Annual Report for Fiscal Year Ending 01-03, 2025 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Dollar Amounts 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 IV, Item 15 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 I, 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 other parts and accessories. Our proprietary product database maps our SKUs to product applications based on vehicle makes, models and years. We principally sell our products to individual consumers through our flagship website at www.carparts.com, our mobile app, online marketplaces and our wholesale platform. 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 disintermediating the traditional auto parts supply chain and selling products directly to customers online allows us to efficiently deliver products to our customers. Industry-wide trends that support our strategy and future growth include:

Executive Summary

For fiscal year 2025, the Company's operations generated net sales of $547,525, compared to $588,846 for fiscal year 2024, representing a decrease of 7.0%. The Company incurred a net loss of $50,443 for fiscal year 2025 compared to a net loss of $40,601 for fiscal year 2024. The Company's net loss before interest expense (income), net, income tax provision, depreciation and amortization expense, amortization of intangible assets, impairment of long-lived assets, share-based compensation expense, workforce transition costs, distribution center costs and strategic alternatives exploration costs ("Adjusted EBITDA"), was $(14,008) in fiscal year 2025 compared to $(7,055) in fiscal year 2024. Refer to the section below titled "Non-GAAP measures" for information regarding our use of Adjusted EBITDA and a reconciliation from net loss.

Net sales decreased in fiscal year 2025 compared to fiscal year 2024 primarily driven by our efforts to increase profitability by rationalizing marketing spend. Gross profit decreased by 8.8% to $179,348. Gross margin decreased 60 basis points to 32.8% in fiscal year 2025 compared to 33.4% in fiscal year 2024. The decrease in gross margin was primarily driven by product mix and the impact from tariffs, partially offset by our pricing increases.

Total expenses, which primarily consisted of cost of sales and operating expense, increased in fiscal year 2025 compared to the same period in 2024. The components of cost of sales and operating costs are described in further detail under "Components of Results of Operations" below.

Non-GAAP measures

Regulation G, "Conditions for Use of Non-GAAP Financial Measures," and other provisions of the Exchange Act, as amended, define and prescribe the conditions for use of certain non-GAAP financial information. We provide EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. EBITDA consists of net loss before (a) interest (expense) income, 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, workforce transition costs, distribution center costs, strategic alternatives exploration costs and impairment of long-lived assets.

We believe 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 our operations that, when viewed with the accounting principles generally accepted in the United States ("GAAP") results and the accompanying reconciliation to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting the our business and results of operations.

Management uses Adjusted EBITDA as one measure of our operating performance because it assists in comparing our operating performance on a consistent basis by removing the impact of stock 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. We also believe 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 our 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, we expect to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items from our 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 to Adjusted EBITDA for the periods presented (in thousands):

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Components of Results of Operations

Net Sales. Online and offline sales represent two different sales channels for our products. Online is our primary sales channel as we generate net sales primarily from eCommerce sales of auto parts to individual consumers through our mobile-friendly website at www.carparts.com, our mobile app, online marketplaces, and our wholesale platform. Online marketplaces consist primarily of sales of our products on online marketplace websites, where we sell through online storefronts that we maintain on third-party owned websites such as eBay and Amazon. Our offline sales channel represents our distribution of products directly to commercial customers by selling auto parts to collision repair shops through our wholesale platform. Our offline sales channel also includes both stock ship distribution as well as drop ship programs for automotive warehouse distributors and other online resellers. The product mix includes the majority of our house brands stock ship parts, which includes replacement parts, hard parts (maintenance and repair components), other parts (performance upgrades) and specialty products across domestic and import vehicle applications.

Cost of Sales. Cost of sales consists of the direct costs associated with procuring parts from suppliers and delivering products to customers. These costs include direct product costs, outbound freight and shipping costs, warehouse supplies and warranty costs, partially offset by purchase discounts. Depreciation and amortization expenses are excluded from cost of sales and included in operating expense.

Operating Expense. Operating expense consists of marketing, general and administrative, fulfillment, and technology expense. We also include share-based compensation expense in the applicable operating expense category based on the respective equity award recipient's function. Marketing expense consists of online advertising spend,

television advertising, internet commerce facilitator fees and other advertising costs, as well as payroll and related expenses associated with our customer service and marketing personnel. General and administrative expense consists primarily of administrative payroll and related expenses, merchant processing fees, legal and professional fees and other administrative costs. Fulfillment expense consists primarily of payroll and related costs associated with our warehouse employees and our purchasing group, facilities rent, building maintenance, depreciation and other costs associated with inventory management and our wholesale operations. Technology expense consists primarily of payroll and related expenses of our information technology personnel, the cost of hosting our servers, communications expenses and internet connectivity costs, computer support and software development amortization expense. Marketing expense, general and administrative expense, and fulfillment expense also includes depreciation and amortization expense. In fiscal year 2025, operating expense also consists of impairment loss on long-lived assets. See further information of impairment in "Note 3 - Property and Equipment, Net" in the Notes to the Consolidated Financial Statements included in Part II, Item 8, of this report

Other Income, Net. Other income, net primarily consists of miscellaneous income or expense and interest income comprised primarily of interest income on investments.

Interest Expense. Interest expense consists primarily of interest expense on our outstanding revolving loan and letters of credit balances, deferred financing cost amortization and finance lease interest.

Presentation of Results of Operations and Liquidity and Capital Resources

The following discussion and analysis of our Results of Operations and Liquidity and Capital Resources includes a comparison of fiscal year 2025 to fiscal year 2024. A similar discussion and analysis which compares fiscal year 2024 to fiscal year 2023 may be found in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report filed with the SEC pursuant to Section 13 or 15(d) under the Exchange Act on March 26, 2025.

Results of Operations

The following table sets forth our results of operations for the fiscal years presented, expressed as a percentage of net sales:

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Fifty-Three Weeks Ended January 3, 2026 Compared to the Fifty-Two Weeks Ended December 28, 2024

Net Sales and Gross Margin

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Net sales decreased $41,321, or 7.0%, for fiscal year 2025 compared to fiscal year 2024 primarily driven by our efforts to increase profitability by rationalizing marketing spend.

Gross profit decreased $17,391, or 8.8%, in fiscal year 2025 compared to fiscal year 2024. Gross margin decreased 60 basis points to 32.8% in fiscal year 2025 compared to 33.4% in fiscal year 2024. The decrease in gross margin was primarily driven by product mix and the impact from tariffs, partially offset by our pricing increases.

Operating Expense

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Operating expense decreased $9,151, or 3.9%, for fiscal year 2025 compared to fiscal year 2024. The decrease was mainly attributable to favorable payroll costs due to headcount reductions and favorable marketing spend, partially offset by the impairment loss on long-lived assets.

Total Other (Expense) Income, Net

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Total other (expense) income, net, decreased $1,507, or 500.7%, for fiscal year 2025 compared to fiscal year 2024 primarily driven by an increase in interest expense due to higher borrowings on the revolving loan payable and a decrease in interest income due to a lower cash balance throughout 2025.

Income Tax Provision

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We account for income taxes in accordance with ASC 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 based on the consideration of all available evidence using a "more likely than not" standard. Realization of deferred tax assets is dependent upon taxable income in prior carryback years, estimates of future taxable income, tax

planning strategies, and reversal of existing taxable temporary differences. ASC 740 provides that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years or losses expected in early future years. As of January 3, 2026, due to cumulative losses in recent years, we maintained a valuation allowance in the amount of $55,405 against deferred tax assets that were not more likely than not to be realized.

As of January 3, 2026, we had no material unrecognized tax benefits, interest or penalties related to federal and state income tax matters. As of January 3, 2026, our federal and state NOL carryforwards were $152,613 and $108,281, respectively. Federal NOL carryforwards of $622 were acquired in the acquisition of WAG which are subject to Section 382 of the Code and limited to an annual usage limitation of $135. Our federal NOL carryforwards begin to expire in 2029, while state NOL carryforwards also begin to expire in 2029.

Liquidity and Capital Resources

Sources of Liquidity

During the fifty-three weeks ended January 3, 2026, we primarily funded our operations with cash and cash equivalents generated from operations, borrowings from our revolving loan, the issuance of the Convertible Notes with an aggregate principal amount of $25,000 (see "Note 4 - Borrowings") and the issuance of common stock for $10,733 of gross proceeds (see "Note 5 - Stockholders' Equity and Share-Based Compensation"). We had cash and cash equivalents of $25,821 as of January 3, 2026, representing a $10,576 decrease from $36,397 of cash and cash equivalents as of December 28, 2024. Based on our current operating plan, we believe that our existing cash and cash equivalents, investments, cash flows from operations and available funds under our Amended Credit Facility will be sufficient to finance our operations through at least the next twelve months (see "Debt and Available Borrowing Resources" and "Funding Requirements" below).

As of January 3, 2026 and December 28, 2024, our working capital was $53,817 and $48,445, respectively.

Cash Flows

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Operating Activities

Net cash (used in) provided by operating activities for the fiscal years ended January 3, 2026 and December 28, 2024 was $(34,076) and $10,338, respectively. The decrease was primarily driven by a higher net loss in fiscal year 2025, in addition to the decrease in net cash outflow from the change in working capital, mainly attributable to moderating our inventory position in fiscal year 2025 due to the uncertainty from tariffs.

Investing Activities

For the fiscal year ended January 3, 2026, net cash used in investing activities was primarily the result of additions to property and equipment of $7,961, which are mainly related to capitalized website and software development costs. For the fiscal year ended December 28, 2024, net cash used in investing activities was primarily the result of additions to property and equipment of $20,573, which are mainly related to capitalized website and software development costs and machinery and equipment additions, primarily related to the new Las Vegas distribution center.

Financing Activities

Net cash provided by (used in) financing activities was $31,397 and $(4,422) for the fiscal years ended January 3, 2026 and December 28, 2024, respectively. The increase was primarily attributable to the issuance of the Convertible Notes with an aggregate principal amount of $25,000 and $10,733 of gross proceeds from the issuance of common stock in September 2025.

Debt and Available Borrowing Resources

Total debt was $34,010 as of January 3, 2026, which primarily consists of Convertible Notes payable and right-of-use obligations-finance. Total debt was $12,313 as of December 28, 2024, which primarily consists of right-of-use obligations-finance.

Convertible Notes Payable

On September 8, 2025, we entered into a Purchase Agreement with certain investors, pursuant to which we issued Convertible Notes with an aggregate principal amount of $25,000. The Convertible Notes accrue interest quarterly at a rate of two percent (2%) per annum, payable in kind. The outstanding Convertible Notes principal balance, plus any unpaid and accrued interest, is convertible at the option of the investors into shares of common stock at the maturity date, at a Conversion Price of $1.20 per share. As of January 3, 2026, the Convertible Notes payable balance was $25,161, which included $161 of payable in kind interest expense. The maturity date of the Convertibles Notes is September 10, 2028.

Amended Credit Facility

We maintain an Amended Credit Facility that provides for, among other things, a revolving commitment, which is subject to a borrowing base derived from certain receivables, inventory and property and equipment. On September 8, 2025, we and JPMorgan entered into the First Amendment to the existing Amended and Restated Credit Agreement, dated as of June 17, 2022. The First Amendment provides for the revolving commitment in an aggregate principal amount of $25,000 (formerly $75,000), a sublimit of $2,500 for the issuance of letters of credit and allows for an uncommitted ability to increase the revolving commitment by an additional $125,000, subject to certain terms and conditions. The Amended Credit Facility now matures on September 8, 2026 (formerly June 17, 2027).

As of January 3, 2026 and December 28, 2024, our outstanding revolving loan balance was $0 and $0, respectively. During the fiscal years ended January 3, 2026 and December 28, 2024, we borrowed and paid down $20,675 and $0, respectively, from the revolving loan under the Amended Credit Facility. The outstanding standby letters of credit balance as of December 28, 2024 and December 28, 2024 were $680 and $680, respectively, and we had $0 of our trade letters of credit outstanding in accounts payable in our consolidated balance sheets. We use the trade letters of credit in the ordinary course of business to satisfy certain vendor obligations.

Loans drawn under the Amended Credit Facility bear interest, at our option, at a per annum rate equal to either (a) Adjusted Secured Overnight Financing Rate ("SOFR") plus an applicable margin of 3.00% per annum, or (b) an "alternate prime base rate" plus an applicable margin of 1.50% per annum. As of September 27, 2025, the SOFR based interest rate was 6.78% and the prime based rate was 8.25%. A commitment fee, based upon unused availability under the Amended Credit Facility bearing interest at a rate of 0.50% per annum, is payable monthly. The Covenant Testing Trigger Period (as defined under the Amended Credit Agreement) means the period commencing on any day that excess availability is less than $5,000 for three consecutive business days and will continue until excess availability has been greater than, or equal to, $5,000 at all times for 45 consecutive days. In addition, upon the occurrence of a Covenant Testing Trigger Period, we shall be required to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0, continuing until excess availability has been greater than or equal to $5,000 for 45 consecutive days.

Certain of our domestic subsidiaries are co-borrowers (together with the Company, the "Borrowers") under the Amended Credit Agreement, and certain other domestic subsidiaries are guarantors (the "Guarantors" and, together with

the Borrowers, the "Loan Parties") under the Amended Credit Agreement. The Borrowers and the Guarantors are jointly and severally liable for the Borrowers' obligations under the Amended Credit Agreement. The Loan Parties' obligations under the Amended Credit Agreement are secured, subject to customary permitted liens and certain exclusions, by a perfected security interest in (a) all tangible and intangible assets and (b) all of the capital stock owned by the Loan Parties (limited, in the case of foreign subsidiaries, to 65% of the capital stock of such foreign subsidiaries). The Borrowers may voluntarily prepay the loans at any time. The Borrowers are required to make mandatory prepayments of the loans (without payment of a premium) with net cash proceeds received upon the occurrence of certain "prepayment events," which include certain sales or other dispositions of collateral, certain casualty or condemnation events, certain equity issuances or capital contributions, and the incurrence of certain debt.

The Amended Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to us and our subsidiaries, including, among other things, restrictions on indebtedness, liens, fundamental changes, investments, dispositions, prepayment of other indebtedness, mergers, and dividends and other distributions.

Events of default under the Amended Credit Agreement include: failure to timely make payments due under the Amended Credit Agreement; material misrepresentations or misstatements under the Amended Credit Agreement and other related agreements; failure to comply with covenants under the Amended Credit Agreement and other related agreements; certain defaults in respect of other material indebtedness; insolvency or other related events; certain defaulted judgments; certain ERISA-related events; certain security interests or liens under the loan documents cease to be, or are challenged by us or any of our subsidiaries as not being, in full force and effect; any loan document or any material provision of the same ceases to be in full force and effect; and certain criminal indictments or convictions of any Loan Party. As of January 3, 2026, we were in compliance with all covenants under the Amended Credit Agreement.

See additional information in "Note 4 - Borrowings" in the Notes to the Consolidated Financial Statements included in Part II, Item 8, of this report.

Funding Requirements

Based on our current operating plan, we believe that our existing cash, cash equivalents, investments, cash flows from operations and available debt or equity financing will be sufficient to finance our operational cash needs through at least the next twelve months. Our future capital requirements may, however, vary materially from those now planned or anticipated. Changes in our operating plans, lower than anticipated net sales or gross margin, increased expenses, continued or worsened economic conditions, worsening operating performance by us, or other events, including those described in "Risk Factors" included in Part I, Item 1A may force us to sell assets or seek additional debt or equity financings in the future, including the issuance of additional common stock under a registration statement. There can be no assurance that we would be able to raise such additional financing or engage in asset sales on acceptable terms, or at all. If we are not able to raise adequate additional financing or proceeds from asset sales, we will need to defer, reduce or eliminate significant planned expenditures, restructure or significantly curtail our operations.

Seasonality

We believe our business is somewhat seasonal in nature. It includes many categories, geographies, and channels which may experience seasonality from time to time based on various external factors. Additionally, seasonality may affect our product mix. These historical seasonality trends could continue, and such trends may have a material impact on our financial condition and results of operations in subsequent periods.

Recent Accounting Pronouncements

See "Note 1 - Summary of Significant Accounting Policies and Nature of Operations" of the Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Actual results could differ from those estimates under different assumptions and conditions. We believe that of our significant accounting policies, which are described in Note 1 - Summary of Significant Accounting Policies and Nature of Operations" of the Notes to Consolidated Financial Statements, the following accounting policies and estimates set forth below involve a greater degree of judgment or complexity.

Valuation of Inventory - Inventory Reserve. Inventory primarily consists of finished goods. We purchase inventory from suppliers both domestically and internationally, primarily in Taiwan and China. Inventory is accounted for using the first-in first-out ("FIFO") method and valued at the lower of cost or net realizable value. We recognize provisions for obsolete and slow-moving inventory primarily based on judgments about expected disposition of inventory, generally, through sales, or liquidations of obsolete inventory, and expected recoverable values based on currently-available or historical information. If actual market conditions are less favorable than those anticipated by management, additional write-offs to reduce the value of our inventory may be required.

Impairment of Long-Lived Assets. We assess potential impairments whenever events or changes in circumstances indicate that the carrying value of our long-lived assets, or asset group, may not be recoverable. If an indicator of impairment exists, we review the recoverability of our long-lived assets by estimating the future undiscounted cash flows compared to the carrying value of such assets, or asset group. An impairment loss will result when the carrying value of the asset group exceeds the undiscounted future cash flows of the asset group.

On January 3, 2026, we considered the significant decline in our market value, combined with the fiscal year 2025 net cash used in operating activities in the consolidated statements of cash flows, to be changes in circumstances that represent indicators of impairment. Therefore, the consolidated asset group was tested for recoverability by comparing the future undiscounted cash flows against its carrying value. It was determined that the carrying value exceeded the future undiscounted cash flows of the asset group. The fair value of the asset group, estimated using a market approach in an independent third-party valuation, was less than its carrying amount. Therefore, the excess of the carrying amount above the fair value was recognized as an impairment loss, which was allocated to the long-lived assets' carrying values on a pro rata basis. The impairment loss cannot reduce the long-lived asset's carrying value below its fair value. Our long-lived assets consists of property and equipment, net, right-of-use assets - operating leases, net, and right-of-use assets - finance leases, net. During the year ended January 3, 2026, we recognized an impairment charge of $3,690 on its long-lived assets, resulting in an impairment loss of $3,690 recorded in operating expense in the consolidated statements of operations. During the year ended December 28, 2024, no impairment loss was recorded.