Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and
analysis of financial condition and results of operations should be read together with our unaudited condensed consolidated financial
statements, together with the related notes thereto, included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our
audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 (our “2020
Form 10-K”).
For the purposes of this section, “we,”
“us,” “our,” “Onyx,” the “Company” and “PARTS iD” each refer to Onyx prior
to the closing of the Business Combination and PARTS iD, Inc. following the closing of the Business Combination, as the context indicates,
unless the context otherwise refers to Legacy Acquisition Corp.
Overview
PARTS iD, Inc. is a technology-driven, digital
commerce company focused on creating custom infrastructure and unique user experiences within niche markets. PARTS iD was originally founded
in 2008 as Onyx Enterprises, Int’l, Corp. Our vision is to develop a leading technology platform purpose-built for purchasing complex
parts and accessories for all vehicle types with a complete repository of fitment data, and to deliver an unrivaled parts and accessories
shopping experience of extraordinary choice, competitive prices, and fast delivery.
The success of CARiD.com has inspired pursuit
of our long-term strategy to scale into similar markets via our proprietary built, modular digital commerce technology platform. While
our core focus continues to be automotive, in August 2018, we launched seven new verticals (including BOATiD.com, MOTORCYCLEiD.com, CAMPERiD.com
and more) which demonstrates fungibility of our technology platform. These verticals address similar market challenges and focus on the
enthusiasts’ needs through our seamless shopping experience using proprietary tools and techniques.
Although the ongoing COVID-19 pandemic has caused
an economic downturn on a global scale, disrupted global supply chains, and created significant uncertainty, volatility, and disruption
across economies, it has also led to an increased adoption of online shopping by consumers, which has had a positive effect on the Company’s
revenue. Despite increases in order cancellations and delivery times, the Company has largely been successful in managing its supply chain
to date.
We have made significant investments to provide
an enhanced experience to our diverse base of “do-it-yourself” (“DIY”), “do-it-for-me” (“DIFM”)
and PRO (mechanics) customers. As of June 30, 2021, we had over 1,000 active product vendors with their many shipping locations across
the nation. This distributed, inventory-light fulfillment model allowed us to offer customers over 17 million SKUs on the platform as
of June 30, 2021. Furthermore, our proprietary fulfillment algorithm determines and selects the most optimal fulfillment location based
on inventory availability and proximity to the customer, thereby providing faster delivery speed and decreasing the total cost to the
customer. We continue to focus on improving our product offerings in the catalog, specifically for new verticals, original equipment (“OE”)
and repair parts business.
Despite a decrease in traffic in the three and
six months ended June 30, 2021 as compared to the same prior year periods, we experienced better conversions and higher average order
values, which contributed to an increase of 5.6% and 28.8% in the total value of orders received in the three and six months ended June
30, 2021, respectively, over the same prior year periods. By category of accessories and parts, the primary drivers of the increases in
the total value of orders received were increases in Wheels and Tires by 20.3% and 47.4%, and in Repair parts by 17.3% and 28.9%, in the
three and six months ended June 30, 2021, respectively.
We have also been focused on increasing our presence
in the DIFM segment of the automotive aftermarket industry, including growing related partnerships, and we chose to invest in a tire installation
network as our first step. Using our purpose-built data architecture and differentiated technology, consumers can visit CARiD.com, research
and choose from a wide variety of tires, and in the same transaction select a tire installation center near them and schedule an appointment.
Through partnerships with tire installation businesses, we had 2,117 active tire installation locations nationwide as of June 30, 2021.
We recently made a technical enhancement in the process of adding new locations, and management now expects steady growth in the number
of installation locations in the near future. The tire installation network initiative is one of many programs we are working on to advance
CARiD.com’s position as a one-stop shop and seamless solution for all car enthusiast needs.
Management continues to focus on several
other efforts to drive growth, including product cultivation, vendor optimization, distribution network expansion and marketing diversification.
Effects of the COVID-19 Pandemic
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. Recently, the extent and severity of the pandemic and such containment measures have abated somewhat
due to the general public’s utilization of COVID-19 vaccines. However, public concern over COVID-19 remains, and related containment
measures may increase in the future, especially due to the recent spread of COVID-19 variants.
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 costs and inefficiencies in sourcing products. In future periods, the pandemic might cause 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 demand for and the inventory of the Company’s products have remained stable, in future periods the COVID-19 pandemic
could have an adverse impact on the Company through reduced consumer demand for or inventory of its products. 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. For more information on the risks
the COVID-19 pandemic poses to the business, see Item 1A. “Risk Factors” in our 2020 Form 10-K.
Key Financial and Operating Metrics
We measure our business using financial and operating
metrics, as well as non-GAAP financial measures. See “Results of Operations – Non-GAAP Financial Measures” below for
more information on non-GAAP financial measures. We monitor several key business metrics to evaluate our business, measure our performance,
develop financial forecasts and make strategic decisions, including the following:
Traffic and Engagement Metrics
For the three months ended June 30,
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
% Change
|
|
Number of Users
|
|
|
31,984,337
|
|
|
|
39,014,126
|
|
|
|
(7,029,789
|
)
|
|
|
(18.02
|
)%
|
Number of Sessions
|
|
|
59,523,329
|
|
|
|
76,376,487
|
|
|
|
(16,853,158
|
)
|
|
|
(22.07
|
)%
|
Bounce Rate
|
|
|
13.45
|
%
|
|
|
14.57
|
%
|
|
|
(1.12
|
)%
|
|
|
(7.70
|
)%
|
Number of Pageviews
|
|
|
255,491,738
|
|
|
|
323,963,567
|
|
|
|
(68,471,829
|
)
|
|
|
(21.14
|
)%
|
Pages/Session
|
|
|
4.29
|
|
|
|
4.24
|
|
|
|
0.05
|
|
|
|
1.19
|
%
|
Average Session Duration
|
|
|
0:03:25
|
|
|
|
0:03:31
|
|
|
|
(0:00:06)
|
|
|
|
(2.84
|
)%
|
For the six months ended June 30,
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
% Change
|
|
Number of Users
|
|
|
64,637,688
|
|
|
|
69,834,009
|
|
|
|
(5,196,321
|
)
|
|
|
(7.44
|
)%
|
Number of Sessions
|
|
|
124,272,640
|
|
|
|
136,942,111
|
|
|
|
(12,669,471
|
)
|
|
|
(9.25
|
)%
|
Bounce Rate
|
|
|
13.73
|
%
|
|
|
14.77
|
%
|
|
|
(1.03
|
)%
|
|
|
(7.01
|
)%
|
Number of Pageviews
|
|
|
541,368,091
|
|
|
|
579,584,869
|
|
|
|
(38,216,778
|
)
|
|
|
(6.59
|
)%
|
Pages/Session
|
|
|
4.36
|
|
|
|
4.23
|
|
|
|
0.13
|
|
|
|
2.93
|
%
|
Average Session Duration
|
|
|
0:03:26
|
|
|
|
0:03:29
|
|
|
|
(0:00:03)
|
|
|
|
(1.44
|
)%
|
We use the metrics above to gauge our ability
to acquire targeted traffic and keep users engaged. This information informs us of how effective our proprietary technology, data, and
content is, and helps us define our strategic roadmap and key initiatives.
Results of Operations
|
|
Three months ended June 30,
|
|
|
Change
|
|
|
|
2021
|
|
|
% of Rev.
|
|
|
2020
|
|
|
% of Rev.
|
|
|
Amount
|
|
|
%
|
|
Revenue, net
|
|
$
|
130,409,332
|
|
|
|
|
|
|
$
|
113,853,524
|
|
|
|
|
|
|
$
|
16,555,808
|
|
|
|
14.5
|
%
|
Cost of goods sold
|
|
|
104,270,051
|
|
|
|
80.0
|
%
|
|
|
89,655,601
|
|
|
|
78.7
|
%
|
|
|
14,614,450
|
|
|
|
16.3
|
%
|
Gross profit
|
|
|
26,139,281
|
|
|
|
20.0
|
%
|
|
|
24,197,923
|
|
|
|
21.3
|
%
|
|
|
1,941,358
|
|
|
|
8.0
|
%
|
Gross Margin
|
|
|
20.0
|
%
|
|
|
|
|
|
|
21.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
10,907,319
|
|
|
|
8.4
|
%
|
|
|
9,296,637
|
|
|
|
8.2
|
%
|
|
|
1,610,682
|
|
|
|
17.3
|
%
|
Selling, general & administrative
|
|
|
12,603,017
|
|
|
|
9.7
|
%
|
|
|
10,076,998
|
|
|
|
8.9
|
%
|
|
|
2,526,019
|
|
|
|
25.1
|
%
|
Depreciation
|
|
|
1,819,581
|
|
|
|
1.4
|
%
|
|
|
1,783,415
|
|
|
|
1.6
|
%
|
|
|
36,166
|
|
|
|
2.0
|
%
|
Total operating expenses
|
|
|
25,329,917
|
|
|
|
19.4
|
%
|
|
|
21,157,050
|
|
|
|
18.6
|
%
|
|
|
4,172,867
|
|
|
|
19.7
|
%
|
Income from operations
|
|
|
809,364
|
|
|
|
0.6
|
%
|
|
|
3,040,873
|
|
|
|
2.7
|
%
|
|
|
(2,231,509
|
)
|
|
|
(11.7
|
)%
|
Interest expense
|
|
|
395
|
|
|
|
0.0
|
%
|
|
|
1,038
|
|
|
|
0.0
|
%
|
|
|
(643
|
)
|
|
|
(61.9
|
)%
|
Income before income tax
|
|
|
808,969
|
|
|
|
0.6
|
%
|
|
|
3,039,835
|
|
|
|
2.7
|
%
|
|
|
(2,230,866
|
)
|
|
|
(73.4
|
)%
|
Income tax expense
|
|
|
182,857
|
|
|
|
0.1
|
%
|
|
|
766,120
|
|
|
|
0.7
|
%
|
|
|
(583,263
|
)
|
|
|
(76.1
|
)%
|
Net income
|
|
$
|
626,112
|
|
|
|
0.5
|
%
|
|
$
|
2,273,715
|
|
|
|
2.0
|
%
|
|
$
|
(1,647,603
|
)
|
|
|
(72.5
|
)%
|
|
|
Six months ended June 30,
|
|
|
Change
|
|
|
|
2021
|
|
|
% of Rev.
|
|
|
2020
|
|
|
% of Rev.
|
|
|
Amount
|
|
|
%
|
|
Revenue, net
|
|
$
|
239,482,960
|
|
|
|
|
|
|
$
|
184,579,489
|
|
|
|
|
|
|
$
|
54,903,471
|
|
|
|
29.7
|
%
|
Cost of goods sold
|
|
|
190,510,070
|
|
|
|
79.6
|
%
|
|
|
145,212,766
|
|
|
|
78.7
|
%
|
|
|
45,297,304
|
|
|
|
31.2
|
%
|
Gross profit
|
|
|
48,972,890
|
|
|
|
20.4
|
%
|
|
|
39,366,723
|
|
|
|
21.3
|
%
|
|
|
9,606,167
|
|
|
|
24.4
|
%
|
Gross Margin
|
|
|
20.4
|
%
|
|
|
|
|
|
|
21.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
21,406,705
|
|
|
|
8.9
|
%
|
|
|
15,390,787
|
|
|
|
8.3
|
%
|
|
|
6,015,918
|
|
|
|
39.1
|
%
|
Selling, general & administrative
|
|
|
23,961,724
|
|
|
|
10.0
|
%
|
|
|
18,748,252
|
|
|
|
10.2
|
%
|
|
|
5,213,472
|
|
|
|
27.8
|
%
|
Depreciation
|
|
|
3,593,354
|
|
|
|
1.5
|
%
|
|
|
3,308,098
|
|
|
|
1.8
|
%
|
|
|
285,256
|
|
|
|
8.6
|
%
|
Total operating expenses
|
|
|
48,961,783
|
|
|
|
20.4
|
%
|
|
|
37,447,137
|
|
|
|
20.3
|
%
|
|
|
11,514,646
|
|
|
|
30.7
|
%
|
Income from operations
|
|
|
11,107
|
|
|
|
0.0
|
%
|
|
|
1,919,586
|
|
|
|
1.0
|
%
|
|
|
(1,908,479
|
)
|
|
|
(6.3
|
)%
|
Interest expense
|
|
|
6,885
|
|
|
|
0.0
|
%
|
|
|
6,821
|
|
|
|
0.0
|
%
|
|
|
64
|
|
|
|
0.9
|
%
|
Income before income tax
|
|
|
4,222
|
|
|
|
0.0
|
%
|
|
|
1,912,765
|
|
|
|
1.0
|
%
|
|
|
(1,908,543
|
)
|
|
|
(99.8
|
)%
|
Income tax expense
|
|
|
22,923
|
|
|
|
0.0
|
%
|
|
|
483,620
|
|
|
|
0.3
|
%
|
|
|
(460,697
|
)
|
|
|
(95.3
|
)%
|
Net income (loss)
|
|
$
|
(18,701
|
)
|
|
|
0.0
|
%
|
|
$
|
1,429,145
|
|
|
|
0.8
|
%
|
|
$
|
(1,447,846
|
)
|
|
|
(101.3
|
)%
|
Revenue
Revenue increased $16.6 million, or 14.5%, for
the three months ended June 30, 2021 and $54.9 million, or 29.7%, for the six months ended June 30, 2021, compared to the same prior year
periods. These increases were primarily attributable to increases in conversion rates by 9.2% and 19.9% for the three and six months ended
June 30, 2021, respectively, and in average order values by 20.0% and 16.4% for the three and six months ended June 30, 2021, respectively,
partially offset by a decrease in traffic in both periods. The increases in conversion rates were primarily attributable to product growth
in new verticals, search engine bidding automation and optimization, and increased e-commerce adoption. The increases in average order
values were primarily attributable to increases in average numbers of items per order and changes in the mix of categories of items sold
in the relevant periods.
Cost of Goods Sold
Cost of goods sold is composed of product cost,
the associated fulfillment and handling costs charged by vendors, if any, and shipping costs. In the three and six months ended June 30,
2021, cost of goods sold increased by $14.6 million, or 16.3%, and $45.3 million, or 31.2%, respectively, compared to the three and six
months ended June 30, 2020. These increases in cost of goods sold were primarily driven by increases in the number of orders or the products
sold as well as increases in shipping costs.
For the three and six months ended June 30, 2021,
cost of goods sold was 80.0% and 79.6% of revenue, respectively, compared to 78.7% of revenue in each of the three and six months ended
June 30, 2020. The 1.3% and 0.9% increases in cost of goods sold as a percentage of revenue, respectively, were primarily attributable
to increases in shipping costs and pricing and promotional tests in some categories. Management expects that these shipping cost pressures
will ease as our supply chain becomes more efficient, which management expects will be the case if the current abatement of the COVID-19
pandemic and related containment measures continue.
Gross Profit and Gross Margin
Gross profit increased $1.9 million or 8.0%, and
$9.6 million or 24.4%, for the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June
30, 2020. These increases were primarily attributable to the 14.5% and 29.7% increases in revenue in the three and six months ended June
30, 2021, respectively, partially offset by increased shipping costs and pricing and promotional tests.
Gross margin of 20.0% and 20.4% in the three and
six months ended June 30, 2021, respectively, was lower than the gross margin of 21.3% in each of the three and six months ended June
30, 2020, primarily attributable to increases in shipping costs and pricing and promotional tests designed to maximize revenue and gross
profit.
Operating Expenses
Advertising expenses increased $1.6 million or
17.3%, and $6.0 million or 39.1%, for the three and six months ended June 30, 2021, respectively, compared to the three and six months
ended June 30, 2020. These increases in advertising costs were primarily attributable to (i) an increase in cost-per-click, (ii) a change
in the mix of advertising channels used, and (iii) testing of new advertising campaigns and content development. Management believes investment
in advertisement is one of the key drivers of revenue and its efficiency is measured by management in terms of revenue per advertisement
dollar spent.
Selling, general and administrative (“SG&A”)
expenses increased $2.5 million, or 25.1%, and $5.2 million, or 27.8%, for the three and six months ended June 30, 2021, respectively,
compared to the three and six months ended June 30, 2020. These increases were primarily attributable to an increase of (i) $1.3 million
and $1.3 million, respectively, of non-cash share-based expenses, (ii) $1.1 million and $2.2 million, respectively, of public company
operating expenses, and (iii) $0.2 million and $1.3 million, respectively, in merchant services provider processing fees in line with
the increase in revenue.
Depreciation expenses increased $0.04 million,
or 2.0%, and $0.3 million, or 8.6%, respectively, for the three and six months ended June 30, 2021 compared to the three and six months
ended June 30, 2020.
Interest Expense
Interest expense decreased by $643, or 61.9%,
and increased by $64, or 0.9%, for the three and six months ended June 30, 2021, respectively, compared to the three and six months ended
June 30, 2020.
Income Tax Expense
Income tax expenses decreased by $0.6 million,
or 76.1%, and $0.5 million, or 95.3%, for the three and six months ended June 30, 2021, respectively, compared to the three and six months
ended June 30, 2020. For the three and six months ended June 30, 2021, the effective income tax rate was 22.6% and 542.94%, respectively,
compared to 25.2% and 25.28% for the three and six months ended June 30, 2020, respectively. The changes in rate were primarily attributable
to changes in state taxes and expenses not deductible for income tax purposes.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
This report includes non-GAAP financial measures
that differ from financial measures calculated in accordance with U.S. generally accepted accounting principles (“GAAP”).
These non-GAAP financial measures may not be comparable to similar measures reported by other companies and should be considered in addition
to, and not as a substitute for, or superior to, other measures prepared in accordance with GAAP. Management uses non-GAAP financial measures
internally to evaluate the performance of the business. Additionally, management believes certain non-GAAP measures provide meaningful
incremental information to investors to consider when evaluating the performance of the Company.
To this end, we provide EBITDA and Adjusted EBITDA,
which are non-GAAP financial measures. EBITDA consists of net income (loss) plus (a) interest expense; (b) income tax provision (or less
benefit); and (c) depreciation expense. Adjusted EBITDA consists of EBITDA plus costs, fees, expenses, write offs and other items that
do not impact the fundamentals of our operations, as described further below following the reconciliation of these metrics. Management
believes these non-GAAP measures provide useful information to investors in their assessment of the performance of our business. The exclusion
of certain expenses in calculating EBITDA and Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis
as these costs may vary independent of business performance. Accordingly, we believe that EBITDA and Adjusted EBITDA provide useful information
to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
EBITDA and Adjusted EBITDA have limitations as
an analytical tool, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported
under GAAP. Some of these limitations are:
|
●
|
Although depreciation is a non-cash charge, the assets being depreciated may have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
|
|
|
|
|
●
|
EBITDA and Adjusted EBITDA do not reflect changes in our working capital;
|
|
|
|
|
●
|
EBITDA and Adjusted EBITDA do not reflect income tax payments that may represent a reduction in cash available to us;
|
|
|
|
|
●
|
EBITDA and Adjusted EBITDA do not reflect depreciation and interest expenses associated with the lease financing obligations; and
|
|
|
|
|
●
|
Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
|
Because of these limitations, you should consider
EBITDA and Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and
our other GAAP results.
The following table reflects the reconciliation
of net income (loss) to EBITDA and Adjusted EBITDA for each of the periods indicated.
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
626,112
|
|
|
$
|
2,273,715
|
|
|
$
|
(18,701
|
)
|
|
$
|
1,429,145
|
|
Interest expense
|
|
|
395
|
|
|
|
1,038
|
|
|
|
6,885
|
|
|
|
6,821
|
|
Income tax expense (benefit)
|
|
|
182,857
|
|
|
|
766,120
|
|
|
|
22,923
|
|
|
|
483,620
|
|
Depreciation
|
|
|
1,819,581
|
|
|
|
1,783,415
|
|
|
|
3,593,354
|
|
|
|
3,308,098
|
|
EBITDA
|
|
|
2,628,945
|
|
|
|
4,824,288
|
|
|
|
3,604,461
|
|
|
|
5,227,684
|
|
Stock compensation expenses included in Statement of operations
|
|
|
1,292,604
|
|
|
|
-
|
|
|
|
1,321,428
|
|
|
|
-
|
|
Founder’s compensation(1)
|
|
|
-
|
|
|
|
570,818
|
|
|
|
-
|
|
|
|
782,705
|
|
Legal & settlement expenses (gains) (2)
|
|
|
239,761
|
|
|
|
(79,495
|
)
|
|
|
483,186
|
|
|
|
(49,237
|
)
|
Other items(3)
|
|
|
-
|
|
|
|
177,181
|
|
|
|
-
|
|
|
|
215,162
|
|
Adjusted EBITDA Total
|
|
$
|
4,161,310
|
|
|
$
|
5,492,792
|
|
|
$
|
5,409,075
|
|
|
$
|
6,176,314
|
|
% of revenue
|
|
|
3.2
|
%
|
|
|
4.8
|
%
|
|
|
2.3
|
%
|
|
|
3.3
|
%
|
(1)
|
Represents the excess compensation paid to one of the founders of Onyx over the amount management believes would have been the compensation of an independent professional CEO for the applicable reporting periods.
|
(2)
|
Represents legal and settlement expenses and gains related to significant matters that do not impact the fundamentals of our operations, pertaining to: (i) causes of action between certain of the Company’s shareholders and which involves claims directly against the Company seeking the fulfillment of alleged indemnification obligations with respect to these matters, and (ii) trademark and IP protection cases. We are involved in routine IP litigation, commercial litigation and other various litigation matters. We review litigation matters from both a qualitative and quantitative perspective to determine if excluding the losses or gains will provide our investors with useful incremental information. Litigation matters can vary in their characteristics, frequency and significance to our operating results.
|
(3)
|
Includes write-offs of advances and certain fraud loss claims from earlier years that we determined were uncollectible.
|
Net income decreased by $1.6 million and $1.4
million for the three and six months ended June 30, 2021, respectively, as compared to the same prior year periods. The decreases in net
income were primarily driven by incremental public company costs of $1,076,913 and $2,247,450 for those periods, respectively, increases
in non-cash stock compensation, and increases in advertisement costs, as discussed above. The year-over-year decreases in Adjusted EBITDA
for the three and six months ended June 30, 2021 were attributable to these decreases in net income, partially offset by founders compensation
and other items during the 2020 periods not recurring in the 2021 periods, as noted in the reconciliation table above.
Free Cash Flow
To provide investors with additional information
regarding our financial results, we have also disclosed free cash flow, a non-GAAP financial measure that we calculate as net cash provided
by (used in) operating activities less capital expenditures (which consist of purchases of property and equipment and website and software
development costs). We have provided a reconciliation below of free cash flow to net cash provided by operating activities, the most directly
comparable GAAP financial measure.
We have included free cash flow in this report
because it is an important indicator of our liquidity as it measures the amount of cash we generate. Accordingly, we believe that free
cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner
as our management.
Free cash flow has limitations as a financial
measure, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. There are
limitations to using non-GAAP financial measures, including that other companies, including companies in our industry, may calculate free
cash flow differently. Because of these limitations, you should consider free cash flow alongside other financial performance measures,
including net cash provided by (used in) operating activities, capital expenditures and our other GAAP results.
The following table presents a reconciliation
of net cash provided by operating activities to free cash flow for each of the periods indicated.
|
|
Six months ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Net cash provided by operating activities
|
|
$
|
9,050,923
|
|
|
$
|
35,791,455
|
|
Purchase of property and equipment
|
|
|
(283,786
|
)
|
|
|
(9,344
|
)
|
Website and software development costs
|
|
|
(3,611,451
|
)
|
|
|
(3,443,447
|
)
|
Free cash flow
|
|
$
|
5,155,686
|
|
|
$
|
32,338,664
|
|
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand
of $27.3 million as of June 30, 2021, cash generated from operations and changes in operating assets and liabilities. We believe our current
resources will be sufficient to fund our cash needs for current operations for at least the next 12 months. Our primary uses of cash are
for investment in website and software development.
The following table summarizes the key cash flow
metrics from our statements of cash flows for the six months ended June 30, 2021 and 2020:
|
|
Six months ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Net cash provided by operating activities
|
|
$
|
9,050,923
|
|
|
$
|
35,791,455
|
|
Net cash used in investing activities
|
|
|
(3,895,237
|
)
|
|
|
(3,452,791
|
)
|
Net cash used in financing activities
|
|
|
(10,473
|
)
|
|
|
(261,043
|
)
|
Net change in cash
|
|
$
|
5,145,213
|
|
|
$
|
32,077,621
|
|
Cash Flows from Operating Activities
The net cash provided by operating activities
consists of our net income (loss) adjusted for certain non-cash items, including depreciation as well as the effect of changes in working
capital and other activities. Operating cash flows can be volatile and are sensitive to many factors, including changes in working capital
and our net income (loss). We have a negative working capital model (current liabilities exceed current assets). Any profitable growth
in revenue results in incremental cash for the Company, as we receive funds when customers place orders on the website, while accounts
payable are paid over a period time, based on vendor terms, which range on average from one week to eight weeks.
Net cash provided by operating activities in the
six months ended June 30, 2021 was $9.1 million, resulting from a net loss of $18,701 and cash provided by a change in (a) operating assets
and liabilities of $4.2 million, which in turn was primarily driven by increases in accounts payable and customer deposits, (b) depreciation
expense of $3.6 million, and (c) non-cash share based compensation expense of $1.3 million.
Net cash provided by operating activities in the
six months ended June 30, 2020 was $35.8 million, resulting from net income of $1.4 million and cash provided by a change in (a) operating
assets and liabilities of $30.6 million, which in turn was primarily driven by increases in accounts payable and customer deposits, (b)
depreciation expense of $3.3 million, and (c) non-cash deferred income tax expense of $0.5 million.
Cash Flows from Investing Activities
Net cash used in investing activities was $3.9
million for the six months ended June 30, 2021, consisting of website and software development costs and purchases of property and equipment.
Cash used in investing activities varies depending on the timing of technology and product development cycles.
Net cash used in investing activities was $3.5
million for the six months ended June 30, 2020, consisting primarily of website and software development costs.
Cash Flows from Financing Activities
Net cash used in financing activities for the
six months ended June 30, 2021 was $10,473, compared to $261,043 in the six months ended June 30, 2020. The decrease was primarily related
to cessation of payments of preferred stock dividends.
Critical Accounting Estimates
SEC guidance defines critical accounting estimates
as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably
likely to have a material impact on the financial condition or results of operation of the registrant. There were no significant changes
in our critical accounting estimates from those discussed in our 2020 Form 10-K, except as disclosed below. See Note 2 of the Notes to
Unaudited Condensed Consolidated Financial Statements for our other significant accounting policies and accounting pronouncements that
may impact the Company’s consolidated financial position, earnings, cash flows or disclosures.
Revenue Recognition
Our revenue recognition is impacted by estimates
of unshipped and undelivered orders at the end of the applicable reporting period. As we ship a large volume of packages through multiple
carriers, actual delivery dates may not always be available, and as such we estimate delivery dates based on historical data. If actual
unshipped and undelivered orders are not consistent with our estimates, the impact on our revenue for the applicable reporting period
could be material. Unshipped and undelivered orders as of June 30, 2021 and December 31, 2020 were $19.5 million and $16.2 million, respectively,
which are reflected as customer deposits on our balance sheets.
The outstanding days from the order date of our
unshipped and undelivered orders based on our actual determination were, on average, 13.0 days as of June 30, 2021, and 12.7 days as of
December 31, 2020.
Sales discounts earned by customers at the time
of purchase and taxes collected from customers, which are remitted to governmental authorities, are deducted from gross revenue in determining
net revenue. Allowances for sales returns are estimated and recorded based on historical experience and reduce product revenue, inclusive
of shipping fees, by expected product returns. Our estimated net allowances for sales returns at June 30, 2021 and 2020 were $800,215
and $712,744 respectively.
If actual sales returns are not consistent with
our estimates, or if we have to make adjustments, we may incur future losses or gains that could be material. Adjustments to our estimated
net allowances for sales returns over the three months and six months ended June 30, 2021 and 2020 were as follows:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Balance at beginning of period
|
|
$
|
1,125,970
|
|
|
$
|
554,753
|
|
|
$
|
1,062,077
|
|
|
$
|
495,697
|
|
Adjustment
|
|
|
(325,755
|
)
|
|
|
157,991
|
|
|
|
(261,862
|
)
|
|
|
217,047
|
|
Balance at Closing of period
|
|
$
|
800,215
|
|
|
$
|
712,744
|
|
|
$
|
800,215
|
|
|
$
|
712,744
|
|
Website and Software Development
We capitalize certain costs associated with website
and software (technology platform including the catalog) developed for internal use in accordance with Accounting Standards Codification
(“ASC”) 350-50, Intangibles — Goodwill and Other — Website Development Costs, and ASC 350-40, Intangibles
— Goodwill and Other — Internal Use Software, when both the preliminary project design and the testing stage are completed
and management has authorized further funding for the project, which it deems probable of completion and to be used for the function intended.
Capitalized costs include amounts directly related to website and software development such as contractors’ fees, payroll and payroll-related
costs for employees who are directly associated with and who devote time to our internal-use software. Capitalization of such costs ceases
when the project is substantially complete and ready for its intended use. Capitalized costs are amortized over a three-year period commencing
on the date that the specific module or platform is placed in service. Costs incurred during the preliminary stages of development and
ongoing maintenance costs are expensed as incurred. Determinations as to when a project is substantially complete and what constitutes
ongoing maintenance require judgments and estimates by management. We periodically review the carrying values of capitalized costs and
makes judgments as to ultimate realization. The amount of capitalized software costs for the six months ended June 30, 2021 and 2020 were
as follows:
Six months ended June 30,
|
|
Capitalized
Software
|
|
2021 (Includes non-cash share-based compensation capitalized $417,182)
|
|
$
|
4,028,633
|
|
2020
|
|
$
|
3,443,447
|
|
Off-Balance Sheet Arrangements
PARTS iD is not a party to any off-balance sheet
arrangements.