PRTS 10-Q Q1 2015
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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.
 

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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.

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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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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).

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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).

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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).

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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

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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

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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.


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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

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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.

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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.


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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.

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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.

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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.

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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
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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.

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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.

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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


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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.

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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.

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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):
 

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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

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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

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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

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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

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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

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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

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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

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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):


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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





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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
)%
 
0.3
 %
Thirteen Weeks Ended April 4, 2015 Compared to the Thirteen Weeks Ended March 29, 2014
Net Sales and Gross Margin
 
 
Thirteen Weeks Ended
 
April 4, 2015
 
March 29, 2014
 
(in thousands)
Net sales
$
76,388

 
$
68,028

Cost of sales
54,910

 
47,327

Gross profit
$
21,478

 
$
20,701

Gross margin
28.1
%
 
30.4
%
Net sales increased $8,360, or 12.3%, for the first quarter of 2015 compared to the first quarter of 2014. Our net sales consisted of online sales, which included mobile-based online sales, representing 90.4% of the total for the first quarter of 2015 (compared to 89.4% in the first quarter of 2014), and offline sales, representing 9.6% of the total for the first quarter of 2015 (compared to 10.6% in the first quarter of 2014). The net sales increase was driven by an increase of $8,158, or 13.4%, in online sales. Online sales increased primarily due to an increase of 5.0% in conversion, a 1.0% increase in unique visitors, and an increase in average order value of 4.3%. The increase in unique visitors was favorable due to the improved marketing spend efficiency. In the first quarter of 2015, our offline sales, which consist of our Kool-Vue™ and wholesale operations, increased by $201, or 2.8%, compared to the first quarter of 2014, primarily due to an increase in Kool-Vue™ sales, partially offset by a decline in sales related to the closure of the Carson warehouse in August 2014.
Gross profit increased $777, or 3.8%, in the first quarter of 2015 compared to the first quarter of 2014. Gross margin rate decreased 2.3% to 28.1% in the first quarter of 2015 compared to 30.4% in the first quarter of 2014. Gross margin rate

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decreased for the thirteen weeks ended April 4, 2015 compared to the prior year period primarily due to reduced margins from online sales, and to a lesser extent reduced margins from offline sales. Gross margin from online sales decreased primarily due to sales mix, competitive pricing strategies and to a lesser extent lower freight revenue as a percent of total freight charges. Gross margin from offline sales was unfavorably impacted by higher mix of lower margin offline revenue for the thirteen weeks ended April 4, 2015 compared to the same period last year.
Marketing Expense
 
 
Thirteen Weeks Ended
 
April 4, 2015
 
March 29, 2014
 
(in thousands)
Marketing expense
$
10,852

 
$
10,115

Percent of net sales
14.1
%
 
14.9
%
Total marketing expense increased $737, or 7.3%, for the first quarter of 2015 compared to the first quarter of 2014. Online advertising expense, which includes catalog costs, was $4,977, or 7.2%, of online sales compared to $4,390, or 7.2%, of online sales for the prior year period. Online advertising expense increased in the first quarter of 2015 primarily due to our non-catalog online adverting expenses, which includes listing and placement fees paid to commercial and search engine websites, of $4,573, or 6.0%, of net sales compared to $3,845, or 5.7% of net sales first quarter of 2014. Marketing expense, excluding online advertising, was $5,875, or 7.7%, of net sales compared to $5,725, or 8.4%, of net sales for the same period last year. The increase was primarily due to higher labor cost of $409, and increased overhead of $91 partially offset by a decrease in depreciation and amortization of $347. As a percent of sales, total marketing expense during the first quarter of 2015 was slightly lower compared to the first quarter of 2014.


General and Administrative Expense
 
 
Thirteen Weeks Ended
 
April 4, 2015
 
March 29, 2014
 
(in thousands)
General and administrative expense
$
4,181

 
$
4,147

Percent of net sales
5.5
%
 
6.1
%
General and administrative expense increased $34, or 0.8%, for the first quarter of 2015 compared to the first quarter of 2014 and as a percent of sales was lower by 0.6%, primarily due to leveraging of fixed wages and overhead on higher sales.
Fulfillment Expense
 
 
Thirteen Weeks Ended
 
April 4, 2015
 
March 29, 2014
 
(in thousands)
Fulfillment expense
$
5,060

 
$
4,712

Percent of net sales
6.6
%
 
6.9
%
Fulfillment expense as a percent of net sales was lower by 0.3% for the first quarter of 2015, compared to the first quarter of 2014. The decrease was primarily due to lower fixed wages, overhead and lower depreciation and amortization, in part, due to the closure of the Carson warehouse in the fourth quarter of 2014.
Technology Expense
 

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Thirteen Weeks Ended
 
April 4, 2015
 
March 29, 2014
 
(in thousands)
Technology expense
$
1,288

 
$
1,148

Percent of net sales
1.7
%
 
1.7
%
Technology expense increased $140, or 12.2%, for the first quarter of 2015 compared to the first quarter of 2014 and as a percent of sales was flat to last year. The increase was primarily due to higher computer support costs.
Amortization of Intangible Assets
 
 
Thirteen Weeks Ended
 
April 4, 2015
 
March 29, 2014
 
(in thousands)
Amortization of intangible assets
$
115

 
$
84

Percent of net sales
0.2
%
 
0.1
%
Amortization of intangibles increased $31, or 36.9%, for the first quarter of 2015 compared to the first quarter of 2014. The increase was due to purchases of intangible assets during fiscal 2014.
Total Other Expense, Net
 
 
Thirteen Weeks Ended
 
April 4, 2015
 
March 29, 2014
 
(in thousands)
 
 
Other expense, net
$
(350
)
 
$
(262
)
Percent of net sales
(0.5
)%
 
(0.4
)%
Total other expense, net increased $88, or 33.6%, for the first quarter of 2015 compared to the first quarter of 2014 primarily due to higher loan interest costs due to a higher revolver balance during the first quarter of 2015 compared to the first quarter of 2014.
Income Tax Provision
 
 
Thirteen Weeks Ended
 
April 4, 2015
 
March 29, 2014
 
(in thousands)
Income tax (benefit) provision
$
(52
)
 
$
32

Percent of net sales
(0.1
)%
 
—
%
For the thirteen weeks ended April 4, 2015, the effective tax rate for the Company was 14.1%. The Company’s effective tax rate for the thirteen weeks ended April 4, 2015 differed from the U.S. federal statutory rate primarily as a result of the recording of valuation allowance against the pre-tax losses that 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. For the thirteen weeks ended March 29, 2014, the effective tax rate for the Company was 13.7%. The Company’s effective tax rate for the thirteen weeks ended 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.


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Foreign Currency
The impact of foreign currency is related to our offshore operations in the Philippines and sales of our products in Canada and was not material to our operations. See additional information in “Foreign Currency Risk” below in Item 3.

Liquidity and Capital Resources
Sources of Liquidity
During the thirteen weeks ended April 4, 2015 and March 29, 2014, we funded our operations with cash generated from operations as well as through borrowing under our credit facility. We had cash of $7,917 and short-term investments of $66 as of April 4, 2015, representing a $264 increase from $7,653 of cash as of January 3, 2015 and a $4 increase from $62 of short-term investments as of January 3, 2015. Based on our current operating plan, we believe that our existing cash and cash equivalents, investments, cash flows from operations and debt financing will be sufficient to finance our operational cash needs through at least the next twelve months (see “Debt and Available Borrowing Resources” below).
As of April 4, 2015, our credit facility provided for a revolving commitment of up to $23,318 subject to a borrowing base derived from certain of our receivables, inventory and property and equipment (see “Debt and Available Borrowing Resources” below).
In August 2014, we filed a shelf registration statement covering the offer and sale of up to $100,000 of common stock with the SEC. The shelf registration was declared effective by the SEC on August 20, 2014. The terms of any offering under our shelf registration statement will be determined at the time of the offering and disclosed in a prospectus supplement filed with the SEC. The shelf registration expires on August 20, 2017.
On October 8, 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%. The proceeds from the sale of AutoMD common stock will be used to fund the operating activities of AutoMD.
Working Capital
As of April 4, 2015 and January 3, 2015, our working capital was $14,450 and $14,645, respectively. Our revolving loan does not require principal payments, however it is classified as current due to certain U.S. GAAP requirements (see “Debt and Available Borrowing Resources” below for further details). The historical seasonality in our business during the year can cause cash and cash equivalents, inventory and accounts payable to fluctuate, resulting in changes in our working capital.

Cash Flows
The following table summarizes the key cash flow metrics from our consolidated statements of cash flows for the thirteen weeks ended April 4, 2015 and March 29, 2014 (in thousands):
 
 
Thirteen Weeks Ended
 
April 4, 2015
 
March 29, 2014
Net cash provided by operating activities
$
4,550

 
$
8,142

Net cash used in investing activities
(2,248
)
 
(1,558
)
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


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Operating Activities
Cash provided by operating activities is primarily comprised of net loss, adjusted for non-cash activities such as depreciation and amortization expense, amortization of intangible assets and share-based compensation expense. These non-cash adjustments represent charges reflected in net loss and, therefore, to the extent that non-cash items increase or decrease our operating results, there will be no corresponding impact on our cash flows. Net loss adjusted for non-cash adjustments to operating activities was $2,183 for the thirteen weeks ended April 4, 2015 (adjusted for non-cash charges primarily related to share-based compensation expense of $510 and depreciation and amortization expense of $1,934), compared to net gain adjusted for non-cash adjustments to operating activities of $3,062 for the thirteen weeks ended March 29, 2014 (adjusted for non-cash charges primarily consisting of shared based compensation of $376 and depreciation and amortization expense of $2,368). After excluding the effects of the non-cash charges, the primary changes in cash flows relating to operating activities resulted from changes in operating assets and liabilities.
 
•
Accounts receivable increased to $4,209 at April 4, 2015 from $3,804 at January 3, 2015, resulting in a increase in operating assets and reflecting a cash outflow of $405 for the thirteen weeks ended April 4, 2015. Accounts receivable increased primarily due to higher sales levels leading to a $337 increase in trade receivables, and $84 increase in credit card receivables. For the thirteen weeks ended March 29, 2014, cash inflow related to the change in accounts receivable was $147.
•
Inventory decreased to $48,347 at April 4, 2015 from $48,362 at January 3, 2015, resulting in an decrease in operating assets and reflecting a cash inflow of $15 for the thirteen weeks ended April 4, 2015. We expect to maintain our current level of inventory during the remainder of 2015. For the thirteen weeks ended March 29, 2014, cash inflow related to the change in inventory was $374.
•
Accounts payable and accrued expenses increased to $35,089 at April 4, 2015 compared to $33,109 at January 3, 2015, resulting in an increase in operating liabilities and reflecting a cash inflow of $2,497 for the thirteen weeks ended April 4, 2015. Accounts payable and accrued expenses increased primarily due to the increase in accounts payable of $1,230, a $466 increase in freight related accruals and a $354 increase in advertising and marketing related accruals. Accounts payable and accrued expenses could fluctuate in future periods due to the amount of our revenues and the related purchases and the timing of our payments. For the thirteen weeks ended March 29, 2014, cash inflow related to the change in accounts payable and accrued expenses was $2,792.
Investing Activities
For the thirteen weeks ended April 4, 2015 and March 29, 2014, net cash used in investing activities was primarily the result of increases in property and equipment ($2,151 and $1,558, respectively), which are mainly related to capitalized website and software development costs. We expect our capital expenditures to increase over the next twelve months as we continue to invest in our customer experience and long term value initiatives.
Financing Activities
For the thirteen weeks ended April 4, 2015, net cash used in financing activities was primarily due to net payments made on our revolving loan payable of $1,536. For the thirteen weeks ended March 29, 2014, net cash used in financing activities was primarily due to payments made on outstanding debt, totaling $6,024.
Debt and Available Borrowing Resources
Total debt was $18,958 as of April 4, 2015 (comprised of capital lease payable and revolving loan payable), compared to $20,561 (comprised of capital lease payable and revolving loan payable) as of January 3, 2015. The decrease was due a reduction in the amount outstanding under our line of credit from January 3, 2015 to April 4, 2015.
The Company maintains an asset-based revolving 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 any such increases. The credit facility matures on April 26, 2017.
On March 24, 2015, the Company, certain of its domestic subsidiaries and JPMorgan entered into a Seventh Amendment to Credit Agreement and First Amendment to Pledge and Security Agreement, which amended the Credit Agreement previously entered into by the Company, certain of its domestic subsidiaries and JPMorgan on April 26, 2012 and the Pledge and Security Agreement previously entered into by the Company, certain of its domestic subsidiaries and JPMorgan on April 26, 2012.

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Pursuant to the amendment, JPMorgan increased the permitted amount of principal indebtedness related to capital leases 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) LIBOR plus an applicable margin of 2.25%, or (b) an “alternate base rate” minus an applicable margin of 0.25%. Each applicable margin as set forth in the prior sentence is subject to increase or decrease by 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 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.

Our Credit Facility requires us to satisfy certain financial covenants which could limit our ability to react to market conditions or satisfy extraordinary capital needs and could otherwise restrict our financing and operations. If we are unable to satisfy the financial covenants and tests at any time, we may as a result cease being able to borrow under the Credit Facility or be required to immediately repay loans under the Credit Facility, and our liquidity and capital resources and ability to operate our business could be severely impacted, which would have a material adverse effect on our financial condition and results of operations. In those events, we may need to sell additional assets or seek additional equity or additional debt financing or attempt to modify our existing Credit Agreement. There can be no assurance that we would be able to raise such additional

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financing or engage in such asset sales on acceptable terms, or at all, or that we would be able to modify our existing Credit Agreement.
See additional information in “Note 6 – Borrowings” of the Notes to Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this report.
Funding Requirements
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. Our future capital requirements may, however, vary materially from those now planned or anticipated. Changes in our operating plans, lower than anticipated net sales or gross margins, increased expenses, continued or worsened economic conditions, worsening operating performance by us, or other events, including those described in “Risk Factors” included in Part II, Item 1A may force us to sell additional assets and seek additional debt or equity financing in the future. We may need to issue additional common stock under our shelf registration, discussed above. 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 we are not able to raise adequate additional financing or proceeds from additional asset sales, we will need to defer, reduce or eliminate significant planned expenditures, restructure or significantly curtail our operations.


Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Contractual Obligations
The following table sets forth our contractual cash obligations and commercial commitments as of April 4, 2015:
 
 
Payment Due By Period (in thousands)
Contractual Obligations:
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
Operating lease obligations (1)
$
3,691

 
$
1,134

 
$
1,528

 
$
845

 
$
184

Capital lease obligations (2)
18,270

 
759

 
1,877

 
1,843

 
13,791

 
(1)
Commitments under operating leases relate primarily to our leases on our corporate offices in Carson, California, our distribution centers in Chesapeake, Virginia and our call center in the Philippines.
(2)
Commitments under capital leases primarily relate to sale-leaseback of our LaSalle, Illinois facility. See additional details in “Note 4 – Property and Equipment, Net” of the Notes to Consolidated Financial Statements (Unaudited) included in Part I, Item I of this report. 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.
Seasonality
We believe our business is subject to seasonal fluctuations. We have historically experienced higher sales of body parts in winter months when inclement weather and hazardous road conditions typically result in more automobile collisions. Engine parts and performance parts and accessories have historically experienced higher sales in the summer months when consumers have more time to undertake elective projects to maintain and enhance the performance of their automobiles and the warmer weather during that time is conducive for such projects. We expect the historical seasonality trends to continue to have a material impact on our financial condition and results of operations during the reporting periods in any given year.
Inflation
Inflation has not had a material impact upon our operating results, and we do not expect it to have such an impact in the near future. We cannot assure you that our business will not be affected by inflation in the future.

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Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, costs and expenses, as well as the disclosure of contingent assets and liabilities and other related disclosures. On an ongoing basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition, uncollectible receivables, inventory reserve, intangible and other long-lived assets and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, and we include any revisions to our estimates in our results for the period in which the actual amounts become known.
Our critical accounting policies are included in “ Note 1 – Summary of Significant Accounting Policies and Nature of Operations” of the Notes to Consolidated Financial Statements (Unaudited), included above in Part I, Item 1 of this report. There were no significant changes to our critical accounting policies during the thirteen weeks ended April 4, 2015. We believe our critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our historical consolidated financial condition and results of operations (for further detail refer to our Annual Report on Form 10-K that we filed with the SEC on March 20, 2015):
 
•
Revenue Recognition;
•
Fair Value of Financial Instruments and other Fair Value Measurements;
•
Inventory;
•
Website and Software Development Costs;
•
Long-Lived Assets and Intangibles;
•
Share-Based Compensation; and
•
Income Taxes.
Recent Accounting Pronouncements
See “Note 1 – Summary of Significant Accounting Policies and Nature of Operations – Recent Accounting Pronouncements” of the Notes to Consolidated Financial Statements (Unaudited), included above in Part I, Item 1 of this report.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk. Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial commodity market prices and rates. We are exposed to market risk primarily in the area of changes in U.S. interest rates and conditions in the credit markets. We also have some exposure related to foreign currency fluctuations. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We do not have any derivative financial instruments as of April 4, 2015. We attempt to increase the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities and mutual funds that hold debt securities.
Interest Rate Risk. Our investment securities generally consist of mutual funds. As of April 4, 2015, our investments were comprised of $66 of investments in mutual funds that primarily hold debt securities.
As of April 4, 2015, we had a balance of $9,485 outstanding under a revolving loan under our credit facility. The interest rate on this loan is computed based on a LIBOR and Prime loan rate, adjusted by features specified in our loan agreement. At our debt level as of April 4, 2015, a 100 basis point increase in interest rates would not materially affect our earnings and cash flows. If, however, we are unable to meet the covenants in our loan agreement, we would be required to renegotiate the terms of credit under the loan agreement, including the interest rate. There can be no assurance that any renegotiated terms of credit would not materially impact our earnings. At April 4, 2015, our LIBOR based interest rate was 2.44% per annum (on $9,485 principal) and our Prime based rate was 3.50% per annum (on $0 principal). Refer to additional discussion in Item 2, under the

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caption “Liquidity and Capital Resources – Debt and Available Borrowing Resources” and in “Note 6 – Borrowings” of the Notes to Consolidated Financial Statements (Unaudited), included in Part I, Item 1 of this report.
Foreign Currency Risk. Our purchases of auto parts from our Asian suppliers are denominated in U.S. dollars; however, a change in the foreign currency exchange rates could impact our product costs over time. Our financial reporting currency is the U.S. dollar and changes in exchange rates significantly affect our reported results and consolidated trends. For example, if the U.S. dollar weakens year-over-year relative to currencies in our international locations, our consolidated gross profit and operating expenses will be higher than if currencies had remained constant. Likewise, if the U.S. dollar strengthens year-over-year relative to currencies in our international locations, our consolidated gross profit and operating expenses will be lower than if currencies had remained constant. Our operating expenses in the Philippines are generally paid in Philippine Pesos, and as the exchange rate fluctuates, it adversely or favorably impacts our operating results. In light of the above, a fluctuation of 10% in the Peso/U.S. dollar exchange rate would have approximately a $272 impact on our Philippine operating expenses for the thirteen weeks ended April 4, 2015. During fiscal year 2014, we hedged a portion of our forecasted foreign currency exposure associated with operating expenses incurred in the Philippines. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. As of January 3, 2015 and April 4, 2015, we had no hedges in place. We are evaluating our options on how to manage this risk and considering various methods to mitigate such risk. Our Canadian website sales are denominated in Canadian dollars; however, fluctuations in exchange rates from these operations are only expected to have a nominal impact on our operating results due to the relatively small number of sales generated in Canada. We believe it is important to evaluate our operating results and growth rates before and after the effect of currency changes.
ITEM 4.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by Rule 13a – 15(b) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 1934 Act, as of the end of the period covered by this report.

Disclosure controls and procedures provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Inherent Limitations on Internal Controls
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

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PART II. OTHER INFORMATION

ITEM 1.    Legal Proceedings
The information set forth under the caption “Legal Matters” in “Note 10 – Commitments and Contingencies” of the Notes to Consolidated Financial Statements (Unaudited), included in Part I, Item 1 of this report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see the section entitled “Risk Factors” included in Part II, Item 1A of this report.
ITEM 1A. Risk Factors
Our business is subject to a number of risks which are discussed below. Other risks are presented elsewhere in this report and in our other filings with the SEC. We have marked with an asterisk (*) those risk factors that reflect substantive changes from the risk factors included in the Annual Report on Form 10-K that we filed with the SEC on March 20, 2015. You should consider carefully the following risks in addition to the other information contained in this report and our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K, and any amendments thereto, before deciding to buy, sell or hold our common stock. If any of the following known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose all or part of your investment.
Risks Related To Our Business
Purchasers of aftermarket auto parts may not choose to shop online, which would prevent us from acquiring new customers who are necessary to the growth of our business.
The online market for aftermarket auto parts is less developed than the online market for many other business and consumer products, and currently represents only a small part of the overall aftermarket auto parts market. Our success will depend in part on our ability to attract new customers and to convert customers who have historically purchased auto parts through traditional retail and wholesale operations. Specific factors that could discourage or prevent prospective customers from purchasing from us include:
 
•
concerns about buying auto parts without face-to-face interaction with sales personnel;
•
the inability to physically handle, examine and compare products;
•
delivery time associated with Internet orders;
•
concerns about the security of online transactions and the privacy of personal information;
•
delayed shipments or shipments of incorrect or damaged products;
•
increased shipping costs; and
•
the inconvenience associated with returning or exchanging items purchased online.
If the online market for auto parts does not gain widespread acceptance, our sales may decline and our business and financial results may suffer.
* We depend on search engines and other online sources to attract visitors to our websites, and if we are unable to attract these visitors and convert those into customers in a cost-effective manner, our business and results of operations will be harmed.
Our success depends on our ability to attract online consumers to our websites and convert them into customers in a cost-effective manner. We are significantly dependent upon search engines, shopping comparison sites and other online sources for our website traffic. We are included in search results as a result of both 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 sites.

Algorithmic listings cannot be purchased and instead are determined and displayed solely by a set of formulas utilized by the search engine. Search engines, shopping comparison sites and other online sources have in the past, and will continue to revise their algorithms from time to time in an attempt to optimize their search results. For example, search engines, like Google, revise their algorithms regularly in an attempt to optimize their search results. In fiscal years 2012 and 2013, we were negatively impacted by the changes in methodology for how Google displayed or selected our different websites for customer

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search results, which reduced our unique visitor count and adversely affected our financial results. We believe that we addressed the changes in the methodology for customer search results that we experienced in 2012 and 2013, we expect that we will have to continue to address challenges due to similar revisions to search engine algortihms in the future, and there can be no assurance that we will be successful in addressing these issues. If other search engines, shopping comparison sites or similar online sources on which we rely for website traffic were to modify their general methodology for how they display or select our websites in a manner similar to the changes made by Google, or if Google continues to make changes to Google’s search results ranking algorithms that cause those algorithms to interact with our platform in a manner that continues to reduce our unique visitors, even fewer consumers may click through to our websites, and our financial results could be further adversely affected.
Similarly, if any free search engine or shopping comparison site on which we rely begins charging fees for listing or placement, or if one or more of the search engines, shopping comparison sites and other online sources on which we rely for purchased listings, modifies or terminates its relationship with us, our expenses could rise, we could lose customers and traffic to our websites could decrease.
Shifting online consumer behavior for purchasers of aftermarket auto parts may shift from desktop based to mobile device based online shopping, which could impact the growth of our business and our financial results could suffer.
Mobile device based online shopping represents an increasing part of our business. Shifting consumer behavior indicates that our customers may become more inclined to shop for aftermarket auto parts through their mobile devices. Mobile customers exhibit different behaviors than our more traditional desktop based e-commerce customers. 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. If we are unable to continue to adapt our mobile device shopping experience from desktop based online shopping in ways that improve our customer’s mobile experience and increase the engagement of our mobile customers our sales may decline and our business and financial results may suffer.
* During the first quarter of 2015, our net losses continued, and we expect our net losses to continue for the remainder of fiscal year 2015.

During the first quarter of 2015, we incurred a net loss of $60 compared to a net income of $201 for the first quarter of 2014. Overall, we expect our net losses to continue for the remainder of fiscal year 2015, although at a lower level than in 2014. If these negative trends continue, they 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. 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 the net losses we have experienced continues for longer than we expect because our strategies to return to positive sales growth and 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, file for bankruptcy or cease operations.

Our operations are restricted by our credit facility, and our ability to borrow funds under our credit facility is subject to a borrowing base.
Our credit facility includes a number of restrictive covenants. These covenants could impair our financing and operational flexibility and make it difficult for us to react to market conditions and satisfy our ongoing capital needs and unanticipated cash requirements. Specifically, such covenants restrict our ability and, if applicable, the ability of our subsidiaries to, among other things:
 
•
incur additional debt;
•
make certain investments and acquisitions;
•
enter into certain types of transactions with affiliates;
•
use assets as security in other transactions;
•
pay dividends on our capital stock or repurchase our equity interests, excluding payments of preferred stock dividends which are specifically permitted under our credit facility;
•
sell certain assets or merge with or into other companies;

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•
guarantee the debts of others;
•
enter into new lines of business;
•
pay or amend our subordinated debt;
•
form any joint ventures or subsidiary investments.
Restrictions in our credit facility could also prevent us from satisfying certain of our contingent obligations set forth in the documents we entered into in connection with AutoMD’s sale of common stock. For example, in order for us to be able to consummate the purchase of 2,000 shares of AutoMD common stock as required by the terms of the purchase agreement we entered into with AutoMD, which would be triggered in the event that AutoMD fails to meet specified cash balances and numbers of approved auto repair shops submitting a quotation on AutoMD’s website, at the time such obligation is triggered we must have excess availability to borrow under the credit agreement of at least $4 million and must satisfy a minimum fixed charge coverage ratio of 1.25:1.0. In addition, in order for us to be able to reimburse AutoMD for legal expenses incurred by AutoMD in connection with proceedings related to AutoMD’s intellectual property, which we could be required to do for a period of three years, at the time of such reimbursement we must have excess availability to borrow under the credit agreement of at least $4,000. In the event that restrictions in our credit facility cause us to breach our contractual obligations under the documents we entered into in connection with AutoMD’s sale of common stock, we could be sued for breach of contract, be liable for damages to other investors in AutoMD, and AutoMD’s support from its strategic investors could be compromised, each of which could have a material adverse effect on our financial condition and results of operations.
In addition, our credit facility is subject to a borrowing base derived from certain of our receivables, inventory, property and equipment. In the event that components of the borrowing base are adversely affected for any reason, including adverse market conditions or downturns in general economic conditions, we could be restricted in the amount of funds we can borrow under the credit facility. Furthermore, in the event that components of the borrowing base decrease to a level below the amount of loans then-outstanding under the credit facility, we could be required to immediately repay loans to the extent of such shortfall. If any of these events were to occur, it could severely impact our liquidity and capital resources, limit our ability to operate our business and could have a material adverse effect on our financial condition and results of operations.
Furthermore, under certain circumstances, our credit facility may require us to satisfy a financial covenant, which could limit our ability to react to market conditions or satisfy extraordinary capital needs and could otherwise impact our liquidity and capital resources, restrict our financing and have a material adverse effect on our results of operations.
Our ability to comply with the covenants and other terms of our debt obligations will depend on our future operating performance. If we fail to comply with such covenants and terms, we would be required to obtain waivers from our lenders to maintain compliance with our debt obligations. In the future, if we are unable to obtain any necessary waivers and our debt is accelerated, a material adverse effect on our financial condition and future operating performance would result. Additionally, our indebtedness that we may incur could have important consequences, including the following:
 
•
we will have to dedicate a portion of our cash flow to making payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions or other general corporate purposes;
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certain levels of indebtedness may make us less attractive to potential acquirers or acquisition targets;
•
certain levels of indebtedness may limit our flexibility to adjust to changing business and market conditions, and make us more vulnerable to downturns in general economic conditions as compared to competitors that may be less leveraged; and
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as described in more detail above, the documents providing for our indebtedness contain restrictive covenants that may limit our financing and operational flexibility.
Furthermore, our ability to satisfy our debt service obligations will depend, among other things, upon fluctuations in interest rates, our future operating performance and ability to refinance indebtedness when and if necessary. These factors depend partly on economic, financial, competitive and other factors beyond our control. We may not be able to generate sufficient cash from operations to meet our debt service obligations as well as fund necessary capital expenditures and general operating expenses. In addition, if we need to refinance our debt, or obtain additional debt financing or sell assets or equity to satisfy our debt service obligations, we may not be able to do so on commercially reasonable terms, if at all. If this were to occur, we may need to defer, reduce or eliminate significant planned expenditures, restructure or significantly curtail our operations, file for bankruptcy or cease operations.

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We may not be able to successfully acquire new businesses or integrate acquisitions, which could cause our business to suffer.

We may not be able to successfully complete potential strategic acquisitions if we cannot reach agreement on acceptable terms, due to restrictions under our credit facility or for other reasons. If we acquire a company or a division of a company, we may experience difficulty integrating that company’s or division’s personnel and operations, which could negatively affect our operating results. In addition:
 
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the key personnel of the acquired company may decide not to work for us;
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customers of the acquired company may decide not to purchase products from us;
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we may experience business disruptions as a result of information technology systems conversions;
•
we may experience additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, and financial reporting;
•
we may be held liable for environmental, tax or other risks and liabilities as a result of our acquisitions, some of which we may not have discovered during our due diligence;
•
we may intentionally assume the liabilities of the companies we acquire, which could materially and adversely affect our business;
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our ongoing business may be disrupted or receive insufficient management attention;
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we may not be able to realize the cost savings or other financial benefits or synergies we anticipated, either in the amount or in the time frame that we expect; and
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we may incur additional debt or issue equity securities to pay for any future acquisition, the issuance of which could involve the imposition of restrictive covenants or be dilutive to our existing stockholders.
Integrating any newly acquired businesses’ websites, technologies or services is likely to be costly and may require a substantial amount of resources and time to successfully complete. Our integration activities in connection with our acquisitions have caused a substantial diversion of our management’s attention. If we are unable to successfully complete the integration of acquisitions, we may not realize the anticipated synergies from such acquisitions, we may take further impairment charges and write-downs associated with such acquisitions, and our business and results of operations could suffer.
If our assets become impaired we may be required to record a significant charge to earnings.
We review our long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered are changes in circumstances indicating that the carrying value of our assets may not be recoverable include a decrease in future cash flows. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our assets is determined, resulting in an impact on our results of operations. For example, during the second quarter of 2013, we recorded an impairment charge on property and equipment of $4,800 and on intangible assets of $1,300. During the fourth quarter of 2012, we recorded an impairment charge on goodwill of $18,900 and on intangible assets of $5,600.

If we are unable to manage the challenges associated with our international operations, the growth of our business could be limited and our business could suffer.
We maintain international business operations in the Philippines. This international operation includes development and maintenance of our websites, our main call center, and sales and back office support services. We also have a Canadian subsidiary, which we may in the future operate to facilitate sales in Canada. We are subject to a number of risks and challenges that specifically relate to our international operations. Our international operations may not be successful if we are unable to meet and overcome these challenges, which could limit the growth of our business and may have an adverse effect on our business and operating results. These risks and challenges include:
 
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the amount and timing of operating costs and capital expenditures relating to the maintenance and expansion of our business, operations and infrastructure;
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difficulties and costs of staffing and managing foreign operations, including any impairment to our relationship with employees caused by a reduction in force;
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restrictions imposed by local labor practices and laws on our business and operations;

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exposure to different business practices and legal standards;
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unexpected changes in regulatory requirements;
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the imposition of government controls and restrictions;
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political, social and economic instability and the risk of war, terrorist activities or other international incidents;
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the failure of telecommunications and connectivity infrastructure;
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natural disasters and public health emergencies;
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potentially adverse tax consequences;
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the failure of local laws to provide a sufficient degree of protection against infringement of our intellectual property; and
•
fluctuations in foreign currency exchange rates and relative weakness in the U.S. dollar.
* We are dependent upon relationships with suppliers in Taiwan, China and the United States for the vast majority of our products.
We acquire substantially all of our products from manufacturers and distributors located in Taiwan, China and the United States. Our top ten suppliers represented 44.9% of our total product purchases during the thirteen weeks ended April 4, 2015. We do not have any long-term contracts or exclusive agreements with our foreign suppliers that would ensure our ability to acquire the types and quantities of products we desire at acceptable prices and in a timely manner. In addition, our ability to acquire products from our suppliers in amounts and on terms acceptable to us is dependent upon a number of factors that could affect our suppliers and which are beyond our control. For example, financial or operational difficulties that some of our suppliers may face could result in an increase in the cost of the products we purchase from them. In addition, the increasing consolidation among auto parts suppliers may disrupt or end our relationship with some suppliers, result in product shortages and/or lead to less competition and, consequently, higher prices. Furthermore, as part of our routine business, suppliers extend credit to us in connection with our purchase of their products. In the future, our suppliers may limit the amount of credit they are willing to extend to us in connection with our purchase of their products. If this were to occur, it could impair our ability to acquire the types and quantities of products that we desire from the applicable suppliers on acceptable terms, severely impact our liquidity and capital resources, limit our ability to operate our business and could have a material adverse effect on our financial condition and results of operations.
In addition, because many of our suppliers are outside of the United States, additional factors could interrupt our relationships or affect our ability to acquire the necessary products on acceptable terms, including:
 
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political, social and economic instability and the risk of war or other international incidents in Asia or abroad;
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fluctuations in foreign currency exchange rates that may increase our cost of products;
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tariffs and protectionist laws and business practices that favor local businesses;
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difficulties in complying with import and export laws, regulatory requirements and restrictions;
•
natural disasters and public health emergencies; and
•
import shipping delays resulting from foreign or domestic labor shortages, slow downs, or stoppage.

Additionally, if we do not maintain our relationships with our existing suppliers or develop relationships with new suppliers on acceptable commercial terms, we may not be able to continue to offer a broad selection of merchandise at competitive prices and, as a result, we could lose customers and our sales could decline.
* We are dependent upon third parties for distribution and fulfillment operations with respect to many of our products.
For a number of the products that we sell, we outsource the distribution and fulfillment operation and are dependent on our distributors to manage inventory, process orders and distribute those products to our customers in a timely manner. For the thirteen weeks ended April 4, 2015, our product purchases from three drop-ship suppliers represented 11.7% of our total product purchases. If we do not maintain our existing relationships with these suppliers and our other distributors on acceptable commercial terms, we will need to obtain other suppliers and may not be able to continue to offer a broad selection of merchandise at competitive prices, and our sales may decrease.

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In addition, because we outsource to distributors a number of these traditional retail functions relating to those products, we have limited control over how and when orders are fulfilled. We also have limited control over the products that our distributors purchase or keep in stock. Our distributors may not accurately forecast the products that will be in high demand or they may allocate popular products to other resellers, resulting in the unavailability of certain products for delivery to our customers. Any inability to offer a broad array of products at competitive prices and any failure to deliver those products to our customers in a timely and accurate manner may damage our reputation and brand and could cause us to lose customers and our sales could decline.
* We depend on third-party delivery services to deliver our products to our customers on a timely and consistent basis, and any deterioration in our relationship with any one of these third parties or increases in the fees that they charge could harm our reputation and adversely affect our business and financial condition.
We rely on third parties for the shipment of our products and we cannot be sure that these relationships will continue on terms favorable to us, or at all. Shipping costs have increased from time to time, and may continue to increase, and we may not be able to pass these costs directly to our customers, which could harm our business, prospects, financial condition and results of operations by increasing our costs of doing business and resulting in reduced gross margins which could negatively affect our operating results.
In addition, if our relationships with these third parties are terminated or impaired, or if these third parties are unable to deliver products for us, whether due to labor shortage, slow down or stoppage, deteriorating financial or business condition, responses to terrorist attacks or for any other reason, we would be required to use alternative carriers for the shipment of products to our customers. Changing carriers could have a negative effect on our business and operating results due to reduced visibility of order status and package tracking and delays in order processing and product delivery, and we may be unable to engage alternative carriers on a timely basis, upon terms favorable to us, or at all.
If commodity prices such as fuel, plastic and steel increase, our margins may reduce.
Our third party delivery services have increased fuel surcharges from time to time, and such increases negatively impact our margins, as we are generally unable to pass all of these costs directly to consumers. Increasing prices in the component materials for the parts we sell may impact the availability, the quality and the price of our products, as suppliers search for alternatives to existing materials and as they increase the prices they charge. We cannot ensure that we can recover all the increased costs through price increases, and our suppliers may not continue to provide the consistent quality of product as they may substitute lower cost materials to maintain pricing levels, all of which may have a negative impact on our business and results of operations.
If our fulfillment operations are interrupted for any significant period of time or are not sufficient to accommodate increased demand, our sales would decline and our reputation could be harmed.
Our success depends on our ability to successfully receive and fulfill orders and to promptly deliver our products to our customers. The majority of orders for our auto body parts products are filled from our inventory in our distribution centers, where all our inventory management, packaging, labeling and product return processes are performed. Increased demand and other considerations may require us to expand our distribution centers or transfer our fulfillment operations to larger facilities in the future.
Our distribution centers are susceptible to damage or interruption from human error, fire, flood, power loss, telecommunications failures, terrorist attacks, acts of war, break-ins, earthquakes and similar events. We do not currently maintain back-up power systems at our fulfillment centers. We do not presently have a formal disaster recovery plan and our business interruption insurance may be insufficient to compensate us for losses that may occur in the event operations at our fulfillment center are interrupted. Any interruptions in our fulfillment operations for any significant period of time, including interruptions resulting from the expansion of our existing facilities or the transfer of operations to a new facility, could damage our reputation and brand and substantially harm our business and results of operations and alternate arrangements may increase the cost of fulfillment. In addition, if we do not successfully expand our fulfillment capabilities in response to increases in demand, we may not be able to substantially increase our net sales.
We rely on bandwidth and data center providers and other third parties to provide products to our customers, and any failure or interruption in the services provided by these third parties could disrupt our business and cause us to lose customers.

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We rely on third-party vendors, including data center and bandwidth providers. Any disruption in the network access or co-location services, which are the services that house and provide Internet access to our servers, provided by these third-party providers or any failure of these third-party providers to handle current or higher volumes of use could significantly harm our business. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise little control over these third-party vendors, which increases our vulnerability to problems with the services they provide. We also license technology and related databases from third parties to facilitate elements of our e-commerce platform. We have experienced and expect to continue to experience interruptions and delays in service and availability for these elements. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies could negatively impact our relationship with our customers and adversely affect our business. Our systems also heavily depend on the availability of electricity, which also comes from third-party providers. If we were to experience a major power outage, we would have to rely on back-up generators. These back-up generators may not operate properly through a major power outage, and their fuel supply could also be inadequate during a major power outage. Information systems such as ours may be disrupted by even brief power outages, or by the fluctuations in power resulting from switches to and from backup generators. This could disrupt our business and cause us to lose customers.
We face intense competition and operate in an industry with limited barriers to entry, and some of our competitors may have greater resources than us and may be better positioned to capitalize on the growing e-commerce auto parts market.
The auto parts industry is competitive and highly fragmented, with products distributed through multi-tiered and overlapping channels. We compete with both online and offline retailers who offer original equipment manufacturer (“OEM”) and aftermarket auto parts to either the DIY or do-it-for-me customer segments. Current or potential competitors include the following:
 
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national auto parts retailers such as Advance Auto Parts, AutoZone, Napa Auto Parts, CarQuest, O’Reilly Automotive and Pep Boys;
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large online marketplaces such as Amazon.com and eBay;
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other online retailers and auto repair information websites;
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local independent retailers or niche auto parts online retailers; and
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wholesale aftermarket auto parts distributors such as LKQ Corporation.
•
foreign-based manufacturers and distributors selling product online directly to customers,
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manufacturers, brand suppliers and other distributors selling online directly to customers; and
•
low cost structure online drop ship models.
Barriers to entry are low, and current and new competitors can launch websites at a relatively low cost. Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, technical, management and other resources than we do. For example, in the event that online marketplace companies such as Amazon or eBay, who have larger customer bases, greater brand recognition and significantly greater resources than we do, focus more of their resources on competing in the aftermarket auto parts market, it could have a material adverse effect on our business and results of operations. In addition, some of our competitors have used and may continue to use aggressive pricing tactics and devote substantially more financial resources to website and system development than we do. We expect that competition will further intensify in the future as Internet use and online commerce continue to grow worldwide. Increased competition may result in reduced sales, lower operating margins, reduced profitability, loss of market share and diminished brand recognition.
Additionally, we have experienced significant competitive pressure from our suppliers who are now selling their products directly to customers. Since our suppliers have access to merchandise at very low costs, they can sell products at lower prices and maintain higher gross margins on their product sales than we can. Our financial results have been negatively impacted by direct sales from our suppliers to our current and potential customers, and our total number of orders and average order value may continue to decline due to increased competition. Continued competition from suppliers of ours that are capable of maintaining high sales volumes and acquiring products at lower prices than us will continue to negatively impact our business and results of operations, including through reduced sales, lower operating margins, reduced profitability, loss of market share and diminished brand recognition. We are in the process of implementing several strategies to attempt to overcome the challenges created by our suppliers selling directly to our customers and potential customers, including lowering our prices by increasing foreign sourced products and by improvements in our websites, which may not be successful. If these strategies are not successful, our operating results and financial conditions could be materially and adversely affected.

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If we fail to offer a broad selection of products at competitive prices to meet our customers’ demands, our revenue could decline.
In order to expand our business, we must successfully offer, on a continuous basis, a broad selection of auto parts that meet the needs of our customers, including by being the first to market with new SKUs. Our auto parts are used by consumers for a variety of purposes, including repair, performance, improved aesthetics and functionality. In addition, to be successful, our product offerings must be broad and deep in scope, competitively priced, well-made, innovative and attractive to a wide range of consumers. We cannot predict with certainty that we will be successful in offering products that meet all of these requirements. If our product offerings fail to satisfy our customers’ requirements or respond to changes in customer preferences, our revenue could decline.
Challenges by OEMs to the validity of the aftermarket auto parts industry and claims of intellectual property infringement could adversely affect our business and the viability of the aftermarket auto parts industry.
OEMs have attempted to use claims of intellectual property infringement against manufacturers and distributors of aftermarket products to restrict or eliminate the sale of aftermarket products that are the subject of the claims. The OEMs have brought such claims in federal court and with the United States International Trade Commission. We have received in the past, and we anticipate we may in the future receive, communications alleging that certain products we sell infringe the patents, copyrights, trademarks and trade names or other intellectual property rights of OEMs or other third parties. For instance, after approximately three and a half years of litigation and related costs and expenses, on April 16, 2009, we entered into a settlement agreement with Ford Motor Company and Ford Global Technologies, LLC that ended the two legal actions that were initiated by Ford against us related to claims of intellectual property infringement. The United States Patent and Trademark Office records indicate that OEMs are seeking and obtaining more design patents then they have in the past. To the extent that the OEMs are successful with intellectual property infringement claims, we could be restricted or prohibited from selling certain aftermarket products which could have an adverse effect on our business. Infringement claims could also result in increased costs of doing business arising from increased legal expenses, adverse judgments or settlements or changes to our business practices required to settle such claims or satisfy any judgments. Litigation could result in interpretations of the law that require us to change our business practices or otherwise increase our costs and harm our business. We do not maintain insurance coverage to cover the types of claims that could be asserted. If a successful claim were brought against us, it could expose us to significant liability.
If we are unable to protect our intellectual property rights, our reputation and brand could be impaired and we could lose customers.
We regard our trademarks, trade secrets and similar intellectual property such as our proprietary back-end order processing and fulfillment code and process as important to our success. We rely on trademark and copyright law, and trade secret protection, and confidentiality and/or license agreements with employees, customers, partners and others to protect our proprietary rights. We cannot be certain that we have taken adequate steps to protect our proprietary rights, especially in countries where the laws may not protect our rights as fully as in the United States. In addition, our proprietary rights may be infringed or misappropriated, and we could be required to incur significant expenses to preserve them. In the past we have filed litigation to protect our intellectual property rights. The outcome of such litigation can be uncertain, and the cost of prosecuting such litigation may have an adverse impact on our earnings. We have common law trademarks, as well as pending federal trademark registrations for several marks and several registered marks. Even if we obtain approval of such pending registrations, the resulting registrations may not adequately cover our intellectual property or protect us against infringement by others. Effective trademark, service mark, copyright, patent and trade secret protection may not be available in every country in which our products and services may be made available online. We also currently own or control a number of Internet domain names, including www.usautoparts.net, www.carparts.com, www.autopartswarehouse.com, www.jcwhitney.com and www.AutoMD.com, and have invested time and money in the purchase of domain names and other intellectual property, which may be impaired if we cannot protect such intellectual property. We may be unable to protect these domain names or acquire or maintain relevant domain names in the United States and in other countries. If we are not able to protect our trademarks, domain names or other intellectual property, we may experience difficulties in achieving and maintaining brand recognition and customer loyalty.
If our product catalog database is stolen, misappropriated or damaged, or if a competitor is able to create a substantially similar catalog without infringing our rights, then we may lose an important competitive advantage.
We have invested significant resources and time to build and maintain our product catalog, which is maintained in the form of an electronic database, which maps SKUs to relevant product applications based on vehicle makes, models and years. We believe that our product catalog provides us with an important competitive advantage in both driving traffic to our websites

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and converting that traffic to revenue by enabling customers to quickly locate the products they require. We cannot assure you that we will be able to protect our product catalog from unauthorized copying or theft or that our product catalog will continue to operate adequately, without any technological challenges. In addition, it is possible that a competitor could develop a catalog or database that is similar to or more comprehensive than ours, without infringing our rights. In the event our product catalog is damaged or is stolen, copied or otherwise replicated to compete with us, whether lawfully or not, we may lose an important competitive advantage and our business could be harmed.

Our e-commerce system is dependent on open-source software, which exposes us to uncertainty and potential liability.
We utilize open-source software such as Linux, Apache, MySQL, PHP, Fedora and Perl throughout our web properties and supporting infrastructure although we have created proprietary programs. Open-source software is maintained and upgraded by a general community of software developers under various open-source licenses, including the GNU General Public License (“GPL”). These developers are under no obligation to maintain, enhance or provide any fixes or updates to this software in the future. Additionally, under the terms of the GPL and other open-source licenses, we may be forced to release to the public source-code internally developed by us pursuant to such licenses. Furthermore, if any of these developers contribute any code of others to any of the software that we use, we may be exposed to claims and liability for intellectual property infringement. A number of lawsuits are currently pending against third parties over the ownership rights to the various components within some open-source software that we use. If the outcome of these lawsuits is unfavorable, we may be held liable for intellectual property infringement based on our use of these open-source software components. We may also be forced to implement changes to the code-base for this software or replace this software with internally developed or commercially licensed software.
We face exposure to product liability lawsuits.
The automotive industry in general has been subject to a large number of product liability claims due to the nature of personal injuries that result from car accidents or malfunctions. As a distributor of auto parts, including parts obtained overseas, we could be held liable for the injury or damage caused if the products we sell are defective or malfunction. While we carry insurance against product liability claims, if the damages in any given action were high or we were subject to multiple lawsuits, the damages and costs could exceed the limits of our insurance coverage. If we were required to pay substantial damages as a result of these lawsuits, it may seriously harm our business and financial condition. Even defending against unsuccessful claims could cause us to incur significant expenses and result in a diversion of management’s attention. In addition, even if the money damages themselves did not cause substantial harm to our business, the damage to our reputation and the brands offered on our websites could adversely affect our future reputation and our brand, and could result in a decline in our net sales and profitability.
We rely on key personnel and may need additional personnel for the success and growth of our business.
Our business is largely dependent on the personal efforts and abilities of highly skilled executive, technical, managerial, merchandising, marketing, and call center personnel. Competition for such personnel is intense, and we cannot assure that we will be successful in attracting and retaining such personnel. The loss of any key employee or our inability to attract or retain other qualified employees could harm our business and results of operations.
System failures, including failures due to natural disasters or other catastrophic events, could prevent access to our websites, which could reduce our net sales and harm our reputation.
Our sales would decline and we could lose existing or potential customers if they are not able to access our websites or if our websites, transactions processing systems or network infrastructure do not perform to our customers’ satisfaction. Any Internet network interruptions or problems with our websites could:
 
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prevent customers from accessing our websites;
•
reduce our ability to fulfill orders or bill customers;
•
reduce the number of products that we sell;
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cause customer dissatisfaction; or
•
damage our brand and reputation.
We have experienced brief computer system interruptions in the past, and we believe they may continue to occur from time to time in the future. Our systems and operations are also vulnerable to damage or interruption from a number of sources,

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including a natural disaster or other catastrophic event such as an earthquake, typhoon, volcanic eruption, fire, flood, terrorist attack, computer viruses, power loss, telecommunications failure, physical and electronic break-ins and other similar events. For example, our headquarters and the majority of our infrastructure, including some of our servers, are located in Southern California, a seismically active region. We also maintain offshore and outsourced operations in the Philippines, an area that has been subjected to a typhoon and a volcanic eruption in the past. In addition, California has in the past experienced power outages as a result of limited electrical power supplies and due to recent fires in the southern part of the state. Such outages, natural disasters and similar events may recur in the future and could disrupt the operation of our business. Our technology infrastructure is also vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. Although the critical portions of our systems are redundant and backup copies are maintained offsite, not all of our systems and data are fully redundant. We do not presently have a formal disaster recovery plan in effect and may not have sufficient insurance for losses that may occur from natural disasters or catastrophic events. Any substantial disruption of our technology infrastructure could cause interruptions or delays in our business and loss of data or render us unable to accept and fulfill customer orders or operate our websites in a timely manner, or at all.
Risks Related To Our Capital Stock
* Our common stock price has been and may continue to be volatile, which may result in losses to our stockholders.
The market prices of technology and e-commerce companies generally have been extremely volatile and have recently experienced sharp share price and trading volume changes. The trading price of our common stock is likely to be volatile and could fluctuate widely in response to, among other things, the risk factors described in this report and other factors beyond our control such as fluctuations in the operations or valuations of companies perceived by investors to be comparable to us, our ability to meet analysts’ expectations, or conditions or trends in the Internet or auto parts industries.
Since the completion of our initial public offering in February 2007 through April 4, 2015, the trading price of our common stock has been volatile, ranging from a high of $12.61 per share to a low per share of $0.91. We have also experienced significant fluctuations in the trading volume of our common stock. General economic and political conditions unrelated to our performance may also adversely affect the price of our common stock. In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been initiated. Due to the inherent uncertainties of litigation, we cannot predict the ultimate outcome of any such litigation if it were initiated. The initiation of any such litigation or an unfavorable result could have a material adverse effect on our financial condition and results of operations.
* Our common stock may be delisted from the Nasdaq Global Market (“Nasdaq”) if we are unable to maintain compliance with Nasdaq’s continued listing standards.
As a company traded on the Nasdaq, we are subject to compliance with Nasdaq’s listing rules, which require, among other things, that our Board of Directors be comprised of a majority of independent directors. In July 2013, we received a notice from Nasdaq that the Company’s Board of Directors was no longer comprised of a majority of independent directors due to the resignation of one of our independent directors. We regained compliance in November 2013 with the appointment of two new independent directors, prior to the expiration of the cure period provided by Nasdaq,
Nasdaq imposes, among other requirements, continued listing standards including minimum bid and public float requirements. The price of our common stock must trade at or above $1.00 to comply with Nasdaq’s minimum bid requirement for continued listing on the Nasdaq. If our stock trades at bid prices of less than $1.00 for a period in excess of 30 consecutive business days, the Nasdaq could send a deficiency notice to us for not remaining in compliance with the minimum bid listing standards. During the first quarter of 2015 and fiscal year 2014, our common stock never traded below $1.00. At certain times during the third quarter of 2013, our common stock traded below $1.00 per share at closing before it returned to trading at or above $1.00 to comply with Nasdaq’s minimum bid requirement for continued listing on the Nasdaq, however, at no time did such period exceed 30 consecutive business days. If the closing bid price of our common stock fails to meet Nasdaq’s minimum closing bid price requirement, or if we otherwise fail to meet any other applicable requirements of the Nasdaq and we are unable to regain compliance, Nasdaq may make a determination to delist our common stock.
Any delisting of our common stock could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease. Furthermore, if our common stock were delisted it could adversely affect our ability to obtain financing for the continuation of our operations and/or result in the loss of confidence by investors, customers, suppliers and employees.
* Our executive officers and directors and certain related parties own a significant percentage of our stock.

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As of April 4, 2015, our executive officers and directors and certain related parties and entities that are affiliated with them beneficially owned in the aggregate approximately 51.7% of our outstanding shares of stock. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, these stockholders, acting together, will be able to significantly influence our management and affairs and control matters requiring stockholder approval including the election of our entire Board of Directors and certain significant corporate actions such as mergers, consolidations or the sale of substantially all of our assets. As a result, this concentration of ownership could delay, defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would benefit our other stockholders and us.

The rights, preferences and privileges of our existing preferred stock may restrict our financial and operational flexibility.
In March 2013, our Board of Directors, under the authority granted by our Certificate of Incorporation, established a series of preferred stock, our Series A Convertible Preferred, which has various rights, preferences and privileges senior to the shares of our common stock. Dividends on the Series A Convertible Preferred are payable quarterly, subject to the satisfaction of certain conditions, at a rate of $0.058 per share per annum in cash, in shares of common stock or in any combination of cash and common stock as determined by our Board of Directors. While we may, at our election, subject to the satisfaction of certain conditions, pay any accrued but unpaid dividends on the Series A Convertible Preferred in either cash or in common stock, we may be unable to satisfy the requisite conditions for paying dividends in common stock and, under such circumstances, we will be required to pay such accrued but unpaid dividends in cash. In such circumstances, we will be required to use cash that would otherwise be used to fund our ongoing operations to pay such accrued but unpaid dividends. To the extent we do pay dividends in common stock, the ownership percentage of our common stockholders who are not holders of the Series A Convertible Preferred will be diluted. Our Series A Convertible Preferred is initially convertible for 4,149,997 shares of common stock, and to the extent that the Series A Convertible Preferred is converted, the common stock ownership percentage of our common stockholders who are not converting holders of the Series A Convertible Preferred will be diluted.
Our future operating results may fluctuate and may fail to meet market expectations.
We expect that our revenue and operating results will continue to fluctuate from quarter to quarter due to various factors, many of which are beyond our control. If our quarterly revenue or operating results fall below the expectations of investors or securities analysts, the price of our common stock could significantly decline. The factors that could cause our operating results to continue to fluctuate include, but are not limited to:
 
•
fluctuations in the demand for aftermarket auto parts;
•
price competition on the Internet or among offline retailers for auto parts;
•
our ability to attract visitors to our websites and convert those visitors into customers, including to the extent based on our ability to successfully work with different search engines to drive visitors to our websites;
•
our ability to successfully sell our products through third-party online marketplaces;
•
competition from companies that have longer operating histories, larger customer bases, greater brand recognition, access to merchandise at lower costs and significantly greater resources than we do, like third-party online market places and our suppliers;
•
our ability to maintain and expand our supplier and distribution relationships without significant price increases or reduced service levels;
•
our ability to borrow funds under our credit facility;
•
the effects of seasonality on the demand for our products;
•
our ability to accurately forecast demand for our products, price our products at market rates and maintain appropriate inventory levels;
•
our ability to build and maintain customer loyalty;
•
our ability to successfully integrate our acquisitions;
•
infringement actions that could impact the viability of the auto parts aftermarket or portions thereof;
•
the success of our brand-building and marketing campaigns;
•
our ability to accurately project our future revenues, earnings, and results of operations;

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•
government regulations related to use of the Internet for commerce, including the application of existing tax regulations to Internet commerce and changes in tax regulations;
•
technical difficulties, system downtime or Internet brownouts;
•
the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure; and
•
macroeconomic conditions that adversely impacts the general retail sales environment.
* If we fail to maintain an effective system of internal control over financial reporting or comply with Section 404 of the Sarbanes-Oxley Act of 2002, we may not be able to accurately report our financial results or prevent fraud, and our stock price could decline.
While management has concluded that our internal controls over financial reporting were effective as of April 4, 2015, we have in the past, and could in the future, have a significant deficiency or material weakness in internal control over financial reporting or fail to comply with Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to properly maintain an effective system of internal control over financial reporting, it could impact our ability to prevent fraud or to issue our financial statements in a timely manner that presents fairly our financial condition and results of operations. The existence of any such deficiencies or weaknesses, even if remediated, may also lead to the loss of investor confidence in the reliability of our financial statements, could harm our business and negatively impact the trading price of our common stock. Such deficiencies or material weaknesses may also subject us to lawsuits, investigations and other penalties.
Our charter documents could deter a takeover effort, which could inhibit your ability to receive an acquisition premium for your shares.
Provisions in our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Such provisions include the following:
 
•
our Board of Directors are authorized, without prior stockholder approval, to create and issue preferred stock which could be used to implement anti-takeover devices;
•
advance notice is required for director nominations or for proposals that can be acted upon at stockholder meetings;
•
our Board of Directors is classified such that not all members of our board are elected at one time, which may make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace all or a majority of our directors;
•
stockholder action by written consent is prohibited except with regards to an action that has been approved by the Board;
•
special meetings of the stockholders are permitted to be called only by the chairman of our Board of Directors, our chief executive officer or by a majority of our Board of Directors;
•
stockholders are not permitted to cumulate their votes for the election of directors; and
•
stockholders are permitted to amend certain provisions of our bylaws only upon receiving at least 66 2/3% of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.
We do not intend to pay dividends on our common stock.
We currently do not expect to pay any cash dividends on our common stock for the foreseeable future.
General Market and Industry Risk
Economic conditions have had, and may continue to have an adverse effect on the demand for aftermarket auto parts and could adversely affect our sales and operating results.
We sell aftermarket auto parts consisting of body and engine parts used for repair and maintenance, performance parts used to enhance performance or improve aesthetics and accessories that increase functionality or enhance a vehicle’s features. Demand for our products has been and may continue to be adversely affected by general economic conditions. In declining

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economies, consumers often defer regular vehicle maintenance and may forego purchases of nonessential performance and accessories products, which can result in a decrease in demand for auto parts in general. Consumers also defer purchases of new vehicles, which immediately impacts performance parts and accessories, which are generally purchased in the first six months of a vehicle’s lifespan. In addition, during economic downturns some competitors may become more aggressive in their pricing practices, which would adversely impact our gross margin and could cause large fluctuations in our stock price. Certain suppliers may exit the industry which may impact our ability to procure parts and may adversely impact gross margin as the remaining suppliers increase prices to take advantage of limited competition.

Vehicle miles driven, vehicle accident rates and insurance companies’ willingness to accept a variety of types of replacement parts in the repair process have fluctuated and may decrease, which could result in a decline of our revenues and negatively affect our results of operations.
We and our industry depend on the number of vehicle miles driven, vehicle accident rates and insurance companies’ willingness to accept a variety of types of replacement parts in the repair process. Decreased miles driven reduce the number of accidents and corresponding demand for crash parts, and reduce the wear and tear on vehicles with a corresponding reduction in demand for vehicle repairs and replacement or hard parts. If consumers were to drive less in the future, as a result of higher gas prices or otherwise, our sales may decline and our business and financial results may suffer.
The success of our business depends on the continued growth of the Internet as a retail marketplace and the related expansion of the Internet infrastructure.
Our future success depends upon the continued and widespread acceptance and adoption of the Internet as a vehicle to purchase products. If customers or manufacturers are unwilling to use the Internet to conduct business and exchange information, our business will fail. The commercial acceptance and use of the Internet may not continue to develop at historical rates, or may not develop as quickly as we expect. The growth of the Internet, and in turn the growth of our business, may be inhibited by concerns over privacy and security, including concerns regarding “viruses” and “worms,” reliability issues arising from outages or damage to Internet infrastructure, delays in development or adoption of new standards and protocols to handle the demands of increased Internet activity, decreased accessibility, increased government regulation, and taxation of Internet activity. In addition, our business growth may be adversely affected if the Internet infrastructure does not keep pace with the growing Internet activity and is unable to support the demands placed upon it, or if there is any delay in the development of enabling technologies and performance improvements.
We may be subject to liability for sales and other taxes and penalties, which could have an adverse effect on our business.
In 2014, we collected sales or other similar taxes only on the shipment of goods to the states of California, Kansas, Virginia, Illinois and Ohio. The U.S. Supreme Court has ruled that vendors whose only connection with customers in a state is by common carrier or the U.S. mail are free from state-imposed duties to collect sales and use taxes in that state. However, states could seek to impose additional income tax obligations or sales tax collection obligations on out-of-state companies such as ours, which engage in or facilitate online commerce, based on their interpretation of existing laws, including the Supreme Court ruling, or specific facts relating to us. If sales tax obligations are successfully imposed upon us by a state or other jurisdiction, we could be exposed to substantial tax liabilities for past sales and penalties and fines for failure to collect sales taxes. We could also suffer decreased sales in that state or jurisdiction as the effective cost of purchasing goods from us increases for those residing in that state or jurisdiction.
In addition, a number of states, as well as the U.S. Congress, have been considering various initiatives that could limit or supersede the Supreme Court’s apparent position regarding sales and use taxes on Internet sales. If any of these initiatives are enacted, we could be required to collect sales and use taxes in additional states and our revenue could be adversely affected. Furthermore, the U.S. Congress has not yet extended a moratorium, which was first imposed in 1998 but has since expired, on state and local governments’ ability to impose new taxes on Internet access and Internet transactions. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us as well as substantially impair the growth of e-commerce and adversely affect our revenue and profitability. Since our service is available over the Internet in multiple states, these jurisdictions may require us to qualify to do business in these states. If we fail to qualify in a jurisdiction that requires us to do so, we could face liabilities for taxes and penalties.
Security threats to our IT infrastructure could expose us to liability, and damage our reputation and business
It is essential to our business strategy that our technology and network infrastructure remain secure and is perceived by our customers to be secure. Despite security measures, however, any network infrastructure may be vulnerable to cyber-attacks by hackers and other security threats. As a leading online source for automotive aftermarket parts and repair information, we

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may face cyber-attacks that attempt to penetrate our network security, including our data centers, to sabotage or otherwise disable our network of websites and online marketplaces, misappropriate our or our customers’ proprietary information, which may include personally identifiable information, or cause interruptions of our internal systems and services. If successful, any of these attacks could negatively affect our reputation, damage our network infrastructure and our ability to sell our products, harm our relationship with customers that are affected and expose us to financial liability.

If we do not respond to technological change, our websites could become obsolete and our financial results and conditions could be adversely affected.
We maintain a network of websites which requires substantial development and maintenance efforts, and entails significant technical and business risks. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our websites. The Internet and the e-commerce industry are characterized by rapid technological change, the emergence of new industry standards and practices and changes in customer requirements and preferences. Therefore, we may be required to license emerging technologies, enhance our existing websites, develop new services and technology that address the increasingly sophisticated and varied needs of our current and prospective customers, and adapt to technological advances and emerging industry and regulatory standards and practices in a cost-effective and timely manner. Our ability to remain technologically competitive may require substantial expenditures and lead time and our failure to do so may harm our business and results of operations.
Existing or future government regulation could expose us to liabilities and costly changes in our business operations and could reduce customer demand for our products and services.
We are subject to federal and state consumer protection laws and regulations, including laws protecting the privacy of customer non-public information and regulations prohibiting unfair and deceptive trade practices, as well as laws and regulations governing businesses in general and the Internet and e-commerce and certain environmental laws. Additional laws and regulations may be adopted with respect to the Internet, the effect of which on e-commerce is uncertain. These laws may cover issues such as user privacy, spyware and the tracking of consumer activities, marketing e-mails and communications, other advertising and promotional practices, money transfers, pricing, content and quality of products and services, taxation, electronic contracts and other communications, intellectual property rights, and information security. Furthermore, it is not clear how existing laws such as those governing issues such as property ownership, sales and other taxes, trespass, data mining and collection, and personal privacy apply to the Internet and e-commerce. To the extent we expand into international markets, we will be faced with complying with local laws and regulations, some of which may be materially different than U.S. laws and regulations. Any such foreign law or regulation, any new U.S. law or regulation, or the interpretation or application of existing laws and regulations to the Internet or other online services or our business in general, may have a material adverse effect on our business, prospects, financial condition and results of operations by, among other things, impeding the growth of the Internet, subjecting us to fines, penalties, damages or other liabilities, requiring costly changes in our business operations and practices, and reducing customer demand for our products and services. We do not maintain insurance coverage to cover the types of claims or liabilities that could arise as a result of such regulation.
We may be affected by global climate change or by legal, regulatory, or market responses to such change.
The growing political and scientific sentiment is that global weather patterns are being influenced by increased levels of greenhouse gases in the earth’s atmosphere. This growing sentiment and the concern over climate change have led to legislative and regulatory initiatives aimed at reducing greenhouse gas emissions. For example, proposals that would impose mandatory requirements on greenhouse gas emissions continue to be considered by policy makers in the United States. Laws enacted that directly or indirectly affect our suppliers (through an increase in the cost of production or their ability to produce satisfactory products) or our business (through an impact on our inventory availability, cost of sales, operations or demand for the products we sell) could adversely affect our business, financial condition, results of operations and cash flows. Significant increases in fuel economy requirements or new federal or state restrictions on emissions of carbon dioxide that may be imposed on vehicles and automobile fuels could adversely affect demand for vehicles, annual miles driven or the products we sell or lead to changes in automotive technology. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by us or our suppliers. Our inability to respond to changes in automotive technology could adversely impact the demand for our products and our business, financial condition, results of operations or cash flows
The United States government may substantially increase border controls and impose restrictions on cross-border commerce that may substantially harm our business.

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We purchase a substantial portion of our products from foreign manufacturers and other suppliers who source products internationally. Restrictions on shipping goods into the United States from other countries pose a substantial risk to our business. Particularly since the terrorist attacks on September 11, 2001, the United States government has substantially increased border surveillance and controls. If the United States were to impose further border controls and restrictions, impose quotas, tariffs or import duties, increase the documentation requirements applicable to cross border shipments or take other actions that have the effect of restricting the flow of goods from other countries to the United States, we may have greater difficulty acquiring our inventory in a timely manner, experience shipping delays, or incur increased costs and expenses, all of which would substantially harm our business and results of operations.

ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds
None.

ITEM 3.    Defaults Upon Senior Securities
None.

ITEM 4.    Mine Safety Disclosures
Not applicable.
 
ITEM 5.    Other Information
None.

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ITEM 6.    Exhibits
The following exhibits are filed herewith or incorporated by reference to the location indicated below:
Exhibit No.
Description
 
 
3.1
Second Amended and Restated Certificate of Incorporation of U.S. Auto Parts Network, Inc. as filed with the Delaware Secretary of State on February 14, 2007 (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2007)
 
 
3.2
Amended and Restated Bylaws of U.S. Auto Parts Network, Inc. (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2007)
 
 
3.3
Certificate of Designation, Preferences and Rights of the Series A Convertible Preferred Stock of U.S. Auto Parts Network, Inc. (incorporated by reference to the Current Report on Form 8-K filed on March 25, 2013)
 
 
4.1*
Specimen common stock certificate
 
 
10.1
Seventh Amendment to Credit Agreement dated March 24, 2015, by and among U.S. Auto Parts Network, Inc., certain of its domestic subsidiaries and JPMorgan Chase Bank, N.A
 
 
10.2
Employment Agreement dated March 23, 2015, between U.S. Auto Parts Network, Inc. and Neil Watanabe (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed on March 24, 2015).
 
 
10.3
Settlement Agreement and Release of All Claims dated February 26, 2015, by and between U.S. Auto Parts Network, Inc. and Houman Akhavan.
 
 
31.1
Certification of the Principal Executive Officer required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended
 
 
31.2
Certification of the Principal Financial Officer required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended
 
 
32.1
Certification of the Chief Executive Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
32.2
Certification of the Chief Financial Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
*    Incorporated by reference to the exhibit of the same number from the registration statement on Form S-1 of U.S. Auto Parts Network, Inc. (File No. 333-138379) initially filed with the Securities and Exchange Commission on November 2, 2006, as amended.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date: May 12, 2015
U.S. AUTO PARTS NETWORK, INC.
 
 
 
 
By:
/s/ Shane Evangelist
 
 
Shane Evangelist
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
By:
/s/ Neil T. Watanabe
 
 
Neil T. Watanabe
 
 
Chief Financial Officer
 
 
(Principal Financial Accounting Officer)


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