Item
1. Business
The
following discussion reflects, and “we,” “us,” “our” the “Company” and “PARTS
iD” generally refer to, the business of Onyx Enterprises Int’l, Corp. prior to giving effect to the Business Combination
and PARTS iD, Inc. after giving effect to the Business Combination, as the context indicates, unless the context otherwise refers
to Legacy Acquisition Corp.
Introductory
Note
On
November 20, 2020 (the “Closing Date”), PARTS iD, Inc., a Delaware corporation (f/k/a Legacy Acquisition Corp. (“Legacy”))
(the “Company” or “PARTS iD”), consummated the previously announced business combination pursuant to that
certain Business Combination Agreement, dated September 18, 2020 (the “Business Combination Agreement”), by and among
the Company, Excel Merger Sub I, Inc., a Delaware corporation and an indirect wholly owned subsidiary of the Company and directly
owned subsidiary of Merger Sub 2 (“Merger Sub 1”), Excel Merger Sub II, LLC, a Delaware limited liability company
and direct wholly owned subsidiary of the Company (“Merger Sub 2”), Onyx Enterprises Int’l, Corp., a New Jersey
corporation (“Onyx”), and Shareholder Representative Services LLC, a Colorado limited liability company, solely in
its capacity as the stockholder representative pursuant to the terms of Section 11.16 of the Business Combination Agreement.
At
the closing of the transactions contemplated by the Business Combination Agreement (the “Closing”), (a) Merger
Sub 1 merged with and into Onyx (the “First Merger”), with Onyx surviving as a direct wholly-owned subsidiary of Merger
Sub 2, and (b) promptly following the First Merger, Onyx, as the surviving company of the First Merger, merged with and into
Merger Sub 2 (the “Second Merger”). Upon the consummation of the Second Merger, Merger Sub 2 was the surviving company
and Onyx ceased to exist, and Merger Sub 2 became a direct, wholly owned subsidiary of the Company (collectively with the other
transactions described in the Business Combination Agreement, the “Business Combination”). On the Closing Date, (i)
Legacy changed its name from Legacy Acquisition Corp. to PARTS iD, Inc. and listed its shares of Class A common stock, par
value $0.0001 per share (the “Class A Common Stock”) on the NYSE under the symbol “ID” and (ii) Merger
Sub 2 changed its name to PARTS iD, LLC (“PARTS iD, LLC”).
Available
Information
Our
website address is www.partsidinc.com. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably
practicable after they are electronically filed with, or furnished to, the SEC. In addition, our code of ethics, audit committee
charter, compensation committee charter, nominating and corporate governance committee charter and strategy, technology and risk
management committee charter are available free of charge on our website. The public may read materials we file with the SEC,
including reports, proxy and information statements, and other information, on the Internet site maintained by the SEC. The address
of that site is www.sec.gov.
The
above references to our website and the SEC’s website do not constitute incorporation by reference of the information contained
on the websites and such information should not be considered part of this document.
Overview
PARTS
iD, Inc. is a technology-driven, digital commerce company focused on creating custom infrastructure and unique user experiences
within niche markets. The Company was founded in 2008 with a vision of creating a one-stop digital commerce destination for the
automotive parts and accessories market. Management believes that the Company has since become a market leader and proven brand-builder,
fueled by its commitment to delivering an engaging shopping experience; comprehensive, accurate and varied product offerings;
and continued digital commerce innovation.
At
its core, the Company’s technology solution is a data and information platform that enables and facilitates a differentiated
digital commerce experience within complex product markets, as opposed to a pure digital commerce or electronics retailer. The
deep technology platform that we have built integrates software engineering with catalog management, data intelligence, mining
and analytics, along with user interface development that utilizes distinctive rules-based parts fitment software capabilities.
In order to handle the ever-growing need for accurate automotive product and parts data, the Company has utilized cutting-edge
computational and software engineering techniques, including Bayesian classification, to enhance and improve data records and
product information and also deliver an engaging user experience. The technology platform also offers the Company fungibility,
which was demonstrated by the fact that it was able to launch seven new verticals in August 2018.
Through
the journey of building a comprehensive and complex product portfolio with over 17 million SKUs, as well as building an end-to-end
digital commerce platform, the Company has developed a platform for both digital commerce and fulfillment, relying on insights
gleaned from nearly 14 billion data points related to vehicle parts, a virtual shipping network comprising over 2,500 locations,
nearly 5,000 active brands, and machine-learning algorithms for complex fitment industries such as vehicle parts and accessories.
While
the Company’s platform has been initially focused on automotive parts and accessories, management believes the Company’s
platform is scalable and can be applied to other complex, multi-dimensional fitment, product portfolio industries, in addition
to the seven new parts and accessories verticals — semi truck, motorcycle, powersports, RV/camper, boating, recreation and
tools — that we launched in August 2018.
The
Company has positioned these verticals under its existing “iD” brand and believes this will drive brand loyalty among
customers and reputation among vendors, ultimately increasing online traffic, brand visibility, and customer orders for adjacent
markets. The Company has since experienced growth in revenue related to the new verticals, our original equipment (“OE”)
business, and our repair parts business.
Customer
service is a key aspect of the experience the Company offers to its customers throughout their buying journey. The Company has
specialized customer support teams which assist customers in navigating through the platform, addressing any technical questions,
order tracking and completing the order.
Digital
Commerce Platform
The
Company’s digital commerce platform was developed in-house from inception as a solution for industries with data limitations
and parts fitment complexities, all while making processes simpler and more efficient. A core differentiator of the Company’s
digital commerce platform is its purpose-built and proprietary data catalog developed over more than a decade by collecting, analyzing
and refining data regarding original equipment manufacturer, or OEM, vehicles and aftermarket products and customer feedback to
define a universe of accurate Year-Make-Model, or YMM, values. Management believes this functionality creates a unique user experience
path that drives purchase intelligence and increases consumer confidence and trust.
The
Company’s in-house data catalog houses nearly 14 billion data points for automobiles and the Company’s other seven
verticals. This data catalog is designed to tie vehicles with parts that fit their specific YMM, including the variations of sub-model,
engine size, transmission type and drivetrain type, as well as to recommend complementary products, such as tools required to
install purchased parts and accessories. To build its catalog, the Company aggregates data from multiple sources, cross-pollinates
this data to address any gaps in data sets, enriches the catalog using its proprietary internal data, then applies artificial
intelligence to make further improvements. Through this process, the Company’s data catalog is able to: (i) determine the
exact parts fitment for a product by its parameters, even if certain fitment details are originally missing in manufacturers’
data feeds; and (ii) rapidly incorporate new SKUs as they become available. Because its data catalog is continually expanding
with each customer interaction, the Company also is able to offer better purchase recommendations, increase up-sell opportunities,
improve the efficiency of its fulfillment operations, and lower errors and mistakes in orders. These economic and commercial advantages
result in a fly-wheel effect that increases operating leverage and momentum. Because the cost of operating the Company’s
data catalog is largely fixed, the Company has been able to expand its customer offerings into adjacent categories at relatively
low incremental costs. The Company’s in-house catalog and deep understanding of fitment data helps offer a personalized
and tailored experience to its diverse customer base of DIY, DIFM and PRO (mechanics) customers. For example, the Company can
offer its DIFM consumers the ability to research and choose from a wide variety of tires, and in the same transaction select a
tire installation center (2,117 locations available as of February 28, 2021) near them and schedule an appointment. The Company
is committed to providing an enhanced customer experience and becoming a one-stop shop and seamless solution for all vehicle enthusiast
needs.
Product
Vendors
The
Company provides its product vendors with access to its large customer base and e-commerce market. The Company’s 1000+ product
vendors can leverage the Company’s disruptive technology, enhanced fitment data, deep understanding of the market and large
customer database to sell and position their innovative product catalog instantly. Product vendors can benefit from the Company’s
engaging shopping experience, advanced 3D imagery, in-depth product description, reviews, installation guides and other tailored
content offered by the Company’s platform, complemented by specialized customer service.
Fulfillment
Operations
The
Company’s virtual, proprietary and capital-efficient fulfillment model manages our sales volume while carrying minimal inventory,
which is primarily associated with its private label products. The Company’s platform, which incorporates live or frequently
updated inventory feeds from our product vendors, provides stock-on-hand for more than 17 million products across nearly 5,000
brands. The Company’s fulfillment model decides which product vendor to source from while the sale is made based on a proprietary
algorithm, which incorporates factors such as availability of inventory, customer proximity, shipping cost and profitability.
This
decentralized, data-driven approach allows the Company to increase delivery speed through more than 2,500 shipping points from
its U.S. vendor network.
Products
The
Company primarily sells automotive parts and accessories, including a wide range of goods from automobile accessories, wheels
and tires, performance parts, lighting and repair parts. In addition, the Company launched seven new verticals in August 2018
and, in 2020, the value of the orders received from these new verticals grew to approximately 10% of the Company’s total
order value. These seven new verticals offer parts and accessories for semi-trucks, motorcycles, powersports (including ATVs,
snowmobiles and personal watercraft), RVs/campers, boats, recreation (including outdoor sports and camping gear) and tools using
the same proprietary platform.
The
Company primarily sources its products from industry leading brands and product vendors located in the U.S., except that its private
label products are largely sourced from foreign product vendors. Regarding sales of products sourced from our product vendors,
no single product vendor accounted for more than 10% of the Company’s total revenue for the year ended December 31, 2020.
The Company’s inventory on hand, which largely relates to private label products, has generally remained below $1.0 million
in value. As of December 31, 2020 and December 31, 2019, the sale value of customers’ unshipped and undelivered orders were
$16.2 million and $8.6 million, respectively.
Private
Label Product. The Company’s private label business uses proprietary data to identify, import and sell higher
margin products that are in demand on its platform. Management believes that by selecting and pairing a superior import product
with its purpose-built and proprietary data catalog, consumers are provided the option to purchase a high-quality product at a
reasonable cost. Private label revenue was less than 10% of the Company’s total revenue for the year ended December 31,
2020.
Branded
Product. The Company has developed and implemented application-programming interfaces with the majority of its
drop-ship product vendors that allow it to electronically transmit orders, check inventory availability, and receive the shipment
tracking information and share it with its customers. These processes allow the Company to offer nearly 5,000 brands on an inventory-free
basis, thereby reducing carrying costs and improving margins.
Industry
and Market Opportunity
The
Company’s management believes the U.S. aftermarket automotive market is massive, fragmented, and ripe for disruption as
overall consumer preferences are increasingly shifting to online transactions. Although the ultimate impacts of the COVID-19 pandemic
remain uncertain and consumer demand for automobile parts and accessories may be impacted in a recessionary environment, a recent
survey published by Capgemini SE, a consulting corporation, found that 46% of U.S. adults surveyed plan to use their cars more
often and public transportation less often in the future. Additionally, the pandemic is accelerating trends of online shopping
more broadly as consumers seek to avoid physical retail locations.
In
2020, the domestic automotive aftermarket market opportunity was estimated to be approximately $392 billion. The Company has historically
focused on the $46 billion specialty automotive equipment market, but is seeking to accelerate its growth through automotive repairs,
targeted international expansion and the addition of new verticals. The Company’s other product verticals present an aggregate
market opportunity exceeding $120 billion in 2020.
Marketing
Management
believes its customers’ core need is to find the right parts that fit their vehicle at the best price and are delivered
on time. Our marketing strategies are designed around customer acquisition and retention which includes paid and non-paid advertising.
Our paid advertising primarily includes search engine marketing, display, paid social media, connected TV (CTV) and paid partnerships.
Our non-paid advertising efforts include search engine optimization, non-paid social media and e-mail marketing.
The
Company currently drives traffic to its platform primarily with search engines; 77% of the Company’s traffic and 66% of
its revenue in 2020 was acquired in this manner. Once on the platform, customers are presented with the Company’s proprietary
marketing and product content that is created via in-house, multi-step image and video processing. Automated image refinement
and the Company’s creative design team work to ensure consistency and quality across all content, including the product
images presented to customers on the Company’s platform. Product pages on the Company’s platform present customers
with multiple, customized product choices, plus cross-sell and up-sell opportunities, as well as training materials, product comparison
information, installation instructions and customer reviews. Customers have the option to shop and explore on the Company’s
platform in multiple ways, including by part number, brand or product category.
Competition
The
parts and accessories industries in which the Company sells its products are competitive and fragmented, and products are distributed
through multi-tiered and overlapping channels. The Company competes with both online and offline sellers that offer parts and
accessories, repair parts and OEM parts to either the DIY or the DIFM consumer groups. Current or potential competitors include
(i) online retailers, including both niche retailers of uncommon, highly specialized products and general retailers of a larger
number of broadly available products; (ii) national parts retailers such as Advance Auto Parts, AutoZone, NAPA and O’Reilly
Auto Parts; (iii) internet-based marketplaces such as Amazon.com and eBay.com; (iv) discount stores and mass merchandisers; (v)
local independent retailers; (vi) wholesale parts distributors and (vii) manufacturers, product vendors and other distributors
selling online directly to consumers. The Company faces significant competition from these and other retailers in the United States
and abroad. The majority of these competitors are, and will be, substantially larger than the Company, and have substantially
greater resources and operating histories. There can be no assurance that the Company will be able to keep pace with the technological
or product developments of its competitors. These companies also compete with the Company in recruiting and retaining highly qualified
technical and professional personnel and consultants.
Competitive
factors in the markets the Company serves include fitment data and related intelligence, technology, customer experience, customer
service, range of product offerings, product availability, product quality, price and shipping speed. Management believes its
custom-built tech-stack for the complex, multi-dimensional automotive parts and accessories industry, which offers nearly 5,000
brands and more than 17 million unique SKUs, provides it with a unique competitive advantage.
Intellectual
Property
The
Company owns a number of trade names, service marks and trademarks, including “iD,” “CARiD,” “BOATiD,”
“MOTORCYCLEiD,” “CAMPERiD,” “POWERSPORTSiD,” “TOOLSiD,” “TRUCKiD,”
“RECREATIONiD” and more, for use in connection with its business. In addition, the Company owns and has registered
trademarks for certain of its private label brands. Management believes these trade names, service marks and trademarks are important
to the Company’s sales and marketing strategy.
Environmental
Matters
The
Company is subject to various federal, state and local laws and governmental regulations relating to the operation of its business,
including those governing the use and transportation of hazardous substances and emissions-related standards, established by the
United States Environmental Protection Agency (the “EPA”), and similar state-level regulators, including the California
Air Resources Board (“CARB”).
While
the Company has processes in place to ensure that products are sold in compliance with the requirements imposed by the EPA and
similar state-level regulators, all verification processes have inherent limitations. The Company has been, is currently, and
may in the future be the subject of regulatory proceedings initiated by the EPA, CARB or other applicable regulatory bodies, and
the results of such proceedings are uncertain. For additional information, see Note 6 of Notes to Consolidated Financial Statements.
Although
management believes that the Company is in substantial compliance with currently applicable environmental laws, rules, and regulations,
it is unable to predict the ultimate impact of adopted or future laws, rules, and regulations on its business, properties or products.
Such laws, rules, or regulations may cause the Company to incur significant expenses to achieve or maintain compliance, may require
it to modify its product offerings, may adversely affect the price of or demand for some of its products, and may ultimately affect
the way the Company conducts its operations. Failure to comply with these current or future laws, rules, or regulations could
result in harm to the Company’s reputation and/or could lead to fines and other penalties, including restrictions on the
importation of the Company’s products into, or the sale of its products in, one or more jurisdictions until compliance is
achieved.
Seasonality
The
Company’s revenue is relatively evenly distributed throughout the year, although sales typically spike during the spring
months upon the distribution to the general public by the IRS of income tax refunds and during the winter holiday season. While
the Company expects to be able to maintain sales growth through seasonality, it recognizes that future revenues may be affected
by these seasonal trends as well as cyclical trends affecting the overall economy, especially the automotive parts and accessories
industry.
Employees
As
of December 31, 2020, the Company employed 108 full-time employees, all in the United States. None of the Company’s employees
are represented by a labor union, and management believes that the Company’s relations with its employees are good.
Certain
call center, development, and back-office services are provided by independent contractors in Ukraine, Belarus, Philippines and
Costa Rica.
INFORMATION
ABOUT OUR EXECUTIVE OFFICERS
The
following table sets forth certain information with respect to our executive officers as of March 5, 2021.
Name
|
|
Age
|
|
Title
|
Antonino
Ciappina
|
|
39
|
|
Chief
Executive Officer
|
Kailas
Agrawal
|
|
63
|
|
Chief
Financial Officer
|
Ajay
Roy
|
|
38
|
|
Chief
Operating Officer
|
Mark
Atwater
|
|
61
|
|
Vice
President of Vendor Relations
|
Antonino
Ciappina served as Onyx’s Interim General Manager from July 2020 until the Closing of the Business Combination in November
2020 and has served as the Company’s Chief Executive Officer since the Closing. Upon joining Onyx in January 2020, Mr. Ciappina
served as Chief Marketing Officer and directed efforts related to marketing, customer acquisition and retention, pricing optimization,
advertising, creative services, market research, analytics and public relations for the portfolio of iD brands. Prior to joining
Onyx, Mr. Ciappina served in various digital marketing and e-commerce positions, most recently as Senior Director, E-Commerce
& Digital Marketing at Foot Locker from May 2018 to December 2019, as Vice President, E-Commerce & Digital Marketing at
Firestar Diamond Group from June 2017 to May 2018 and as Director, Digital Marketing & Customer Acquisition at The Children’s
Place from April 2015 to June 2017. Mr. Ciappina earned his Bachelor of Science degree in Business Administration, Marketing and
International Business from Montclair State University.
Kailas
Agrawal served as Onyx’s Chief Financial Officer from January 2018 until the Closing of the Business Combination in
November 2020 and has served as the Company’s Chief Financial Officer since the Closing. Prior to joining Onyx, Mr. Agrawal
served as Chief Financial Officer at In Colour Capital (during this period, he functioned as the Chief Financial Officer of Onyx),
an independent principal investment group, from January 2016 to December 2017 and as Principal Financial Consultant with KSS Consulting,
Inc. from May 2014 to December 2015. Additionally, Mr. Agrawal has gained international experience while serving in various positions
for multiple organizations across the United States, Canada, and India, including as Regional Chief Financial Officer of Minacs
Worldwide, Inc. Mr. Agrawal’s experience spans numerous industries such as information technology services, food distribution,
real estate, agricultural processing and manufacturing. Mr. Agrawal earned a designation as a Chartered Accountant from the Institute
of Chartered Accountants of India in addition to obtaining a Bachelor of Commerce from the University of Mumbai.
Ajay
Roy served as Onyx’s Chief Operating Officer from October 2019 until the Closing of the Business Combination in November
2020 and has served as the Company’s Chief Operating Officer since the Closing. Prior to joining Onyx, Mr. Roy served as
Senior Vice President of Operations at Moda Operandi, Inc., an online fashion retailer, from September 2018 to August 2019 and
General Manager of Global Supply Chain and Operations at Wayfair, Inc., an online furniture and home-goods retailer, from August
2017 to August 2018. Additionally, Mr. Roy gained extensive management experience while serving as Vice President of ToolsGroup,
Inc., a global provider of service-driven supply chain planning and demand analytics software, from 2013 to August 2017 and as
a Management Consultant with Deloitte Consulting. Mr. Roy earned his Master’s in Business Administration from SP Jain School
of Management and a Bachelor of Engineering in Computer Engineering from the MS Ramaiah Institute of Technology.
Mark
Atwater served as Onyx’s Vice President of Vendor Relations from October 2016 until the Closing of the Business Combination
in November 2020 and has served as the Company’s Vice President of Vendor Relations the Closing. As Vice President of Vendor
Relations, Mr. Atwater is responsible for the leadership of the Vendor Relations Department, management of Onyx’s vendor
partners, pricing strategy, new product category development and carrier logistics. Since joining Onyx in 2011, Mr. Atwater has
served in a variety of positions including General Manager and Director of Vendor Relations. Prior to joining Onyx, while serving
in a variety of positions in the automotive industry, Mr. Atwater obtained experience in negotiating, purchasing, logistics and
distribution, warehouse management, retail store management, automotive sales and e-commerce sales.
Item
1A. Risk Factors
Our
business, financial condition and results of operations could be materially adversely affected by a number of factors. In
addition to the factors discussed elsewhere in this report, the following risks and uncertainties could materially harm our business,
financial condition or results of operations, including causing our actual results to differ materially from those projected in
any forward-looking statements. The following list of significant risk factors is not all-inclusive or necessarily
in order of importance. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial,
also may materially adversely affect us in future periods. You should carefully consider these risks and uncertainties
before investing in our securities.
Risks
Related to the COVID-19 Pandemic
The
global COVID-19 pandemic could harm the Company’s business, results of operations, financial condition and liquidity.
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. 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) and shipping times. The extent to which the COVID-19 pandemic impacts the Company’s business, results
of operations, financial condition and liquidity in the future will depend on numerous evolving factors that it cannot predict,
including the duration and scope of the pandemic; any resurgence of the pandemic; governmental, business and individuals’
actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on national and global
economic activity, unemployment levels and financial markets; the potential for 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, the COVID-19 pandemic has generally
resulted in a decrease in consumer spending with respect to the wider economy, which in the future could have an adverse impact
on the Company through reduced consumer demand for or inventory of its products. Additionally, the COVID-19 pandemic has caused
the Company to require employees to work remotely for an indefinite period of time, which could negatively impact its business
and harm productivity and collaboration. 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.
To
the extent the COVID-19 pandemic adversely affects the Company’s business, results of operations, financial condition or
liquidity, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section.
Risks
Related to the Company’s Business and Industry
The
Company depends on search engines and other online sources to attract visitors to its digital commerce platform, and if the Company
is unable to attract these visitors and convert them into customers in a cost-effective manner, its business and results of operations
will be harmed.
The
Company’s success depends on its ability to attract customers in a cost-effective manner. The Company’s investments
in marketing may not effectively reach potential consumers or those consumers may not decide to buy from it or the volume of consumers
that purchase from it may not yield the intended return on investment. In order to drive traffic to its digital commerce platform,
the Company relies on relationships with providers of online services, search engines, shopping comparison sites and marketplace
sites to provide content, advertising banners and other links. In particular, the Company relies on Google as an important marketing
channel, and if Google changes its algorithms or if competition increases for advertisements on Google or the Company’s
other marketing channels, the Company may be unable to cost-effectively attract customers to its products. During the year ended
December 31, 2020, 51.1% of the Company’s revenue was directly attributable to organic and paid traffic from Google.
In
addition, many of the parties with whom the Company has online-advertising arrangements could provide advertising services to
other companies, including retailers with whom the Company competes. As competition for online advertising has increased, the
cost for these services has also increased. With the growing awareness of the importance of digital commerce channels, many of
the Company’s competitors are investing to acquire customers at a much higher cost and with a much lower profitability threshold,
including through free shipping and other loss leaders. A significant increase in the cost of the marketing channels, including
a change in the proportion of paid and free traffic upon which the Company relies, could adversely impact its ability to attract
customers in a cost-effective manner and harm its business and results of operations. Further, while the Company uses promotions
as a way to drive sales, these promotional activities may not drive sales and may adversely affect its gross margins.
Similarly,
if any free search engine, price comparison and shopping engine, or marketplace site on which the Company relies begins charging
fees for listing or placement, or if one or more of the search engines, price comparison and shopping engines, marketplace sites
or other online sources on which the Company relies for purchased listings increases their fees, or modifies or terminates its
relationship with the Company, including by restricting certain categories of products, the Company’s expenses could rise,
it could lose customers, and traffic to its digital commerce platform could decrease. Moreover, if the use of price comparison
and shopping engines by consumers continues to increase in popularity, the Company may face increased pricing pressure or suffer
reduced sales as consumers are more readily able to price compare among online shopping platforms.
The
Company’s recent growth rates may not be sustainable or indicative of its future growth.
The Company experienced
significant growth in recent periods. This rate of growth may not be sustainable or indicative of the Company’s future rate
of growth. The Company believes that its continued growth will depend upon the success of its multiple initiatives and continuation
of higher traffic and conversion rates, which primarily depend on (i) customer experiences, (ii) the economy and customers’
disposable income, (iii) the Company’s product offerings, product pricing and fulfillment, (iv) shipping speed and cost
optimization, (v) the Company’s competitive position in the aftermarket parts supply, (vi) changes in search engine algorithms
affecting the Company’s website’s search engine optimization, and (vii) vendor supplies and vendor performance.
If
the Company is unable to manage the challenges associated with its international operations, the growth of its business could
be limited and its business could suffer.
The
Company maintains international business operations in Ukraine, Belarus, the Philippines and Costa Rica. This international operation
includes development and maintenance of the Company’s websites and call center and back-office support services. The Company
is subject to a number of risks and challenges that specifically relate to its international operations. The Company’s international
operations may not be successful if it is unable to meet and overcome these challenges, which could limit the growth of its business
and may have an adverse effect on its business and operating results. These risks and challenges include:
|
●
|
difficulties
and costs of staffing and managing foreign operations, including any impairment to its
relationship with contractors, including the lead contractor of the Company’s Ukraine
operations, as well as service providers controlled by that lead contractor;
|
|
●
|
changes
in operating costs charged by the Company’s Ukrainian service providers, who are
controlled by the Company’s lead contractor in Ukraine;
|
|
●
|
increasing
competition with respect to technology resources in Ukraine, leading to higher costs
and higher attrition;
|
|
●
|
restrictions
imposed by local labor practices and laws on its business and operations;
|
|
●
|
exposure
to different business practices and legal standards;
|
|
●
|
unexpected
changes in regulatory requirements;
|
|
●
|
the
imposition of government controls and restrictions;
|
|
●
|
political,
social and economic instability and the risk of war, terrorist activities or other international
incidents;
|
|
●
|
the
failure of telecommunications and connectivity infrastructure;
|
|
●
|
natural
disasters and public health emergencies, including the ongoing COVID-19 pandemic; and
|
|
●
|
potentially
adverse tax consequences, including the possible imposition of increased withholding
taxes or the re-classification of contractors as employees under local law.
|
The
Company’s growth strategy is dependent upon its ability to expand its “iD” branded store in industries outside
automotive parts and accessories and to expand beyond its core DIY customer base into “business to business” and DIFM
customers.
While
the Company’s digital commerce platform initially focused solely on automotive parts and accessories, management believes
its platform is scalable. Accordingly, management believes that its application to other complex product portfolio industries,
including the seven parts and accessories verticals launched in August 2018 under the “iD” brand (i.e., semi-truck,
motorcycle, powersports, RV/camper, boating, recreation and tools), will continue to drive brand loyalty among customers and reputation
among vendors and increase customer orders from adjacent markets. However, the Company can provide no assurance that this
strategy will continue to be successful. In future periods, the Company’s parts and accessories verticals may fail to attract
new customers or appeal to the Company’s existing customers of automotive products, or the customers of each vertical may
be more segmented than the Company expects, thereby limiting its ability to develop cross-vertical brand loyalty. The Company
may also struggle to populate its new verticals with a comprehensive assortment of products, which management believes is important
to attract and retain customers. Additionally, within the automotive parts and accessories space, the Company’s growth strategy
is focused on expanding beyond its core DIY customer base by increasing business-to-business sales and sales to DIFM customers.
These prospective customers may not be receptive to the Company’s marketing efforts, product offerings, or current speed
of fulfillment or shipping, or may remain committed to using their existing product vendors. If for these or other reasons the
Company is unable to continue to execute its growth strategy, its results of operations and financial conditions could be adversely
affected.
Purchasers
of aftermarket automotive parts and accessories may not choose to shop online, which would prevent the Company from acquiring
new customers who are necessary to the growth of its business.
The
online market for automotive parts and accessories is less developed than the online market for many other business and consumer
products and currently represents only a small part of the overall automotive parts and accessories market. The Company’s
success will depend in part on its ability to attract new customers and to convert customers who have historically purchased automotive
parts and accessories through traditional retail and wholesale operations. Specific factors that could discourage or prevent prospective
customers from purchasing from the Company include:
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concerns
about buying automotive parts and accessories without face-to-face interaction with sales
personnel;
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the
inability to physically handle, examine and compare products;
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delivery
time associated with internet orders;
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concerns
about the security of online transactions and the privacy of personal information;
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delayed
shipments or shipments of incorrect or damaged products;
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increased
shipping costs;
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the
inconvenience associated with returning or exchanging items purchased online; and
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limited
or no installation options or support for many products purchased online.
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If
the online market for automotive parts and accessories does not gain widespread acceptance, the Company’s sales may decline
and its business and financial results may suffer.
If
demand for the Company’s products slow, then its business may be materially adversely affected.
Demand
for the products the Company sells may be affected by a number of factors it cannot control, including:
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the
number of older vehicles in service. Vehicles seven years old or older are generally
no longer under the original vehicle manufacturers’ warranties and tend to
need more maintenance and repair than newer vehicles.
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the
economy. In periods of declining economic conditions, consumers may reduce their discretionary
spending by deferring vehicle maintenance or repair. Additionally, such conditions may
affect the Company’s customers’ ability to obtain credit. During periods
of expansionary economic conditions, more of the Company’s DIY customers may pay
others to repair and maintain their vehicles instead of working on their own vehicles,
or they may purchase new vehicles.
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the
weather. Milder weather conditions may lower the failure rates of automotive parts, while
extended periods of rain and winter precipitation may cause the Company’s customers
to defer maintenance and repair on their vehicles. Further, drastic weather storms, such
as hurricanes and winter storms, can have an immediate negative impact on the demand
for the Company’s products.
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technological
advances. Advances in automotive technology, such as electric vehicles, and parts design
can result in cars needing maintenance less frequently and parts lasting longer.
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the
number of miles vehicles are driven annually. Higher vehicle mileage increases the need
for maintenance and repair. Mileage levels may be affected by gas prices, ride sharing,
the COVID-19 pandemic and related restrictions to slow its spread and other factors.
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COVID-19
and the related increase in online shopping. Beginning in the second quarter of fiscal
year 2020, the Company’s traffic and conversion rate increased substantially and
its telephone calls to online traffic ratio decreased, each of which the Company’s
management attributes to the COVID-19 pandemic and related restrictions to slow its spread.
The Company’s financial projections assume its traffic and conversion rate will
remain elevated going forward and its telephone calls to online traffic ratio will remain
lower, so any reversal of these factors could cause the Company to fail to achieve its
projections.
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the
quality of the vehicles manufactured by original vehicle manufacturers and the length
of the warranties or maintenance offered on new vehicles.
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restrictions
on access to telematics and diagnostic tools and repair information imposed by the original
vehicle manufacturers or by governmental regulation. These restrictions may cause vehicle
owners to rely on dealers to perform maintenance and repairs.
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decreases
in vehicle ownership due to wider adoption of on-demand transportation and ride sharing
services.
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These
factors could result in a decline in the demand for the Company’s products, which could adversely affect its business and
overall financial condition.
The
Company is dependent upon relationships with product vendors in Taiwan and China for the majority of its products.
The
Company acquires a majority of its private label products, and its product vendors acquire a majority of their products, from
manufacturers and distributors located in Taiwan and China. The Company does not have any long-term contracts or exclusive agreements
with its foreign product vendors that would ensure its ability to acquire the types and quantities of products it desires at acceptable
prices and in a timely manner or that would allow it to rely on customary indemnification protection with respect to any third-party
claims similar to some of its U.S. product vendors.
In
addition, because many of the Company’s direct and indirect product vendors are outside of the United States, additional
factors could interrupt its relationships or affect the Company’s ability to acquire necessary products on acceptable terms,
including:
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political,
social and economic instability and the risk of war or other international incidents
in Asia or abroad;
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fluctuations
in foreign currency exchange rates that may increase cost of products;
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imposition
of duties, taxes, tariffs or other charges on imports;
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difficulties
in complying with import and export laws, regulatory requirements and restrictions;
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natural
disasters and public health emergencies, such as COVID-19;
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import
shipping delays resulting from foreign or domestic labor shortages, slow-downs, or stoppages;
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the
failure of local laws to provide a sufficient degree of protection against infringement
of its intellectual property;
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imposition
of new legislation relating to import quotas or other restrictions that may limit the
quantity of its product that may be imported into the U.S. from countries or regions
where it does business;
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financial
or political instability in any of the countries in which its products are manufactured;
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potential
recalls or cancellations of orders for any product that does not meet its quality standards;
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disruption
of imports by labor disputes or strikes and local business practices;
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political
or military conflict involving the United States or any country in which its product
vendors are located, which could cause a delay in the transportation of its products,
an increase in transportation costs and additional risk to product being damaged and
delivered on time;
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heightened
terrorism security concerns, which could subject imported goods to additional, more frequent
or more thorough inspections, leading to delays in deliveries or impoundment of goods
for extended periods;
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inability
of its non-U.S. product vendors to obtain adequate credit or access liquidity to finance
their operations; and
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its
ability to enforce any agreements with its foreign product vendors.
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If
the Company were unable to import products from China and Taiwan in a cost-effective manner or at all, it could suffer irreparable
harm to its business and be required to significantly curtail its operations, file for bankruptcy or cease operations.
From
time to time, the Company may also have to resort to administrative and court proceedings to enforce its legal rights with foreign
product vendors. However, it may be more difficult to evaluate the level of legal protection the Company enjoys in Taiwan and
China and the corresponding outcome of any administrative or court proceedings than in comparison to its product vendors in the
United States.
The
Company depends on third-party delivery services to deliver products to its customers on a timely and consistent basis, and any
deterioration in its relationship with any one of these third parties or increases in the fees that they charge could harm its
reputation and adversely affect its business and financial condition.
The
Company relies on third parties for the shipment of products, including a single carrier for the majority of its shipping needs,
and it cannot be sure that these relationships will continue on terms favorable to it, or at all. Shipping costs have increased
from time to time, and may continue to increase, and the Company may not be able to pass these costs directly to its customers.
Any increased shipping costs could harm the Company’s business, prospects, financial condition and results of operations
by increasing its costs of doing business and reducing gross margins, which could negatively affect its operating results. In
addition, the Company utilizes a variety of shipping methods for outbound logistics. For outbound logistics, the Company relies
on “Less-than-Truckload,” or LTL, and parcel freight based upon the product and quantities being shipped and customer
delivery requirements. These outbound freight costs have increased on a year-over-year basis and may continue to increase in the
future. The Company also ships a number of oversized automotive parts and accessories, which may trigger additional shipping costs
by third-party delivery services. Any increases in fees or any increased use of LTL would increase the Company’s shipping
costs, which could negatively affect its operating results.
In
addition, if the Company’s relationships with these third parties, especially the single carrier the Company relies upon
for the majority of its shipping needs, are terminated or impaired, or if these third parties are unable to deliver products for
the Company, whether due to a labor shortage, slow down or stoppage, deteriorating financial or business conditions, responses
to the COVID-19 pandemic, terrorist attacks or for any other reason, the Company would be required to use alternative carriers
for the shipment of products to its customers. Changing carriers could have a negative effect on the Company’s business
and operating results due to reduced visibility of order status and package tracking and delays in order processing and product
delivery, and it may be unable to engage alternative carriers on a timely basis, upon terms favorable to it, or at all.
The
Company relies on bandwidth and data center providers and other third parties to provide products to its customers, and any failure
or interruption in the services provided by these third parties could disrupt its business and cause it to lose customers.
The
Company relies on third-party vendors, including data center and bandwidth providers. Any disruption in the network access or
co-location services, which are the services that house and provide internet access to the Company’s servers, provided by
these third-party providers or any failure of these third-party providers to handle current or higher volumes of use could significantly
harm the Company’s business. Any financial or other difficulties the Company’s providers face may have negative effects
on the Company’s business, the nature and extent of which cannot be predicted. The Company exercises little control over
these third-party vendors, which increases its vulnerability to problems with the services they provide.
The
Company also licenses technology from third parties, including software packages, ERP systems, system applications, hosting services,
and related databases, to facilitate elements of its digital commerce platform, back-office support and accounting systems. The
Company has experienced and expects to continue to experience interruptions and delays in service and availability for these elements.
Any errors, failures, interruptions or delays experienced in connection with these third-party technologies could negatively impact
the Company’s relationship with its customers and adversely affect its business. The Company’s systems also heavily
depend on the availability of electricity, which also comes from third-party providers.. Information systems such as the Company’s
may be disrupted by even brief power outages, or by the fluctuations in power. This could disrupt the Company’s business
and cause it to lose customers.
The
Company is highly dependent upon key product vendors.
The
Company’s top ten product vendors represented approximately 33.4% of its total revenue during the fiscal year ended December
31, 2020. The Company’s ability to acquire products from its product vendors in amounts and on terms acceptable to it is
dependent upon a number of factors that could affect its product vendors and which are beyond its control. For example, financial
or operational difficulties that some of the Company’s product vendors may face could result in an increase in the cost
of the products the Company purchases from them. If the Company does not maintain its relationships with its existing product
vendors or develop relationships with new product vendors on acceptable commercial terms, it may not be able to continue to offer
a broad selection of merchandise at competitive prices and, as a result, it could lose customers and its sales could decline.
The
Company outsources the distribution and fulfillment operation for most of the products it sells and is dependent on drop-ship
product vendors to manage inventory, process orders and distribute those products to its customers in a timely manner. For the
fiscal year ended December 31, 2020, products shipped by drop-ship product vendors represented the vast majority of the Company’s
total revenue. Because the Company outsources a number of traditional retail functions to product vendors, it has limited control
over how and when orders are fulfilled. The Company also has limited control over the products that its product vendors purchase
or keep in stock. The Company’s product vendors may not accurately forecast the products that will be in high demand or
they may allocate popular products to other resellers, resulting in the unavailability of certain products for delivery to the
Company’s customers. Any inability to offer a broad array of products at competitive prices and any failure to deliver those
products to the Company’s customers in a timely and accurate manner may damage the Company’s reputation and brand
and could cause it to lose customers and its sales to decline.
In
addition, the increasing consolidation among automotive parts and accessories product vendors may disrupt or end the Company’s
relationship with some product vendors, result in product shortages and/or lead to less competition and, consequently, higher
prices. Furthermore, as part of its routine business, product vendors extend credit to the Company in connection with its purchase
of their products. In the future, the Company’s product vendors may limit the amount of credit they are willing to extend
to the Company in connection with its purchase of their products, including as a result of the Company’s public disclosure
of its financial statements. If this were to occur, it could impair the Company’s ability to acquire the types and quantities
of products that it desires from the applicable product vendors on acceptable terms, severely impact its liquidity and capital
resources, limit its ability to operate its business and could have a material adverse effect on its financial condition and results
of operations.
The
Company is dependent on its product vendors to supply it with products that comply with safety and quality standards at competitive
prices and to comply with the terms of their stated customer warranties.
The
Company is dependent on its vendors continuing to supply quality products at favorable prices. If the Company’s merchandise
offerings do not meet its customers’ expectations regarding safety and quality, it could experience lost sales, increased
costs and exposure to legal and reputational risk. All of the Company’s product vendors must comply with applicable product
safety laws, and the Company is dependent on them to ensure that the products its customers buy comply with all safety and quality
standards. Events that give rise to actual, potential or perceived product safety concerns could expose the Company to government
enforcement action and private litigation and result in costly product recalls and other liabilities. To the extent the Company’s
product vendors are subject to additional governmental regulation of their product design and/or manufacturing processes, the
cost of the merchandise it purchases may rise. In addition, negative customer perceptions regarding the safety or quality of the
products the Company sells could cause its customers to seek alternative sources for their needs, resulting in lost sales. In
those circumstances, it may be difficult and costly for the Company to regain the confidence of its customers.
The
Company is also dependent on its product vendors to comply with the terms of their stated customer product warranties. To the
extent that the Company’s product vendors fail to satisfy legitimate warranty claims asserted by the Company’s customers,
the Company may be directly responsible for reimbursing such customers, which could have a material adverse effect on its financial
condition and results of operations, particularly if one or more of the Company’s larger product vendors fails to honor
its warranty obligations.
The
Company is dependent on entities controlled by a lead contractor in Ukraine to recruit and manage its development team and back-office
support, as well to provide a physical facility to its contractors.
Based
on management’s knowledge, the Company’s lead contractor and his affiliate have sole authority to recruit and retain
the Company’s information technology subcontractors, and own the physical facility in Ukraine at which such subcontractors
report to work. Because substantially all of the Company’s information technology functions are performed in Ukraine, the
Company is dependent on the lead contractor and his affiliate with respect to such functions. If these contractors or subcontractors
fail to perform according to agreed-upon terms and timetables or terminate the arrangements under which they perform these functions,
the Company may be unable to engage a substitute on commercially reasonable terms, or at all. This would likely result in temporary
service disruptions and increased costs, which could have a material adverse effect on the Company’s business, results of
operations and financial condition.
If
the Company fails to offer a broad selection of products at competitive prices or fails to locate sufficient inventory to meet
customer demands, its revenue could decline.
In
order to expand its business, the Company must successfully offer, on a continuous basis, a broad selection of automotive parts
and accessories that meet the needs of its customers. Products sold by the Company are used by consumers for a variety of purposes,
including repair, performance, improved aesthetics and functionality. In addition, to be successful, the Company’s product
offerings must be broad and deep in scope, competitively priced, well-made, innovative and attractive to a wide range of consumers.
The Company cannot predict with certainty that it will be successful in offering products that meet all of these requirements.
Moreover, even if the Company offers a broad selection of products at competitive prices, it must maintain access to sufficient
inventory to meet consumer demand. If the Company’s product offerings fail to satisfy its customers’ requirements
or respond to changes in customer preferences or if the Company otherwise fails to locate sufficient inventory to meet customer
demands, its revenue could decline.
Shifting
online consumer behavior regarding automotive parts and accessories could adversely impact the Company’s financial results
and the growth of its business.
Shifting
consumer behavior indicates that the Company’s customers are becoming more inclined to shop for automotive parts and accessories
through their mobile devices. For the year ended December 31, 2020, approximately 49% of the Company’s revenue and 64% of
its traffic was attributable to mobile customers. Mobile customers exhibit different behaviors than more traditional desktop-based
e-commerce customers. User sophistication and technological advances have increased consumer expectations around the user experience
on mobile devices, including speed of response, functionality, product availability, security, and ease of use. If the Company
is unable to continue to adapt its mobile device shopping experience in ways that improve its customers’ mobile experience
and increase the engagement of its mobile customers, the Company’s sales may decline and its business and financial results
may suffer.
If
commodity prices such as fuel, plastic and steel increase, the Company’s margins may be negatively impacted.
Increasing
prices in the component materials for the parts the Company sells may impact the availability, the quality and the price of its
products, as product vendors search for alternatives to existing materials and increase the prices they charge. The Company cannot
ensure that it can recover all the increased costs through price increases, and its product vendors may not continue to provide
a consistent quality of product as they may substitute lower cost materials to maintain pricing levels, all of which may have
a negative impact on the Company’s business and results of operations.
The
Company faces intense competition and operates in an industry with limited barriers to entry, and some of its competitors may
have greater resources than it and may be better positioned to capitalize on the growing online automotive aftermarket parts and
accessories market.
The
parts and accessories industries in which the Company sells its products are competitive and fragmented, and products are distributed
through multi-tiered and overlapping channels. The Company competes with both online and offline sellers that offer parts and
accessories, repair parts and original equipment manufacturer parts to either the DIY or the DIFM consumer segments. Current or
potential competitors include (i) online retailers, including both niche retailers of uncommon, highly specialized products
and general retailers of a larger number of broadly available products; (ii) national parts retailers such as Advance Auto
Parts, AutoZone, NAPA and O’Reilly Auto Parts; (iii) internet-based marketplaces such as Amazon.com and eBay.com; (iv) discount
stores and mass merchandisers; (v) local independent retailers; (vi) wholesale parts distributors and (vii) manufacturers,
product vendors and other distributors selling online directly to consumers.
Barriers
to entry are low, and current and new competitors can launch websites at a relatively low cost. Many of the Company’s current
and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing, technical, management and other resources than it does. For example, in the event that online marketplace
companies such as Amazon or eBay, who have larger customer bases, greater brand recognition and significantly greater resources
than the Company does, focus more of their resources on competing in the automotive parts and accessories market, it could have
a material adverse effect on the Company’s business and results of operations. In addition, some of the Company’s
competitors have used and may continue to use aggressive pricing tactics and devote substantially more financial resources to
website and system development than the Company does. The Company expects that competition will further intensify in the future
as internet use and online commerce continue to grow worldwide. Increased competition may result in reduced sales, lower operating
margins, reduced profitability, loss of market share and diminished brand recognition.
Additionally,
the Company has experienced significant competitive pressure from certain of its product vendors who are now selling their products
directly to customers. Since the Company’s product vendors have access to merchandise at very low costs, they can sell products
at lower prices and maintain higher gross margins on their product sales than the Company can. The Company’s financial results
have been negatively impacted by direct sales from its product vendors to its current and potential customers, and the Company’s
total number of orders and average order value may decline due to increased competition. Continued competition from the Company’s
product vendors may also continue to negatively impact its business and results of operations, including through reduced sales,
lower operating margins, reduced profitability, loss of market share and diminished brand recognition. The Company has implemented
and will continue to implement several strategies to attempt to overcome the challenges created by its product vendors selling
directly to its customers and potential customers, including optimizing its pricing, continuing to increase its mix of private
label products and improving its diligence commerce platform, which may not be successful. If these strategies are not successful,
the Company’s results of operations and financial condition could be materially and adversely affected.
The
Company relies on key personnel and may need additional personnel for the success and growth of its business.
The
Company’s business is largely dependent on the personal efforts and abilities of highly skilled executive, technical, managerial,
merchandising, marketing, and call center personnel. Competition for such personnel is intense, and the Company cannot assure
that it will be successful in attracting and retaining such personnel. The loss of any key employee or the Company’s inability
to attract or retain other qualified employees could harm its business and results of operations.
The
Company generates a portion of its revenue from advertising, and reduced spending by advertisers or new and existing technologies
that block ads online could harm its business.
The
Company generates a portion of its revenue from the display of ads online. Expenditures by advertisers tend to be cyclical, reflecting
overall economic conditions and budgeting and buying patterns. Adverse macroeconomic conditions can have a material adverse effect
on the demand for advertising and cause the Company’s advertisers to reduce the amounts they spend on advertising, which
could harm the Company’s results of operations and financial condition.
Changes
to the automotive industry and consumer views on vehicle ownership could materially adversely affect our business, results of
operations and financial condition.
The
automotive industry is predicted to experience rapid change in the years to come, including increases in ride-sharing services,
advances in electric vehicle production and driverless technology. Ride-sharing services such as Uber and Lyft provide consumers
with mobility options outside of traditional vehicle ownership. Manufacturers also continue to invest in increasing production
and quality of battery-electric vehicles, which generally require less maintenance than traditional cars and trucks and may be
more difficult for DIY customers to repair. Technological advances are also facilitating the development of driverless vehicles,
which may further reduce the need for vehicle ownership. If sales of automotive parts and accessories decline as a result of these
or other changes to the automotive industry, our business, results of operations and financial condition could be materially and
adversely affected.
Risks
Related to the Company’s Finances
The
Company has a history of losses.
The
Company has a history of low operating margins and losses. The Company continues to focus on growing its business in the near
term, with increasing investments in its business, which may result in the incurrence of additional losses. During the fiscal
year ended December 31, 2020, the Company had net income of $2.1 million before a cash and non-cash deemed distribution to preferred
stockholders (and after such distribution, a net loss of $13.3 million available to common stockholders), compared to a net loss
of $0.7 million (and a net loss of $1.2 million available to common stockholders) for the fiscal year ended December 31, 2019.
If the Company incurs substantial net losses in the future, it could impact the Company’s liquidity, as it may not be able
to provide positive cash flows from operations in order to meet its working capital requirements. The Company may need to sell
additional assets or seek additional equity or additional debt financing in the future. In such case, there can be no assurance
that the Company would be able to raise such additional financing or engage in such asset sales on acceptable terms, or at all.
If the Company’s net losses were to continue, and if the Company is not able to raise adequate additional financing or proceeds
from asset sales to continue to fund its ongoing operations, it will need to defer, reduce or eliminate significant planned expenditures,
restructure or significantly curtail its operations, file for bankruptcy or cease operations.
The
Company may not generate sufficient cash flows to cover its operating expenses, and any failure to obtain additional capital could
jeopardize its operations and the cost of capital may be high.
As
of December 31, 2020, the Company had negative working capital of approximately $25.8 million. In the event that the Company is
unable to generate sufficient cash from its operating activities or obtain financing, it could be required to delay, reduce or
discontinue its operations and ongoing business efforts. Further, if for any reason, the revenues of the Company decline or there
are unfavorable changes in the credit terms from its key product vendors, it could have an adverse impact on the availability
of working capital to the Company. Even if the Company is able to raise capital, it may raise capital by selling equity securities,
which will be dilutive to existing stockholders. If the Company incurs indebtedness, costs of financing may be extremely high,
and the Company will be subject to default risks associated with such indebtedness, which may harm its ability to continue its
operations.
Changes
in customer, product, vendor or sourcing sales mix could cause the Company’s gross margin and ultimately operating margins
to decline; failure to mitigate these pressures could adversely affect its results of operations and financial condition.
The
Company’s gross margins are dependent on the mix of products it sells, decisions to drop-ship rather than stock products
in its distribution centers, decisions to offer private label alternatives or branded offerings, price changes by its vendors,
pricing actions by competitors, and the mix of paid and organic traffic to its e-commerce platform. In addition, the Company’s
margin could be adversely affected by any consumer shift away from its private label products.
We
may be unable to accurately forecast net sales and appropriately plan our expenses in the future.
Net
sales and results of operations are difficult to forecast because they generally depend on the volume, timing and type of orders
we receive, all of which are uncertain. We base our expense levels and investment plans on our estimates of net sales and gross
margins. We cannot be sure the same growth rates, trends, and other key performance metrics are meaningful predictors of future
growth. If our assumptions prove to be wrong, we may spend more than we anticipate acquiring and retaining customers or may generate
lower net sales per active customer than anticipated, either of which could have a negative impact on our business, financial
condition, and results of operations.
Risks
Related to Regulation and Tax
Regulation
in the areas of privacy and protection of user data could harm the Company’s business.
The
Company is subject to laws relating to the collection, use, retention, security, and transfer of personally identifiable information
about its users around the world. Much of the personal information that the Company collects, especially customer identity and
financial information, is regulated by multiple laws. User data protection laws may be interpreted and applied inconsistently
from country to country. These laws continue to develop in ways the Company cannot predict and that may harm its business.
Regulatory
scrutiny of privacy, user data protection, use of data and data collection is increasing on a global basis. The Company is subject
to a number of privacy and similar laws and regulations in the countries in which it operates, and these laws and regulations
will likely continue to evolve over time, both through regulatory and legislative action and judicial decisions. In addition,
compliance with these laws may restrict the Company’s ability to provide services to its customers that they may find to
be valuable. For example, the EU General Data Protection Regulation (“GDPR”) applies to all of the Company’s
activities conducted from an establishment in the European Union or related to products and services offered in the European Union,
and impose significant compliance obligations regarding the handling of personal data. If the Company fails to comply with the
GDPR, or if regulators assert the Company has failed to comply with the GDPR, it may lead to regulatory enforcement actions, which
can result in monetary penalties of up to 4% of worldwide revenue, private lawsuits, or reputational damage. In the United States,
California has adopted the California Consumer Privacy Act of 2018 (“CCPA”), which became effective January 1, 2020
and which provides a private right of action for data breaches and requires companies that process information on California residents
to make new disclosures to consumers about their data collection, use and sharing practices and allows consumers to opt out of
certain data sharing with third parties. Moreover, on November 3, 2020, Californians voted to approve a ballot measure that created
the California Privacy Rights Act (“CPRA”), which amends and expands the rights and obligations under the CCPA. Most
of the CPRA’s substantive provisions will not take effect until January 1, 2023. Once the CPRA takes effect, it will replace
the CCPA, although in the interim, businesses must comply with the CCPA. In addition to the CCPA and CPRA, several other U.S.
states have or are considering adopting laws and regulations imposing obligations regarding the handling of personal data. Compliance
with the GDPR, the CCPA, the CPRA and other current and future applicable international and U.S. privacy, cybersecurity and related
laws can be costly and time-consuming. Complying with these varying national and international requirements could cause the Company
to incur substantial costs or require it to change its business practices in a manner adverse to its business, and violations
of privacy-related laws can result in significant penalties.
A
determination that there have been violations of laws relating to the Company’s practices under communications-based laws
could also expose it to significant damage awards, fines and other penalties that could, individually or in the aggregate, materially
harm its business. In particular, because of the enormous number of emails and other communications the Company sends to its users,
communications laws that provide a specified monetary damage award or fine for each violation (such as those described below)
could result in particularly large awards or fines.
For
example, the Federal Communications Commission amended certain of its regulations under the Telephone Consumer Protection Act,
or TCPA, in 2012 and 2013 in a manner that could increase the Company’s exposure to liability for certain types of telephonic
communication with customers. Under the TCPA, plaintiffs may seek actual monetary loss or statutory damages of $500 per violation,
whichever is greater, and courts may treble the damage award for willful or knowing violations. Given the enormous number of communications
the Company sends to its users, a determination that there have been violations of the TCPA or other communications-based statutes
could expose the Company to significant damage awards that could, individually or in the aggregate, materially harm its business.
The
Company posts on its websites its privacy policies and practices concerning the collection, use and disclosure of user data. Any
failure, or perceived failure, by the Company to comply with its posted privacy policies or with any regulatory requirements or
orders or other federal, state or international privacy or consumer protection-related laws and regulations, including the GDPR
and the CCPA, could result in proceedings or actions against it by governmental entities or others (e.g., class action privacy
litigation), subject it to significant penalties and negative publicity, require it to change its business practices, increase
its costs and adversely affect its business. Data collection, privacy and security have become the subject of increasing public
concern. If internet and mobile users were to reduce their use of the Company’s websites, mobile platforms, products, and
services as a result of these concerns, its business could be harmed. As noted above, the Company is subject to the possibility
of security breaches, which themselves may result in a violation of these laws.
The
Company is subject to various federal, state and local laws and governmental regulations relating to the operation of its business,
which may affect the way the Company conducts its operations.
The
Company is subject to various federal, state and local laws and governmental regulations relating to the operation of its business,
including those governing the use and transportation of hazardous substances and emissions-related standards, established by the
EPA, and similar state-level regulators, including CARB.
While
the Company has processes in place to ensure that products are sold in compliance with the requirements imposed by the EPA and
similar state-level regulators, all verification processes have inherent limitations. The Company has been, is currently, and
may in the future be the subject of regulatory proceedings initiated by the EPA, CARB or other applicable regulatory bodies, and
the results of such proceedings are uncertain. For additional information, see Note 6 of Notes to Consolidated Financial Statements.
Although
management believes that the Company is in substantial compliance with currently applicable environmental laws, rules, and regulations,
it is unable to predict the ultimate impact of adopted or future laws, rules, and regulations on its business, properties or products.
Such laws, rules, or regulations may cause the Company to incur significant expenses to achieve or maintain compliance, may require
it to modify its product offerings, may adversely affect the price of or demand for some of its products, and may ultimately affect
the way the Company conducts its operations. Failure to comply with these current or future laws, rules, or regulations could
result in harm to the Company’s reputation and/or could lead to fines and other penalties, including restrictions on the
importation of the Company’s products into, or the sale of its products in, one or more jurisdictions until compliance is
achieved.
The
Company could be required to collect additional sales taxes or be subject to other tax liabilities that may increase the costs
its customers would have to pay for its products and adversely affect its operating results.
In
general, the Company has not historically collected state or local sales, use, or other similar taxes in any jurisdictions in
which it believed it did not have a tax nexus. In addition, the Company has not historically collected state or local sales, use,
or other similar taxes in certain jurisdictions in which it does have a physical presence, in reliance on applicable exemptions.
On June 21, 2018, the U.S. Supreme Court decided, in South Dakota v. Wayfair, Inc., that state and local jurisdictions
may, at least in certain circumstances, enforce a sales and use tax collection obligation on remote vendors that have no physical
presence in such jurisdiction. A number of states have begun, or have positioned themselves to begin, requiring sales and use
tax collection by remote vendors and/or by online marketplaces. The details and effective dates of these collection requirements
vary from state to state. While we believe we now collect, remit, and report sales tax in all required states, it is still possible
that one or more jurisdictions may assert that we have liability for previous periods for which we did not collect sales, use,
or other similar taxes, and if such an assertion or assertions were successful it could result in substantial tax liabilities,
including for past sales taxes and penalties and interest, which could materially adversely affect our business, financial condition,
and operating results.
Certain
U.S. state tax authorities could assert that the Company has nexus in that state and seek to impose state and local income taxes
which could harm its results of operations.
For
the tax year ending December 31, 2019, and for years prior thereto, the Company filed state income tax returns in New Jersey.
There is a risk that state tax authorities in other states could assert that the Company is liable for state and local income
taxes based upon income or gross receipts allocable to such states because the Company has nexus with those states. The Company
could then be subject to state and local taxation in other states, in lieu of or in addition to, taxation in New Jersey. Penalties
and interest could apply to unpaid tax attributable to prior periods. Such tax assessments, penalties and interest may adversely
impact the Company’s results of operations and financial position.
Risks
Related to Intellectual Property and Cybersecurity
Any
failure to maintain the security of the information relating to the Company’s customers, employees and vendors, whether
as a result of cybersecurity attacks on its information systems or otherwise, could damage its reputation, result in litigation
or other legal actions against it, cause it to incur substantial additional costs, and materially adversely affect its business
and results of operations.
Like
most retailers, the Company receives and stores in its information systems personal information about its customers, employees
and vendors. Most of this information is stored digitally in connection with the Company’s digital commerce platform. The
Company also utilizes third-party service providers for a variety of reasons, including, without limitation, for digital storage
technology, back-office support, and other functions. Such providers may have access to information the Company holds about its
customers, employees or vendors. In addition, the Company depends upon the secure transmission of confidential information over
public networks, including information permitting cashless payments.
Cyber
threats are rapidly evolving and those threats and the means for obtaining access to information in digital and other storage
media are becoming increasingly sophisticated. Cyber threats and cyber-attackers can be sponsored by countries or sophisticated
criminal organizations or be the work of hackers with a wide range of motives and expertise. The Company and the businesses with
which it interacts have experienced and continue to experience threats to data and systems, including by perpetrators of random
or targeted malicious cyber-attacks, computer viruses, worms, bot attacks or other destructive or disruptive software and attempts
to misappropriate customer information, including credit card information, and cause system failures and disruptions. Some of
the Company’s systems have experienced security breaches in the past, and there can be no assurance that similar breaches
will not recur in the future.
Employee
error or malfeasance, faulty password management, social engineering or other irregularities may also result in a defeat of the
Company or its third-party service providers’ security measures and a breach of its or their information systems. Moreover,
hardware, software or applications the Company uses may have inherent vulnerabilities or defects of design, manufacture or operations
or could be inadvertently or intentionally implemented or used in a manner that could compromise information security.
Any
compromise of the Company’s data security systems or of those of businesses with which it interacts, which results in confidential
information being accessed, obtained, damaged, modified, lost or used by unauthorized or improper persons, could harm the Company’s
reputation and expose it to regulatory actions, customer attrition, remediation expenses, and claims from customers, employees,
vendors, financial institutions, payment card networks and other persons, any of which could materially and adversely affect the
Company’s business operations, financial condition and results of operations. Because the techniques used to obtain unauthorized
access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of a compromise,
the Company may be unable to anticipate these techniques or to implement adequate preventative measures, and the Company or its
third-party service providers may not discover any security breach, vulnerability or compromise of information for a significant
period of time after the security incident occurs.
In
addition, such events could be widely publicized and could materially adversely affect the Company’s reputation with its
customers, employees, vendors and stockholders, could harm its competitive position with respect to other digital commerce websites,
and could result in a material reduction in net sales from its digital commerce platform. Such events could also result in the
release to the public of confidential information about the Company’s operations and financial condition and performance
and could result in litigation or other legal actions against the Company or the imposition of penalties, fines, fees or liabilities,
which may not be covered by its insurance policies. Moreover, a security compromise could require the Company to devote significant
management resources to address the problems created by the issue and to expend significant additional resources to upgrade further
the security measures it employs to guard personal and confidential information against cyber-attacks and other attempts to access
or otherwise compromise such information and could result in a disruption of its operations.
The
Company accepts payments using a variety of methods, including credit and debit cards, online payment systems such as PayPal,
Google Pay, Affirm and gift cards, and it may offer new payment options over time. As an online retailer, the Company is reliant
upon third-party payment processors to sell its products, and any interruption to the services provided by such payment processors,
including as a result of payment disputes, would have an immediate impact on the Company’s cash flows, financial position
and results of operations. Third-party payment processors may also increase their fees or increase the minimum reserves on the
Company’s accounts, which could decrease the Company’s profit margin and impair the Company’s liquidity, respectively.
As
a retailer accepting debit and credit cards for payment, the Company also is subject to various industry data protection standards
and protocols, such as payment network security operating guidelines and the Payment Card Industry Data Security Standard. The
Company cannot be certain that the security measures it maintains to protect all of its information technology systems are able
to prevent, contain or detect cyber-attacks, cyber terrorism, security breaches or other compromises from known malware or other
threats that may be developed in the future. To the extent that any cyber-attack or incursion in the Company or one of its third-party
service provider’s information systems results in the loss, damage, misappropriation or other compromise of information,
the Company may be materially adversely affected by claims from customers, financial institutions, regulatory authorities, payment
card networks and others. In certain circumstances, the Company’s contracts with payment card processors and payment card
networks (such as Visa, Mastercard, American Express and Discover) generally require the Company to adhere to payment card network
rules, which could make it liable to payment card issuers and others if information in connection with payment cards and payment
card transactions that it processes is compromised or if the Company permits fraudulent purchases on its platform, which liabilities
could be substantial. If the event of a material increase in fraudulent purchases on the Company’s platform, payment card
processors and payment card networks could refuse to process further payments for purchases on the Company’s platform, which
would materially impact the Company’s results of operations and financial position.
If
the Company’s proprietary data catalog is stolen, misappropriated or damaged, or if a competitor is able to create a substantially
similar database without infringing the Company’s rights, then the Company may lose an important competitive advantage.
The
Company has invested significant resources and time to build and maintain its proprietary data catalog, which maps stock-keeping
units, to relevant product applications based on vehicle years, makes, and models. Management believes that the Company’s
data catalog provides it with an important competitive advantage in both driving traffic to its digital commerce platform and
converting that traffic to revenue by enabling customers to quickly locate the parts and accessories they require. The Company
cannot assure you that it will be able to protect its data catalog from unauthorized copying or theft or that such database will
continue to operate adequately, without any technological challenges. In addition, it is possible that a competitor could develop
a catalog or database that is similar to or more comprehensive than the Company’s data catalog, without infringing the Company’s
rights. In the event its data catalog is damaged or is stolen, copied or otherwise replicated to compete with the Company, whether
lawfully or not, the Company may lose an important competitive advantage and its business could be harmed.
Claims
of intellectual property infringement by parts manufacturers, distributors or retailers to the validity of aftermarket parts and
accessories or related marketing materials could adversely affect the Company’s business.
Parts
manufacturers, distributors and retailers have asserted claims of intellectual property infringement against retailers of aftermarket
products, including the Company. The Company has received in the past, and anticipates receiving in the future, communications
alleging that certain products it sells infringe the patents, copyrights, trademarks and trade names or other intellectual property
rights of parts manufacturers, distributors or retailers. Other parts retailers have also asserted ownership of product images
that were provided by product vendors for the Company to use on its online platform. While the Company now has processes in place
to prevent the use of unauthorized product images on its platform, there can be no assurance that such processes will work
as intended or prevent future infringement claims.
Infringement
claims could result in increased costs of doing business arising from new importing requirements, increased port and carrier fees
and legal expenses, adverse judgments or settlements or changes to the Company’s business practices required to settle such
claims or satisfy any judgments. Litigation or regulatory enforcement could also result in interpretations of the law that require
the Company to change its business practices or otherwise increase its costs and harm its business. The Company may not maintain
sufficient, or any, insurance coverage to cover the types of claims that could be asserted. If a successful claim were brought
against the Company, it could expose the Company to significant liability.
If
the Company is unable to protect its intellectual property rights, its reputation and brand could be impaired and it could lose
customers.
The
Company regards its trademarks, trade secrets and similar intellectual property such as its “iD” brand, its proprietary
digital commerce platform, its proprietary data catalog and its back-end order processing and fulfillment code and process as
important to its success. The Company relies on trademark, patent and copyright law, and trade secret protection, and confidentiality
and/or license agreements with employees, customers, partners and others to protect its proprietary rights. The Company cannot
be certain that it has taken adequate steps to protect its proprietary rights, especially in countries where the laws may not
protect its rights as fully as in the United States. In addition, the Company’s proprietary rights may be infringed
or misappropriated, and the Company could be required to incur significant expenses in its efforts to preserve them. In the past,
the Company has filed litigation to protect its intellectual property rights, including its “iD” brand. The outcome
of such litigation can be uncertain, and the cost of prosecuting such litigation may have an adverse impact on the Company’s
earnings. The Company has common law trademarks, as well as pending federal trademark registrations for several marks and several
registered marks. However, any registrations may not adequately cover the Company’s intellectual property or protect it
against infringement by others. Effective trademark, service mark, copyright, patent and trade secret protection may not be available
in every country in which the Company’s products may be made available online. The Company also currently owns or controls
a number of internet domain names, including www.carid.com, www.truckid.com, www.motorcycleid.com, www.powersportsid.com, www.camperid.com,
www.boatid.com, www.recreationid.com and www.toolsid.com, and has invested time and money in the purchase of domain names and
other intellectual property, which may be impaired if it cannot protect such intellectual property. The Company may be unable
to protect these domain names or acquire or maintain relevant domain names in the United States and in other countries. If
the Company is not able to protect its trademarks, domain names or other intellectual property, it may experience difficulties
in achieving and maintaining brand recognition and customer loyalty.
The
Company’s digital commerce platform is dependent on open-source software, which exposes it to uncertainty and potential
liability.
The
Company utilizes open-source software such as Linux, Apache, MySQL, PHP, and Perl throughout its digital commerce platform and
supporting infrastructure, although it has created proprietary programs. Open-source software is maintained and upgraded by a
general community of software developers under various open-source licenses, including the GNU General Public License (“GPL”).
These developers are under no obligation to maintain, enhance or provide any fixes or updates to this software in the future.
Additionally, under the terms of the GPL and other open-source licenses, the Company may be forced to release to the public source-code
internally developed by it pursuant to such licenses. Furthermore, if any of these developers contribute any code of others to
any of the software that the Company uses, the Company may be exposed to claims and liability for intellectual property infringement
and may also be forced to implement changes to the code-base for this software or replace this software with internally developed
or commercially licensed software.
System
failures, including failures due to natural disasters or other catastrophic events, could prevent access to the Company’s
digital commerce platform, which could reduce its net sales and harm its reputation.
The
Company’s sales would decline and it could lose existing or potential customers if it is not able to access its digital
commerce platform or if its digital commerce platform, transactions processing systems or network infrastructure do not perform
to its customers’ satisfaction. Any internet network interruptions or problems with the Company’s digital commerce
platform could:
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prevent
customers from accessing such digital commerce platform;
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reduce
its ability to fulfill orders or bill customers;
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reduce
the number of products that it sells;
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cause
customer dissatisfaction; or
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damage
its brand and reputation.
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The
Company has experienced brief computer system interruptions in the past, and it believes they may continue to occur from time
to time in the future. The Company’s systems and operations are also vulnerable to damage or interruption from a number
of sources, including a natural disaster or other catastrophic event such as an earthquake, typhoon, volcanic eruption, fire,
flood, tsunami, winter storms, terrorist attack, riots, social disturbances, political unrest, computer viruses, power loss, telecommunications
failure, physical and electronic break-ins, hardware failures, hosting issues, domain name system issues, distributed denial-of-service
attacks, content management system issues, malicious hackers, lapses in maintenance, and other similar events. The Company also
maintains offshore and outsourced operations in the Philippines, an area that has been subjected to a typhoon and a volcanic eruption
in the past, and Costa Rica, a seismically active region. The Company’s engineering and product data development team is
located in Ukraine and Belarus, which have been the subject of political unrest. Natural disasters or other catastrophic events
may recur in the future and could disrupt the operation of the Company’s business. The Company’s technology infrastructure
is also vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, and not all of the Company’s
systems and data are fully redundant. Any substantial disruption of the Company’s technology infrastructure could cause
interruptions or delays in its business and loss of data or render it unable to accept and fulfill customer orders or operate
its digital commerce platform in a timely manner, or at all.
Risks
Related to Litigation
The
Company’s business could be adversely affected by an ongoing legal proceeding with certain stockholders.
In
March 2018, the founders of Onyx, predecessor to the Company, which founders then owned 48% of the Company’s outstanding
shares of common stock, filed a lawsuit against the then majority stockholder, which had acquired its 52% interest in Onyx in
July 2015, and against Prashant Pathak, Chairman of the Board of Directors of the Company, and certain other individuals
and affiliates related to the majority stockholder. The minority stockholders allege, among other things, that they agreed to
sell their shares in Onyx in reliance upon statements of the majority stockholder, Mr. Pathak and the other defendants that they
subsequently would bring additional investors and capital to Onyx, and that the defendants fraudulently and intentionally made
material misstatements concerning Onyx’s valuation to potential investors. The claims of the minority stockholders involve
various theories of fraud, breach of fiduciary duties, oppression of minority stockholders, and tortious interference with their
prospective economic relations. None of the claims allege breach of any of the contracts entered into in connection with the July 2015
sale of shares to the majority stockholder. The majority stockholder filed counterclaims against the minority stockholders alleging
breach of fiduciary duty, unjust enrichment, breach of contract and breach of implied covenant of good faith and fair dealing,
among other claims, and filed a third party claim against the Company for indemnification. The Company’s insurance carrier
denied coverage for the indemnification claim by the majority stockholder, and the Company has created a reserve with respect
to that claim.
On
September 30, 2020 certain of Onyx’s minority stockholders filed a motion and form of order seeking to have one of its executive
officers removed from his position, and demanding (i) that such officer repay all amounts paid to him since August 4, 2020, and
(ii) that Onyx seek repayment of legal and auditing fees incurred. That motion was denied on January 21, 2021 by the Special Master.
The Report of the Special Master is subject to review and approval by the Court.
Depending
upon the outcome of certain claims in the legal proceeding, the Company could be responsible for reimbursement of fees, costs
and expenses of the plaintiffs under its legacy indemnification obligations pursuant to indemnification contracts with the respective
plaintiffs, its charter and bylaws and New Jersey law. While all or a portion of any such indemnification obligations may be paid
by the Company’s directors’ and officers’ insurance, there can be no assurance as to the amounts that would
be paid, if any, by the insurance carriers.
Additionally,
among other forms of relief sought, the plaintiffs are seeking rescission of the sale of the 52% interest to the majority stockholder.
If granted, a rescission could have a negative impact on the Company, including the transfer of a majority of its outstanding
common stock to the minority stockholders. If any equitable adjustment of the ownership interests of the Company’s current
majority stockholder is made, such actions could result in the resignation or removal of Mr. Pathak or the other designee of the
majority stockholder from the Company’s board of directors and/or members of the Company’s management team. Accordingly,
the legal proceeding could adversely affect the functioning of the Company’s board of directors and/or executive officers,
lead to management distraction and interfere with the Company’s operations, any of which could materially and adversely
harm the Company’s business and results of operation.
In
addition, on October 3, 2020, counsel to the defendants in the Stockholder Litigation received a letter from counsel to the minority
stockholders objecting to Onyx Enterprises Canada Inc.’s use of the “drag-along right” under Section 4.5 of
the Stockholders Agreement, dated July 17, 2015 (the “Stockholders Agreement”), and the proxy granted pursuant to
Section 5.1 of the Stockholders Agreement to execute (i) the stockholder written consent, dated September 18, 2020, approving
the Business Combination Agreement and (ii) the Stockholder Support Agreement, dated October 30, 2020, in each case on behalf
of the minority stockholders. The letter also described the Business Combination as unlawful and threatened further unspecified
actions by the minority stockholders.
On
October 15, 2020, the minority stockholders filed an order to show cause to preliminarily enjoin the Business Combination pending
final adjudication of the Stockholder Litigation. On October 23, 2020, the Superior Court of New Jersey, Chancery Division, Monmouth
County refused to grant a preliminary injunction and set the hearing date on the order to show cause for December 4, 2020. On
October 26, 2020, the minority stockholders filed an application for permission to file emergent motion to request a temporary
restraining order preventing the closing of the Business Combination prior to the December 4th hearing with the Superior Court
of New Jersey, Appellate Division, which such court denied. On October 27, 2020, the minority stockholders appealed the Appellate
Division’s ruling to the Supreme Court of New Jersey. On October 28, 2020, the Supreme Court of New Jersey denied such appeal.
On November 20, 2020, the minority stockholders requested another emergent motion before the Superior Court of New Jersey, Chancery
Division, Monmouth County for a temporary restraining order preventing the closing of the Business Combination. The Superior Court
of New Jersey, Chancery Division, Monmouth County denied that request by order dated November 20, 2020.
For
additional information regarding legal actions, claims and administrative proceedings that management believes could have a material
adverse effect on its financial position, results of operations or cash flows, including further information on the ongoing litigation
with certain minority stockholders and the notice of violation it received from the EPA, see Note 6 of Notes to Consolidated Financial
Statements.
Because
the Company is involved in litigation from time to time and is subject to numerous laws and governmental regulations, it could
incur substantial judgments, fines, legal fees and other costs as well as reputational harm.
The
Company is sometimes the subject of complaints or litigation from customers, employees, or other third parties for various reasons.
For example, Stanislav Royzenshteyn, the former Chief Executive Officer of Onyx, a predecessor to the Company, alleged that Onyx
failed to pay him amounts owed under his employment agreement, including, but not limited to, unpaid bonuses, salary, personal,
sick and vacation days, and employment-related reimbursements. The damages sought against the Company in some of these litigation
proceedings could be substantial. Although the Company maintains liability insurance for some litigation claims, if one or more
of the claims were to greatly exceed its insurance coverage limits or if its insurance policies do not cover a claim, this could
have a material adverse effect on its business, financial condition, results of operations and cash flows.
The
Company is also subject to numerous federal, state and local laws and governmental regulations relating to, among other things,
environmental protection, product quality and safety standards, labor and employment, discrimination, anti-bribery/anti-corruption,
data privacy and income taxes. Compliance with existing and future laws and regulations could increase the cost of doing business
and adversely affect the Company’s results of operations. If the Company fails to comply with existing or future laws or
regulations, it may be subject to governmental or judicial fines or sanctions, while incurring substantial legal fees and costs,
as well as reputational risk. In addition, the Company’s capital and operating expenses could increase due to remediation
measures that may be required if the Company is found to be noncompliant with any existing or future laws or regulations.
For
additional information regarding legal actions, claims and administrative proceedings that management believes could have a material
adverse effect on its financial position, results of operations or cash flows, including ongoing litigation with certain minority
stockholders and the notice of violation it received from the EPA, see Note 6 of Notes to Consolidated Financial Statements.
The
Company faces exposure to product liability lawsuits.
The
automotive industry in general has been subject to a large number of product liability claims due to the nature of personal injuries
that result from car accidents or malfunctions. As a distributor of automotive parts and accessories, including parts and accessories
obtained overseas, the Company could be held liable for the injury or damage caused if the products it sells are defective or
malfunction, regardless of whether the product manufacturer is the party at fault. While the Company carries insurance against
product liability claims, if the damages in any given action were high or the Company were subject to multiple lawsuits, the damages
and costs could exceed the limits of its insurance coverage or prevent it from obtaining coverage in the future. If the Company
were required to pay substantial damages as a result of these lawsuits, it may seriously harm its business and financial condition.
Even defending against unsuccessful claims could cause the Company to incur significant expenses and result in a diversion of
management’s attention. In addition, even if the money damages themselves did not cause substantial harm to the Company’s
business, the damage to its reputation and the brands offered on its digital commerce platform could adversely affect its future
reputation and its brand and could result in a decline in its net sales.
Risks
Related to Ownership of our Common Stock
Concentration
of ownership among certain stockholders may prevent other stockholders from influencing significant corporate decisions.
As
of March 5, 2021, each of Prashant Pathak, Chairman of the Board of the Company and a director and President of Onyx Enterprises
Canada Inc. (“OEC”), Roman Gerashenko and Stanislav Royzenshteyn, beneficially owned, directly or indirectly, approximately
42.84%, 18.20%, and 18.20%, respectively, of our outstanding common stock, and our directors and executive officers as a group
beneficially owned approximately 48.58% of our outstanding common stock. These beneficial ownership percentages do not reflect
the pending issuance by the Company of an aggregate 300,000 shares of Class A common stock to each of these individuals according
to their pro rata share of common stock of Onyx prior to the closing of the Business Combination. As of March 5, 2021, such issuance
has not yet occurred, but is in process. As a result of their current holdings as supplemented by the issuance in process, these
stockholders will be able to exercise a significant level of control over all matters requiring stockholder approval, including
the election of directors, any amendment of the Certificate of Incorporation and approval of significant corporate transactions.
This control could have the effect of delaying or preventing a change of control or changes in management and will make the approval
of certain transactions difficult or impossible without the support of these stockholders.
Sales
of a substantial number of shares of our common stock in the public market could cause the price of our common stock to fall.
Sales
of a substantial number of shares of our common stock in the public market or the perception that these sales might occur could
depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity
securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock. In addition,
the sale of substantial amounts of our common stock could adversely impact its price.
The
shares of common stock covered by the Registration Statement on Form S-1 filed on January 29, 2021, pursuant to which certain
stockholders may sell their shares, represent approximately 88.78% of our outstanding common stock. Sales, or the potential sales,
of substantial numbers of shares in the public market by those selling stockholders upon termination of applicable contractual
lock-up agreements, could increase the volatility of the market price of our common stock or adversely affect the market price
of our common stock.
We
have never paid dividends on our common stock, and we do not anticipate paying dividends in the foreseeable future.
We
have never paid dividends on any of our capital stock and currently intend to retain any future earnings to fund the growth of
our business. Any determination to pay dividends in the future will be at the discretion of the Board and will depend on our financial
condition, operating results, capital requirements, general business conditions and other factors that the Board may deem relevant.
As a result, capital appreciation, if any, of our Common Stock will be the sole source of gain for the foreseeable future.
Our
stock price is volatile, and you may not be able to sell shares of our Common Stock at or above the price you paid.
The
trading price of our Common Stock is volatile and could be subject to wide fluctuations in response to various factors, some of
which are beyond our control. These factors include:
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actual
or anticipated fluctuations in operating results;
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failure
to meet or exceed financial estimates and projections of the investment community or
that we provide to the public;
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issuance
of new or updated research or reports by securities analysts or changed recommendations
for our stock or the transportation industry in general;
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announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures,
collaborations or capital commitments;
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operating
and share price performance of other companies that investors deem comparable to us;
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our
focus on long-term goals over short-term results;
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the
timing and magnitude of our investments in the growth of our business;
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actual
or anticipated changes in laws and regulations affecting our business;
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additions
or departures of key management or other personnel;
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disputes
or other developments related to our intellectual property or other proprietary rights,
including litigation;
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our
ability to market new and enhanced products and technologies on a timely basis;
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sales
of substantial amounts of the common stock by the Board, executive officers or significant
stockholders or the perception that such sales could occur;
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changes
in our capital structure, including future issuances of securities or the incurrence
of debt; and
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general
economic, political and market conditions.
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In
addition, the stock market in general, and the NYSE American in particular, has experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry
factors may seriously affect the market price of our Common Stock, regardless of our actual operating performance. In addition,
in the past, following periods of volatility in the overall market and the market price of a particular company’s securities,
securities class action litigation has often been instituted against these companies. This litigation, if instituted against us,
could result in substantial costs and a diversion of our management’s attention and resources.
Risks
Related to Our Being a Public Company
We
will incur significant increased expenses and administrative burdens as a public company, which could have an adverse effect on
our business, financial condition and results of operations.
We
face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private
company. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), including the requirements of Section 404,
as well as rules and regulations subsequently implemented by the SEC, the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 and the rules and regulations promulgated and to be promulgated thereunder, the Public Company Accounting Oversight
Board (the “PCAOB”) and the securities exchanges, impose additional reporting and other obligations on public companies.
Compliance with public company requirements will increase costs and make certain activities more time-consuming. A number of those
requirements require us to carry out activities that Onyx, as a private company, had not done previously. For example, we created
new board committees and have adopted new internal controls and disclosure controls and procedures. In addition, expenses associated
with SEC reporting requirements will be incurred. Furthermore, if any issues in complying with those requirements are identified
(for example, if the auditors identify a material weakness or significant deficiency in the internal control over financial reporting),
we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect our reputation
or investor perceptions of it. In addition, we have obtained director and officer liability insurance. Risks associated with our
status as a public company may make it more difficult to attract and retain qualified persons to serve on the Board or as executive
officers. The additional reporting and other obligations imposed by these rules and regulations increase legal and financial compliance
costs and the costs of related legal, accounting and administrative activities. These increased costs will require us to divert
a significant amount of money that could otherwise be used to expand the business and achieve strategic objectives. Advocacy efforts
by stockholders and third parties may also prompt additional changes in governance and reporting requirements, which could further
increase costs.
Our
failure to timely and effectively implement controls and procedures required by Section 404(a) of the Sarbanes-Oxley Act
could have a material adverse effect on our business.
As
a public company, we are required to provide management’s attestation on internal controls. The standards required for a
public company under Section 404(a) of the Sarbanes-Oxley Act are significantly more stringent than those required of Onyx
as a private company. Management may not be able to effectively and timely implement controls and procedures that adequately respond
to the increased regulatory compliance and reporting requirements now applicable to it. If we are not able to implement the additional
requirements of Section 404(a) in a timely manner or with adequate compliance, we may not be able to assess whether our internal
controls over financial reporting are effective, which may subject us to adverse regulatory consequences and could harm investor
confidence and the market price of our securities.
Our
management has limited experience in operating a public company.
Our
executive officers have limited experience in the management of a publicly traded company. Our management team may not successfully
or effectively manage our transition to a public company that will be subject to significant regulatory oversight and reporting
obligations under federal securities laws. Their limited experience in dealing with the increasingly complex laws pertaining to
public companies could be a significant disadvantage in that it is likely that an increasing amount of their time may be devoted
to these activities which will result in less time being devoted to the management and growth of the Company. We may not have
adequate personnel with the appropriate level of knowledge, experience, and training in the accounting policies, practices or
internal controls over financial reporting required of public companies in the United States. The development and implementation
of the standards and controls necessary for the Company to achieve the level of accounting standards required of a public company
in the United States may require costs greater than expected. It is possible that we will be required to expand our employee base
and hire additional employees to support our operations as a public company which will increase our operating costs in future
periods.
If
we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, a bankruptcy court
may seek to recover the proceeds from our trust account that was set up when we were a special purpose acquisition company, and
the members of our Board may be viewed as having breached their fiduciary duties to our creditors, thereby exposing us and the
members of our Board to claims of punitive damages.
If
we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, any distributions
received by stockholders holding shares of Common Stock could be viewed under applicable debtor/creditor and/or bankruptcy laws
as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could
seek to recover all amounts received by our stockholders holding shares of common stock. In addition, our Board may be viewed
as having breached its fiduciary duty to our creditors and/or having acted in bad faith, thereby exposing us and our Board to
claims of punitive damages, by paying our stockholders holding shares of common stock from our trust account prior to addressing
the claims of creditors.
The
Company is an “emerging growth company” and a “smaller reporting company” and the reduced disclosure and
governance requirements applicable to those types of companies may make its securities less attractive to investors.
The
Company is an “emerging growth company,” as defined in the JOBS Act. As an emerging growth company, the Company is
not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, which would
require the Company’s internal control over financial reporting to be audited by its independent registered public accounting
firm, has reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and is
exempt from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved. Additionally, as an emerging growth company, the Company has elected to delay the
adoption of new or revised accounting standards that have different effective dates for public and private companies until those
standards apply to private companies (as defined under Section 2(a) of the Sarbanes-Oxley Act). As such, the Company’s
financial statements may not be comparable to companies that comply with public company effective dates.
The
Company also is a “smaller reporting company” under Rule 12b-2 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). As a smaller reporting company, the Company is entitled to rely on certain exemptions and reduced
disclosure requirements, such as simplified executive compensation disclosures and reduced financial statement disclosure requirements,
in the Company’s SEC filings.
These
exemptions and decreased disclosures in the Company’s SEC filings due to our status as an emerging growth company and a
smaller reporting company may make it harder for investors to analyze the Company’s results of operations and financial
prospects. Investors may find our common stock less attractive because we rely on these exemptions. If some investors find our
common stock less attractive as a result, there may be a less active trading market for our common stock and our common stock
price may be more volatile.
If
securities or industry analysts do not publish or cease publishing research or reports about the Company, its business or its
market, or if they adversely change their recommendations regarding the common stock, the price and trading volume of the common
stock could decline.
The
trading market for our common stock is influenced by the research and reports that industry or securities analysts may publish
about the Company, its business, market or competitors. Securities and industry analysts may never publish research on the Company.
If no securities or industry analysts commence coverage of the Company, its stock price and trading volume would likely be
negatively impacted. If any of the analysts who may cover the Company change their recommendation regarding its common stock adversely,
or provide more favorable relative recommendations about its competitors, the price of its common stock would likely decline.
If any analyst who may cover the Company were to cease coverage of the Company or fail to regularly publish reports on it, it
could lose visibility in the financial markets, which could cause the Company’s stock price or trading volume to decline.
Certain
minority stockholders of the Company could engage in activities that might be disruptive of the Company’s ongoing business.
Certain
minority stockholders of the Company could engage in litigation against the Company and its directors seeking monetary damages
and/or potentially distracting the Company’s directors and officers from executing upon the Company’s business plans,
and could engage in shareholder activism that may be disruptive to the Company. See “—The Company’s business
could be adversely affected by an ongoing legal proceeding with certain stockholders” for more information regarding
litigation brought by these minority stockholders prior to the Business Combination.
The
Company’s Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive
forum for certain types of actions and proceedings that may be initiated by the Company’s stockholders, which could limit
its stockholders’ ability to obtain a favorable judicial forum for disputes with the Company or its directors, officers,
employees or stockholders.
Our
Certificate of Incorporation provides that, subject to limited exceptions, (i) any derivative action or proceeding brought on
behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other
employee of the Company to the Company or the stockholders of the Company, (iii) any action asserting a claim against the Company,
its directors, officers or employees arising pursuant to any provision of the General Corporation Law of the State of Delaware
(the “DGCL”) or the second amended and restated certificate of incorporation or the amended and restated bylaws of
the Company (the “Bylaws”), or (iv) any action asserting a claim against the Company, its directors, officers or employees
is governed by the internal affairs doctrine. The Company’s bylaws designate the federal district courts of the United States
as the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Any person
or entity purchasing or otherwise acquiring any interest in shares of Common Stock shall be deemed to have notice of and to have
consented to the provisions of the Certificate of Incorporation and bylaws described above. In addition, Section 22 of the Securities
Act provides that federal and state courts have concurrent jurisdiction over lawsuits brought to enforce any duty or liability
created by the Securities Act or the rules and regulations thereunder. To the extent the exclusive forum provision restricts the
courts in which claims arising under the Securities Act may be brought, there is uncertainty as to whether a court would enforce
such a provision. We note that investors cannot waive compliance with the federal securities laws and the rules and regulations
thereunder. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it
finds favorable for disputes with the Company or its directors, officers or other employees, which may discourage such lawsuits
against the Company and its directors, officers and employees. Alternatively, if a court were to find these provisions of the
Certificate of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or
proceedings, the Company may incur additional costs associated with resolving such matters in other jurisdictions, which could
adversely affect the Company’s business and financial condition.