PARTS ID, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements as ofDecember 31, 2022 and 2021, together with the related notes thereto, included in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on 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 several assumptions and estimates that are inherently subject to significant risks and uncertainties, and our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in the sections entitled "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements." 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 andPARTS iD, Inc. following the closing of the Business Combination, as the context indicates, unless the context otherwise refers toLegacy Acquisition Corp.
Overview
PARTS iD, Inc. is a technology-driven, digital commerce company on a mission to transform theU.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 over eighteen million parts and accessories 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 handle the ever-growing need for accurate product and parts data, we use cutting-edge computational and software engineering techniques, including Bayesian classification, to enhance and improve data records and product information, and ultimately to contribute to the overall development of a rich and engaging user experience. Furthermore, our technology platform is architected to support much more than just car parts and accessories. We believe that we have demonstrated the flexibility and scalability of our technology by launching seven adjacent verticals, including BOATiD.com, MOTORCYCLEiD.com, CAMPERiD.com, and others inAugust 2018 , all of which leverage the same proprietary technology platform and data architecture. Management believes that an increasing portion of the dollars spent on vehicle parts and accessories will be spent online and that there is an opportunity for acquiring more market share in that realm. Our platform business model is designed to grow our net revenue by acquiring new customers as well as stimulating repeat purchases from our existing customers. Through paid and unpaid advertising, we attract new and repeat customers to our sites. We attempt to turn these customers into repeat customers by creating a seamless shopping experience across their entire journey - offering best-in-class product discovery, purchasing, fulfillment and customer service. 36 There are several key competitive strengths that management believes highlight the attractiveness of the Company's platform business model and underscore howPARTS iD, Inc. is differentiated from its competition, including:
1. The Company's distinctive technology, customer-first UI, and proprietary
fitment data that enables a differentiated shopping experience for the
automotive parts consumer. Unlike any other consumer product category, we
believe that the success or failure of selling automotive parts, and
especially aftermarket accessories at scale, comes down to rich andcomprehensive fitment data. We believe that the Company has been successful at
developing its own proprietary fitment database which is not licensed for use
to any other person or entity.
2. We believe that the Company's product catalog of over eighteen million
products and over forty-five hundred brands is unrivaled. Our comprehensive
catalog is enriched with over fourteen billion data points, advanced 3D
imagery, in-depth product descriptions, customer reviews, installation and
fitment guides, as well as other rich custom content specifically catering to
the needs of the automotive aftermarket industry and is further complemented
by our highly trained and specialized customer service.
The Company's proprietary and asset-light fulfillment model has enabled us to
grow organically without external capital. This platform model is enabled by a
network of over one thousand suppliers which we have cultivated relationships
with and integrated over the last fifteen years. This has enabled us to further
scale our catalog size and to add adjacent verticals which allows us to offer a
broader array of product lines over our competitors. Furthermore, our
geo-sourcing fulfillment algorithm factors in real-time inventory when
available, customer proximity, shipping cost, and profitability to optimize
product sourcing. This algorithmic approach allows us to increase fill rate and
delivery speed.
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.
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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 expense, general and administrative overhead and capital expenditures. InJune 2022 , we took steps to reduce our costs by reducing our employment base inthe United States , and reducing our independent contractors inUkraine ,the Philippines , andCosta Rica , and by reducing other operating expenses. The employees and independent contractors affected by this reduction were informed of the Company's decision beginning inJune 2022 . The annualized savings from the measures described above were approximately$12 million . Additionally, inOctober 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. Although the ongoing COVID-19 pandemic has caused economic disruptions on a global scale, and created significant uncertainty, we believe it increased the adoption of online shopping by consumers and, for periods during which stimulus payments were disbursed by the government, increased demand, which had a positive effect on the Company's revenue and profitability. However, there was a decline in traffic after the first quarter of 2021, primarily due to an increase in the average cost-per-click in the Company's search advertising programs and lower consumer discretionary spend that adversely impacted marketing productivity. We also experienced increased order cancellations in 2022 due to supply chain disruptions. In addition, due to liquidity issues, we were unable to generate traffic to our sites, thus causing a significant decline in revenues compared to the prior year. The decrease in traffic and increased order cancellations, decreases in the conversion rate and average order values resulted in lower revenue for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 .
Impact of COVID-19
We continue to actively monitor the COVID-19 pandemic, including the spread of certain variants of the virus and plan for potential impacts on our business. While conditions related to the pandemic generally have improved in 2022 compared to 2021 and 2020, they vary geographically. Even though the COVID-19 pandemic has caused economic disruptions on a global scale, and created significant uncertainty, we believe it increased volume of online shopping by consumers and, for periods during which stimulus payments were disbursed by the government, particularly betweenApril 2020 andApril 2021 , increased demand for the products of the Company had positive effect on revenues and profitability. However, there was a decline in traffic to our sites in 2022, due to an increase in the average cost-per-click in the Company's search advertising programs, changes in channel mix, and lower consumer discretionary spending due to a downturn in economic conditions. The impact of COVID-19, including changes in consumer behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy. Recent outbreaks in certain regions continue to cause intermittent COVID-19-related disruptions in our supply chain. Continued spikes in the price of materials, workforce shortages and shipping and seaport delays led to increases in the cost of goods sold, which negatively impacted gross margins of the Company. Supply chain challenges have increased order cancellations and shipping costs. After more than two years of port congestions and container shortages, supply chain disruptions are showing signs of easing. We continue to pass a portion of the increased costs through to our customers, while balancing the need to maintain price competitiveness. Notwithstanding the economic challenges described above, the Company achieved a Gross Margin of 18.7% during 2022 compared to 20.1% in the prior year. Management continues to focus on efforts to drive growth, including product cultivation, vendor optimization, distribution network expansion and marketing diversification with a greater emphasis on the additional verticals, original equipment ("OE") and repair parts business. 38 Russian-Ukrainian Conflict The Russian invasion ofUkraine and resulting in response from several nations have impacted, and are expected to continue to impact, our business in the near term.Russia's invasion ofUkraine 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 located inUkraine . Therefore, the conflict inUkraine 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 inFebruary 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. Some of our contractors have moved outside ofUkraine to neighboring countries where they continue to work remotely. Some of our contractors who have remained inUkraine have moved to other areas inUkraine , but their ability to continue work is subject to significant uncertainty and potential disruptions. The situation inUkraine is highly complex and continues to evolve. We cannot provide any assurance that our outsourced teams inUkraine will be able to provide efficient and uninterrupted services, which could have an adverse effect on our operations and business. In addition, our ability to maintain adequate liquidity for our operations is dependent on a number of factors, including our revenue and earnings, which could be significantly impacted by the conflict inUkraine . 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 inUkraine andRussia , and will consider further actions as appropriate. 39
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 Year Ended
2022 2021 YoY Change %Change
Number of Users 107,300,006 127,459,324 (20,159,318 ) (15.8 )%
Number of Sessions 180,683,108 238,708,556 (58,025,448 ) (24.3 )%
Number of Pageviews 708,031,453 988,152,867 (280,121,414 ) (28.3 )%
Pages/Sessions 3.92 4.14 (0.22 ) (5.3. )%
Average Session Duration 0:02:54 0:03:15 (0:00:21 ) (10.8 )%
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.
Results of Operations
Years ended December 31, Change
2022 % of Rev. 2021 % of Rev. Amount %
Revenue, net $ 340,596,365 $ 448,668,928 $ (108,072,563 ) (24.1 )%Cost of goods sold 276,920,256 81.3 %$ 358,439,239
79.9 % (81,518,983 ) (22.7 )% Gross profit 63,676,109 18.7 % 90,229,689 20.1 % (26,553,580 ) (29.4 )% Gross Margin 18.7 % 20.1 % Operating expenses: Advertising 31,509,076 9.3 % 42,346,886 9.4 % (10,837,810 ) (25.6 )% Selling, general & administrative 39,492,132 11.6 % 49,554,126 11.0 % (10,061,994 ) (20.3 )% Depreciation 8,283,982 2.4 % 7,465,095 1.7 % 818,887 11.0 % Total operating expenses 79,285,190 23.3 % 99,366,107
22.1 % (20,080,917 ) (20.2 )% Loss from operations (15,609,081 ) (4.6 )% (9,143,418 )
2.0 % (66,472,663 ) (70.8 )%
Change in fair value of
warrants (248,000 ) (0.1 )% - 0.0 % (248,000 )
Interest expense 240,282 0.1 % 7,172 0.0 % 233,110 3250.3 %
Loss before income tax (15,601,363 ) (4.6 )% (9,143,590 )
2.0 % (6,457,773 ) 70.6 %
Income tax (benefit) 2,322,517 0.7 % (1,180,790) 0.2 % 3,503,307 296.7 % Net loss$ (17,923,880 ) (5.3 )%$ (7,962,800 ) (1.8 )%$ (9,961,080 ) (125.1 )% Revenue Revenue decreased$108.1 million , or 24.1 %, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . This decrease was primarily attributable a decrease in site traffic of 9.1% offset by increases in the conversion rate of 24.3% and in the average order value of 12.5% all of which led to a decrease in orders. Supply chain disruptions adversely impacted our sales for the year. Cancellations of sales orders increased to 10.3% for the year endedDecember 31, 2022 compared to 10.9% for the year endedDecember 31, 2021 . The increase in cancellation rates resulted in$15 million more in cancellations in 2021 and$10 million more in cancellations in 2022 compared to 2021. The increase in the site conversion rate was primarily attributable to search engine bidding automation and optimization, continuous customer experience enhancements and pricing initiatives, product cultivation, and continued e-commerce adoption. The increase in the average order value was primarily attributable to increases in the average number of items per order, changes in the mix of categories of items sold and inflation. 40 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 year endedDecember 31, 2022 , cost of goods sold decreased by$81.5 million , or 22.7%, compared to the year endedDecember 31, 2021 . This decrease in cost of goods sold was primarily driven by a decrease in the number of orders or products sold, partially offset by increases in cost of product and shipping costs. Included in cost of goods sold for the year endedDecember 31, 2022 is$3.9 million related to vendor credits that may not be recoverable. For the year endedDecember 31, 2022 , cost of goods sold was 81.3% of revenue, compared to 79.9% revenue for the year endedDecember 31, 2021 . The 0.4% increase in cost of goods sold as a percentage of revenue was primarily attributable to trailing supply chain disruptions associated with the COVID-19 pandemic. During the year endedDecember 31, 2022 , we had to source some products from alternate vendors that had higher price points due to product price inflation and higher shipping costs, which higher prices were not passed on to the customer entirely. We have now begun to pass a portion of the increased costs through to our customers, while balancing the need to maintain price competitiveness. Management only expects these cost pressures to materially ease when the COVID-19 pandemic and related containment measures abate, which cannot be currently predicted with any certainty.
Gross Profit and Gross Margin
Gross profit decreased$26.5 million , or 29.4%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . This decrease was primarily attributable to the 24.1% decrease in revenue in the year endedDecember 31, 2022 due to supply chain interruptions and vendor related constraints in the second half of the year, partially offset by the increase in cost of goods sold due primarily a slight increase costs and trailing supply chain disruptions associated with the COVID-19 pandemic in the first half of the year, and the$3.9 million charge related to vendor credits discussed above. Gross margin of 18.7% for the year endedDecember 31, 2022 , was lower than the gross margin of 20.1% for the year endedDecember 31, 2021 , primarily attributable to increases in product and shipping costs associated with ongoing supply chain disruptions as discussed above and the$3.9 million charge discussed above. Operating Expenses
Advertising expenses decreased$10.8 million , or 25.6%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . This decrease in advertising costs was primarily attributable a decrease in average cost-per-click, a change in the mix of advertising channels used and a downturn in economic conditions. 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. Decreases in overall available searches and increasing competition, coupled with additional campaigns that were transitioned to automated bidding from manual bidding, led to lower costs-per-click for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The consequent higher advertising cost was partly offset by an increase in the site conversion rate and the average order value. Management continues to take steps to diversify advertising in new channels, such as paid social and customer retention programs to drive growth. Selling, general and administrative ("SG&A") expenses decreased$10.1 million , or 20.3%, compared to the year endedDecember 31, 2021 . This decrease was primarily attributable to a decrease in of$2.5 million in merchant processing costs,$2.4 million in share-based compensation,$1.7 million in direct support costs,$1.2 million in in payroll in line with the increase in revenue.
Depreciation expense increased
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Interest Expense
Interest expense was
Income Tax Expenses
Income tax expense increased by$3.5 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , the effective income (benefit) tax rate was (20.4) % compared to 12.91% for the year endedDecember 31, 2021 . The change in rate was primarily attributable to changes in valuation allowance, state taxes and the incurrence of expenses that are 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 withU.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 stock compensation expense and other 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 the Board.
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 years indicated.
Years ended December 31,
2022 2021
Net income (loss) $ (17,923,880 ) $ (7,962,800 )
Change in fair value of warrants (248,000 ) -
Interest expense 240,282 7,172
Income tax (benefit) 2,322,517 (1,180,790 )
Depreciation 8,283,982 7,465,095
EBITDA (7,325,099 ) (1,671,323 )
Stock compensation expense 2,444,246 4,852,985Legal and settlement expenses (1) 761,587 1,150,247
$ (4,119,266 ) $ 4,331,909 As % of revenues (1.21 )% 0.97 %
(1) 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.
Net loss increased by $10.0 million to a net loss of $17.9 million by a decrease
in revenues offset by decreases in advertising costs, non-cash stock
compensation expense and public company operating expenses, as discussed above.
The year-over-year decrease in Adjusted EBITDA for the year ended December 31,
2022 , was attributable to the increase in net loss, partially offset by a
decrease in stock-based compensation.
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 years indicated.
Years
ended
2022 2021
Net cash (used in) / provided by operating activities
(94,195 ) (324,025 )
Purchase of intangible assets - (25,214 )
Proceeds from sale of fixed assets 90,250 -
Website and software development costs (5,704,021 ) (7,250,921 )
Free Cash Flow $ (24,202,869 ) $ 1,020,230 Liquidity and Capital Resources
The Company's cash was$3.8 million and$23.2 million as ofDecember 31, 2022 and 2021, respectively. We have operated with a negative working capital model since our inception. The Company has a working capital deficiency of approximately$41.6 million . We continue to face macro-economic headwinds, liquidity issues and the resulting declining revenue and profitability, which substantially decreased the negative working capital, and resulted in the use of approximately$18.5 million in cash from operating activities, of which$14.3million was attributable to changes in working capital during the year endedDecember 31, 2022 . With this, substantial doubt exists about the Company's ability to continue as going concern within one year after filing of this Annual Report on Form 10-K. To address liquidity concerns, the Company continues to restructure and optimize its operations including moderating capital investments, improving gross margin, reducing expenses, and renegotiating vendor payment terms. The Company also believes that the newly negotiated shipping contract will lead to a substantial reduction in our shipping costs which began earlyNovember 2022 . This will enable the Company to increase revenue and improve profitability. In addition, the Company obtained$5 million of net funding to address its liquidity needs. For more information, please see "Note 14 - Subsequent Events." 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 and allow the Company to continue operations for the next 12 months. 44
However, any projections of future cash needs and cash flows are subject to uncertainty. See "Risk Factors" included in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of the factors that may impact our ability to maintain adequate liquidity.
Cash Flow Summary
The change in cash and cash equivalents is as follows:
Years
ended
2022 2021
Net cash (used in) / provided by operating activities
(5,707,966 ) (7,600,160 )
Net cash provided by / (used in) financing activities 4,795,906 (19,706 )
Net change in cash $ (19,406,963 ) $ 1,000,524 Our principal sources of liquidity are cash flows generated from operations, particularly negative working capital.
Cash Flows from Operating Activities
The net cash provided by operating activities consist of our net loss, adjusted
for certain non-cash items, including depreciation, and share based compensation
expense, 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 loss. The Company has
a negative working capital model (current liabilities exceed current assets).
Any profitable growth in revenue results in incremental cash for the Company,
where funds are received when customers place orders on the website, while
accounts payable are paid over a period, based on vendor terms, which range on
average from one week to eight weeks or more.
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Cash used in operating activities in the year ended December 31, 2022 was $18.5
million and was driven primarily by net loss of $17.9 million , changes in
operating assets and liabilities of $14.3 million and partially offset by the
impact of the impact of non-cash depreciation and amortization expense of $8.3
million and share based compensation of $2.4 million .
Cash provided by operating activities in the year ended December 31, 2021 was
$8.6 million and was driven primarily by the impact of non-cash depreciation and
amortization expense of $7.5 million , cash provided by changes in operating
assets and liabilities of $5.5 million , and share based compensation expense of
$4.8 million .
Cash Flows from Investing Activities
Net cash used in investing activities was$5.7 million and$7.6 million , respectively, for the years endedDecember 31, 2022 and 2021, consisting primarily of website and software development costs in both years. Cash used in investing activities varies depending on the timing of technology and product development cycles.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year endedDecember 31, 2022 , was$4.8 million , compared to cash used of$0.02 million for the year endedDecember 31, 2021 . The increase was primarily related to net borrowings of
$4.8 million . Future Cash Requirements Operating Leases
The Company has several non-cancelable operating leases for facilities and vehicles that expire over the next four years. Rental expense for operating leases was$861,362 and$1,207,969 for the years endedDecember 31, 2022 and 2021, respectively. Future minimum lease payments under non-cancelable operating leases as ofDecember 31, 2022 are as follows: Year endingDecember 31, 2023 753,871 2024 276,358 2025 177,939$ 1,208,168
Debt and Capital Structure Activity
The Company had no borrowings untilOctober 21, 2022 , where the Company executed a Loan and Security Agreement ("Loan Agreement") withJGB Collateral, LLC ("Administrative Agent" or "JGB"). The Loan Agreement provided for term loans in an aggregate principal amount of up to$11.0 million under two tranches. The tranches consist of (i) a first tranche consisting of term a loan in the aggregate principal amount of$5.5 million , of which the entire amount was funded to the Company at closing (the "Initial Term Loan Advance"); and (ii) a second tranche consists of a term loan in the aggregate principal amount of an additional$5.5 million , which may be funded to the Company by the Lender at its sole and absolute discretion (subject to the terms and conditions of the Loan Agreement) until the date that is six months after the closing date (the "Second Term Loan Advance" and together with the Initial Term Loan Advance, the "Term Loan Advances"). The Initial Term Loan Advance was issued with an original issue discount of$500,000 . OnFebruary 22, 2023 , the Company and JGB executed an amendment to the Loan Agreement. See "Note 14 - Subsequent Events" for more information.
As collateral for the obligations, the Company has granted to the Lender a senior security interest in all of Company's right, title, and interest in, to and under all of Company's property.
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Warrants
In connection with the entry into the Loan Agreement, with respect to the
Initial Term Loan Advance, the Company issued the Lender a warrant (the
"Warrant") to purchase 1,000,000 shares (the "Warrant Shares") of the Company's
Class A common stock, par value $0.0001 per share (the "Common Stock"). Should
the Company seek and obtain the Second Loan Term Advance in accordance with the
terms of the Loan Agreement, the Company will issue another Warrant to the
Lender to purchase an additional 1,000,000 shares of the Company's Common Stock
on the same terms and conditions as the Warrant issued with respect to the
Initial Term Loan Advance.
The Company received funding of $5,000,000 in cash on October 21, 2022 . The
warrant was valued at $799,000 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 .
In December 2022 , the Company notified the lenders that it was in violation of
its revenue covenant as it did not meet certain revenue threshold. In January
2023 , the lenders granted forbearance to the Company in connection with these
covenant violations through April 30, 2023 . As a result, the Company paid
$50,000 to the lenders in exchange for issuing the forbearance.
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 consists 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 Boardmay deem relevant. Cash Taxes Taxes paid in cash in the year endedDecember 31, 2022 were$5,000 and$7,209 during the year endedDecember 31, 2021 . As ofDecember 31, 2022 , the Company had$17,034,462 in federal and$737,640 in state net operating losses ("NOLs"), all remaining from 2019 and onward and accordingly available to offset future taxable income indefinitely. However, the NOLs are subject to an 80% of taxable income limitation for all periods afterJanuary 1, 2021 . The Company does not currently anticipate any significant increase or decrease of the total amount of unrecognized tax benefits within the next twelve months.
Critical Accounting Estimates
Critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operation of the registrant. These items require the application of management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing our consolidated financial statements in accordance with GAAP, management has made estimates, assumptions and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing these financial statements, management has utilized available information, including our past history, industry standards and the current and projected economic environments, among other factors, in forming its estimates, assumptions and judgments, giving due consideration to materiality. Because the use of estimates is inherent in GAAP, actual results could differ from those estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of companies in similar businesses. A summary of the accounting estimates that management believes are critical to the preparation of our consolidated financial statements is set forth below. See Note 2 of the Notes to Consolidated Financial Statements included in this report 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 InMay 2014 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). This new 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. In doing so, companies need 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, we perform the following steps: (i) identify contracts with customers; (ii) identify performance obligation(s); (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s); and (v) recognize revenue when (or as) we satisfy each performance obligation.
We recognize revenue on product sales through our website as the principal in
the transaction, as we have concluded we control the product before it is
transferred to the customer. We control products when we are the entity
responsible for fulfilling the promise to the customer and take responsibility
for the acceptability of the goods, assume inventory risk from shipment through
the delivery date, have discretion in establishing prices, and select the
product vendors of products sold.
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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.
The Company has two types of customer liabilities: (i) amounts received from
customers prior to the delivery of products are recorded as customer deposits on
our balance sheets and are recognized as revenue when the products are
delivered, amounting to $3,098,119 and $15,497,857 as of December 31, 2022 and
2021, respectively and (ii) site credits, which are initially recorded in
accrued expenses and are recognized as revenue in the period they are redeemed,
amounting to $3,414,019 and $2,855,998 as of December 31, 2022 and 2021,
respectively.
The outstanding days from the order date of our unshipped and undelivered orders
based on our actual determination were, on average, 9.6 days as of December 31,
2022 , and 11.6 days as of December 31, 2021 . The decrease in time between
outstanding days from December 31, 2022 compared to December 31, 2021 was due to
our prioritizing vendors with higher inventory levels.
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. Net allowances
for sales returns as of December 31, 2022 and 2021, were $549,250 and $738,465 ,
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 years
ended December 31, 2022 and 2021 were as follows:
Balance at Balance at
Beginning Close
Year Ended December 31, of Period Adjustments of Period
2022 $ 738,465 $ (189,215 ) $ 549,250
2021 $ 1,062,077 $ (323,612 ) $ 738,465 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 years ended
Year Ended December 31, Capitalized Software 2022 $ 5,704,021 2021 $ 7,250,921 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 Doubtful Accounts
Accounts receivable balances include amounts due from customers. The Company periodically reviews its accounts receivable balances to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due accounts, historical occurrences of credit losses, existing economic conditions, and other circumstances that may indicate that the realization of an account is in doubt. As ofDecember 31, 2022 and 2021, the Company determined that an allowance for doubtful accounts was not necessary. As circumstances change, it could result in material adjustments to the allowance for doubtful accounts.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any
off-balance sheet arrangements, as defined by applicable
Recent Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements included elsewhere in this report for information on how recent accounting pronouncements have affected or may affect our financial position, results of operations or cash flows.
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