Item
1. Business
The
following discussion reflects, and “we,” “us,” “our” the “Company” and “PARTS iD”
generally refer to, the business of Onyx Enterprises Int’l, Corp. prior to giving effect to the Business Combination and PARTS
iD, Inc. after giving effect to the Business Combination, as the context indicates, unless the context otherwise refers to Legacy Acquisition
Corp.
Introductory
Note
On
November 20, 2020 (the “Closing Date”), PARTS iD, Inc., a Delaware corporation (f/k/a Legacy Acquisition Corp. (“Legacy”))
(the “Company” or “PARTS iD”), consummated the previously announced business combination pursuant to that certain
Business Combination Agreement, dated September 18, 2020 (the “Business Combination Agreement”), by and among the Company,
Excel Merger Sub I, Inc., a Delaware corporation and an indirect wholly owned subsidiary of the Company and directly owned subsidiary
of Merger Sub 2 (“Merger Sub 1”), Excel Merger Sub II, LLC, a Delaware limited liability company and direct wholly owned
subsidiary of the Company (“Merger Sub 2”), Onyx Enterprises Int’l, Corp., a New Jersey corporation (“Onyx”),
and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the stockholder representative
pursuant to the terms of Section 11.16 of the Business Combination Agreement.
At
the closing of the transactions contemplated by the Business Combination Agreement (the “Closing”), (a) Merger Sub 1 merged
with and into Onyx (the “First Merger”), with Onyx surviving as a direct wholly-owned subsidiary of Merger Sub 2, and (b)
promptly following the First Merger, Onyx, as the surviving company of the First Merger, merged with and into Merger Sub 2 (the “Second
Merger”). Upon the consummation of the Second Merger, Merger Sub 2 was the surviving company and Onyx ceased to exist, and Merger
Sub 2 became a direct, wholly owned subsidiary of the Company (collectively with the other transactions described in the Business Combination
Agreement, the “Business Combination”). On the Closing Date, (i) Legacy changed its name from Legacy Acquisition Corp. to
PARTS iD, Inc. and listed its shares of Class A common stock, par value $0.0001 per share (the “Class A Common Stock”) on
the NYSE under the symbol “ID” and (ii) Merger Sub 2 changed its name to PARTS iD, LLC (“PARTS iD, LLC”).
Available
Information
Our
website address is www.partsidinc.com. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable
after they are electronically filed with, or furnished to, the SEC. In addition, our code of ethics, audit committee charter, compensation
committee charter, nominating and corporate governance committee charter and strategy, technology and risk management committee charter
are available free of charge on our website. The public may read materials we file with the SEC, including reports, proxy and information
statements, and other information, on the Internet site maintained by the SEC. The address of that site is www.sec.gov.
The
above references to our website and the SEC’s website do not constitute incorporation by reference of the information contained
on the websites and such information should not be considered part of this document.
Overview
PARTS
iD, Inc. is a technology-driven, digital commerce company focused on creating custom infrastructure and unique user experiences within
niche markets. The Company was founded in 2008 with a vision of creating a one-stop digital commerce destination for the automotive parts
and accessories market. Management believes that the Company has since become a market leader and proven brand-builder, fueled by its
commitment to delivering an engaging shopping experience; comprehensive, accurate and varied product offerings; and continued digital
commerce innovation.
At
its core, the Company’s technology solution is a data and information platform that enables and facilitates a differentiated digital
commerce experience within complex product markets, as opposed to a pure digital commerce or electronics retailer. The deep technology
platform that we have built integrates software engineering with catalog management, data intelligence, mining and analytics, along with
user interface development that utilizes distinctive rules-based parts fitment software capabilities. In order to handle the ever-growing
need for accurate automotive product and parts data, the Company has utilized cutting-edge computational and software engineering techniques,
including Bayesian classification, to enhance and improve data records and product information and also deliver an engaging user experience.
The technology platform also offers the Company fungibility, which was demonstrated by the fact that it was able to launch seven additional
verticals in August 2018.
Through
the journey of building a comprehensive and complex product portfolio with approximately 18 million SKUs, as well as building an end-to-end
digital commerce platform, the Company has developed a platform for both digital commerce and fulfillment, relying on insights gleaned
from over 14 billion data points related to vehicle parts, a virtual shipping network comprising over 2,500 locations, over 5,000 active
brands, and machine-learning algorithms for complex fitment industries such as vehicle parts and accessories.
While
the Company’s platform has been initially focused on automotive parts and accessories, management believes the Company’s
platform is scalable and can be applied to other complex, multi-dimensional fitment, product portfolio industries, in addition to the
seven parts and accessories verticals — semi-truck, motorcycle, powersports, RV/camper, boating, recreation and tools — that
we launched in August 2018.
The
Company has positioned these verticals under its existing “iD” brand and believes this will drive brand loyalty among customers
and reputation among vendors, ultimately increasing online traffic, brand visibility, and customer orders for adjacent markets. The Company
has since experienced growth in revenue related to the additional verticals, our original equipment (“OE”) business, and
our repair parts business.
Customer
service is a key aspect of the experience the Company offers to its customers throughout their buying journey. The Company has specialized
customer support teams which assist customers in navigating through the platform, addressing any technical questions, order tracking
and completing the order.
Digital
Commerce Platform
The
Company’s digital commerce platform was developed in-house from inception as a solution for industries with data limitations and
parts fitment complexities, all while making processes simpler and more efficient. A core differentiator of the Company’s digital
commerce platform is its purpose-built and proprietary data catalog developed over more than a decade by collecting, analyzing and refining
data regarding original equipment manufacturer, or OEM, vehicles and aftermarket products and customer feedback to define a universe
of accurate Year-Make-Model, or YMM, values. Management believes this functionality creates a unique user experience path that drives
purchase intelligence and increases consumer confidence and trust.
The
Company’s in-house data catalog houses over 14 billion data points for automobiles and the Company’s other seven verticals.
This data catalog is designed to tie vehicles with parts that fit their specific YMM, including the variations of sub-model, engine size,
transmission type and drivetrain type, as well as to recommend complementary products, such as tools required to install purchased parts
and accessories. To build its catalog, the Company aggregates data from multiple sources, cross-pollinates this data to address any gaps
in data sets, enriches the catalog using its proprietary internal data, then applies artificial intelligence to make further improvements.
Through this process, the Company’s data catalog is able to: (i) determine the exact parts fitment for a product by its parameters,
even if certain fitment details are originally missing in manufacturers’ data feeds; and (ii) rapidly incorporate new SKUs as they
become available. Because its data catalog is continually expanding with each customer interaction, the Company also is able to offer
better purchase recommendations, increase up-sell opportunities, improve the efficiency of its fulfillment operations, and lower errors
and mistakes in orders. These economic and commercial advantages result in a fly-wheel effect that increases operating leverage and momentum.
Because the cost of operating the Company’s data catalog is largely fixed, the Company has been able to expand its customer offerings
into adjacent categories at relatively low incremental costs. The Company’s in-house catalog and deep understanding of fitment
data helps offer a personalized and tailored experience to its diverse customer base of DIY, DIFM and PRO (mechanics) customers. The
Company is committed to providing an enhanced customer experience and becoming a one-stop shop and seamless solution for all vehicle
enthusiast needs.
Product
Vendors
The
Company provides its product vendors with access to its large customer base and e-commerce market. The Company’s 1000+ product
vendors can leverage the Company’s disruptive technology, enhanced fitment data, deep understanding of the market and large customer
database to sell and position their innovative product catalog instantly. Product vendors can benefit from the Company’s engaging
shopping experience, advanced 3D imagery, in-depth product description, reviews, installation guides and other tailored content offered
by the Company’s platform, complemented by specialized customer service.
Fulfillment
Operations
The Company’s virtual, proprietary and capital-efficient
fulfillment model manages its sales volume while carrying minimal inventory, which is primarily associated with its private label products.
The Company’s platform, which incorporates live or frequently updated inventory feeds from our product vendors, provides stock-on-hand
for approximately 18 million products across over 5,000 active brands. The Company’s fulfillment model decides which product vendor
to source from while the sale is made based on a proprietary algorithm, which incorporates factors such as availability of inventory,
customer proximity, shipping cost and profitability.
This
decentralized, data-driven approach allows the Company to increase delivery speed through more than 2,500 shipping points from its U.S.
vendor network.
Products
The
Company primarily sells automotive parts and accessories, including a wide range of goods from automobile accessories, wheels and tires,
performance parts, lighting and repair parts. In addition, the Company launched seven new verticals in August 2018 and, in 2021, the
value of the orders received from these verticals was approximately 9% of the Company’s total order value. These seven verticals
offer parts and accessories for semi-trucks, motorcycles, powersports (including ATVs, snowmobiles and personal watercraft), RVs/campers,
boats, recreation (including outdoor sports and camping gear) and tools using the same proprietary platform.
The
Company primarily sources its products from industry leading brands and product vendors located in the U.S., except that its private
label products are largely sourced from foreign product vendors. Regarding sales of products sourced from our product vendors, no single
product vendor accounted for more than 10% of the Company’s total revenue for the year ended December 31, 2021. The Company’s
inventory on hand, which largely relates to private label products, was approximately $1.7 million in value as of December 31, 2021.
As of December 31, 2021 and December 31, 2020, the sale value of customers’ unshipped and undelivered orders were $15.5 million
and $16.2 million, respectively.
Private
Label Product. The Company’s private label business uses proprietary data to identify, import and sell higher margin products
that are in demand on its platform. Management believes that by selecting and pairing a superior import product with its purpose-built
and proprietary data catalog, consumers are provided the option to purchase a high-quality product at a reasonable cost. Private label
revenue was less than 10% of the Company’s total revenue for the year ended December 31, 2021.
Branded Product. The Company has developed and implemented application-programming interfaces with the majority of its drop-ship
product vendors that allow it to electronically transmit orders, check inventory availability, and receive the shipment tracking information
and share it with its customers. These processes allow the Company to offer over 5,000 brands on an inventory-free basis, thereby reducing
carrying costs and improving margins.
Industry
and Market Opportunity
The
Company’s management believes the U.S. aftermarket automotive market is massive, fragmented, and ripe for disruption as overall
consumer preferences are increasingly shifting to online transactions. Although the ultimate impacts of the COVID-19 pandemic remain
uncertain and consumer demand for automobile parts and accessories may be impacted in a recessionary environment, a recent survey published
by Capgemini SE, a consulting corporation, found that 46% of U.S. adults surveyed plan to use their cars more often and public transportation
less often in the future.
According
to Hedges & Company, the light duty auto parts industry is projected to be $341 billion in 2022, which includes parts and service.
The entire automotive aftermarket/auto care industry, including medium and heavy-duty parts and services, is projected to be $439 billion
in 2022.
The
Company has historically focused on the $48 billion specialty automotive equipment market but is seeking to accelerate its growth through
automotive repairs, targeted international expansion and the addition of new verticals. The Company’s other product verticals present
an aggregate market opportunity exceeding $100 billion. The Company recently hired general managers with industry experience to lead
its boating, RV/camper and motorcycle verticals.
Market
Size
| (1) | 2022
forecast published by Hedges Company based on Auto Care Association/AASA Channel Forecast
Model; (2) 2021 SEMA Market Report. (3) Outdoor Industry Association, IBIS World, Global
Market Insights, Technavio, Freedonia, National Marine Manufacturers Association |
SEMA
Future Trends January2022 report
Market
by Channels
Historically
consumers have bought the majority of their automotive specialty-equipment parts from in-store retail channels. However, 2020 saw shifts
toward online sales due to restrictions on in-person shopping. Just over half of dollars spent on automotive specialty-equipment parts
in 2020 and 2021 went through online channels. Sales channel preferences vary widely based on the cost, complexity, and local availability
of a given product type. The online penetration is generally higher for accessories, as online channels offer convenience and a broader
selection as compared to in-store retail channels.
According
to Hedges & Company: (i) year-over-year growth in automotive eCommerce in 2022 is expected to be 11.7%; (ii)the compounded annual
growth rate (CAGR) for parts eCommerce is projected just under 9% through 2025; (iii) online revenue for automotive parts eCommerce revenue
is expected to reach $38 billion in 2022 in the U.S.; and (iv) first-party and third-party marketplaces auto parts industry growth combined
in the U.S. is projected to reach $67 billion by the year 2030.
Source:
2021 SEMA Market Report
In
summary, the market opportunity is large and heavily fragmented, and the online DIFM/installer market is an additional market opportunity.
Marketing
Management
believes its customers’ core need is to find the right parts that fit their vehicle at the best price and are delivered on time.
Our marketing strategies are designed around customer acquisition and retention which includes paid and non-paid advertising. Our paid
advertising primarily includes search engine marketing, display, paid social media, and paid partnerships. Our non-paid advertising efforts
include search engine optimization, non-paid social media and e-mail marketing.
The
Company currently drives traffic to its platform primarily with search engines; 75% of the Company’s traffic and 64% of its revenue
in 2021 was acquired in this manner. Once on the platform, customers are presented with the Company’s proprietary marketing and
product content that is created via in-house, multi-step image and video processing. Automated image refinement and the Company’s
creative design team work to ensure consistency and quality across all content, including the product images presented to customers on
the Company’s platform. Product pages on the Company’s platform present customers with multiple, customized product choices,
plus cross-sell and up-sell opportunities, as well as training materials, product comparison information, installation instructions and
customer reviews. Customers have the option to shop and explore on the Company’s platform in multiple ways, including by part number,
brand or product category.
Competition
The
parts and accessories industries in which the Company sells its products are competitive and fragmented, and products are distributed
through multi-tiered and overlapping channels. The Company competes with both online and offline sellers that offer parts and accessories,
repair parts and OEM parts to either the DIY or the DIFM consumer groups. Current or potential competitors include (i) online retailers,
including both niche retailers of uncommon, highly specialized products and general retailers of a larger number of broadly available
products; (ii) national parts retailers such as Advance Auto Parts, AutoZone, NAPA and O’Reilly Auto Parts; (iii) internet-based
marketplaces such as Amazon.com and eBay.com; (iv) discount stores and mass merchandisers; (v) local independent retailers; (vi) wholesale
parts distributors and (vii) manufacturers, product vendors and other distributors selling online directly to consumers. The Company
faces significant competition from these and other retailers in the United States and abroad. The majority of these competitors are,
and will be, substantially larger than the Company, and have substantially greater resources and operating histories. There can be no
assurance that the Company will be able to keep pace with the technological or product developments of its competitors. These companies
also compete with the Company in recruiting and retaining highly qualified technical and professional personnel and consultants.
Competitive
factors in the markets the Company serves include fitment data and related intelligence, technology, customer experience, customer service,
range of product offerings, product availability, product quality, price and shipping speed. Management believes its custom-built tech-stack
for the complex, multi-dimensional automotive parts and accessories industry, which offers over 5,000 active brands and approximately
18 million unique SKUs, provides it with a unique competitive advantage.
Intellectual
Property
The
Company owns a number of trade names, service marks and trademarks, including “iD,” “CARiD,” “BOATiD,”
“MOTORCYCLEiD,” “CAMPERiD,” “POWERSPORTSiD,” “TOOLSiD,” “TRUCKiD,” “RECREATIONiD”
and more, for use in connection with its business. In addition, the Company owns and has registered trademarks for certain of its private
label brands. Management believes these trade names, service marks and trademarks are important to the Company’s sales and marketing
strategy.
Environmental
Matters
The
Company is subject to various federal, state and local laws and governmental regulations relating to the operation of its business, including
those governing the use and transportation of hazardous substances and emissions-related standards, established by the United States
Environmental Protection Agency (the “EPA”), and similar state-level regulators, including the California Air Resources Board
(“CARB”).
While
the Company has processes in place to ensure that products are sold in compliance with the requirements imposed by the EPA and similar
state-level regulators, all verification processes have inherent limitations. The Company has been, is currently, and may in the future
be the subject of regulatory proceedings initiated by the EPA, CARB or other applicable regulatory bodies, and the results of such proceedings
are uncertain. For additional information, see Note 5 of Notes to Consolidated Financial Statements.
Although
management believes that the Company is in substantial compliance with currently applicable environmental laws, rules, and regulations,
it is unable to predict the ultimate impact of adopted or future laws, rules, and regulations on its business, properties or products.
Such laws, rules, or regulations may cause the Company to incur significant expenses to achieve or maintain compliance, may require it
to modify its product offerings, may adversely affect the price of or demand for some of its products, and may ultimately affect the
way the Company conducts its operations. Failure to comply with these current or future laws, rules, or regulations could result in harm
to the Company’s reputation and/or could lead to fines and other penalties, including restrictions on the importation of the Company’s
products into, or the sale of its products in, one or more jurisdictions until compliance is achieved.
Seasonality
The
Company’s revenue is relatively evenly distributed throughout the year, although sales typically spike during the spring months
upon the distribution to the general public by the IRS of income tax refunds and during the winter holiday season. While the Company
expects that seasonality will not have a significant impact on its sales, it recognizes that future revenues may be affected by these
seasonal trends as well as cyclical trends affecting the overall economy, especially the automotive parts and accessories industry.
Employees
As
of December 31, 2021, the Company employed 108 full-time employees, all in the United States. None of the Company’s employees are
represented by a labor union, and management believes that the Company’s relations with its employees are good. Most of our call
center, web-site development, IT infrastructure support and back-office services are provided by independent contractors in Ukraine,
Belarus, Philippines and Costa Rica. Our outside U.S. operations allow us to access requisite talent at a significantly lower cost compared
to U.S.-based talent.
INFORMATION
ABOUT OUR EXECUTIVE OFFICERS
The
following table sets forth certain information with respect to our executive officers as of March 10, 2022.
Name |
|
Age |
|
Title |
Antonino Ciappina |
|
40 |
|
Chief Executive Officer |
Kailas Agrawal |
|
64 |
|
Chief Financial Officer |
Ajay Roy |
|
39 |
|
Chief Operating Officer |
Mark Atwater |
|
62 |
|
Vice President of Vendor Relations |
John Pendleton |
|
62 |
|
Executive Vice President, Legal & Corporate Affairs |
Antonino
Ciappina served as Onyx’s Interim General Manager from July 2020 until the Closing of the Business Combination in November
2020 and has served as the Company’s Chief Executive Officer since the Closing. Upon joining Onyx in January 2020, Mr. Ciappina
served as Chief Marketing Officer and directed efforts related to marketing, customer acquisition and retention, pricing optimization,
advertising, creative services, market research, analytics and public relations for the portfolio of iD brands. Prior to joining Onyx,
Mr. Ciappina served in various digital marketing and e-commerce positions, most recently as Senior Director, E-Commerce & Digital
Marketing at Foot Locker from May 2018 to December 2019, as Vice President, E-Commerce & Digital Marketing at Firestar Diamond Group
from June 2017 to May 2018 and as Director, Digital Marketing & Customer Acquisition at The Children’s Place from April 2015
to June 2017. Mr. Ciappina earned his Bachelor of Science degree in Business Administration, Marketing and International Business from
Montclair State University.
Kailas
Agrawal served as Onyx’s Chief Financial Officer from January 2018 until the Closing of the Business Combination in November
2020 and has served as the Company’s Chief Financial Officer since the Closing. Prior to joining Onyx, Mr. Agrawal served as Chief
Financial Officer at In Colour Capital (during this period, he functioned as the Chief Financial Officer of Onyx), an independent principal
investment group, from January 2016 to December 2017 and as Principal Financial Consultant with KSS Consulting, Inc. from May 2014 to
December 2015. Additionally, Mr. Agrawal has gained international experience while serving in various positions for multiple organizations
across the United States, Canada, and India, including as Regional Chief Financial Officer of Minacs Worldwide, Inc. Mr. Agrawal’s
experience spans numerous industries such as information technology services, food distribution, real estate, agricultural processing
and manufacturing. Mr. Agrawal earned a designation as a Chartered Accountant from the Institute of Chartered Accountants of India in
addition to obtaining a Bachelor of Commerce from the University of Mumbai.
Ajay
Roy served as Onyx’s Chief Operating Officer from October 2019 until the Closing of the Business Combination in November 2020
and has served as the Company’s Chief Operating Officer since the Closing. Prior to joining Onyx, Mr. Roy served as Senior Vice
President of Operations at Moda Operandi, Inc., an online fashion retailer, from September 2018 to August 2019 and General Manager of
Global Supply Chain and Operations at Wayfair, Inc., an online furniture and home-goods retailer, from August 2017 to August 2018. Additionally,
Mr. Roy gained extensive management experience while serving as Vice President of ToolsGroup, Inc., a global provider of service-driven
supply chain planning and demand analytics software, from 2013 to August 2017 and as a Management Consultant with Deloitte Consulting.
Mr. Roy earned his Master’s in Business Administration from SP Jain School of Management and a Bachelor of Engineering in Computer
Engineering from the MS Ramaiah Institute of Technology.
Mark
Atwater served as Onyx’s Vice President of Vendor Relations from October 2016 until the Closing of the Business Combination
in November 2020 and has served as the Company’s Vice President of Vendor Relations since the Closing. As Vice President of Vendor
Relations, Mr. Atwater is responsible for the leadership of the Vendor Relations Department, management of Onyx’s vendor partners,
pricing strategy, new product category development and carrier logistics. Since joining Onyx in 2011, Mr. Atwater has served in a variety
of positions including General Manager and Director of Vendor Relations. Prior to joining Onyx, while serving in a variety of positions
in the automotive industry, Mr. Atwater obtained experience in negotiating, purchasing, logistics and distribution, warehouse management,
retail store management, automotive sales and e-commerce sales.
John Pendleton has served as the Company’s Executive
Vice President, Legal & Corporate Affairs since October 2021. Previously, he was a partner at DLA Piper for 11 years. Prior to joining
DLA Piper, he was a partner at McCarter & English, where he practiced law from 1985 to 2010. Over his distinguished legal career,
he defended public and private companies in breach of contract, misrepresentation, ERISA, RICO, securities fraud, complex litigation and
regulatory matters. John tried numerous cases throughout the United States and managed thousands of cases as national coordinating counsel
for one of the largest financial service companies in the U.S. His clients have included Fortune 100 companies in financial services,
pharmaceutical, real estate, leasing, insurance, and employee benefits areas. In addition, Mr. Pendleton is the former Mayor of Mountain
Lakes, New Jersey and served as a member of its governing body for eight years. He currently serves on the board of Washington &
Jefferson College and is also a trustee of the New Jersey Institute for Social Justice. He graduated from Rutgers University School of
Law in 1984 and Washington & Jefferson College with a B.A. (magna cum laude) in 1981.
Item
1A. Risk Factors
Our
business, financial condition and results of operations could be materially adversely affected by a number of factors. In addition to
the factors discussed elsewhere in this report, the following risks and uncertainties could materially harm our business, financial condition
or results of operations, including causing our actual results to differ materially from those projected in any forward-looking statements.
The following list of significant risk factors is not all-inclusive or necessarily in order of importance. Additional risks and uncertainties
not presently known to us, or that we currently deem immaterial, also may materially adversely affect us in future periods. You should
carefully consider these risks and uncertainties before investing in our securities.
Risks Related to the Ukraine Conflict and the COVID-19
Pandemic
Russian military action against Ukraine has resulted in disruptions to the
operations of our outsourced teams in Ukraine and could have a material adverse effect on our operations, liquidity and business.
As of January 31, 2022, we had approximately 670 contractors,
consisting of our outsourced engineering and product data development team as well as our outsourced marketing, back office and part of
our customer service teams, located in Ukraine, which has been involved in political confrontation with the Russian Federation since 2014.
While initially confined to two eastern provinces and the Crimean peninsula, the conflict escalated significantly in February 2022 when
the Russian Federation launched a full scale invasion with as many as 190,000 troops across all of Ukraine. Since that time, the
conflict has escalated, has caused disruption throughout the country and has provoked strong reactions from countries around the world,
including the imposition of broad financial and economic sanctions against Russia. Our outsourced teams in Ukraine are located in the
southern part of the country, which has been invaded. The actual hardware, including all servers, involved in operating our business
have been located outside Ukraine for several years.
Since the onset of the active conflict in February, most our
contractors have been able to continue their work, although at a reduced capacity and/or schedule. Our websites and call centers
have continued to function, but could be more negatively impacted in the future. Some of our contractors have moved outside
of Ukraine to neighboring countries where they continue to work remotely. Some of our contractors who have remained in Ukraine
have moved to areas in western Ukraine, but their ability to continue work is subject to significant uncertainty and potential disruptions.
The situation is highly complex and continues to evolve. Although
we are working to provide IT support by existing personnel in other countries and planning for temporary work locations in surrounding
countries, we cannot provide any assurance that our outsourced teams in Ukraine will be able to provide efficient and uninterrupted services,
which could have an adverse effect on our operations and business. In addition, our ability to maintain adequate liquidity for our operations
is dependent on a number of factors, including our revenue and earnings, which could be significantly impacted by the conflict in Ukraine.
Further, any major breakdown or closure of utility services in Ukraine or in the neighboring countries of Moldova, Romania, Poland or
Hungary or adverse displacement of our teams or disruption of international banking could materially impact our operations and liquidity.
In addition, civil unrest, political instability or uncertainty,
military activities or broad-based sanctions, should they continue for the long term or escalate, could require us to re-balance our geographic
concentrations and could have an adverse effect on our operations and financial performance, including through increased costs of compliance,
higher volatility in foreign currency exchange rates, increased use of less cost-efficient resources and negative impacts to our business
resulting from deteriorating general economic conditions. Further, we cannot predict the impact of the military actions and any heightened
military conflict or geopolitical instability that may follow, including additional sanctions or counter-sanctions, heightened inflation,
cyber disruptions or attacks, higher energy costs, supply chain disruptions and higher freight costs.
The
global COVID-19 pandemic could harm the Company’s business, results of operations, financial condition and liquidity.
The
global spread of COVID-19 and related measures to contain its spread (such as government-mandated business closures and shelter-in-place
guidelines) have created significant volatility, uncertainty and economic disruption. Although the COVID-19 pandemic and related measures
to contain its spread have not adversely affected the Company’s results of operations to date, they have adversely affected certain
components of the Company’s business, including by increasing cancellations (which can result in an increase in advertisement costs),
shipping times and cost of goods sold. The extent to which the COVID-19 pandemic impacts the Company’s business, results of operations,
financial condition and liquidity in the future will depend on numerous evolving factors that it cannot predict, including the duration
and scope of the pandemic; any resurgence of the pandemic; governmental, business and individuals’ actions that have been and continue
to be taken in response to the pandemic; the impact of the pandemic on national and global economic activity, unemployment levels and
financial markets; the potential for shipping difficulties, including slowed deliveries to customers; the potential for increased cancellations
by customers; and the ability of consumers to pay for products. Although consumer online demand for and the inventory of the Company’s
products have remained stable, the COVID-19 pandemic has generally resulted in a decrease in consumer spending with respect to the wider
economy, which in the future could have an adverse impact on the Company through reduced consumer demand for or inventory of its products.
Additionally, the COVID-19 pandemic has caused the Company to require employees to work remotely for an indefinite period of time, which
could negatively impact its business and harm productivity and collaboration. If there is a prolonged impact of COVID-19, it could adversely
affect the Company’s business, results of operations, financial condition and liquidity, perhaps materially. The future impact
of COVID-19 and these containment measures cannot be predicted with certainty and may increase the Company’s borrowing costs, if
any, and other costs of capital and otherwise adversely affect its business, results of operations, financial condition and liquidity,
and the Company cannot assure that it will have access to external financing at times and on terms it considers acceptable, or at all,
or that it will not experience other liquidity issues going forward.
To
the extent the COVID-19 pandemic adversely affects the Company’s business, results of operations, financial condition or liquidity,
it may also have the effect of heightening many of the other risks described in this “Risk Factors” section.
Risks
Related to the Company’s Business and Industry
The
Company depends on search engines and other online sources to attract visitors to its digital commerce platform, and if the Company is
unable to attract these visitors and convert them into customers in a cost-effective manner, its business and results of operations will
be harmed.
The
Company’s success depends on its ability to attract customers in a cost-effective manner. The Company’s investments in marketing
may not effectively reach potential consumers or those consumers may not decide to buy from it or the volume of consumers that purchase
from it may not yield the intended return on investment. In order to drive traffic to its digital commerce platform, the Company relies
on relationships with providers of online services, search engines, shopping comparison sites and marketplace sites to provide content,
advertising banners and other links. In particular, the Company relies on Google as an important marketing channel, and if Google changes
its algorithms or if competition increases for advertisements on Google or the Company’s other marketing channels, the Company
may be unable to cost-effectively attract customers to its products. During the year ended December 31, 2021, 49% of the Company’s
revenue was directly attributable to organic and paid traffic from Google.
In
addition, many of the parties with whom the Company has online-advertising arrangements could provide advertising services to other companies,
including retailers with whom the Company competes. As competition for online advertising has increased, the cost for these services
has also increased. With the growing awareness of the importance of digital commerce channels, many of the Company’s competitors
are investing to acquire customers at a much higher cost and with a much lower profitability threshold, including through free shipping
and other loss leaders. A significant increase in the cost of the marketing channels, including a change in the proportion of paid and
free traffic upon which the Company relies, could adversely impact its ability to attract customers in a cost-effective manner and harm
its business and results of operations. Further, while the Company uses promotions as a way to drive sales, these promotional activities
may not drive sales and may adversely affect its gross margins.
Similarly,
if any free search engine, price comparison and shopping engine, or marketplace site on which the Company relies begins charging fees
for listing or placement, or if one or more of the search engines, price comparison and shopping engines, marketplace sites or other
online sources on which the Company relies for purchased listings increases their fees, or modifies or terminates its relationship with
the Company, including by restricting certain categories of products, the Company’s expenses could rise, it could lose customers,
and traffic to its digital commerce platform could decrease. Moreover, if the use of price comparison and shopping engines by consumers
continues to increase in popularity, the Company may face increased pricing pressure or suffer reduced sales as consumers are more readily
able to price compare among online shopping platforms.
The Company’s growth is dependent on a number
of factors which may not be achieved.
The Company believes that its continued growth will depend
upon the success of its multiple initiatives and higher traffic and conversion rates, which primarily depend on (i) customer experiences,
(ii) the economy and customers’ disposable income, (iii) the Company’s product offerings, product pricing and fulfillment,
(iv) shipping speed and cost optimization, (v) the Company’s competitive position in the aftermarket parts supply, (vi) changes
in search engine algorithms affecting the Company’s website’s search engine optimization, and (vii) vendor supplies and vendor
performance.
If
the Company is unable to manage the challenges associated with its international operations, its operations and business could suffer
and the growth of its business could be limited.
The
Company maintains international business operations in Ukraine, Belarus, the Philippines and Costa Rica. These international operations
include development and maintenance of the Company’s websites and call center and back-office support services. The Company is
subject to a number of risks and challenges that specifically relate to its international operations. If the Company is unable to address
and overcome these challenges, its operations could be interrupted or its growth could be limited, which may have an adverse effect on
its business and operating results. These risks and challenges include:
|
● |
difficulties
and costs of staffing and managing foreign operations, including any impairment to its relationship with contractors, including the
lead contractor of the Company’s Ukraine operations, as well as service providers controlled by that lead contractor; |
|
● |
concentration
of knowledge and control held by the lead contractor of the Company’s Ukraine operations, his affiliate and service providers
controlled by that lead contractor regarding material aspects of the Company’s information technology and cybersecurity frameworks; |
|
● |
changes
in operating costs charged by the Company’s Ukrainian service providers, who are controlled by the Company’s lead contractor
in Ukraine; |
|
● |
increasing
competition with respect to technology resources in Ukraine, leading to higher costs and higher attrition; |
|
● |
restrictions
imposed by local labor practices and laws on its business and operations; |
|
● |
exposure
to different business practices and legal standards; |
|
● |
unexpected
changes in regulatory requirements; |
|
● |
the
imposition of government controls and restrictions; |
|
● |
political,
social and economic instability and the risk of war, terrorist activities or other international incidents; |
|
● |
the
failure of telecommunications and connectivity infrastructure; |
|
● |
natural
disasters and public health emergencies, including the ongoing COVID-19 pandemic; and |
|
● |
potentially
adverse tax consequences, including the possible imposition of increased withholding taxes or the re-classification of contractors
as employees under local law. |
The
Company’s growth strategy is dependent upon its ability to expand its “iD” branded store in industries outside automotive
parts and accessories and to expand beyond its core DIY customer base into “business to business” and DIFM customers.
While
the Company’s digital commerce platform initially focused solely on automotive parts and accessories, management believes its platform
is scalable. Accordingly, management believes that its application to other complex product portfolio industries, including the seven
parts and accessories verticals launched in August 2018 under the “iD” brand (i.e., semi-truck, motorcycle, powersports,
RV/camper, boating, recreation and tools), will continue to drive brand loyalty among customers and reputation among vendors and increase
customer orders from adjacent markets. However, the Company can provide no assurance that this strategy will continue to be successful.
The Company’s parts and accessories verticals may fail to attract new customers or appeal to the Company’s customers of automotive
products, or the customers of each vertical may be more segmented than the Company expects, thereby limiting its ability to develop and
maintain cross-vertical brand loyalty. The Company may also struggle to populate its additional verticals with a comprehensive assortment
of products, which management believes is important to attract and retain customers. Additionally, within the automotive parts and accessories
space, the Company’s growth strategy is focused on expanding beyond its core DIY customer base by increasing business-to-business
sales and sales to DIFM customers. These prospective customers may not be receptive to the Company’s marketing efforts, product
offerings, or current speed of fulfillment or shipping, or may remain committed to using their existing product vendors. If for these
or other reasons the Company is unable to continue to execute its growth strategy, its results of operations and financial conditions
could be adversely affected.
Purchasers
of aftermarket automotive parts and accessories may not choose to shop online, which would prevent the Company from acquiring new customers
who are necessary to the growth of its business.
The
online market for automotive parts and accessories is less developed than the online market for many other business and consumer products
and currently represents only a small part of the overall automotive parts and accessories market. The Company’s success will depend
in part on its ability to attract new customers and to convert customers who have historically purchased automotive parts and accessories
through traditional retail and wholesale operations. Specific factors that could discourage or prevent prospective customers from purchasing
from the Company include:
|
● |
concerns
about buying automotive parts and accessories without face-to-face interaction with sales personnel; |
|
● |
the
inability to physically handle, examine and compare products; |
|
● |
delivery
time associated with internet orders; |
|
● |
concerns
about the security of online transactions and the privacy of personal information; |
|
● |
delayed
shipments or shipments of incorrect or damaged products; |
|
● |
increased
costs related to shipping; |
|
● |
the
inconvenience associated with returning or exchanging items purchased online; and |
|
● |
limited
or no installation options or support for many products purchased online. |
If
the online market for automotive parts and accessories does not gain widespread acceptance, the Company’s sales may decline and
its business and financial results may suffer.
If
demand for the Company’s products slows, then its business may be materially adversely affected.
Demand
for the products the Company sells may be affected by a number of factors it cannot control, including:
|
● |
the
number of older vehicles in service. Vehicles seven years old or older are generally no longer under the original vehicle manufacturers’
warranties and tend to need more maintenance and repair than newer vehicles. |
|
● |
the
economy. In periods of declining economic conditions, consumers may reduce their discretionary spending by deferring vehicle maintenance
or repair. Additionally, such conditions may affect the Company’s customers’ ability to obtain credit. During periods
of expansionary economic conditions, more of the Company’s DIY customers may pay others to repair and maintain their vehicles
instead of working on their own vehicles, or they may purchase new vehicles. |
|
● |
the
weather. Milder weather conditions may lower the failure rates of automotive parts, while extended periods of rain and winter precipitation
may cause the Company’s customers to defer maintenance and repair on their vehicles. Further, drastic weather storms, such
as hurricanes and winter storms, can have an immediate negative impact on the demand for the Company’s products. |
|
● |
technological
advances. Advances in automotive technology, such as electric vehicles, and parts design can result in cars needing maintenance less
frequently and parts lasting longer. |
|
● |
the
number of miles vehicles are driven annually. Higher vehicle mileage increases the need for maintenance and repair. Mileage levels
may be affected by gas prices, ride sharing, the COVID-19 pandemic and related restrictions to slow its spread and other factors. |
|
● |
the
number and quality of the vehicles manufactured by original vehicle manufacturers and the length of the warranties or maintenance
offered on new vehicles. In turn, supply chain constraints can impact the consequent production of new vehicles, such as the
recent disruptions to the global availability of chips required for the production of new vehicles. |
|
● |
restrictions
on access to telematics and diagnostic tools and repair information imposed by the original vehicle manufacturers or by governmental
regulation. These restrictions may cause vehicle owners to rely on dealers to perform maintenance and repairs. |
|
● |
decrease
in vehicle ownership due to wider adoption of on-demand transportation and ride sharing services. |
|
|
|
|
● |
any
change in consumer discretionary spend. This impacts the demand for the Company’s accessories business materially, which business
comprises more than 75% of our total revenue. |
These
factors could result in a decline in the demand for the Company’s products, which could adversely affect its business and overall
financial condition.
The
growth of our business depends on our ability to accurately predict consumer trends, successfully introduce new products and services,
improve existing products and services, and expand into new offerings
Our
growth depends, in part, on our ability to successfully introduce new products and services and improve and reposition our existing products
and services to meet the requirements of our customers. It also depends on our ability to expand our offerings, which depends on our
ability to predict and respond to evolving consumer trends, demands and preferences. The development and introduction of innovative new
products and services and expansion into new offerings can be costly. In addition, it may be difficult to establish new supplier or partner
relationships and determine appropriate product selection when developing a new product, service or offering.
Any
new product, service or offering may not generate sufficient customer interest and sales to become profitable or to cover the costs of
its development and promotion and, as a result, may reduce our operating income. In addition, any such unsuccessful effort may adversely
affect our brand and reputation. If we are unable to anticipate, identify, develop or market products, services or any new offerings
that respond to changes in consumer requirements and preferences, or if our new product or service introductions, repositioned products
or services, or new offerings fail to gain consumer acceptance, we may be unable to grow our business as anticipated, our sales may decline
and our margins and profitability may decline or not improve. As a result, our business, financial condition, and results of operations
may be materially and adversely affected.
In
addition, while we plan to continue to invest in the development of our business, we may be unable to maintain or expand sales of our
proprietary brand products for a number of reasons, including the loss of key suppliers and product recalls. Maintaining consistent product
quality, competitive pricing, and availability of our proprietary brand products for our customers is essential to developing and maintaining
customer loyalty and brand awareness. Our proprietary brand products on average provide us with higher gross margins than the comparable
third-party brand products that we sell. Accordingly, our inability to sustain the growth and sales of our proprietary brand offerings
may materially and adversely affect our projected growth rates, business, financial condition, and results of operations.
Our
estimate of the size of market opportunities may prove to be inaccurate.
Data
for retail sales of products is collected for most, but not all channels, and as a result, it is difficult to estimate the size of the
market and predict the rate at which the market for our products will grow, if at all. While our market size estimates are made in good
faith and are based on assumptions and estimates we believe to be reasonable, these estimates may not be accurate. If our estimates of
the size of our addressable market and market opportunities are not accurate, our potential for future growth may be less than we currently
anticipate, which could have a material adverse effect on our business, financial condition, and results of operations.
If
we cannot successfully manage the unique challenges presented by international markets, we may not be successful in expanding our operations
outside the U.S.
Our
strategy may include the expansion of our operations to international markets. Although some of our executive officers have experience
in international business from prior positions, we have little experience with operations outside the U.S. Our ability to successfully
execute this strategy is affected by many of the same operational risks we face in expanding our U.S. operations. In addition, our international
expansion may be adversely affected by our ability to identify and gain access to local suppliers, obtain and protect relevant trademarks,
domain names, and other intellectual property, as well as by local laws and customs, legal and regulatory constraints, political and
economic conditions and currency regulations of the countries or regions in which we may intend to operate in the future. Risks inherent
in expanding our operations internationally also include, among others, the costs and difficulties of managing international operations,
adverse tax consequences, domestic and international tariffs and other barriers to trade.
The
Company is dependent upon relationships with product vendors in Taiwan and China for the majority of its products.
The
Company acquires a majority of its private label products, and its product vendors acquire a majority of their products, from manufacturers
and distributors located in Taiwan and China. The Company does not have any long-term contracts or exclusive agreements with its foreign
product vendors that would ensure its ability to acquire the types and quantities of products it desires at acceptable prices and in
a timely manner or that would allow it to rely on customary indemnification protection with respect to any third-party claims similar
to some of its U.S. product vendors.
In
addition, because many of the Company’s direct and indirect product vendors are outside of the United States, additional factors
could interrupt its relationships or affect the Company’s ability to acquire necessary products on acceptable terms, including:
|
● |
political,
social and economic instability and the risk of war or other international incidents in Asia or abroad; |
|
|
|
|
● |
fluctuations
in foreign currency exchange rates that may increase cost of products; |
|
|
|
|
● |
imposition
of duties, taxes, tariffs or other charges on imports; |
|
|
|
|
● |
difficulties
in complying with import and export laws, regulatory requirements and restrictions; |
|
|
|
|
● |
natural
disasters and public health emergencies, such as COVID-19; |
|
|
|
|
● |
import
shipping delays resulting from foreign or domestic labor shortages, slow-downs, or stoppages; |
|
|
|
|
● |
the
failure of local laws to provide a sufficient degree of protection against infringement of its intellectual property; |
|
|
|
|
● |
imposition
of new legislation relating to import quotas or other restrictions that may limit the quantity of its product that may be imported
into the U.S. from countries or regions where it does business; |
|
|
|
|
● |
financial
or political instability in any of the countries in which its products are manufactured; |
|
|
|
|
● |
potential
recalls or cancellations of orders for any product that does not meet its quality standards; |
|
|
|
|
● |
disruption
of imports by labor disputes or strikes and local business practices; |
|
|
|
|
● |
political
or military conflict involving the United States or any country in which its product vendors are located, which could cause a delay
in the transportation of its products, an increase in transportation costs and additional risk to product being damaged and delivered
on time; |
|
|
|
|
● |
heightened
terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading
to delays in deliveries or impoundment of goods for extended periods; |
|
|
|
|
● |
inability
of its non-U.S. product vendors to obtain adequate credit or access liquidity to finance their operations; and |
|
|
|
|
● |
its
ability to enforce any agreements with its foreign product vendors. |
If
the Company or its vendors were unable to import products from China and Taiwan in a cost-effective manner or at all, it could suffer
irreparable harm to its business and be required to significantly curtail its operations, file for bankruptcy or cease operations. COVID-19
related supply chain constraints have caused delays in products procurement, increases in shipping cost and increases in our order cancellation
rates.
From
time to time, the Company may also have to resort to administrative and court proceedings to enforce its legal rights with foreign product
vendors. However, it may be more difficult to evaluate the level of legal protection the Company enjoys in Taiwan and China and the corresponding
outcome of any administrative or court proceedings than in comparison to its product vendors in the United States.
The
Company depends on third-party delivery services to deliver products to its customers on a timely and consistent basis, and any deterioration
in its relationship with any one of these third parties or increases in the fees that they charge could harm its reputation and adversely
affect its business and financial condition.
The
Company relies on third parties for the shipment of products, including a single carrier for the majority of its shipping needs, and
it cannot be sure that these relationships will continue on terms favorable to it, or at all. In 2021, our shipping costs substantially
increased, and may continue to increase, and we have not been able, and may continue to not be able, to pass all of these costs directly
on to its customers. Any increased shipping costs could harm the Company’s business, prospects, financial condition and results
of operations by increasing its costs of doing business and reducing gross margins, which would negatively affect its operating results.
In
addition, if the Company’s relationships with these third parties, especially the single carrier the Company relies upon for the
majority of its shipping needs, are terminated or impaired, or if these third parties are unable to deliver products for the Company,
whether due to a labor shortage, slow down or stoppage, deteriorating financial or business conditions, responses to the COVID-19 pandemic,
terrorist attacks or for any other reason, the Company would be required to use alternative carriers for the shipment of products to
its customers. Changing carriers could have a negative effect on the Company’s business and operating results due to reduced visibility
of order status and package tracking and delays in order processing and product delivery, and it may be unable to engage alternative
carriers on a timely basis, upon terms favorable to it, or at all.
The
Company relies on bandwidth and data center providers and other third parties to provide products to its customers, and any failure or
interruption in the services provided by these third parties could disrupt its business and cause it to lose customers.
The
Company relies on third-party vendors, including data center and bandwidth providers. Any disruption in the network access or co-location
services, which are the services that house and provide internet access to the Company’s servers, provided by these third-party
providers or any failure of these third-party providers to handle current or higher volumes of use could significantly harm the Company’s
business. Any financial or other difficulties the Company’s providers face may have negative effects on the Company’s business,
the nature and extent of which cannot be predicted. The Company exercises little control over these third-party vendors, which increases
its vulnerability to problems with the services they provide.
The
Company also licenses technology from third parties, including software packages, ERP systems, system applications, hosting services,
and related databases, to facilitate elements of its digital commerce platform, back-office support and accounting systems. The Company
has experienced and expects to continue to experience interruptions and delays in service and availability for these elements. Any errors,
failures, interruptions or delays experienced in connection with these third-party technologies could negatively impact the Company’s
relationship with its customers and adversely affect its business. The Company’s systems also heavily depend on the availability
of electricity, which also comes from third-party providers. Information systems such as the Company’s may be disrupted by even
brief power outages, or by the fluctuations in power. This could disrupt the Company’s business and cause it to lose customers.
The
Company is highly dependent upon key product vendors.
The
Company’s top ten product vendors represented approximately 34.9% of its total revenue during the fiscal year ended December 31,
2021. The Company’s ability to acquire products from its product vendors in amounts and on terms acceptable to it is dependent
upon a number of factors that could affect its product vendors and which are beyond its control. For example, financial or operational
difficulties that some of the Company’s product vendors may face could result in an increase in the cost of the products the Company
purchases from them. If the Company does not maintain its relationships with its existing product vendors or develop relationships with
new product vendors on acceptable commercial terms, it may not be able to continue to offer a broad selection of merchandise at competitive
prices and, as a result, it could lose customers and its sales could decline.
The
Company outsources the distribution and fulfillment operation for most of the products it sells and is dependent on drop-ship product
vendors to manage inventory, process orders and distribute those products to its customers in a timely manner. For the fiscal year ended
December 31, 2021, products shipped by drop-ship product vendors represented the vast majority of the Company’s total revenue.
Because the Company outsources a number of traditional retail functions to product vendors, it has limited control over how and when
orders are fulfilled. The Company also has limited control over the products that its product vendors purchase or keep in stock. The
Company’s product vendors may not accurately forecast the products that will be in high demand or they may allocate popular products
to other resellers, resulting in the unavailability of certain products for delivery to the Company’s customers. Any inability
to offer a broad array of products at competitive prices and any failure to deliver those products to the Company’s customers in
a timely and accurate manner may damage the Company’s reputation and brand and could cause it to lose customers and its sales to
decline.
In
addition, the increasing consolidation among automotive parts and accessories product vendors may disrupt or end the Company’s
relationship with some product vendors, result in product shortages and/or lead to less competition and, consequently, higher prices.
Furthermore, as part of its routine business, product vendors extend credit to the Company in connection with its purchase of their products.
In the future, the Company’s product vendors may limit the amount of credit they are willing to extend to the Company in connection
with its purchase of their products, including as a result of the Company’s public disclosure of its financial statements. If this
were to occur, it could impair the Company’s ability to acquire the types and quantities of products that it desires from the applicable
product vendors on acceptable terms, severely impact its liquidity and capital resources, limit its ability to operate its business and
could have a material adverse effect on its financial condition and results of operations.
The
pandemic and related measures have recently caused supply chain constraints, leading to some of our key suppliers having low in-stock
rates. This has led to higher order cancellations by our customers due to vendors going out of stock or shipping delays, part of which
led us to turn to alternate sourcing of products at higher prices. Due to various factors, including vaccine transportation, the shipping
capacities of our carriers were reduced, and they increased our shipping costs. A few of our smaller vendors have also been consolidating
their shipping locations, thereby increasing delivery time and shipping costs. The resultant inflation, higher prices as well as higher
shipping cost has not been able to be entirely passed on to the customer, which has adversely impacted our cost of goods sold and gross
margins, and could continue.
The
Company is dependent on its product vendors to supply it with products that comply with safety and quality standards at competitive prices
and to comply with the terms of their stated customer warranties.
The
Company is dependent on its vendors continuing to supply quality products at favorable prices. If the Company’s merchandise offerings
do not meet its customers’ expectations regarding safety and quality, it could experience lost sales, increased costs and exposure
to legal and reputational risk. All of the Company’s product vendors must comply with applicable product safety laws, and the Company
is dependent on them to ensure that the products its customers buy comply with all safety and quality standards. Events that give rise
to actual, potential or perceived product safety concerns could expose the Company to government enforcement action and private litigation
and result in costly product recalls and other liabilities. To the extent the Company’s product vendors are subject to additional
governmental regulation of their product design and/or manufacturing processes, the cost of the merchandise it purchases may rise. In
addition, negative customer perceptions regarding the safety or quality of the products the Company sells could cause its customers to
seek alternative sources for their needs, resulting in lost sales. In those circumstances, it may be difficult and costly for the Company
to regain the confidence of its customers.
The
Company is also dependent on its product vendors to comply with the terms of their stated customer product warranties. To the extent
that the Company’s product vendors fail to satisfy legitimate warranty claims asserted by the Company’s customers, the Company
may be directly responsible for reimbursing such customers, which could have a material adverse effect on its financial condition and
results of operations, particularly if one or more of the Company’s larger product vendors fails to honor its warranty obligations.
The
Company is dependent on entities controlled by a lead contractor in Ukraine to recruit and manage its development team and back-office
support, to provide a physical facility to its contractors and to manage the Company’s information technology and cybersecurity
frameworks.
Based
on management’s knowledge, the Company’s lead contractor and his affiliate have historically recruited and managed the Company’s
information technology subcontractors and own the physical facility in Ukraine. Because substantially all of the Company’s information
technology functions are performed in Ukraine and because, based on management’s knowledge, the Company’s lead contractor
in Ukraine, his affiliate and the service providers controlled by that lead contractor have knowledge and control of certain material
aspects of the Company’s information technology and cybersecurity frameworks, the Company is dependent on the lead contractor and
his affiliate with respect to such functions and frameworks. If these contractors or subcontractors fail to perform according to agreed-upon
terms and timetables or terminate the arrangements under which they perform these functions, the Company’s operations may be disrupted
or unable to function until the Company is able to engage a substitute, which may not be available on commercially reasonable terms,
or at all. This could have a material adverse effect on the Company’s business, results of operations and financial condition.
We
are in the process of working with our contractors to develop disaster recovery and business continuity plans and processes related to
our website and back-office functions. The current conflict in the Ukraine may temporarily delay those plans as we continue to support
our contractors in an effort to prevent any disruption in services to our customers.
If
the Company fails to offer a broad selection of products at competitive prices or fails to locate sufficient inventory to meet customer
demands, its revenue could decline.
In
order to expand its business, the Company must successfully offer, on a continuous basis, a broad selection of automotive parts and accessories
that meet the needs of its customers. Products sold by the Company are used by consumers for a variety of purposes, including repair,
performance, improved aesthetics and functionality. In addition, to be successful, the Company’s product offerings must be broad
and deep in scope, competitively priced, well-made, innovative and attractive to a wide range of consumers. The Company cannot predict
with certainty that it will be successful in offering products that meet all of these requirements. Moreover, even if the Company offers
a broad selection of products at competitive prices, it must maintain access to sufficient inventory to meet consumer demand. If the
Company’s product offerings fail to satisfy its customers’ requirements or respond to changes in customer preferences or
if the Company otherwise fails to locate sufficient inventory to meet customer demands, its revenue could decline.
Shifting
online consumer behavior regarding automotive parts and accessories could adversely impact the Company’s financial results and
the growth of its business.
Shifting
consumer behavior indicates that the Company’s customers are more inclined to shop for automotive parts and accessories through
their mobile devices. For the year ended December 31, 2021, approximately 50% of the Company’s website revenue and 63% of its website
traffic was attributable to mobile customers. Mobile customers exhibit different behaviors than more traditional desktop-based e-commerce
customers. User sophistication and technological advances have increased consumer expectations around the user experience on mobile devices,
including speed of response, functionality, product availability, security, and ease of use. If the Company is unable to continue to
adapt its mobile device shopping experience in ways that improve its customers’ mobile experience and increase the engagement of
its mobile customers, the Company’s sales may decline and its business and financial results may suffer.
Our
business may be adversely affected if we are unable to provide our customers with a cost-effective platform that is able to respond and
adapt to rapid changes in technology.
The
number of people who access the internet through devices other than personal computers, including mobile phones, handheld computers such
as notebooks and tablets, video game consoles and television set-top devices, has increased dramatically in recent years. The versions
of our website and mobile applications developed for these devices may not be compelling to consumers. Our website and platform are also
currently not compatible with voice-enabled products. Adapting our services and/or infrastructure to these devices as well as other new
internet, networking or telecommunications technologies could be time-consuming and could require us to incur substantial expenditures,
which could adversely affect our business, financial condition, and results of operations.
Additionally,
as new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in developing applications
for alternative devices and platforms and we may need to devote significant resources to the creation, support and maintenance of such
applications. If we are unable to attract consumers to our website or mobile applications through these devices or are slow to develop
a version of our website or mobile applications that is more compatible with alternative devices, we may fail to capture a significant
share of consumers and could also lose customers, which could materially and adversely affect our business, financial condition, and
results of operations.
Further,
we continually upgrade existing technologies and business applications and we may be required to implement new technologies or business
applications in the future. The implementation of upgrades and changes requires significant investments. Our results of operations may
be affected by the timing, effectiveness and costs associated with the successful implementation of any upgrades or changes to our systems
and infrastructure. In the event that it is more difficult for our customers to buy products from us on their mobile devices, or if our
customers choose not to buy products from us on their mobile devices or to use mobile products that do not offer access to our website,
we could lose customers and fail to attract new customers. As a result, our customer growth could be harmed and our business, financial
condition, and results of operations may be materially and adversely affected.
Significant
product cancellations or returns could harm our business.
We
allow our customers to cancel their orders, as well as return products, for which we offer refunds, subject to our return and refunds
policy. If cancellations, returns or refunds are significant or higher than anticipated and forecasted, our business, financial condition,
and results of operations could be adversely affected. Further, we modify our policies relating to returns or refunds from time to time,
and may do so in the future, which may result in customer dissatisfaction and harm to our reputation or brand, or an increase in the
number of product returns or the amount of refunds we make. In 2021, while our returns rates were relatively constant, our cancellation
rates increased compared to pre-pandemic years.
If
commodity prices such as fuel, plastic, aluminum and steel increase, the Company’s margins may be negatively impacted.
Increasing
prices in the component materials for the parts the Company sells may impact the availability, the quality and the price of its products,
as product vendors search for alternatives to existing materials and increase the prices they charge. The Company cannot ensure that
it can recover all the increased costs through price increases, and its product vendors may not continue to provide a consistent quality
of product as they may substitute lower cost materials to maintain pricing levels, all of which may have a negative impact on the Company’s
business and results of operations. In 2021, there were increases in costs of product materials, and we were unable to pass on the entire
increase to consumers, which negatively impacted our gross margin, and such negative impacts may continue to occur.
The
Company faces intense competition and operates in an industry with limited barriers to entry, and some of its competitors may have greater
resources than it and may be better positioned to capitalize on the growing online automotive aftermarket parts and accessories market.
The
parts and accessories industries in which the Company sells its products are competitive and fragmented, and products are distributed
through multi-tiered and overlapping channels. The Company competes with both online and offline sellers that offer parts and accessories,
repair parts and original equipment manufacturer parts to either the DIY or the DIFM consumer segments. Current or potential competitors
include (i) online retailers, including both niche retailers of uncommon, highly specialized products and general retailers of a
larger number of broadly available products; (ii) national parts retailers such as Advance Auto Parts, AutoZone, NAPA and O’Reilly
Auto Parts; (iii) internet-based marketplaces such as Amazon.com and eBay.com; (iv) discount stores and mass merchandisers;
(v) local independent retailers; (vi) wholesale parts distributors and (vii) manufacturers, product vendors and other
distributors selling online directly to consumers.
Barriers
to entry are low, and current and new competitors can launch websites at a relatively low cost. Many of the Company’s current and
potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial,
marketing, technical, management and other resources than it does. For example, in the event that online marketplace companies such as
Amazon or eBay, who have larger customer bases, greater brand recognition and significantly greater resources than the Company does,
focus more of their resources on competing in the automotive parts and accessories market, it could have a material adverse effect on
the Company’s business and results of operations. In addition, some of the Company’s competitors have used and may continue
to use aggressive pricing tactics and devote substantially more financial resources to website and system development than the Company
does. The Company expects that competition will further intensify in the future as internet use and online commerce continue to grow
worldwide. Increased competition may result in reduced sales, lower operating margins, reduced profitability, loss of market share and
diminished brand recognition.
Additionally,
the Company has experienced significant competitive pressure from certain of its product vendors who are now selling their products directly
to customers. Since the Company’s product vendors have access to merchandise at very low costs, they can sell products at lower
prices and maintain higher gross margins on their product sales than the Company can. The Company’s financial results have been
negatively impacted by direct sales from its product vendors to its current and potential customers, and the Company’s total number
of orders and average order value may decline due to increased competition. Continued competition from the Company’s product vendors
may also continue to negatively impact its business and results of operations, including through reduced sales, lower operating margins,
reduced profitability, loss of market share and diminished brand recognition. The Company has implemented and will continue to implement
several strategies to attempt to overcome the challenges created by its product vendors selling directly to its customers and potential
customers, including optimizing its pricing, continuing to increase its mix of private label products and improving its diligence commerce
platform, which may not be successful. If these strategies are not successful, the Company’s results of operations and financial
condition could be materially and adversely affected.
The
Company relies on key personnel and may need additional personnel for the success and growth of its business.
The
Company’s business is largely dependent on the personal efforts and abilities of highly skilled executive, technical, managerial,
merchandising, marketing, and call center personnel including overseas contractors. Competition for such personnel is intense, and the
Company cannot assure that it will be successful in attracting and retaining such personnel. The loss of any key employee or the Company’s
inability to attract or retain other qualified employees could harm its business and results of operations.
The
Company generates a portion of its revenue from advertising, and reduced spending by advertisers or new and existing technologies that
block ads online could harm its business.
The
Company generates a portion of its revenue from the display of ads online. Expenditures by advertisers tend to be cyclical, reflecting
overall economic conditions and budgeting and buying patterns. Adverse macroeconomic conditions can have a material adverse effect on
the demand for advertising and cause the Company’s advertisers to reduce the amounts they spend on advertising, which could harm
the Company’s results of operations and financial condition.
Changes
to the automotive industry and consumer views on vehicle ownership could materially adversely affect our business, results of operations
and financial condition.
The
automotive industry is predicted to experience rapid change in the years to come, including increases in ride-sharing services, advances
in electric vehicle production and driverless technology. Ride-sharing services such as Uber and Lyft provide consumers with mobility
options outside of traditional vehicle ownership. Manufacturers also continue to invest in increasing production and quality of battery-electric
vehicles, which generally require less maintenance than traditional cars and trucks and may be more difficult for DIY customers to repair.
Technological advances are also facilitating the development of driverless vehicles, which may further reduce the need for vehicle ownership.
If sales of automotive parts and accessories decline as a result of these or other changes to the automotive industry, our business,
results of operations and financial condition could be materially and adversely affected.
Risks
Related to the Company’s Finances
The
Company has a history of losses.
The
Company has a history of low operating margins and losses. The Company continues to focus on growing its business in the near term, with
increasing investments in its business, which may result in the incurrence of additional losses. During the fiscal year ended December
31, 2021, the Company had a net loss of $8.0 million, compared to net income of $2.1 million before a cash and non-cash deemed distribution
of $15.4 million to preferred stockholders (and after such distribution, a net loss of $13.3 million available to common stockholders)
for the fiscal year ended December 31, 2020. In 2021, the decrease in gross margin and the increase in advertising costs substantially
reduced the profitability of the Company. With continuing supply chain constraints, 2022 could also be adversely impacted by lower gross
margins and higher advertising costs. If the Company incurs substantial net losses in the future, it could impact the Company’s
liquidity, as it may not be able to provide positive cash flows from operations in order to meet its working capital requirements. The
Company may need to sell additional assets or seek additional equity or additional debt financing in the future. In such case, there
can be no assurance that the Company would be able to raise such additional financing or engage in such asset sales on acceptable
terms, or at all. If the Company’s net losses were to continue, and if the Company is not able to raise adequate additional financing
or proceeds from asset sales to continue to fund its ongoing operations, it will need to defer, reduce or eliminate significant planned
expenditures, restructure or significantly curtail its operations, file for bankruptcy or cease operations.
The
Company may not generate sufficient cash flows to cover its operating expenses, and any failure to obtain additional capital could jeopardize
its operations and the cost of capital may be high.
As
of December 31, 2021, the Company had negative working capital of approximately $30.3 million. In the event that the Company is unable
to generate sufficient cash from its operating activities or obtain financing, it could be required to delay, reduce or discontinue its
operations and ongoing business efforts. Further, if for any reason, the revenues of the Company decline or there are unfavorable changes
in the credit terms from its key product vendors, it could have an adverse impact on the availability of working capital to the Company.
Even if the Company is able to raise capital, it may raise capital by selling equity securities, which will be dilutive to existing stockholders.
If the Company incurs indebtedness, costs of financing may be extremely high, and the Company will be subject to default risks associated
with such indebtedness, which may harm its ability to continue its operations.
Changes
in customer, product, vendor or sourcing sales mix could cause the Company’s gross margin and ultimately operating margins to decline;
failure to mitigate these pressures could adversely affect its results of operations and financial condition.
The
Company’s gross margins are dependent on the mix of products it sells, decisions to drop-ship rather than stock products in its
distribution centers, decisions to offer private label alternatives or branded offerings, price changes by its vendors, pricing actions
by competitors, and the mix of paid and organic traffic to its e-commerce platform. In addition, the Company’s margin could be
adversely affected by any consumer shift away from its private label products. Declines in the Company’s margins could adversely
affect its results of operations and financial condition.
We
may be unable to accurately forecast net sales and appropriately plan our expenses in the future.
Net
sales and results of operations are difficult to forecast because they generally depend on the volume, timing and type of orders we receive,
all of which are uncertain. We base our expense levels and investment plans on our estimates of net sales and gross margins. We cannot
be sure the same growth rates, trends, and other key performance metrics are meaningful predictors of future growth. If our assumptions
prove to be wrong, we may spend more than we anticipate acquiring and retaining customers or may generate lower net sales per active
customer than anticipated, either of which could have a negative impact on our business, financial condition, and results of operations.
Risks
Related to Regulation and Tax
Regulation
in the areas of privacy and protection of user data could harm the Company’s business.
The
Company is subject to laws relating to the collection, use, retention, security, and transfer of personally identifiable information
about its users around the world. Much of the personal information that the Company collects, especially customer identity and financial
information, is regulated by multiple laws. User data protection laws may be interpreted and applied inconsistently from country to country.
These laws continue to develop in ways the Company cannot predict and that may harm its business.
Regulatory
scrutiny of privacy, user data protection, use of data and data collection is increasing on a global basis. The Company is subject to
a number of privacy and similar laws and regulations in the countries in which it operates, and these laws and regulations will likely
continue to evolve over time, both through regulatory and legislative action and judicial decisions. In addition, compliance with these
laws may restrict the Company’s ability to provide services to its customers that they may find to be valuable. For example, the
EU General Data Protection Regulation (“GDPR”) applies to all of the Company’s activities conducted from an establishment
in the European Union or related to products and services offered in the European Union, and imposes significant compliance obligations
regarding the handling of personal data. If the Company fails to comply with the GDPR, or if regulators assert the Company has failed
to comply with the GDPR, it may lead to regulatory enforcement actions, which can result in monetary penalties of up to 4% of worldwide
revenue, private lawsuits, or reputational damage. In the United States, all 50 states now have data breach laws that require timely
notification to individuals, and at times regulators, the media or credit reporting agencies, if a company has experienced the unauthorized
access or acquisition of personal information. California has adopted the California Consumer Privacy Act of 2018 (“CCPA”),
which became effective January 1, 2020 and which provides a private right of action for data breaches and requires companies that process
information on California residents to make new disclosures to consumers about their data collection, use and sharing practices and allows
consumers to opt out of certain data sharing with third parties. Moreover, on November 3, 2020, Californians voted to approve a ballot
measure that created the California Privacy Rights Act (“CPRA”), which expands the scope of the CCPA and establishes a new
California Privacy Protection Agency that will enforce the law and issue regulations. The CPRA is scheduled to take effect on January
1, 2023, with a lookback to January 1, 2022. In addition to the CCPA and CPRA, several other U.S. states have or are considering adopting
laws and regulations imposing obligations regarding the handling of personal data. Compliance with the GDPR, the CCPA, the CPRA and other
current and future applicable international and U.S. privacy, cybersecurity and related laws can be costly and time-consuming. Complying
with these varying national and international requirements could cause the Company to incur substantial costs or require it to change
its business practices in a manner adverse to its business, and violations of privacy-related laws can result in significant penalties.
A
determination that there have been violations of laws relating to the Company’s practices under communications-based laws could
also expose it to significant damage awards, fines and other penalties that could, individually or in the aggregate, materially harm
its business. In particular, because of the enormous number of emails and other communications the Company sends to its users, communications
laws that provide a specified monetary damage award or fine for each violation (such as those described below) could result in particularly
large awards or fines.
For
example, the Federal Communications Commission amended certain of its regulations under the Telephone Consumer Protection Act, or TCPA,
in 2012 and 2013 in a manner that could increase the Company’s exposure to liability for certain types of telephonic communication
with customers. Under the TCPA, plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater,
and courts may treble the damage award for willful or knowing violations. Given the enormous number of communications the Company sends
to its users, a determination that there have been violations of the TCPA or other communications-based statutes could expose the Company
to significant damage awards that could, individually or in the aggregate, materially harm its business.
The
Company posts on its websites its privacy policies and practices concerning the collection, use and disclosure of user data. Any failure,
or perceived failure, by the Company to comply with its posted privacy policies or with any regulatory requirements or orders or other
federal, state or international privacy or consumer protection-related laws and regulations, including the GDPR and the CCPA, could result
in proceedings or actions against it by governmental entities or others (e.g., class action privacy litigation), subject it to significant
penalties and negative publicity, require it to change its business practices, increase its costs and adversely affect its business.
Data collection, privacy and security have become the subject of increasing public concern. If internet and mobile users were to reduce
their use of the Company’s websites, mobile platforms, products, and services as a result of these concerns, its business could
be harmed. As noted above, the Company is subject to the possibility of security breaches, which themselves may result in a violation
of these laws.
The
Company is subject to various federal, state and local laws and governmental regulations relating to the operation of its business, which
may affect the way the Company conducts its operations.
The
Company is subject to various federal, state and local laws and governmental regulations relating to the operation of its business, including
those governing the use and transportation of hazardous substances and emissions-related standards, established by the U.S. Environmental
Protection Agency (“EPA”), and similar state-level regulators, including the California Air Resources Board (“CARB”).
While
the Company has processes in place to ensure that products are sold in compliance with the requirements imposed by the EPA and similar
state-level regulators, all verification processes have inherent limitations. The Company has been, is currently, and may in the future
be the subject of regulatory proceedings initiated by the EPA, CARB or other applicable regulatory bodies, and the results of such proceedings
are uncertain. For additional information, see Note 5 of Notes to Consolidated Financial Statements included in this report.
Although
management believes that the Company is in substantial compliance with currently applicable environmental laws, rules, and regulations,
it is unable to predict the ultimate impact of adopted or future laws, rules, and regulations on its business, properties or products.
Such laws, rules, or regulations may cause the Company to incur significant expenses to achieve or maintain compliance, may require it
to modify its product offerings, may adversely affect the price of or demand for some of its products, and may ultimately affect the
way the Company conducts its operations. Failure to comply with these current or future laws, rules, or regulations could result in harm
to the Company’s reputation and/or could lead to fines and other penalties, including restrictions on the importation of the Company’s
products into, or the sale of its products in, one or more jurisdictions until compliance is achieved.
The
Company could be required to collect additional sales taxes or be subject to other tax liabilities that may increase the costs its customers
would have to pay for its products and adversely affect its operating results.
In
general, the Company has not historically collected state or local sales, use, or other similar taxes in any jurisdictions in which it
believed it did not have a tax nexus. In addition, the Company has not historically collected state or local sales, use, or other similar
taxes in certain jurisdictions in which it does have a physical presence, in reliance on applicable exemptions. On June 21, 2018, the
U.S. Supreme Court decided, in South Dakota v. Wayfair, Inc., that state and local jurisdictions may, at least in certain circumstances,
enforce a sales and use tax collection obligation on remote vendors that have no physical presence in such jurisdiction. A number
of states have begun, or have positioned themselves to begin, requiring sales and use tax collection by remote vendors and/or by online
marketplaces. The details and effective dates of these collection requirements vary from state to state. While we believe we now collect,
remit, and report sales tax in all required states, it is still possible that one or more jurisdictions may assert that we have liability
for previous periods for which we did not collect sales, use, or other similar taxes, and if such an assertion or assertions were successful
it could result in substantial tax liabilities, including for past sales taxes and penalties and interest, which could materially adversely
affect our business, financial condition, and operating results.
Certain
U.S. state tax authorities could assert that the Company has nexus in that state and seek to impose state and local income taxes which
could harm its results of operations.
For
the tax year ending December 31, 2020, and for years prior thereto, the Company filed state income tax returns in New Jersey. There is
a risk that state tax authorities in other states could assert that the Company is liable for state and local income taxes based upon
income or gross receipts allocable to such states because the Company has nexus with those states. The Company could then be subject
to state and local taxation in other states, in lieu of or in addition to, taxation in New Jersey. Penalties and interest could apply
to unpaid tax attributable to prior periods. Such tax assessments, penalties and interest may adversely impact the Company’s results
of operations and financial position.
Risks
Related to Intellectual Property and Cybersecurity
Any
failure to maintain the security of the information relating to the Company’s customers, employees and vendors, whether as a result
of cybersecurity attacks on its information systems or otherwise, could damage its reputation, result in litigation or other legal actions
against it, cause it to incur substantial additional costs, and materially adversely affect its business and results of operations.
Like
most retailers, the Company receives and stores in its information systems personal information about its customers, employees and vendors.
Most of this information is stored digitally in connection with the Company’s digital commerce platform. The Company also utilizes
third-party service providers for a variety of reasons, including, without limitation, for digital storage technology, back-office support,
and other functions. Such providers may have access to information the Company holds about its customers, employees or vendors. In addition,
the Company depends upon the secure transmission of confidential information over public networks, including information permitting cashless
payments.
Cyber
threats are rapidly evolving and those threats and the means for obtaining access to information in digital and other storage media are
becoming increasingly sophisticated. Cyber threats and cyber-attackers can be sponsored by countries or sophisticated criminal organizations
or be the work of hackers with a wide range of motives and expertise. The Company and the businesses with which it interacts have experienced
and continue to experience threats to data and systems, including by perpetrators of random or targeted malicious cyber-attacks, computer
viruses, worms, bot attacks or other destructive or disruptive software and attempts to misappropriate customer information, including
credit card information, and cause system failures and disruptions. Some of the Company’s systems have experienced security breaches
in the past, and there can be no assurance that similar breaches will not recur in the future.
Employee
error or malfeasance, faulty password management, social engineering or other irregularities may also result in a defeat of the Company
or its third-party service providers’ security measures and a breach of its or their information systems. Moreover, hardware, software
or applications the Company uses may have inherent vulnerabilities or defects of design, manufacture or operations or could be inadvertently
or intentionally implemented or used in a manner that could compromise information security.
Any
compromise of the Company’s data security systems or of those of businesses with which it interacts, which results in confidential
information being accessed, obtained, damaged, modified, lost or used by unauthorized or improper persons, could harm the Company’s
reputation and expose it to regulatory actions, customer attrition, remediation expenses, and claims from customers, employees, vendors,
financial institutions, payment card networks and other persons, any of which could materially and adversely affect the Company’s
business operations, financial condition and results of operations. Because the techniques used to obtain unauthorized access, disable
or degrade service, or sabotage systems change frequently and may not immediately produce signs of a compromise, the Company may be unable
to anticipate these techniques or to implement adequate preventative measures, and the Company or its third-party service providers may
not discover any security breach, vulnerability or compromise of information for a significant period of time after the security incident
occurs.
In
addition, such events could be widely publicized and could materially adversely affect the Company’s reputation with its customers,
employees, vendors and stockholders, could harm its competitive position with respect to other digital commerce websites, and could result
in a material reduction in net sales from its digital commerce platform. Such events could also result in the release to the public of
confidential information about the Company’s operations and financial condition and performance and could result in litigation
or other legal actions against the Company or the imposition of penalties, fines, fees or liabilities, which may not be covered by its
insurance policies. Moreover, a security compromise could require the Company to devote significant management resources to address the
problems created by the issue and to expend significant additional resources to upgrade further the security measures it employs to guard
personal and confidential information against cyber-attacks and other attempts to access or otherwise compromise such information and
could result in a disruption of its operations.
The
Company accepts payments using a variety of methods, including credit and debit cards, online payment systems such as PayPal, Google
Pay, Affirm and gift cards, and it may offer new payment options over time. As an online retailer, the Company is reliant upon third-party
payment processors to sell its products, and any interruption to the services provided by such payment processors, including as a result
of payment disputes, would have an immediate impact on the Company’s cash flows, financial position and results of operations.
Third-party payment processors may also increase their fees or increase the minimum reserves on the Company’s accounts, which could
decrease the Company’s profit margin and impair the Company’s liquidity, respectively.
As
a retailer accepting debit and credit cards for payment, the Company also is subject to various industry data protection standards and
protocols, such as payment network security operating guidelines and the Payment Card Industry Data Security Standard. The Company cannot
be certain that the security measures it maintains to protect all of its information technology systems are able to prevent, contain
or detect cyber-attacks, cyber terrorism, security breaches or other compromises from known malware or other threats that may be developed
in the future. To the extent that any cyber-attack or incursion in the Company or one of its third-party service provider’s information
systems results in the loss, damage, misappropriation or other compromise of information, the Company may be materially adversely affected
by claims from customers, financial institutions, regulatory authorities, payment card networks and others. In certain circumstances,
the Company’s contracts with payment card processors and payment card networks (such as Visa, Mastercard, American Express and
Discover) generally require the Company to adhere to payment card network rules, which could make it liable to payment card issuers and
others if information in connection with payment cards and payment card transactions that it processes is compromised or if the Company
permits fraudulent purchases on its platform, which liabilities could be substantial. If the event of a material increase in fraudulent
purchases on the Company’s platform, payment card processors and payment card networks could refuse to process further payments
for purchases on the Company’s platform, which would materially impact the Company’s results of operations and financial
position.
If
the Company’s proprietary data catalog is stolen, misappropriated or damaged, or if a competitor is able to create a substantially
similar database without infringing the Company’s rights, then the Company may lose an important competitive advantage.
The
Company has invested significant resources and time to build and maintain its proprietary data catalog, which maps stock-keeping units,
to relevant product applications based on vehicle years, makes, and models. Management believes that the Company’s data catalog
provides it with an important competitive advantage in both driving traffic to its digital commerce platform and converting that traffic
to revenue by enabling customers to quickly locate the parts and accessories they require. The Company cannot assure you that it will
be able to protect its data catalog from unauthorized copying or theft or that such database will continue to operate adequately, without
any technological challenges. In addition, it is possible that a competitor could develop a catalog or database that is similar to or
more comprehensive than the Company’s data catalog, without infringing the Company’s rights. In the event its data catalog
is damaged or is stolen, copied or otherwise replicated to compete with the Company, whether lawfully or not, the Company may lose an
important competitive advantage and its business could be harmed.
Claims
of intellectual property infringement by parts manufacturers, distributors or retailers to the validity of aftermarket parts and accessories
or related marketing materials could adversely affect the Company’s business.
Parts
manufacturers, distributors and retailers have asserted claims of intellectual property infringement against retailers of aftermarket
products, including the Company. The Company has received in the past, and anticipates receiving in the future, communications alleging
that certain products it sells infringe the patents, copyrights, trademarks and trade names or other intellectual property rights of
parts manufacturers, distributors or retailers. Other parts retailers have also asserted ownership of product images that were provided
by product vendors for the Company to use on its online platform. While the Company now has processes in place designed to prevent the
use of unauthorized product images on its platform, there can be no assurance that such processes will work as intended or prevent
future infringement claims.
Infringement
claims could result in increased costs of doing business arising from new importing requirements, increased port and carrier fees and
legal expenses, adverse judgments or settlements or changes to the Company’s business practices required to settle such claims
or satisfy any judgments. Litigation or regulatory enforcement could also result in interpretations of the law that require the Company
to change its business practices or otherwise increase its costs and harm its business. The Company may not maintain sufficient, or any,
insurance coverage to cover the types of claims that could be asserted. If a successful claim were brought against the Company, it could
expose the Company to significant liability.
If
the Company is unable to protect its intellectual property rights, its reputation and brand could be impaired and it could lose customers.
The
Company regards its trademarks, trade secrets and similar intellectual property such as its “iD” brand, its proprietary digital
commerce platform, its proprietary data catalog and its back-end order processing and fulfillment code and process as important to its
success. The Company relies on trademark, patent and copyright law, and trade secret protection, and confidentiality and/or license agreements
with employees, customers, partners and others to protect its proprietary rights. The Company cannot be certain that it has taken adequate
steps to protect its proprietary rights, especially in countries where the laws may not protect its rights as fully as in the United States.
In addition, the Company’s proprietary rights may be infringed or misappropriated, and the Company could be required to incur significant
expenses in its efforts to preserve them. In the past, the Company has filed litigation to protect its intellectual property rights,
including its “iD” brand. The outcome of such litigation can be uncertain, and the cost of prosecuting such litigation may
have an adverse impact on the Company’s earnings. The Company has common law trademarks, as well as pending federal trademark registrations
for several marks and several registered marks. However, any registrations may not adequately cover the Company’s intellectual
property or protect it against infringement by others. Effective trademark, service mark, copyright, patent and trade secret protection
may not be available in every country in which the Company’s products may be made available online. The Company also currently
owns or controls a number of internet domain names, including www.carid.com, www.truckid.com, www.motorcycleid.com, www.powersportsid.com,
www.camperid.com, www.boatid.com, www.recreationid.com and www.toolsid.com, and has invested time and money in the purchase of domain
names and other intellectual property, which may be impaired if it cannot protect such intellectual property. The Company may be unable
to protect these domain names or acquire or maintain relevant domain names in the United States and in other countries. If the Company
is not able to protect its trademarks, domain names or other intellectual property, it may experience difficulties in achieving and maintaining
brand recognition and customer loyalty.
The
Company’s digital commerce platform is dependent on open-source software, which exposes it to uncertainty and potential liability.
The
Company utilizes open-source software such as Linux, Apache, MySQL, PHP, and Perl throughout its digital commerce platform and supporting
infrastructure, although it has created proprietary programs. Open-source software is maintained and upgraded by a general community
of software developers under various open-source licenses, including the GNU General Public License (“GPL”). These developers
are under no obligation to maintain, enhance or provide any fixes or updates to this software in the future. Additionally, under
the terms of the GPL and other open-source licenses, the Company may be forced to release to the public source-code internally developed
by it pursuant to such licenses. Furthermore, if any of these developers contribute any code of others to any of the software that the
Company uses, the Company may be exposed to claims and liability for intellectual property infringement and may also be forced to implement
changes to the code-base for this software or replace this software with internally developed or commercially licensed software.
System
failures, including failures due to natural disasters or other catastrophic events, could prevent access to the Company’s digital
commerce platform, which could reduce its net sales and harm its reputation.
The
Company’s sales would decline and it could lose existing or potential customers if it is not able to access its digital commerce
platform or if its digital commerce platform, transactions processing systems or network infrastructure do not perform to its customers’
satisfaction. Any internet network interruptions or problems with the Company’s digital commerce platform could:
|
● |
prevent
customers from accessing such digital commerce platform; |
|
● |
reduce
its ability to fulfill orders or bill customers; |
|
● |
reduce
the number of products that it sells; |
|
● |
cause
customer dissatisfaction; or |
|
● |
damage
its brand and reputation. |
The
Company has experienced brief computer system interruptions in the past, and it believes they may continue to occur from time to time
in the future. The Company’s systems and operations are also vulnerable to damage or interruption from a number of sources, including
a natural disaster or other catastrophic event such as an earthquake, typhoon, volcanic eruption, fire, flood, tsunami, winter storms,
terrorist attack, riots, social disturbances, political unrest, computer viruses, power loss, telecommunications failure, physical and
electronic break-ins, hardware failures, hosting issues, domain name system issues, distributed denial-of-service attacks, content management
system issues, malicious hackers, lapses in maintenance, and other similar events. The Company also maintains offshore and outsourced
operations in the Philippines, an area that has been subjected to a typhoon and a volcanic eruption in the past, and Costa Rica, a seismically
active region.
The
Company’s engineering and product data development team as well as back office and part of its customer service center are located
in Ukraine, which has been involved in political confrontation with Russian federation. The Russo-Ukrainian war is an ongoing and protracted
conflict that started in February 2014, primarily involving Russia and pro-Russian forces on one hand, and Ukraine on the other. The
war has centered on the status of Crimea and parts of the Donbas and Luhansk, which are largely internationally recognized as part of
Ukraine. With recent Russian move to recognize Donbas and Luhansk Ukrainian territories as independent republic appears to be the opening
salvo of a larger potential military operation targeting Ukraine. The latest estimates by the US government suggests that between 169,000
and 190,000 Russian and rebel troops are stationed along Ukraine’s border, both in Russia and neighboring Belarus. Against this backdrop,
diplomatic talks between Russia and the United States and its allies have not yet yielded any solutions. Our business continuity plans
are not strong enough to protect us in any such adverse situation. Any major breakdown or closure of utility services or any major threat
to civilians or international banking disruption could materially impact the operations and liquidity of the Company.
Natural
disasters or other catastrophic events may recur in the future and could disrupt the operation of the Company’s business. The Company’s
technology infrastructure is also vulnerable to computer viruses, physical or electronic break-ins, employee or contractor malfeasance
and other disruptions, and not all of the Company’s systems and data are fully redundant. Any substantial disruption of the Company’s
technology infrastructure could cause interruptions or delays in its business and loss of data or render it unable to accept and fulfill
customer orders or operate its digital commerce platform in a timely manner, or at all.
Risks
Related to Litigation
Because
the Company is involved in litigation from time to time and is subject to numerous laws and governmental regulations, it could incur
substantial judgments, fines, legal fees and other costs as well as reputational harm.
The Company is sometimes the subject of complaints
or litigation from customers, current and former employees, current and former stockholders, or other third parties for various reasons.
The damages sought against the Company in some of these litigation proceedings could be substantial. Although the Company maintains liability
insurance for some litigation claims, if one or more of the claims were to greatly exceed its insurance coverage limits or if its insurance
policies do not cover a claim, this could have a material adverse effect on its business, financial condition, results of operations
and cash flows.
The
Company is also subject to numerous federal, state and local laws and governmental regulations relating to, among other things, environmental
protection, product quality and safety standards, labor and employment, discrimination, anti-bribery/anti-corruption, data privacy and
income taxes. Compliance with existing and future laws and regulations could increase the cost of doing business and adversely affect
the Company’s results of operations. If the Company fails to comply with existing or future laws or regulations, it may be subject
to governmental or judicial fines or sanctions, while incurring substantial legal fees and costs, as well as reputational risk. In addition,
the Company’s capital and operating expenses could increase due to remediation measures that may be required if the Company is
found to be noncompliant with any existing or future laws or regulations.
For additional information regarding legal actions,
claims and administrative proceedings that management believes could have a material adverse effect on its financial position, results
of operations or cash flows, including ongoing litigation with certain stockholders and the notice of violation it received from the EPA,
see Note 5 of Notes to Consolidated Financial Statements included in this report.
The
Company faces exposure to product liability lawsuits.
The
automotive industry in general has been subject to a large number of product liability claims due to the nature of personal injuries
that result from car accidents or malfunctions. As a distributor of automotive parts and accessories, including parts and accessories
obtained overseas, the Company could be held liable for the injury or damage caused if the products it sells are defective or malfunction,
regardless of whether the product manufacturer is the party at fault. While the Company carries insurance against product liability claims,
if the damages in any given action were high or the Company were subject to multiple lawsuits, the damages and costs could exceed the
limits of its insurance coverage or prevent it from obtaining coverage in the future. If the Company were required to pay substantial
damages as a result of these lawsuits, it may seriously harm its business and financial condition. Even defending against unsuccessful
claims could cause the Company to incur significant expenses and result in a diversion of management’s attention. In addition,
even if the money damages themselves did not cause substantial harm to the Company’s business, the damage to its reputation and
the brands offered on its digital commerce platform could adversely affect its future reputation and its brand and could result in a
decline in its net sales.
Risks
Related to Ownership of our Common Stock
Concentration
of ownership among certain stockholders may prevent other stockholders from influencing significant corporate decisions.
As
of December 31, 2021, each of Prashant Pathak, Chairman of the Board of the Company and a director and President of Onyx Enterprises
Canada Inc. (“OEC”), Roman Gerashenko and Stanislav Royzenshteyn, beneficially owned, directly or indirectly, approximately
41.9%, 17.8%, and 17.8%, respectively, of our outstanding Common Stock, and our directors and executive officers as a group beneficially
owned approximately 46% of our outstanding Common Stock. As a result of their current holdings, these stockholders will be able to exercise
a significant level of control over all matters requiring stockholder approval, including the election of directors, any amendment of
the Certificate of Incorporation and approval of significant corporate transactions. This control could have the effect of delaying or
preventing a change of control or changes in management and will make the approval of certain transactions difficult or impossible without
the support of these stockholders.
Sales
of a substantial number of shares of our Common Stock in the public market could cause the price of our common stock to fall.
Sales
of a substantial number of shares of our Common Stock in the public market or the perception that these sales might occur could depress
the market price of our Common Stock and could impair our ability to raise capital through the sale of additional equity securities.
We are unable to predict the effect that sales may have on the prevailing market price of our Common Stock. In addition, the sale of
substantial amounts of our Common Stock could adversely impact its price.
The
shares of Common Stock covered by effective registration statements, pursuant to which certain stockholders may sell their shares, represent
approximately 90% of our outstanding Common Stock. Sales, or the potential sales, of substantial numbers of shares in the public
market by those selling stockholders could increase the volatility of the market price of our Common Stock or adversely affect the market
price of our Common Stock.
We
have never paid dividends on our Common Stock, and we do not anticipate paying dividends in the foreseeable future.
We
have never paid dividends on any of our capital stock and currently intend to retain any future earnings to fund the growth of our business.
Any determination to pay dividends in the future will be at the discretion of the Board and will depend on our financial condition, operating
results, capital requirements, general business conditions and other factors that the Board may deem relevant. As a result, capital appreciation,
if any, of our Common Stock will be the sole source of gain for the foreseeable future.
Our
stock price is volatile, and you may not be able to sell shares of our Common Stock at or above the price you paid.
The
trading price of our Common Stock is volatile and could be subject to wide fluctuations in response to various factors, some of which
are beyond our control. These factors include:
|
● |
actual
or anticipated fluctuations in operating results; |
|
● |
failure
to meet or exceed financial estimates and projections of the investment community or that we provide to the public; |
|
● |
issuance
of new or updated research or reports by securities analysts or changed recommendations for our stock or the transportation industry
in general; |
|
● |
announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments; |
|
● |
operating
and share price performance of other companies that investors deem comparable to us; |
|
● |
our
focus on long-term goals over short-term results; |
|
● |
the
timing and magnitude of our investments in the growth of our business; |
|
● |
actual
or anticipated changes in laws and regulations affecting our business; |
|
● |
additions
or departures of key management or other personnel; |
|
● |
disputes
or other developments related to our intellectual property or other proprietary rights, including litigation; |
|
● |
our
ability to market new and enhanced products and technologies on a timely basis; |
|
● |
sales
of substantial amounts of the Common Stock by the Board, executive officers or significant stockholders or the perception that such
sales could occur; |
|
● |
changes
in our capital structure, including future issuances of securities or the incurrence of debt; and |
|
● |
general
economic, political and market conditions. |
In
addition, the stock market in general, and the NYSE American in particular, has experienced extreme price and volume fluctuations that
have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may
seriously affect the market price of our Common Stock, regardless of our actual operating performance. In addition, in the past, following
periods of volatility in the overall market and the market price of a particular company’s securities, securities class action
litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial
costs and a diversion of our management’s attention and resources.
Risks
Related to Our Being a Public Company
We
will incur significant increased expenses and administrative burdens as a public company, which could have an adverse effect on our business,
financial condition and results of operations.
We
face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private
company. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), including the requirements of Section 404, as well
as rules and regulations subsequently implemented by the SEC, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and
the rules and regulations promulgated and to be promulgated thereunder, the Public Company Accounting Oversight Board (the “PCAOB”)
and the securities exchanges, impose additional reporting and other obligations on public companies. Compliance with public company requirements
will increase costs and make certain activities more time-consuming. A number of those requirements require us to carry out activities
that Onyx, as a private company, had not done previously. For example, we created new board committees and have adopted new internal
controls and disclosure controls and procedures. In addition, expenses associated with SEC reporting requirements have been, and will
continue to be, incurred. Furthermore, if any issues in complying with those requirements are identified (for example, if the auditors
identify a material weakness or significant deficiency in the internal control over financial reporting), we could incur additional costs
rectifying those issues, and the existence of those issues could adversely affect our reputation or investor perceptions of it. In addition,
we have obtained director and officer liability insurance. Risks associated with our status as a public company may make it more difficult
to attract and retain qualified persons to serve on the Board or as executive officers. The additional reporting and other obligations
imposed by these rules and regulations increase legal and financial compliance costs and the costs of related legal, accounting and administrative
activities. These increased costs require us to divert a significant amount of money that could otherwise be used to expand the business
and achieve strategic objectives. Advocacy efforts by stockholders and third parties may also prompt additional changes in governance
and reporting requirements, which could further increase costs.
Our
failure to timely and effectively implement controls and procedures required by Section 404(a) of the Sarbanes-Oxley Act could have
a material adverse effect on our business.
As
a public company, we are required to provide management’s attestation on internal controls. The standards required for a public
company under Section 404(a) of the Sarbanes-Oxley Act are significantly more stringent than those required of Onyx as a private
company. Management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased
regulatory compliance and reporting requirements now applicable to it. If we are not able to implement the additional requirements of
Section 404(a) in a timely manner or with adequate compliance, we may not be able to assess whether our internal controls over financial
reporting are effective, which may subject us to adverse regulatory consequences and could harm investor confidence and the market price
of our securities.
Our
management has limited experience in operating a public company.
Our
executive officers have limited experience in the management of a publicly traded company. Our management team may not successfully or
effectively manage our transition to a public company that will be subject to significant regulatory oversight and reporting obligations
under federal securities laws. Their limited experience in dealing with the increasingly complex laws pertaining to public companies
could be a significant disadvantage in that it is likely that an increasing amount of their time may be devoted to these activities which
will result in less time being devoted to the management and growth of the Company. We may not have adequate personnel with the appropriate
level of knowledge, experience, and training in the accounting policies, practices or internal controls over financial reporting required
of public companies in the United States. The development and implementation of the standards and controls necessary for the Company
to achieve the level of accounting standards required of a public company in the United States may require costs greater than expected.
It is possible that we will be required to expand our employee base and hire additional employees to support our operations as a public
company which will increase our operating costs in future periods.
The
Company is an “emerging growth company” and a “smaller reporting company” and the reduced disclosure and governance
requirements applicable to those types of companies may make its securities less attractive to investors.
The
Company is an “emerging growth company,” as defined in the JOBS Act. As an emerging growth company, the Company is not required
to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, which would require the Company’s
internal control over financial reporting to be audited by its independent registered public accounting firm, has reduced disclosure
obligations regarding executive compensation in its periodic reports and proxy statements, and is exempt from the requirements of holding
a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Additionally, as an emerging growth company, the Company has elected to delay the adoption of new or revised accounting standards that
have different effective dates for public and private companies until those standards apply to private companies (as defined under Section 2(a)
of the Sarbanes-Oxley Act). As such, the Company’s financial statements may not be comparable to companies that comply with public
company effective dates.
The
Company also is a “smaller reporting company” under Rule 12b-2 of the Exchange Act. As a smaller reporting company, the Company
is entitled to rely on certain exemptions and reduced disclosure requirements, such as simplified executive compensation disclosures
and reduced financial statement disclosure requirements, in the Company’s SEC filings.
These
exemptions and decreased disclosures in the Company’s SEC filings due to our status as an emerging growth company and a smaller
reporting company may make it harder for investors to analyze the Company’s results of operations and financial prospects. Investors
may find our Common Stock less attractive because we rely on these exemptions. If some investors find our Common Stock less attractive
as a result, there may be a less active trading market for our Common Stock and our Common Stock price may be more volatile.
If
securities or industry analysts do not publish or cease publishing research or reports about the Company, its business or its market,
or if they adversely change their recommendations regarding the Common Stock, the price and trading volume of the Common Stock could
decline.
The
trading market for our Common Stock is influenced by the research and reports that industry or securities analysts may publish about
the Company, its business, market or competitors. If any of the analysts who cover the Company change their recommendation regarding
its Common Stock adversely, or provide more favorable relative recommendations about its competitors, the price of its Common Stock would
likely decline. If any analyst who may cover the Company were to cease coverage of the Company or fail to regularly publish reports on
it, it could lose visibility in the financial markets, which could cause the Company’s stock price or trading volume to decline.
Certain
minority stockholders of the Company could engage in activities that might be disruptive of the Company’s ongoing business.
Certain
minority stockholders of the Company could engage in litigation against the Company and its directors seeking monetary damages and/or
potentially distracting the Company’s directors and officers from executing upon the Company’s business plans, and could
engage in shareholder activism that may be disruptive to the Company. See “—The Company’s business could be adversely
affected by an ongoing legal proceeding with certain stockholders” for more information regarding litigation brought by these
minority stockholders prior to the Business Combination.
The
Company’s Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum
for certain types of actions and proceedings that may be initiated by the Company’s stockholders, which could limit its stockholders’
ability to obtain a favorable judicial forum for disputes with the Company or its directors, officers, employees or stockholders.
Our
Certificate of Incorporation provides that, subject to limited exceptions, (i) any derivative action or proceeding brought on behalf
of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the
Company to the Company or the stockholders of the Company, (iii) any action asserting a claim against the Company, its directors, officers
or employees arising pursuant to any provision of the General Corporation Law of the State of Delaware (the “DGCL”) or the
second amended and restated certificate of incorporation or the amended and restated bylaws of the Company (the “Bylaws”),
or (iv) any action asserting a claim against the Company, its directors, officers or employees is governed by the internal affairs doctrine.
The Company’s bylaws designate the federal district courts of the United States as the exclusive forum for the resolution of any
complaint asserting a cause of action arising under the Securities Act. Any person or entity purchasing or otherwise acquiring any interest
in shares of Common Stock shall be deemed to have notice of and to have consented to the provisions of the Certificate of Incorporation
and bylaws described above. In addition, Section 22 of the Securities Act provides that federal and state courts have concurrent jurisdiction
over lawsuits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. To the
extent the exclusive forum provision restricts the courts in which claims arising under the Securities Act may be brought, there is uncertainty
as to whether a court would enforce such a provision. We note that investors cannot waive compliance with the federal securities laws
and the rules and regulations thereunder. This choice of forum provision may limit a stockholder’s ability to bring a claim in
a judicial forum that it finds favorable for disputes with the Company or its directors, officers or other employees, which may discourage
such lawsuits against the Company and its directors, officers and employees. Alternatively, if a court were to find these provisions
of the Certificate of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or
proceedings, the Company may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely
affect the Company’s business and financial condition.