UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
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TABLE OF CONTENTS
Page | |||
| CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS | ii | ||
| PART I | |||
| ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED) | 1 | |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 12 | |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 20 | |
| ITEM 4. | CONTROLS AND PROCEDURES | 20 | |
| PART II | 21 | ||
| ITEM 1. | LEGAL PROCEEDINGS | 21 | |
| ITEM 1A. | RISK FACTORS | 21 | |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 21 | |
| ITEM 6. | EXHIBITS | 22 | |
| SIGNATURES | 23 | ||
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements in this report 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 of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (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 likely impacts of the COVID-19 pandemic. 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, which has 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:
| ● | costs related to operating as a public company; | |
| ● | difficulties in managing our international business operations, particularly in the Ukraine, including with respect to enforcing the terms of our agreements with our contractors and managing increasing costs of operations; | |
| ● | the impact of health epidemics, including the COVID-19 pandemic, on our business and the actions we may take in response thereto; | |
| ● | 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; | |
| ● | 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; | |
| ● | competition and our ability to counter competition, including changes to the algorithms of Google and other search engines; | |
| ● | 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; | |
| ● | ability to maintain and enforce intellectual property rights and ability to maintain technology leadership; | |
| ● | our future capital requirements, our ability to raise capital and utilize sources of cash; | |
| ● | our ability to obtain funding for our operations; | |
| ● | 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; | |
| ● | disruptions in the supply chain; 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 II, Item 1A of this report and Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2020), 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.
ii
PART I
Item 1. Financial Statements
Index to Condensed Consolidated Financial Statements
| Page | |
| Condensed Unaudited 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, 2021 and December 31, 2020
| June 30, 2021 (Unaudited) | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets | ||||||||
| Deferred tax assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Customer deposits | ||||||||
| Accrued expenses | ||||||||
| Other current liabilities | ||||||||
| Notes payable, current portion | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES (Note 6) | ||||||||
| SHAREHOLDERS’ DEFICIT | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $0.0001 par value per share; | ||||||||
| Additional paid in capital | - | |||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Shareholder’s Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
PARTS iD, INC.
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 2021 and 2020
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2021 (Unaudited) | 2020 (Unaudited) | 2021 (Unaudited) | 2020 (Unaudited) | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Advertising | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| Income tax expense | ||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Less: Preferred stocks dividends | - | - | ||||||||||||||
| Income (Loss) available to common shareholders | $ | $ | $ | ( | ) | $ | ||||||||||
| Income (Loss) per common share | ||||||||||||||||
| Basic income (loss) per share | $ | $ | $ | ( | ) | $ | ||||||||||
| Weighted average number of shares (basic) | ||||||||||||||||
| Diluted income (loss) per share | $ | $ | $ | ( | ) | $ | ||||||||||
| Weighted average number of shares (diluted) | ||||||||||||||||
The accompanying notes are an integral part of these 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, 2021 and 2020 (Unaudited)
| Class A Common Stock | Class F Common Stock | Preferred Stock | Additional Paid In | Accumulated Deficit | Total Shareholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Amount | Deficit | ||||||||||||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Preferred stock dividend | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Preferred stock dividend | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Share based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Issue of shares on release of working capital reserve | ( | ) | ||||||||||||||||||||||||||||||||||
| Share based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
PARTS iD, INC.
Condensed Consolidated Statements of Cash Flows
For the three and six months ended June 30, 2021 and 2020 (Unaudited)
| Six months ended June 30, | ||||||||
| 2021 (Unaudited) | 2020 (Unaudited) | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Deferred income tax | - | |||||||
| Share based compensation | - | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable | ( | ) | ||||||
| Customer deposits | ||||||||
| Accrued expenses | ||||||||
| Other current liabilities | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Website and software development costs | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Principal paid on notes payable | ( | ) | ( | ) | ||||
| Payments of preferred stock dividends | - | ( | ) | |||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net change in cash | ||||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flows information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | - | |||||
The accompanying notes are an integral part of the 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” or “us”), is a technology-driven, digital commerce company focused on creating custom
infrastructure and unique user experiences within niche markets.
Merger between Legacy Acquisition Corp. and Onyx Enterprises Int’l, Corp.
On November 20, 2020, Legacy Acquisition Corp., a special purpose acquisition company and publicly traded “shell company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended) (“Legacy”), and Onyx Enterprises Int’l, Corp., a New Jersey corporation (“Onyx”), consummated a business combination (the “Business Combination”) pursuant to that Business Combination Agreement, dated as of September 18, 2020 (the “Business Combination Agreement”), by and among Legacy, Excel Merger Sub I, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Legacy and directly owned subsidiary of Merger Sub 2 as defined below (“Merger Sub 1”), Excel Merger Sub II, LLC, a Delaware limited liability company and direct wholly owned subsidiary of Legacy (“Merger Sub 2”), Onyx, and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the stockholder representative, pursuant to which: (a) Merger Sub 1 merged with and into Onyx, with Onyx surviving as a direct wholly-owned subsidiary of Merger Sub 2, (b) Onyx merged with and into Merger Sub 2, with Merger Sub 2 surviving as direct wholly-owned subsidiary of Legacy, and (c) Legacy changed its name from Legacy Acquisition Corp. to PARTS iD, Inc. and Merger Sub 2 changed its name to PARTS iD, LLC.
At the effective time of the Business Combination,
Legacy issued
The Business Combination was treated as a recapitalization and reverse acquisition for financial reporting purposes. Onyx is considered the acquirer for accounting purposes, and Legacy’s historical financial statements before the Business Combination have been replaced with the historical financial statements of Onyx in this and future filings with the SEC. Accordingly, the operations of the Company are primarily comprised of the historical operations of Onyx and the financial position and result of operations of Legacy have been incorporated into the Company’s consolidated financial statements beginning on November 20, 2020, the effective date of the Business Combination. Similarly, the outstanding number of common shares of Onyx, its par value and Additional paid in capital (APIC) as of December 31, 2019 were adjusted to reflect the exchange of shares and its par value of the legal acquirer, Legacy.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements are presented in U.S. dollars and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and as amended by Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).
6
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The December 31, 2020 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Results for interim periods should not be considered indicative of results for any other interim period or for the full year.
The consolidated financial statements include the accounts of PARTS iD, Inc. and its wholly-owned subsidiary PARTS iD, LLC. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements include revenue recognition, return allowances, allowance for doubtful accounts, depreciation, inventory valuation, valuation of deferred income tax assets and the capitalization and recoverability of software development costs.
Stock Compensation Policy
Compensation expense related to stock option awards and restricted stock units granted to certain employees, directors and consultants is based on the fair value of the awards on the grant date. If the service inception date precedes the grant date, accrual of compensation cost for periods before the grant date is based on the fair value of the award at the reporting date. In the period in which the grant date occurs, cumulative compensation cost is adjusted to reflect the cumulative effect of measuring compensation cost based on fair value at the grant date rather than the fair value previously used at the service inception date or any subsequent reporting date. Forfeitures are recorded as they occur. The Company recognizes compensation cost related to time-vested options and restricted stock units with graded vesting features on a straight-line basis over the requisite service period. Compensation cost related to a performance-vesting options and performance-based units, where a performance condition or a market condition that affects vesting exists, is recognized over the shortest of the explicit, implicit, or defined service periods. Compensation cost is adjusted depending on whether or not the performance condition is achieved. If the achievement of the performance condition is probable or becomes probable, the full fair value of the award is recognized. If the achievement of the performance condition is not probable or ceases to be probable, then no compensation cost is recognized.
Significant Accounting Policies
There have been no significant changes from the significant accounting policies disclosed in Note 2 of the “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, 2020 (our “2020 Form 10-K”).
7
Note 3 – Property and equipment
Property and equipment consisted of the following as of:
| June 30, 2021 | December 31, 2020 | |||||||
| Website and software development | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Computers and electronics | ||||||||
| Vehicles | ||||||||
| Leasehold improvements | ||||||||
| Video and equipment | ||||||||
| Total - Gross | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total - Net | $ | $ | ||||||
Property and equipment included the following amounts for assets recorded under capital leases.
| June 30, 2021 | December 31, 2020 | |||||||
| Gross value at cost | $ | $ | ||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
Depreciation of property and equipment for the
three months ended June 30, 2021 and 2020 amounted to $
Note 4 – Borrowings
Equipment Leases
As of June 30, 2021 and December 31, 2020, the
Company’s borrowings consisted of equipment leases at an interest rate of
Future minimum lease payments under non-cancelable capital leases during the year ended June 30, are as follows:
| 2022 | $ | |||
| Less: Interest expenses | ||||
| Total | $ |
8
Note 5 – Shareholders’ Deficit
Preferred Stock
As of June 30, 2021, the Company had authorized
for issuance a total of
Common Stock
Upon finalizing the calculation of the aggregate
purchase price with respect to the Business Combination in April 2021, the Company released
As of June 30, 2021, the Company had
| b) | Equity Plans reserve: |
Further, pursuant to the Business Combination Agreement, the Sponsor has a right to 1,502,129 shares of Class A common stock should its price exceed $15.00 per share for any thirty-day trading period during the 730 calendar days after the closing of the Business Combination.
Note 6 – Commitments and Contingencies
As of June 30, 2021, there were no material changes to the Company’s legal matters and other contingencies disclosed in our 2020 Form 10-K, except for the following.
Seoul Semiconductor Co. LTD et. al. v. Onyx Enterprises Int’l Corp
On May 15, 2020, the Company was sued for patent infringement by Seoul Semiconductor Company (“Seoul Semiconductors”), a designer of LED component packages and the manufacturing processes necessary to produce LED packages. The Civil Action is captioned as Seoul Semiconductor Co., LTD. and Seoul Viosys Co., LTD v. Onyx Enterprises Int’l Corp, Civil Action Number 2:20-cv-05955 and was heard in the United States District Court for the District of New Jersey. The Company did not have knowledge of these patents, nor does it manufacturer LEDs. Rather, the Company sources lighting products for sale on its platforms through third party manufacturers. Seoul Semiconductors sought a royalty for past sales and an agreement to source future LED components from one of its approved component manufacturers. On April 29, 2021, the Company and Seoul Semiconductors entered into a Settlement and Patent License Agreement, pursuant to which the Company paid a cash settlement to Seoul Semiconductors, and which contained a mutual release of certain claims each party may have had against the other as well as certain licensing terms. The final disposition of this matter did not have a material adverse effect on the Company’s balance sheets or results of operations.
9
Stockholder Litigation and Business Combination Litigation
With respect to the Stockholder Litigation (as defined and described in Note 6 of the “Notes to Consolidated Financial Statements” included in our 2020 Form 10-K, on March 4, 2021, the Founder Stockholders (as defined in such Note 6) filed a motion to preserve various causes of action related to the Business Combination and the claims for indemnification. That motion was denied without prejudice on June 22, 2021. On June 18, 2021, the Founder Stockholders filed a “Supplemental Complaint” in the Stockholder Litigation related to the indemnification claims. The clerk of the court dismissed their Supplemental Complaint because the court did not grant leave to file a supplemental complaint. The Founder Stockholders filed a motion objecting to the order denying their motion to preserve claims for future litigation and have asked the Special Master to opine on the Supplemental Complaint and to preserve those claims.
Note 7 — Stock-Based Compensation
During the three and six months ended June 30,
2021, selling, general and administrative expenses included $
During the three and six months ended June 30,
2021, 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”).
There are
The 2020 EIP provides for the grant of stock options, including incentive stock options, non-qualified stock options, restricted stock, dividend equivalents, stock payments, restricted stock units, performance shares, other incentive awards, stock appreciation rights, and cash awards (collectively “awards”). The awards may be granted to employees and consultants of the Company’s affiliates and subsidiaries.
Beginning in January 2021, the Company has granted both restricted stock units (“RSUs”) and restricted performance-based stock units (“PSUs”) as described below.
Restricted Stock Units
The following table summarizes the activity related to RSUs during the six months ended June 30, 2021:
| Weighted | ||||||||
| Restricted | Average | |||||||
| Stock | Grant Date | |||||||
| Units | Fair Value | |||||||
| Balance at January 1, 2021 | $ | |||||||
| Granted | $ | |||||||
| Balance at June 30, 2021 | $ | |||||||
10
The Company has granted RSUs that
vest over a specified period, generally up to three years from the date of grant. Of the
Performance Based Restricted Stock Units
The following table summarizes the activity related to PSUs during the six months ended June 30, 2021:
| PSU Type | Balance of PSUs at January 01, 2021 | Units Granted | Weighted Average grant date fair value | Balance of PSUs at June 30, 2021 | ||||||||||||
| PSUs subject to Net Revenue | $ | |||||||||||||||
| PSUs subject to Cash Flow | $ | |||||||||||||||
| Total | ||||||||||||||||
During the six months ended June 30,
2021, the Company granted
Of the
During the three and six months ended
June 30, 2021, the Company recognized stock-based compensation expense associated with PSUs of $
Note 8 – Income Taxes
For the three months ended June 30, 2021 and 2020,
the effective income tax rates were
The effective income tax rates differ from the
federal statutory rate of
On March 27, 2020, the Coronavirus Aid, Relief,
and Economic Security Act (“CARES Act”) was enacted in the United Sates. The CARES Act contains several tax provisions, including
modifications to the NOL and business interest limitations as well as a technical correction to the recovery period for qualified improvement
property. The Company has evaluated these provisions in the CARES Act and does not expect a material impact to its tax provision, except
for the
The Company does not currently anticipate any significant increase or decrease of the total amount of unrecognized tax benefits within the next twelve months.
None of the Company’s U.S. federal or state income tax returns are currently under examination by the Internal Revenue Service (the “IRS”) or state authorities. However, fiscal years 2017 and later remain subject to examination by the IRS and respective states.
11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis of financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements, together with the related notes thereto, included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 (our “2020 Form 10-K”).
For the purposes of this section, “we,” “us,” “our,” “Onyx,” the “Company” and “PARTS iD” each refer to Onyx prior to the closing of the Business Combination and PARTS iD, Inc. following the closing of the Business Combination, as the context indicates, unless the context otherwise refers to Legacy Acquisition Corp.
Overview
PARTS iD, Inc. is a technology-driven, digital commerce company focused on creating custom infrastructure and unique user experiences within niche markets. PARTS iD was originally founded in 2008 as Onyx Enterprises, Int’l, Corp. Our vision is to develop a leading technology platform purpose-built for purchasing complex parts and accessories for all vehicle types with a complete repository of fitment data, and to deliver an unrivaled parts and accessories shopping experience of extraordinary choice, competitive prices, and fast delivery.
The success of CARiD.com has inspired pursuit of our long-term strategy to scale into similar markets via our proprietary built, modular digital commerce technology platform. While our core focus continues to be automotive, in August 2018, we launched seven new verticals (including BOATiD.com, MOTORCYCLEiD.com, CAMPERiD.com and more) which demonstrates fungibility of our technology platform. These verticals address similar market challenges and focus on the enthusiasts’ needs through our seamless shopping experience using proprietary tools and techniques.
Although the ongoing COVID-19 pandemic has caused an economic downturn on a global scale, disrupted global supply chains, and created significant uncertainty, volatility, and disruption across economies, it has also led to an increased adoption of online shopping by consumers, which has had a positive effect on the Company’s revenue. Despite increases in order cancellations and delivery times, the Company has largely been successful in managing its supply chain to date.
We have made significant investments to provide an enhanced experience to our diverse base of “do-it-yourself” (“DIY”), “do-it-for-me” (“DIFM”) and PRO (mechanics) customers. As of June 30, 2021, we had over 1,000 active product vendors with their many shipping locations across the nation. This distributed, inventory-light fulfillment model allowed us to offer customers over 17 million SKUs on the platform as of June 30, 2021. Furthermore, our proprietary fulfillment algorithm determines and selects the most optimal fulfillment location based on inventory availability and proximity to the customer, thereby providing faster delivery speed and decreasing the total cost to the customer. We continue to focus on improving our product offerings in the catalog, specifically for new verticals, original equipment (“OE”) and repair parts business.
Despite a decrease in traffic in the three and six months ended June 30, 2021 as compared to the same prior year periods, we experienced better conversions and higher average order values, which contributed to an increase of 5.6% and 28.8% in the total value of orders received in the three and six months ended June 30, 2021, respectively, over the same prior year periods. By category of accessories and parts, the primary drivers of the increases in the total value of orders received were increases in Wheels and Tires by 20.3% and 47.4%, and in Repair parts by 17.3% and 28.9%, in the three and six months ended June 30, 2021, respectively.
We have also been focused on increasing our presence in the DIFM segment of the automotive aftermarket industry, including growing related partnerships, and we chose to invest in a tire installation network as our first step. Using our purpose-built data architecture and differentiated technology, consumers can visit CARiD.com, research and choose from a wide variety of tires, and in the same transaction select a tire installation center near them and schedule an appointment. Through partnerships with tire installation businesses, we had 2,117 active tire installation locations nationwide as of June 30, 2021. We recently made a technical enhancement in the process of adding new locations, and management now expects steady growth in the number of installation locations in the near future. The tire installation network initiative is one of many programs we are working on to advance CARiD.com’s position as a one-stop shop and seamless solution for all car enthusiast needs.
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Management continues to focus on several other efforts to drive growth, including product cultivation, vendor optimization, distribution network expansion and marketing diversification.
Effects of the COVID-19 Pandemic
The global spread of COVID-19 and related measures to contain its spread (such as government-mandated business closures and shelter-in-place guidelines) have created significant volatility, uncertainty and economic disruption. Recently, the extent and severity of the pandemic and such containment measures have abated somewhat due to the general public’s utilization of COVID-19 vaccines. However, public concern over COVID-19 remains, and related containment measures may increase in the future, especially due to the recent spread of COVID-19 variants.
Although the COVID-19 pandemic and related measures to contain its spread have not adversely affected the Company’s results of operations to date, they have adversely affected certain components of the Company’s business, including by increasing cancellations (which can result in an increase in advertisement costs), shipping times and costs and inefficiencies in sourcing products. In future periods, the pandemic might cause shipping difficulties, including slowed deliveries to customers; the potential for increased cancellations by customers; and the ability of consumers to pay for products. Although consumer demand for and the inventory of the Company’s products have remained stable, in future periods the COVID-19 pandemic could have an adverse impact on the Company through reduced consumer demand for or inventory of its products. If there is a prolonged impact of COVID-19, it could adversely affect the Company’s business, results of operations, financial condition and liquidity, perhaps materially. The future impact of COVID-19 and these containment measures cannot be predicted with certainty and may increase the Company’s borrowing costs, if any, and other costs of capital and otherwise adversely affect its business, results of operations, financial condition and liquidity, and the Company cannot assure that it will have access to external financing at times and on terms it considers acceptable, or at all, or that it will not experience other liquidity issues going forward. For more information on the risks the COVID-19 pandemic poses to the business, see Item 1A. “Risk Factors” in our 2020 Form 10-K.
Key Financial and Operating Metrics
We measure our business using financial and operating metrics, as well as non-GAAP financial measures. See “Results of Operations – Non-GAAP Financial Measures” below for more information on non-GAAP financial measures. We monitor several key business metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions, including the following:
Traffic and Engagement Metrics
For the three months ended June 30,
| 2021 | 2020 | Change | % Change | |||||||||||||
| Number of Users | 31,984,337 | 39,014,126 | (7,029,789 | ) | (18.02 | )% | ||||||||||
| Number of Sessions | 59,523,329 | 76,376,487 | (16,853,158 | ) | (22.07 | )% | ||||||||||
| Bounce Rate | 13.45 | % | 14.57 | % | (1.12 | )% | (7.70 | )% | ||||||||
| Number of Pageviews | 255,491,738 | 323,963,567 | (68,471,829 | ) | (21.14 | )% | ||||||||||
| Pages/Session | 4.29 | 4.24 | 0.05 | 1.19 | % | |||||||||||
| Average Session Duration | 0:03:25 | 0:03:31 | (0:00:06) | (2.84 | )% | |||||||||||
For the six months ended June 30,
| 2021 | 2020 | Change | % Change | |||||||||||||
| Number of Users | 64,637,688 | 69,834,009 | (5,196,321 | ) | (7.44 | )% | ||||||||||
| Number of Sessions | 124,272,640 | 136,942,111 | (12,669,471 | ) | (9.25 | )% | ||||||||||
| Bounce Rate | 13.73 | % | 14.77 | % | (1.03 | )% | (7.01 | )% | ||||||||
| Number of Pageviews | 541,368,091 | 579,584,869 | (38,216,778 | ) | (6.59 | )% | ||||||||||
| Pages/Session | 4.36 | 4.23 | 0.13 | 2.93 | % | |||||||||||
| Average Session Duration | 0:03:26 | 0:03:29 | (0:00:03) | (1.44 | )% | |||||||||||
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We use the metrics above to gauge our ability to acquire targeted traffic and keep users engaged. This information informs us of how effective our proprietary technology, data, and content is, and helps us define our strategic roadmap and key initiatives.
Results of Operations
| Three months ended June 30, | Change | |||||||||||||||||||||||
| 2021 | % of Rev. | 2020 | % of Rev. | Amount | % | |||||||||||||||||||
| Revenue, net | $ | 130,409,332 | $ | 113,853,524 | $ | 16,555,808 | 14.5 | % | ||||||||||||||||
| Cost of goods sold | 104,270,051 | 80.0 | % | 89,655,601 | 78.7 | % | 14,614,450 | 16.3 | % | |||||||||||||||
| Gross profit | 26,139,281 | 20.0 | % | 24,197,923 | 21.3 | % | 1,941,358 | 8.0 | % | |||||||||||||||
| Gross Margin | 20.0 | % | 21.3 | % | ||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Advertising | 10,907,319 | 8.4 | % | 9,296,637 | 8.2 | % | 1,610,682 | 17.3 | % | |||||||||||||||
| Selling, general & administrative | 12,603,017 | 9.7 | % | 10,076,998 | 8.9 | % | 2,526,019 | 25.1 | % | |||||||||||||||
| Depreciation | 1,819,581 | 1.4 | % | 1,783,415 | 1.6 | % | 36,166 | 2.0 | % | |||||||||||||||
| Total operating expenses | 25,329,917 | 19.4 | % | 21,157,050 | 18.6 | % | 4,172,867 | 19.7 | % | |||||||||||||||
| Income from operations | 809,364 | 0.6 | % | 3,040,873 | 2.7 | % | (2,231,509 | ) | (11.7 | )% | ||||||||||||||
| Interest expense | 395 | 0.0 | % | 1,038 | 0.0 | % | (643 | ) | (61.9 | )% | ||||||||||||||
| Income before income tax | 808,969 | 0.6 | % | 3,039,835 | 2.7 | % | (2,230,866 | ) | (73.4 | )% | ||||||||||||||
| Income tax expense | 182,857 | 0.1 | % | 766,120 | 0.7 | % | (583,263 | ) | (76.1 | )% | ||||||||||||||
| Net income | $ | 626,112 | 0.5 | % | $ | 2,273,715 | 2.0 | % | $ | (1,647,603 | ) | (72.5 | )% | |||||||||||
| Six months ended June 30, | Change | |||||||||||||||||||||||
| 2021 | % of Rev. | 2020 | % of Rev. | Amount | % | |||||||||||||||||||
| Revenue, net | $ | 239,482,960 | $ | 184,579,489 | $ | 54,903,471 | 29.7 | % | ||||||||||||||||
| Cost of goods sold | 190,510,070 | 79.6 | % | 145,212,766 | 78.7 | % | 45,297,304 | 31.2 | % | |||||||||||||||
| Gross profit | 48,972,890 | 20.4 | % | 39,366,723 | 21.3 | % | 9,606,167 | 24.4 | % | |||||||||||||||
| Gross Margin | 20.4 | % | 21.3 | % | ||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Advertising | 21,406,705 | 8.9 | % | 15,390,787 | 8.3 | % | 6,015,918 | 39.1 | % | |||||||||||||||
| Selling, general & administrative | 23,961,724 | 10.0 | % | 18,748,252 | 10.2 | % | 5,213,472 | 27.8 | % | |||||||||||||||
| Depreciation | 3,593,354 | 1.5 | % | 3,308,098 | 1.8 | % | 285,256 | 8.6 | % | |||||||||||||||
| Total operating expenses | 48,961,783 | 20.4 | % | 37,447,137 | 20.3 | % | 11,514,646 | 30.7 | % | |||||||||||||||
| Income from operations | 11,107 | 0.0 | % | 1,919,586 | 1.0 | % | (1,908,479 | ) | (6.3 | )% | ||||||||||||||
| Interest expense | 6,885 | 0.0 | % | 6,821 | 0.0 | % | 64 | 0.9 | % | |||||||||||||||
| Income before income tax | 4,222 | 0.0 | % | 1,912,765 | 1.0 | % | (1,908,543 | ) | (99.8 | )% | ||||||||||||||
| Income tax expense | 22,923 | 0.0 | % | 483,620 | 0.3 | % | (460,697 | ) | (95.3 | )% | ||||||||||||||
| Net income (loss) | $ | (18,701 | ) | 0.0 | % | $ | 1,429,145 | 0.8 | % | $ | (1,447,846 | ) | (101.3 | )% | ||||||||||
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Revenue
Revenue increased $16.6 million, or 14.5%, for the three months ended June 30, 2021 and $54.9 million, or 29.7%, for the six months ended June 30, 2021, compared to the same prior year periods. These increases were primarily attributable to increases in conversion rates by 9.2% and 19.9% for the three and six months ended June 30, 2021, respectively, and in average order values by 20.0% and 16.4% for the three and six months ended June 30, 2021, respectively, partially offset by a decrease in traffic in both periods. The increases in conversion rates were primarily attributable to product growth in new verticals, search engine bidding automation and optimization, and increased e-commerce adoption. The increases in average order values were primarily attributable to increases in average numbers of items per order and changes in the mix of categories of items sold in the relevant periods.
Cost of Goods Sold
Cost of goods sold is composed of product cost, the associated fulfillment and handling costs charged by vendors, if any, and shipping costs. In the three and six months ended June 30, 2021, cost of goods sold increased by $14.6 million, or 16.3%, and $45.3 million, or 31.2%, respectively, compared to the three and six months ended June 30, 2020. These increases in cost of goods sold were primarily driven by increases in the number of orders or the products sold as well as increases in shipping costs.
For the three and six months ended June 30, 2021, cost of goods sold was 80.0% and 79.6% of revenue, respectively, compared to 78.7% of revenue in each of the three and six months ended June 30, 2020. The 1.3% and 0.9% increases in cost of goods sold as a percentage of revenue, respectively, were primarily attributable to increases in shipping costs and pricing and promotional tests in some categories. Management expects that these shipping cost pressures will ease as our supply chain becomes more efficient, which management expects will be the case if the current abatement of the COVID-19 pandemic and related containment measures continue.
Gross Profit and Gross Margin
Gross profit increased $1.9 million or 8.0%, and $9.6 million or 24.4%, for the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020. These increases were primarily attributable to the 14.5% and 29.7% increases in revenue in the three and six months ended June 30, 2021, respectively, partially offset by increased shipping costs and pricing and promotional tests.
Gross margin of 20.0% and 20.4% in the three and six months ended June 30, 2021, respectively, was lower than the gross margin of 21.3% in each of the three and six months ended June 30, 2020, primarily attributable to increases in shipping costs and pricing and promotional tests designed to maximize revenue and gross profit.
Operating Expenses
Advertising expenses increased $1.6 million or 17.3%, and $6.0 million or 39.1%, for the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020. These increases in advertising costs were primarily attributable to (i) an increase in cost-per-click, (ii) a change in the mix of advertising channels used, and (iii) testing of new advertising campaigns and content development. Management believes investment in advertisement is one of the key drivers of revenue and its efficiency is measured by management in terms of revenue per advertisement dollar spent.
Selling, general and administrative (“SG&A”) expenses increased $2.5 million, or 25.1%, and $5.2 million, or 27.8%, for the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020. These increases were primarily attributable to an increase of (i) $1.3 million and $1.3 million, respectively, of non-cash share-based expenses, (ii) $1.1 million and $2.2 million, respectively, of public company operating expenses, and (iii) $0.2 million and $1.3 million, respectively, in merchant services provider processing fees in line with the increase in revenue.
Depreciation expenses increased $0.04 million, or 2.0%, and $0.3 million, or 8.6%, respectively, for the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020.
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Interest Expense
Interest expense decreased by $643, or 61.9%, and increased by $64, or 0.9%, for the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020.
Income Tax Expense
Income tax expenses decreased by $0.6 million, or 76.1%, and $0.5 million, or 95.3%, for the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020. For the three and six months ended June 30, 2021, the effective income tax rate was 22.6% and 542.94%, respectively, compared to 25.2% and 25.28% for the three and six months ended June 30, 2020, respectively. The changes in rate were primarily attributable to changes in state taxes and expenses not deductible for income tax purposes.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
This report includes non-GAAP financial measures that differ from financial measures calculated in accordance with U.S. generally accepted accounting principles (“GAAP”). These non-GAAP financial measures may not be comparable to similar measures reported by other companies and should be considered in addition to, and not as a substitute for, or superior to, other measures prepared in accordance with GAAP. Management uses non-GAAP financial measures internally to evaluate the performance of the business. Additionally, management believes certain non-GAAP measures provide meaningful incremental information to investors to consider when evaluating the performance of the Company.
To this end, we provide EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. EBITDA consists of net income (loss) plus (a) interest expense; (b) income tax provision (or less benefit); and (c) depreciation expense. Adjusted EBITDA consists of EBITDA plus costs, fees, expenses, write offs and other items that do not impact the fundamentals of our operations, as described further below following the reconciliation of these metrics. Management believes these non-GAAP measures provide useful information to investors in their assessment of the performance of our business. The exclusion of certain expenses in calculating EBITDA and Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis as these costs may vary independent of business performance. Accordingly, we believe that EBITDA and Adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
EBITDA and Adjusted EBITDA have limitations as an analytical tool, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
| ● | Although depreciation is a non-cash charge, the assets being depreciated may have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; | |
| ● | EBITDA and Adjusted EBITDA do not reflect changes in our working capital; | |
| ● | EBITDA and Adjusted EBITDA do not reflect income tax payments that may represent a reduction in cash available to us; | |
| ● | EBITDA and Adjusted EBITDA do not reflect depreciation and interest expenses associated with the lease financing obligations; and | |
| ● | Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure. |
Because of these limitations, you should consider EBITDA and Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.
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The following table reflects the reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for each of the periods indicated.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Adjusted EBITDA | ||||||||||||||||
| Net income (loss) | $ | 626,112 | $ | 2,273,715 | $ | (18,701 | ) | $ | 1,429,145 | |||||||
| Interest expense | 395 | 1,038 | 6,885 | 6,821 | ||||||||||||
| Income tax expense (benefit) | 182,857 | 766,120 | 22,923 | 483,620 | ||||||||||||
| Depreciation | 1,819,581 | 1,783,415 | 3,593,354 | 3,308,098 | ||||||||||||
| EBITDA | 2,628,945 | 4,824,288 | 3,604,461 | 5,227,684 | ||||||||||||
| Stock compensation expenses included in Statement of operations | 1,292,604 | - | 1,321,428 | - | ||||||||||||
| Founder’s compensation(1) | - | 570,818 | - | 782,705 | ||||||||||||
| Legal & settlement expenses (gains) (2) | 239,761 | (79,495 | ) | 483,186 | (49,237 | ) | ||||||||||
| Other items(3) | - | 177,181 | - | 215,162 | ||||||||||||
| Adjusted EBITDA Total | $ | 4,161,310 | $ | 5,492,792 | $ | 5,409,075 | $ | 6,176,314 | ||||||||
| % of revenue | 3.2 | % | 4.8 | % | 2.3 | % | 3.3 | % | ||||||||
| (1) | Represents the excess compensation paid to one of the founders of Onyx over the amount management believes would have been the compensation of an independent professional CEO for the applicable reporting periods. |
| (2) | Represents legal and settlement expenses and gains related to significant matters that do not impact the fundamentals of our operations, pertaining to: (i) causes of action between certain of the Company’s shareholders and which involves claims directly against the Company seeking the fulfillment of alleged indemnification obligations with respect to these matters, and (ii) trademark and IP protection cases. We are involved in routine IP litigation, commercial litigation and other various litigation matters. We review litigation matters from both a qualitative and quantitative perspective to determine if excluding the losses or gains will provide our investors with useful incremental information. Litigation matters can vary in their characteristics, frequency and significance to our operating results. |
| (3) | Includes write-offs of advances and certain fraud loss claims from earlier years that we determined were uncollectible. |
Net income decreased by $1.6 million and $1.4 million for the three and six months ended June 30, 2021, respectively, as compared to the same prior year periods. The decreases in net income were primarily driven by incremental public company costs of $1,076,913 and $2,247,450 for those periods, respectively, increases in non-cash stock compensation, and increases in advertisement costs, as discussed above. The year-over-year decreases in Adjusted EBITDA for the three and six months ended June 30, 2021 were attributable to these decreases in net income, partially offset by founders compensation and other items during the 2020 periods not recurring in the 2021 periods, as noted in the reconciliation table above.
Free Cash Flow
To provide investors with additional information regarding our financial results, we have also disclosed free cash flow, a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less capital expenditures (which consist of purchases of property and equipment and website and software development costs). We have provided a reconciliation below of free cash flow to net cash provided by operating activities, the most directly comparable GAAP financial measure.
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We have included free cash flow in this report because it is an important indicator of our liquidity as it measures the amount of cash we generate. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management.
Free cash flow has limitations as a financial measure, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. There are limitations to using non-GAAP financial measures, including that other companies, including companies in our industry, may calculate free cash flow differently. Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash provided by (used in) operating activities, capital expenditures and our other GAAP results.
The following table presents a reconciliation of net cash provided by operating activities to free cash flow for each of the periods indicated.
| Six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash provided by operating activities | $ | 9,050,923 | $ | 35,791,455 | ||||
| Purchase of property and equipment | (283,786 | ) | (9,344 | ) | ||||
| Website and software development costs | (3,611,451 | ) | (3,443,447 | ) | ||||
| Free cash flow | $ | 5,155,686 | $ | 32,338,664 | ||||
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand of $27.3 million as of June 30, 2021, cash generated from operations and changes in operating assets and liabilities. We believe our current resources will be sufficient to fund our cash needs for current operations for at least the next 12 months. Our primary uses of cash are for investment in website and software development.
The following table summarizes the key cash flow metrics from our statements of cash flows for the six months ended June 30, 2021 and 2020:
| Six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash provided by operating activities | $ | 9,050,923 | $ | 35,791,455 | ||||
| Net cash used in investing activities | (3,895,237 | ) | (3,452,791 | ) | ||||
| Net cash used in financing activities | (10,473 | ) | (261,043 | ) | ||||
| Net change in cash | $ | 5,145,213 | $ | 32,077,621 | ||||
Cash Flows from Operating Activities
The net cash provided by operating activities consists of our net income (loss) adjusted for certain non-cash items, including depreciation as well as the effect of changes in working capital and other activities. Operating cash flows can be volatile and are sensitive to many factors, including changes in working capital and our net income (loss). We have a negative working capital model (current liabilities exceed current assets). Any profitable growth in revenue results in incremental cash for the Company, as we receive funds when customers place orders on the website, while accounts payable are paid over a period time, based on vendor terms, which range on average from one week to eight weeks.
Net cash provided by operating activities in the six months ended June 30, 2021 was $9.1 million, resulting from a net loss of $18,701 and cash provided by a change in (a) operating assets and liabilities of $4.2 million, which in turn was primarily driven by increases in accounts payable and customer deposits, (b) depreciation expense of $3.6 million, and (c) non-cash share based compensation expense of $1.3 million.
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Net cash provided by operating activities in the six months ended June 30, 2020 was $35.8 million, resulting from net income of $1.4 million and cash provided by a change in (a) operating assets and liabilities of $30.6 million, which in turn was primarily driven by increases in accounts payable and customer deposits, (b) depreciation expense of $3.3 million, and (c) non-cash deferred income tax expense of $0.5 million.
Cash Flows from Investing Activities
Net cash used in investing activities was $3.9 million for the six months ended June 30, 2021, consisting of website and software development costs and purchases of property and equipment. Cash used in investing activities varies depending on the timing of technology and product development cycles.
Net cash used in investing activities was $3.5 million for the six months ended June 30, 2020, consisting primarily of website and software development costs.
Cash Flows from Financing Activities
Net cash used in financing activities for the six months ended June 30, 2021 was $10,473, compared to $261,043 in the six months ended June 30, 2020. The decrease was primarily related to cessation of payments of preferred stock dividends.
Critical Accounting Estimates
SEC guidance defines critical accounting estimates as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operation of the registrant. There were no significant changes in our critical accounting estimates from those discussed in our 2020 Form 10-K, except as disclosed below. See Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements for our other significant accounting policies and accounting pronouncements that may impact the Company’s consolidated financial position, earnings, cash flows or disclosures.
Revenue Recognition
Our revenue recognition is impacted by estimates of unshipped and undelivered orders at the end of the applicable reporting period. As we ship a large volume of packages through multiple carriers, actual delivery dates may not always be available, and as such we estimate delivery dates based on historical data. If actual unshipped and undelivered orders are not consistent with our estimates, the impact on our revenue for the applicable reporting period could be material. Unshipped and undelivered orders as of June 30, 2021 and December 31, 2020 were $19.5 million and $16.2 million, respectively, which are reflected as customer deposits on our balance sheets.
The outstanding days from the order date of our unshipped and undelivered orders based on our actual determination were, on average, 13.0 days as of June 30, 2021, and 12.7 days as of December 31, 2020.
Sales discounts earned by customers at the time of purchase and taxes collected from customers, which are remitted to governmental authorities, are deducted from gross revenue in determining net revenue. Allowances for sales returns are estimated and recorded based on historical experience and reduce product revenue, inclusive of shipping fees, by expected product returns. Our estimated net allowances for sales returns at June 30, 2021 and 2020 were $800,215 and $712,744 respectively.
If actual sales returns are not consistent with our estimates, or if we have to make adjustments, we may incur future losses or gains that could be material. Adjustments to our estimated net allowances for sales returns over the three months and six months ended June 30, 2021 and 2020 were as follows:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Balance at beginning of period | $ | 1,125,970 | $ | 554,753 | $ | 1,062,077 | $ | 495,697 | ||||||||
| Adjustment | (325,755 | ) | 157,991 | (261,862 | ) | 217,047 | ||||||||||
| Balance at Closing of period | $ | 800,215 | $ | 712,744 | $ | 800,215 | $ | 712,744 | ||||||||
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Website and Software Development
We capitalize certain costs associated with website and software (technology platform including the catalog) developed for internal use in accordance with Accounting Standards Codification (“ASC”) 350-50, Intangibles — Goodwill and Other — Website Development Costs, and ASC 350-40, Intangibles — Goodwill and Other — Internal Use Software, when both the preliminary project design and the testing stage are completed and management has authorized further funding for the project, which it deems probable of completion and to be used for the function intended. Capitalized costs include amounts directly related to website and software development such as contractors’ fees, payroll and payroll-related costs for employees who are directly associated with and who devote time to our internal-use software. Capitalization of such costs ceases when the project is substantially complete and ready for its intended use. Capitalized costs are amortized over a three-year period commencing on the date that the specific module or platform is placed in service. Costs incurred during the preliminary stages of development and ongoing maintenance costs are expensed as incurred. Determinations as to when a project is substantially complete and what constitutes ongoing maintenance require judgments and estimates by management. We periodically review the carrying values of capitalized costs and makes judgments as to ultimate realization. The amount of capitalized software costs for the six months ended June 30, 2021 and 2020 were as follows:
| Six months ended June 30, | Capitalized Software | |||
| 2021 (Includes non-cash share-based compensation capitalized $417,182) | $ | 4,028,633 | ||
| 2020 | $ | 3,443,447 | ||
Off-Balance Sheet Arrangements
PARTS iD is not a party to any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.
Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2021. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of June 30, 2021.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2021 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 a number of legal actions, proceedings, litigation and other disputes arising in the ordinary course of our business. See Note 6 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding legal matters and proceedings, which is incorporated herein by reference, as well as the information below.
Lexidine LLC v. Onyx Enterprises Int’l Corp
On January 20, 2021, Lexidine, LLC filed a patent infringement suit against the Company in the United States District Court for the District of New Jersey. The case is based upon United States Patent No. 7,609,961 and is directed toward certain OEM Fit 3rd Brake Light Cameras offered for sale by third party brands on the Company’s eCommerce platform. It is captioned as Lexidine LLC v. Onyx Enterprises Int’l Corp, d/b/a www.carid.com, Case No. 3:21-cv-00946. Lexidine is seeking monetary relief for the sale of allegedly infringing products as well as injunctive relief. This matter was administratively terminated by the United States District Court for the District of New Jersey on July 27, 2021.
Item 1A. Risk Factors
There have been no material changes to our risk factors from those previously disclosed in our 2020 Form 10-K, except as disclosed below.
The SEC issued guidance on the application of warrant accounting guidance which might require that our warrants be accounted for as liabilities rather than as equity and might result in a restatement of our previously issued financial statements.
On April 12, 2021, the staff of the SEC issued a public statement entitled “Staff Statement on Accounting and Reporting Considerations for Warrants issued by Special Purpose Acquisition Companies (“SPACs”)” (the “Statement”). In the Statement, the SEC staff expressed its view that certain terms and conditions common to SPAC warrants may require the warrants to be classified as liabilities on the SPAC’s balance sheet as opposed to equity. Until the closing of the Business Combination on November 20, 2020, we had outstanding warrants that were accounted for as equity on our balance sheets. We are in the process of discussing and evaluating with our independent auditors whether our warrants should have been presented as liabilities on our previously issued financial statements.
If we conclude that our previously-outstanding warrants should have been classified as derivative liabilities measured at fair value on our balance sheets, we may be required to restate our previously issued financial statements. This could result in additional costs, diversion of management resources, a determination that our internal control over financial reporting or our disclosure controls and procedures are or were not effective, potential loss of investor confidence, and a decline in the market value of our common stock.
In addition to a potential restatement, there might be further inquiries from the SEC or the NYSE American regarding our financial statements, if restated, or matters relating thereto. Any potential future inquiries from the SEC or the NYSE American as a result of the potential restatement of our historical financial statements, would, regardless of the outcome, likely consume a significant amount of our resources in addition to any resources consumed in connection with the potential restatement itself.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
Upon finalizing the calculation of the aggregate purchase price with respect to the Business Combination, on April 8, 2021, the Company released 299,999 shares of Class A common stock and $10 in cash in lieu of fractional shares to former Onyx shareholders pursuant to the Business Combination Agreement. These securities were issued under Section 4(a)(2) and Rule 506 of the Securities Act in a transaction not involving a public offering.
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Issuer Purchases of Equity Securities
During the three months ended June 30, 2021, the Company did not repurchase any of its securities.
Item 6. Exhibits
| * | Each of these Exhibits constitutes a management contract, compensatory plan or arrangement. |
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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 9, 2021 | By: | /s/ Antonino Ciappina |
| Antonino Ciappina | ||
| Chief Executive Officer | ||
| August 9, 2021 | By: | /s/ Kailas Agrawal |
| Kailas Agrawal | ||
| Chief Financial Officer | ||
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