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 26, 2020

◻ 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

A picture containing object, clock, screen, computer

Description automatically generated

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 November 5, 2020, the registrant had 47,926,738 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 26, 2020

TABLE OF CONTENTS


		Page
	PART I. FINANCIAL INFORMATION

ITEM 1.	Financial Statements	4
	Consolidated Balance Sheets (Unaudited) at September 26, 2020 and December 28, 2019	4
	Consolidated Statements of Operations and Comprehensive Operations (Unaudited) for the Thirteen and Thirty-nine Weeks Ended September 26, 2020 and September 28, 2019	5
	Consolidated Statements of Stockholders’ Equity (Unaudited) for the Thirteen and Thirty-nine Weeks Ended September 26, 2020 and September 28, 2019	6
	Consolidated Statements of Cash Flows (Unaudited) for the Thirty-nine Weeks Ended September 26, 2020 and September 28, 2019	7
	Notes to Consolidated Financial Statements (Unaudited)	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	22
ITEM 4.	Controls and Procedures	22

	PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	24
ITEM 1A.	Risk Factors	24
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
ITEM 3.	Defaults Upon Senior Securities	45
ITEM 4.	Mine Safety Disclosures	45
ITEM 5.	Other Information	45
ITEM 6.	Exhibits	46

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^® and Evan Fischer^®, amongst others, are our United States trademarks. All other trademarks and trade names appearing in this report are the property of their respective owners.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

CARPARTS.COM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, In Thousands, Except Par Value and Per Share Liquidation Value)


	September 26,		December 28,
	2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	58,971	$	2,273
Accounts receivable, net		6,975		2,669
Inventory		76,729		52,500
Other current assets		6,882		4,931
Total current assets		149,557		62,373
Property and equipment, net		12,645		9,650
Right-of-use - assets - operating leases, net		18,256		4,544
Right-of-use - assets - financing leases, net		10,053		9,011
Other non-current assets		2,329		2,368
Total assets	$	192,840	$	87,946
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	49,448	$	44,433
Accrued expenses		22,630		9,519
Customer deposits		456		652
Notes payable, current		—		729
Right-of-use - obligation - operating, current		2,285		1,368
Right-of-use - obligation - finance, current		893		640
Other current liabilities		3,182		2,605
Total current liabilities		78,894		59,946
Notes payable, non-current		—		1,060
Right-of-use - obligation - operating, non-current		16,764		3,419
Right-of-use - obligation - finance, non-current		9,697		8,627
Other non-current liabilities		2,918		2,514
Total liabilities		108,273		75,566
Commitments and contingencies
Stockholders’ equity:
Series A convertible preferred stock, $0.001 par value; $1.45 per share liquidation value or aggregate of $6,017; 4,150 shares authorized; 0 and 2,771 shares issued and outstanding at September 26, 2020 and December 28, 2019		0		3
Common stock, $0.001 par value; 100,000 shares authorized; 47,772 and 36,167 shares issued and outstanding at September 26, 2020 and December 28, 2019 (of which 2,525 are treasury stock)		50		38
Treasury stock		(7,146)		(7,146)
Additional paid-in capital		257,497		187,147
Accumulated other comprehensive income		139		214
Accumulated deficit		(165,973)		(167,876)
Total stockholders’ equity		84,567		12,380
Total liabilities and stockholders' equity	$	192,840	$	87,946

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 26,		September 28,		September 26,		September 28,
	2020		2019		2020		2019
Net sales	$	117,406	$	69,273	$	324,154	$	217,698
Cost of sales ⁽¹⁾		74,285		48,130		210,425		154,663
Gross profit		43,121		21,143		113,729		63,035
Operating expense		41,389		22,601		110,174		69,144
Income (loss) from operations		1,732		(1,458)		3,555		(6,109)
Other income (expense):
Other, net		6		(1)		80		41
Interest expense		(308)		(517)		(1,461)		(1,411)
Total other expense, net		(302)		(518)		(1,381)		(1,370)
Income (loss) before income taxes		1,430		(1,976)		2,174		(7,479)
Income tax provision (benefit)		45		(552)		199		(1,018)
Net income (loss)		1,385		(1,424)		1,975		(6,461)
Other comprehensive (loss) income:
Foreign currency translation adjustments		(38)		19		(73)		(19)
Unrealized gain (loss) on deferred compensation trust assets		35		—		(2)		—
Total other comprehensive (loss) income		(3)		19		(75)		(19)
Comprehensive income (loss)	$	1,382	$	(1,405)	$	1,900	$	(6,480)
Net income (loss) per share:
Basic net income (loss) per share	$	0.03	$	(0.04)	$	0.05	$	(0.18)
Diluted net income (loss) per share	$	0.03	$	(0.04)	$	0.04	$	(0.18)
Weighted-average common shares outstanding:
Shares used in computation of basis net income (loss) per share		44,686		35,856		40,314		35,623
Shares used in computation of diluted net income (loss) per share		53,573		35,856		50,386		35,623

(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
	Preferred Stock			Common Stock			Paid-in-		Treasury		Comprehensive		Accumulated		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Stock		Income		Deficit		Equity
Balance as originally reported at December 29, 2018	2,771	$	3	34,992	$	38	$	183,139	$	(7,146)	$	579	$	(137,791)	$	38,822
Effect of new accounting adoption	—		—	—		—		—		—		—		1,623		1,623
Balance as currently reported at December 29, 2018	2,771		3	34,992		38		183,139		(7,146)		579		(136,168)		40,445
Net loss	—		—	—		—		—		—		—		(3,581)		(3,581)
Issuance of shares in connection with restricted stock units vesting	—		—	437		—		(288)		—		—		—		(288)
Issuance of shares in connection with BOD fees	—		—	4		—		4		—		—		—		4
Share-based compensation	—		—	—		—		554		—		—		—		554
Common stock dividend on preferred stock	—		—	—		—		—		—		—		(39)		(39)
Effect of changes in foreign currencies	—		—	—		—		—		—		(5)		—		(5)
Balance, March 30, 2019	2,771		3	35,433		38		183,409		(7,146)		574		(139,788)		37,090
Net Loss	—		—	—		—		—		—		—		(1,457)		(1,457)
Issuance of shares in connection with restricted stock units vesting	—		—	348		—		(2)		—		—		—		(2)
Issuance of shares in connection with BOD fees	—		—	3		—		5		—		—		—		5
Share-based compensation	—		—	—		—		625		—		—		—		625
Common stock dividend on preferred stock	—		—	—		—		40		—		—		(41)		(1)
Effect of changes in foreign currencies	—		—	—		—		—		—		(33)		—		(33)
Balance, June 29, 2019	2,771		3	35,784		38		184,077		(7,146)		541		(141,286)		36,227
Net loss	—		—	—		—		—		—		—		(1,424)		(1,424)
Issuance of shares in connection with stock option exercise	—		—	100		—		100		—		—		—		100
Issuance of shares in connection with restricted stock units vesting	—		—	2		—		(2)		—		—		—		(2)
Issuance of shares in connection with BOD fees	—		—	5		—		5		—		—		—		5
Share-based compensation	—		—	—		—		813		—		—		—		813
Common stock dividend on preferred stock	—		—	33		—		40		—		—		(40)		—
Effect of changes in foreign currencies	—		—	—		—		—		—		19		—		19
Balance, September 28, 2019	2,771	$	3	35,924	$	38	$	185,033	$	(7,146)	$	560	$	(142,750)	$	35,738

Balance, December 28, 2019	2,771	$	3	36,167	$	38	$	187,147	$	(7,146)	$	214	$	(167,876)	$	12,380
Net loss	—		—	—		—		—		—		—		(978)		(978)
Issuance of shares in connection with stock option exercise	—		—	523		1		1,119		—		—		—		1,120
Issuance of shares in connection with restricted stock units vesting	—		—	1,809		2		(86)		—		—		—		(84)
Issuance of shares in connection with BOD fees	—		—	3		—		6		—		—		—		6
Share-based compensation	—		—	—		—		2,819		—		—		—		2,819
Common stock dividend on preferred stock	—		—	20		—		38		—		—		(39)		(1)
Conversion of preferred stock	(150)		—	150		—		—		—		—		—		—
Unrealized loss on deferred compensation trust assets	—		—	—		—		—		—		(95)		—		(95)
Effect of changes in foreign currencies	—		—	—		—		—		—		(6)		—		(6)
Balance, March 28, 2020	2,621		3	38,672		41		191,043		(7,146)		113		(168,893)		15,161
Net income	—		—	—		—		—		—		—		1,568		1,568
Issuance of shares in connection with stock option exercise	—		—	907		1		1,772		—		—		—		1,773
Issuance of shares in connection with restricted stock units vesting	—		—	183		—		(2)		—		—		—		(2)
Issuance of shares in connection with BOD fees	—		—	3		—		6		—		—		—		6
Share-based compensation	—		—	—		—		1,874		—		—		—		1,874
Dividend on preferred stock	—		—	25		—		—		—		—		(33)		(33)
Conversion of preferred stock	(2,621)		(3)	2,621		3		—		—		—		—		—
Unrealized gain on deferred compensation trust assets	—		—	—		—		—		—		58		—		58
Effect of changes in foreign currencies	—		—	—		—		—		—		(29)		—		(29)
Balance, June 27, 2020	—		—	42,411		45		194,693		(7,146)		142		(167,358)		20,376
Net income	—		—	—		—		—		—		—		1,385		1,385
Issuance of common stock, net of underwriters' offering expenses and commissions	—		—	4,900		5		60,526		—		—		—		60,531
Issuance of shares in connection with stock option exercise	—		—	459		—		504		—		—		—		504
Issuance of shares in connection with restricted stock units vesting	—		—	1		—		(5)		—		—		—		(5)
Issuance of shares in connection with BOD fees	—		—	1		—		6		—		—		—		6
Share-based compensation	—		—	—		—		1,773		—		—		—		1,773
Unrealized gain on deferred compensation trust assets	—		—	—		—		—		—		35		—		35
Effect of changes in foreign currencies	—		—	—		—		—		—		(38)		—		(38)
Balance, September 26, 2020	—	$	—	47,772	$	50	$	257,497	$	(7,146)	$	139	$	(165,973)	$	84,567

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 26,		September 28,
	2020		2019
Operating activities
Net income (loss)	$	1,975	$	(6,461)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense		5,298		4,572
Amortization of intangible assets		75		75
Deferred income taxes		—		(1,176)
Share-based compensation expense		5,991		1,955
Stock awards issued for non-employee director service		18		13
Loss from disposition of assets		1		—
Amortization of deferred financing costs		14		2
Changes in operating assets and liabilities:
Accounts receivable		(4,306)		(622)
Inventory		(24,229)		1,927
Other current assets		(1,927)		(731)
Other non-current assets		(622)		775
Accounts payable and accrued expenses		18,062		3,874
Other current liabilities		380		(280)
Right-of-Use Obligation - Operating Leases - Current		902		1,573
Right-of-Use Obligation - Operating Leases - Long-term		(354)		(1,332)
Other non-current liabilities		332		163
Net cash provided by operating activities		1,610		4,327
Investing activities
Additions to property and equipment		(6,936)		(4,686)
Net cash used in investing activities		(6,936)		(4,686)
Financing activities
Borrowings from revolving loan payable		1,394		11,514
Payments made on revolving loan payable		(1,394)		(11,514)
Proceeds from notes payable		4,107		162
Payments of notes payable		(5,333)		—
Payments on finance leases		(560)		(453)
Net proceeds from issuance of common stock		60,531		—
Statutory tax withholding payment for share-based compensation		(91)		(290)
Proceeds from exercise of stock options		3,398		99
Preferred stock dividends paid		(33)		(80)
Net cash provided by (used in) financing activities		62,019		(562)
Effect of exchange rate changes on cash		5		(2)
Net change in cash and cash equivalents		56,698		(923)
Cash and cash equivalents, beginning of period		2,273		2,031
Cash and cash equivalents, end of period	$	58,971	$	1,108
Supplemental disclosure of non-cash investing and financing activities:
Right-of-use operating asset acquired	$	14,785	$	1,684
Right-of-use financed asset acquired	$	1,900	$	749
Accrued asset purchases	$	735	$	1,200
Share-based compensation expense capitalized in property and equipment	$	475	$	37
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	113	$	85
Cash paid during the period for interest	$	1,603	$	1,385

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, online marketplaces and offline to wholesale distributors. 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.

On July 23, 2020, the Company’s Board of Directors approved an amendment to change the name of the Company from U.S. Auto Parts Network, Inc. to CarParts.com, Inc. and subsequently adopted Amendment No. 2 to the Company’s Bylaws. On July 27, 2020, the Company filed a Certificate of Amendment to the Certificate of Incorporation reflecting the change of the Company’s name to CarParts.com, Inc.

The Company’s products consist of replacement parts (formerly referred to as collision) serving the wear and tear and body repair market, hard parts (formerly referred to as engine) 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. The majority of these products are sold through our websites. In addition, we sell an extensive line of mirror products, including our own house brand (formerly referred to as private label) 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. 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 26, 2020 and the consolidated results of operations and cash flows for the thirteen and thirty-nine weeks ended September 26, 2020 and September 28, 2019. 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 28, 2019, which was filed with the SEC on March 10, 2020 and all our other periodic filings, including Current Reports on Form 8-K, filed with the SEC after the end of our 2019 fiscal year, and throughout the date of this report.

During the thirteen and thirty-nine weeks ended September 26, 2020, the Company generated net income of $1,385 and $1,975, respectively, compared to a net loss of $1,424 and $6,461 during the thirteen and thirty-nine weeks ended September 28, 2019, respectively. 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.

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Prior period operating expense amounts have been classified to conform to the current period presentation of operating expense in the consolidated statements of operations.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU’) No. 2018-15, “Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40)” (“ASU 2018-15”). The objective of this update is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted the standard on December 29, 2019 and the adoption did not have a material impact on the consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and other subsequent amendments including ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, collectively referred to as (“ASC 326”), which provides a new impairment model that require measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to accounts receivable, contract assets, available for sale securities and certain financial guarantees. The Company adopted the standard on December 29, 2019 and the adoption did not have a material impact on the consolidated financial statements.

Recently Early Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes. The update is intended to simplify the current rules regarding the accounting for income taxes and addresses several technical topics including accounting for franchise taxes, allocating income taxes between a loss in continuing operations and in other categories such as discontinued operations, reporting income taxes for legal entities that are not subject to income taxes, and interim accounting for enacted changes in tax laws. The new standard is effective for fiscal years beginning after December 15, 2020; however, early adoption is permitted. The Company early adopted the standard on December 29, 2019 and the adoption did not have a material impact on the consolidated financial statements.

Note 2 – Borrowings

The Company maintains an asset-based revolving credit facility ("Credit Facility") that provides for, among other things, a revolving commitment in an aggregate principal amount of up to $30,000, which is subject to a borrowing base derived from certain receivables, inventory, and property and equipment. As of September 26, 2020, our outstanding revolving loan balance was $0. The outstanding standby letters of credit balance as of September 26, 2020 was $1,550, 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) LIBOR plus an applicable margin of 1.25% to 1.75% per annum based on the Company's fixed charge coverage ratio, or (b) an “alternate prime base rate” subject to a reduction by 0.25% to 0.75% per annum based on the Company’s fixed charge coverage ratio. As of September 26, 2020, the Company’s LIBOR based interest rate was 1.44% (on $0 principal) and the Company’s prime based rate was 3.00% (on $0 principal). A commitment fee, based upon undrawn availability under the Credit Facility bearing interest at a rate of 0.25% per annum, is payable monthly. Under the terms of the credit agreement with JPMorgan Chase Bank (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 the $3,600 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 $3,600 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 $3,000, 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 Company’s excess availability was $22,519 as of September 26, 2020. As of the date hereof, the cash dominion period has not been in effect; accordingly, no principal payments are due. The Credit

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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 December 16, 2022.

Note 3 – Stockholders’ Equity and Share-Based Compensation

Public Equity Offering

On August 18, 2020, the Company completed an underwritten public equity offering of 4,000 shares of its common stock at a public offering price of $13.00 per share, resulting in net proceeds of $48,831 after deducting underwriters’ offering expenses and commissions. As part of the public equity offering, the Company granted the underwriters a 30-day option to purchase up to 900 shares of its common stock at the public offering price. The underwriters subsequently exercised their option in full within 30 days to purchase 900 shares of the Company’s common stock resulting in additional net proceeds of $11,700. The Company intends to use the net proceeds from the public equity offering for working capital and other general corporate purposes.

Options and Restricted Stock Units

The Company had the following common stock option activity during the thirty-nine weeks ended September 26, 2020:

●

Granted options to purchase 2,558 common shares.

●

Exercise of 1,793 options to purchase common shares.

●

Forfeiture of 175 options to purchase common shares.

●

Expiration of 617 options to purchase common shares.

The following table summarizes the Company’s restricted stock unit ("RSU") activity for the thirty-nine weeks ended September 26, 2020, and details regarding the awards outstanding and exercisable at September 26, 2020 (in thousands):


				Weighted Average
		Weighted		Remaining
		Average		Contractual	Aggregate
	Shares	Exercise Price		Term (in years)	Intrinsic Value
Vested and expected to vest at December 28, 2019	1,654	$	—
Awarded	3,536	$	—
Vested	(2,037)	$	—
Forfeited	(32)	$	—
Awards outstanding, September 26, 2020	3,121	$	—	2.48	$	34,862
Vested and expected to vest at September 26, 2020	3,121	$	—	2.48	$	34,862

During the thirty-nine weeks ended September 26, 2020, 187 RSUs that vested were time-based and 1,787 were performance-based. In addition, 56 shares were released to a departing employee and 7 shares were issued as partial payment for director’s fee as elected by a current Board member. For the RSUs awarded, the number of shares issued on the date of vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. For those employees who elect not to receive shares net of the minimum statutory withholding requirements, the appropriate taxes are paid directly by the employee. During the thirty-nine weeks ended September 26, 2020, we withheld 37 shares to satisfy $888 of employees’ tax obligations. Although shares withheld are not issued, they are treated as a common stock repurchase in our consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

For the thirteen and thirty-nine weeks ended September 26, 2020, we recorded compensation costs related to stock options and RSUs of $1,773 and $6,466, respectively. For the thirteen and thirty-nine weeks ended September 28, 2019, we recorded compensation costs related to stock options and RSUs of $813 and $1,992, respectively. As of

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September 26, 2020, there was unrecognized compensation expense related to stock options and RSUs of $9,353 that will be expensed through September 2024.

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				Thirty-Nine Weeks Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Net income (loss) per share:
Numerator:
Net income (loss)	$	1,385	$	(1,424)		1,975		(6,461)
Dividends on Series A Convertible Preferred Stock		—		40		71		120
Net income (loss) allocable to common shares	$	1,385	$	(1,464)	$	1,904	$	(6,581)
Denominator:
Weighted-average common shares outstanding (basic)		44,686		35,856		40,314		35,623
Common equivalent shares from common stock options, restricted stock and preferred stock		8,887		—		10,072		—
Weighted-average common shares outstanding (diluted)		53,573		35,856		50,386		35,623
Basic net income (loss) per share	$	0.03	$	(0.04)	$	0.05	$	(0.18)
Diluted net income (loss) per share	$	0.03	$	(0.04)	$	0.04	$	(0.18)

The anti-dilutive securities, which are excluded from the calculation of diluted earnings per share due to their anti-dilutive effect are as follows (in thousands):


	Thirteen Weeks Ended		Thirty-Nine Weeks Ended
	September 26, 2020	September 28, 2019	September 26, 2020	September 28, 2019
Performance stock units	—	-	—	4
Restricted stock units	4	35	30	72
Series A Convertible Preferred Stock (a)	—	2,771	—	2,771
Options to purchase common stock	259	6,855	289	6,540
Total	263	9,661	319	9,387

(a)

On June 19, 2020, each outstanding share of the Series A Convertible Preferred Stock (“Preferred Stock”) automatically converted to one share of the Company’s common stock. This automatic conversion was required pursuant to Section 4 of the Preferred Stock purchase agreement (dated March 25, 2013) because the volume weighted average price for the common stock price was equal to, or exceeded, $4.35 for 30 consecutive trading days. The Company issued an aggregate of 2,620,687 shares of common stock in connection with the automatic conversion.

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 2015-2019 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 2016-2019 remain open.

For the thirteen and thirty-nine weeks ended September 26, 2020, the effective tax rate for the Company’s operations was 3.2% and 9.2%, 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 effective 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.

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For the thirteen and thirty-nine weeks ended September 28, 2019, the effective tax rate for the Company’s operations was 27.9% and 13.6%, 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 effective tax rates, and 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.

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 26, 2020, there was no material change from fiscal year ended 2019 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.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017. Due to the existence of previously incurred losses, the NOL carryback provisions of the CARES Act did not result in a cash benefit to the Company, however, we do anticipate increased interest expense deductions for tax purposes in 2020 and 2021 as a result of the relaxation of the limitations on the deductibility of interest.

Note 6 – Commitments and Contingencies

Leases

During March, April and July 2020, the Company entered into new lease agreements for its Philippines subsidiary, Torrance headquarters and the Texas distribution center, respectively.

Philippines office lease: The lease commenced on March 15, 2020 with a ten-year lease term set to expire in March of 2030. The Company is obligated to pay approximately $500 in annual base rent, which shall increase by 5% each year beginning on the second year of the lease term and then increase by 4% each year beginning on the sixth year of the lease term. In accordance with ASU 842 – Leases (“ASC 842”), the Company recorded $5,325 in Right-of-use assets – operating, non-current, and $4,981 in Right-of-use obligation – operating, non-current, with $344 recorded in Right-of-use obligation – operating, current, on the consolidated balance sheet at the commencement of the lease.

Torrance headquarters office lease: The lease commenced on April 13, 2020 with a seventy-month lease term set to expire in March of 2026. The Company is obligated to pay approximately $73 in monthly base rent (rent abatement for five months in the first two years), which shall increase by 3% each year beginning on the second-year anniversary of the lease term. In accordance with ASU 842 – Leases (“ASC 842”), the Company recorded $4,338 in Right-of-use assets – operating, non-current, and $3,916 in Right-of-use obligation – operating, non-current, with $422 recorded in Right-of-use obligation – operating, current, on the consolidated balance sheet at the commencement of the lease.

Texas distribution center lease: The lease commenced on July 1, 2020 with a ninety-month lease term set to expire in December of 2027. The Company is obligated to pay approximately $48 in monthly base rent (rent abatement for the first six months of the lease term), which shall increase to $71 in monthly base rent beginning on the second-year anniversary of the lease term and then shall increase by 3% each year beginning on the third-year anniversary. In accordance with ASU 842 – Leases (“ASC 842”), the Company recorded $5,469 in Right-of-use assets – operating, non-current, and $5,231 in Right-of-use obligation – operating, non-current, with $238 recorded in Right-of-use obligation – operating, current, on the consolidated balance sheet at the commencement of the lease.

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

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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.

Customs Issues. On April 2, 2018, the Company filed a complaint against the United States of America, the United States Department of Homeland Security (“DHS”), in the United States Court of International Trade (the “Court”) (Case No. 1:18-cv-00068) seeking (i) relief from a single entry bonding requirement set by the United States Customs and Border Protection (“CBP”), at a level equivalent to three times the commercial invoice value of each shipment (the “Bonding Requirement”), (ii) a declaration that the Bonding Requirement is unlawful, (iii) an injunction prohibiting additional delayed entry for all of the Company’s currently-held goods being denied entry into the United States. The genesis for the action is CBP’s wrongful seizure of aftermarket vehicle grilles and associated parts being imported by the Company (“Repair Grilles”) on the basis that the Repair Grilles allegedly bear counterfeit trademarks of the original automobile manufacturers (i.e., original-equipment manufacturers, or “OEMs”). Generally, these trademarks, as applied against the Company, purport to cover the shape of the grilles themselves, or the OEM’s logo or name. However, the Repair Grilles are not counterfeit and do not cause a likelihood of confusion amongst purchasers or the relevant consuming public which are prerequisites for seizures under the pertinent provision of the Tariff Act being relied upon by CBP to seize the Repair Grilles.

On May 25, 2018, the Court granted the Company’s motion for preliminary injunction and ordered, among other things, that the Defendants are restrained from enforcing the 3X Bonding Requirement. On July 24, 2019, the Company further reached confidential terms with CBP to settle these matters. As part of the settlement: (i) Customs will release to the Company certain inventory mistakenly seized, (ii) the Company and CBP enter into mutual releases, and (iii) without admitting liability, the Company will forfeit to CBP certain goods which CBP deems to be violative. All outstanding CBP enforcement issues are resolved, and the Company has no outstanding damage or duty claims from CBP.

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 (formerly referred to as collision) serving the wear and tear and body repair market, hard parts (formerly referred to as engine) 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 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
House Brands
Replacement Parts	70	%	63	%	70	%	60	%
Hard Parts	16	%	23	%	18	%	20	%
Performance	1	%	1	%	1	%	1	%

Branded
Replacement Parts	1	%	1	%	1	%	1	%
Hard Parts	7	%	6	%	6	%	10	%
Performance	5	%	6	%	4	%	8	%

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 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 sell our products to individual consumers through www.carparts.com, online marketplaces and offline to wholesale distributors. Our user friendly and flagship website, www.carparts.com, provides customers with a broad selection of SKUs, with detailed product descriptions and photographs. 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 our strategy of disintermediating the traditional auto parts supply chain and selling products directly to customers over the Internet allows us to efficiently deliver products to our customers. Industry-wide trends that support our strategy include:

1.Number of SKUs required to serve the market. The number of automotive SKUs has grown dramatically over the last several years. In today’s market, unless the consumer is driving a high volume 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 websites provide customers with a favorable alternative to the brick-and-mortar shopping experience by offering a comprehensive selection of approximately 825,000 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, remained near record-highs at 11.8 years during 2019, according to the U.S. Auto Care Association. In addition, IHS, a market analytics firm, found that the total number of light vehicles in operation in the U.S. has increased to record levels, and should continue to rise through 2020. 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 almost $20 billion by 2022. Improved product availability, lower prices and consumers’ growing comfort with digital platforms are driving the shift to online sales. We believe that

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we are well positioned for the shift to online sales due to our history of being a leading source for aftermarket automotive parts through online marketplaces and our network of websites.

Impact of COVID-19

The challenges posed by the COVID-19 pandemic on the United States and global economy increased significantly in March and some challenges continued through the third quarter of 2020. 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 had no significant disruptions and 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”).

COVID-19 had only minimal disruptions on our business as sales for the thirty-nine weeks ended September 26, 2020 were unfavorably impacted primarily in mid to late March during the initial stages of COVID-19 stay-at-home orders. 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.

Cybersecurity Matters

On June 28, 2020, we detected a ransomware attack on our network that disrupted access to some of our systems. We immediately took steps to isolate the affected systems and contain the disruption to our information technology infrastructure, including taking some systems offline as a precautionary measure. Our internal IT team subsequently restored and recovered the affected IT systems to full functionality. We engaged third party consultants and law enforcement to investigate the incident, and we internally have found no evidence that sensitive customer data was compromised or stolen from the IT systems, although our investigation is continuing. We believe there has not been any, current or expected future, material impact to our business, results of operations or financial condition because of this ransomware attack. In order to mitigate the likelihood of similar future events, we have implemented enhanced security features and monitoring procedures.

Executive Summary

For the third quarter of 2020, the Company’s operations generated net sales of $117,406, compared with $69,273 for the third quarter of 2019, representing an increase of 69.5%. Our operations generated net income of $1,385 for the third quarter of 2020 compared to a net loss of $1,424 for the third quarter of 2019. Our operations generated a net income (loss) before interest expense, net, income tax provision (benefit), depreciation and amortization expense, amortization of intangible assets, plus share-based compensation expense, and in 2019, costs related to our customs issues and employee transition costs (“Adjusted EBITDA”) of $5,131 in the third quarter of 2020 compared to $1,316 in the third quarter of 2019. Adjusted EBITDA, which 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 third quarter of 2020 compared to the third quarter of 2019 primarily due to an increase in our online sales as well as a slight increase in our offline sales. Our online sales, which include our e-commerce and online marketplace sales channels, contributed 93.9% of total net sales and our offline sales, which consist of our Kool-Vue^® and wholesale operations, contributed 6.1% of total net sales. Our online sales increased by $47,309, or 75.1%, to $110,299 compared to the same period last year due to an increase in e-commerce sales, primarily driven by our sales growth from our flagship website, CarParts.com. Our offline sales increased by $824, or 13.1%, to $7,107 compared to the same period last year primarily due to an increase in sales from our wholesale operations. Gross profit increased by 103.9% to $43,121. The increase in gross profit was primarily due to improved product mix, channel mix, and logistics optimization.

Total expenses, which primarily consisted of cost of sales and operating expense, increased in the third quarter of 2020 compared to the same period in 2019. The changes in both cost of sales and operating expense are described in further detail under — “Results of Operations” below.

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We continue to pursue the following strategies in order to improve our operating performance:

●

We have returned to positive e-commerce growth by continuing to focus on making the auto parts purchasing process as easy and seamless as possible. We plan to continue to provide unique catalog content and provide better content on our websites with the goal of improving our ranking on the search results.

●

We continue to work to improve the website purchase experience for our customers by (1) helping our customers find the parts they want to buy by reducing failed searches and increasing user purchase confidence; (2) implementing guided navigation and custom buying experiences specific to strategic part names; (3) increasing order size across our sites through improved recommendation engines; (4) improving our site speed; and (5) creating a frictionless checkout experience for our customers. In addition, we intend to continue to improve our mobile enabled websites to take advantage of shifting consumer behaviors. These efforts are intended to increase the number of repeat purchases, as well as contribute to our sales growth.

●

We continue to work towards becoming one of the preferred low price options in the market for aftermarket auto parts and accessories. We also continue to offer lower prices by increasing foreign sourced house brand products as they are generally less expensive and we believe provide better value for the consumer. We believe our product offering will grow our sales and improve our margins.

●

We continue to increase product selection by being the first to market with many new SKUs. We currently have approximately 65,000 house brand SKUs and over 760,000 branded SKUs in our product selection. We will continue to seek to add new categories and expand our existing specialty categories. We believe continued product expansion will increase the total number of orders and contribute to our sales growth. Additionally, we plan to continue to maintain certain in-stock inventory throughout the year to provide consistent service levels and improve customer experience.

●

We continue to implement cost saving measures.

Non-GAAP measures

Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” and other provisions of the Securities Exchange Act of 1934, as amended, define and prescribe the conditions for use of certain non-GAAP financial information. We provide EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. EBITDA consists of net income (loss) before (a) interest expense, net; (b) income tax provision (benefit); (c) depreciation and amortization expense; and (d) amortization of intangible assets; while Adjusted EBITDA consists of EBITDA before share-based compensation expense, and in 2019, costs related to our customs issues and employee transition costs.

The Company believes that these non-GAAP financial measures provide important supplemental information to management and investors. These non-GAAP financial measures reflect an additional way of viewing aspects of the Company’s operations that, when viewed with the GAAP results and the accompanying reconciliation to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting the Company’s business and results of operations.

Management uses Adjusted EBITDA as 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 stock compensation expense and in 2019, the costs associated with the customs issue, 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

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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 income (loss) from operations to Adjusted EBITDA for the periods presented (in thousands):


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Net income (loss)	$	1,385	$	(1,424)	$	1,975	$	(6,461)
Depreciation & amortization		1,766		1,531		5,298		4,572
Amortization of intangible assets		25		25		75		75
Interest expense, net		304		516		1,453		1,410
Taxes		45		(552)		199		(1,018)
EBITDA	$	3,525	$	96	$	9,000	$	(1,422)
Stock compensation expense	$	1,606	$	792	$	5,991	$	1,955
Employee transition costs⁽¹⁾		—		425		—		1,695
Customs costs⁽²⁾		—		3		—		418
Adjusted EBITDA	$	5,131	$	1,316	$	14,991	$	2,646

(1)	We incurred employee transition costs related to the transition of our executive management team including severance, recruiting, hiring bonus and relocation costs.

(2)	We incurred port and carrier fees and legal costs associated with our customs related issues. Refer to “Note 6 – Commitments and Contingencies” of our Notes to Consolidated Financial Statements for additional details.

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				Thirty-Nine Weeks Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	63.3		69.5		64.9		71.0
Gross profit	36.7		30.5		35.1		29.0
Operating expense	35.3		32.5		34.0		31.8
Income (loss) from operations	1.5		(2.0)		1.1		(2.8)
Other income (expense):
Other income, net	0.0		(0.0)		0.0		0.0
Interest expense	(0.3)		(0.7)		(0.4)		(0.6)
Total other expense, net	(0.3)		(0.7)		(0.4)		(0.6)
Income (loss) before income taxes	1.2		(2.7)		0.7		(3.4)
Income tax provision (benefit)	0.0		(0.8)		0.1		(0.5)
Net income (loss)	1.2	%	(1.9)	%	0.6	%	(2.9)	%

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Thirteen and Thirty-Nine Weeks Ended September 26, 2020 Compared to the Thirteen and Thirty-Nine Weeks Ended September 28, 2019

Net Sales and Gross Margin


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 26, 2020			September 28, 2019			September 26, 2020			September 28, 2019

	(in thousands)						(in thousands)
Net sales	$	117,406		$	69,273		$	324,154		$	217,698
Cost of sales		74,285			48,130			210,425			154,663
Gross profit	$	43,121		$	21,143		$	113,729		$	63,035
Gross margin		36.7	%		30.5	%		35.1	%		29.0	%

Net sales increased $48,133, or 69.5%, for the third quarter of 2020 compared to the third quarter of 2019. Our net sales consisted of online sales, representing 93.9% of the total for the third quarter of 2020 (compared to 90.9% in the third quarter of 2019), and offline sales, representing 6.1% of the total for the third quarter of 2020 (compared to 9.1% in the third quarter of 2019). The net sales increase was due to an increase in online sales of $47,309, or 75.1%, as well as an increase in offline sales of $824, or 13.1%. Our online sales channels increase was driven by an increase in e-commerce sales primarily driven by our sales growth from our flagship website, CarParts.com. The offline sales channel increased primarily due to increased sales to our wholesale customers.

Net sales increased $106,456, or 48.9%, for the thirty-nine weeks ended September 26, 2020 (“YTD Q3 2020”) compared to the same period in 2019. Our net sales consisted of online and offline sales, representing 93.9% and 6.1%, respectively, of the total net sales for YTD Q3 2020 (compared to 90.7% and 9.3%, respectively, for the same period in 2019). The net sales increase was driven by an increase of $107,080, or 54.2%, in online sales, offset by a decrease in offline sales of $624, or 3.0%. Our online sales channel increase was driven by an increase in ecommerce sales primarily driven by our sales growth from our flagship website, CarParts.com. The offline sales channel decreased primarily due to decreased sales to our wholesale customers.

Gross profit increased $21,978 or 103.9%, for the third quarter of 2020 compared to the same period of 2019 and increased $50,694, or 80.4%, in YTD Q3 2020 compared to YTD Q3 2019. Gross margin increased 620 basis points to 36.7% in the third quarter of 2020 compared to 30.5% in the third quarter of 2019. Gross margin increased 610 basis points to 35.1% for YTD Q3 2020 compared to 29.0% in the same period of 2019. The increase in gross profit and gross margin was primarily due to improved product mix, channel mix, and logistics optimization.

Operating Expense

Thirteen Weeks Ended

Thirty-Nine Weeks Ended

September 26, 2020

September 28, 2019

September 26, 2020

September 28, 2019

(in thousands)

Operating expense

41,389