This prospectus supplement no. 3 amends and
supplements the prospectus dated September 23, 2021 (as supplemented or amended from time to time, the “Prospectus”),
which forms a part of our Registration Statement on Form S-1 (No. 333-252567) relating to the resale of up to 27,953,349 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 SEC
on August 8, 2022, all of which are attached to this prospectus supplement.
Our Common Stock is traded on the NYSE American under
the symbol “ID.” On January 26, 2023, the last reported sale price of our Common Stock was $0.81 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: 34,062,616 shares of Class A common stock, $0.001 par
value per share, outstanding on August 3, 2022.
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 on a mission to transform
the U.S. automotive aftermarket and the adjacent complex parts markets we serve by providing customers a differentiated customer experience
with advanced product search capabilities, proprietary product options, exclusive shop by service type functionality, visually inspired
browsing, easy product discovery, rich custom content, an exhaustive product catalog and competitive prices.
References herein to the “Business Combination”
refer to the business combination that closed on November 20, 2020, resulting in the Company’s current corporate composition.
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, 2021, 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.
Certain Significant Risks and Uncertainties
The Company has a working capital deficiency of
approximately $35.6 million and experienced declining revenues. While we have operated with a working capital deficiency since our inception,
this combined with declined profitability has caused us to consume approximately $12.3 million in cash from operating activities during
the six months ending June 30, 2022. The Company has moderated capital investments and has taken steps to improve profitability. Our ability
to meet our obligations as they become due is dependent upon increased and stabilized profitability. The Company believes that the operational
adjustments that have been implemented will be sufficient to provide sufficient cash to meet its obligations as they become due for the
next twelve months.
In February 2022, the Russian Federation launched
a full-scale invasion against Ukraine, and sustained conflict and disruption in the region is ongoing. 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. While the conflict
has not caused significant disruptions to our operations to date, it could have a material adverse effect upon the Company in future periods.
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, 2021 (our “2021 Form 10-K”) and in Note 2 to Condensed Consolidated financial
statements included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.
Note 3 – Property and equipment
Property and equipment consisted of the following
as of:
| | |
June 30,
2022 | | |
December 31,
2021 | |
| Website and software development | |
$ | 47,699,891 | | |
$ | 43,265,793 | |
| Furniture and fixtures | |
| 851,926 | | |
| 851,926 | |
| Computers and electronics | |
| 1,012,840 | | |
| 994,925 | |
| Vehicles | |
| 439,662 | | |
| 430,162 | |
| Leasehold improvements | |
| 255,136 | | |
| 237,190 | |
| Video and equipment | |
| 176,903 | | |
| 176,903 | |
| Total - Gross | |
| 50,436,358 | | |
| 45,956,899 | |
| Less: accumulated depreciation | |
| (36,352,918 | ) | |
| (32,256,023 | ) |
| Total - Net | |
$ | 14,083,440 | | |
$ | 13,700,876 | |
Depreciation of property and equipment for the
three months ended June 30, 2022 and 2021 amounted to $2,142,433 and $1,819,581, respectively, and for six months ended June 30, 2022
and 2021 amounted to $4,096,895 and $3,593,354, respectively.
Note 4 – Leases
Operating Leases
The Company has lease arrangements for office
spaces and an equipment lease. These leases expire at various dates through 2025.
| | |
As of and
for the three and six
months ended
June 30, 2022 | |
| | |
| |
| Operating Lease Expense - 3 months ended June 30, 2022 | |
$ | 244,094 | |
| Operating Lease Expense - 6 months ended June 30, 2022 | |
$ | 492,485 | |
| | |
| | |
| Additional Lease information: | |
| | |
| Weighted average remaining lease term-operating leases (in years) | |
| 2.1 | |
| Weighted average discount rate-operating leases | |
| 7 | % |
| | |
| | |
| Future minimum lease payments under non-cancellable leases as of June 30, 2022 were as follows: | |
| | |
| | |
| | |
| 2022 | |
$ | 437,109 | |
| 2023 | |
| 753,871 | |
| 2024 | |
| 276,358 | |
| 2025 | |
| 177,939 | |
| 2026 | |
| - | |
| Thereafter | |
| - | |
| Total future minimum lease payments | |
$ | 1,645,277 | |
| Less portion representing interest | |
| 151,674 | |
| Present value of lease obligations | |
$ | 1,493,603 | |
| Less current portion of lease obligations | |
| 766,367 | |
| Long term portion of lease obligations | |
$ | 727,236 | |
Note 5 – Shareholders’ Deficit
Preferred Stock
As of June 30, 2022, 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”). As of June
30, 2022 and 2021, no shares of Preferred Stock were issued or were outstanding. The Certificate of Incorporation of the Company authorizes
the Board to fix the voting rights, if any, designations, powers, preferences and relative, participating, optional, special, and other
rights at the time of issue of any Preferred Stock.
Common Stock
As of June 30, 2022 and 2021, the Company had
34,062,616 and 33,173,456, respectively, shares of Class A common stock outstanding. As of June 30, 2022 and 2021, the Company had reserved
6,809,018 and 7,998,178, respectively, shares of Class A common stock for issuance as follows:
| | |
Nature of Reserve | |
As of
June 30,
2022 | | |
As of
June 30,
2021 | |
| | a. | |
Indemnification reserve: Upon the expiration of the indemnification period of two years 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 | |
| 750,000 | | |
| 750,000 | |
| | b. | |
Adjustment reserve: Upon finalizing the merger consideration, in 2021, the Company issued 299,999 shares to former Onyx shareholders | |
| - | | |
| 300,000 | |
| | c. | |
EIP reserve: Shares reserved for future issuance under the stockholder approved Parts iD, Inc. 2020 Equity Incentive Plan | |
| 4,015,436 | | |
| 4,904,596 | |
| | d. | |
ESPP reserve: Shares reserved for future issuance under the stockholder approved Parts iD, Inc. 2020 Employee Stock Purchase Plan | |
| 2,043,582 | | |
| 2,043,582 | |
| | | |
Total shares reserved for future issuance | |
| 6,809,018 | | |
| 7,998,178 | |
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 effective date of the Business Combination.
Note 6 - Commitments and Contingencies
As of June 30, 2022, there were no material changes
to the Company’s legal matters and other contingencies disclosed in the Note 5 of the “Notes to Consolidated Financial Statements”
included in our 2021 Form 10-K.
Note 7 - Stock-Based Compensation
During the three months ended June 30, 2022, and
2021, selling, general and administrative expenses included $(180,529) and $1,292,604 of stock-based compensation expense, respectively.
For the three months ended June 30, 2022, stock-based compensation is negative at $(180,529), due to nil accrual for PSUs as well as write
back of previous PSUs accrual of $973,659.
During the three months ended June 30, 2022 and
2021, the Company capitalized $432,224 and $417,182, 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.
During the six months ended June 30, 2022 and
2021, the Company capitalized $856,334 and $417,182 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”). The
2020 EIP became effective immediately upon the closing of the Business Combination. As of June 30, 2022 and 2021, of the 4,904,596 shares
of Class A common stock reserved for issuance under the 2020 EIP in the aggregate, 4,015,436 shares remained available for issuance.
The 2020 EIP provides for the grant of stock options,
restricted stock, restricted stock units (“RSUs”), performance shares, performance units (“PSUs”), stock appreciation
rights, other stock-based awards and cash awards (collectively “awards”). The awards may be granted to employees, directors
and consultants of the Company.
Restricted Stock Units
The following table summarizes the activity related
to RSUs during the six months ended June 30, 2022:
| | |
Restricted
Stock Units | | |
Weighted
Average
Grant
Date Fair
Value | |
| Unvested balance at January 1, 2022 | |
| 1,551,033 | | |
$ | 6.52 | |
| Granted | |
| 388,000 | | |
$ | 1.12 | |
| Vested | |
| (96,812 | ) | |
$ | 6.93 | |
| Forfeited | |
| (52,001 | ) | |
$ | 7.62 | |
| Unvested balance at June 30, 2022 | |
| 1,790,220 | | |
$ | 5.29 | |
As of June 30, 2022, approximately $6.8 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 1.33 years.
Performance Based Restricted Stock Units
The following table summarizes the activity related
to PSUs during the six months ended June 30, 2022:
| PSU Type | |
Balance at
January 1,
2022 | | |
Granted | | |
Forfeited | | |
Balance at
June 30,
2022 | |
| Net revenue based | |
| 495,200 | | |
| 29,600 | | |
| (103,200 | ) | |
| 421,600 | |
| Weighted average grant date fair value | |
$ | 8.00 | | |
$ | 2.20 | | |
$ | 7.92 | | |
$ | 7.61 | |
| Cash flow based | |
| 123,800 | | |
| 7,400 | | |
| (25,800 | ) | |
| 105,400 | |
| Weighted average grant date fair value | |
$ | 1.55 | | |
$ | 1.55 | | |
$ | 1.55 | | |
$ | 1.55 | |
| Total | |
| 619,000 | | |
| 37,000 | | |
| (129,000 | ) | |
| 527,000 | |
As of June 30, 2022, the performance criteria
included in the PSUs plan are unlikely to be achieved and accordingly $1.0 million accrued previously as stock-based compensation expenses
associated with the outstanding PSUs has been reversed. The weighted average period of 1.57 years is still remaining before the outstanding
PSUs expire.
Employee Stock Purchase Plan
In October 2020, in connection with the Business
Combination, the Company’s stockholders approved the Parts iD, Inc. 2020 Employee Stock Purchase Plan (the “2020 ESPP”).
There are 2,043,582 shares of Class A common stock available for issuance under the 2020 ESPP. The 2020 ESPP became effective immediately
upon the closing of the Business Combination, but it has not yet been implemented. As of June 30, 2022, no shares had been issued under
the 2020 ESPP.
Note 8 – Income Taxes
For the three months ended June 30, 2022, and
2021, the effective income tax rate of (4.06)% and 22.60%, respectively, and for the six months ended June 30, 2022 and 2021, the effective
income tax rates were (15.92%) and 542.94%, 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 Sates. 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. The Company’s realization
of its tax asset is dependent upon our ability to generate taxable income in future periods. A valuation allowance may be required if,
based on the weight of available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized.
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, 2021 (our “2021
Form 10-K”).
The following discussion and analysis contains
forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on
a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could differ
materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but
not limited to, those factors discussed in the section “Risk Factors” included in our 2021 Form 10-K. See also the “Cautionary
Note Regarding Forward-Looking Statements” set forth at the beginning of this Quarterly Report on Form 10-Q.
Overview
PARTS iD, Inc. is a technology-driven, digital
commerce company on a mission to transform the U.S. automotive aftermarket and the adjacent complex parts markets we serve by providing
customers a differentiated customer experience with advanced product search capabilities, proprietary product options, exclusive shop
by service type functionality, visually inspired browsing, easy product discovery, rich custom content, an exhaustive product catalog
and competitive prices.
We deliver this customer experience vision using
our purpose-built technology platform and user interface (UI), proprietary parts and accessories fitment data with more than fourteen
billion product and fitment data points powered with machine learning, and a comprehensive product catalog spanning over eighteen million
parts and accessories from over one thousand suppliers we partner with across eight verticals.
Our technology platform integrates software engineering
with catalog management, data intelligence, mining, and analytics, along with user interface development which utilizes distinctive rules-based
parts fitment software capabilities. To handle the ever-growing need for accurate product and parts data, we use cutting-edge computational
and software engineering techniques, including Bayesian classification, to enhance and improve data records and product information, and
ultimately to contribute to the overall development of a rich and engaging user experience. Furthermore, our technology platform is architected
to support much more than just car parts and accessories. We believe that we have demonstrated the flexibility and scalability of our
technology by launching seven adjacent verticals, including BOATiD.com, MOTORCYCLEiD.com, CAMPERiD.com, and others in August 2018, all
of which leverage the same proprietary technology platform and data architecture.
We believe an increasing portion of the dollars
spent on vehicle parts and accessories will be spent online and that there is an opportunity for acquiring more market share in that realm.
Our platform business model is designed to grow our net revenue by acquiring new customers as well as stimulating repeat purchases from
our existing customers. Through paid and unpaid advertising, we attract new and repeat customers to our sites. We attempt to turn these
customers into repeat customers by creating a seamless shopping experience across their entire journey — offering best-in-class
product discovery, purchasing, fulfillment and customer service.
There are several key competitive strengths that
we believe highlight the attractiveness of our platform business model and underscore how PARTS iD, Inc. is differentiated from its competition,
including:
| 1. | The Company’s distinctive technology, customer-first
UI, and proprietary fitment data that enables a differentiated shopping experience for the automotive parts consumer. Unlike any other
consumer product category, we believe that the success or failure of selling automotive parts, and especially aftermarket accessories
at scale, comes down to rich and comprehensive fitment data. We believe that the Company has been successful at developing its own proprietary
fitment database which is not licensed for use to any other person or entity. |
| 2. | We believe that the Company’s product catalog of over eighteen million products and over five thousand
brands is unrivaled. Our comprehensive catalog is enriched with over fourteen billion data points, advanced 3D imagery, in-depth product
descriptions, customer reviews, installation and fitment guides, as well as other rich custom content specifically catering to the needs
of the automotive aftermarket industry and is further complemented by our highly trained and specialized customer service. |
| 3. | The Company’s proprietary and asset-light fulfillment model has enabled us to grow organically without
external capital. This platform model is enabled by a network of over one thousand suppliers which we have cultivated relationships with
and integrated over the last fifteen years. This has enabled us to further scale our catalog size and to add adjacent verticals which
allows us to offer a broader array of product lines over our competitors. Furthermore, our geo-sourcing fulfillment algorithm factors
in real-time inventory when available, customer proximity, shipping cost, and profitability to optimize product sourcing. This algorithmic
approach allows us to increase fill rate and delivery speed. |
| 4. | The Company’s differentiated customer experience is a result of rich content, wide product range
with ease of selection, proprietary fitment data, and highly trained customer service representatives, providing a data-driven engagement
platform for discovery and inspiration. This is demonstrated by: |
| a. | the Company’s Net Promoter Score continues to be between
60 – 70 despite the global supply chain disruptions (primarily due to the COVID-19 pandemic) which began in 2021 and continues
today; |
| b. | the Company’s overall product return rate across all eight verticals is consistently within the
range of 5 - 6% versus industry averages of more than 20%; and |
| c. | repeat customer revenue contributed 37.8% of total revenue for the second quarter of 2022, up from 34.9%
in the second quarter of 2021. |
The Company has invested fifteen years in building
its proprietary platform and we believe that our investment in technology and data has allowed us to expand into adjacent verticals, leveraging
a capital-efficient just-in-time inventory model to offer our consumers an extensive selection and customer experience.
At the end of the second quarter of 2022, we took
several measures toward optimizing our gross margin, advertising expense, general and administrative overhead, capital expenditure and
our net working capital. Beginning on June 16, 2022, we took additional restructuring steps to reduce our costs by reducing our employment
base in the United States, and reducing our independent contractors in Ukraine and Costa Rica, and to reduce other operating expenses.
The employees and independent contractors affected by this reduction were informed of the Company’s decision beginning on June 16,
2022. Each affected employee in the United States was paid such employee’s respective salary through such employee’s termination
date. Additionally, each affected employee in the United States was asked to release claims against the Company through his or her severance
period. The expected savings from the steps described above amount to approximately $12 million on an annualized basis.
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 additional adjacent verticals, original equipment (“OE”) and repair parts businesses. We have also been focused
on increasing our presence in the DIFM (Do-It-For-Me) segment of the automotive aftermarket industry. More than 5,000 new locations have
been added to our tire installation network, an important step in our efforts to build an omnichannel customer experience and attract
customers in the $225+ billion DIFM segment to our platform.
Impact of COVID-19
We continue to actively monitor the COVID-19 pandemic,
including the current spread of certain variants of the virus and plan for potential impacts on our business. While conditions related
to the pandemic generally have improved in 2022 compared to 2021, conditions vary significantly by geography. Although the COVID-19 pandemic
has caused economic disruptions on a global scale, and created significant uncertainty, we believe it increased the adoption of online
shopping by consumers and, for periods during which stimulus payments were disbursed by the government, particularly between April 2020
and April 2021, increased demand for the products of the Company with a positive effect on our revenue and profitability. However, there
was a decline in traffic after the first quarter of 2021, primarily due to an increase in the average cost-per-click in the Company’s
search advertising programs and lower consumer discretionary spend that adversely impacted marketing productivity.
COVID-19 and related containment measures have
disrupted the supply chain, negatively affecting the Company and our industry. In the first half of 2022, continued spikes in the price
of materials, low in-stock rates by our key suppliers, workforce shortages and shipping and seaport delays led to increases in the cost
of goods sold, which negatively impacted gross margins of the Company. Supply chain challenges increased order cancellations and shipping
costs. Our real-time multi-sourced inventory model helped us mitigate some of the risk by sourcing certain products from secondary and
tertiary sources, but these measures resulted in increased costs. We continue to pass a portion of the increased costs through to our
customers, while balancing the need to maintain price competitiveness.
Russian-Ukrainian Conflict
In February
2022, the Russian Federation launched a full-scale invasion against Ukraine, and sustained conflict and disruption in the region is ongoing.
Russia’s invasion of Ukraine has elevated global geopolitical tensions and security concerns as well as having recently created worldwide
inflationary pressures. Our engineering and product data development team as well as back office
and part of its customer service center are located in Ukraine. Therefore, the conflict in Ukraine could have a material adverse effect
on our business, financial condition and results of operations. While the conflict has not caused significant disruptions to our operations
to date, it could have a material adverse effect upon the Company in future periods.
Since the onset of the active conflict in February,
most of 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 other areas in Ukraine, but their ability to continue work is subject to significant uncertainty and potential disruptions.
The situation
in Ukraine is highly complex and continues to evolve. 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, any major threat to
civilians or any international banking disruption could materially impact the operations and liquidity of the Company. We will continue
monitoring the military, social, political, regulatory and economic environment in Ukraine and Russia, and will consider further actions
as appropriate.
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,
| | |
2022 | | |
2021 | | |
Change | | |
% Change | |
| Number of Users | |
| 30,162,993 | | |
| 31,984,337 | | |
| (1,821,344 | ) | |
| (5.7 | )% |
| Number of Sessions | |
| 50,312,238 | | |
| 59,523,329 | | |
| (9,211,091 | ) | |
| (15.5 | )% |
| Number of Pageviews | |
| 189,340,557 | | |
| 255,491,738 | | |
| (66,151,181 | ) | |
| (25.9 | )% |
| Pages/Session | |
| 3.76 | | |
| 4.29 | | |
| (0.53 | ) | |
| (12.3 | )% |
| Average Session Duration | |
| 0:02:59 | | |
| 0:03:25 | | |
| (0:00:26 | ) | |
| (12.7 | )% |
For the Six Months Ended June 30,
| | |
2022 | | |
2021 | | |
Change | | |
% Change | |
| Number of Users | |
| 61,312,113 | | |
| 64,637,688 | | |
| (3,325,575 | ) | |
| (5.1 | )% |
| Number of Sessions | |
| 105,417,225 | | |
| 124,272,640 | | |
| (18,855,415 | ) | |
| (15.2 | )% |
| Number of Pageviews | |
| 399,344,224 | | |
| 541,368,091 | | |
| (142,023,867 | ) | |
| (26.2 | )% |
| Pages/Session | |
| 3.79 | | |
| 4.36 | | |
| (0.57 | ) | |
| (13.0 | )% |
| Average Session Duration | |
| 0:02:59 | | |
| 0:03:26 | | |
| (0:00:27 | ) | |
| (13.1 | )% |
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 June 30, | | |
Change | |
| | |
2022 | | |
% of Rev. | | |
2021 | | |
% of Rev. | | |
Amount | | |
% | |
| Revenue, net | |
$ | 104,257,478 | | |
| | | |
$ | 130,409,332 | | |
| | | |
$ | (26,151,854 | ) | |
| (20.1 | )% |
| Cost of goods sold | |
| 83,674,247 | | |
| 80.3 | % | |
| 104,270,051 | | |
| 80.0 | % | |
| (20,595,804 | ) | |
| (19.8 | )% |
| Gross profit | |
| 20,583,231 | | |
| 19.7 | % | |
| 26,139,281 | | |
| 20.0 | % | |
| (5,556,050 | ) | |
| (21.3 | )% |
| Gross Margin | |
| 19.7 | % | |
| | | |
| 20.0 | % | |
| | | |
| | | |
| | |
| Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Advertising | |
| 9,437,657 | | |
| 9.1 | % | |
| 10,907,319 | | |
| 8.4 | % | |
| (1,469,662 | ) | |
| (13.5 | )% |
| Selling, general & administrative | |
| 9,940,889 | | |
| 9.5 | % | |
| 12,603,017 | | |
| 9.7 | % | |
| (2,662,129 | ) | |
| (21.1 | )% |
| Depreciation | |
| 2,142,433 | | |
| 2.1 | % | |
| 1,819,581 | | |
| 1.4 | % | |
| 322,852 | | |
| 17.7 | % |
| Total operating expenses | |
| 21,520,979 | | |
| 20.6 | % | |
| 25,329,917 | | |
| 19.4 | % | |
| (3,808,939 | ) | |
| (15.0 | )% |
| (Loss) income from operations | |
| (937,748 | ) | |
| (0.9 | )% | |
| 809,364 | | |
| 0.6 | % | |
| (1,747,112 | ) | |
| (215.9 | )% |
| Interest expense | |
| - | | |
| 0.0 | % | |
| 395 | | |
| 0.0 | % | |
| (395 | ) | |
| (100.0 | )% |
| (Loss) income before income tax | |
| (937,748 | ) | |
| (0.9 | )% | |
| 808,969 | | |
| 0.6 | % | |
| (1,746,717 | ) | |
| (215.9 | )% |
| Income tax (benefits) expense | |
| (38,037 | ) | |
| 0.0 | % | |
| 182,857 | | |
| 0.1 | % | |
| (220,894 | ) | |
| (120.8 | )% |
| Net (loss) income | |
$ | (899,711 | ) | |
| (0.9 | )% | |
$ | 626,112 | | |
| 0.5 | % | |
$ | (1,525,823 | ) | |
| (243.7 | )% |
| | |
Six months ended June 30, | | |
Change | |
| | |
2022 | | |
% of Rev. | | |
2021 | | |
% of Rev. | | |
Amount | | |
% | |
| Revenue, net | |
$ | 199,149,626 | | |
| | | |
$ | 239,482,960 | | |
| | | |
$ | (40,333,334 | ) | |
| (16.8 | )% |
| Cost of goods sold | |
| 160,072,167 | | |
| 80.4 | % | |
| 190,510,070 | | |
| 79.6 | % | |
| (30,437,903 | ) | |
| (16.0 | )% |
| Gross profit | |
| 39,077,459 | | |
| 19.6 | % | |
| 48,972,890 | | |
| 20.4 | % | |
| (9,895,431 | ) | |
| (20.2 | )% |
| Gross Margin | |
| 19.6 | % | |
| | | |
| 20.4 | % | |
| | | |
| | | |
| | |
| Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Advertising | |
| 19,138,949 | | |
| 9.6 | % | |
| 21,406,705 | | |
| 8.9 | % | |
| (2,267,756 | ) | |
| (10.6 | )% |
| Selling, general & administrative | |
| 21,613,616 | | |
| 10.9 | % | |
| 23,961,724 | | |
| 10.0 | % | |
| (2,348,109 | ) | |
| (9.8 | )% |
| Depreciation | |
| 4,096,895 | | |
| 2.1 | % | |
| 3,593,354 | | |
| 1.5 | % | |
| 503,541 | | |
| 14.0 | % |
| Total operating expenses | |
| 44,849,460 | | |
| 22.5 | % | |
| 48,961,783 | | |
| 20.4 | % | |
| (4,112,324 | ) | |
| (8.4 | )% |
| (Loss) income from operations | |
| (5,772,001 | ) | |
| (2.9 | )% | |
| 11,107 | | |
| 0.0 | % | |
| (5,783,108 | ) | |
| n.m. | |
| Interest expense | |
| - | | |
| 0.0 | % | |
| 6,885 | | |
| 0.0 | % | |
| (6,885 | ) | |
| (100.0 | )% |
| (Loss) income before income tax | |
| (5,772,001 | ) | |
| (2.9 | )% | |
| 4,222 | | |
| 0.0 | % | |
| (5,776,223 | ) | |
| n.m. | |
| Income tax (benefits) expenses | |
| (919,103 | ) | |
| (0.5 | )% | |
| 22,923 | | |
| 0.0 | % | |
| (942,026 | ) | |
| n.m. | |
| Net (loss) income | |
$ | (4,852,898 | ) | |
| (2.4 | )% | |
$ | (18,701 | ) | |
| 0.0 | % | |
$ | (4,834,197 | ) | |
| n.m. | |
Note: “n.m.” : not meaningful
Revenue
Revenue decreased $26.2 million, or 20.1%, for
the three months ended June 30, 2022 and $40.3 million, or 16.8%, for the six months ended June 30, 2022, compared to the same prior year
periods.
The decreases were primarily attributable to a
lower number of orders due to decreases in traffic and the site conversion rate, partly offset by an increase in the average order value
and an increase in Marketplace revenue.
Traffic decreased by 15.5% and 15.2% in the three
and six months ended June 30, 2022, compared to the same prior periods respectively, and site conversions decreased 15.4% and 14.7% for
the three and six months ended June 30, 2022 compared to the same prior period. The decreases were partially offset by increases in in
average order value (AOV) of 10.3% and 9.9% for the three and six months ended June 30, 2022, compared to the same prior year periods.
We believe that the decrease in traffic and the
site conversion rate was primarily attributable to inflation and consequent reduction in discretionary spending by consumers. The decrease
was exacerbated by lower availability of new cars, lack of government stimulus as compared to the first half of 2021 as well as an increase
in product costs due to high inflation. The increase in average order value compared to the same prior year periods was primarily attributable
to increases in inflation and shipping charges passed onto customers.
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,
2022, cost of goods sold decreased by $20.6 million, or 19.8%, and $30.4 million, or 16.0%, respectively, compared to the three and six
months ended June 30, 2021. This decrease in cost of goods sold was primarily driven by decreases in the number of orders or products
sold and related shipping costs.
For the three and six months ended June 30, 2022,
cost of goods sold was 80.3% and 80.4% of revenue, respectively, compared to 80.0% and 79.6% of revenue for the three and six months ended
June 30, 2021, respectively. The 0.3% and 0.8% increases in cost of goods sold as a percentage of revenue was primarily attributable to
changes in product categories mix and ongoing supply chain disruptions associated with the COVID-19 pandemic.
During the three months and six months ended June
30, 2022, we continued to source select products from alternate vendors at higher price points and we did not pass all of the associated
increased costs to the consumer. Management currently expects these cost pressures to ease as our supply chain regains efficiencies with
the COVID-19 pandemic and related containment measures abating. We also continued to make investments in the adjacent verticals, repair
parts and original equipment businesses.
Gross Profit and Gross Margin
Gross profit decreased $5.6 million or 21.3%,
and $9.9 million or 20.2%, for the three and six months ended June 30, 2022, respectively, compared to the three and six months ended
June 30, 2021. These decreases were primarily attributable to the 20.1% and 16.8% decreases in revenue for the three and six months ended
June 30, 2022, compared to the same prior year periods, and increases in product and shipping costs associated with supply chain disruptions.
Gross margin of 19.7% and 19.6% in the three and
six months ended June 30, 2022, respectively, was lower than the gross margin of 20.0% and 20.4% in the three and six months ended June
30, 2021, primarily due to a change in the product category revenue mix and increases in product and shipping costs associated with ongoing
supply chain disruptions.
Operating Expenses
Advertising expenses decreased $1.5 million or
13.5%, and $2.3 million or 10.6%, for the three and six months ended June 30, 2022, respectively, compared to the three and six months
ended June 30, 2021, primarily due to lower traffic and number of clicks.
Advertising expenses as a percentage of revenue
were 9.1%, and 9.6%, for the three and six months ended June 30, 2022, compared to 8.4% and 8.9% for the three and six months ended June
30, 2021, respectively. The increase in percentage was primarily attributable to increases in cost-per-click, a change in the mix of advertising
channels, increase in cancellation of sales orders, and investments in certain marketing initiatives. 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.
Selling, general and administrative (“SG&A”)
expenses decreased $2.7 million, or 21.1%, and $2.3 million, or 9.8%, for the three and six months ended June 30, 2022, respectively,
compared to the three and six months ended June 30, 2021. The decreases were primarily attributable to: (a) a decrease in non-cash share-based
compensation expense of $1.5 million and $0.6 million, (b) a decrease in merchant processing fees of $0.5 million and $0.8 million; and
(c) public company costs of $0.3 million and $0.4 million for the three and six months ended June 30, 2022 compared to the same prior
year period.
Depreciation expenses increased $0.3 million,
or 17.7%, and $0.5 million, or 14.0%, respectively, for the three and six months ended June 30, 2022 compared to the same prior year period.
Interest Expense
Interest expense decreased by $395, or 100.0%,
and $6,885, or 100.0%, respectively, for the three and six months ended June 30, 2022 compared to the three and six months ended June
30, 2021.
Income Tax Expense
Income taxes decreased by $0.2 million, or 120.8%,
and $0.9 million, for the three and six months ended June 30, 2022, respectively, compared to the three and six months ended June 30,
2021.
For the three and six months ended June 30, 2022,
the effective income tax rate was (4.06)% and (15.92)%, respectively, compared to 22.60% and 542.94% for the three and six months ended
June 30, 2021, 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, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Net income (loss) | |
$ | (899,711 | ) | |
$ | 626,112 | | |
$ | (4,852,898 | ) | |
$ | (18,701 | ) |
| Interest expense | |
| - | | |
| 395 | | |
| - | | |
| 6,885 | |
| Income taxes (benefits) | |
| (38,037 | ) | |
| 182,857 | | |
| (919,103 | ) | |
| 22,923 | |
| Depreciation | |
| 2,142,433 | | |
| 1,819,581 | | |
| 4,096,895 | | |
| 3,593,354 | |
| EBITDA | |
| 1,204,685 | | |
| 2,628,945 | | |
| (1,675,106 | ) | |
| 3,604,461 | |
| Stock compensation expenses | |
| (180,529 | ) | |
| 1,292,604 | | |
| 686,841 | | |
| 1,321,428 | |
| Legal & settlement expenses (1) | |
| 316,743 | | |
| 243,426 | | |
| 596,385 | | |
| 483,186 | |
| | |
| | | |
| | | |
| | | |
| | |
| Adjusted EBITDA Total | |
$ | 1,340,899 | | |
$ | 4,164,975 | | |
$ | (391,880 | ) | |
$ | 5,409,075 | |
| % to revenue | |
| 1.3 | % | |
| 3.2 | % | |
| -0.2 | % | |
| 2.3 | % |
| (1) | Represents legal and settlement
expenses 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 intellectual property (“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. |
Net income decreased by $1.5 million and $4.8
million for the three and six months ended June 30, 2022, respectively, as compared to the same prior year periods, primarily driven by
a decrease in gross profit, partially offset by decreases in advertising, merchant processing fees and direct support fees. The year-over-year
decrease in Adjusted EBITDA for the three and six months ended June 30, 2022, as compared to the same prior year period, was attributable
to an increase in net loss, partially offset by non-cash stock compensation expense, 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 (used in) provided by operating activities to free cash flow for each of the periods indicated.
| | |
For three months ended | | |
For the six months
ended June 30, | |
| | |
March 31,
2022 | | |
June 30,
2022 | | |
2022 | | |
2021 | |
| Total net cash provided by operating activities | |
$ | (5,521,565 | ) | |
$ | (6,741,471 | ) | |
$ | (12,263,036 | ) | |
$ | 9,050,923 | |
| Purchase of property and equipment (net) | |
| (16,200 | ) | |
| (29,160 | ) | |
| (45,360 | ) | |
| (283,786 | ) |
| Website and software development costs | |
| (1,837,962 | ) | |
| (1,739,802 | ) | |
| (3,577,764 | ) | |
| (3,611,451 | ) |
| Free cash flow | |
$ | (7,375,727 | ) | |
$ | (8,510,433 | ) | |
$ | (15,886,160 | ) | |
$ | 5,155,686 | |
The breakup of net cash (used in) provided by
operating activities is as follows.
| | |
For three months ended | | |
For the six months
ended June 30, | |
| | |
March 31,
2022 | | |
June 30,
2022 | | |
2022 | | |
2021 | |
| Net cash from profit and loss account | |
$ | (1,764,030 | ) | |
$ | 967,683 | | |
$ | (796,347 | ) | |
$ | 4,896,081 | |
| Net cash used in working capital changes | |
| (3,757,535 | ) | |
| (7,709,154 | ) | |
| (11,466,689 | ) | |
| 4,154,842 | |
| Total net cash (used in) provided by operating activities | |
$ | (5,521,565 | ) | |
$ | (6,741,471 | ) | |
$ | (12,263,036 | ) | |
$ | 9,050,923 | |
Liquidity and Capital Resources
The Company’s cash was $7.3 million and
$23.2 million as of June 30, 2022 and December 31, 2021, respectively. Our ability to maintain adequate liquidity for our operations is
dependent upon a number of factors, including our revenue and earnings, management of net working capital and capital expenditures and
our ability to a) take further cost savings and cash conservation measures, as necessary and b) to manage adverse impact of COVID-19,
Russia-Ukraine conflict, inflation and lower consumer discretionary spending and other adverse macroeconomic conditions. The Company has
a working capital deficiency of approximately $35.6 million and experienced declining revenues. While we have operated with a working
capital deficiency since our inception, this combined with declined profitability has caused us to consume approximately $12.3 million
in cash from operating activities (as shown in the Cash Flow Summary table above) during the six months ending June 30, 2022. We evaluated
whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as
a going concern within one year after the filing of this Quarterly Report. Recently the Company has moderated capital investments and
has taken steps to improve profitability, including optimizing its gross margin, advertising expense, general and administrative overhead,
capital expenditure and its net working capital. We expect these measures to yield approximately $12 million of cash generation on an
annualized basis. Our ability to meet our obligations as they become due is dependent upon increased and stabilized profitability. At
this time, we believe that cash flows generated from operations and our cash will be sufficient to meet our anticipated operating cash
needs for at least the next twelve months.
However, any projections of future cash needs
and cash flows are subject to substantial uncertainty. See Part II, Item 1A of this Quarterly Report on Form 10-Q and Item 1A of Part
I, “Risk Factors” for a discussion of the factors that may impact our ability to maintain adequate liquidity, included in
our 2021 Form 10-K.
Cash flow Summary
The change in cash and cash equivalents was as
follows.
| | |
Three months ended
June 30, | | |
Six months ended
June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Total Net cash provided by operating activities | |
$ | (6,741,471 | ) | |
$ | (7,967,039 | ) | |
$ | (12,263,036 | ) | |
$ | 9,050,923 | |
| Net cash used in investing activities | |
| (1,768,962 | ) | |
| (2,122,963 | ) | |
| (3,623,124 | ) | |
| (3,895,237 | ) |
| Net cash used in financing activities | |
| - | | |
| (5,317 | ) | |
| - | | |
| (10,473 | ) |
| Net change in cash | |
$ | (8,510,433 | ) | |
$ | (10,095,319 | ) | |
$ | (15,886,160 | ) | |
$ | 5,145,213 | |
The breakup of net cash (used in) provided by
operating activities is as follows.
| | |
Three months ended
June 30, | | |
Six months ended
June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Net cash from profit and loss account | |
$ | 967,683 | | |
$ | 3,738,297 | | |
$ | (796,347 | ) | |
$ | 4,896,081 | |
| Net cash used in working capital changes | |
| (7,709,154 | ) | |
| (11,705,336 | ) | |
| (11,466,689 | ) | |
| 4,154,842 | |
| Total Net cash (used in) provided by operating activities | |
| (6,741,471 | ) | |
| (7,967,039 | ) | |
| (12,263,036 | ) | |
| 9,050,923 | |
Cash Flows from Operating Activities
The net cash (used in) 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 used in operating activities in the six
months ended June 30, 2022 was $12.3 million and was driven primarily by the impact of a net cash loss of $0.8 million, and a negative
net change in operating assets and liabilities of $11.5 million, primarily comprising of a decrease in accounts payables and customer
deposits.
Net cash provided by operating activities in the
six months ended June 30, 2021 was $9.1 million, resulting from a net cash gain of $4.9 million 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.
Cash Flows from Investing Activities
Net cash used in investing activities was $3.6
million for the six months ended June 30, 2022, compared to $3.9 million for the six months ended June 30, 2021, consisting of website
and software development costs and purchases of property and equipment in both periods. Cash used in investing activities varies depending
on the timing of technology and product development cycles.
Cash Flows from Financing Activities
Net cash used in financing activities for the
three months ended June 30, 2022, was $0, compared to $10,473 in the three months ended June 30, 2021, due to principal paid on notes
payable in the prior year period that did not recur in the current year period.
Future Cash Requirements
Operating Leases
The Company has several non-cancelable lease arrangements
for office spaces and an equipment lease that expire at various dates through 2025. Rental expense for operating leases was $244,094 for
the three months ended June 30, 2022.
Future minimum lease payments under non-cancelable
operating leases as of June 30, 2022, are as follows:
| 2022 | |
$ | 437,109 | |
| 2023 | |
| 753,871 | |
| 2024 | |
| 276,358 | |
| 2025 | |
| 177,939 | |
| Total future minimum lease payments | |
$ | 1,645,277 | |
Debt and Capital Structure Activity
We had no borrowings as of June 30, 2022. However,
we continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, obtain finance and operating
lease arrangements, and/or enter into financing obligations for strategic reasons or to further strengthen our financial position. The
sale of additional equity or convertible debt securities would be dilutive to our shareholders. In addition, we will, from time to time,
consider the acquisition of, or investment in, complementary businesses, products, services, capital infrastructure, and technologies,
which might affect our liquidity requirements or cause us to secure additional financing, or issue additional equity or debt securities.
There can be no assurance that additional credit lines or financing instruments will be available in amounts or on terms acceptable to
us, if at all.
Capital Expenditures
Capital expenditures consist primarily of website
and software development, and the amount and timing thereof varies depending on the timing of technology and product development cycles.
Dividends
The Company has never paid dividends on any of
our capital stock and currently intends 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.
Cash Taxes
The Company paid negligible taxes in cash for
both the three months ended June 30, 2022 and 2021. As of December 31, 2021, the Company had $8,701,504 in federal net operating losses
(“NOL”), all remaining from 2019 and onwards and accordingly available to offset future taxable income indefinitely. However,
the NOL’s are subject to an 80% of taxable income limitation for all periods after January 1, 2021. The Company does not currently
anticipate any significant increase or decrease of the total amount of unrecognized tax benefits within the next twelve months. The Company’s
realization of its tax asset is dependent upon our ability to generate taxable income in future periods. A valuation allowance may be
required if, based on the weight of available evidence, it is more likely than not that some portion of the deferred tax asset will not
be realized.
Critical Accounting Estimates
Critical accounting estimates are 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. These items require the application of management’s
most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently
uncertain and that may change in subsequent periods. In preparing our consolidated financial statements in accordance with GAAP, management
has made estimates, assumptions and judgments that affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods.
In preparing these financial statements, management
has utilized available information, including our past history, industry standards and the current and projected economic environments,
among other factors, in forming its estimates, assumptions and judgments, giving due consideration to materiality. Because the use of
estimates is inherent in GAAP, actual results could differ from those estimates. In addition, other companies may utilize different estimates,
which may impact comparability of our results of operations to those of companies in similar businesses.
A summary of the accounting estimates that management
believes are critical to the preparation of our consolidated financial statements is set forth below. See Note 2 of the Notes to Consolidated
Financial Statements included in this report and in our 2021 Form 10-K 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, 2022, and December 31, 2021, were $10.8 million and $15.5 million,
respectively, which are reflected as customer deposits on our consolidated balance sheets.
The outstanding days from the order date of our
unshipped and undelivered orders were, on average, estimated at 9.6 days as of June 30, 2022, based on our actual determination of 9.6
days as of April 30, 2022 and based on our actual determination were, on average, 11.6 days as of December 31, 2021.
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.
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, 2022, and 2021 were as follows:
| | |
For the three months ended
June 30, | | |
For the six months ended
June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Balance at beginning of period | |
$ | 883,653 | | |
$ | 1,125,970 | | |
$ | 738,465 | | |
$ | 1,062,077 | |
| Adjustment | |
| (127,546 | ) | |
| (325,755 | ) | |
| 17,642 | | |
| (261,862 | ) |
| Balance at Closing of period | |
$ | 756,107 | | |
$ | 800,215 | | |
$ | 756,107 | | |
$ | 800,215 | |
Website and Software Development
We capitalize certain costs associated with website
and software development (technology platform including the product catalog) 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, 2022, and 2021
were as follows:
| Six months ended June 30, | |
Capitalized Software | |
| 2022 | |
$ | 3,577,764 | |
| 2021 | |
$ | 3,611,451 | |
Stock-Based Compensation
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 or amounts previously recognized are reversed.
Changes in expectations and outcomes different
from estimates (such as the achievement or non- achievement of performance conditions) may cause a significant adjustment to earnings
in a reporting period as timing and amount of expense recognition is highly dependent on management’s estimate.
Deferred Tax Assets
Deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and net operating loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates for years in which those temporary differences are expected to be recovered or settled. The measurement of deferred
tax assets is reduced by the amount of any tax benefit that, based on available evidence, is not expected to be realized, and a corresponding
allowance is established. The current income tax provision reflects the tax consequences of revenues and expenses currently taxable or
deductible on the Company’s various income tax returns for the reporting year.
Allowance for Doubtful Accounts
Accounts receivable balances include amounts due
from customers. The Company periodically reviews its accounts receivable balances to determine whether an allowance for doubtful accounts
is necessary based on an analysis of past due accounts, historical occurrences of credit losses, existing economic conditions, and other
circumstances that may indicate that the realization of an account is in doubt. As of June 30, 2022, and 2021, the Company determined
that an allowance for doubtful accounts was not necessary. As circumstances change, it could result in material adjustments to the allowance
for doubtful accounts.
Recent Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial
Statements included elsewhere in this report for information on how recent accounting pronouncements have affected or may affect our financial
position, results of operations or cash flows.
Off-Balance Sheet Arrangements
We did not have during the periods presented,
and we do not currently have, any off-balance sheet arrangements, as defined by applicable SEC regulations.
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 June 30, 2022. 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 June 30, 2022.
Changes in Internal Control over Financial
Reporting
There were no changes in our internal control
over financial reporting that occurred during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.