UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
Amendment No. 1
For the quarterly period
ended
or
Commission File Number:
(Exact Name of Registrant as Specified in Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
(Address of Principal Executive Offices, Zip Code)
Registrant’s telephone
number, including area code:
Securities registered under Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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.
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).
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.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of
shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Explanatory Note
On August 15, 2023, PARTS iD, Inc. (the “Company”) filed with the Securities and Exchange Commission (the “SEC”) its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023 (the “Original Report”). This Amendment No. 1 on Form 10-Q/A (this “Amendment”) to the Original Report is being filed solely to correct the number for “Net cash provided by financing activities” in the unaudited Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2023. This Amendment No. 1 amends and restates the Original Report in its entirety. In addition, as required by SEC rules, we are also filing currently dated certifications pursuant to Sections 906 and 302 of the Sarbanes-Oxley Act of 2002.
Except as described above, no changes have been made to the Original Report. This Amendment continues to speak as of the date of the Original Report, and the Company has not updated the disclosures contained therein to reflect any events that occurred at a date subsequent to the Original Report.
TABLE OF CONTENTS
| Page | ||
| CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS | ii | |
| PART I | 1 | |
| ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED) | 1 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 20 |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 32 |
| ITEM 4. | CONTROLS AND PROCEDURES | 32 |
| PART II | 33 | |
| ITEM 1. | LEGAL PROCEEDINGS | 33 |
| ITEM 1A. | RISK FACTORS | 33 |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 33 |
| ITEM 6. | EXHIBITS | 34 |
| SIGNATURES | 35 | |
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements in this Quarterly Report on Form 10-Q that address events, developments, or results that we expect or anticipate may occur in the future are “forward-looking statements” within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “project,” “forecast,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “seeks,” “scheduled,” or “will,” and similar expressions are intended to identify forward-looking statements. These statements relate to future periods, future events or our future operating or financial plans or performance, are made on the basis of management’s current views and assumptions with respect to future events, including management’s current views regarding the impacts of the COVID-19 pandemic, supply chain constraints from current economic conditions, high inflation and the conflict in Ukraine. Any forward-looking statement is not a guarantee of future performance and actual results could differ materially from those contained in the forward-looking statement. We operate in a changing environment where new risks emerge from time to time and it is not possible for us to predict all risks that may affect us, particularly those associated with the COVID-19 pandemic and the conflict in Ukraine, which have had wide-ranging and continually evolving effects. The forward-looking statements, as well as our prospects as a whole, are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. These risks and uncertainties include, without limitation:
| ● | Our future capital requirements; |
| ● | our ability to raise capital and utilize sources of cash; |
| ● | our ability to generate sufficient revenue to cover our operating expenses and to continue to operate with a working capital deficiency; |
| ● | our ability to service our obligations and to obtain funding for our operations; |
| ● | the ongoing conflict between Ukraine and Russia has affected and may continue to affect our business; |
| ● | competition and our ability to counter competition, including changes to the algorithms of Google and other search engines and related impacts on our revenue and advertisement expenses; |
| ● | the impact on our business of macro-economic factors including discretionary spending pressure due to inflation and low savings rates that impact consumer sentiment; |
| ● | the impact of health epidemics, including the COVID-19 pandemic, on our business and the actions we may take in response thereto; |
| ● | disruptions in the supply chain and associated impacts on demand, product availability, order cancellations and cost of goods sold including the economic impacts of record inflation; |
| ● | difficulties in managing our international business operations, particularly in Ukraine, including with respect to enforcing the terms of our agreements with our contractors and managing increasing costs of operations; |
| ● | changes in our strategy, future operations, financial position, estimated revenue and losses, product pricing, projected costs, prospects and plans; |
| ● | the outcome of actual or potential litigation, complaints, product liability claims, or regulatory proceedings, and the potential adverse publicity related thereto; |
ii
| ● | the implementation, market acceptance and success of our business model, expansion plans, opportunities, and initiatives, including the market acceptance of our planned products and services; |
| ● | developments and projections relating to our competitors and industry; |
| ● | our expectations regarding our ability to obtain and maintain intellectual property protection and not infringe on the rights of others; |
| ● | our ability to maintain and enforce intellectual property rights and our ability to maintain our technology position; |
| ● | changes in applicable laws or regulations; |
| ● | the effects of current and future U.S. and foreign trade policy and tariff actions; |
| ● | disruptions in the marketplace for online purchases of aftermarket auto parts; |
| ● | costs related to operating as a public company; and |
| ● | the possibility that we may be adversely affected by other economic, business, and/or competitive factors. |
See also the section titled “Risk Factors” (refer to Part I, Item 1A of this report), and subsequent reports and registration statements filed from time to time with the Securities and Exchange Commission (the “SEC”), for further discussion of certain risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements. Readers of this report are cautioned not to rely on these forward-looking statements, since there can be no assurance that these forward-looking statements will prove to be accurate. Forward-looking statements speak only as of the date they are made, and we expressly disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This cautionary note is applicable to all forward-looking statements contained in this report.
iii
PART I
Item 1. Financial Statements
Index to Condensed Consolidated Financial Statements
| Page | ||
| Unaudited Condensed Consolidated Financial Statements | ||
| Condensed Consolidated Balance Sheets | 2 | |
| Condensed Consolidated Statements of Operations | 3 | |
| Condensed Consolidated Statements of Changes in Shareholders’ Deficit | 4 | |
| Condensed Consolidated Statements of Cash Flows | 5 | |
| Notes to Condensed Consolidated Financial Statements | 6 |
1
PARTS iD, INC.
Condensed Consolidated Balance Sheets
As of June 30, 2023 and December 31, 2022
| June 30, 2023 (Unaudited) | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets | ||||||||
| Right-of-use assets | ||||||||
| Security deposits | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Customer deposits | ||||||||
| Accrued expenses | ||||||||
| Other current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Convertible notes payable, net | ||||||||
| Warrants liability | ||||||||
| Total current liabilities | ||||||||
| Other non-current liabilities | ||||||||
| Operating lease, net of current portion | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES (Note 7) | ||||||||
| SHAREHOLDERS’ DEFICIT | ||||||||
| 1,000,000 shares authorized and | - | - | ||||||
| 10,000,000 Class F shares authorized and 0 issued and outstanding | - | - | ||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and shareholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
PARTS iD, INC.
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 2023 and 2022 (Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Advertising | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on extinguishment of debt | ||||||||||||||||
| Change in fair value of warrants | ( | ) | ||||||||||||||
| Interest expense | ||||||||||||||||
| Loss before income tax benefit | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
PARTS iD, INC.
Condensed Consolidated Statements of Changes in Shareholders’ Deficit
For the three and six months ended June 30, 2023 and 2022 (Unaudited)
| Additional | Accumulated | Total | ||||||||||||||||||
| Class A Common Stock | Paid-In | Deficit | Shareholders’ | |||||||||||||||||
| Shares | Amount | Capital | Amount | Deficit | ||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Share-based compensation | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||
| Share-based compensation | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Share-based compensation | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||
| Vesting of RSUs | ( | ) | ||||||||||||||||||
| Share-based compensation | - | |||||||||||||||||||
| Note payable allocated to warrants | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PARTS iD, INC.
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2023 and 2022 (Unaudited)
| Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Deferred tax benefit | ( | ) | ||||||
| Amortization of right-of-use assets | ||||||||
| Share-based compensation expense | ||||||||
| Change in fair value of warrants | ( | ) | ||||||
| Loss on extinguishment of debt | ||||||||
| Write-off of debt issuance costs due to extinguishment of debt | ||||||||
| Accretion of discount on convertible note | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Customer deposits | ( | ) | ( | ) | ||||
| Accrued expenses | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Other current liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of intangible asset | ||||||||
| Website and software development costs | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Repayment of note payable | ( | ) | ||||||
| Proceeds from convertible notes payable | ||||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ( | ) | ( | ) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental non-cash disclosure: | ||||||||
| Issuance of convertible warrants related to notes payable | $ | $ | ||||||
| Supplemental disclosure of cash flows information: | - | |||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
PARTS iD, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 – Organization and Description of Business
Description of Business
PARTS iD, Inc., a Delaware corporation (the “Company,”
“PARTS iD,” “we,” “our” or “us”), is a technology-driven, digital commerce company focused
on creating custom infrastructure and unique user experience within niche markets.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The unaudited condensed 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, 2022 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 unaudited condensed 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 credit losses, depreciation, inventory valuation, valuation of deferred income tax assets and the capitalization and recoverability of software development costs.
Stock 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 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 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.
6
Concentration of Credit Risk
Financial instruments that expose the Company
to a concentration of credit risk principally include cash and accounts receivable balances. The Company has significant cash balances
at financial institutions which throughout the year regularly exceed the federally insured limit of $
Going Concern
These condensed consolidated financial statements
have been prepared in accordance with GAAP assuming the Company will continue as a going concern. The going concern assumption contemplates
the realization of assts and satisfaction of liabilities in the normal course of business. We have operated with a negative working capital
model since our inception. The Company has a working capital deficiency of approximately $
The accompanying condensed consolidated financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and does not reflect any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to our ability to continue as a going concern.
To address liquidity concerns, the Company is pursuing additional financing
and continues to restructure and optimize its operations including moderating capital investments, improving gross margin, reducing expenses,
and renegotiating vendor payment terms. In addition, to address its liquidity needs, the Company recently obtained an aggregate of $
PARTS iD has also retained Canaccord Genuity Group, Inc. (“Canaccord”) as its financial advisor and DLA Piper LLP (US) as its legal counsel to assist in evaluating potential strategic alternatives.
There can be no assurance that the evaluation of strategic alternatives will result in any potential transaction, or any assurance as to its outcome or timing. PARTS iD has not set a timetable for completion of the process and does not intend to disclose developments related to the process unless and until PARTS iD executes a definitive agreement with respect thereto, or the Board of Directors otherwise determines that further disclosure is appropriate or required.
Accounts Receivable
Accounts receivable balances include amounts due from customers. The Company periodically reviews its accounts receivable balances to determine whether an allowance for credit losses 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, 2023 and December 31, 2022, the Company determined that an allowance for credit losses was not necessary.
7
Inventory
Inventory consists of purchased goods that are
immediately available-for-sale and are stated at the lower cost or net realizable value, determined using the first-in, first-out method.
Merchandise-in-transit directly from suppliers to customers is recorded in inventory until the product is delivered to the customer. As
of June 30, 2023, and December 31, 2022, merchandise-in-transit amounted to $
Other Current Assets
Other current assets include advances to vendors
amounting to $
Website and Software Development
The Company capitalizes certain costs associated with website and software developed for internal use in accordance with 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 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 the internal-use software project. Capitalization of such costs ceases when the project is 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.
Intangible Assets
Intangible assets consist of indefinite-lived domain names and are stated at cost less impairment losses, if any. The Company reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. When such events occur, the Company compares the carrying amount of the asset to the undiscounted expected future cash flows related to the asset. If the comparison indicates that an impairment exists, the amount of the impairment is calculated as the difference between the excess of the carrying amount over the fair value of the asset. The Company has determined that there were no triggering events in the six months ended June 30, 2023 and 2022, and no impairment charges were necessary.
During the first quarter of 2023, the Company
sold its Onyx.com domain name for $
Property and Equipment
| Asset Class | Estimated useful lives | ||
| Video and studio equipment | |||
| Website and internally developed software | |||
| Computer and electronics | |||
| Vehicles | |||
| Furniture and fixtures | |||
| Leasehold improvements |
Accounts Payable
Accounts payable as of June 30, 2023, consisted
of amounts payable to vendors of $
8
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This standard replaced all previous accounting guidance on this topic, eliminated all industry-specific guidance and provided a unified model to determine how revenue is recognized. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard requires companies to use more judgment and make more estimates than under prior guidance. Judgments include identifying performance obligations in the contract, estimating the amount of consideration to include in the transaction price, and allocating the transaction price to each performance obligation.
In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following steps: (i) identifies contracts with customers; (ii) identifies performance obligation(s); (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligation(s); and (v) recognizes revenue when (or as) the Company satisfies each performance obligation.
The Company recognizes revenue on product sales through its website as the principal in the transaction as the Company has concluded it controls the product before it is transferred to the customer. The Company controls products when it is the entity responsible for fulfilling the promise to the customer and takes responsibility for the acceptability of the goods, assumes inventory risk from shipment through the delivery date, has discretion in establishing prices, and selects the suppliers of products sold.
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. Allowances for sales returns at June 30, 2023 and December 31, 2022, were $
The Company has two types of contractual liabilities:
(a) amounts received from customers prior to the delivery of products are recorded as customer deposits in the accompanying condensed
consolidated balance sheets and are recognized as revenue when the products are delivered, which amounted to $
Cost of Goods Sold
Cost of goods sold consists of the cost of product sold to customers, plus shipping and handling costs and shipping supplies, net of vendor rebates.
Advertising Costs
Advertising costs are expensed as incurred. The
Company incurred $
Income Taxes
The Company is a C corporation for U.S. federal income tax purposes. Accordingly, the Company accounts for income taxes in accordance with the provisions of ASC 740, Income Taxes (“ASC 740”). 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.
9
ASC 740 also provides guidance on the accounting for uncertain tax positions recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Based on the Company’s evaluation, management concluded that there are no significant uncertain tax positions requiring recognition in the Company’s condensed consolidated financial statements. The Company files U.S. federal and State of New Jersey state tax returns and had no unrecognized tax benefits at June 30, 2023 and December 31, 2022.
The Company’s policy for recording interest and penalties associated with audits is to record such expenses as a component of income tax expense. There were no amounts accrued for penalties or interest as of or during the six months ended June 30, 2023 and 2022. Management is currently unaware of any issues under review that could result in significant payments, accruals, or material deviations from its filing positions.
Loss Per Share
For the three and six months ended June 30, 2023 and 2022, basic net loss per common share was determined by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. For purposes of calculating diluted net loss per common share, the denominator includes both the weighted average common shares outstanding and the number of common stock equivalents if the inclusion of such common stock equivalents would be dilutive. Dilutive common stock equivalents potentially include performance-based stock units and unvested restricted stock units using the treasury stock method. For all periods presented, there is no difference in the number of shares used to compute basic and diluted net loss per common share due to the Company’s net loss.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable that a loss has been incurred. This ASU is effective for smaller reporting companies for years beginning January 1, 2023. The Company adopted Topic 326 on January 1, 2023, and the adoption of this guidance did not have a material impact on the condensed consolidated financial statements.
Certain Significant Risks and Uncertainties
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 in Ukraine. The Company’s ability to maintain adequate liquidity for its operations is dependent upon several factors, including its revenue and earnings, the impacts of COVID-19 and Russian-Ukraine conflict on macroeconomic conditions, and its ability to take further cost savings and cash conservation measures if necessary. The Russian-Ukraine conflict could have a material adverse effect upon the Company.
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, 2022 (our “2022 Form 10-K”).
10
Note 3 – Property and Equipment
| June 30, 2023 | December 31, 2022 | |||||||
| Website and software development | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Computers and electronics | ||||||||
| Vehicles | ||||||||
| Leasehold improvements | ||||||||
| Video and equipment | ||||||||
| Total - Gross | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Total - Net | $ | $ | ||||||
Depreciation of property and equipment for three
months ended June 30, 2023 and 2022 was $
Note 4 – Leases
Operating Leases
| As of and for the Three and Six Months Ended June 30, 2023 | ||||
| Operating Lease Expense – 3 months ended June 30, 2023 | $ | |||
| Operating Lease Expense – 6 months ended June 30, 2023 | $ | |||
| Additional Lease Information: | ||||
| Weighted average remaining lease term-operating leases (in years) | ||||
| Weighted average discount rate-operating leases | % | |||
| Future minimum lease payments under non-cancellable leases as of June 30, 2023, were as follows: | ||||
| July 1, 2023 to December 31, 2023 | $ | |||
| January 1, 2024 to December 31, 2024 | ||||
| January 1, 2025 to September 30, 2025 | ||||
| Sub-total | ||||
| Less: Portion representing interest | ||||
| Total future minimum lease payments | ||||
| Less: Current portion of lease obligations | ||||
| Long-term portion of lease obligations | $ | |||
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Note 5 – Debt
On October 21, 2022, the Company entered into a Loan and Security Agreement with JGB Collateral, LLC (as amended, the “JGB Loan Agreement”), a Delaware limited liability company (“JGB”), in its capacity as collateral agent (the “Agent”) and the several financial institutions or entities that from time to time become parties to the JGB Loan Agreement as lenders (collectively, the “Lender”).
The loan agreement provided for term loans in
an aggregate principal amount of up to $
In connection with the entry into the loan agreement,
with respect to the Initial Term Loan Advance, the Company issued to the Lender a warrant (the “Warrant”) to purchase
The effective interest rate on the Initial Term
Loan Advance of $
On February 22, 2023 the Company and the
Agent executed an amendment to the Loan Agreement (the “First Amendment”), which, among other things, (i) the Company
agreed to repay the principal amount of the term loan to the Agent in the following installments: (A) $
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In connection with the First Amendment, the Company and the Agent entered into an Amended and Restated Intellectual Property and Security Agreement (the “A&R Security Agreement”) which amended and restated that certain Intellectual Property and Security Agreement, dated as of October 21, 2022. The A&R Security Agreement removed the exclusion of the Volkswagen Trademark Claims from the Agent’s security interest in the Company’s intellectual property.
The First Amendment was accounted for as a debt extinguishment
in accordance with ASC 470, which resulted in the Initial Term Loan Advance being derecognized and the convertible notes that were issued
as a result of the First Amendment being recorded at fair value with the difference resulting in a $
On March 6, 2023 (the “Initial Closing Date”),
PARTS iD, Inc., a Delaware corporation (the “Company”), entered into a Note and Warrant Purchase Agreement (the “March
Purchase Agreement”) whereby the Company agreed to issue and sell to certain investors (collectively, the “Investors”),
in a private placement, (a) an aggregate principal amount of up to $
The March Convertible Notes accrue interest at
The March Convertible Notes are strictly subordinated to the (i) senior secured indebtedness incurred or owed by the Company pursuant to the JGB Loan Agreement; and (ii) the Permitted Litigation Indebtedness (as defined in the JGB Loan Agreement).
Subject to the subordination provisions described above and more fully described in the March Convertible Notes, the March Convertible Notes are secured by a junior security interest in all the Company’s rights, title, and interest in and to all the Company’s assets. The March Convertible Notes mature on March 6, 2025.
The March Warrants will
expire after 5 years from the date of issuance and may not be exercised on a cashless basis.
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The Company intends to use the proceeds from the issuance of the March Convertible Notes and the March Warrants for working capital purposes and the repayment of current indebtedness.
The March Convertible Notes and the March Warrants were issued by the Company in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and have not been registered under the Securities Act.
As of June 30, 2023,
the Company had $
On May 19, 2023, the
Company issued to certain investors, in a private placement (i) unsecured convertible promissory notes in the aggregate principal amount
of $
The Company allocated the proceeds from the private
placement between the May Convertible Notes and the May Warrants by applying the relative fair value methodology. The Company allocated
$
The May Convertible
Notes accrue interest at
The May Convertible Notes are strictly subordinated to the (i) senior secured indebtedness incurred or owed by the Company pursuant to the JGB Loan Agreement and (ii) Permitted Litigation Indebtedness (as defined in the JGB Loan Agreement).
The May Warrants will
expire after 5 years from the date of issuance and may not be exercised on a cashless basis. The warrants provide that a holder of May
Warrants will not have the right to exercise any portion of its warrants, if such holder, together with its affiliates, and any other
party whose holdings would be aggregated with those of the holder for purposes of Section 13(d) or Section 16 of the Exchange Act would
beneficially own in excess of
On June 14, 2023, the
Company entered into a Note and Warrant Purchase Agreement whereby the Company agreed to issue and sell to an investor in a private placement,
(i) an unsecured convertible promissory note in the aggregate principal amount of $
The Company allocated the proceeds from the private
placement between the June Convertible Note and the June Warrants by applying the relative fair value methodology. The Company allocated
$
The June Convertible Note is strictly subordinated to the (i) senior secured indebtedness incurred or owed by the Company pursuant to the JGB Loan Agreement and (ii) Permitted Litigation Indebtedness (as defined in the Loan Agreement).
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On June 16, 2023, the
Company entered into a Second Amendment to the JGB Loan Agreement (the “Second Amendment”). Pursuant to the Second Amendment,
the Company borrowed an additional $
As of June 30, 2023,
the Company had approximately $
On July 13, 2023, the Company repaid in full the indebtedness owed under the JGB Loan Agreement and the JGB loan Agreement was terminated in accordance with its terms. See “Subsequent Events” below for more information.
Note 6 – Shareholders’ Deficit
Preferred Stock
As of June 30, 2023,
the Company had authorized for issuance a total of
Common Stock
As of June 30, 2023,
and December 31, 2022, the Company had
| Nature of Reserve | As of June 30, 2023 | As of December 31, 2022 | ||||||||
| 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 | |||||||||
| b. | EIP reserve: Shares reserved for future issuance under the stockholder approved Parts iD, Inc. 2020 Equity Incentive Plan | |||||||||
| c. | ESPP reserve: Shares reserved for future issuance under the stockholder approved Parts iD, Inc. 2020 Employee Stock Purchase Plan | |||||||||
| Total shares reserved for future issuance | ||||||||||
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Note 7 – Commitments and Contingencies
As of June 30, 2023, there were no material changes to the Company’s legal matters and other contingencies disclosed in Note 7 of the “Notes to Consolidated Financial Statements” included in our Annual Report on 2022 Form 10-K for the year ended December 31, 2022.
Note 8 – Share-Based Compensation
During the three months ended June 30, 2023 and
2022, selling, general and administrative expenses included $
During the three months ended June 30, 2023 and
2022, the Company capitalized $
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, 2023, of the
The 2020 EIP provides for the grant of stock options, restricted stock, restricted stock units (“RSUs”), 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
| Restricted Stock Units | Weighted Average Grant Date Fair Value | |||||||
| Unvested balance on January 1, 2023 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Forfeited | ( | ) | $ | |||||
| Unvested balance on June 30, 2023 | $ | |||||||
As of June 30, 2023, approximately $
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Performance-Based Restricted Stock Units
| PSU Type | Balance at January 1, 2023 | Granted | Forfeited | Balance at June 30, 2023 | ||||||||||||
| Net revenue based | - | |||||||||||||||
| Weighted average grant date fair value | $ | $ | - | $ | $ | |||||||||||
| Cash flow based | - | |||||||||||||||
| Weighted average grant date fair value | $ | $ | - | $ | $ | |||||||||||
| Total | - | |||||||||||||||
As of June 30, 2023, the performance criteria
included in the PSUs plan are unlikely to be achieved, and accordingly, the Company has no accrual of share-based compensation expenses
associated with the outstanding PSUs. The weighted average period of
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
Note 9 – Income Taxes
Deferred tax assets and liabilities are recognized based on temporary differences in financial statements and income tax carrying values using rates in effect for years such differences are to reverse. Due to uncertainties surrounding the Company’s ability to generate future taxable income and consequently realize such deferred income tax assets, a full valuation allowance has been established.
The disclosures regarding deferred tax assets included in our 2022 Form 10-K continue to be accurate for the three and six months ended June 30, 2023.
The Company does not currently anticipate any significant increase or decrease in 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.
Note 10 – Subsequent Events
Convertible Notes and Warrants
On July 13, 2023, the
Company entered into a Note and Warrant Purchase Agreement (the “July Purchase Agreement”)
whereby the Company agreed to issue and sell to certain investors affiliated with certain directors, officers and beneficial owners
of the Company, in a private placement (i) an aggregate principal amount of up to $
The July Convertible Notes
issued to the non-insider purchaser accrues interest at
17
The July Warrants will
expire after 5 years from the date of issuance and the July Warrants issued to the non-insider Purchaser may be exercised on a cashless
basis. The July Warrants provide that a holder of July Warrants will not have the right to exercise any portion of its July Warrants,
if such holder, together with its affiliates, and any other party whose holdings would be aggregated with those of the holder for purposes
of Section 13(d) or Section 16 of the Exchange Act would beneficially own in excess of
On July 13, 2023, the Company used proceeds
from the July Convertible Notes and the Lind Financing (as described below) to repay the Lenders and the JGB Loan Agreement was thereby
terminated upon the receipt by the Lenders of a payoff amount of $
Lind Financing
On July 14, 2023 (the “Initial Lind Closing Date”), the Company
entered into a Securities Purchase Agreement (the “Lind Purchase Agreement”) with Lind Global Partners II, L.P. (“Lind”)
and one other external investor. The agreement provides for loans in an aggregate principal amount of up to $
At any time while the Lind Note is outstanding, the Company may deliver
a written notice requesting an increase in the amount of funding equal to no less than $
The Lind Note was issued
at a discount and matures on July 14, 2024. Following the date that is sixty (60) days after the earlier to occur of (A) the date the
Registration Statement is declared effective by the SEC or (B) the date that any shares issued pursuant to the Lind Note may be immediately
resold under Rule 144 of the Securities Act, the Company may repay all, but not less than all, of the then outstanding principal amount
of the Lind Note, subject to a
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As collateral for the obligations under the Lind Purchase Agreement, the Company has granted to Lind a senior security interest in all of Company’s right, title, and interest in, to and under all of Company’s property (inclusive of intellectual property), subject to certain exceptions.
The Lind Warrant expires 5 years from the date of issuance and may
be exercised on a cashless basis. The Lind Warrant provides that Lind will not have the right to exercise any portion of the warrant,
if, together with its affiliates, and any other party whose holdings would be aggregated with those of the holder for purposes of Section
13(d) or Section 16 of the Securities Exchange Act of 1934, as amended, would beneficially own in excess of 4.99%, of the number of shares
of the Company’s Common Stock outstanding immediately after giving effect to such exercise (the “Beneficial Ownership Limitation”);
provided, however, that the Beneficial Ownership Limitation shall automatically increase to 9.99% if Lind, together with its affiliates,
owns in excess of
The Lind Warrant provides for customary shelf and piggyback registration rights with respect to the shares of Common Stock underlying the Lind Note and the Lind Warrant.
Placement Agent Warrant
On July 14, 2023, in consideration for its services in respect of the
Lind Financing described above, the Company also issued to Titan Partners Group LLC, a division of American Partners, LLC (the “Placement
Agent”) warrants to purchase
Management has evaluated subsequent events through the filing date of this Quarterly Report on Form 10-Q and believes that all material subsequent events have been disclosed.
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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, 2022 (our “2022 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 2022 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. (the “Company”) 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.
The Company delivers 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 approximately eighteen million parts and accessories, when fully available, from over one thousand suppliers we partner with across eight verticals.
The Company’s 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 manage 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 designed 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.
There are several key competitive strengths that management believes highlight the attractiveness of the Company’s 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 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 approximately eighteen million products, when fully available, and approximately forty-five hundred brands is unrivaled. Our comprehensive catalog is enriched with approximately 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. |
| The Company’s proprietary and asset-light fulfillment model is enabled by a network of hundreds of suppliers with whom 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. |
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| 3. | 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%; and |
| c. | repeat customer revenue was 34% of total revenue for the fourth quarter of 2022. |
The Company has invested sixteen 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.
During 2022, we took several measures to reduce operating costs, including reducing advertising expenses, general and administrative overhead, and capital expenditures. In June 2022, we took steps to reduce our costs by reducing our employment base in the United States, and reducing our independent contractors in Ukraine, the Philippines, and Costa Rica, and by reducing other operating expenses. The employees and independent contractors affected by this reduction were informed of the Company’s decision beginning in June 2022. The annualized savings from the measures described above were approximately $12 million. Additionally, in October 2022, the Company successfully negotiated a new shipping contract that will yield more than 15% in lower outbound shipping rates. The shipping cost reduction is expected to reduce shipping losses and the cost of delivery to customers.
In the first quarter of 2023, the Company took additional reductions in its advertising expense by approximately 77%, its US-based salaries by approximately 55%, and outside contractor costs by approximately 35%. These reductions were made in order to bring the cost structure of the Company in line with the current business environment.
In the second quarter of 2023, the Company further reduced SG&A to $5.1 million from $9.9 million compared to the same quarter in 2022. Discretionary spending such as salaries and support costs were reduced significantly. Net loss decreased from $6.5 million in the first quarter of 2023 to $3.8 million in the second quarter of 2023. Gross margin for the three months ended June 30, 2023 increased to 25.2% from 19.7% in the same quarter last year as the Company is focused on increasing gross margins. Gross margin for the six months ended June 30, 2023 increased to 23.2% from 19.6% for the same period last year.
Russian-Ukrainian Conflict
The Russian invasion of Ukraine and resulting response from several nations have impacted, and are expected to continue to impact, our business in the near term. Russia’s invasion of Ukraine has elevated global geopolitical tensions and security concerns as well as having recently created some inflationary pressures. Our engineering and product data development team as well as back office and part of its customer service center are 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 2022, 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. Many 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.
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The situation in Ukraine is 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 several 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,
| 2023 | 2022 | Change | % Change | |||||||||||||
| Number of Users | 12,562,591 | 30,162,993 | (17,600,402 | ) | (58.4 | )% | ||||||||||
| Number of Sessions | 16,252,141 | 50,312,238 | (34,060,097 | ) | (67.7 | )% | ||||||||||
| %Number of Pageviews | 69,376,287 | 189,340,557 | (119,964,270 | ) | (63.4 | )% | ||||||||||
| Pages/Session | 4.27 | 3.76 | 0.51 | 13.6 | % | |||||||||||
| Average Session Duration | 0:02:29 | 0:02:59 | (0:00:30 | ) | (16.8 | )% | ||||||||||
For the Six Months Ended June 30,
| 2023 | 2022 | Change | % Change | |||||||||||||
| Number of Users | 28,200,684 | 61,312,113 | (33,111,429 | ) | (54.0 | )% | ||||||||||
| Number of Sessions | 37,536,743 | 105,417,225 | (67,880,482 | ) | (64.4 | )% | ||||||||||
| %Number of Pageviews | 169,897,676 | 399,344,224 | (229,446,548 | ) | (57.5.4 | )% | ||||||||||
| Pages/Session | 4.50 | 3.79 | 0.71 | 18.7 | % | |||||||||||
| Average Session Duration | 0:02:35 | 0:02:59 | (0:00:24 | ) | (7.8 | )% | ||||||||||
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.
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Results of Operations
For the Three Months Ended June 30,
| Three months ended June 30, | Change | |||||||||||||||||||||||
| 2023 | % of Rev. | 2022 | % of Rev. | Amount | % | |||||||||||||||||||
| Net revenue | $ | 16,119,809 | $ | 104,257,478 | $ | (88,137,669 | ) | (84.5 | )% | |||||||||||||||
| Cost of goods sold | 12,059,825 | 74.8 | % | 83,674,247 | 80.3 | % | (71,614,422 | ) | (85.6 | )% | ||||||||||||||
| Gross profit | 4,059,984 | 25.2 | % | 20,583,231 | 19.7 | % | (16,523,247 | ) | (80.3 | )% | ||||||||||||||
| Gross margin | 25.2 | % | 19.7 | % | ||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Advertising | 423,153 | 2.6 | % | 9,437,657 | 9.1 | % | (9,014,504 | ) | (95.5 | )% | ||||||||||||||
| Selling, general & administrative | 5,128,823 | 32.0 | % | 9,940,889 | 9.5 | % | (4,812,066 | ) | (48.4 | )% | ||||||||||||||
| Depreciation | 1,978,114 | 12.3 | % | 2,142,433 | 2.1 | % | (164,318 | ) | (7.7 | )% | ||||||||||||||
| Total operating expenses | 7,530,090 | 46.9 | % | 21,520,979 | 20.6 | % | (13,990,889 | ) | (65.0 | )% | ||||||||||||||
| Loss from operations | (3,470,106 | ) | (21.5 | )% | (937,748 | ) | (0.9 | )% | (2,532,358 | ) | 270.0 | % | ||||||||||||
| Loss on extinguishment of debt | - | - | - | - | - | - | ||||||||||||||||||
| Change in fair value of warrants | 15,000 | 0.1 | % | - | - | 15,000 | - | |||||||||||||||||
| Interest expense | 522,861 | 3.2 | % | - | - | 522,861 | - | |||||||||||||||||
| (Loss) before income tax | (4,007,967 | ) | (24.9 | )% | (937,748 | ) | (0.9 | )% | (3,070,219 | ) | 327.4 | % | ||||||||||||
| Income tax benefit (expense) | (1,000 | ) | 0.0 | % | 38,037 | (0.0 | )% | (39,037 | ) | ( | )% | |||||||||||||
| Net loss | $ | (4,008,967 | ) | (24.9 | )% | $ | (899,711 | ) | (0.9 | )% | $ | (3,109,256 | ) | 345.6 | % | |||||||||
For the Six Months Ended June 30,
| Six months ended June 30, | Change | |||||||||||||||||||||||
| 2023 | % of Rev. | 2022 | % of Rev. | Amount | % | |||||||||||||||||||
| Net revenue | $ | 32,320,813 | $ | 199,149,626 | $ | (166,828,813 | ) | (83.8 | )% | |||||||||||||||
| Cost of goods sold | 24,829,288 | 76.8 | % | 160,072,167 | 80.4 | % | (135,242,879 | ) | (84.5 | )% | ||||||||||||||
| Gross profit | 7,491,525 | 23.2 | % | 39,077,459 | 19.6 | % | (31,585,934 | ) | (80.8 | )% | ||||||||||||||
| Gross margin | 23.2 | % | 19.6 | % | ||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Advertising | 1,567,293 | 4.8 | % | 19,138,949 | 9.6 | % | (17,571,656 | ) | (91.8 | )% | ||||||||||||||
| Selling, general & administrative | 11,157,741 | 34.6 | % | 21,613,616 | 10.9 | % | (10,455,875 | ) | (48.4 | )% | ||||||||||||||
| Depreciation | 3,977,030 | 12.3 | % | 4,096,895 | 2.1 | % | (119,865 | ) | (2.9 | )% | ||||||||||||||
| Total operating expenses | 16,702,064 | 51.7 | % | 44,849,460 | 22.5 | % | (28,147,396 | ) | (62.8 | )% | ||||||||||||||
| Loss from operations | (9,210,539 | ) | (28.5 | )% | (5,772,001 | ) | (2.9 | )% | (3,438,538 | ) | 59.6 | % | ||||||||||||
| Loss on extinguishment of debt | 879,045 | 2.7 | % | - | - | - | - | |||||||||||||||||
| Change in fair value of warrants | (541,000 | ) | (1.7 | )% | - | - | (541,000 | ) | - | |||||||||||||||
| Interest expense | 939,166 | 2.9 | % | - | - | 939,166 | - | |||||||||||||||||
| Loss before income tax | (10,487,750 | (32.4 | )% | (5,772,001 | ) | (2.9 | )% | (4,715,749 | ) | 81.7 | % | |||||||||||||
| Income tax expense (benefit) | 1,000 | 0.0 | % | (919,013 | ) | (0.5 | )% | 920,103 | (99.9 | )% | ||||||||||||||
| Net loss | $ | (10,488,750 | ) | (32.5 | )% | $ | (4,852,898 | ) | (2.4 | )% | $ | (5,635,852 | ) | 116.1 | % | |||||||||
Revenue
Revenue for the three months ended June 30, 2023, decreased by $88.1 million, or 84.5%, compared to the same prior year period, primarily attributable to supply chain disruptions and the lack of product availability coupled with a decrease in advertising spend because of our liquidity squeeze which peaked in early February and led to vendors not giving us access to their full product catalog. Compared to the same prior year period, traffic declined by 58.4% in the three-month period ended June 30, 2023, the site conversion rate decreased by 47.4% and average order value decreased by 9.3%.
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For the six months ended June 30, 2023, revenue decreased by $166.8 million, or 83.8 %, compared to the same prior year period, also attributable to supply chain disruptions and the lack of product availability coupled with a decrease in advertising spend due to our liquidity squeeze which peaked in early February and led to vendors not giving us access to their full product catalog. Compared to the same prior year period, traffic declined by 54.0% in the six-month period ended June 30, 2023, the site conversion rate decreased by 50.7% and average order value decreased by 9.0%.
We believe that the decrease in traffic and the site conversion rate was primarily attributed to lower orders because of product unavailability, supply chain interruptions, reduction in discretionary spending and a significant reduction in advertising spending by the Company.
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 June 30, 2023, cost of goods sold decreased by $71.6 million, or 85.6%, compared to the same prior year period. This decrease in the cost of goods sold was primarily driven by decreases in the number of orders or products sold and related shipping costs.
For the three months ended June 30, 2023, cost of goods sold was 74.8% compared to 80.3% of revenue in the respective prior year period. The 5.5% decrease in cost of goods sold as a percentage of revenue was primarily attributable to changes in product mix, as well as ongoing supply chain disruptions and the lack of product availability as a result of our liquidity squeeze which peaked in early February.
For the six months ended June 30, 2023, cost of goods sold was 76.8% compared to 80.4% of revenue in the respective prior year period. The 3.6% decrease in cost of goods sold as a percentage of revenue was primarily attributable to changes in product mix, as well as ongoing supply chain disruptions and the lack of product availability as a result of our liquidity squeeze which peaked in early February.
Gross Profit and Gross Margin
Gross profit decreased by $16.5 million, or 80.3%, for the three months ended June 30, 2023, compared to the same prior year period, primarily due to an 84.5% decrease in revenue.
Gross profit decreased by $31.6 million, or 80.8%, for the six months ended June 30, 2023, compared to the same prior year period, primarily due to an 83.8% decrease in revenue.
Gross margin of 23.2% for the six months ended June 30, 2023, was higher than the gross margin of 19.6% for the six months ended June 30, 2022, primarily attributable to a change in the product category revenue mix as discussed above and shipping cost savings which was partially offset by increases in product costs.
Operating Expenses
Advertising expense decreased $9.0 million, or 95.5%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to reduction in discretionary spending which led to lower traffic and number of clicks. As a percentage of revenue, advertising expenses were 2.6% and 9.1% for the three months ended June 30, 2023 and 2022, respectively. The decrease in percentage was primarily attributable to a significant reduction in advertising expenditures.
Advertising expense decreased $17.6 million, or 91.8%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, also due to reduction in discretionary spending which led to lower traffic and number of clicks. As a percentage of revenue, advertising expenses were 4.8% and 9.6% for the six months ended June 30, 2023, and 2022, respectively. The decrease in percentage was also attributable to a significant reduction in advertising expenditures.
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Selling, general and administrative (“SG&A”) expenses decreased $4.8 million, or 48.4%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. This decrease was primarily attributable to a decrease in outsourced sales and customer service expenses of $1.1 million, inhouse direct sales expenses of $0.4 million, research development expenses of $0.6 million, professional fees of $0.4 million, insurance costs of $0.3 million and various other immaterial decreases. Selling, general and administrative (“SG&A”) expenses decreased $10.5 million, or 48.4%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. This decrease was primarily attributable to a decrease in payroll costs of $1.5 million, outsourced costs of $1.2 million, research and development costs of $0.9 million, office costs of $0.4 million, professional fees of $0.4 million public company costs of $0.3 million and various other immaterial decreases.
Depreciation expense decreased $0.2 million or 7.7% for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. Depreciation expense decreased $0.1 million or 2.9% for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.
Interest Expense
Interest expense was $522,861, an increase of $522,861 for the three months ended June 30, 2023, compared to $0 for the three months ended June 30, 2022. Interest expense for the six months ended June 30, 2023 was $9399,166 an increase of $939,166, compared to the $0 for the three months ended June 30, 2022 of which $615,451 was related to JGB debt and $299,478 was related to other loans plus accretion of discount
Income Tax Benefit
Income tax expense was $1,000 for the three and six months ended June 30, 2023, compared to a benefit of $38,037 for the three months ended June 30, 2022 and a benefit of $919,103 for the six months ended June 30, 2023. For the three months ended June 30, 2023, the effective income tax rate was 0.0%, compared to (4.1)% for the three months ended June 30, 2022. For the six months ended June 30, 2022, the effective tax rate was (15.9)%. The Company incurred a loss for the quarter and six months ended June 30, 2023 and elected a full valuation allowance for the deferred tax asset.
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.
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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 | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net loss | $ | (4,008,967 | ) | $ | (899,711 | ) | $ | (10,488,750 | ) | $ | (4,852,898 | ) | ||||
| Interest expense | 522,861 | - | 939,166 | - | ||||||||||||
| Income tax expense (benefit) | 1,000 | (38,037 | ) | 1,000 | (919,103 | ) | ||||||||||
| Depreciation | 1,978,114 | 2,142,433 | 3,977,030 | 4,096,895 | ||||||||||||
| EBITDA | (1,508,993 | ) | 1,204,685 | (5,571,554 | ) | (1,675,106 | ) | |||||||||
| Share compensation expense included in statement of operations | 458,981 | (180,529 | ) | 1,114,568 | 686,841 | |||||||||||
| Legal & settlement expenses (1) | 102,426 | 316,743 | 102,426 | 596,385 | ||||||||||||
| Adjusted EBITDA Total | $ | (945,585 | ) | $ | 1,340,899 | $ | (4,354,560 | ) | $ | (391,880 | ) | |||||
| % of revenue | -5.9 | % | 1.3 | % | -13.5 | % | -0.2 | % | ||||||||
| (1) | Represents legal and settlement expenses related to significant matters that do not impact the fundamentals of our operations, pertaining to: (a) 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. |
Net loss increased by $3.1 million for the three months ended June 30, 2023, as compared to the same prior year period, primarily driven by a decrease in gross profit of $16.5 million partially offset by a decrease in operating expenses of $14.0 million, The year-over-year decrease in Adjusted EBITDA for the three months ended June 30, 2023, as compared to the same prior year period, was primarily attributable to an increase in net loss, interest of $0.3 million partially offset by a decrease in non-cash share 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 (used in) 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.
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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 operating activities to free cash flow for each of the periods indicated.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net cash used in operating activities | $ | (1,440,8612 | ) | $ | (6,741,471 | ) | $ | (5,148,214 | ) | $ | (12,263,036 | ) | ||||
| Purchase of property and equipment | (2,893 | ) | (29,160 | ) | (2,893 | ) | (45,360 | ) | ||||||||
| Website and software development costs | (595,654 | ) | (1,739,802 | ) | (1,477,297 | ) | (3,577,764 | ) | ||||||||
| Free cash flow | $ | (2,139,399 | ) | $ | (8,510,433 | ) | $ | (6,628,404 | ) | $ | (15,886,160 | ) | ||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net cash from profit and loss account | $ | (1,078,160 | ) | $ | (967,683 | ) | $ | (4,158,185 | ) | $ | (796,347 | ) | ||||
| Net cash used in working capital changes | (462,692 | ) | (7,709,154 | ) | (990,029 | ) | (11,466,689 | ) | ||||||||
| Total net cash used in operating activiteis | $ | (1,540,852 | ) | $ | (6,741,471 | ) | $ | (5,148,214 | ) | $ | (12,263,036 | ) | ||||
Liquidity and Capital Resources
The Company’s cash was $0.3 million as of June 30, 2023. We have operated with a negative working capital model since our inception. The Company has a working capital deficiency of approximately $47.3 million as of June 30, 2023. We continue to face macro-economic headwinds, liquidity issues and the resulting declining revenue and profitability, which increased the working capital deficit in the current year and resulted in the use of approximately $5.1 million in cash from operating activities, of which $1.0 million was attributable to changes in working capital during the quarter ended June 30, 2023. With this, substantial doubt exists about the Company’s ability to continue as a going concern within one year after filing this Quarterly Report on Form 10-Q.
We obtained additional financing for $1.25 million, from certain investors and our Chief Executive Officer, from the sale and issuance of convertible notes and warrants on May 19, 2023 and June 14, 2023 and additional borrowing of $0.7 million from JGB on June 16, 2023.
Additionally, on July 14, 2023, the Company entered into a Securities Purchase Agreement (the “Lind Purchase Agreement”) with Lind Global Partners II, L.P.(“Lind”). The Lind Purchase Agreement provides for loans in an aggregate principal amount of up to $10.0 million under various tranches. As a result, the Company received funding in the amount of $3.75 million and pursuant to the terms of the Lind Purchase Agreement. Lind agreed to fund an additional $1.0 million upon (i) the effectiveness of a registration statement filed with the SEC for the registration of the shares of Common Stock underlying the notes and warrants issued to Lind and (ii) the receipt of Stockholder Approval (as defined in the Lind Purchase Agreement). In consideration for the $4.75 million, the Company issued and sold to Lind, in a private placement, (a) a senior secured convertible promissory note in the aggregate principal amount of $5,367,500 and (b) 12,837,838 warrants to purchase the Company’s Common Stock at an exercise price of $0.50 per share. This note was issued at a discount and matures on July 14, 2024. The warrants expire 5 years from the date of issuance and may be exercised on a cashless basis.
The Company can borrow additional amounts of no less than $1.0 million and shall not exceed $5.25 million in which the lender has discretion as to whether or not to lend the additional amounts.
Our ability to meet our obligations as they become due is dependent upon the degree of the success of our plans. Our ability to meet our obligations as they become due is dependent upon increased and stabilized revenue and profitability and additional funding. The Company believes that the operational adjustments that have been implemented, and the funds raised, will improve the financial position.
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See 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 2022 Form 10-K.
Cash Flow Summary
The change in cash was as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net cash used in operating activities | $ | (1,440,861 | ) | $ | (6,741,471 | ) | $ | (5,048,214 | ) | $ | (12,263,036 | ) | ||||
| Net cash used in investing activities | (598,548 | ) | (1,768,962 | ) | (1,230,190 | ) | (3,623,124 | ) | ||||||||
| Net cash provided by financing activities | 1,850,000 | - | 2,750,000 | - | ||||||||||||
| Net change in cash | $ | (189,400 | ) | $ | (8,510,433 | ) | $ | (3,528,404 | ) | $ | (15,886,160 | ) | ||||
Cash Flows from Operating Activities
The net cash used in operating activities consists of net 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. Vendor terms range on average from one week to eight weeks.
Net cash used in operating activities in the three months ended June 30, 2023, was $1.4 million, and was driven primarily by the impact of a net loss of $4.0 million, and a negative net change in operating assets and liabilities of $0.5 primarily comprising of a decrease in prepaids of $0.5 million decrease in customer deposits $0.4 million, accounts payable of $0.2 million which was partially offset by non-cash depreciation and amortization expense of $2.0 million.
Net cash used in operating activities in the six months ended June 30, 2023, was $5.1 million, and was driven primarily by the impact of a net loss of $10.3 million, and a negative net change in operating assets and liabilities of $1.0 million primarily comprising of an increase in accounts payables and non-cash depreciation and amortization expenses of $4.3 million and other non-cash charges of $1.8 million.
Cash Flows from Investing Activities
Net cash used in investing activities was $0.6 million for the three months ended June 30, 2023, compared to $1.8 million for the three months ended June 30, 2022, which primarily consisted of website and software development costs in both periods. The current year amount was partially offset by the proceeds from the sale of the Onyx.com domain name. Cash used in investing activities varies depending on the timing of technology and product development cycles.
Cash Flows from Financing Activities
Net cash provided from financing activities for the three months ended June 30, 2023, was $2.0 million, compared to $0 in the three months ended June 30, 2022 as the Company issued convertible notes of $1.3 million and a non-convertible note for $0.7 million.
Net cash provided by financing activities for the six months ended June 30, 2023, was $2.9 million compared to $0 in the six months ended June 30, 2022, due to borrowings from the issuance of convertible notes of $4.2 million and $0.7 million of non-convertible note offset by repayment of $2.0 million of the JGB note.
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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 $98,426 for the three months ended June 30, 2023.
Future minimum lease payments under non-cancelable operating leases as of June 30, 2023, are as follows:
| July 1, 2023, to December 31, 2023 | $ | 359,322 | ||
| January 1, 2024 to December 31, 2024 | 276,358 | |||
| January 1, 2024 to September 30, 2025 | 197,940 | |||
| Total future minimum lease payments | $ | 833,620 |
Warrants
In connection with the entry into the JGB Loan Agreement, with respect to the Initial Term Loan Advance, the Company issued JGB a warrant (the “Warrant”) to purchase 1,000,000 shares (the “Warrant Shares”) of the Company’s Class A Common Stock.
The Company received funding of $5,000,000 in cash on October 21, 2022. The warrant was valued at $799,000 at issuance using the Black-Scholes model. The Company paid approximately $0.2 million in costs in connection with the loan. The loan calls for thirty monthly payments of $183,333 beginning April 30, 2023, with the last payment due on September 30, 2025. On February 22, 2023 the Company and the Agent executed an amendment to the Loan Agreement (the “Amendment”), which, among other things, the Company agreed to repay the principal amount of the term loan to the Agent in the following installments: (A) $2 million on February 23, 2023, (B) $1 million on August 22, 2023 and (C) the entire remaining principal balance and all accrued but unpaid interest which remained at the original loan rate of 8.0% (including the Original Issue Discount, as defined in the Amendment) on August 22, 2024.
In addition, the Company issued convertible notes on March 6, 2023 for an aggregate principal amount of $2.9 million and the Company issued the investors warrants to purchase 580,000 shares of common stock. These warrants were valued at approximately $158,000 at issuance using the Black-Sholes model.
During the second quarter 2023 the Company issued convertible notes in the aggregate principal amount of $1.25 million and warrants to purchase 2,777,777 shares of the Common Stock. These warrants were valued at approximately $911,000 at issuance using the Black-Scholes model. The Company accounted for the warrants by allocating approximately $527,000 as a discount on the debt and this discount will be amortized over the life of the loans. In addition, the Company recorded amortization of approximately $24,000 to interest expense.
The warrants liability balance includes the values of warrants issued in connection with issuance of convertible debt issued by the Company. The Company periodically reviews the values of these warrants based on the historical and future values of the Company’s stock, it’s volatility and the risk-free rate using the Black-Scholes model. As of June 30, 2023 and December 31, 2022 the liability was $168,000 and $551,000, respectively. A change in any of the aforementioned factors over time could result in a material adjustment to this liability.
The Company continues to 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 vary depending on the timing of technology and product development cycles.
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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 $1,000 in taxes in cash for the six months ended June 30, 2023, and $2,608 for the six months ended June 30, 2022. As of December 31, 2022, the Company had $17,034,462 in federal net operating losses (“NOL”), all remaining from 2019 and onwards and accordingly may be available to offset future taxable income indefinitely. However, the NOL’s are subject to an 80% taxable income limitation for all periods after January 1, 2021. The Company does not currently anticipate any significant increase or decrease in the total amount of unrecognized tax benefits within the next twelve months.
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 condensed consolidated financial statements, management has utilized available information, including our history, industry standards and the current and projected economic environments, among other factors, in forming its estimates, assumptions and judgments, considering 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 condensed consolidated financial statements is set forth below. See Note 2 of the Notes to Consolidated Financial Statements included in this report and in our 2022 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, 2023 and December 31, 2022, were $0.9 million and $3.1 million, respectively, which are reflected as customer deposits on our condensed consolidated balance sheets.
The outstanding days from the order date of our unshipped and undelivered orders were, on average, estimated at 11.1 days as of April 30, 2023.
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.
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If actual sales returns are not consistent with our estimates, or if we must 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 and six months ended June 30, 2023 and 2022 were as follows:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Balance at beginning of period | $ | 1,210,692 | $ | 883,653 | $ | 549,250 | $ | 738,465 | ||||||||
| Adjustment | (997,157 | ) | (127,546 | ) | (335,715 | ) | 17,642 | |||||||||
| Balance at closing of period | $ | 213,535 | $ | 756,107 | $ | 213,535 | $ | 756,107 | ||||||||
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 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 make judgments as to ultimate realization. The amount of capitalized software costs for the six months ended June 30, 2023 and 2022 were as follows:
| Six months ended June 30, | Capitalized Software | |||
| 2022 | $ | 3,577,764 | ||
| 2023 | $ | 1,477,297 | ||
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 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 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.
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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 Credit Losses
Accounts receivable balances include amounts due from customers. The Company periodically reviews its accounts receivable balances to determine whether an allowance for credit losses 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, 2023 and December 31, 2022, the Company determined that an allowance for credit losses was not necessary. As circumstances change, it could result in material adjustments to the allowance for credit losses.
Recent Accounting Pronouncements
See Note 2 of the Notes to the Condensed 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
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 conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2023. 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, 2023.
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, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Item 1. Legal Proceedings
We are routinely involved in several legal actions, proceedings, litigation, and other disputes arising in the ordinary course of our business. See Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding legal matters and proceedings, which is incorporated herein by reference.
Item 1A. Risk Factors
There have been no material changes to our risk factors from those previously disclosed in our 2022 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
The information required by this Item 2 related to the issuance of convertible notes and warrants to purchase shares of the Company’s Common Stock issued to certain investors is contained in the Current Reports on Form 8-K filed with SEC on May 22, 2023, June 20, 2023 and July 17, 2023.
Issuer Purchases of Equity Securities
During the three months ended June 30, 2023, the Company did not repurchase any of its securities.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
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Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PARTS iD, INC. | ||
| August 15, 2023 | By: | /s/ Lev Peker |
| Lev Peker | ||
| Chief Executive Officer | ||
| August 15, 2023 | By: | /s/ James Doss |
| James Doss | ||
| Chief Financial Officer | ||
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