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 September 30, 2023

☐ 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 October 23, 2023, the registrant had 57,498,607 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 THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2023

TABLE OF CONTENTS


		Page
	PART I. FINANCIAL INFORMATION

ITEM 1.	Financial Statements	4
	Consolidated Balance Sheets (Unaudited) at September 30, 2023 and December 31, 2022	4
	Consolidated Statements of Operations and Comprehensive Operations (Unaudited) for the Thirteen and Thirty-nine Weeks Ended September 30, 2023 and October 1, 2022	5
	Consolidated Statements of Stockholders’ Equity (Unaudited) for the Thirteen and Thirty-nine Weeks Ended September 30, 2023 and October 1, 2022	6
	Consolidated Statements of Cash Flows (Unaudited) for the Thirty-nine Weeks Ended September 30, 2023 and October 1, 2022	7
	Notes to Consolidated Financial Statements (Unaudited)	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	20
ITEM 4.	Controls and Procedures	20

	PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	21
ITEM 1A.	Risk Factors	21
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
ITEM 3.	Defaults Upon Senior Securities	43
ITEM 4.	Mine Safety Disclosures	43
ITEM 5.	Other Information	43
ITEM 6.	Exhibits	44

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)


	September 30,		December 31,
	2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	66,679	$	18,767
Accounts receivable, net		9,448		6,406
Inventory, net		123,965		136,026
Other current assets		6,671		6,672
Total current assets		206,763		167,871
Property and equipment, net		23,719		24,290
Right-of-use - assets - operating leases, net		20,611		23,951
Right-of-use - assets - finance leases, net		16,465		19,750
Other non-current assets		3,264		2,537
Total assets	$	270,822	$	238,399
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	83,432	$	57,616
Accrued expenses		21,860		16,466
Right-of-use - obligation - operating, current		4,845		4,571
Right-of-use - obligation - finance, current		4,426		4,753
Other current liabilities		5,008		4,622
Total current liabilities		119,571		88,028
Right-of-use - obligation - operating, non-current		17,688		21,412
Right-of-use - obligation - finance, non-current		13,348		15,916
Other non-current liabilities		2,550		2,971
Total liabilities		153,157		128,327
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized; 57,497 and 54,693 shares issued and outstanding as of September 30, 2023 and December 31, 2022 (of which 3,060 and 2,565 are treasury stock, respectively)		60		57
Treasury stock		(9,766)		(7,625)
Additional paid-in capital		309,106		297,265
Accumulated other comprehensive income		1,153		1,126
Accumulated deficit		(182,888)		(180,751)
Total stockholders’ equity		117,665		110,072
Total liabilities and stockholders' equity	$	270,822	$	238,399

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				Thirty-Nine Weeks Ended
	September 30,		October 1,		September 30,		October 1,
	2023		2022		2023		2022
Net sales	$	166,864	$	164,807	$	519,334	$	507,080
Cost of sales ⁽¹⁾		112,047		108,659		341,524		327,835
Gross profit		54,817		56,148		177,810		179,245
Operating expense		57,734		56,729		180,935		173,144
(Loss) income from operations		(2,917)		(581)		(3,125)		6,101
Other income (expense):
Other income, net		874		117		2,427		363
Interest expense		(360)		(435)		(1,043)		(1,073)
Total other income (expense), net		514		(318)		1,384		(710)
(Loss) income before income taxes		(2,403)		(899)		(1,741)		5,391
Income tax provision		114		49		396		118
Net (loss) income		(2,517)		(948)		(2,137)		5,273
Other comprehensive (loss) gain:
Foreign currency translation adjustments		—		—		—		124
Unrealized (loss) gain on deferred compensation trust assets		(21)		(36)		27		(170)
Total other comprehensive (loss) gain		(21)		(36)		27		(46)
Comprehensive (loss) income	$	(2,538)	$	(984)	$	(2,110)	$	5,227
Net (loss) income per share:
Basic net (loss) income per share	$	(0.04)	$	(0.02)	$	(0.04)	$	0.10
Diluted net (loss) income per share	$	(0.04)	$	(0.02)	$	(0.04)	$	0.09
Weighted-average common shares outstanding:
Shares used in computation of basic net (loss) income per share		57,179		54,481		56,252		54,009
Shares used in computation of diluted net (loss) income per share		57,179		54,481		56,252		57,283

(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		Income		Deficit		Equity
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 Employee Stock Purchase Plan ("ESPP")	45		—		431		—		—		—		431
Officers and directors stock purchasing 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 purchasing 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
Net loss	—		—		—		—		—		(948)		(948)
Issuance of shares in connection with stock option exercise	63		—		184		—		—		—		184
Issuance of shares in connection with restricted stock units vesting	72		—		—		—		—		—		—
Issuance of shares in connection with BOD fees	1		—		6		—		—		—		6
Issuance of shares in connection with ESPP	62		—		363		—		—		—		363
Share-based compensation	—		—		3,760		—		—		—		3,760
Unrealized loss on deferred compensation trust assets	—		—		—		—		(36)		—		(36)
Effect of changes in foreign currencies	—		—		—		—		—		—		—
Balance, October 1, 2022	54,558	$	57	$	293,450	$	(7,625)	$	228	$	(174,527)	$	111,583

Balance, December 31, 2022	54,693	$	57	$	297,265	$	(7,625)	$	1,126	$	(180,751)	$	110,072
Net income	—		—		—		—		—		1,051		1,051
Issuance of shares in connection with stock option exercise	972		1		1,523		—		—		—		1,524
Issuance of shares in connection with restricted stock units vesting	495		1		—		—		—		—		1
Issuance of shares in connection with BOD fees	1		—		6		—		—		—		6
Issuance of shares in connection with ESPP	42		—		221		—		—		—		221
Share-based compensation	—		—		4,170		—		—		—		4,170
Unrealized gain on deferred compensation trust assets	—		—		—		—		24		—		24
Balance, April 1, 2023	56,203	$	59	$	303,185	$	(7,625)	$	1,150	$	(179,700)	$	117,069
Net loss	—		—		—		—		—		(671)		(671)
Issuance of shares in connection with stock option exercise	279		—		446		—		—		—		446
Issuance of shares in connection with restricted stock units vesting	431		—		—		—		—		—		—
Issuance of shares in connection with BOD fees	1		—		5		—		—		—		5
Share-based compensation	—		—		2,937		—		—		—		2,937
Stock repurchase	—		—		(5)		(1,047)		—		—		(1,052)
Unrealized gain on deferred compensation trust assets	—		—		—		—		24		—		24
Balance, July 1, 2023	56,914	$	59	$	306,568	$	(8,672)	$	1,174	$	(180,371)	$	118,758
Net loss	—		—		—		—		—		(2,517)		(2,517)
Issuance of shares in connection with stock option exercise	404		1		635		—		—		—		636
Issuance of shares in connection with restricted stock units vesting	105		—		—		—		—		—		—
Issuance of shares in connection with BOD fees	1		—		6		—		—		—		6
Issuance of shares in connection with ESPP	73		—		262		—		—		—		262
Share-based compensation	—		—		1,640		—		—		—		1,640
Stock repurchase	—		—		(5)		(1,094)		—		—		(1,099)
Unrealized loss on deferred compensation trust assets	—		—		—		—		(21)		—		(21)
Balance, September 30, 2023	57,497	$	60	$	309,106	$	(9,766)	$	1,153	$	(182,888)	$	117,665

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)


	Thirty-Nine Weeks Ended
	September 30,		October 1,
	2023		2022
Operating activities
Net (loss) income	$	(2,137)	$	5,273
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization expense		12,596		9,671
Amortization of intangible assets		28		81
Share-based compensation expense		8,158		7,786
Stock awards issued for non-employee director service		17		17
Stock awards related to officers and directors stock purchase plan from payroll deferral		—		27
Gain from disposition of assets		(75)		(41)
Amortization of deferred financing costs		49		37
Changes in operating assets and liabilities:
Accounts receivable		(3,185)		(4,624)
Inventory		11,616		(15,900)
Other current assets		1		(124)
Other non-current assets		(199)		(745)
Accounts payable and accrued expenses		31,208		4,524
Other current liabilities		386		(315)
Right-of-use obligation - operating leases - current		613		279
Right-of-use obligation - operating leases - long-term		(723)		(108)
Other non-current liabilities		(488)		(136)
Net cash provided by operating activities		57,865		5,702
Investing activities
Additions to property and equipment		(7,380)		(10,546)
Proceeds from sale of property and equipment		83		44
Net cash used in investing activities		(7,297)		(10,502)
Financing activities
Borrowings from revolving loan payable		159		10,351
Payments made on revolving loan payable		(159)		(5,351)
Payments on finance leases		(3,592)		(3,099)
Repurchase of treasury stock		(2,151)		—
Net proceeds from issuance of common stock for ESPP		483		794
Proceeds from exercise of stock options		2,604		1,113
Net cash (used in) provided by financing activities		(2,656)		3,808
Effect of exchange rate changes on cash		—		(498)
Net change in cash and cash equivalents		47,912		(1,490)
Cash and cash equivalents, beginning of period		18,767		18,144
Cash and cash equivalents, end of period	$	66,679	$	16,654
Supplemental disclosure of non-cash investing and financing activities:
Right-of-use finance asset acquired	$	784	$	7,889
Accrued asset purchases	$	658	$	859
Share-based compensation expense capitalized in property and equipment	$	589	$	1,051
Stock issued for services	$	—	$	81
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	180	$	175
Cash paid during the period for interest	$	999	$	1,011
Cash received during the period for interest	$	1,365	$	7

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 September 30, 2023 and the consolidated results of operations and cash flows for the thirteen and thirty-nine weeks ended September 30, 2023 and October 1, 2022. 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 December 31, 2022, which was filed with the SEC on March 8, 2023 and all our other periodic filings, including Current Reports on Form 8-K, filed with the SEC after the end of our 2022 fiscal year, and throughout the date of this report.

Effective July 3, 2022, management reassessed our functional currency determination for our Philippines subsidiary in accordance with ASC 830, Foreign Currency Matters, and concluded a change in the functional currency was appropriate from the local currency to the U.S. dollar, our reporting currency. As a result, the change in the Philippines subsidiary’s functional currency has been applied on a prospective basis in accordance with ASC 830. Effective as of July 3, 2022, foreign currency gains and losses are now included in net (loss) income. Any translation gains and losses that were previously recorded in accumulated other comprehensive income in the Company’s consolidated balance sheets remained unchanged through July 2, 2022. Foreign currency assets and liabilities are now remeasured into U.S. dollars using current exchange rates, except for nonmonetary assets and equity, which are remeasured at historical exchange rates. Revenue and expenses are remeasured using average exchange rates during the fiscal year, except for expenses related to nonmonetary assets, which are remeasured at historical exchange rates.

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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. The Credit Facility provides for the revolving commitment in an aggregated principal amount of $75,000 and allows for an uncommitted ability to increase the aggregate principal amount by an additional $75,000 to $150,000, subject to certain terms and conditions. The Credit Facility matures on June 17, 2027. As of September 30, 2023 and December 31, 2022, our outstanding revolving loan balance was $0, respectively. As of September 30, 2023 and December 31, 2022, the outstanding standby letters of credit balance was $1,100 and $620, respectively, and we had $0 of our trade letters of credit outstanding in accounts payable in our consolidated balance sheets.

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 September 30, 2023, the Company’s SOFR based interest rate was 6.92% and the Company’s prime based rate was 8.50%. 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 with JPMorgan Chase Bank, N.A. (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,” as defined under the Credit Agreement, 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 the trigger subject to adjustment based on the Company’s revolving commitment). In addition, in the event that the Company’s required excess availability related to the “Covenant Testing Trigger Period” (as defined under the Credit Agreement) is less than $7,500 (10% of the aggregate revolving commitment) for three consecutive business days, the Company shall be required to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0, and continuing until excess availability has been greater than or equal to $7,500 at all times for 45 consecutive days (with the trigger subject to adjustment based on the Company’s revolving commitment).

Note 3 – Stockholders’ Equity and Share-Based Compensation

Options and Restricted Stock Units

The Company had the following common stock option activity during the thirty-nine weeks ended September 30, 2023:

●

Granted options to purchase 0 common shares.

●

Exercise of 1,655 options to purchase common shares.

●

Forfeiture of 68 option to purchase common shares.

●

Expiration of 9 options to purchase common shares.

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The following table summarizes the Company’s restricted stock unit ("RSU") activity for the thirty-nine weeks ended September 30, 2023, and details regarding the awards outstanding and exercisable as of September 30, 2023 (in thousands):



			Weighted Average
			Grant Date	Aggregate
	Shares		Fair Value	Intrinsic Value
Vested and expected to vest as of December 31, 2022	3,132
Awarded	2,239
Vested	(1,032)
Forfeited	(724)
Awards outstanding, September 30, 2023	3,615	$	9.27	$	14,893
Vested and expected to vest as of September 30, 2023	3,613	$	9.27	$	14,886

During the thirty-nine weeks ended September 30, 2023, 756 RSUs that vested were time-based and 276 were performance-based.

For the thirteen and thirty-nine weeks ended September 30, 2023, we recorded compensation costs related to stock options and RSUs of $1,640 and $8,747, respectively. For the thirteen and thirty-nine weeks ended October 1, 2022, we recorded compensation costs related to stock options and RSUs of $3,760 and $8,837, of which $0 and $81 related to common shares issued to consultants as part of their compensation for services provided during those respective periods. As of September 30, 2023, there was unrecognized compensation expense related to stock options and RSUs of $21,325 that will be expensed through September 2027.

Stock Repurchase Program

On July 27, 2021, the Company’s Board of Directors authorized a stock repurchase program under which the Company may purchase up to $30 million of the Company’s common stock from time to time. The repurchases of common stock may be executed through open market purchases, block trades, the implementation of a 10b5-1 plan, and/or any other available methods. During the thirteen weeks ended September 30, 2023, the Company repurchased 245 shares of its common stock at a total cost of $1,094, excluding commissions, at an average price of $4.47. During the thirty-nine weeks ended September 30, 2023, the Company repurchased 495 shares of its common stock at a total cost of $2,141, excluding commissions, at an average price of $4.33 per share. During the thirteen and thirty-nine weeks ended October 1, 2022, the Company did not repurchase any shares of its common stock. As of September 30, 2023, the Company remained authorized to repurchase up to approximately $27,379 in shares of its common stock.

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Note 4 – Net (Loss) Income Per Share

The following table sets forth the computation of basic and diluted net (loss) income per share (in thousands, except per share data):


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Net (loss) income per share:
Numerator:
Net (loss) income allocable to common shares	$	(2,517)	$	(948)		(2,137)		5,273
Denominator:
Weighted-average common shares outstanding (basic)		57,179		54,481		56,252		54,009
Common equivalent shares from common stock options and restricted stock		—		—		—		3,274
Weighted-average common shares outstanding (diluted)		57,179		54,481		56,252		57,283
Basic net (loss) income per share	$	(0.04)	$	(0.02)	$	(0.04)	$	0.10
Diluted net (loss) income per share	$	(0.04)	$	(0.02)	$	(0.04)	$	0.09

Options and RSUs that were antidilutive and not included in the dilutive earnings per share calculation for the thirty-nine weeks ended October 1, 2022 amounted to 1,590. For the thirteen and thirty-nine weeks ended September 30, 2023 and the thirteen weeks ended October 1, 2022, 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 2018-2022 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 2019-2022 remain open.

For the thirteen and thirty-nine weeks ended September 30, 2023, the effective tax rate for the Company was (4.7)% and (22.7)%, 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 loss.

For the thirteen and thirty-nine weeks ended October 1, 2022, the effective tax rate for the Company was (5.5)% and 2.2%, 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 of the current period pre-tax (loss) income.

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 thirty-nine weeks ended September 30, 2023, there was no material change from fiscal year ended December 31, 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.

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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, including, for example, claims relating to product liability, workplace injuries, intellectual property rights, and employment matters. For example, a worker, who was directly employed by the Company’s third party labor contracting firm at the Company’s Grand Prairie, TX warehouse has filed a negligence claim in the Superior Court of the State of California, Los Angeles County, Central District relating to a workplace injury from March 2021. The case is in the discovery stage, and trial is currently scheduled for 2024. The Company intends to defend itself vigorously, although there can be no assurance that there will not be some liability. 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				Thirty-Nine Weeks Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
House Brands
Replacement Parts	64	%	68	%	65	%	67	%
Hard Parts	19	%	18	%	19	%	20	%
Performance	1	%	1	%	1	%	1	%

Branded
Replacement Parts	1	%	1	%	1	%	1	%
Hard Parts	9	%	7	%	8	%	7	%
Performance	6	%	5	%	6	%	4	%

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 vision of “Empowering Drivers Along Their Journey” focuses on creating a trusted platform that takes the stress out of vehicle repair and maintenance. We believe our strategy consists of four areas of focus: outstanding customer service, operational excellence, financial discipline, and innovation.

Outstanding Customer Service means delivering an extensive assortment of competitively priced, quality parts to drivers looking for simple, stress-free vehicle care in an unparalleled digital-first experience. We accomplish this by leveraging our vertically integrated supply chain, expanding our domestic footprint to get closer to the customer, and improving our website and user experience.

Operational Excellence means creating a culture of continuous improvement. We focus on optimizing processes, eliminating bottlenecks, and improving communication and collaboration within our organization. This requires a commitment to ongoing learning and development as well as embracing new technologies and processes.

Financial Discipline means optimizing costs and managing financial resources in a prudent and responsible manner in order to drive shareholder value. At an organizational level, our goal is to optimize cash flow, control costs, and allocate resources effectively.

Innovation means ensuring that our company continues to evolve and deliver products and services that meet our customers evolving needs. There are currently products and services that are not widely available to customers that we believe are areas of opportunity. With meticulous execution, these innovations have the chance to build more value for our shoppers while creating additional revenues or profits in the future.

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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 1,020,000 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, reached a new record-high of 12.5 years in 2023, 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 Do-It-Yourself (“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 approximately $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.

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 December 31, 2022.

Executive Summary

For the third quarter of 2023, the Company generated net sales of $166,864, compared with $164,807 for the third quarter of 2022, representing an increase of 1.2%. The Company incurred a net loss of $2,517 for the third quarter of 2023 compared to a net loss of $948 for the third quarter of 2022. The Company’s net (loss) income before interest (income) expense, net, income tax provision, depreciation and amortization expense, amortization of intangible assets, plus share-based compensation expense (“Adjusted EBITDA”) of $3,048 in the third quarter of 2023 compared to $6,254 in the third quarter of 2022. 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 (loss) income.

Net sales increased in the third quarter of 2023 compared to the third quarter of 2022. Gross profit decreased by 2.4% to $54,817 and gross margin decreased 120 basis points to 32.9% compared to 34.1% in the third quarter of 2022. The decrease in gross margin was primarily driven by unfavorable freight costs and a shift in product mix.

Total expenses, which primarily consisted of cost of sales and operating expense, increased in the third quarter of 2023 compared to the same period in 2022. 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, 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 (loss) income before (a) interest (income) 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.

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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.

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