This prospectus supplement supplements the prospectus
dated September 23, 2021 (the “Prospectus”), which forms a part of our Registration Statement on Form S-1 (No. 333-259522)
relating to the resale of up to 2,545,137 shares of our Class A common stock, $0.0001 par value per share (“Common Stock”)
by the selling stockholders identified therein pursuant to the Registration Rights Agreements (as defined in the Prospectus). This prospectus
supplement should be read in conjunction with the Prospectus and is qualified by reference to the Prospectus except to the extent that
the information in this prospectus supplement supersedes the information contained in the Prospectus.
This prospectus supplement is being filed to update
and supplement the information in the Prospectus with the information contained in our Quarterly Report on Form 10-Q filed with the U.S.
Securities and Exchange Commission on November 9, 2021, which is attached to this prospectus supplement.
Our Common Stock is traded on the NYSE American
under the symbol “ID.” On November 9, 2021, the last reported sale price of our Common Stock was $4.15 per share.
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each
of the issuer’s classes of common stock, as of the latest practicable date: 33,173,456 shares of Class A common stock, $0.001
par value per share, outstanding on November 3, 2021.
Note 1 – Organization and Description of Business
Description of Business
PARTS iD, Inc., a Delaware corporation (the “Company,”
“PARTS iD,” “we” or “us”), is a technology-driven, digital commerce company focused on creating custom
infrastructure and unique user experiences within niche markets. PARTS iD has a product portfolio comprising more than 17.5 million SKUs,
an end-to-end digital commerce platform for both digital commerce and fulfillment, and 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.
Management believes that the Company is 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.
Merger between Legacy Acquisition Corp. and
Onyx Enterprises Int’l, Corp.
On November 20, 2020, Legacy Acquisition Corp.,
a special purpose acquisition company and publicly traded “shell company” (as defined in Rule 12b-2 of the Securities Exchange
Act of 1934, as amended) (“Legacy”), and Onyx Enterprises Int’l, Corp., a New Jersey corporation (“Onyx”),
consummated a business combination (the “Business Combination”) pursuant to that Business Combination Agreement, dated as
of September 18, 2020 (the “Business Combination Agreement”), by and among Legacy, Excel Merger Sub I, Inc., a Delaware corporation
and an indirect wholly owned subsidiary of Legacy and directly owned subsidiary of Merger Sub 2 as defined below (“Merger Sub 1”),
Excel Merger Sub II, LLC, a Delaware limited liability company and direct wholly owned subsidiary of Legacy (“Merger Sub 2”),
Onyx, and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the stockholder representative,
pursuant to which: (a) Merger Sub 1 merged with and into Onyx, with Onyx surviving as a direct wholly-owned subsidiary of Merger
Sub 2, (b) Onyx merged with and into Merger Sub 2, with Merger Sub 2 surviving as direct wholly-owned subsidiary of Legacy, and (c)
Legacy changed its name from Legacy Acquisition Corp. to PARTS iD, Inc. and Merger Sub 2 changed its name to PARTS iD, LLC.
At the effective time of the Business Combination,
Legacy issued 24,950,958 shares of Class A common stock to Onyx shareholders and all outstanding shares of Legacy Class F common stock
and warrants for Legacy Class A common stock were settled through a combination of cash, redemptions, cancellation and conversions into
Class A common stock of the Company. In addition, all outstanding Onyx preferred shares were redeemed and settled through a combination
of cash and issuance of Class A common stock of the Company.
The Business Combination was treated as a recapitalization
and reverse acquisition for financial reporting purposes. Onyx is considered the acquirer for accounting purposes, and Legacy’s
historical financial statements before the Business Combination have been replaced with the historical financial statements of Onyx in
this and future filings with the SEC. Accordingly, the operations of the Company are primarily comprised of the historical operations
of Onyx and the financial position and result of operations of Legacy have been incorporated into the Company’s consolidated financial
statements beginning on November 20, 2020, the effective date of the Business Combination. Similarly, the outstanding number of common
shares of Onyx, its par value and Additional paid in capital (APIC) as of December 31, 2019 were adjusted to reflect the exchange of shares
and its par value of the legal acquirer, Legacy.
Note 2 – Summary of Significant Accounting
Policies
Basis of Presentation and Principles of
Consolidation
The consolidated financial statements are presented
in U.S. dollars and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification
(“ASC”) and as amended by Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).
In the opinion of management, the accompanying
unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary
for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The
December 31, 2020 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures
required by GAAP. Results for interim periods should not be considered indicative of results for any other interim period or
for the full year.
The consolidated financial statements include
the accounts of PARTS iD, Inc. and its wholly-owned subsidiary PARTS iD, LLC. All intercompany accounts and transactions have been eliminated
in consolidation.
Use of Estimates
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the level of
subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the
impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates
and assumptions affecting the financial statements include revenue recognition, return allowances, allowance for doubtful accounts, depreciation,
inventory valuation, valuation of deferred income tax assets and the capitalization and recoverability of software development costs.
Stock Compensation Policy
Compensation expense related to stock option awards
and restricted stock units granted to certain employees, directors and consultants is based on the fair value of the awards on the grant
date. If the service inception date precedes the grant date, accrual of compensation cost for periods before the grant
date is based on the fair value of the award at the reporting date. In the period in which the grant date occurs, cumulative compensation
cost is adjusted to reflect the cumulative effect of measuring compensation cost based on fair value at the grant date rather than the
fair value previously used at the service inception date or any subsequent reporting date. Forfeitures are recorded as they occur. The
Company recognizes compensation cost related to time-vested options and restricted stock units with graded vesting features on a straight-line
basis over the requisite service period. Compensation cost related to a performance-vesting options and performance-based units, where
a performance condition or a market condition that affects vesting exists, is recognized over the shortest of the explicit, implicit,
or defined service periods. Compensation cost is adjusted depending on whether or not the performance condition is achieved. If the achievement
of the performance condition is probable or becomes probable, the full fair value of the award is recognized. If the achievement of the
performance condition is not probable or ceases to be probable, then no compensation cost is recognized.
Significant Accounting Policies
There have been no significant changes from the
significant accounting policies disclosed in Note 2 of the “Notes to Consolidated Financial Statements” included in our Annual
Report on Form 10-K for the year ended December 31, 2020 (our “2020 Form 10-K”).
Note 3 – Property and equipment
Property and equipment consisted of the following
as of:
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
Website and software development
|
|
$
|
40,624,004
|
|
|
$
|
33,894,207
|
|
|
Furniture and fixtures
|
|
|
850,511
|
|
|
|
843,575
|
|
|
Computers and electronics
|
|
|
978,480
|
|
|
|
696,684
|
|
|
Vehicles
|
|
|
430,162
|
|
|
|
430,162
|
|
|
Leasehold improvements
|
|
|
237,190
|
|
|
|
219,757
|
|
|
Video and equipment
|
|
|
176,903
|
|
|
|
176,903
|
|
|
Total - Gross
|
|
|
43,297,250
|
|
|
|
36,261,288
|
|
|
Less: accumulated depreciation
|
|
|
(30,271,923
|
)
|
|
|
(24,790,928
|
)
|
|
Total - Net
|
|
$
|
13,025,327
|
|
|
$
|
11,470,360
|
|
Property and equipment included the following
amounts for assets recorded under capital leases.
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
Gross value at cost
|
|
$
|
303,230
|
|
|
$
|
303,230
|
|
|
Less: accumulated depreciation
|
|
|
(277,915
|
)
|
|
|
(269,382
|
)
|
|
Net
|
|
$
|
25,315
|
|
|
$
|
33,848
|
|
Depreciation of property and equipment for the
three months ended September 30, 2021 and 2020 amounted to $1,887,641 and $1,726,574, respectively. and for nine months ended September
30, 2021 and 2020 amounted to $5,480,995 and $5,034,672, respectively.
Note 4 – Borrowings
Equipment Leases
As of September 30, 2021 and December 31, 2020,
the Company’s borrowings consisted of equipment leases at an interest rate of 12.35% per annum. The principal and interest payments
extend through November 30, 2021.
Future minimum lease payments under non-cancelable
capital leases during the fourth quarter of 2021, are as follows:
|
2021
|
|
$
|
3,808
|
|
|
Less: Interest expenses
|
|
|
(58
|
)
|
|
Total
|
|
$
|
3,750
|
|
Note 5 – Shareholders’ Deficit
Preferred Stock
As of September 30, 2021, the Company had authorized
for issuance a total of 1,000,000 shares of preferred stock, par value of $0.0001 per share (“Preferred Stock”), and as of
that date, no shares of Preferred Stock were issued or outstanding.
Common Stock
Upon finalizing the calculation of the aggregate
purchase price with respect to the Business Combination in April 2021, the Company released 299,999 shares of Class A common stock and
$10 in cash in lieu of fractional shares to former Onyx shareholders pursuant to the Business Combination Agreement.
As of September 30, 2021, the Company had 33,173,456
shares of Class A common stock outstanding and had reserved 7,698,178 shares of Class A common stock for issuance as follows:
|
|
a)
|
Indemnification reserve: Upon the expiration of the indemnification period of two years from the closing
of the Business Combination as described in the Business Combination Agreement, subject to the payments of indemnity claims, if any, the
Company will issue up to 750,000 shares to former Onyx shareholders.
|
|
|
b)
|
Equity Plans reserve: 4,904,596 shares reserved for future issuance under the PARTS iD, Inc. 2020 Equity
Incentive Plan and 2,043,582 shares reserved for future issuance under the PARTS iD, Inc. 2020 Employee Stock Purchase Plan.
|
Further, pursuant to the Business Combination
Agreement, the Sponsor has a right to 1,502,129 shares of Class A common stock should its price exceed $15.00 per share for any thirty-day
trading period during the 730 calendar days after the closing of the Business Combination.
Note 6 – Commitments and Contingencies
As of September 30, 2021, there were no material
changes to the Company’s legal matters and other contingencies disclosed in the Note 6 of the “Notes to Consolidated Financial
Statements” included in our 2020 Form 10-K, except for the following:
Stockholder Litigation and Business Combination
Litigation
With respect to the Stockholder Litigation (as
defined and described in Note 6 of the “Notes to Consolidated Financial Statements” included in our 2020 Form 10-K, on March
4, 2021, Stanislav Royzenshteyn and Roman Gerashenko (together, the “Founder Stockholders”) filed a motion to preserve various
causes of action related to the Business Combination and the claims for indemnification. That motion was denied without prejudice on June
22, 2021.
On June 18, 2021, the Founder Stockholders filed
a “Supplemental Complaint” in the Stockholder Litigation related to the indemnification claims. The clerk of the court dismissed
their Supplemental Complaint because the court did not grant leave to file a supplemental complaint. The Founder Stockholders filed a
motion objecting to the order denying their motion to preserve claims for future litigation and have asked the Special Master to opine
on the Supplemental Complaint and to preserve those claims.
Onyx Enterprises Canada Inc. and its principals
filed a motion for summary judgment seeking dismissal of all of the claims brought by the Founder Stockholders, which motion was heard
on February 19, 2021. On August 31, 2021, the court issued an order granting in part and denying in part the motion for summary judgment,
by which order eight claims were dismissed and seven claims were preserved. Pursuant to the court’s opinion, all of the derivative
claims brought by the plaintiffs against the Company were dismissed. The only remaining claim against the Company is the defendants’
claim for indemnification.
Note 7 – Stock-Based
Compensation
During the three and nine months ended September
30, 2021, selling, general and administrative expenses included $1,981,717 and $3,303,145, respectively, of stock-based compensation expense.
During the three and nine months ended September
30, 2021, the Company capitalized $921,599 and $1,338,781, respectively, of stock-based compensation expense associated with awards issued
to consultants who are directly associated with and who devote time to our internal-use software.
Equity Incentive Plan
In October 2020, in connection with the Business
Combination, the Company’s stockholders approved the PARTS iD, Inc. 2020 Equity Incentive Plan (the “2020 EIP”).
There are 4,904,596 shares of Class A common stock available for issuance under the 2020 EIP. The 2020 EIP became effective immediately
upon the closing of the Business Combination.
The 2020 EIP provides for the grant of stock options,
including incentive stock options, non-qualified stock options, restricted stock, dividend equivalents, stock payments, restricted stock
units, performance shares, other incentive awards, stock appreciation rights, and cash awards (collectively “awards”). The
awards may be granted to employees and consultants of the Company’s affiliates and subsidiaries.
Beginning in January 2021, the Company has granted
both restricted stock units (“RSUs”) and restricted performance-based stock units (“PSUs”) as described below.
Restricted Stock Units
The following table summarizes the activity
related to RSUs during the nine months ended September 30, 2021:
|
|
|
|
|
|
Weighted
|
|
|
|
|
Restricted
|
|
|
Average
|
|
|
|
|
Share
|
|
|
Grant Date
|
|
|
|
|
Units
|
|
|
Fair Value
|
|
|
Balance at January 1, 2021
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
2,352,881
|
|
|
$
|
6.54
|
|
|
Forfeited
|
|
|
(15,000
|
)
|
|
$
|
8.02
|
|
|
Balance at September 30, 2021
|
|
|
2,337,881
|
|
|
$
|
6.54
|
|
The Company has granted RSUs that
vest over a specified period, generally up to three years from the date of grant. RSUs granted include 106,806 RSUs granted to directors,
of which 49,994 will vest on November 20, 2021 and the balance of 56,812 will vest on the earlier
of June 8, 2022 or the date of the 2022 annual meeting of stockholders. The remaining RSUs granted during the nine months ended
September 30, 2021 were to various employees, contractors and consultants and will vest, subject to the recipient’s continuity of
employment or service with the Company, generally in equal installments over a period of three years.
The Company recognized $2,530,675
and $3,997,843 of stock-based compensation expense associated with RSUs for the three and nine months ended September 30, 2021, respectively.
As of September 30, 2021, approximately $11.2 million of unamortized stock-based compensation expense was associated with outstanding
RSUs, which is expected to be recognized over a remaining weighted average period of 2.1 years.
Performance Based Restricted Stock Units
The following table summarizes the
activity related to PSUs during the nine months ended September 30, 2021:
|
PSU Type
|
|
Balance at
January 1,
2021
|
|
|
Granted
|
|
|
Weighted
Average
grant date
fair value
|
|
|
Forfeited
|
|
|
Balance
at
September 30,
2021
|
|
|
Net Revenue based
|
|
|
-
|
|
|
|
499,600
|
|
|
$
|
8.02
|
|
|
|
8,000
|
|
|
|
491,600
|
|
|
Cash Flow based
|
|
|
-
|
|
|
|
124,900
|
|
|
$
|
6.04
|
|
|
|
2,000
|
|
|
|
122,900
|
|
|
Total
|
|
|
-
|
|
|
|
624,500
|
|
|
|
|
|
|
|
10,000
|
|
|
|
614,500
|
|
During the nine months ended September
30, 2021, the Company granted 624,500 PSUs to several employees, contractors and consultants that contain both service and performance-based
vesting conditions. The PSUs will vest in March 2024 based upon the level of achievement of several Company-specific operational performance
milestones for the three years ended December 31, 2023, as determined by the Compensation Committee of the Company.
Of the 624,500 PSUs granted, 80%,
or 499,600 PSUs, include net revenue performance-based vesting conditions that were established at the grant date. The remaining 20%,
or 124,900 PSUs, granted are subject to cash flow performance-based vesting conditions, of which certain thresholds had not been established
as of September 30, 2021. As a result, the service inception date of these remaining PSUs precedes the grant date associated with these
PSUs and the recognition of compensation expense is based upon the fair value of these PSUs at September 30, 2021. See “Stock Compensation
Policy” in Note 2 for more information.
During the three and nine months ended
September 30, 2021, the Company recognized stock-based compensation expense associated with PSUs of $372,641 and $644,083 respectively.
As of September 30, 2021, approximately $3.9 million of unamortized stock-based compensation expense was associated with outstanding PSUs,
which is expected to be recognized over a weighted average period of 2.3 years.
Note 8 – Income Taxes
For
the three months ended September 30, 2021 and 2020, the effective income tax rates were 21.39% and 19.69%, respectively; and for the
nine months ended September 30, 2021 and 2020, the effective income tax rates were 20.87% and 21.05%, respectively.
The effective income tax rates differ from the
federal statutory rate of 21% primarily due to the effect of state income taxes, share-based compensation and expenses not deductible
for income tax purposes.
On March 27, 2020, the Coronavirus Aid, Relief,
and Economic Security Act (“CARES Act”) was enacted in the United States. The CARES Act contains several tax provisions, including
modifications to the net operating loss (“NOL”) and business interest limitations as well as a technical correction to the
recovery period for qualified improvement property. The Company has evaluated these provisions in the CARES Act and does not expect a
material impact to its tax provision, except for the 80% of taxable income limitation in the future on the utilization of the Company’s
NOLs.
The Company does not currently anticipate any
significant increase or decrease of the total amount of unrecognized tax benefits within the next twelve months.
None of the Company’s U.S. federal or state
income tax returns are currently under examination by the Internal Revenue Service (the “IRS”) or state authorities. However,
fiscal years 2017 and later remain subject to examination by the IRS and respective states.
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
The success of the Company 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
economic disruptions on a global scale, and created significant uncertainty, it increased the adoption of online shopping by consumers,
which has had an overall positive effect on the Company’s revenue since the onset of the pandemic. Most recently, however, there
was a decline in traffic in the third quarter due primarily to an increase in the average cost-per-click in the Company’s search
advertising programs that adversely impacted marketing productivity. We also experienced increased order cancellations in the third quarter
due to supply chain disruptions. These factors were partially offset by increases in the conversion rate and average order value, but
revenue for the three months ended September 30, 2021, decreased compared to the same period in the prior year. Nonetheless, net revenue
for the nine months ended September 30, 2021, revenue was up compared to the corresponding period in 2020.
COVID-19 and related containment measures have
disrupted the supply chain, negatively affecting the Company and our industry. The recent spikes in the price of steel and other materials,
workforce shortages and shipping and seaport delays have led to increases in the cost of goods sold and low in-stock rates with our key
suppliers. Increasing supply chain challenges have led to increased order cancellations and shipping costs. Our real-time multi-sourced
inventory model helped us mitigate some of the impact by sourcing certain products from secondary and tertiary sources during the third
quarter of 2021, but this resulted in increased costs. We began to pass a portion of the increased costs through to our customers, while
balancing the need to maintain price competitiveness.
Management continues to focus on efforts to drive
growth, including product cultivation, vendor optimization, distribution network expansion and marketing diversification, with a greater
emphasis on the new verticals, original equipment (“OE”) and repair parts business. We also recently filled a number of key
executive positions to support this growth, including hiring leaders for our key categories of Boating and Marine and RV/Camper.
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 September 30,
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
%
Change
|
|
|
Number of Users
|
|
|
32,978,118
|
|
|
|
41,499,193
|
|
|
|
(8,521,075
|
)
|
|
|
(20.5
|
)%
|
|
Number of Sessions
|
|
|
56,540,357
|
|
|
|
79,537,185
|
|
|
|
(22,996,828
|
)
|
|
|
(28.9
|
)%
|
|
Number of Pageviews
|
|
|
230,235,761
|
|
|
|
317,881,759
|
|
|
|
(87,645,998
|
)
|
|
|
(27.6
|
)%
|
|
Pages/Session
|
|
|
4.07
|
|
|
|
4.00
|
|
|
|
0.08
|
|
|
|
1.9
|
%
|
|
Average Session Duration
|
|
|
00:03:11
|
|
|
|
00:03:21
|
|
|
|
(0:00:10
|
)
|
|
|
(5.2
|
)%
|
For the nine months ended September 30,
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
%
Change
|
|
|
Number of Users
|
|
|
95,809,701
|
|
|
|
108,216,245
|
|
|
|
(12,406,544
|
)
|
|
|
(11.5
|
)%
|
|
Number of Sessions
|
|
|
180,812,997
|
|
|
|
216,479,296
|
|
|
|
(35,666,299
|
)
|
|
|
(16.5
|
)%
|
|
Number of Pageviews
|
|
|
771,603,852
|
|
|
|
897,466,628
|
|
|
|
(125,862,776
|
)
|
|
|
(14.0
|
)%
|
|
Pages/Session
|
|
|
4.27
|
|
|
|
4.15
|
|
|
|
0.12
|
|
|
|
2.9
|
%
|
|
Average Session Duration
|
|
|
0:03:21
|
|
|
|
0:03:26
|
|
|
|
(0:00:05
|
)
|
|
|
(2.1
|
)%
|
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 September 30,
|
|
|
Change
|
|
|
|
|
2021
|
|
|
% of
Rev.
|
|
|
2020
|
|
|
% of
Rev.
|
|
|
Amount
|
|
|
%
|
|
|
Revenue, net
|
|
$
|
102,595,793
|
|
|
|
|
|
|
$
|
123,171,974
|
|
|
|
|
|
|
$
|
(20,576,181
|
)
|
|
|
(16.7
|
)%
|
|
Cost of goods sold
|
|
|
82,316,633
|
|
|
|
80.2
|
%
|
|
|
95,716,087
|
|
|
|
77.7
|
%
|
|
|
(13,399,454
|
)
|
|
|
(14.0
|
)%
|
|
Gross profit
|
|
|
20,279,160
|
|
|
|
19.8
|
%
|
|
|
27,455,887
|
|
|
|
22.3
|
%
|
|
|
(7,176,727
|
)
|
|
|
(26.1
|
)%
|
|
Gross margin
|
|
|
19.8
|
%
|
|
|
|
|
|
|
22.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
9,730,026
|
|
|
|
9.5
|
%
|
|
|
9,624,007
|
|
|
|
7.8
|
%
|
|
|
106,019
|
|
|
|
1.1
|
%
|
|
Selling, general & administrative
|
|
|
12,906,797
|
|
|
|
12.6
|
%
|
|
|
10,134,882
|
|
|
|
8.2
|
%
|
|
|
2,771,915
|
|
|
|
27.4
|
%
|
|
Depreciation
|
|
|
1,887,641
|
|
|
|
1.8
|
%
|
|
|
1,726,574
|
|
|
|
1.4
|
%
|
|
|
161,067
|
|
|
|
9.3
|
%
|
|
Total operating expenses
|
|
|
24,524,464
|
|
|
|
23.9
|
%
|
|
|
21,485,463
|
|
|
|
17.4
|
%
|
|
|
3,039,001
|
|
|
|
14.1
|
%
|
|
(Loss) income from operations
|
|
|
(4,245,304
|
)
|
|
|
(4.1
|
)%
|
|
|
5,970,424
|
|
|
|
4.8
|
%
|
|
|
(10,215,728
|
)
|
|
|
(171.1
|
)%
|
|
Interest expense
|
|
|
229
|
|
|
|
0.0
|
%
|
|
|
863
|
|
|
|
0.0
|
%
|
|
|
(634
|
)
|
|
|
(73.5
|
)%
|
|
(Loss) income before income tax
|
|
|
(4,245,533
|
)
|
|
|
(4.1
|
)%
|
|
|
5,969,561
|
|
|
|
4.8
|
%
|
|
|
(10,215,094
|
)
|
|
|
(171.1
|
)%
|
|
Income tax expense (benefit)
|
|
|
(908,011
|
)
|
|
|
(0.9
|
)%
|
|
|
1,175,607
|
|
|
|
1.0
|
%
|
|
|
(2,083,618
|
)
|
|
|
(177.2
|
)%
|
|
Net (loss) income
|
|
$
|
(3,337,522
|
)
|
|
|
(3.3
|
)%
|
|
$
|
4,793,954
|
|
|
|
3.9
|
%
|
|
$
|
(8,131,476
|
)
|
|
|
(169.6
|
)%
|
|
|
|
Nine months ended September 30,
|
|
|
Change
|
|
|
|
|
2021
|
|
|
% of
Rev.
|
|
|
2020
|
|
|
% of
Rev.
|
|
|
Amount
|
|
|
%
|
|
|
Revenue, net
|
|
$
|
342,078,753
|
|
|
|
|
|
|
$
|
307,751,463
|
|
|
|
|
|
|
$
|
34,327,290
|
|
|
|
11.2
|
%
|
|
Cost of goods sold
|
|
|
272,826,703
|
|
|
|
79.8
|
%
|
|
|
240,928,853
|
|
|
|
78.3
|
%
|
|
|
31,897,850
|
|
|
|
13.2
|
%
|
|
Gross profit
|
|
|
69,252,050
|
|
|
|
20.2
|
%
|
|
|
66,822,610
|
|
|
|
21.7
|
%
|
|
|
2,429,440
|
|
|
|
3.6
|
%
|
|
Gross Margin
|
|
|
20.2
|
%
|
|
|
|
|
|
|
21.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
31,136,731
|
|
|
|
9.1
|
%
|
|
|
25,014,794
|
|
|
|
8.1
|
%
|
|
|
6,121,937
|
|
|
|
24.5
|
%
|
|
Selling, general & administrative
|
|
|
36,868,521
|
|
|
|
10.8
|
%
|
|
|
28,883,134
|
|
|
|
9.4
|
%
|
|
|
7,985,387
|
|
|
|
27.6
|
%
|
|
Depreciation
|
|
|
5,480,995
|
|
|
|
1.6
|
%
|
|
|
5,034,672
|
|
|
|
1.6
|
%
|
|
|
446,323
|
|
|
|
8.9
|
%
|
|
Total operating expenses
|
|
|
73,486,247
|
|
|
|
21.5
|
%
|
|
|
58,932,600
|
|
|
|
19.1
|
%
|
|
|
14,553,647
|
|
|
|
24.7
|
%
|
|
(Loss) income from operations
|
|
|
(4,234,197
|
)
|
|
|
(1.2
|
)%
|
|
|
7,890,010
|
|
|
|
2.6
|
%
|
|
|
(12,124,207
|
)
|
|
|
(153.7
|
)%
|
|
Interest expense
|
|
|
7,114
|
|
|
|
0.0
|
%
|
|
|
7,684
|
|
|
|
0.0
|
%
|
|
|
(570
|
)
|
|
|
(7.4
|
)%
|
|
(Loss) income before income tax
|
|
|
(4,241,311
|
)
|
|
|
(1.2
|
)%
|
|
|
7,882,326
|
|
|
|
2.6
|
%
|
|
|
(12,123,637
|
)
|
|
|
(153.8
|
)%
|
|
Income tax expense (benefit)
|
|
|
(885,088
|
)
|
|
|
(0.3
|
)%
|
|
|
1,659,227
|
|
|
|
0.5
|
%
|
|
|
(2,544,315
|
)
|
|
|
(153.3
|
)%
|
|
Net (loss) income
|
|
$
|
(3,356,223
|
)
|
|
|
(1.0
|
)%
|
|
$
|
6,223,099
|
|
|
|
2.0
|
%
|
|
$
|
(9,579,322
|
)
|
|
|
(153.9
|
)%
|
Revenue
Revenue for the three months ended September 30, 2021
decreased by $20.6 million, or 16.7%, compared to the same prior year period, primarily attributable to lower traffic resulting from an
increase in the average cost-per-click in search advertising programs that adversely impacted marketing productivity, as well as increased
order cancellations due to supply chain disruptions. Compared to the same prior year period, traffic declined by 28.9% in the three-month
period ended September 30, 2021, while the site conversion rate and average order value increased by 8.9% and 11.3% respectively.
For the nine months ended September 30, 2021, revenue
increased by $34.3 million, or 11.2%, compared to the same prior year period. The revenue increase was primarily due to an increase in
the number of orders, with increases in the site conversion rate and average order value of 16.1% and 12.9%, respectively, being partially
offset by a decline in traffic of 16.5%, as well as increased order cancellations due to supply chain disruptions in the third quarter.
Supply chain disruptions related to COVID-19 also
adversely impacted revenue in both periods, as cancellations of sales orders increased by 10.4% and 27.2% in three and nine month periods
ended September 30, 2021, respectively, as compared to the same prior year periods.
The increase in site conversion rates in both
periods was primarily attributable to search engine bidding automation and optimization, pricing initiatives, product cultivation, and
continued e-commerce adoption. The increase in average order values in both periods was primarily attributable to increases in the 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 months ended September 30,
2021, cost of goods sold decreased by $13.4 million, or 14.0%, compared to the same prior year period. This decrease in cost of goods
sold was primarily driven by decreases in the number of orders or products sold and related shipping costs, partially offset by increases
in product costs and shipping costs due to supply chain disruptions. In the nine months ended September 30, 2021, cost of goods sold increased
by $31.9 million, or 13.2%, compared to the same prior year period. This increase in cost of goods sold was primarily driven by an increase
in the number of orders or products sold, as well as increases in product costs and shipping costs due to supply chain disruptions.
For the three and nine months ended September
30, 2021, cost of goods sold was 80.2% and 79.8% of revenue, respectively, compared to 77.7% and 78.3% of revenue in the respective prior
year periods. The 2.5% and 1.5% increases in cost of goods sold as a percentage of revenue were primarily attributable to ongoing supply
chain disruptions associated with the COVID-19 pandemic. During these 2021 periods, we had to source some products from alternate vendors
at higher price points, and had to balance the need to maintain price competitiveness as we began to pass a portion of the increased costs
through to our customers. Management expects these cost pressures to materially ease only if and when the COVID-19 pandemic and related
containment measures abate, which cannot be currently predicted with any certainty.
Gross Profit and Gross Margin
Gross profit decreased by $7.2 million, or 26.1%,
for the three months ended September 30, 2021 compared to the same prior year period, primarily due to a 16.7% decrease in revenue and
increases in product and shipping costs associated with supply chain disruptions. Gross profit increased by $2.4 million, or 3.6%, for
the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. This change was primarily attributable
to a 11.2% increase in revenue in the nine months ended September 30, 2021, partially offset by increases in product and shipping costs
associated with supply chain disruptions.
Gross margins of 19.8% and 20.2% in the three
and nine months ended September 30, 2021, respectively, were lower than gross margins of 22.3% and 21.7% for the three and nine months
ended September 30, 2020, primarily attributable to increases in product and shipping costs associated with ongoing supply chain disruptions
as discussed above.
Operating Expenses
Advertising expenses increased $0.1 million, or
1.1%, and $6.1 million, or 24.5%, for the three and nine months ended September 30, 2021, respectively, compared to the three and nine
months ended September 30, 2020. These increases in advertising costs were primarily attributable to increases in the average cost-per-click,
a change in the mix of advertising channels used, testing new advertising campaigns and content development. Management believes investment
in advertisement is one of the key drivers of revenue, and measures advertising efficiency in terms of revenue per advertisement dollar
spent.
Decreases in overall available searches and increasing
competition, coupled with additional campaigns being transitioned to automated bidding from manual bidding, led to higher costs-per-click
in the three and nine months ended September 30, 2021 as compared to the same prior year periods.
The consequent higher advertising cost was partly
offset by an increase in the site conversion rate and average order value in both periods. Management is taking steps to diversify advertising
in new channels, such as paid social and customer retention programs, to drive growth.
Selling, general and administrative (“SG&A”)
expenses increased $2.8 million, or 27.4%, and $8.0 million, or 27.6%, for the three and nine months ended September 30, 2021, respectively,
compared to the three and nine months ended September 30, 2020. These increases were primarily attributable to increases in non-cash share-based
expenses ($2.0 million and $3.3 million, respectively), public company operating expenses ($1.1 million and $3.3 million, respectively),
and, for the nine-month period, merchant services provider processing fees of $1.1 million.
Depreciation expenses increased $0.2 million,
or 9.3%, and $0.4 million, or 8.9%, for the three and nine months ended September 30, 2021, respectively, compared to the three and nine
months ended September 30, 2020.
Interest Expense
Interest expense decreased by $634, or 73.5%,
and by $570, or 7.4%, for the three and nine months ended September 30, 2021, respectively, compared to the three and nine months ended
September 30, 2020.
Income Tax Expense
Income tax benefit was $0.9 million for each of
the three and nine months ended September 30, 2021, compared to income tax expense of $1.2 million and $1.7 million for the three and
nine months ended September 30, 2020, respectively. For the three and nine months ended September 30, 2021, the effective income tax rate
was 21.4% and 20.9%, respectively, compared to 19.7% and 21.1% for the three and nine months ended September 30, 2020, respectively. The
changes in rates 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
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Net income (loss)
|
|
$
|
(3,337,522
|
)
|
|
$
|
4,793,954
|
|
|
$
|
(3,356,223
|
)
|
|
$
|
6,223,099
|
|
|
Interest expense
|
|
|
229
|
|
|
|
863
|
|
|
|
7,114
|
|
|
|
7,684
|
|
|
Income tax expense (benefit)
|
|
|
(908,011
|
)
|
|
|
1,175,607
|
|
|
|
(885,088
|
)
|
|
|
1,659,227
|
|
|
Depreciation
|
|
|
1,887,641
|
|
|
|
1,726,574
|
|
|
|
5,480,995
|
|
|
|
5,034,672
|
|
|
EBITDA
|
|
|
(2,357,663
|
)
|
|
|
7,696,998
|
|
|
|
1,246,798
|
|
|
|
12,924,682
|
|
|
Stock compensation expenses included in Statement of operations
|
|
|
1,981,717
|
|
|
|
-
|
|
|
|
3,303,145
|
|
|
|
-
|
|
|
Business combination transaction expenses(1)
|
|
|
-
|
|
|
|
282,618
|
|
|
|
-
|
|
|
|
282,618
|
|
|
Founder’s compensation(2)
|
|
|
-
|
|
|
|
14,987
|
|
|
|
-
|
|
|
|
797,692
|
|
|
Legal & settlement expenses (3)
|
|
|
238,293
|
|
|
|
152,899
|
|
|
|
721,480
|
|
|
|
103,662
|
|
|
Other items(4)
|
|
|
-
|
|
|
|
37,981
|
|
|
|
-
|
|
|
|
253,143
|
|
|
Adjusted EBITDA Total
|
|
$
|
(137,653
|
)
|
|
$
|
8,185,483
|
|
|
$
|
5,271,423
|
|
|
$
|
14,361,797
|
|
|
% of revenue
|
|
|
(0.1
|
)%
|
|
|
7.2
|
%
|
|
|
1.5
|
%
|
|
|
4.7
|
%
|
|
(1)
|
Represents the expenses incurred solely related to the Business Combination that closed in November 2020. It primarily includes investment banker fees, legal fees, professional fees for accountants and SEC and Hart-Scott-Rodino filing fees.
|
|
(2)
|
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.
|
|
(3)
|
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.
|
|
(4)
|
Includes write-offs of advances and certain fraud loss claims from earlier years that we determined were uncollectible.
|
Net income decreased by $8.1 million for the three
months ended September 30, 2021, as compared to the same prior year period, primarily driven by incremental public company operating expenses
of $1.1 million and an increase in non-cash stock compensation of $2.0 million, as well as a decrease in gross profit of $7.2 million.
Net income decreased by $9.6 million for the nine months ended September 30, 2021, as compared to the same prior year period, primarily
driven by an increase in advertising costs of $6.1 million, incremental public company operating expenses of $3.3 million, and an increase
in non-cash stock compensation of $3.3 million. The year-over-year decreases in Adjusted EBITDA for the three and nine months ended September
30, 2021 as compared to the same prior year periods were attributable to these decreases in net income, partially offset by Business Combination
transaction expenses, founders compensation and other items which did not recur in the 2021 periods.
Free Cash Flow
To provide investors with additional information
regarding our financial results, we disclose free cash flow, a non-GAAP financial measure that we calculate as net cash provided by operating
activities less capital expenditures. Capital expenditures consist of purchases of property and equipment, purchases of intangible assets
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.
Free cash flow 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 to aid in understanding and evaluating our operating results in the same manner as 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.
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Net cash provided by operating activities
|
|
$
|
7,022,739
|
|
|
$
|
28,879,301
|
|
|
Purchase of property and equipment
|
|
|
(306,165
|
)
|
|
|
(17,700
|
)
|
|
Purchase of intangible assets
|
|
|
-
|
|
|
|
(7,769
|
)
|
|
Website and software development costs
|
|
|
(5,391,016
|
)
|
|
|
(5,146,408
|
)
|
|
Free cash flow
|
|
$
|
1,325,558
|
|
|
$
|
23,707,424
|
|
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand
of $23.5 million as of September 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 use
of cash is for investment in website and software development.
The following table summarizes the key cash flow
metrics from our statements of cash flows for the nine months ended September 30, 2021 and 2020:
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Net cash provided by operating activities
|
|
$
|
7,022,739
|
|
|
$
|
28,879,301
|
|
|
Net cash used in investing activities
|
|
|
(5,697,181
|
)
|
|
|
(5,171,877
|
)
|
|
Net cash used in financing activities
|
|
|
(15,956
|
)
|
|
|
(390,892
|
)
|
|
Net change in cash
|
|
$
|
1,309,602
|
|
|
$
|
23,316,532
|
|
Cash Flows from Operating Activities
The net cash provided by operating activities
consists of net income (loss), adjustments for certain non-cash items, including depreciation, and 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 where current liabilities exceed current assets. Any profitable growth
in revenue results in incremental cash for the Company. We receive funds when customers place orders on the website, while accounts payable
are paid over a period of time. Vendor terms range on average from one week to eight weeks.
Net cash provided by operating activities in the
nine months ended September 30, 2021 was $7.0 million, comprised of a net loss of $3.4 million and cash provided by (i) a change in operating
assets and liabilities of $2.5 million, primarily driven by increases in accounts payable and customer deposits, (ii) depreciation expense
of $5.5 million, and (iii) non-cash share-based compensation expense of $3.3 million. These amounts were partially offset by a change
in the non-cash deferred tax benefit of $0.9 million.
Net cash provided by operating activities in the
nine months ended September 30, 2020 was $28.9 million, comprised of net income of $6.2 million, and cash provided by (i) changes in operating
assets and liabilities of $16.3 million, primarily driven by increases in accounts payable and customer deposits, (ii) depreciation expense
of $5.0 million, and (iii) a change in non-cash deferred income tax expense of $1.4 million.
Cash Flows from Investing Activities
Net cash used in investing activities was $5.7
million for the nine months ended September 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 $5.2
million for the nine months ended September 30, 2020, consisting primarily of website and software development costs.
Cash Flows from Financing Activities
Net cash used in financing activities for the
nine months ended September 30, 2021 was $15,956, compared to $390,892 in the nine months ended September 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 September 30, 2021 and December 31, 2020 were $18.0 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 were, on average, estimated at 13.0 days as of September 30, 2021, based on our actual determinations
of 13.0 days as of June 30, 2021 and of 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 September 30, 2021 and 2020 were $766,646
and $664,886, 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 nine months ended September 30, 2021 and 2020 were as follows:
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Balance at beginning of period
|
|
$
|
800,215
|
|
|
$
|
712,744
|
|
|
$
|
1,062,077
|
|
|
$
|
495,697
|
|
|
Adjustment
|
|
|
(33,569
|
)
|
|
|
(47,858
|
)
|
|
|
(295,431
|
)
|
|
|
169,189
|
|
|
Balance at Closing of period
|
|
$
|
766,646
|
|
|
$
|
664,886
|
|
|
$
|
766,646
|
|
|
$
|
664,886
|
|
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 nine months ended September 30, 2021 and
2020 were as follows:
|
Nine months ended September 30,
|
|
Capitalized
Software
|
|
|
2021 (Includes capitalized non-cash share-based compensation of $1,338,781)
|
|
$
|
6,729,797
|
|
|
2020
|
|
$
|
5,146,408
|
|
Off-Balance Sheet Arrangements
PARTS iD is not a party to any off-balance sheet
arrangements.
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
Not required for smaller reporting companies.
Item 4. Controls and Procedures
Management’s Evaluation of Disclosure
Controls and Procedures
Disclosure controls and procedures are controls
and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed
in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the
Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of September 30, 2021. Based upon their evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) were effective as of September 30, 2021.
Changes in Internal Control over Financial
Reporting
There were no changes in our internal control
over financial reporting that occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.