The following management's discussion and analysis of financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements, together with the related notes thereto, included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2021(our "2021 Form 10-K"). Overview
PARTS iD, Inc.is a technology-driven, digital commerce company focused on creating custom infrastructure and unique user experiences within niche markets. The success of the Company has inspired pursuit of our long-term strategy to scale into similar markets via our proprietary built, modular digital commerce technology platform. While our core focus continues to be automotive, in August 2018, we launched seven additional verticals (including BOATiD.com, MOTORCYCLEiD.com, CAMPERiD.com and more) which demonstrate the fungibility of our technology platform. These verticals address similar market challenges and focus on the enthusiasts' needs through our seamless shopping experience using proprietary tools and techniques. Although the COVID-19 pandemic has caused economic disruptions on a global scale, and created significant uncertainty, we believe it increased the adoption of online shopping by consumers and, for periods during which stimulus payments were disbursed by the government, particularly between April 2020and April 2021, increased demand for the products of the Company with a positive effect on our revenue and profitability. However, there was a decline in traffic after the first quarter of 2021, primarily due to an increase in the average cost-per-click in the Company's search advertising programs and lower consumer discretionary spend that adversely impacted marketing productivity. COVID-19 and related containment measures have disrupted the supply chain, negatively affecting the Company and our industry. In the first quarter of 2022, continued spikes in the price of materials, low in-stock rates by our key suppliers, workforce shortages and shipping and seaport delays led to increases in the cost of goods sold, which negatively impacted gross margins of the Company. Supply chain challenges increased order cancellations and shipping costs. Our real-time multi-sourced inventory model helped us mitigate some of the risk by sourcing certain products from secondary and tertiary sources, but these measures resulted in increased costs. We continue to pass a portion of the increased costs through to our customers, while balancing the need to maintain price competitiveness.
Management continues to focus on efforts to drive growth, including product cultivation, vendor optimization, distribution network expansion and marketing diversification with a greater emphasis on the additional adjacent verticals, original equipment ("OE") and repair parts businesses. We have also been focused on increasing our presence in the DIFM (Do-It-For-Me) segment of the automotive aftermarket industry. More than 5,000 new locations have been added to our tire installation network, an important step in our efforts to build an omnichannel customer experience and attract customers in the $225+ billion DIFM segment
to our platform. Russian-Ukrainian Conflict In
February 2022, the Russian Federationlaunched a full-scale invasion against Ukraine, and sustained conflict and disruption in the region is ongoing.The Company's engineering and product data development team as well as back office and part of its customer service center are located in Ukraine. The conflict could have a material adverse effect upon the Company. Since the onset of the active conflict in February, most the Company's contractors have been able to continue their work, although at a reduced capacity and/or schedule. The Company's websites and call centers have continued to function but could be more negatively impacted in the future. Some of the Company's contractors have moved outside of Ukraineto neighboring countries where they continue to work remotely. Some of the Company's contractors who have remained in Ukrainehave moved to other areas in Ukraine, but their ability to continue work is subject to significant uncertainty and potential disruptions. 11
The situation is highly complex and continues to evolve. The Company cannot provide any assurance that its outsourced teams in
Ukrainewill be able to provide efficient and uninterrupted services, which could have an adverse effect on the Company's operations and business. In addition, the Company's ability to maintain adequate liquidity for our operations is dependent on a number of factors, including our revenue and earnings, which could be significantly impacted by the conflict in Ukraine. Further, any major breakdown or closure of utility services or any major threat to civilians or international banking disruption could materially impact the operations and liquidity of the Company.
Main financial and operational indicators
We measure our business using financial and operating metrics, as well as non-GAAP financial measures. See "Results of Operations - Non-GAAP Financial Measures" below for more information on non-GAAP financial measures. We monitor several key business metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions, including the following:
Traffic and engagement indicators
For the three months ended
2022 2021 Change % Change Number of Users 32,529,076 34,535,770 (2,006,694 ) (5.8 )% Number of Sessions 55,104,987 64,749,311 (9,644,324 ) (14.9 )% Number of Pageviews 210,003,667 285,876,353 (75,872,686 ) (26.5 )% Pages/Session 3.81 4.42 (0.60 ) (13.7 )% Average Session Duration 00:02:59 00:03:26 (0:00:29 ) (13.9 )% We use the metrics above to gauge our ability to acquire targeted traffic and keep users engaged. This information informs us of how effective our proprietary technology, data, and content is, and helps us define our strategic roadmap and key initiatives. Results of Operations Three months ended March 31, Change 2022 % of Rev. 2021 % of Rev. Amount % Revenue, net
$ 94,892,148 $ 109,073,628 $ (14,181,480 )(13.0 )%
Cost of goods sold 76,397,920 80.5 % 86,240,019 79.1 % (9,842,099 ) (11.4 )% Gross profit 18,494,228 19.5 % 22,833,609 20.9 % (4,339,381 ) (19.0 )% Gross Margin 19.5 % 20.9 % Operating expenses Advertising 9,701,292 10.2 % 10,499,386 9.6 % (798,094 ) (7.6 )% Selling, general & administrative 11,672,727 12.3 % 11,358,707 10.4 % 314,020 2.8 % Depreciation 1,954,462 2.1 % 1,773,773 1.6 % 180,689 10.2 % Total operating expenses 23,328,481 24.6 % 23,631,866 21.7 % (303,385 ) (1.3 )% Loss from operations (4,834,253 ) (5.1 )% (798,257 )
(0.7)% (4,035,996) 505.6%
Interest expense - 0.0 % 6,490 0.0 % (6,490 ) (100.0 )% Loss before income tax (4,834,253 ) (5.1 )% (804,747 )
(0.7 )% (4,029,506 ) 500.7 % Income tax benefit (881,066 ) (0.9 )% (159,934 ) (0.1 )% (721,132 ) 450.9 % Net loss
$ (3,953,187 )(4.2 )% $ (644,813 )(0.6 )% $ (3,308,374 )513.1 % 12 Revenue Revenue for the three months ended March 31, 2022, decreased by $14.2 million, or 13.0%, compared to the same prior year period, primarily attributable to a lower number of orders due to decreases in traffic and the site conversion rate, partly offset by an increase in the average order value and an increase in Marketplace revenue. Compared to the same prior year period, traffic declined by 14.9% in the three-month period ended March 31, 2022, the site conversion rate decreased by 13.9% and average order value increased by 9.4%. We believe that the decrease in traffic and the site conversion rate was primarily attributable to a reduction in discretionary spending by consumers. The decrease was exacerbated by a lack of government stimulus as compared to the first quarter of 2021, a delay in the issuance of IRSrefund checks, which have historically benefited first quarter revenue, as well as an increase in product costs due to high inflation. The increase in average order value in the first quarter of 2022 compared to the same prior year period was primarily attributable to increases in inflation and shipping charges to the customers. Cost of Goods Sold
Cost of goods sold is composed of product cost, the associated fulfillment and handling costs charged by vendors, if any, and shipping costs. In the three months ended
March 31, 2022, cost of goods sold decreased by $9.8 million, or 11.4%, compared to the same prior year period. This decrease in cost of goods sold was primarily driven by decreases in the number of orders or products
sold and related shipping costs. For the three months ended
March 31, 2022, cost of goods sold was 80.5% compared to 79.1% of revenue in the respective prior year period. The 1.4% increase in cost of goods sold as a percentage of revenue was primarily attributable to changes in product categories mix and ongoing supply chain disruptions associated with the COVID-19 pandemic. During the three months ended March 31, 2022, we continued to source select products from alternate vendors at higher price points and we did not pass all of the associated increased costs to the consumer. Management currently expects these cost pressures to ease as our supply chain should regain efficiencies as the COVID-19 pandemic and related containment measures abate. We also continued to make investments in the adjacent verticals, repair parts and original equipment businesses.
Gross profit and gross margin
Gross profit decreased by
$4.3 million, or 19.0%, for the three months ended March 31, 2022, compared to the same prior year period, primarily due to a 13.0% decrease in revenue and increases in product and shipping costs associated
with supply chain disruptions.
Gross margin of 19.5% for the three months ended
March 31, 2022, was lower than the gross margin of 20.9% for the three months ended March 31, 2021, primarily attributable to a change in the product category revenue mix as discussed above and increases in product and shipping costs associated with ongoing supply
chain disruptions. Operating Expenses
Advertising expenses decreased
$0.8 million, or 7.6%, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to lower traffic and number of clicks. Advertising expenses as a percentage of revenue were 10.2% and 9.6% for the three months ended March 31, 2022and 2021, respectively. The increase in percentage was primarily attributable to increases in cost-per-click, a change in the mix of advertising channels and investments in certain marketing initiatives. Management believes investment in advertisement is one of the key drivers of revenue, and measures advertising efficiency in terms of revenue
per advertisement dollar spent. Selling, general and administrative ("SG&A") expenses increased
$0.3 million, or 2.8%, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. This increase was primarily attributable to an increase in non-cash share-based compensation expense of $0.8 million, partially offset by decreases in public company operating expenses of $0.3 millionand in merchant services provider processing fees of $0.3 million.
Depreciation charges increased
13 Interest Expense
Interest expense decreased by
Income Tax Expense Income tax benefit was
$0.9 millionfor the three months ended March 31, 2022, compared to $0.2 millionfor the three months ended March 31, 2021. For the three months ended March 31, 2022, the effective income tax rate was (18.23)%, compared to (19.87)% for the three months ended March 31, 2021. The change in rate was primarily attributable to changes in state taxes and expenses not deductible for income tax purposes. Non-GAAP Financial Measures EBITDA and Adjusted EBITDA
This report includes non-GAAP financial measures that differ from financial measures calculated in accordance with
U.S.generally accepted accounting principles ("GAAP"). These non-GAAP financial measures may not be comparable to similar measures reported by other companies and should be considered in addition to, and not as a substitute for, or superior to, other measures prepared in accordance with GAAP. Management uses non-GAAP financial measures internally to evaluate the performance of the business. Additionally, management believes certain non-GAAP measures provide meaningful incremental information to investors to consider when evaluating the performance of the Company. To this end, we provide EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. EBITDA consists of net income (loss) plus (a) interest expense; (b) income tax provision (or less benefit); and (c) depreciation expense. Adjusted EBITDA consists of EBITDA plus costs, fees, expenses, write-offs and other items that do not impact the fundamentals of our operations, as described further below following the reconciliation of these metrics. Management believes these non-GAAP measures provide useful information to investors in their assessment of the performance of our business. The exclusion of certain expenses in calculating EBITDA and Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis as these costs may vary independent of business performance. Accordingly, we believe that EBITDA and Adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:
? Although depreciation is a non-monetary expense, depreciated assets can
need to be replaced in the future, and EBITDA and Adjusted EBITDA will not
reflect the capital expenditure needs for these replacements or for new ones
capital expenditure requirements;
? EBITDA and Adjusted EBITDA do not reflect changes in our working capital;
? EBITDA and Adjusted EBITDA do not reflect tax payments that may
represent a reduction in the cash available to us;
? EBITDA and Adjusted EBITDA do not reflect depreciation and interest expense
associated with the lease financing obligations; and
? Other companies, including companies in our industry, may calculate
EBITDA differently, which reduces its usefulness as a comparative measure.
Due to these limitations, you should consider EBITDA and Adjusted EBITDA along with other measures of financial performance, including various cash flow measures, net income (loss), and our other GAAP results.
The following table reflects the reconciliation of net earnings (loss) to EBITDA and adjusted EBITDA for each of the periods indicated.
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