UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 2, 2022

☐ 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

CARPARTS.COM, 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.)

2050 W. 190^th Street, Suite 400, Torrance, CA 90504

(Address of Principal Executive Office) (Zip Code)

(424) 702-1455

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	PRTS	The NASDAQ Stock Market LLC (NASDAQ Global Market)

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 ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧

As of July 28, 2022, the registrant had 54,463,975 shares of common stock outstanding, $0.001 par value.

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CARPARTS.COM, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 2, 2022

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		Page
	PART I. FINANCIAL INFORMATION

ITEM 1.	Financial Statements	4
	Consolidated Balance Sheets (Unaudited) at July 2, 2022 and January 1, 2022	4
	Consolidated Statements of Operations and Comprehensive Operations (Unaudited) for the Thirteen and Twenty-six Weeks Ended July 2, 2022 and July 3, 2021	5
	Consolidated Statements of Stockholders’ Equity (Unaudited) for the Thirteen and Twenty-six Weeks Ended July 2, 2022 and July 3, 2021	6
	Consolidated Statements of Cash Flows (Unaudited) for the Twenty-six Weeks Ended July 2, 2022 and July 3, 2021	7
	Notes to Consolidated Financial Statements (Unaudited)	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	19
ITEM 4.	Controls and Procedures	20

	PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	20
ITEM 1A.	Risk Factors	20
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
ITEM 3.	Defaults Upon Senior Securities	42
ITEM 4.	Mine Safety Disclosures	42
ITEM 5.	Other Information	42
ITEM 6.	Exhibits	43

Unless the context requires otherwise, as used in this report, the terms “CarParts.com,” the “Company,” “we,” “us” and “our” refer to CarParts.com, Inc. and its subsidiaries. Unless otherwise stated, all amounts are presented in thousands.

Carparts.com^®, Kool-Vue^®, JC Whitney^®, Evan Fischer^®, SureStop^®, TrueDrive^®, DriveWire^™, and DriveMotive^™, amongst others, are our current and pending trademarks in the United States. 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, our ability to acquire additional market share, 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

CARPARTS.COM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, In Thousands, Except Par Value Data)


	July 2,		January 1,
	2022		2022
ASSETS
Current assets:
Cash and cash equivalents	$	15,224	$	18,144
Accounts receivable, net		7,085		5,015
Inventory, net		163,016		138,851
Other current assets		8,299		6,592
Total current assets		193,624		168,602
Property and equipment, net		24,172		20,736
Right-of-use - assets - operating leases, net		26,103		28,680
Right-of-use - assets - finance leases, net		20,289		15,130
Other non-current assets		2,711		2,188
Total assets	$	266,899	$	235,336
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	82,887	$	67,372
Accrued expenses		18,724		17,517
Customer deposits		571		826
Right-of-use - obligation - operating, current		4,068		4,201
Right-of-use - obligation - finance, current		4,489		2,953
Other current liabilities		4,071		3,925
Total current liabilities		114,810		96,794
Right-of-use - obligation - operating, non-current		23,784		26,367
Right-of-use - obligation - finance, non-current		16,602		12,868
Other non-current liabilities		3,449		3,739
Total liabilities		158,645		139,768
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized; 54,360 and 52,960 shares issued and outstanding as of July 2, 2022 and January 1, 2022 (of which 2,565 are treasury stock)		57		56
Treasury stock		(7,625)		(7,625)
Additional paid-in capital		289,137		282,663
Accumulated other comprehensive gain		264		274
Accumulated deficit		(173,579)		(179,800)
Total stockholders’ equity		108,254		95,568
Total liabilities and stockholders' equity	$	266,899	$	235,336

See accompanying notes to consolidated financial statements (unaudited).

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CARPARTS.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS

(Unaudited, in Thousands, Except Per Share Data)


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 2,		July 3,		July 2,		July 3,
	2022		2021		2022		2021
Net sales	$	176,220	$	157,536	$	342,273	$	302,338
Cost of sales ⁽¹⁾		114,285		104,187		219,176		199,815
Gross profit		61,935		53,349		123,097		102,523
Operating expense		57,644		51,013		116,415		102,685
Income (loss) from operations		4,291		2,336		6,682		(162)
Other income (expense):
Other, net		190		116		246		197
Interest expense		(346)		(267)		(638)		(517)
Total other expense, net		(156)		(151)		(392)		(320)
Income (loss) before income taxes		4,135		2,185		6,290		(482)
Income tax provision		17		113		69		168
Net income (loss)		4,118		2,072		6,221		(650)
Other comprehensive gain (loss):
Foreign currency translation adjustments		104		16		124		30
Unrealized (loss) gain on deferred compensation trust assets		(100)		38		(134)		73
Total other comprehensive gain (loss)		4		54		(10)		103
Comprehensive income (loss)	$	4,122	$	2,126	$	6,211	$	(547)
Net income (loss) per share:
Basic net income (loss) per share	$	0.08	$	0.04	$	0.12	$	(0.01)
Diluted net income (loss) per share	$	0.07	$	0.04	$	0.11	$	(0.01)
Weighted-average common shares outstanding:
Shares used in computation of basic net income (loss) per share		54,210		51,684		53,744		50,222
Shares used in computation of diluted net income (loss) per share		57,210		57,122		57,315		50,222

(1)	Excludes depreciation and amortization expense which is included in operating expense.

See accompanying notes to consolidated financial statements (unaudited).

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CARPARTS.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, In Thousands)


								Accumulated
				Additional				Other				Total
	Common Stock			Paid-in-		Treasury		Comprehensive		Accumulated		Stockholders’
	Shares	Amount		Capital		Stock		(Loss) Income		Deficit		Equity
Balance, January 2, 2021	48,091	$	51	$	260,260	$	(7,146)	$	(215)	$	(169,461)	$	83,489
Net loss	—		—		—		—		—		(2,722)		(2,722)
Issuance of shares in connection with stock option exercise	130		—		163		—		—		—		163
Issuance of shares in connection with restricted stock units vesting	2,382		2		(6)		—		—		—		(4)
Issuance of shares in connection with BOD fees	—		—		6		—		—		—		6
Share-based compensation	—		—		4,080		—		—		—		4,080
Unrealized gain on deferred compensation trust assets	—		—		—		—		35		—		35
Effect of changes in foreign currencies	—		—		—		—		14		—		14
Balance, April 3, 2021	50,603		53		264,503		(7,146)		(166)		(172,183)		85,061

Net income	—		—		—		—		—		2,072		2,072
Issuance of shares in connection with stock option exercise	1,463		2		2,615		—		—		—		2,617
Issuance of stock awards	118		—		389		—		—		—		389
Issuance of shares in connection with BOD fees	—		—		6		—		—		—		6
Share-based compensation	—		—		3,821		—		—		—		3,821
Unrealized gain on deferred compensation trust assets	—		—		—		—		38		—		38
Effect of changes in foreign currencies	—		—		—		—		16		—		16
Balance, July 3, 2021	52,184	$	55	$	271,334	$	(7,146)	$	(112)	$	(170,111)	$	94,020

Balance, January 1, 2022	52,960		56		282,663		(7,625)		274		(179,800)		95,568
Net income	—		—		—		—		—		2,103		2,103
Issuance of shares in connection with stock option exercise	533		—		792		—		—		—		792
Issuance of shares in connection with restricted stock units vesting	519		1		(1)		—		—		—		—
Issuance of stock awards to consultants	10		—		81		—		—		—		81
Issuance of shares in connection with BOD fees	—		—		6		—		—		—		6
Issuance of shares in connection with ESPP	45		—		431		—		—		—		431
Officers and directors stock purchase plan	3		—		23		—		—		—		23
Share-based compensation	—		—		4,225		—		—		—		4,225
Unrealized loss on deferred compensation trust assets	—		—		—		—		(34)		—		(34)
Effect of changes in foreign currencies	—		—		—		—		20		—		20
Balance, April 2, 2022	54,070	$	57	$	288,220	$	(7,625)	$	260	$	(177,697)	$	103,215
Net income	—		—		—		—		—		4,118		4,118
Issuance of shares in connection with stock option exercise	70		—		136		—		—		—		136
Issuance of shares in connection with restricted stock units vesting	220		—		—		—		—		—		—
Issuance of shares in connection with BOD fees	—		—		6		—		—		—		6
Officers and directors stock purchase plan	—		—		4		—		—		—		4
Share-based compensation	—		—		771		—		—		—		771
Unrealized loss on deferred compensation trust assets	—		—		—		—		(100)		—		(100)
Effect of changes in foreign currencies	—		—		—		—		104		—		104
Balance, July 2, 2022	54,360	$	57	$	289,137	$	(7,625)	$	264	$	(173,579)	$	108,254

See accompanying notes to consolidated financial statements (unaudited).

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CARPARTS.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, In Thousands)


	Twenty-Six Weeks Ended
	July 2,		July 3,
	2022		2021
Operating activities
Net income (loss)	$	6,221	$	(650)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense		6,265		4,550
Amortization of intangible assets		55		55
Share-based compensation expense		4,498		7,272
Stock awards issued for non-employee director service		11		12
Stock awards related to officers and directors stock purchase plan from payroll deferral		27		—
Gain from disposition of assets		(17)		—
Amortization of deferred financing costs		21		9
Changes in operating assets and liabilities:
Accounts receivable		(2,070)		(676)
Inventory		(24,165)		(24,649)
Other current assets		(1,739)		1,316
Other non-current assets		(741)		540
Accounts payable and accrued expenses		17,466		12,883
Other current liabilities		(109)		42
Right-of-use obligation - operating leases - current		(105)		430
Right-of-use obligation - operating leases - long-term		(20)		(76)
Other non-current liabilities		(139)		(77)
Net cash provided by operating activities		5,459		981
Investing activities
Additions to property and equipment		(7,797)		(5,398)
Proceeds from sale of property and equipment		44		—
Net cash used in investing activities		(7,753)		(5,398)
Financing activities
Borrowings from revolving loan payable		5,296		90
Payments made on revolving loan payable		(5,296)		(90)
Payments on finance leases		(1,966)		(990)
Net proceeds from issuance of common stock for ESPP		432		—
Statutory tax withholding payment for share-based compensation		—		(3)
Proceeds from exercise of stock options		929		2,779
Net cash (used in) provided by financing activities		(605)		1,786
Effect of exchange rate changes on cash		(21)		(22)
Net change in cash and cash equivalents		(2,920)		(2,653)
Cash and cash equivalents, beginning of period		18,144		35,802
Cash and cash equivalents, end of period	$	15,224	$	33,149
Supplemental disclosure of non-cash investing and financing activities:
Right-of-use operating asset acquired	$	—	$	17
Right-of-use finance asset acquired	$	7,235	$	3,629
Accrued asset purchases	$	1,060	$	1,954
Share-based compensation expense capitalized in property and equipment	$	579	$	1,018
Stock issued for services	$	81	$	389
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	148	$	65
Cash paid during the period for interest	$	653	$	543

See accompanying notes to consolidated financial statements (unaudited).

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CARPARTS.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In Thousands, Except Per Share Data)

Note 1 – Basis of Presentation and Description of Company

CarParts.com, Inc. (including its subsidiaries) is a leading online provider of aftermarket auto parts and accessories. The Company sells its products primarily to individual consumers through its flagship website located at www.carparts.com and online marketplaces. Our corporate website is also located at www.carparts.com/investor. References to the “Company,” “we,” “us,” or “our” refer to CarParts.com, Inc. and its consolidated subsidiaries.

The Company’s products consist of replacement parts serving the wear and tear and body repair market, hard parts to serve the maintenance and repair market, and performance parts and accessories. The replacement parts category is primarily comprised of body parts for the exterior of an automobile as well as certain other mechanical or electrical parts that are not related to the functioning of the engine or drivetrain. Our parts in this category typically replace original body parts that have been damaged as a result of general wear and tear or a collision. In addition, we sell an extensive line of mirror products, including parts from our own house brand called Kool-Vue^®, which are marketed and sold as aftermarket replacement parts and as upgrades to existing parts. The hard parts category is primarily comprised of engine components and other mechanical and electrical parts including our house brand of catalytic converters called Evan Fischer^®. These hard parts serve as replacement parts that are generally used by professionals and do-it-yourselfers for engine and mechanical maintenance and repair. We also offer performance versions of many parts sold in each of the above categories, including parts from our own house brand, JC Whitney^®. 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 Torrance, California. The Company has employees located in both the United States and 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 July 2, 2022 and the consolidated results of operations and cash flows for the thirteen and twenty-six weeks ended July 2, 2022 and July 3, 2021. The Company’s results for the interim periods are not necessarily indicative of the results that may be expected for any other interim period, or for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended January 1, 2022, which was filed with the SEC on March 2, 2022 and all our other periodic filings, including Current Reports on Form 8-K, filed with the SEC after the end of our 2021 fiscal year, and throughout the date of this report.

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.

Note 2 – Borrowings

The Company maintains an asset-based revolving credit facility ("Credit Facility") that provides for, among other things, a revolving commitment, which is subject to a borrowing base derived from certain receivables, inventory, and property and equipment. On June 17, 2022, the Company and JPMorgan Chase Bank entered into an Amended and Restated Credit Agreement (as amended, the “Credit Agreement”) amending and restating in its entirety that certain Credit Agreement dated April 26, 2012, as amended through the Fourteenth Amendment (the “Amendment”). The Amendment provides for the revolving commitment in an aggregated principal amount of $75,000 (formerly $30,000)

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and allows for an uncommitted ability to increase the aggregate principal amount by an additional $75,000 to $150,000 (formerly $40,000 maximum), subject to certain terms and conditions.

As of July 2, 2022, our outstanding revolving loan balance was $0. The outstanding standby letters of credit balance as of July 2, 2022 was $620, and we had $0 of our trade letters of credit outstanding in accounts payable in our consolidated balance sheet.

Loans drawn under the Credit Facility bear interest, at the Company’s option, at a per annum rate equal to either (a) Adjusted Secured Overnight Financing Rate (“SOFR”) plus an applicable margin of 1.50% to 2.00% per annum based on the Company's fixed charge coverage ratio, or (b) an “alternate prime base rate” subject to an increase from 0.00% to 0.50% per annum based on the Company’s fixed charge coverage ratio. As of July 2, 2022, the Company’s SOFR based interest rate was 3.33% and the Company’s prime based rate was 4.75%. A commitment fee, based upon undrawn availability under the Credit Facility bearing interest at a rate of either 0.20% or 0.25% per annum based on the amount of undrawn availability, 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 $9,000 (12% of the aggregate revolving commitment) for three consecutive business days and will continue until, during the preceding 45 consecutive days, no event of default existed and excess availability has been greater than $9,000 at all times (with such trigger subject to adjustment based on the Company’s revolving commitment). In addition, in the event that “excess availability,” as defined under the Credit Agreement, is less than $7,500 (10% of the aggregate revolving commitment), the Company shall be required to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 (with the trigger subject to adjustment based on the Company’s revolving commitment). The Credit Agreement requires us to obtain a prior written consent from JPMorgan Chase Bank when we determine to pay any dividends on or make any distribution with respect to our common stock. The Credit Facility matures on June 17, 2027.

Note 3 – Stockholders’ Equity and Share-Based Compensation

Options and Restricted Stock Units

The Company had the following common stock option activity during the twenty-six weeks ended July 2, 2022:

●

Granted options to purchase 0 common shares.

●

Exercise of 602 options to purchase common shares.

●

Forfeiture of 88 options to purchase common shares.

●

Expiration of 15 options to purchase common shares.

The following table summarizes the Company’s restricted stock unit ("RSU") activity for the twenty-six weeks ended July 2, 2022, and details regarding the awards outstanding and exercisable as of July 2, 2022 (in thousands):



		Weighted			Weighted Average
		Average			Grant Date	Aggregate
	Shares	Exercise Price			Fair Value	Intrinsic Value
Vested and expected to vest as of January 1, 2022	3,023	$	—
Awarded	2,161	$	—
Vested	(736)	$	—
Forfeited	(1,208)	$	—
Awards outstanding, July 2, 2022	3,240	$	—	$	11.53	$	23,522
Vested and expected to vest as of July 2, 2022	3,240	$	—	$	11.53	$	23,522

During the twenty-six weeks ended July 2, 2022, 242 RSUs that vested were time-based and 494 were performance-based.

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For the thirteen and twenty-six weeks ended July 2, 2022, we recorded compensation costs related to stock options and RSUs of $771 and $5,077, respectively, of which $0 and $81 related to common shares issued to consultants as part of their compensation for services provided during those respective periods. For the thirteen and twenty-six weeks ended July 3, 2021, we recorded compensation costs related to stock options and RSUs of $4,210 and $8,290, respectively, of which $389 related to common shares issued to consultants as part of their compensation for services provided during the period. As of July 2, 2022, there was unrecognized compensation expense related to stock options and RSUs of $28,807 that will be expensed through June 2026.

Note 4 – Net Income (Loss) 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				Twenty-Six Weeks Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Net income (loss) per share:
Numerator:
Net income (loss) allocable to common shares	$	4,118	$	2,072		6,221		(650)
Denominator:
Weighted-average common shares outstanding (basic)		54,210		51,684		53,744		50,222
Common equivalent shares from common stock options and restricted stock		3,000		5,438		3,571		—
Weighted-average common shares outstanding (diluted)		57,210		57,122		57,315		50,222
Basic net income (loss) per share	$	0.08	$	0.04	$	0.12	$	(0.01)
Diluted net income (loss) per share	$	0.07	$	0.04	$	0.11	$	(0.01)

Options and RSUs that were antidilutive and not included in the dilutive earnings per share calculation for the thirteen and twenty-six weeks ended July 2, 2022 amounted to 1,771 and 1,789, respectively, and amounted to 899 for the thirteen weeks ended July 3, 2021. For the twenty-six weeks ended July 3, 2021, all outstanding potentially dilutive securities have been excluded from the calculation of diluted net loss per share as the effect of including such securities would have been anti-dilutive.

Note 5 – Income Taxes

The Company is subject to U.S. federal income tax as well as income tax of foreign and state tax jurisdictions. The tax years 2017-2021 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 2018-2021 remain open.

For the thirteen and twenty-six weeks ended July 2, 2022, the effective tax rate for the Company was 0.4% and 1.1%, respectively. The effective tax rate differed from the U.S. federal statutory rate primarily due to state income taxes, income of our Philippines subsidiary that is subject to different tax rates, share-based compensation that is either not deductible for tax purposes or for which the tax deductible amount is different than the financial reporting amount, and a change in the valuation allowance that offset the tax on the current period pre-tax income.

For the thirteen and twenty-six weeks ended July 3, 2021, the effective tax rate for the Company was 5.2% and (34.9%), respectively. The effective tax rate differed from the U.S. federal statutory rate primarily due to state income taxes, income of our Philippines subsidiary that is subject to different tax rates, certain employee compensation, share-based compensation that is either not deductible for tax purposes or for which the tax deductible amount is different than the financial reporting amount, and a change in the valuation allowance that offset the tax of the current period pre-tax income (loss).

The Company accounts for income taxes in accordance with ASC Topic 740 - Income Taxes (“ASC 740”). Under the provisions of ASC 740, management is required to evaluate whether a valuation allowance should be established against its deferred tax assets. We currently have a full valuation allowance against our deferred tax assets. As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. For the twenty-six weeks ended July 2, 2022,

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there was no material change from fiscal year ended January 1, 2022 in the amount of the Company's deferred tax assets that are not considered to be more likely than not to be realized in future years.

Note 6 – Commitments and Contingencies

Legal Matters

Asbestos. A wholly-owned subsidiary of the Company, Automotive Specialty Accessories and Parts, Inc. and its wholly-owned subsidiary Whitney Automotive Group, Inc. ("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.

Ordinary course litigation. 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 7 – Product Information

As described in Note 1 above, the Company’s products consist of replacement parts serving the wear and tear and body repair market, hard parts to serve the maintenance and repair market, and performance parts and accessories. The following table summarizes the approximate distribution of the Company’s revenue by product type.


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
House Brands
Replacement Parts	66	%	67	%	66	%	68	%
Hard Parts	19	%	19	%	21	%	18	%
Performance	1	%	—	%	1	%	1	%

Branded
Replacement Parts	1	%	1	%	1	%	1	%
Hard Parts	8	%	8	%	7	%	7	%
Performance	5	%	5	%	4	%	5	%

Total	100	%	100	%	100	%	100	%

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In Thousands, Except Per Share Data, Or As Otherwise Noted)

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 U.S. Securities and Exchange Commission (“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 a leading online provider of aftermarket auto parts, including replacement parts, hard parts, and performance parts and accessories. We principally sell our products to individual consumers through our flagship website at www.carparts.com and online marketplaces. Our proprietary product database maps our SKUs to product applications based on vehicle makes, models and years. Our corporate website is located at www.carparts.com/investor. The inclusion of our website addresses in this report does not include or incorporate by reference into this report any information on our websites.

We believe by disintermediating the traditional auto parts supply chain and selling products directly to customers online allows us to efficiently deliver products to our customers. Our mission is to change the way people repair their cars and get them back on the road, and our strategy consists of the Right Part, Right Time, Right Place, as outlined below:

Right Part means ensuring our customers can find a solution to fix their vehicle on our website. Our efforts to accomplish this include curating our proprietary catalogue, creating a fast, mobile-friendly user experience, building world class data science and inventory forecasting teams and investing more heavily in our logistics and merchandising capabilities. We continue to take steps to improve our product offerings and offer customers premium products at value prices to assist customers on finding the right part.

Right Time means getting the customers back on the road quickly. We expanded our existing facilities and added new distribution centers over the past three years, and plan to add more in the future, to continue improving the customer click to delivery time so that we can keep meeting our customers’ evolving expectations. Our goal is to continue to make investments to improve delivery times by getting closer to our customers to provide them the parts they need in adequate time to get back on the road quickly.

Right Place means empowering our customers to choose how they want to repair and maintain their vehicle. Whether the customer is a Do-It-Yourself (“DIY”) or a Do-It-For-Me (“DIFM”) customer, we intend to continue offering them the resources, tools, and turn-key solutions to get back on the road. Our vision is to provide customers an experience where they can order their repairs or maintain their vehicle and never leave their house. Whether we send a

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mobile mechanic or refer the customer to a trusted auto repair shop, we intend to be there to solve the customer’s needs and make investments in our technology, or other platforms, to bring this vision to reality.

Industry-wide trends that support our strategy and future growth 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 produced 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 flagship website provides customers with a favorable alternative to the brick-and-mortar shopping experience by offering a comprehensive selection of approximately 806,000 SKUs with detailed product descriptions, attributes and photographs combined with the flexibility of fulfilling orders using both drop-ship and stock-and-ship methods.

2.U.S. vehicle fleet expanding and aging. The average age of U.S. light vehicles, an indicator of auto parts demand, is projected to be near record-highs at 12.1 years in 2022, according to the U.S. Auto Care Association. 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. In many cases we believe these older vehicles are driven by DIY car owners who are more likely to handle any necessary repairs themselves rather than taking their car to the professional repair shop.

3.Growth of online sales. The U.S. Auto Care Association estimated that overall revenue from online sales of auto parts and accessories would reach over $21 billion by 2025. Improved product availability, 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 our flagship website and online marketplaces.

Impact of COVID-19

The COVID-19 pandemic created uncertainty and challenges on the United States, the Philippines, and global economies and some challenges continued through the second quarter of 2022. Since the onset of the pandemic, our top priority remains the health and safety of our employees as most have continued to work from home, in addition to ensuring our customers continue receiving our high-quality, personalized service. Our distribution centers continue to remain operational while our safety protocols direct employees onsite to continue to adhere to, and follow, the COVID-19 safety guidelines recommended from the Centers for Disease Control and Prevention (CDC).

We continue to monitor and proactively mitigate risks in our supply chain because of the global supply chain disruption and port congestion. We have incurred, and may in the future incur, additional freight and container costs and may also continue to incur increased costs relating to workforce shortages, overtime charges, and detention costs at one or more of our distribution centers due to the continued effects of the COVID-19 pandemic. However, the ultimate extent of the effects from the COVID-19 pandemic on the Company, our financial condition, results of operations, liquidity, and cash flows will be dependent on evolving developments which are uncertain and cannot be predicted at this time. See the “Risk Factors” section set forth in Part II, Item 1A for further discussion of risks related to COVID-19.

Factors Affecting our Performance

We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed in Part II, Item IA, of this Quarterly Report on Form 10-Q and in Part I, Item IA, in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.

Executive Summary

For the second quarter of 2022, the Company generated net sales of $176,220, compared with $157,536 for the second quarter of 2021, representing an increase of 11.9%. The Company generated net income of $4,118 for the second quarter of 2022 compared to a net income of $2,072 for the second quarter of 2021. The Company’s net income before

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interest expense, net, income tax provision, depreciation and amortization expense, amortization of intangible assets, plus share-based compensation expense (“Adjusted EBITDA”) of $8,318 in the second quarter of 2022 compared to $8,345 in the second quarter of 2021. Adjusted EBITDA is not a Generally Accepted Accounting Principle (“GAAP”) measure. See the section below titled “Non-GAAP measures” for information regarding our use of Adjusted EBTIDA and a reconciliation from net income (loss).

Net sales increased in the second quarter of 2022 compared to the second quarter of 2021 primarily driven by continued strong demand and the expanded capacity from our Grand Prairie distribution center. Gross profit increased by 16.1% to $61,935 and gross margin increased 120 basis points to 35.1% compared to 33.9% in the second quarter of 2021. The increase in gross margin was primarily driven by favorable product mix and favorable inbound and outbound freight costs in the second quarter of 2022.

Total expenses, which primarily consisted of cost of sales and operating expense, increased in the second quarter of 2022 compared to the same period in 2021. The changes in both cost of sales and operating expense are described in further detail under — “Results of Operations” below.

Non-GAAP measures

Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” and other provisions of the Exchange Act, 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 (loss) 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 share-based compensation expense.

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 one 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 share-based compensation expense as well as other items that we do not believe are representative of our ongoing operating performance. 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; and for evaluating the effectiveness of operational strategies. The Company also believes that analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate the ongoing operations of companies in our industry.

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.

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The table below reconciles net income (loss) to Adjusted EBITDA for the periods presented (in thousands):


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Net income (loss)	$	4,118	$	2,072	$	6,221	$	(650)
Depreciation & amortization		3,308		2,171		6,265		4,550
Amortization of intangible assets		27		27		55		55
Interest expense, net		342		263		633		512
Taxes		17		113		69		168
EBITDA	$	7,812	$	4,646	$	13,243	$	4,635
Stock compensation expense	$	506	$	3,699	$	4,498	$	7,272
Adjusted EBITDA	$	8,318	$	8,345	$	17,741	$	11,907

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				Twenty-Six Weeks Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	64.9		66.1		64.0		66.1
Gross profit	35.1		33.9		36.0		33.9
Operating expense	32.7		32.4		34.0		34.0
Income (loss) from operations	2.4		1.5		2.0		(0.1)
Other income (expense):
Other income, net	0.1		0.1		0.1		0.1
Interest expense	(0.2)		(0.2)		(0.2)		(0.2)
Total other expense, net	(0.1)		(0.1)		(0.1)		(0.1)
Income (loss) before income taxes	2.3		1.4		1.8		(0.2)
Income tax provision	0.0		0.1		0.0		0.0
Net income (loss)	2.3	%	1.3	%	1.8	%	(0.2)	%

Thirteen and Twenty-Six Weeks Ended July 2, 2022 Compared to the Thirteen and Twenty-Six Weeks Ended July 3, 2021

Net Sales and Gross Margin


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 2, 2022			July 3, 2021			July 2, 2022			July 3, 2021

	(in thousands)						(in thousands)
Net sales	$	176,220		$	157,536		$	342,273		$	302,338
Cost of sales		114,285			104,187			219,176			199,815
Gross profit	$	61,935		$	53,349		$	123,097		$	102,523
Gross margin		35.1	%		33.9	%		36.0	%		33.9	%

Net sales increased $18,684, or 11.9%, for the second quarter of 2022 compared to the second quarter of 2021. Net sales increased $39,935, or 13.2%, for the twenty-six weeks ended July 2, 2022 (“YTD Q2 2022”) compared to the same period in 2021. The net sales increase was primarily driven by continued strong demand and the expanded capacity from our Grand Prairie distribution center.

Gross profit increased $8,586 or 16.1%, for the second quarter of 2022 compared to the same period of 2021 and increased $20,574, or 20.1%, in YTD Q2 2022 compared to the same period of 2021. Gross margin increased 120 basis points to 35.1% in the second quarter of 2022 compared to 33.9% in the second quarter of 2021. Gross margin increased

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210 basis points to 36.0% for YTD Q2 2022 compared to 33.9% in the same period of 2021. The increase in gross margin was primarily driven by favorable product mix and favorable inbound and outbound freight costs in the second quarter of 2022 and YTD Q2 2022.

Operating Expense


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 2, 2022			July 3, 2021			July 2, 2022			July 3, 2021

	(in thousands)						(in thousands)
Operating expense	$	57,644		$	51,013		$	116,415		$	102,685
Percent of net sales		32.7	%		32.4	%		34.0	%		34.0	%

Operating expense increased $6,631, or 13.0% for the second quarter of 2022 and increased $13,730, or 13.4%, in YTD Q2 2022 compared to the same period in 2021 primarily due to an increase in fulfillment expense. The increase in fulfillment expense was primarily due to a higher number of fulfilled orders and inventory receipts as well as additional expenses related to the opening of the Jacksonville, Florida distribution center.

Total Other Expense, Net