar 30, 2013
 
$
65,405

 
4.0
 %
Jun 28, 2014
$
76,947

 
Jun 29, 2013
 
$
67,889

 
13.3
 %
Sep 27, 2014
$
67,965

 
Sep 28, 2013
 
$
61,724

 
10.1
 %
Jan 3, 2015
$
70,568

 
Dec 28, 2013
 
$
59,735

 
18.1
 %
Apr 4, 2015
$
76,388

 
Mar 29, 2014
 
$
68,028

 
12.3
 %
Like most e-commerce retailers, our success depends on our ability to attract online consumers to our websites and convert them into customers in a cost-effective manner. Historically, marketing through search engines provided the most efficient opportunity to reach millions of on-line auto part buyers. We are included in search results through paid search listings, where we purchase specific search terms that will result in the inclusion of our listing, and algorithmic searches that depend upon the searchable content on our websites. Algorithmic listings cannot be purchased and instead are determined and displayed solely by a set of formulas utilized by the search engine. We have had a history of success with our search engine marketing techniques, which gave our different websites preferred positions in search results. Search engines, like Google, revise their algorithms from time to time in an attempt to optimize their search results. Since 2011, Google has released changes to Google’s search results ranking algorithm aimed to lower the rank of certain sites and return other sites near the top of the search results based upon the quality of the particular site as determined by Google. Google made additional updates throughout fiscal year 2012 and 2013. We were negatively impacted by the changes in methodology for how Google displayed or selected our different websites for customer search results. This reduced our unique visitor count which adversely affected our financial results. We believe we were affected by search engine algorithm changes due to the use of our product catalog across multiple websites. To address this issue we consolidated to a significantly smaller number of websites to ensure unique catalog content. The consolidation resulted in fewer visitors since 2013 as websites continued to close. However, because of the consolidation and improvements in catalog content, orders increased in 2014. Our unique visitor count increased by 0.3 million , or 1.0% , for the first quarter of 2015 to 30.6 million  unique visitors compared to 30.3 million unique visitors in the first quarter of 2014 . As we are significantly dependent upon search engines for our website traffic, if we are unable to attract unique visitors, our business and results of operations will be harmed.
Barriers to entry in the automotive aftermarket industry are low, and current and new competitors can launch websites at a relatively low cost. Due to a number of factors, including the rise of online marketplaces, it is easier for a traditional offline supplier to begin selling online and compete with us. These larger suppliers have access to merchandise at lower costs, enabling them to sell products at lower prices while maintaining adequate gross margins. Total orders for the first quarter of 2015 went up by 8.0% compared to the first quarter of 2014 while our average order value increased by $4 , or 4.3% , for the first quarter of 2015 to $96 compared to $92 in the first quarter of 2014 . Our current and potential customers may decide to purchase directly from our suppliers. Continuing increased competition from our suppliers that have access to products at lower prices than us could result in reduced sales, lower operating margins, reduced profitability, loss of market share and diminished brand recognition. In addition, some of our competitors have used and may continue to use aggressive pricing tactics. We expect that competition will further intensify in the future as Internet use and online commerce continue to grow worldwide.
Total expenses, which primarily consisted of cost of sales and operating costs, increased during the first quarter of 2015 compared to the same period in 2014 . Components of our cost of sales and operating costs are described in further detail under — “Note 1 – Summary of Significant Accounting Policies and Nature of Operations " of our Notes to Consolidated Financial Statements. Our personnel costs declined in the first quarter of 2015 compared to the first quarter of 2014 . Our employees at

29



the end of the first quarter of 2015 increased to 1,037 as compared to 1,016 at the end of the first quarter of 2014 . In 2014 , as part of the Company’s initiatives to reduce labor costs and improve operating efficiencies in response to the challenges in the marketplace and general market conditions, we reduced our workforce by 77 employees. The reduction in headcount resulted from the Company's closure of its distribution facility located in Carson, California. Partially offsetting the decrease in headcount related to restructuring, we hired 28 employees, mostly to support the additional inventory volume at our two remaining warehouses. While we have and continue to undertake several initiatives to improve revenues and reduce the losses in fiscal year 2015 , if the loss trend observed in 2013 and 2014 occur in the fiscal year 2015 , we may be required to further reduce our labor costs.
We made positive strides towards achieving our strategic goals during fiscal year 2014 and in fiscal year 2015 we will continue to pursue these strategies to continue our positive sales growth and improve gross profit while reducing operating costs as percent of sales:
We expect to continue positive e-commerce growth by providing unique catalog content and providing better content on our websites thereby improving our ranking on the search results. In addition, we intend to improve mobile enabled websites to take advantage of shifting consumer behaviors. We expect this to increase unique visitors to our website and help us grow our revenues. We expect revenue trends to remain positive in fiscal year 2015.
We continue to work to improve the website purchase experience for our customers by (1) helping our customers find the parts they want to buy by reducing failed searches and increasing user purchase confidence; (2) selling more highly customized accessories by partnering with manufacturers to build custom shopping experiences; (3) increasing order size across our sites through improved recommendation engines; and (4) completing the roll out of high quality images and videos with emphasis on accessory product lines. In addition, we intend to build mobile enabled websites to take advantage of shifting consumer behaviors. These efforts may increase the conversion rate of our visitors to customers, total number of orders and average order value, repeat purchases and contribute to our revenue growth.
We continue to work to becoming one of the best low price options in the market for after market auto parts and accessories. We will lower our prices by increasing foreign sourced private label products as they are generally less expensive and we believe provide better value for the consumer. We expect this to improve the conversion rate of our visitors to our website, grow our revenues and improve our margins. We also plan to transition away from lower margin stock ship branded products and expand our private label mix, which provides higher margins.
Increase product selection by being the first to market with new SKUs. We currently have over 45,000 private label SKUs and 1.6 million branded SKUs in our product selection. We will seek to add new categories and expand our existing specialty categories. We expect this to increase the total number of orders and contribute to our revenue growth. Additionally, we plan to continue to maintain a certain quantity of inventory in stock throughout the year to ensure consistent service levels and improve customer experience.
Be the consumer advocate for auto repair through AutoMD.com. We will continue to devote resources to AutoMD.com, its system development and the expansion of it's repair shop network, drawing upon the proceeds from the sale of AutoMD common stock. We expect this to improve our brand recognition and contribute to our revenue growth.
Continue to implement cost saving measures.
Overall, we expect revenue growth and reduced net losses in fiscal year 2015 compared to fiscal year 2014, due to the initiatives we have implemented and will implement throughout the year. However, if the revenue growth and reduced net losses we experienced in fiscal year 2014 do not continue in fiscal year 2015 and are more negative than we expect, it could severely impact our liquidity as we may not be able to provide positive cash flows from operations in order to meet our working capital requirements. We may need to borrow additional funds from our credit facility, which under certain circumstances may not be available, sell additional assets or seek additional equity or additional debt financing in the future. Refer to the “Liquidity and Capital Resources ” section below for additional details. There can be no assurance that we would be able to raise such additional financing or engage in such asset sales on acceptable terms, or at all. If our net losses continue for longer than we expect because our strategies to return to profitability are not successful or otherwise, and if we are not able to raise adequate additional financing or proceeds from asset sales to continue to fund our ongoing operations, we will need to defer, reduce or eliminate significant planned expenditures, restructure or significantly curtail our operations.
As we redesign our approach to attracting customers through search engines, we hope to offset much of the decline in visitors to our e-commerce sites by continuing to pursue revenue opportunities in third-party online marketplaces, a number of

30



which are growing significantly each year. Auto parts buyers are finding third-party online marketplaces to be a very attractive environment, for many reasons, the top four being: (1) the security of their personal information; (2) the ability to easily compare product offerings from multiple sellers; (3) transparency (consumers can leave positive or negative feedback about their experience); and (4) favorable pricing. Successful selling in these third-party online marketplaces depends on product innovation, and strong relationships with suppliers, both of which we believe to be our core competencies.

Non-GAAP measures
Regulation G, “Conditions for Use of Non-GAAP Financial Measures ,” and other provisions of the Securities Exchange Act of 1934, as amended, define and prescribe the conditions for use of certain non-GAAP financial information. We provide EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. EBITDA consists of net income before (a) interest expense, net; (b) income tax provision; (c) depreciation and amortization expense; and (d) amortization of intangible assets; while Adjusted EBITDA consists of EBITDA before (a) share-based compensation expense; and (b) restructuring costs.
The Company believes that these non-GAAP financial measures provide important supplemental information to management and investors. These non-GAAP financial measures reflect an additional way of viewing aspects of the Company’s operations that, when viewed with the GAAP results and the accompanying reconciliation to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting the Company’s business and results of operations.
Management uses Adjusted EBITDA as a measure of the Company’s operating performance because it assists in comparing the Company’s operating performance on a consistent basis by removing the impact of items not directly resulting from core operations. Internally, this non-GAAP measure is also used by management for planning purposes, including the preparation of internal budgets; for allocating resources to enhance financial performance; for evaluating the effectiveness of operational strategies; and for evaluating the Company’s capacity to fund capital expenditures and expand its business. The Company also believes that analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies in our industry. Additionally, lenders or potential lenders use Adjusted EBITDA to evaluate the Company’s ability to repay loans.
This non-GAAP financial measure is used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review the Company’s consolidated financial statements in their entirety and to not rely on any single financial measure. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names. In addition, the Company expects to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items from the Company’s non-GAAP measures should not be construed as an inference that these costs are unusual, infrequent or non-recurring.
The Company operates in two reportable segments identified as the core auto parts business ("Base USAP"), and AutoMD, an online automotive repair source of which the Company is a majority stockholder. Segment information is prepared on the same basis that our chief executive officer, who is our chief operating decision maker, manages the segments, evaluates financial results, and makes key operating decisions. Management evaluates the performance of its two operating segments based on net sales, gross profit and loss from operations. The accounting policies of the operating segments are the same as those described in “Note 1 - Summary of Significant Accounting Policies and Nature of Operations” of our Notes to Consolidated Financial Statements. Operating income represents earnings before other income, interest expense and income taxes. The identifiable assets by segment disclosed are those assets specifically identifiable within each segment.
Summarized segment information for our continuing operations from the two reportable segments for the periods presented is as follows (in thousands):


31



 
Thirteen weeks ended
April 4, 2015
 
Thirteen weeks ended
March 29, 2014
 
Base USAP
 
AMD
 
Consolidated
 
Base USAP
 
AMD
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
76,325

 
$
63

 
$
76,388

 
$
67,949

 
$
79

 
$
68,028

Cost of sales
54,910

 

 
54,910

 
47,327

 

 
47,327

Gross profit
21,415

 
63

 
21,478

 
20,622

 
79

 
20,701

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
    Marketing
10,190

 
662

 
10,852

 
9,589

 
526

 
10,115

    General and administrative
4,123

 
58

 
4,181

 
4,147

 

 
4,147

    Fulfillment
5,060

 

 
5,060

 
4,712

 

 
4,712

    Technology
1,240

 
48

 
1,288

 
1,113

 
35

 
1,148

    Amortization of intangible assets
107

 
8

 
115

 
84

 

 
84

        Total operating expenses
20,720

 
776

 
21,496

 
19,645

 
561

 
20,206

Income (loss) from operations
695

 
(713
)
 
(18
)
 
977

 
(482
)
 
495

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
    Other income (expense), net
23

 

 
23

 
(3
)
 

 
(3
)
    Interest expense
(373
)
 

 
(373
)
 
(259
)
 

 
(259
)
        Total other expense
(350
)
 

 
(350
)
 
(262
)
 

 
(262
)
Income (loss) before income taxes
345

 
(713
)
 
(368
)
 
715

 
(482
)
 
233

Income tax (benefit) provision
158

 
(210
)
 
(52
)
 
32

 

 
32

Net income (loss )
$
187

 
$
(503
)
 
$
(316
)
 
$
683

 
$
(482
)
 
$
201

 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
187

 
$
(503
)
 
$
(316
)
 
$
683

 
$
(482
)
 
$
201

Depreciation & amortization
1,549

 
385

 
1,934

 
1,934

 
434

 
2,368

Amortization of intangible assets
107

 
8

 
115

 
84

 

 
84

Interest expense
373

 

 
373

 
259

 

 
259

Taxes
158

 
(210
)
 
(52
)
 
32

 

 
32

EBITDA
$
2,374

 
$
(320
)
 
$
2,054

 
$
2,992

 
$
(48
)
 
$
2,944

Stock comp expense
477

 
33

 
510

 
376

 

 
376

Adjusted EBITDA
$
2,851

 
$
(287
)
 
$
2,564

 
$
3,368

 
$
(48
)
 
$
3,320

 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
$
1,966

 
$
185

 
$
2,151

 
$
1,143

 
$
415

 
$
1,558

Total assets, net of accumulated depreciation
$
76,172

 
$
7,667

 
$
83,839

 
$
65,986

 
$
1,946

 
$
67,932





32



Results of Operations
The following table sets forth selected statement of operations data for the periods indicated, expressed as a percentage of net sales:
 
 
Thirteen Weeks Ended
 
April 4, 2015
 
March 29, 2014
Net sales
100.0
 %
 
100.0
 %
Cost of sales
71.9

 
69.6

Gross profit
28.1

 
30.4

Operating expenses:
 
 
 
Marketing
14.1

 
14.9

General and administrative
5.5

 
6.1

Fulfillment
6.6

 
6.9

Technology
1.7

 
1.7

Amortization of intangible assets
0.2

 
0.1

Total operating expenses
28.1

 
29.7

Income from operations

 
0.7

Other income (expense):
 
 
 
Other income, net

 

Interest expense
(0.5
)
 
(0.4
)
Total other expense, net
(0.5
)
 
(0.4
)
(Loss) income before income taxes
(0.5
)
 
0.3

Income tax (benefit) provision
(0.1
)
 

Net (loss) income including noncontrolling interests
(0.4