UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K/A

(Amendment No. 1)

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 16, 2020 (October 13, 2020)

 

SHIFT TECHNOLOGIES, INC.

(Exact name of registrant as specified in charter)

 

Delaware   001-38839   82-5325852
(State or Other Jurisdiction of
Incorporation)
  (Commission File Number)   (I.R.S. Employer
Identification No.)

 

2525 16th Street, Suite 316, San Francisco, CA   94103
(Address of Principal Executive Offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (855) 575-6739

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Class A common stock, par value $0.0001 per share    SFT    Nasdaq Capital Market 
Warrants to purchase one share of Class A common stock   SFTTW   Nasdaq Capital Market

  

 

 

 

 

 

Cautionary Note Regarding Forward-Looking Statements

 

Statements contained in this Current Report on Form 8-K, and in any document incorporated by reference in this Current Report on Form 8-K, that reflect our current views with respect to future events and financial performance, business strategies, expectations for our business, operating of the Company’s business following completion of the Merger (as defined below) and any other statements of a future or forward-looking nature, constitute “forward-looking statements” for the purposes of federal securities laws. Our forward-looking statements include, but are not limited to, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would,” “will,” “approximately,” “shall” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this Current Report on Form 8-K, and in any document incorporated by reference in this Current Report on Form 8-K, may include, for example, statements about the benefits of the Merger and the future financial performance of the combined company following the Merger.

 

The forward-looking statements contained in this Current Report on Form 8-K, and in any document incorporated by reference in this Current Report on Form 8-K, are based on our current expectations and beliefs concerning future developments and their potential effects on the Company. We cannot assure you that future developments affecting the Company will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the Company’s control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of the Company’s assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. Some factors that could cause actual results to differ include, but are not limited to:

 

the ability to recognize the anticipated benefits of the Merger, which may be affected by, among other things, competition, and the ability of the combined business to grow and manage growth profitably;

 

  the inability of the Merger to qualify as a “reorganization” within the meaning of Section 368(a) of the Code;

 

  our ability to sustain its current rate of growth;

 

  our ability to establish its software as a platform to be used by automotive dealers;

 

  risks relating to our inspection and reconditioning hubs;

 

  impacts of COVID-19 and other pandemics;

 

  our reliance on third-party carriers:

 

  cyber-attacks or other privacy or data security incidents;

 

  our reliance on third-party service providers to provide financing;

 

  changes in the prices of new and used vehicles;

 

  access to desirable vehicle inventory;

 

  changes in applicable laws and regulations;

 

  access to additional debt and equity capital;

 

1

 

 

  changes in technology and consumer acceptance of such changes;

 

  our reliance on internet search engines, vehicle listing sites and social networking sites to help drive traffic to its website;

 

  any restrictions on the sending of emails or messages or an inability to timely deliver such communications;

 

  seasonal and other fluctuations in the Company’s quarterly results of operations;

 

  competition in the markets in which the Company operates;

 

  changes in the auto industry and conditions affecting automotive manufacturers;

 

  natural disasters, adverse weather events and other catastrophic events;

 

  our dependence on key personnel; and

 

  our reliance on third-party technology and information systems.

 

  other economic, business and/or competitive factors, risks and uncertainties, including those described in the section of the proxy statement/prospectus on Form 424B3, filed with the Securities and Exchange Commission on September 24, 2020, entitled “Risk Factors”.

 

The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

Introductory Note

 

As previously reported in the Current Report on Form 8-K filed by the registrant on October 14, 2020 (first filing), (the “Original Report”), on October 13, 2020 (the “Closing Date”), the registrant consummated the previously announced transactions contemplated by the Agreement and Plan of Merger (the “Merger Agreement”), dated as of July 29, 2020, by and among the registrant, IAC Merger Sub, Inc., a wholly-owned subsidiary of the registrant (“Merger Sub”), and Shift Technologies, Inc., a Delaware corporation (“Shift”), as amended by that certain First Amendment to Agreement and Plan of Merger, dated as of August 19, 2020. The Merger Agreement provided for the acquisition of Shift by the registrant pursuant to the merger of Merger Sub with and into Shift (the “Merger”), with Shift continuing as the surviving entity.

 

In connection with the closing of the Merger (the “Closing”), the registrant changed its name from Insurance Acquisition Corp. to Shift Technologies, Inc. Unless the context otherwise requires, “we,” “us,” “our,” and the “Company” refer to the combined company following the Merger, together with its subsidiaries, “IAC” refers to the registrant prior to the closing of the Merger and “Shift” refers to Shift Technologies, Inc., together with its subsidiaries, prior to the Merger.

 

This Amendment No. 1 includes (i) the unaudited condensed consolidated financial statements of Shift as of September 30, 2020 and for the nine months ended September 30, 2020 and 2019, (ii) the Management’s Discussion and Analysis of Financial Condition and Results of Operations of Shift for the nine months ended September 30, 2020 and 2019, (iii) the unaudited pro forma condensed combined financial information of IAC and Shift as of and for the nine months ended September 30, 2020 and (iv) disclosure relating to the dismissal of Grant Thornton as the Company’s independent registered public accounting firm and the appointment of Deloitte & Touche.

 

Except as set forth herein, no other modifications have been made to the Original Report.

 

2

 

 

Item 2.02. Results of Operations and Financial Condition

 

This Amendment No. 1 includes (i) the unaudited condensed consolidated financial statements of Shift as of September 30, 2020 and for the nine months ended September 30, 2020 and 2019, (ii) the Management’s Discussion and Analysis of Financial Condition and Results of Operations of Shift for the nine months ended September 30, 2020 and 2019, and (iii) the unaudited pro forma condensed combined financial information of IAC and Shift as of and for the nine months ended September 30, 2020.

 

The information set forth under Item 9.01 of this Current Report on Form 8-K is incorporated herein by reference.

 

Item 4.01. Changes in Registrant’s Certifying Accountant.

 

(a) Dismissal of Previous Independent Registered Public Accounting Firm

 

On November 11, 2020, the Audit Committee (the “Audit Committee”) of the Board of Directors of the Company approved the dismissal of Grant Thornton LLP (“Grant Thornton”), which was then serving as the Company’s independent registered public accounting firm. Grant Thornton was dismissed on November 16, 2020 as the Company’s independent registered public accounting firm, effective upon completion of their review of the Company’s unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2020, included in its Quarterly Report on Form 10-Q filed on November 16, 2020.

 

Grant Thornton’s reports on the Company’s financial statements for the year ended December 31, 2019 and for the period from March 13, 2018 (inception) to December 31, 2018 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

 

During the period from March 13, 2018 (inception) to December 31, 2019 and the subsequent period through September 30, 2020, there were no: (1) disagreements with Grant Thornton on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to their satisfaction, would have caused them to make reference in connection with their opinion to the subject matter of the disagreement, or (2) reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

 

The Company has provided Grant Thornton with the disclosures under this Item 4.01(a) and has requested Grant Thornton to furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements made by the Company in this Item 4.01(a) and, if not, stating the respects in which it does not agree. Grant Thornton’s letter is filed as Exhibit 16.1 to this Current Report on Form 8-K.

 

(b) Appointment of New Independent Registered Public Accounting Firm

 

On November 11, 2020, the Audit Committee approved the appointment of Deloitte & Touche LLP (“Deloitte”) as the Company’s new independent registered public accounting firm, effective upon the dismissal of Grant Thornton as the Company’s independent registered public accounting firm. Deloitte served as the independent registered public accounting firm of Shift Technologies, Inc. prior to the Merger.

 

During the period from March 13, 2018 (inception) to December 31, 2019, and the subsequent period through September 30, 2020, the Company did not consult Deloitte with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements, and no written report or oral advice was provided to the Company by Deloitte that Deloitte concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement, as that term is described in Item 304(a)(1)(iv) of Regulation S-K under the Exchange Act and the related instructions to Item 304 of Regulation S-K under the Exchange Act, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K under the Exchange Act.

 

3

 

 

Item 9.01. Financial Statements and Exhibits.

 

(a) Financial Statements

 

The unaudited condensed consolidated financial statements of Shift as of September 30, 2020 and for the nine months ended September 30, 2020 and 2019, and the related notes thereto are attached as Exhibit 99.1 and are incorporated herein by reference. Also included as Exhibit 99.2 and incorporated herein by reference is the Management’s Discussion and Analysis of Financial Condition and Results of Operations of Shift for the nine months ended September 30, 2020 and 2019.

 

(b) Pro forma financial information.

 

The unaudited pro forma condensed combined financial information of IAC and Shift as of September 30, 2020, and for the nine months ended September 30, 2020 and for the year ended December 31, 2019, and the related notes thereto are attached as Exhibit 99.3.

 

(d) Exhibits

 

The exhibits filed as part of this Current Report on Form 8-K are listed in the index to exhibits immediately preceding the signature page to this Current Report on Form 8-K, which index to exhibits is incorporated herein by reference.

 

EXHIBIT INDEX

 

Exhibit No.   Description
16.1   Letter from Grant Thornton LLP to the Securities and Exchange Commission dated November 16, 2020.
99.1   Unaudited condensed consolidated financial statements of Shift.
99.2   Management’s Discussion and Analysis of Financial Condition and Results of Operations of Shift.
99.3   Unaudited pro forma condensed combined financial information.

 

4

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

  SHIFT TECHNOLOGIES, INC.
     
Dated: November 16, 2020 By: /s/ Amanda Bradley  
  Name:  Amanda Bradley
  Title: Secretary

 

  

  

5

 

 

Exhibit 16.1

 

November 16, 2020

U.S. Securities and Exchange Commission

Office of the Chief Accountant

100 F Street, NE

Washington, DC 20549

 
 

 

Re: Shift Technologies, Inc.

File No. 001-38839

Dear Sir or Madam:

We have read Item 4.01 of Form 8-K of Shift Technologies, Inc. dated November 16, 2020, and agree with the statements concerning our Firm contained therein.

Very truly yours,

/s/ GRANT THORNTON LLP

 

 

 

 

 

 

Exhibit 99.1

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
   
Index to Condensed Consolidated Financial Statements  
Condensed Consolidated Balance Sheets F-2
Condensed Consolidated Statements of Operations and Comprehensive Loss F-3
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit F-4
Condensed Consolidated Statements of Cash Flows F-6
Notes to Condensed Consolidated Financial Statements F-7

 

F-1

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(unaudited)

 

   As of
September 30,
2020
  

As of
December 31,
2019

 
ASSETS        
Current assets:        
Cash and cash equivalents  $18,366   $42,976 
Accounts receivable, net   7,924    1,839 
Inventory   33,485    18,198 
Prepaid expenses and other current assets   2,161    1,899 
Total current assets   61,936    64,912 
Property and equipment, net   1,802    2,120 
Capitalized website and internal use software costs, net   6,376    5,679 
Restricted cash, noncurrent   1,605    1,600 
Deferred borrowing costs   2,908    5,184 
Other noncurrent assets   2,850    3,274 
Total assets  $77,477   $82,769 
           
Liabilities, CONVERTIBLE PREFERRED STOCK AND stockholders’ DEFICIT
Current liabilities:          
Accounts payable  $9,482   $1,967 
Accrued expenses and other current liabilities   14,413    5,954 
Flooring line of credit   20,556    16,245 
Total current liabilities   44,451    24,166 
Related party long term note, net, noncurrent   22,004    8,505 
Warrants liability   11,021    4,810 
Other noncurrent liabilities   8,284    1,954 
Total liabilities   85,760    39,435 
           
Commitment and contingencies (Note 8)          
           
Convertible preferred stock – par value $0.0001 per share; 259,455,633 shares authorized at September 30, 2020, and December 31, 2019; 255,237,101 shares issued and outstanding at September 30, 2020, and December 31, 2019; (liquidation preference of $175,265 at September 30, 2020, and December 31, 2019)   223,631    223,631 
Stockholders’ deficit:          
Common stock – par value $0.0001 per share; 435,000,000 shares authorized at September 30, 2020, and December 31, 2019, respectively; 44,389,137 and 37,432,555 shares issued and outstanding at September 30, 2020, and December 31, 2019, respectively;   4    3 
Additional paid-in capital   38,023    34,997 
Accumulated deficit   (269,941)   (215,297)
Total stockholders’ deficit   (231,914)   (180,297)
Total liabilities, convertible preferred stock and stockholders’ deficit  $77,477   $82,769 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-2

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

(unaudited)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
                 
Revenue                
Ecommerce revenue, net  $48,486   $36,914   $97,870   $112,645 
Other revenue   2,036    954    3,933    2,627 
Wholesale vehicle revenue   9,392    7,989    20,504    23,612 
Total revenue   59,914    45,857    122,307    138,884 
Cost of sales   56,188    46,709    111,666    139,932 
                     
Gross profit (loss)   3,726    (852)   10,641    (1,048)
Operating expenses:                    
Selling, general and administrative expenses   24,030    16,204    52,109    54,236 
Depreciation and amortization   1,181    888    3,258    2,184 
Total operating expenses   25,211    17,092    55,367    56,420 
Loss from operations   (21,485)   (17,944)   (44,726)   (57,468)
Interest expense   (1,256)   (1,463)   (3,901)   (4,136)
Interest income and other income (expense)   (579)   427    (6,017)   1,642 
Net loss and comprehensive loss attributable to common stockholders  $(23,320)  $(18,980)  $(54,644)  $(59,962)
                     
Net loss and comprehensive loss per share attributable to common stockholders, basic and diluted  $(0.64)  $(0.55)  $(1.57)  $(1.71)
                     
Weighted-average number of shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted   36,457,891    34,333,276    34,851,966    35,063,135 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-3

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit

(in thousands, except share and per share amounts)

(unaudited)

 

   Convertible Preferred Stock   Common Stock   Additional Paid in   Accumulated   Total Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
Three Months Ended September 30, 2019                            
Balance at June 30, 2019   255,224,023   $223,626    37,151,418   $3   $23,537   $(175,796)  $(152,256)
Additional Series C-1 issuance costs       (81)                    
Issuance of warrants upon achievements of milestones                   4,478        4,478 
Issuance of common stock upon exercise of vested options           202,837        21        21 
Vesting of early exercised options                   47        47 
Repurchase of shares related to early exercised options           (7,293)                
Stock-based compensation                   849        849 
Exchange of common shares for Series D preferred shares   13,078    5    (13,078)       (4)       (4)
Net loss and comprehensive loss                       (18,980)   (18,980)
Balance at September 30, 2019   255,237,101   $223,550    37,333,884   $3   $28,928   $(194,776)  $(165,845)

 

   Convertible Preferred Stock   Common Stock   Additional Paid in   Accumulated   Total Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
Nine Months Ended September 30, 2019                            
Balance at December 31, 2018   247,216,590   $213,461    39,878,225   $3   $12,542   $(134,814)  $(122,269)
Adoption of ASU 2018-07 (See Note 5)                   3,915        3,915 
Additional Series C-1 issuance costs       (115)                    
Issuance of Series D convertible preferred, net of issuance costs of $7   4,555,805    5,793                     
Issuance of warrants upon achievement of milestones                   12,077        12,077 
Issuance of common stock upon exercise of vested options           912,639        79        79 
Issuance of common stock upon early exercise of options           50,035                 
Vesting of early exercised options                   173        173 
Repurchase of shares related to early exercised options           (42,309)                
Stock-based compensation                   1,318        1,318 
Exchange of common shares for Series D preferred shares   3,464,706    4,411    (3,464,706)       (1,176)       (1,176)
Net loss and comprehensive loss                       (59,962)   (59,962)
Balance at September 30, 2019   255,237,101   $223,550    37,333,884   $3   $28,928   $(194,776)  $(165,845)

 

F-4

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit

(in thousands, except share and per share amounts)

(unaudited)

 

   Convertible Preferred Stock   Common Stock   Additional Paid in   Accumulated   Total Stockholders’ 
Three Months Ended September 30, 2020  Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
Balance at June 30, 2020   255,237,101   $223,631    38,022,034   $3   $36,033   $(246,621)  $(210,585)
Issuance of common stock upon exercise of vested options           6,396,999    1    697        698 
Repurchase of shares related to early exercised options           (29,896)                
Vesting of early exercised options                   476        476 
Stock-based compensation                   817        817 
Net loss and comprehensive loss                       (23,320)   (23,320)
Balance at September 30, 2020   255,237,101   $223,631    44,389,137   $4   $38,023   $(269,941)  $(231,914)

 

   Convertible Preferred Stock   Common Stock   Additional Paid in   Accumulated   Total Stockholders’ 
Nine Months Ended September 30, 2020  Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
Balance at December 31, 2019   255,237,101   $223,631    37,432,555   $3   $34,997   $(215,297)  $(180,297)
Issuance of common stock upon exercise of vested options           7,010,503    1    784        785 
Issuance of restricted stock awards           18,725        6        6 
Repurchase of shares related to early exercised options           (72,646)                
Vesting of early exercised options                   605        605 
Stock-based compensation                   1,631        1,631 
Net loss and comprehensive loss                       (54,644)   (54,644)
Balance at September 30, 2020   255,237,101   $223,631    44,389,137   $4   $38,023   $(269,941)  $(231,914)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-5

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

   Nine Months Ended
September 30,
 
   2020   2019 
Cash flows from Operating activities        
Net loss  $(54,644)  $(59,962)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   3,258    2,184 
Stock-based compensation expense, including warrant remeasurement   7,666    930 
Non-cash expense upon milestone achievement       2,894 
Contra-revenue associated with milestones   478    7,277 
Amortization of debt discount   3,275    3,108 
Compensation expense from exchange of common stock       4,824 
Changes in operating assets and liabilities:          
Accounts receivable   (6,085)   408 
Inventory   (15,287)   20,673 
Prepaid expenses and other current assets   7    309 
Other noncurrent assets   (54)   (879)
Accounts payable   7,515    (2,259)
Accrued expenses and other current liabilities   7,983    1,220 
Other noncurrent liabilities   (52)   413 
Net cash used in operating activities   (45,940)   (18,860)
           
Cash flows from Investing activities          
Purchases of property and equipment   (407)   (1,085)
Capitalized website internal-use software costs   (2,857)   (3,714)
Net cash used in investing activities   (3,264)   (4,799)
           
Cash flows from Financing activities          
Proceeds from delayed draw term loans   12,500     
Proceeds from flooring line of credit facility   67,413    92,613 
Repayment of flooring line of credit facility   (63,102)   (99,801)
Proceeds from SBA PPP loans   6,055     
Proceeds from issuance of convertible preferred stock       5,800 
Issuance costs related to convertible preferred stock       (121)
Proceeds from stock option exercises, including from early exercised options   1,740    72 
Repurchase of shares related to early exercised options   (7)   (3)
Net cash provided by (used in) financing activities   24,599    (1,440)
Net decrease in cash, cash equivalents and restricted cash   (24,605)   (25,099)
Cash, cash equivalents and restricted cash, beginning of period   44,576    72,092 
Cash, cash equivalents and restricted cash, end of period  $19,971   $46,993 
Supplemental disclosure of cash flow information          
Cash paid for interest  $650   $1,024 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES          
Vesting of exercised options  $605   $173 
Stock-based compensation capitalized to internal-use software  $182   $243 
Reclassification of warrants previously classified as liabilities  $   $3,915 
Exercised options with cash not yet received  $269   $ 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-6

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.DESCRIPTION OF THE BUSINESS AND ACCOUNTING POLICIES

 

Shift Technologies, Inc. (the “Company”) was incorporated in the State of Delaware on December 9, 2013. The Company conducts its business through its wholly owned subsidiaries Shift Operations, LLC, and Shift Finance, LLC.

 

The Company is based in and operates out of San Francisco, California and operates hubs to purchase, recondition and sell vehicles in the following markets in California: San Francisco, Los Angeles, Sacramento and San Diego; as well as operating in Portland, Oregon. Shift operates an innovative platform to make car purchases, car sales and ownership simple. Shift’s innovative platform, which includes proprietary pricing technology, provides consumers with a digital purchase and selling experience, and includes offerings throughout the sales cycle, including vehicle pickup and delivery at a customer’s location.

 

Insurance Acquisition Corp. Merger

 

On June 29, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) among the Company and Insurance Acquisition Corp., (“IAC”), an entity listed on the Nasdaq Capital Market under the trade symbol “INSU”, IAC Merger Sub, Inc., a Delaware corporation and direct wholly owned subsidiary of IAC (“Merger Sub”), providing for, among other things, and subject to the conditions therein, the combination of the Company and IAC pursuant to the proposed merger of Merger Sub with and into the Company with the Company continuing as the surviving entity (the “Merger”).

 

On October 13, 2020, shareholders approved the Merger Agreement, under which Shift received approximately $302 million, net of fees and expenses. See Note 12 Subsequent Events for additional details regarding this transaction.

 

COVID-19

 

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus disease (“COVID-19”) as a pandemic, and the Company expects its operations in all locations to be affected as the virus continues to proliferate. The Company saw a slowing of vehicle sales immediately following the shelter in place ordinances in March; however, within five weeks, weekly sales volume rebounded nearly to pre-COVID-19 volumes. The Company has adjusted certain aspects of its operations to protect its employees and customers while still meeting customers’ needs for vital technology, including implementing contactless purchase and delivery processes and applying long-term antimicrobial surface and air protection systems for its entire inventory.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), was signed into law in response to the COVID-19 pandemic. The CARES Act includes several significant income tax relief provisions as well as the deferral of the employer portion of the social security payroll tax. The income tax benefits include a favorable increase in the interest expense limitation under section 163(j), allowing a five-year net operating loss (“NOL”) carryback provision for certain NOLs, and increasing the amount of NOLs corporations may use to offset income for taxable years beginning before 2021. The Company has evaluated the income tax impacts of the CARES Act and does not expect that the income tax relief provisions of the CARES Act would not significantly impact the Company, since it has had taxable losses since inception. In addition, the Company has adopted the deferral of the employer portion of the social security payroll tax. The deferral is effective from the enactment date through December 31, 2020. As of September 30, 2020, the Company deferred $0.7 million. The deferred amount will be paid in two installments and the amount will be considered timely paid if 50% of the deferred amount is paid by December 31, 2021 and the remainder by December 31, 2022. In April 2020, the Company, through its subsidiaries Shift Technologies and Shift Operations, also borrowed unsecured loans (“PPP Loans”) under the Paycheck Protection Program established under the CARES Act. Refer to Note 4 for additional information regarding the PPP Loans.

 

F-7

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Basis of Presentation

 

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Liquidity

 

Since inception, the Company has generated recurring losses which has resulted in an accumulated deficit of $269.9 million as of September 30, 2020. Further, during the nine months ended September 30, 2020, the Company had negative operating cash flows of $45.9 million. As previously noted, the Company closed the Merger on October 13, 2020. As a result of the Merger, the Company received gross proceeds of $342 million. Management believes that the cash position, inclusive of the funds raised with the Merger, is sufficient to meet capital and liquidity requirements for at least the next 12 months and thereafter for the foreseeable future and therefore there is no longer substantial doubt about the Company’s ability to continue as a going concern.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to the valuation of vehicle inventory, capitalized website and internal-use software development costs, fair value of common stock, warrants, stock-based compensation and income taxes.

 

The COVID-19 pandemic has adversely impacted the global economy, as well as the Company’s operations, and the extent and duration of the impacts remain unclear. The Company’s future estimates, including, but not limited to, the inventory valuations, and fair value measurements, may be impacted and continue to evolve as conditions change as a result of the COVID-19 pandemic.

 

Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from those estimates.

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

 

The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

 

Level 1Quoted prices in active markets for identical assets or liabilities.

 

Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

F-8

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. As of September 30, 2020, all liability-classified warrants that are remeasured in a recurring basis have been valued using Level 3 inputs. The calculation of the warrant value is based on the Black-Scholes valuation model, which requires significant estimates including the expected volatility of our common stock, expected dividend yield, option term and risk-free rate. As of September 30, 2020, and December 31, 2019, there were no accumulated gains or losses related to these financial instruments in accumulated other comprehensive loss.

 

The Company recorded a remeasurement loss of $0.6 million and $6.2 million presented in interest and other expense during the three and nine months ended September 30, 2020, respectively.

 

Unaudited Interim Condensed Consolidated Financial Statements

 

The accompanying interim condensed consolidated balance sheet as of September 30, 2020, the interim condensed consolidated statements of operations and comprehensive loss, condensed consolidated statements of convertible preferred stock and stockholders’ deficit for the three and nine months ended September 30, 2020 and 2019, and condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019, and amounts relating to the interim periods included in the accompanying notes to the interim condensed consolidated financial statements are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited consolidated financial statements, and in management’s opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the Company’s condensed consolidated balance sheet as of September 30, 2020, and its results of operations for the three and nine months ended September 30, 2020 and 2019, and cash flows for the nine months ended September 30, 2019 and 2020. The results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results expected for the fiscal year or any other periods. These interim financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes for the fiscal year ended December 31, 2019.

 

Recently Issued Accounting Standards

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-to-use asset representing its right to use the underlying asset for the lease term. This ASU is effective for public and private companies’ fiscal years beginning after December 15, 2018, and December 15, 2021, respectively, with early adoption permitted. The Company expects to adopt ASU 2016-02 under the private company transition guidance beginning January 1, 2022, and is currently evaluating the impact on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, which amends the guidance on the impairment of financial instruments by requiring measurement and recognition of expected credit losses for financial assets held. This ASU is effective for public and private companies’ fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, and December 15, 2022, respectively. The Company expects to adopt ASU 2016-13 under the private company transition guidance beginning January 1, 2023, and is currently evaluating the impact on the Company’s consolidated financial statements.

 

F-9

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). The intent of this pronouncement is to align the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software as defined in ASC 350-40. Under ASU 2018-15, the capitalized implementation costs related to a cloud computing arrangement will be amortized over the term of the arrangement and all capitalized implementation amounts will be required to be presented in the same line items of the financial statements as the related hosting fees. ASU 2018-15 is effective for public and private companies’ fiscal years beginning after December 15, 2019, and December 15, 2020, respectively, and interim periods within those fiscal years, with early adoption permitted. The Company expects to adopt ASU 2018-15 under the private company transition guidance beginning January 1, 2021, and is currently evaluating the impact on the Company’s consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for public entities for interim and annual periods beginning after December 15, 2020, with early adoption permitted. ASU 2019-12 will be effective for private entities for annual periods beginning after December 15, 2021, and interim periods beginning after December 15, 2020, with early adoption permitted. The Company expects to adopt ASU 2019-12 under the private company transition guidance beginning January 1, 2022, and is currently assessing the impact the guidance will have on the Company’s consolidated financial statements.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848)–Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional expedients and exceptions to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this update are elective and are effective upon issuance for all entities. This guidance is optional and may be elected over time as reference rate reform activities occur. The Company is currently evaluating the impact of this guidance. However, the impact of this ASU is not expected to be material as the Company is not party to any contracts referencing LIBOR that extend past its expected discontinuation.

 

2.CAPITALIZED WEBSITE AND INTERNAL-USE SOFTWARE COSTS, NET

 

Capitalized website and internal-use software development costs consist of the following (in thousands):

 

   As of
September 30,
2020
   As of
December 31,
2019
 
Capitalized website domain costs - nonamortizable  $385   $385 
Capitalized website and internal-use software development costs - amortizable   16,120    12,891 
Less: accumulated amortization   (10,129)   (7,597)
Capitalized website and internal-use software development costs, net  $6,376   $5,679 

 

Amortization of capitalized software development costs is included in depreciation and amortization in the condensed consolidated statement of operations and comprehensive loss and amounted to $0.9 and $0.7 million for the three months ended September 30, 2020 and 2019, respectively, and $2.5 million and $1.9 million for the nine months ended September 30, 2020 and 2019, respectively.

 

F-10

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

3.ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consist of the following (in thousands):

 

   As of
September 30,
2020
   As of
December 31,
2019
 
Liability for vehicles acquired under OEM program  $5,287   $ 
Accrued payroll related costs   3,491    1,083 
Provision for DMV refunds   1,066    1,036 
Accrued sales taxes   1,698    1,691 
Common stock subject to repurchase liability, current   554    269 
Other accrued expenses   2,317    1,875 
Total accrued expenses and other current liabilities  $14,413   $5,954 

 

In November 2019, the Company entered into an arrangement with an original equipment manufacturer (“OEM”) to sell vehicles sourced locally through the trade-in program of the OEM on the Company’s platform. Under the terms of the arrangement, the Company has the option to provisionally accept any trade-ins based on information provided by the OEM. The Company transports any accepted vehicles to its inspection and reconditioning center where Shift inspects the vehicle and makes a final purchasing decision regarding the vehicle. Any rejected vehicles are sent to wholesale auction facilities at Shift’s expense, at which point Shift has no further obligations to the automaker for the rejected vehicle. The Company records inventory received under the arrangement with the OEM equal to the amount of the liability due to the OEM to acquire such vehicles. The liability due to the OEM provider for such acquired vehicles is equal to the OEM’s original acquisition price plus 50% of excess estimated sales price over this original acquisition price.

 

4.BORROWINGS

 

SBA PPP Loan

 

On April 22, 2020, the Company, through Shift Technologies, Inc., and its wholly owned subsidiary, Shift Operations LLC, obtained loans under the Paycheck Protection Program (the “PPP Loans”) with an outstanding principal amount of $6.1 million. The PPP Loans were made through Newtek Small Business Finance (SBA or the “Lender”), and the Company entered into two U.S. Small Business Administration Paycheck Protection Program Notes (the “Agreements”) with the Lender evidencing the PPP Loans.

 

The term of each the PPP Loan is two years. Interest will accrue on the outstanding principal balances of the PPP Loans at a fixed rate of 1.0%, which shall be deferred for the first nine months of the term of the PPP Loans. Monthly payments will be due and payable beginning in October 2020 and continue each month thereafter until maturity of the PPP Loans. The Company may prepay principal of the PPP Loans at any time in any amount without penalty.

 

The Company accounts for the PPP Loans as debt and the balance of $6.1 million at September 30, 2020 is recorded within other noncurrent liabilities.

 

In conjunction with closing of the Merger in October 2020, the Company repaid the outstanding balance and any accrued interest on the PPP Loans in full. See Note 12 for subsequent events.

 

F-11

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Flooring Line of Credit

 

During 2018, the Company entered into a flooring line of credit facility with U.S. Bank National Association (“US Bank”), with the proceeds from such arrangement available to finance the purchase of vehicles. The FLOC initially allowed for a $30.0 million commitment of advances, whereby the Company may borrow, prepay, repay and reborrow the advances. Advances may be prepaid in part or in full at any time without charge, penalty or premium. On September 29, 2020, the loan and security agreement expiration date was amended from September 30, 2020 to December 31, 2020. The outstanding balance of the LOC was $20.5 million and $16.2 million as of September 30, 2020 and December 31, 2019, respectively.

 

5.STOCKHOLDERS’ EQUITY

 

Series D Convertible Preferred Stock

 

In February 2019, the Company completed an additional closing of the Series D convertible preferred stock and issued 4,555,805 shares at $1.2731 per share for gross $5.8 million.

 

Exchange of Common Stock for Series D Convertible Preferred Stock

 

In February 2019, the Company approved the sale of up to an aggregate of 5,000,000 shares of common stock (the “Secondary Shares”) by certain holders of common stock to certain existing or new investors in the Company at a price per share of $1.2731, equal to the original issuance price of the Series D preferred stock. Concurrent with this approval, the Company also approved the exchange of such Secondary Shares for shares of Series D convertible preferred stock pursuant to the terms and conditions of the stock exchange agreement to be entered into by the Company and the holders of the Secondary Shares. Up to 5,000,000 shares of the Series D convertible preferred stock are reserved for issuance pursuant to the terms of an exchange agreement.

 

During the nine-month period ended September 30,2019, certain employee stockholders completed secondary sales of 3,464,706 shares of common stock of the Company to new and existing investors. During the same period, the Company issued 3,464,706 shares of Series D convertible preferred stock in exchange for common stock. The Company recognized $4.7 million in non-cash compensation expense, $1.6 million in payroll tax liabilities and an increase to additional paid-in-capital, which was computed as the difference between the fair value of Series D convertible preferred stock and common stock at the time of exchange of shares.

 

Warrant and Commercial Agreements

 

In September 2018, the Company entered into a warrant agreement (the “Warrant Agreement”) and a commercial agreement for Milestone 1 with Lithia and granted Lithia a warrant to purchase 86,661,588 shares of common stock at an exercise price of $0.01 per share (the “Warrant Shares”). The Warrant Shares shall vest and become exercisable in six separate tranches of 14,443,598 shares each. Vesting and exercisability is dependent upon the achievement of the Milestones, as defined below. While the Warrant Agreement establishes general vesting terms for each of the six Milestones, each of the six Milestones contains substantive service or performance requirements, and were non-binding as neither the Company nor Lithia were obligated to perform until the commercial agreement associated with each Milestone was executed.

 

F-12

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Two tranches of 14,443,598 Warrant Shares shall each vest and become immediately exercisable upon the achievement of each of Milestone 1 and Milestone 2. The remaining four tranches of 14,443,598 Warrant Shares each shall vest and become exercisable on January 12, 2020 (the “Vesting Cliff Date”), provided that Milestone 3, Milestone 4, Milestone 5 and Milestone 6 have been achieved prior to such date. If such Milestone has not been achieved by the Vesting Cliff Date, such 14,443,598 Warrant Shares shall vest and become immediately exercisable upon the achievement of such Milestone. Any unvested Warrant Shares that have not vested by June 12, 2020 (the “Vesting Termination Date”), the Warrant shall automatically terminate with respect to any Warrant Shares which have not become exercisable as of the Vesting Termination Date. All Warrant Shares vested in January 2020.

 

Milestone 1 — the Company, with Lithia’s assistance, enters into acceptable credit facilities with access to asset-based used vehicle floorplan financing.

 

Milestone 2 — the Company and Lithia enter into a data sharing commercial agreement whereby Lithia agrees to transfer certain historical transaction and inventory data to the Company.

 

Milestone 3 — the Company and Lithia enter into a lease and services agreement whereby Lithia will make available at least one of its locations for the Company’s use as a storage/reconditioning/retail delivery center.

 

Milestone 4 — the Company and Lithia enter into a lease and services agreement whereby Lithia will make available at least three of its locations for the Company’s use as a storage/reconditioning/retail delivery center.

 

Milestone 5 — the Company and Lithia enter a commercial agreement whereby Lithia agrees to use commercially reasonable best efforts to help the Company secure and maintain access to finance and insurance products on par with a typical Lithia store.

 

Milestone 6 — the Company and Lithia entering into a commercial agreement where Lithia will purchase mutually-agreed upon vehicles from the Company in a minimum of three existing Lithia markets.

 

2018 Milestones

 

The commercial agreement agreed to with Lithia in September 2018 was entered into concurrently with arrangements that provide for Lithia’s guarantee of the flooring line of credit for a three-year period and the provision by Lithia for the delayed draw facility. The Company determined that there was significant value in the terms received related to both the guarantee and delayed draw facility, for which the Company transferred the warrants identified in Milestone 1 as compensation. Accordingly, upon entering into the arrangements, the Company measured the fair value of the guarantee received at $9.1 million and the fair value of the delayed draw facility at $5.7 million. Further the Company measured the fair value of the warrants to be transferred to Lithia in exchange for Milestone 1 at $4.2 million. The fair value of the guarantee is treated as a deferred borrowing cost associated with the flooring line of credit and is included within deferred borrowing costs on the condensed consolidated balance sheet. The deferred loan commitment cost of $5.7 million is being amortized over the four-year loan commitment period, which resulted in interest expense of $333 thousand during the three month periods ending September 30, 2020 and 2019, and $1.0 million and $832 thousand during the nine months ended September 30, 2020 and 2019, respectively.

 

The warrants issued with Milestone 1 were determined to be liability classified, subject to remeasurement, and are recorded within other non-current liabilities on the condensed consolidated balance sheet as of September 30, 2020, and December 31, 2019. The Company recorded a remeasurement gain of $0.1 million and a loss of $0.1 million to interest and other income during the three and nine months ended September 30, 2019, respectively. The Company recorded a remeasurement loss of $0.6 million and $6.2 million to interest and other expense during the three and nine months ended September 30, 2020.

 

F-13

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Milestone 3 was achieved in December 2018 and the Company recorded the release of the corresponding warrant shares at the then fair value of $4.2 million. The warrants issued with Milestone 3 were determined to be liability classified and are subject to remeasurement, and at December 31, 2018, were recorded within other non-current liabilities on the condensed consolidated balance sheet. At initial recognition of the liability, the fair value of the warrants was determined to be compensation in the form of a lease commission fee which was expensed during 2018 in its entirety to selling, general, and administrative expenses on the consolidated statement of operations and comprehensive loss. On January 1, 2019, the Company adopted ASU 2018-07, and reclassified the fair value of Milestone 3 warrants of $3.9 million from liability to equity and in turn, the balance is no longer subject to remeasurement after the date of adoption.

 

2019 Milestones

 

Prior to 2019, the Company had generated an immaterial amount of sales from Lithia. Beginning in 2019, the Company began to generate more substantial sales with Lithia. As Lithia is a customer, the Company assessed the warrants as consideration payable to a customer under ASC 606.

 

During the three quarters of 2019, the Company entered into agreements related to Milestone 2 and 4 that contractually obligated both the Company and Lithia to perform and, upon signing the relevant agreement, Lithia earned the related warrants. The Company determined that the grant date fair value for the cumulative equity-classified warrants earned related to Milestones 2 and 4 was $9.2 million. For each of the Milestones, the Company considered whether it received distinct goods or services for which it could reasonably estimate the fair value. For Milestone 2, The Company determine that historical data received from Lithia provided an immediate benefit to the Company. The Company concluded that the data represented a distinct good or service. The estimated fair value of such benefit of $2.2 million which was recorded immediately to selling, general, and administrative expenses on the condensed consolidated statement of operations and comprehensive loss. For Milestone 4, the Company received an immaterial amount of distinct goods or services associated with securing the leased space and provisioning of infrastructure so the Company could sell to Lithia in certain markets. Of the remaining value associated with the warrants, $4.1 million was recorded as a reduction to revenue for the first and third quarters from Lithia, $2.7 million as a deferred cost recorded to noncurrent assets, and $0.5 as a noncurrent liability to recognize further constraint under the assumption that warrant value could have increased in the third quarter of 2019. The Company considered the appropriate treatment for the remaining $0.7 million of value associated with the warrants. The Company determined that it was appropriate to recharacterize such amount that exceeded the cumulative revenue recognized as an expense as the arrangements with Lithia do not provide the Company with an exclusive right to sell cars to Lithia and Lithia has no minimum purchase commitment. Accordingly, the Company recorded $0.7 million to selling, general and administrative expenses during the three months ended September 30, 2019.

 

In connection with the negotiations related to Milestone 5, Lithia facilitated an agreement with Automotive Warranty Services (“AWS”) to sell and market AWS’s service plans, whereby the Company receives commission rates from AWS of comparable terms to those received by Lithia. In substance the Company paid Lithia, in the form of Warrant Shares, to make an upfront payment to Company’s customers on behalf of the Company as the Company achieved favorable pricing from AWS. The benefits of this agreement were guaranteed by Lithia for an initial term of five years commencing on the signing date of the agreement. Such arrangement was the first of a number of agreements to be entered into under the terms of Milestone 5, see further discussion below. During the first quarter of 2019, the estimated fair value of the in substance upfront payment to AWS of $2.8 million was recorded, with an offsetting entry recorded to additional paid-in capital, representing a capital transaction with a related party.

 

F-14

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Milestone 5 was met in October 2019 and the Company recorded these warrants to additional paid-in capital based on a fair value of $4.3 million. Milestone 5 was achieved after a mutual signed agreement was entered into evidencing that Lithia provided commercially best efforts to help the Company secure and maintain access to four finance and insurance products on par with a typical Lithia store. The fair value of the in substance upfront payment, other than the $2.8 million for AWS discussed above, was $351 thousand and was recorded to other non-current assets on the condensed consolidated balance sheet. The combined asset recorded of $3.2 million is subject to amortization over a five-year expected period of benefit. During the three and nine months ended September 30, 2020, the Company amortized $159 thousand and $478 thousand, respectively, of the asset as a reduction to finance and insurance sales, which is recorded within other revenues on the condensed consolidated statement of operations and comprehensive loss. During the three and nine months ended September 30, 2019, the Company amortized $142 thousand and $425 thousand, respectively, of the asset as a reduction to finance and insurance sales. As of September 30, 2020 and December 31, 2019, the remaining asset, net of amortization, was $2.0 million and $2.5 million, respectively.

 

During the three and nine months ended September 30, 2020, the Company recognized a loss of $6.2 million related to a remeasurement of the warrants related to Milestone 1.

 

Convertible Preferred Stock

 

The authorized, issued and outstanding shares of the convertible preferred stock and liquidation preferences were as follows (in thousands, except share numbers):

 

   Authorized Shares   Outstanding Shares   Net Carrying Value   Liquidation Preference 
Series                
As of September 30, 2020:                
Series D   83,548,425    82,013,123   $100,624   $104,411 
Series C-1   20,898,641    20,898,641    9,902    10,000 
Series C   97,093,162    94,409,932    37,834    38,000 
Series B   27,305,081    27,305,081    49,862    10,990 
Series A   29,475,670    29,475,670    25,343    11,864 
Series FF   1,134,654    1,134,654    66     
Total   259,455,633    255,237,101   $223,631   $175,265 

 

Common Stock

 

The Company’s reserved shares of common stock for future issuance as of September 30, 2020, are as follows:

 

 Series D convertible preferred stock   82,013,123 
Series C-1 convertible preferred stock   20,898,641 
Series C convertible preferred stock   94,409,932 
Series B convertible preferred stock   27,305,081 
Series A convertible preferred stock   29,475,670 
Series FF convertible preferred stock   1,134,654 
Options to purchase common stock   36,845,947 
Shares available for future option grants   5,693,870 
Warrants to purchase Series C stock   2,111,801 
Warrants to purchase common stock   86,815,048 
Total   386,703,767 

 

6.STOCK-BASED COMPENSATION PLANS

 

The Company has the 2014 Stock Incentive Plan (the “Plan”) that provides for the grant of stock options, restricted stock, and other awards based on common stock of the Company. The maximum number of shares of the Company’s Common Stock that may be subject to awards under the Plan was 66,726,457 as of September 30, 2020, subject to adjustment in accordance with the terms of the Plan. The Company had an aggregate of 5,693,870 shares of Common Stock available for future grants under the Plan as of September 30, 2020.

 

F-15

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Generally, options under the Plans vest and become exercisable ratably over periods ranging from three to four years, with one-year cliff vesting, based on their individual grant dates, subject to continued employment on the applicable vesting dates, and expire within ten years from the date of grant. Options are granted at prices not less than the fair market value of the Company’s Common Stock on the date of grant.

 

Activity related to employee and nonemployee stock options issued under the Plan during the nine months ended September 30, 2020, is set forth below:

 

   Number of Shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life (Years) 
             
As of December 31, 2019   40,551,940   $0.27    8.97 
Granted   8,732,570    0.50    9.91 
Exercised   (7,010,503)   0.29    7.52 
Forfeited   (5,301,065)   0.27      
Cancelled (expired)   (126,995)   0.29      
As of September 30, 2020   36,845,947    0.32    8.49 
                
Vested and expected to vest as of September 30, 2020   36,845,947    0.32    8.49 
Exercisable as of September 30, 2020   36,845,947   $0.32    8.49 

 

The weighted-average fair values of options granted during the three months ended September 30, 2020 and 2019, was $0.37 and $0.124. The weighted-average fair values of options granted during the nine months ended September 30, 2020 and 2019, was $0.196 and $0.123, respectively.

 

Stock-Based Compensation Expense

 

For the three months ended September 30, 2020 and 2019, the Company recorded aggregate stock-based compensation expense of $755 thousand and $718 thousand, respectively. For the nine months ended September 30, 2020 and 2019, the Company recorded aggregate stock-based compensation expense of $1.5 million and $1.1 million, respectively. For the three months ended September 30, 2020 and 2019, the Company capitalized $62 thousand and $131 thousand, respectively, of stock-based compensation expense to capitalized website and internal-use software. For the nine months ended September 30, 2020 and 2019, the Company had capitalized $182 thousand and $243 thousand, respectively, of stock-based compensation expense to capitalized website and internal-use software.

 

As of September 30, 2020, there was $3.6 million of unrecognized stock-based compensation expense that is expected to be recognized over a weighted-average period of 1.12 years.

 

F-16

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

The range of assumptions used in the Black-Scholes model for the valuation of stock options during the three and nine months ended September 30, 2020 and 2019, are as follows:

 

    Three Months Ended
September 30, 
  Nine Months Ended
September 30, 
    2020    2019    2020    2019 
Expected volatility   54.83 – 57.49%   41.05 – 41.59%   52.22 – 57.49%   38.22 – 41.60%
Risk-free interest rate   0.28 – 0.40%   1.52 – 1.88%   0.28 – 0.62%   1.52 – 2.59%
Expected term (years)   4.99 – 6.08   5.66 – 6.25   4.99 – 6.07   5.27 – 6.25
Dividend yield   0%   0%   0%   0%

 

Common Stock Subject to Repurchase Related to Early Exercised Options

 

The Company typically allows employees to exercise options prior to vesting. Upon termination of service of an employee, the Company has the right to repurchase at the original purchase price any non-vested but issued common shares. Accordingly, such early exercises are not substantive for accounting purposes. The consideration received for an exercise of an option is considered to be a deposit of the exercise price, and the related dollar amount is recorded as a liability. The liability is reclassified into additional paid-in capital on a ratable basis as the award vests. During the three and nine months ended September 30, 2020, $476 thousand and $605 thousand, respectively, was recorded to additional paid in capital related to the vesting of awards that were previously early exercised. During the three and nine months ended September 30, 2019, $47 thousand and $173 thousand, respectively, was recorded to additional paid in capital related to the vesting of awards that were previously early exercised.

 

As of September 30, 2020, the Company has recorded a liability of $881 thousand relating to 3,598,034 options that were exercised and are non-vested.

 

A summary of the status of the Company’s non-vested shares and changes during the nine months ended September 30, 2020, is presented below:

 

   As of
September 30,
2020
 
     
Non-vested as of December 31, 2019   3,189,364 
Exercises   6,981,441 
Repurchased   (72,646)
Vested   (6,500,125)
Non-vested as of September 30, 2020   3,598,034 

 

7.RELATED PARTY TRANSACTIONS

 

Sales with Related Party

 

In December 2018, the Company agreed to sell cars to Lithia under a one-sided marketplace (“OSM”) program whereby the Company acquires cars from various sources in Oxnard, Salem and Fresno markets and sells directly and solely to Lithia. In July 2019, the Salem OSM ceased operations.

 

F-17

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

The Company invoices Lithia based on the purchase price of the car plus an agreed upon margin by location. During the three and nine months ended September 30, 2020, the Company recognized approximately $2.2 million and $3.7 million, respectively, of sales from the OSM agreement with Lithia. During the three and nine months ended September 30, 2019, the Company recognized approximately $2.2 million and $6.1 million, respectively, of sales from the OSM agreement with Lithia. The 2019 sales were subject to a contra-revenue adjustment and were fully eliminated following the guidance related to consideration payable to a customer. During the three and nine months ended September 30, 2019, the Company recognized contra-revenue of $2.2 million and $6.1 million, respectively. There was no contra-revenue adjustment in 2020.

 

Other than sales made through OSM locations, the Company also sells used cars to Lithia using a pricing algorithm as a basis for sales price. During the three and nine months ended September 30, 2019, the Company had sales of approximately $0.7 million. The revenues were subject to contra-revenue adjustment and fully eliminated following the guidance related to consideration payable to a customer. There was no such revenue during the nine months ended September 30, 2020.

 

Accounts Receivable from Related Party

 

As of September 30, 2020, and December 31, 2019, the Company has $711 thousand and $335 thousand, respectively, in outstanding accounts receivables from Lithia, which is comprised of $657 thousand and $313 thousand, respectively, in vehicle sales and $54 thousand and $22 thousand, respectively, in commissions based on the number of loan contracts booked with US bank. The Company operates under Lithia’s master agreement with US Bank where the collections pass through Lithia.

 

Lease Agreements

 

In December 2018 and July 2019, pursuant to Milestones 3 and 4 discussed in Note 5, the Company and Lithia entered into license and services agreements that govern the Company’s access to and utilization of reconditioning, offices and parking spaces at the Riverside, Concord, and Portland facilities of Lithia, respectively. The Concord agreement is no longer in use and the Portland agreement expires on October 12, 2021, with automatic 12 months renewal subject to terms and conditions of the agreement. During the three and nine months ended September 30, 2020, total costs related to these agreements were approximately $32 thousand and $92 thousand, respectively, and were expensed to selling, general and administrative expenses on the condensed consolidated statement of operations and comprehensive loss. The comparable costs during the three and nine months ended September 30, 2019, were approximately $31 thousand and $140 thousand, respectively.

 

Flooring Line of Credit Guarantee

 

In February 2019, the Company entered into a guarantee agreement with Lithia. The interest rate is 1.50% per annum based on a daily outstanding flooring line of credit and is payable monthly to Lithia. For the three and nine months ended September 30, 2020, the Company recorded $37 thousand and $114 thousand, respectively, to interest expense on the condensed consolidated statement of operations and comprehensive loss. The comparable costs during the three and nine months ended September 30, 2019, were approximately $88 thousand and $292 thousand, respectively.

 

Delayed Draw Term Loan Agreement

 

The Company drew down $12.5 million on December 27, 2019, in accordance with the Delayed Draw Term Loan (“DDTL”) agreement. On July 2, 2020, an additional $12.5 million was drawn down. As of September 30, 2020, $25.0 million remains outstanding and classified within related party long term note, net, noncurrent on the condensed consolidated balance sheet, net of unamortized deferred borrowing costs associated with the fair value of the loan guarantee of $3.0 million. For the three and nine months ended September 30, 2020, the Company recorded $333 thousand and $1.0 million, respectively, to interest expense on the condensed consolidated statement of operations and comprehensive loss. Refer to Note 5 for further discussion regarding the deferred borrowing costs.

 

F-18

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Accounts Payable Due to Related Party

 

As of September 30, 2020, payables and accruals to Lithia consisted of $528 thousand, comprised primarily of consulting services and various other costs.

 

8.COMMITMENTS AND CONTINGENCIES

 

Lease Agreements

 

The Company is a tenant under various operating leases with third parties, including leases of office facilities and parking/vehicle storage locations. These lease agreements are under noncancelable leases and expire at various dates, ranging from 2020 and extending through 2025.

 

The Company records rent expense on a straight-line basis over the term of the lease. Rent expense was $1.4 million and $2.0 million for the three months ended September 30, 2020 and 2019, respectively, and $4.1 million and $5.5 million for the nine months ended September 30, 2020 and 2019, respectively, and is recorded within selling, general, and administrative expenses on the condensed consolidated statement of operations and comprehensive loss. Future minimum lease payments under non-cancellable operating leases in effect as of September 30, 2020, were as follows (in thousands):

 

 Three months ended December 31, 2020  $1,474 
Year ended December 31, 2021   5,604 
Year ended December 31, 2022   4,462 
Year ended December 31, 2023   4,035 
Year ended December 31, 2024   2,759 
Year ended December 31, 2025   1,865 
Total minimum lease payments  $20,199 

 

Litigation

 

The Company may be subject to legal proceedings and claims that arise in the ordinary course of business. Management is not currently aware of any matters that will have a material effect on the financial position, results of operations, or cash flows of the Company.

 

9.SEGMENT INFORMATION

 

The Company currently is organized into two reportable segments: Retail and Wholesale. The Retail segment represents retail sales of used vehicles through the Company’s ecommerce platform and fees earned on sales of value-added products associated with those vehicles sales such as vehicle service contracts, guaranteed asset protection waiver coverage, prepaid maintenance plans, and appearance protection plans. The Wholesale segment represents sales of used vehicles through wholesale auctions or directly to a wholesaler (“DTW”).

 

No operating segments have been aggregated to form the reportable segments. The Company determined its operating segments based on how the chief operating decision maker (“CODM”) or decision-making group, reviews the Company’s operating results in assessing performance and allocating resources. The CODM is the Co-Chief Executive Officers. The CODM reviews revenue and gross profit for each of the reportable segments. Gross profit is defined as revenue less cost of sales incurred by the segment. The CODM does not evaluate operating segments using asset information as these are managed on an enterprise wide group basis. Accordingly, the Company does not report segment asset information. During the three and nine months ended September 30, 2020 and 2019, the Company did not have sales to customers outside the United States. As of September 30, 2020 and December 31, 2019, the Company did not have any assets located outside of the United States.

 

F-19

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Information about the Company’s reportable segments are as follows (in thousands):

 

   Three Months Ended September 30, 2020 
   Retail   Wholesale   Consolidated 
             
Revenue from external customers  $50,522   $9,392   $59,914 
Segment gross profit   3,642    84    3,726 

 

   Three Months Ended September 30, 2019 
   Retail   Wholesale   Consolidated 
             
Revenue from external customers  $37,868   $7,989   $45,857 
Segment gross profit (loss)   1,739    (2,591)   (852)

 

   Nine Months Ended September 30, 2020 
   Retail   Wholesale   Consolidated 
             
Revenue from external customers  $101,803   $20,504   $122,307 
Segment gross profit (loss)   8,451    2,190    10,641 

 

   Nine Months Ended September 30, 2019 
   Retail   Wholesale   Consolidated 
Revenue from external customers  $115,272   $23,612   $138,884 
Segment gross profit   6,217    (7,265)   (1,048)

 

The reconciliation between reportable segment gross profit (loss) to consolidated loss before provision for income taxes is as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
Segment gross profit (loss)  $3,726   $(852)  $10,641   $(1,048)
Selling, general and administrative expenses   (24,030)   (16,204)   (52,109)   (54,236)
Depreciation and amortization   (1,181)   (888)   (3,258)   (2,184)
Interest expense   (1,256)   (1,463)   (3,901)   (4,136)
Interest income and other income (expense)   (579)   427    (6,017)   1,642 
Loss before provision for income taxes  $(23,320)  $(18,980)  $(54,644)  $(59,962)

 

F-20

 

 

SHIFT TECHNOLOGIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

10.NET LOSS PER SHARE

 

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders:

 

(in thousands, except share and per share amounts)  Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
                 
Net loss attributable to common stockholders  $(23,320)  $(18,980)  $(54,644)  $(59,962)
Weighted-average number of shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted   36,457,891    34,333,276    34,851,966    35,063,135 
Net loss per share attributable to common stockholders, basic and diluted  $(0.64)  $(0.55)  $(1.57)  $(1.71)

 

The following potentially dilutive shares were not included in the calculation of diluted shares outstanding for the periods presented as the effect would have been anti-dilutive:

 

   As of September 30, 
   2020   2019 
         
Redeemable convertible preferred stock   255,237,101    255,237,101 
Warrants   88,926,849    88,926,849 
Stock options   36,845,947    41,481,429 
Restricted stock awards   777,602    758,850 
Total   381,787,499    386,404,229 

 

11.INCOME TAXES

 

The Company did not record a provision or benefit for income taxes during the three and nine months ended September 30, 2020 and 2019. The Company continues to maintain a full valuation allowance for its net U.S. federal and state deferred tax assets. See Note 1 for discussion of the tax effects of the CARES Act.

 

12.SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events for financial statement purposes occurring through November 16, 2020, the date these condensed consolidated financial statements are available to be issued.

 

On October 13, 2020, the Company completed the Merger transaction as discussed in Note 1, which provides the Company with approximately $342 million of gross cash proceeds. On October 14, 2020, the Company’s shares of Class A common stock began trading on the Nasdaq under the ticker symbol “SFT” and warrants under ticker symbol “SFTTW.”

 

The Merger will be accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, INSU, who is the legal acquirer will be treated as the “acquired” company for financial reporting purposes and Shift will be treated as the accounting acquirer. As a result of the Merger, each outstanding share of the Company’s common stock, will convert into newly issued shares of INSU’s Class A common stock, as calculated pursuant to the terms of the Merger Agreement.

 

Concurrent with the closing of merger, the Company repaid the outstanding principal and interest of $6.1 million related to the PPP Loans outstanding as of September 30, 2020. Refer to Note 4 for additional information regarding the PPP Loans.

 

On November 10, 2020, the Company repaid the outstanding principal and interest of $25.0 million related to the Delayed Draw Term Loan outstanding as of September 30, 2020. Refer to Note 7 for additional information regarding this Loan.

 

 

F-21

 

 

Exhibit 99.2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 

You should read the following management’s discussion and analysis together with our unaudited financial statements and related notes filed as Exhibit 99.1 to the Current Report on Form 8-K to which this Exhibit is filed, as well as the audited financial statements and related notes that are included in the proxy statement/prospectus on Form 424B3, filed with the Securities and Exchange Commission on September 24, 2020 (the “Prospectus”). This discussion and analysis should also be read together with our pro forma financial information as of September 30, 2020, and for the nine months ended September 30, 2020 and year ended December 31, 2019, and related notes filed as Exhibit 99.3 to the Current Report on Form 8-K to which this Exhibit is filed. In addition to historical financial information, this discussion and analysis contains forward-looking statements about Shift’s business, operations and industry that involve risks and uncertainties, such as statements regarding Shift’s plans, objectives, expectations and intentions. Shift’s future results and financial condition may differ materially from those currently anticipated by Shift as a result of the factors described in the section of the Prospectus entitled “Risk Factors” and the section of the Current Report on Form 8-K to which this Exhibit is filed entitled “Cautionary Note Regarding Forward-Looking Statements.” Throughout this section, unless otherwise noted “we”, “us”, “our” and the “Company” refer to Shift and its consolidated subsidiaries.

 

Overview

 

Shift is a leading end-to-end ecommerce platform transforming the used car industry with a technology-driven, hassle-free customer experience.

 

Shift’s mission is to make car purchase and ownership simple — to make buying or selling a used car fun, fair, and accessible to everyone. Shift provides comprehensive, technology-driven solutions throughout the car ownership lifecycle:

 

finding the right car,

 

having a test drive brought to you before buying the car,

 

a seamless digitally-driven purchase transaction including financing and vehicle protection products,

 

an efficient, fully-digital trade-in/sale transaction,

 

and a vision to provide high-value support services during car ownership.

 

Each of these steps is powered by Shift’s software solutions, mobile transactions platform, and scalable logistics, combined with the Company’s five centralized inspection, reconditioning & storage centers, called Hubs.

 

Shift’s vision is to provide a comprehensive experience for car owners, driven by technology at every step of the consumer lifecycle. Our continued investments in our research and discovery functionality create a platform that draws customers to engage with the Shift website and provide a seamless search experience.

 

There are three ways to purchase a car from Shift:

 

On-demand test drive: Shift conveniently brings any car to the customer’s desired location for a no-obligation, contactless test drive, usually at their home or work. If the customer chooses to purchase the vehicle, a Shift concierge staff can process the transaction on-the-spot via a mobile app.

 

Buy online: Customers can buy a car sight-unseen without a test drive and have it delivered to their home quickly with the same seven-day return policy as is offered on cars bought in person.

 

Hub test drive: Customers may come to one of Shift’s hub locations to see and test drive multiple cars. When they arrive, customers can scan a QR code on each car to immediately view all relevant details, including ownership & service history, inspection reports, vehicle history reports, and most importantly, dynamic pricing and market price comparisons. This immediate access to all relevant information — without having to rely on a salesman — puts customers in control.

 

   
 

 

Launched in 2014, Shift currently operates five West Coast Hubs capable of reaching over 85%1 of the California population and a large portion of the Oregon population, with proven success in San Francisco, Los Angeles and Orange County, San Diego, Sacramento, and Portland, recent expansion to Seattle in October 2020, and plans to expand to additional metropolitan areas. Each region is supported by one Hub location that acts as the central point for reconditioning and vehicle storage that also enables customers who prefer to browse inventory onsite. In 2019, the Company had $166.2 million of revenue including an $8.5 million contra-revenue charge related to certain milestones under our agreement with Lithia. By targeting urban, densely populated markets, Shift has used direct-to-consumer digital marketing and a responsive ecommerce sales approach to grow its market penetration to over 4% of all used car sales in its top-performing ZIP codes within the San Francisco region. With current operations out of five West Coast Hubs, which together account for only 12%2 of the U.S. population, Shift has significant runway for continued expansion.

 

Shift’s differentiated strategy offers a wide variety of vehicles across the entire spectrum of model, price, age, and mileage to ensure that Shift has the right car for buyers regardless of interest, need, budget, or credit. Shift is the only online dealer to offer a fully omni-channel fulfillment model, led by Shift’s patented system for managing on-demand test drives brought to customers at their preferred location, such as their home.

 

Regardless of the approach chosen by the customer, they will be supported by friendly Shift Concierge and Advisor team members. For all buyers, Shift offers a full suite of options to consumers to finance and protect their vehicle through the only mobile point-of-sale solution on the market. Through our platform, we connect customers to various lending partners for a completely digital end-to-end process for financing and service products. A customer can also complete a short online prequalification form and immediately see a filtered view of cars that meet their budget based on the financing options for which they are, statistically speaking, able to qualify. Customers can also get approved for financing before they even test drive a car, making it much more likely that the customer will purchase a car from us.

 

Shift focuses on unit economics driven by direct vehicle acquisition channels, optimized inventory mix and ancillary product offerings, combined with streamlined inventory onboarding, low fulfillment costs, and centralized software. For the nine months ended September 30, 2020, Shift sourced 89% of its inventory from consumer-sellers and partners driving industry-leading margins and customer acquisition cost. Our data-driven vehicle evaluations help ensure acquisition of the right inventory at the right price to reduce days to sale. We believe that a differentiated ability to purchase vehicles directly from consumer-sellers as compared to our competitors, who purchase a higher percentage through the wholesale market, provides Shift access to a deeper pool of scarce, highly desirable inventory.

 

Sellers are able to go to Shift.com, submit information on their car, and get a quote instantly. Shift uses a proprietary algorithm for pricing that utilizes current market information about market conditions, demand and supply, and car option data, among other factors. Using proprietary pricing and Shift-built mobile iPad diagnostic tools, Shift provides an immediate quote for a customer’s trade-in vehicle, and will schedule an on-demand evaluation at the customer’s location by a member of Shift’s concierge staff. Shift provides selling customers with information on market rates and, when a customer is ready to sell their car, we can digitally initiate e-contracting and an ACH transfer and conveniently take the car on the seller’s behalf so the seller doesn’t even have to leave his or her home to sell their car.

 

Over time, we will expand our machine learning-enabled recommendation engine to help customers find the cars best suited to them. Customer response to the Shift experience is extremely positive, resulting in a 70 Net Promoter Score (“NPS”), an order of magnitude higher score than traditional auto retailers. These positive experiences allow Shift to serve customers over the entire lifecycle of vehicle ownership and retain customers for repeat sales and purchases. By continuing to invest in services that benefit the customer throughout the ownership phase of the lifecycle (for example, vehicle maintenance plans), we will continue to establish a long-term customer base that will return for future transactions.

 

 

1Includes MSA’s within 60 miles of Shift reconditioning facilities in San Francisco, Los Angeles, San Diego, and Sacramento.

 

  2 
 

 

Revenue Model

 

Shift’s two-sided model generates value from both the purchase and sale of vehicles along with financing and vehicle protection products. We acquire cars directly from consumers, partners, and other sources and sell vehicles through our ecommerce platform directly to consumers in a seamless end-to-end process. This model captures value from the difference in the price at which the car is acquired and sold, as well as through fees on the sale of ancillary products such as financing, vehicle protection, and services. If a car that we purchase does not meet our standards for retail sale, we generate revenue by selling through wholesale channels. These vehicles are primarily acquired from customers who trade-in their existing vehicles in connection with a purchase from us. Our revenue for the three months ended September 30, 2020 and 2019, was $59.9 million and $45.9 million, respectively, and $122.3 million and $138.9 million for the nine months ended September 30, 2020 and 2019, respectively. For the nine-month periods ended September 30, 2020 and 2019, respectively, revenue was impacted by a $7.3 million and $0.5 million contra-revenue charge related to certain milestones under our agreement with Lithia. Revenue for the years ended 2019, 2018 and 2017 was $166.2 million, $131.8 million and $194.5 million, respectively. In 2019, our revenue was impacted by an $8.5 million contra-revenue charge related to certain milestones under our agreement with Lithia. We expect significant growth going forward as we expand geographically, increase market penetration, and increase ancillary product sales. Our adjusted gross profit is equal to the revenue from vehicle sales and services less the costs associated with acquiring and reconditioning the vehicle prior to sale. Adjusted gross profit is a non-GAAP financial measure used by our management team to assess our business and consists of gross profit adjusted for non-cash items as set forth below under “— Non-GAAP Financial Measures.”

 

Inventory Sourcing

 

We source the majority of our vehicles directly from consumers and partners who use the Shift platform to resell trade-in and other vehicles. These channels provide scarce and desirable local inventory of used cars of greater quality than those typically found at auction. In addition to those primary channels, we supplement our vehicle acquisitions with purchases from auto auctions, as well as some vehicles sourced locally through the trade-in program of an original equipment manufacturer (“OEM”).

 

Proprietary machine learning-enabled software inputs vast quantities of data across both the supply and demand sides to optimize our vehicle acquisition strategy. As we grow volumes, we expect to improve the performance of our model to optimize our vehicle selection and disposal. To further increase our inventory, we intend to expand our current third party relationships and enter into new partnerships that provide significant growth opportunities in a capital efficient manner.

 

Vehicle Reconditioning

 

All of the cars Shift sells undergo a rigorous 150+ point mechanical inspection and reconditioning process at one of our five regional reconditioning Hub facilities to help ensure that they’re safe, reliable, up to cosmetic standards, and comfortable. We have created two classifications of inventory for reconditioning — Value and Certified — to optimize the level of reconditioning for each vehicle classification. This allows us to efficiently provide each customer with the greatest value through a tailored reconditioning approach. Value cars are typically sold at a lower price point and are sought after by consumers who have different expectations and tolerances for cosmetic reconditioning standards — therefore, we focus on mechanical and safety issues for these vehicles, with less emphasis on cosmetic repair, in order to optimize reconditioning costs. This key component of our reconditioning process impacts our ability to grow profitably and is a primary factor in our decision to conduct reconditioning in-house. With a 60-mile test drive service radius from our hub to a customer’s home, each reconditioning facility is able to cover a large geographic range and service the surrounding metropolitan area. We plan to grow our reconditioning center network as we expand geographically and launch new markets.

 

Logistics Network

 

The primary component of our logistics network consists of intra-city concierge personnel and inter-city third-party carriers. Shift concierges are able to transport vehicles to and from customers, while providing a customer friendly white glove experience, including delivery, disposal, and at-home test drives. This provides the benefit of a seamless experience as well as an on-site sales support agent to guide the customer through the process. Our agreements with long distance haulers allow us to combine the nodes in our network and deliver vehicles between cities. Strategically, this provides customers with a broad set of inventory and a great speed of delivery.

 

Financing and Vehicle Protection Products

 

We generate revenue by earning no obligation referral fees for selling ancillary products to customers that purchase vehicles through the Shift platform. Since we earn fees for the financing and vehicle protection products we sell, also referred to as finance and insurance (“F&I”), our gross profit on these items is equal to the revenue we generate for the sale of those. Our current offering consists of financing from third-party lenders, guaranteed asset protection (“GAP”) waiver, and tire and wheel protection services. We plan to offer additional third-party products to provide a greater product offering to customers and expect these products to contribute to reaching our revenue and profitability targets.

 

 

2Includes MSA’s within 60 miles of Shift reconditioning facilities in San Francisco, Los Angeles, San Diego, and Sacramento.

 

  3 
 

 

Factors Affecting our Business Performance

 

Various trends and other factors have affected and may continue to affect our business, financial condition and operating results, including:

 

Deeper Market Penetration Within Our Existing Markets

 

We believe that there remains a large opportunity to capture additional market share within our existing service areas. We’ve proven our ability to command a strong market share through effective marketing channels, as demonstrated by our current market share in our most established cities in the San Francisco area, where we represent over 4% of the used car sales market.3 We believe that with effective brand marketing, we will be able to reach similar market penetration in our other geographic markets.

 

Expansion into New Markets

 

We believe that a phased, capital efficient, expansion model results in the most cost-effective new market launch strategy in the industry. Our approach to market expansion is to implement controlled launches to expand our existing service territory. This approach both bolsters our existing markets (with new inventory being acquired in nearby cities), while simultaneously providing the new market with the local talent and resources required for a successful launch.

 

Improvements in Technology Platform

 

We are constantly investing in our technology platform to improve both customer experience and our business performance. We regularly implement changes to our software to help customers find the right car for them, while the machine learning component of our inventory and pricing model ensures we get the right cars at the right price. As our algorithms evolve, we are able to better monetize our inventory of vehicles through better pricing, while simultaneously customers are much more likely to purchase a car on our website, thus driving higher demand and sales volume.

 

Improvements in Reconditioning Processes

 

We learned early on from our experience in the used car sales business that to be a reliable used car resource with desirable inventory for all customer types, we needed to control our own reconditioning processes. Our reconditioning program has constantly improved over the course of our history, and we are happy with what we have achieved. Each unit of our inventory is reconditioned with a focus on safety first, while optimizing for repairs that will have the highest return on investment (“ROI”). We believe that our network of reconditioning centers and connecting logistics routes have excess capacity, which we plan to utilize as we increase retail sales volumes. Increasing capacity utilization will positively affect Adjusted GPU by reducing per unit overhead costs. In the third quarter of 2020, due to hiring challenging in the COVID environment, our ability to grow our reconditioning teams could not keep pace with the consumer demand in the market, and we therefore outsourced the reconditioning process for select vehicles. While we believe we’ve seen the greatest impact of this need in the third quarter, we expect to continue to use third party reconditioning in the fourth quarter of 2020 and first half of 2021 as our technician hiring catches up to our throughput targets.

 

Growth in Other Revenue from Existing Revenue Streams

 

We have made great strides over the past two years developing our “other revenue” streams, which comprise the financing and vehicle protection products that we can offer on our digital financing platform, and other ancillary products. We have invested in the technology, as well as the sales team, to increase the likelihood that consumers will purchase ancillary products in connection with the sale of a vehicle, and we see more opportunity for additional revenue within our existing channels purely from further expansion of our attach rates for our entire financing and vehicle protection product suite.

 

 

3Represents Shift’s 2019 total unit sales for ZIP codes in which Shift currently operates from San Francisco, South San Francisco, Daly City and Brisbane, divided by the total 2019 used vehicle sales in the same area.

 

  4 
 

 

Growth in Other Revenue from Expansion of Product Offerings

 

We see great opportunity to further expand our other revenue streams through additional product offerings beyond the existing offerings on our platform. These incremental revenue streams will come in the form of on-boarding new lending partners to our existing loan program, as well as introducing entirely new financing and vehicle protection products to offer our customers. For example, in the first half of 2020, we added a tire and wheel protection program to our suite of product offerings. We intend to continue to grow this business segment to service every foreseeable need of our customers during the vehicle purchase process.

 

Seasonality

 

We expect our quarterly results of operations, including our revenue, gross profit, profitability, if any, and cash flow to vary significantly in the future, based in part on, among other things, consumers’ car buying patterns. We have typically experienced higher revenue growth rates in the second and third quarters of the calendar year than in each of the first or fourth quarters of the calendar year (2019 was an exception to these quarterly trends, as our inventory position was highest entering 2019, which resulted in higher volume for the first quarter 2019). We believe these results are due to seasonal buying patterns driven in part by the timing of income tax refunds, which we believe are an important source of car buyer down payments on used vehicle purchases. We believe that continued investments in growth, including effective marketing and new market entry, will allow us to maintain sales growth through seasonality, however we recognize that in the future our revenues may be affected by these seasonal trends as well as cyclical trends affecting the overall economy, specifically the automotive retail industry.

 

Impact of COVID-19

 

In March 2020, the World Health Organization declared a global pandemic related to the rapidly growing outbreak of a novel strain of coronavirus known as COVID-19, and in the following weeks, shelter-in-place ordinances were put into effect in regions where Shift operates. We saw a slowing of vehicle sales immediately following the shelter-in-place ordinances in March; however, within five weeks, we were back near our pre-COVID-19 weekly sales volumes. Although the ultimate impacts of COVID-19 remain uncertain, a recent survey 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 adoption more broadly as consumers seek to avoid physical retail locations. We believe that this global pandemic will push people to look to alternative means of personal transportation, and our product is well suited to provide customers with a safe, clean means of transportation, through our contactless purchase and delivery processes. Therefore, while it remains possible that sustained or deepened impact on consumer demand resulting from COVID-19 or the related economic recession could negatively impact Shift’s performance, we believe that Shift is well positioned to weather the pandemic.

 

Ultimately, the magnitude and duration of the impact to Shift’s operations is impossible to predict due to:

 

uncertainties regarding the duration of the COVID-19 pandemic and how long related disruptions will continue;

 

the impact of governmental orders and regulations that have been, and may in the future be, imposed;

 

the impact of COVID-19 wholesale auctions, state DMV titling and registration services and other third parties on which we rely; and

 

the deterioration of economic conditions in the United States, as well as record high unemployment levels, which could have an adverse impact on discretionary consumer spending.

 

  5 
 

 

Non-GAAP Financial Measures

 

To supplement the Condensed Consolidated Financial Statements, which are prepared and presented in accordance with GAAP, we present adjusted gross profit, described below, as a non-GAAP measure. We believe the presentation of both GAAP and non-GAAP financial measures provides investors with increased transparency into financial measures used by our management team, and it also improves investors’ understanding of our underlying operating performance and their ability to analyze our ongoing operating trends. All historic non-GAAP financial measures have been reconciled with the most directly comparable GAAP financial measures — these non-GAAP financial measures are not intended to supersede or replace our GAAP results.

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
   ($ in thousands)   ($ in thousands) 
Total gross profit:                
GAAP total gross profit  $3,726   $(852)  $10,641   $(1,048)
Warrant impact adjustment(1)   159    2,372    478    7,277 
Adjusted total gross profit  $3,885   $1,520   $11,119   $6,229 
                     
Ecommerce gross profit:                    
GAAP ecommerce gross profit  $1,606   $785   $4,518   $3,590 
Warrant impact adjustment(1)                
Adjusted ecommerce gross profit  $1,606   $785   $4,518   $3,590 
                     
Other gross profit:                    
GAAP other gross profit  $2,036   $954   $3,933   $2,627 
Warrant impact adjustment(1)   159    142    478    520 
Adjusted other gross profit  $2,195   $1,096   $4,411   $3,147 
                     
Wholesale gross profit:                    
GAAP wholesale gross profit  $84   $(2,591)  $2,190   $(7,265)
Warrant impact adjustment(1)       2,230        6,757 
Adjusted wholesale gross profit  $84   $(361)  $2,190   $(508)

 

 

(1)Elimination of non-cash contra revenue impacts associated with the Lithia warrant agreement. In the referenced warrant agreement, during 2019 Lithia vested in certain warrants to purchase shares of our common stock upon the achievement of various milestones. As discussed further in Note 7 to the Condensed Consolidated Financial Statements, we have determined that a portion of the value associated with warrant consideration paid to Lithia, as a customer of Shift, should be treated as contra-revenue by Shift following the revenue recognition accounting standards codification (“ASC”) topic 606.

 

Adjusted Gross Profit

 

Management evaluates our business based on an adjusted gross profit calculation that removes the financial impact associated with milestones achieved under our Lithia warrant arrangement, which resulted in reductions in gross profit in our Condensed Consolidated Financial Statements as applicable to the periods presented. This is a non-cash adjustment, and we do not expect any material future non-cash gross profit adjustments related to the Lithia warrant agreement. We examine adjusted gross profit in aggregate as well as for each of our revenue streams: ecommerce, other, and wholesale.

 

  6 
 

 

Key Operating Metrics

 

We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our progress and make strategic decisions. Our key operating metrics measure the key drivers of our growth, including opening new hubs, increasing our brand awareness through unique site visitors and continuing to offer a full spectrum of used vehicles to service all types of customers.

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
Units:                
Ecommerce units  2,946   2,181   6,189   6,847 
Wholesale units   1,100    838    2,280    2,354 
Total units sold   4,046    3,019    8,469    9,201 
                     
Ecommerce ASP  $16,458   $16,925   $15,814   $16,452 
Wholesale ASP  $8,538   $9,533   $8,993   $10,031 
                     
Gross Profit per Unit                    
Ecommerce Gross Profit per Unit  $545   $360   $730   $524 
Other Gross Profit per Unit  $691   $437   $635   $384 
Wholesale Gross Profit per Unit  $29   $(1,188)  $354   $(1,061)
Total Gross Profit per Unit  $1,265   $(391)  $1,719   $(153)
                     
Adjusted GPU                    
Ecommerce Adjusted GPU  $545   $360   $730   $524 
Other Adjusted GPU  $745   $502   $713   $460 
Wholesale Adjusted GPU  $29   $(165)  $354   $(74)
Total Adjusted GPU  $1,319   $697   $1,797   $910 
                     
Average monthly unique visitors   379,604    168,177    288,194    183,389 
Average days to sale   37    64    59    71 
Ecommerce vehicles available for sale   1,840    1,250    1,840    1,250 
# of regional hubs   5    5    5    5 

 

Ecommerce Units Sold

 

We define ecommerce units sold as the number of vehicles sold to customers in a given period, net of returns. We currently have a seven-day, 200 mile return policy. The number of ecommerce units sold is the primary driver of our revenues and, indirectly, gross profit, since ecommerce unit sales enable multiple complementary revenue streams, including all financing and protection products. We view ecommerce units sold as a key measure of our growth, as growth in this metric is an indicator of our ability to successfully scale our operations while maintaining product integrity and customer satisfaction.

 

Wholesale Units Sold

 

We define wholesale units sold as the number of vehicles sold through wholesale channels in a given period. While wholesale units are not the primary driver of revenue or gross profit, wholesale is a valuable channel as it allows us to be able to purchase vehicles regardless of condition, which is important for the purpose of accepting a trade-in from a customer making a vehicle purchase from us, and as an online destination for consumers to sell their cars even if not selling us a car that meetings our retail standards.

 

  7 
 

 

Ecommerce Average Sale Price

 

We define ecommerce average sale price (“ASP”) as the average price paid by a customer for an ecommerce vehicle, calculated as ecommerce revenue divided by ecommerce units. Ecommerce average sale price helps us gauge market demand in real-time and allows us to maintain a range of inventory that most accurately reflects the overall price spectrum of used vehicle sales in the market.

 

Wholesale Average Sale Price

 

We define wholesale average sale price as the average price paid by a customer for a wholesale vehicle, calculated as wholesale revenue divided by wholesale units. We believe this metric provides transparency and is comparable to our peers.

 

Gross Profit per Unit

 

We define gross profit per unit as the gross profit for ecommerce, other and wholesale each of which divided by the total number of ecommerce units sold in the period. We calculate gross profit as the revenue from vehicle sales and services less the costs associated with acquiring and reconditioning the vehicle prior to sale. Gross profit per unit is driven by ecommerce vehicle revenue, which generates additional revenue through attachment of our financing and protection products, and gross profit generated from wholesale vehicle sales. We present gross profit per unit from our three revenues streams, as Ecommerce gross profit per unit, Wholesale gross profit per unit and Other gross profit per unit.

 

Adjusted Gross Profit per Unit

 

We define adjusted gross profit per unit (“Adjusted GPU”) as the adjusted gross profit for ecommerce, other and wholesale, as described in “— Non-GAAP Financial Measures” above, each of which divided by the total number of ecommerce units sold in the period. Adjusted GPU is driven by ecommerce vehicle revenue, which generates additional revenue through attachment of our financing and protection products, and gross profit generated from wholesale vehicle sales. We present Adjusted GPU from our three revenues streams, as Ecommerce Adjusted GPU, Wholesale Adjusted GPU and Other Adjusted GPU. We believe Adjusted GPU is a key measure of our growth and long-term profitability.

 

Average Monthly Unique Visitors

 

We define a monthly unique visitor as an individual who has visited our website within a calendar month, based on data collected on our website. We calculate average monthly unique visitors as the sum of monthly unique visitors in a given period, divided by the number of months in that period. To classify whether a visitor is “unique”, we dedupe (a technique for eliminating duplicate copies of repeating data) each visitor based on email address and phone number, if available, and if not, we use the anonymous ID which lives in each user’s internet cookies. This practice ensures that we do not double-count individuals who visit our website multiple times within a month. We view average monthly unique visitors as a key indicator of the strength of our brand, the effectiveness of our advertising and merchandising campaigns and consumer awareness.

 

Average Days to Sale

 

We define average days to sale as the number of days between Shift’s acquisition of a vehicle and sale of that vehicle to a customer, averaged across all ecommerce units sold in a period. We view average days to sale as a useful metric in understanding the health of our inventory.

 

Ecommerce Vehicles Available for Sale

 

We define ecommerce vehicles available for sale as the number of ecommerce vehicles in inventory on the last day of a given reporting period. Until we reach an optimal pooled inventory level, we view ecommerce vehicles available for sale as a key measure of our growth. Growth in ecommerce vehicles available for sale increases the selection of vehicles available to consumers, which we believe will allow us to increase the number of vehicles we sell. Moreover, growth in ecommerce vehicles available for sale is an indicator of our ability to scale our vehicle purchasing, inspection and reconditioning operations.

 

Number of Regional Hubs

 

We define a Hub as a physical location at which we recondition and store units bought and sold within a market. Because of our omni-channel fulfillment model with our on-demand delivery test drive offering, we are able to service super-regional areas covering approximately a 60-mile radius from a single Hub location. This is a key metric as each Hub expands our service area as our service area, reconditioning and storage capacity.

 

  8 
 

 

Components of Results of Operations

 

Revenues

 

Ecommerce Vehicle Revenue

 

Shift sells used vehicles directly to its customers through our website. Revenue from used vehicle sales is recognized upon delivery to or pick-up by the customer. We recognize revenue at the total purchase price stated in the contract, including the Shift service fee, delivery charges, and other fees charged by Shift, net of discounts. Our return policy allows customers to initiate a return until the earlier of the first seven days or 200 miles after delivery. Revenue excludes any sales taxes and DMV registration fees that are collected from customers.

 

Other Revenue

 

We provide buyers on the platform with options for financing. All such services are provided by unrelated third-party vendors and we have agreements with each of these vendors giving us the right to offer such services on Shift’s Platform. When a buyer selects financing from these lenders, we earn a commission based on the actual price paid or financed. We also earn loan revenue through a margin on the lender interest rate. We recognize commission revenue at the time of sale, net of a reserve for estimated contract cancellations.

 

Customers purchasing used vehicles from us may also enter into contracts for vehicle service contracts, which we refer to as VSC, GAP waiver coverage, prepaid maintenance plans, and Appearance Protection Plans (“APP”). Shift sells and receives a commission on VSCs, GAP and prepaid maintenance plans, and APP’s under agreements with Ally Insurance Holdings, Automotive Warranty Services, Your Mechanic, and Dent Wizard pursuant to which we sell VSCs that the service provider(s) administer and serve as the obligor. We recognize commission revenue at the time of sale, net of a reserve for estimated contract cancellations. The reserve for cancellations is estimated based upon historical experience and recent trends and is reflected as a reduction of other revenues. We may add other sellers of APP’s besides those listed in the future. As part of the agreement with Lithia, there is some ongoing contra-revenue associated with the financing component of our other revenue streams.

 

Wholesale Vehicle Revenue

 

We sell vehicles through wholesale auctions. These vehicles are primarily acquired from customers who trade-in their existing vehicles that do not meet our quality standards to list and sell through our website. Revenue from wholesale vehicle sales is recognized when the vehicle is sold at auction or directly to a wholesaler.

 

In December 2018, we agreed to sell cars to Lithia Motors, Inc., under a “one-sided marketplace,” which we refer to as OSM, program whereby we acquire cars in the Oxnard, Salem and Fresno markets directly from consumers and sell directly and solely to Lithia. In July 2019, the Salem OSM was discontinued after we launched the Portland Hub. We recognize revenue at the agreed upon purchase price stated in the contract, plus charges such as repairs. As part of the agreement with Lithia, there is some ongoing contra-revenue associated with the OSM program.

 

Cost of Sales

 

Cost of sales includes the cost to acquire used vehicles and direct and indirect vehicle reconditioning costs associated with preparing the vehicles for resale. Vehicle reconditioning costs include parts, applied labor, unapplied labor, inbound transportation costs and other incremental costs, which are allocated to inventory via specific identification and standard costing. These costs include shipping costs of auction purchased vehicles, mechanical inspection, vehicle preparation supplies and services like initial wash and detail, and repair costs necessary for reconditioning the vehicle for resale. We have certain inventory that does not meet our specifications to sell to customers and dispose of this inventory through sales at auction, direct-to-wholesale or through other channels. Cost of sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value.

 

  9 
 

 

Gross Profit

 

Ecommerce Vehicle Gross Profit

 

Ecommerce vehicle gross profit is the vehicle sales price minus our costs of sales associated with vehicles that we list and sell on our website.

 

Other Gross Profit

 

Other sales and revenues consist of 100% gross margin products for which gross profit equals revenue. Therefore, changes in gross profit and the associated drivers are identical to changes in revenues from these products and the associated drivers.

 

Wholesale Vehicle Gross Profit

 

Wholesale vehicle gross profit is the vehicle sales price minus our cost of sales associated with vehicles we sell to wholesalers. Factors affecting wholesale gross profit include the number of wholesale units sold, the average wholesale selling price, and the mix in type of wholesale units sold (direct-to-wholesale units or ecommerce-to-wholesale units).

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses primarily include payroll and benefits other than those related to reconditioning vehicles, advertising, stock-based compensation expense, facilities costs, technology expenses and other administrative expenses.

 

Depreciation and Amortization

 

Depreciation is computed using the straight-line method over the estimated useful life of the related assets, which is between 2 – 5 years. Leasehold improvements are depreciated over the lesser of the useful life or lease term. Major replacements and improvements are capitalized, while general repairs and maintenance are expensed as incurred.

 

Non-Operating Expenses

 

Interest expense

 

Interest expense consists of the amortization of the fair value of the deferred borrowing costs, and the guarantee of the flooring line of credit facility by Lithia.

 

Interest income and other income (expense)

 

Interest income and other income (expense) primarily represents interest earned on cash deposits and the remeasurement loss on the warrant liability.

 

Net Loss and Comprehensive Loss

 

Net loss and comprehensive loss is determined by subtracting operating and non-operating expenses from revenues.

 

  10 
 

 

Results of Operations

 

The following table presents our consolidated statements of operations and comprehensive loss for the periods indicated:

 

   Three Months Ended September 30,  

Nine Months Ended

September 30,

 
   2020   2019   2020   2019 
   (unaudited,
$ in thousands)
   (unaudited,
$ in thousands)
 
Revenue                
Ecommerce vehicle revenue, net  $48,486   $36,914   $97,870   $112,645 
Other revenue   2,036    954    3,933    2,627 
Wholesale vehicle revenue   9,392    7,989    20,504    23,612 
Total revenue   59,914    45,857    122,307    138,884 
Cost of sales   56,188    46,709    111,666    139,932 
Gross profit   3,726    (852)   10,641    (1,048)
Operating expenses:                    
Selling, general and administrative
expenses
   24,030    16,204    52,109    54,236 
Depreciation and amortization   1,181    888    3,258    2,184 
Total operating expenses   25,211    17,092    55,367    56,420 
Loss from operations   (21,485)   (17,944)   (44,726)   (57,468)
Interest expense   (1,256)   (1,463)   (3,901)   (4,136)
Interest income and other income (expense)   (579)   427    (6,017)   1,642 
Net loss and comprehensive loss attributable to common stockholders  $(23,320)  $(18,980)  $(54,644)  $(59,962)

 

  11 
 

 

Presentation of Results of Operations

 

We present operating results down to gross profit from three distinct revenue channels:

 

Ecommerce Vehicles: The ecommerce channel within our Retail segment represents sales of used vehicles directly to our customers through our website.

 

Other: The other channel within our Retail segment represents fees earned on sales of value-added products associated with the sale of ecommerce vehicles.

 

Wholesale Vehicles: The Wholesale channel is the only component of our Wholesale segment and represents sales of used vehicles through wholesale auctions.

 

Three Months Ended September 30, 2020 and 2019

 

The following table presents certain information from our condensed statements of operations by channel for the periods indicated:

 

   Three Months Ended
September 30,
 
   2020   2019   Change 
   ($ in thousands, except per unit metrics) 
Revenue:            
Ecommerce vehicle revenue, net  $48,486   $36,914    31.3%
Other revenue   2,036    954    113.4%
Wholesale vehicle revenue   9,392    7,989    17.6%
Total revenue  $59,914   $45,857    30.7%
                
Cost of sales:               
Ecommerce vehicle cost of sales  $46,880   $36,129    29.8%
Wholesale vehicle cost of sales   9,308    10,580    (12.0)%
Total cost of sales  $56,188   $46,709    20.3%
                
Gross profit:               
Ecommerce vehicle gross profit  $1,606   $785    104.6%
Other gross profit   2,036    954    113.4%
Wholesale vehicle gross profit   84    (2,591)   103.3%
Total gross profit  $3,726   $(852)   537.6%
                
Adjusted gross profit:               
Ecommerce vehicle adjusted gross profit  $1,606   $785    104.6%
Other adjusted gross profit   2,195    1,096    100.4%
Wholesale vehicle adjusted gross profit   84    (361)   123.3%
Total adjusted gross profit  $3,885   $1,520    155.6%

 

  12 
 

 

   Three Months Ended
September 30,
 
   2020   2019   Change 
   ($ in thousands, except per unit metrics) 
Unit sales information:               
Ecommerce vehicle unit sales   2,946    2,181    35.1%
Wholesale vehicles unit sales   1,100    838    31.3%
                
Average selling prices per unit (“ASP”):               
Ecommerce vehicles  $16,458   $16,925    (2.8)%
Wholesale vehicles  $8,538   $9,533    (10.4)%
                
Gross profit per unit(1):               
Ecommerce gross profit per unit  $545   $360    51.5%
Other gross profit per unit  $691   $437    58.0%
Wholesale gross profit per unit  $29   $(1,188)   102.4%
Total gross profit per unit  $1,265   $(391)   423.8%
                
Adjusted gross profit per unit (Adjusted GPU)(2):               
Ecommerce Adjusted GPU  $545   $360    51.5%
Other Adjusted GPU  $745   $502    48.3%
Wholesale Adjusted GPU  $29   $(165)   117.2%
Total Adjusted GPU  $1,319   $697    89.2%

 

(1)Gross profit per unit is calculated as gross profit for ecommerce, other and wholesale, each of which divided by the total number of ecommerce units sold in the period.

 

(2)Adjusted GPU is calculated as adjusted gross profit for ecommerce, other and wholesale, as described in “— Non-GAAP Financial Measures” above, each of which divided by the total number of ecommerce units sold in the period. A reconciliation for Adjusted GPU to the nearest comparable GAAP metric (gross profit per unit) can be found in the table below:

 

   Three Months Ended 
   September 30, 
   2020   2019 
   ($ per ecommerce unit) 
Total gross profit per unit:        
GAAP total gross profit per unit  $1,265   $(391)
Warrant impact adjustment per unit   54    1,088 
Adjusted total gross profit per unit  $1,319   $697 
           
Ecommerce gross profit per unit:          
GAAP ecommerce gross profit per unit  $545   $360 
Warrant impact adjustment per unit        
Adjusted ecommerce gross profit per unit  $545   $360 
           
Other gross profit per unit:          
GAAP other gross profit per unit  $691   $437 
Warrant impact adjustment per unit   54    65 
Adjusted other gross profit per unit  $745   $502 
           
Wholesale gross profit per unit:          
GAAP wholesale gross profit per unit  $29   $(1,188)
Warrant impact adjustment per unit       1,023 
Adjusted wholesale gross profit per unit  $29   $(165)

 

  13 
 

 

Ecommerce Vehicle Revenue, Net

 

Ecommerce vehicle revenue increased by $11.6 million, or 31.3%, to $48.5 million during the three months ended September 30, 2020, from $36.9 million in the comparable period in 2019. This increase was primarily driven by an increase in ecommerce unit sales as we sold 2,946 ecommerce vehicles in the three months ended September 30, 2020, compared to 2,181 ecommerce vehicles in the three months ended September 30, 2019. The increase in ecommerce vehicle revenue was slightly offset by a decrease in ecommerce ASP, which was $16,458 for the three months ended September 30, 2020, compared to $16,925 for the three months ended September 30, 2019. This decrease in ecommerce ASP was a result of increased demand for lower cost vehicles in the recent economic downturn.

 

Other Revenue

 

Other revenue increased by $1.1 million, or 113.4%, to $2.0 million during the three months ended September 30, 2020, from $1.0 million in the comparable period in 2019. This increase was primarily due to strategic investments to enhance our high-quality ancillary products to better monetize our unit sales.

 

Wholesale Vehicle Revenue

 

Wholesale vehicle revenue increased by $1.4 million, or 17.6%, to $9.4 million during the three months ended September 30, 2020, from $8.0 million in the comparable period in 2019. The increase was primarily due to an increase in wholesale unit sales as we sold 1,100 wholesale vehicles in the three months ended September 30, 2020, compared to 838 wholesale vehicles in the three months ended September 30, 2019. This increase in volume was partially offset by a 10.4% decrease in ASP that resulted from the recent economic downturn.

 

Cost of Sales

 

Cost of sales increased by $9.5 million, or 20.3%, to $56.2 million during the three months ended September 30, 2020, from $46.7 million in the comparable period in 2019. The increase was primarily due to an increase in unit sales as we sold 4,046 total vehicles in the three months ended September 30, 2020, compared to 3,019 total vehicles in the three months ended September 30, 2019. As a percentage of revenue, cost of sales decreased from 102% in the third quarter of 2019 to 94% in the third quarter of 2020.

 

Ecommerce Vehicle Gross Profit

 

Ecommerce vehicle gross profit increased by $0.8 million, or 104.6%, to $1.6 million during the three months ended September 30, 2020, from $0.8 million in the comparable period in 2019. The increase was primarily driven by an increase in ecommerce units sold, as described in “Ecommerce Vehicle Revenue, Net” above. The increase in ecommerce vehicle gross profit was also driven by an increase in ecommerce gross profit per unit, which grew to $545 per unit for the three months ended September 30, 2020, from $360 per unit in the comparable period in 2019. This increase in ecommerce gross profit per unit was largely driven by operational and technological improvements made to rationalize inventory and improve our vehicle sourcing.

 

  14 
 

 

Other Gross Profit

 

Other gross profit per unit and Adjusted GPU increased to $691 and $745 per unit, respectively, during the three months ended September 30, 2020, from $437 and $502 per unit, respectively, in the comparable period in 2019. Other revenue consists of 100% gross margin products for which gross profit equals revenue. Therefore, changes in other gross profit and the associated drivers are identical to changes in other revenue and the associated drivers.

 

Wholesale Vehicle Gross Profit

 

Wholesale vehicle gross profit increased by $2.7 million, or 103.3%, to $0.1 million during the three months ended September 30, 2020, from a loss of $2.6 million in the comparable period in 2019. The increase was primarily driven by an increase in wholesale gross profit per unit and Adjusted GPU, which both grew to $29 per unit for the three months ended September 30, 2020, from a loss of $1,188 gross profit per unit and a loss of $165 Adjusted GPU in the comparable period in 2019. This increase was driven by improvements made to our inventory management which has resulted in fewer ecommerce-to-wholesale incidents where cars we purchased with the intention of selling through our retail segment, end up being sold through wholesale channels, which typically result in a loss on that unit.

 

Components of SG&A

 

   Three Months Ended September 30, 
   2020   2019   Change 
   ($ in thousands) 
Compensation and benefits(1)  $8,700   $8,257    5.4%
Marketing expense   7,666    1,625    371.8%
Other costs(2)   7,664    6,322    21.2%
Total selling, general and administrative expenses  $24,030   $16,204    48.3%

 

(1)Compensation and benefits includes all payroll and related costs, including benefits, payroll taxes and equity-based compensation, except those related to preparing vehicles for sale, which are included in cost of sales, those related to the development of software products for internal use, which are capitalized to software and depreciated over the estimated useful lives of the related assets.

 

(2)Other costs include all other selling, general and administrative expenses such as hub operating costs, vehicle shipping costs for internal purposes, corporate occupancy, professional services, registration and licensing, and IT expenses.

 

Selling, general and administrative expenses increased by $7.8 million, or 48.3%, to $24.0 million during the three months ended September 30, 2020, from $16.2 million in the comparable period in 2019. The increase was primarily due to the increase in marketing expense of $6.0 million, as a result of our initiative to drive unit sales growth by investing in brand marketing. The $6.0 million increase in marketing spend included $3.2 million of branding and brand awareness, and an increase of $2.8 million in buyer and seller marketing, from $1.5 million in the third quarter of 2019 to $4.3 million in the third quarter of 2020. Selling, general and administrative expenses were also impacted primarily due to higher expenses associated with becoming a public company.

 

  15 
 

 

Nine Months Ended September 30, 2020 and 2019

 

The following table presents our condensed statements of operations by channel for the periods indicated:

 

   Nine Months Ended
September 30,
 
   2020   2019   Change 
   ($ in thousands, except per unit metrics) 
Revenue:            
Ecommerce vehicle revenue, net   $97,870   $112,645    (13.1)%
Other revenue    3,933    2,627    49.7%
Wholesale vehicle revenue    20,504    23,612    (13.2)%
Total revenue   $122,307   $138,884    (11.9)%
                
Cost of sales:                
Ecommerce vehicle cost of sales   $93,352   $109,055    (14.4)%
Wholesale vehicle cost of sales    18,314    30,877    (40.7)%
Total cost of sales   $111,666   $139,932    (20.2)%
                
Gross profit:                
Ecommerce vehicle gross profit   $4,518   $3,590    25.8%
Other gross profit    3,933    2,627    49.7%
Wholesale vehicle gross profit    2,190    (7,265)   130.1%
Total gross profit   $10,641   $(1,048)   1115.4%
                
Adjusted gross profit:                
Ecommerce vehicle adjusted gross profit   $4,518   $3,590    25.8%
Other adjusted gross profit    4,411    3,147    40.2%
Wholesale vehicle adjusted gross profit    2,190    (508)   531.5%
Total adjusted gross profit   $11,119   $6,229    78.5%
                
Unit sales information:                
Ecommerce vehicle unit sales    6,189    6,847    (9.6)%
Wholesale vehicles unit sales    2,280    2,354    (3.1)%
                
Average selling prices per unit (“ASP”):                
Ecommerce vehicles   $15,814   $16,452    (3.9)%
Wholesale vehicles   $8,993   $10,031    (10.3)%
                
Gross profit per unit(1):                 
Ecommerce gross profit per unit   $730   $524    39.2%
Other gross profit per unit   $635   $384    65.6%
Wholesale gross profit per unit   $354   $(1,061)   133.3%
Total gross profit per unit   $1,719   $(153)   1223.3%
                
Adjusted gross profit per unit (Adjusted GPU)(2):                 
Ecommerce Adjusted GPU   $730   $524    39.2%
Other Adjusted GPU   $713   $460    55.1%
Wholesale Adjusted GPU   $354   $(74)   577.3%
Total Adjusted GPU   $1,797   $910    97. 5% 

 

 

(1)Gross profit per unit is calculated as gross profit for ecommerce, other and wholesale, each of which divided by the total number of ecommerce units sold in the period

 

  16 
 

 

(2)Adjusted GPU is calculated as adjusted gross profit for ecommerce, other and wholesale, as described in “— Non-GAAP Financial Measures” above, each of which divided by the total number of ecommerce units sold in the period. A reconciliation for Adjusted GPU to the nearest comparable GAAP metric (gross profit per unit) can be found in the table below:

 

   Nine Months Ended 
   September 30, 
   2020   2019 
   ($ per ecommerce unit) 
Total gross profit per unit:          
GAAP total gross profit per unit  $1,719   $(153)
Warrant impact adjustment per unit   78    1,063 
Adjusted total gross profit per unit  $1,797   $910 
           
Ecommerce gross profit per unit:          
GAAP ecommerce gross profit per unit  $730   $524 
Warrant impact adjustment per unit        
Adjusted ecommerce gross profit per unit  $730   $524 
           
Other gross profit per unit:          
GAAP other gross profit per unit  $635   $384 
Warrant impact adjustment per unit   78    76 
Adjusted other gross profit per unit  $713   $460 
           
Wholesale gross profit per unit:          
GAAP wholesale gross profit per unit  $354   $(1,061)
Warrant impact adjustment per unit       987 
Adjusted wholesale gross profit per unit  $354   $(74)

 

Ecommerce Vehicle Revenue

 

Ecommerce vehicle revenue decreased by $14.8 million, or 13.1%, to $97.9 million during the nine months ended September 30, 2020, from $112.6 million in the comparable period in 2019. This decrease was primarily driven by a decrease in ecommerce unit sales as we sold 6,189 ecommerce vehicles in the nine months ended September 30, 2020, compared to 6,847 ecommerce vehicles in the nine months ended September 30, 2019. The decrease in ecommerce unit sales was primarily driven as a result of lower inventory position and the impact of COVID 19 and the related shelter-in-place orders. We entered 2020 with 1,152 ecommerce units available for sale, compared to 2,655 ecommerce units available for sale entering 2019. The lower inventory position was a result of our 2019 business strategy to focus on improving unit economics, rather than growing unit sales volume. Additionally, the shelter-in-place ordinances as a result of the COVID-19 pandemic also initially resulted in lower buyer and seller activity, but soon rebounded as we saw weekly sales volumes return to pre-COVID levels five weeks following the ordinances.

 

  17 
 

 

Another driver of the decrease in ecommerce vehicle revenue was the lower ecommerce ASP, which was $15,814 for the nine months ended September 30, 2020, compared to $16,452 for the nine months ended September 30, 2019. This decrease in ecommerce ASP was a result of increased demand for lower cost vehicles, as well as a tighter pricing environment immediately following the COVID-19 shelter-in-place ordinances

 

Other Revenue

 

Other revenue increased by $1.3 million, or 49.7%, to $3.9 million during the nine months ended September 30, 2020, from $2.6 million in the comparable period in 2019. This increase was primarily due to improved sales of our finance and insurance product offerings by investing in our lending partnerships, sales teams and technology platform .

 

Wholesale Vehicle Revenue

 

Wholesale vehicle revenue decreased by $3.1 million, or 13.2%, to $20.5 million during the nine months ended September 30, 2020, from $23.6 million in the comparable period in 2019. The decrease was primarily due to a decrease in unit sales as we sold 2,280 wholesale vehicles in the nine months ended September 30, 2020, compared to 2,354 wholesale vehicles in the nine months ended September 30, 2019. As was the case for our decrease in ecommerce vehicle unit sales during these periods, the primary driver of this decrease in our wholesale vehicle unit sales was a result of the lower inventory position, as well as slowdown in wholesale auctions immediately following the COVID-19 shelter-in-place ordinances.

 

Cost of Sales

 

Cost of sales decreased by $28.2 million, or 20.2%, to $111.7 million during the nine months ended September 30, 2020, from $139.9 million in the comparable period in 2019. The decrease was primarily due to a decrease in unit sales as we sold 8,469 total vehicles in the nine months ended September 30, 2020, compared to 9,201 total vehicles in the nine months ended September 30, 2019. As a percentage of sales, cost of sales decreased from 101% in the first three quarters of 2019 to 91% in the first three quarters of 2020.

 

Ecommerce Vehicle Gross Profit

 

Ecommerce vehicle gross profit increased by $928 thousand, or 3.8%, to $4.5 million during the nine months ended September 30, 2020, from $3.6 million in the comparable period in 2019. The increase was primarily driven by an increase in ecommerce gross profit per unit, which grew to $730 per unit for the nine months ended September 30, 2020, from $524 per unit in the comparable period in 2019. This increase in ecommerce gross profit per unit was driven by improvements made to our pricing and inventory management strategy and focus on unit economics into 2020.

 

Other Gross Profit

 

Other gross profit per unit and other Adjusted GPU increased to $635 and $713 per unit, respectively, during the nine months ended September 30, 2020, from $384 and $460 per unit, respectively, in the comparable period in 2019. Other revenue consists of 100% gross margin products for which gross profit equals revenue. Therefore, changes in other gross profit and the associated drivers are identical to changes in other revenue and the associated drivers.

 

Wholesale Vehicle Gross Profit

 

Wholesale vehicle gross profit increased by $2.7 million, or 531.5%, to $2.2 million during the nine months ended September 30, 2020, from a loss of $0.5 million in the comparable period in 2019. The increase was primarily driven by an increase in wholesale gross profit per unit and Adjusted GPU, which grew to $354 per unit for the nine months ended September 30, 2020, from a loss of $1,061 and $74 per unit, respectively, in the comparable period in 2019. This increase was driven by improvements made to our inventory management which has resulted in fewer ecommerce-to-wholesale incidents where cars we purchased with the intention of selling through our retail segment, end up being sold through wholesale channels, which typically result in a loss on that unit.

 

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Components of SG&A

 

   Nine Months Ended September 30, 
   2020   2019   Change 
   ($ in thousands)     
Compensation and benefits(1)  $22,021   $26,563    (17.1)%
Marketing expense   12,373    5,257    135.4%
Other costs(2)   17,714    22,416    (21.0)%
Total selling, general and administrative expenses  $52,108   $54,236    (3.9)%

 

 

(1)Compensation and benefits includes all payroll and related costs, including benefits, payroll taxes and equity-based compensation, except those related to preparing vehicles for sale, which are included in cost of sales, those related to the development of software products for internal use, which are capitalized to software and depreciated over the estimated useful lives of the related assets.

 

(2)Other costs include all other selling, general and administrative expenses such as hub operating costs, vehicle shipping costs for internal purposes, corporate occupancy, professional services, registration and licensing, and IT expenses.

 

Selling, general and administrative expenses decreased by $2.1 million, or 3.9%, to $52.1 million during the nine months ended September 30, 2020, from $54.2 million in the comparable period in 2019. The decrease was primarily due to the decrease in compensation and benefits costs of $4.5 million, as a result of our initiative to optimize the corporate teams and other costs of $4.7 million, primarily driven by the expense effects of the Lithia agreement incurred in 2019. Refer to Note 5 in the “Notes to Condensed Consolidated Financial Statements” for additional information. The decrease is partially offset by the increase in marketing expenses of $7.1 million, driven by our initiative to drive unit sales growth by investing in brand marketing, and by higher expenses associated with becoming a public company.

 

Liquidity and Capital Resources

 

Sources of liquidity

 

Our main source of liquidity is cash generated from financing activities. Cash generated from financing activities through September 30, 2020 primarily includes proceeds from the sale of Convertible Preferred Stock (see Note 5 — Stockholders’ Equity in our annual consolidated financial statements), proceeds from our flooring line of credit facility with U.S. Bank in 2020, 2019 and 2018, which we refer to as the FLOC, and proceeds from the Delayed Draw Term Loan, which we refer to as the DDTL, with Lithia in 2019 and 2020. Refer to Note 7 —Related Party Transactions in our Condensed Consolidated Financial Statements for additional information.

 

On June 29, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) among the Company and Insurance Acquisition Corp., (“IAC”), an entity listed on the Nasdaq Capital Market under the trade symbol “INSU”, IAC Merger Sub, Inc., a Delaware corporation and direct wholly owned subsidiary of IAC (“Merger Sub”), providing for, among other things, and subject to the conditions therein, the combination of the Company and IAC pursuant to the proposed merger of Merger Sub with and into the Company with the Company continuing as the surviving entity (the “Merger”).

 

On October 13, 2020, Shift and INSU consummated the Merger, in connection with which the combined public company received approximately $302 million, net of fees and expenses. See Note 12 Subsequent Events in the Notes to Condensed Consolidated Financial Statements for additional details regarding this transaction. This capital will not only contribute to our long-term growth goals but we expect this funding to extend our expected liquidity.

 

  19 
 

 

Since inception, the Company has generated recurring losses which has resulted in an accumulated deficit of $269.9 million as of September 30, 2020. Further, during the nine months ended September 30, 2020, the Company had negative operating cash flows of $45.9 million. In the future, we may attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by incurring indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors. Due to the economic uncertainty caused by the novel coronavirus pandemic, the debt and equity markets have become less predictable and obtaining financing on favorable terms and at favorable rates has become more difficult.

 

Debt obligations

 

In early September 2018, we entered into a Senior Secured Convertible Promissory Note Agreement (“Lithia Note”) with Lithia with a principal sum of $20.0 million and received the related proceeds thereon (see Note 7 — Stockholders’ Equity in our Condensed Consolidated Financial Statements). The Lithia Note was subsequently converted into Series D Convertible Preferred Stock pursuant to its terms in September 2018.

 

In September 2018, we entered into the DDTL with Lithia as lender with a principal sum of $25.0 million, available to be drawn in two tranches of $12.5 million each starting December 2019. In December 2019, we received the first installment of $12.5 million and drew the second $12.5 million tranche in July 2020. The DDTL is secured by all assets of Shift. On November 10, 2020, the full amount of the DDTL was repaid using proceeds of the Merger.

 

In October 2018, we entered into the FLOC with US Bank as a lender, with the proceeds from such arrangement available on a revolving basis to finance the purchase of vehicles, up to 80% of total value. The facility initially allows for a $30.0 million commitment of advances, whereby we may borrow, prepay, repay and reborrow the advances. We may request a one-time increase in the commitment by an amount equal to $20.0 million, provided that certain conditions in the facility agreement are met. Shift’s obligations under the FLOC are backed by a guarantee provided by Lithia. The FLOC is secured by all assets of Shift.

 

As of September 30, 2020, we had total outstanding debt of $20.5 million under the Floorplan Facility and $25.0 million under the DDTL. Over the course of 2020, our weighted average interest rate on our Floorplan Facility and our Long-Term Debt was 3.6%.

 

In April 2020, we received loans with a current total outstanding amount of approximately $6.1 million from the Small Business Administration under the Paycheck Protection Program (the “PPP Loans”) to help us keep our workforce employed and avoid further headcount reduction during the COVID-19 crisis. The full amount of the PPP Loans was repaid in connection with the closing of the Merger in October 2020.

 

Cash Flows Nine Months Ended September 30, 2020 and 2019

 

The following table summarizes our cash flows for the periods indicated:

 

   Nine Months Ended
September 30,
 
   2020   2019 
   ($ in thousands) 
Cash Flow Data:          
Net cash used in operating activities  $(45,940)  $(18,860)
Net cash used in investing activities   (3,264)   (4,799)
Net cash (used in) provided by financing activities   24,599    (1,440)

 

  20 
 

 

Operating Activities

 

For the nine months ended September 30, 2020, net cash used in operating activities was $45.9 million, primarily driven by net loss of $54.6 million adjusted for non-cash charges of $15.01 million and net changes in our operating assets and liabilities of $6.3 million. The non-cash adjustments primarily relate to share-based compensation, including warrant remeasurements, of $7.7 million, amortization of debt discounts associated with loan guarantees and delayed draw term loan of $3.3 million, and depreciation and amortization expense of $3.3 million. The changes in operating assets and liabilities are primarily driven by a $15.3 million increase in inventory and a $6.1 million increase in accounts receivable partially offset by an increase in accrued expenses and other current liabilities of $7.9 million, and an increase in accounts payable of $7.5 million.

 

For the nine months ended September 30, 2019, net cash used in operating activities was $18.9 million, primarily driven by net loss of $60.0 million adjusted for non-cash charges of $21.2 million and net changes in operating assets and liabilities of $19.9 million. The non-cash adjustments primarily relate to the contra-revenue associated with milestones of $7.3 million, compensation expense from an exchange of stock of $4.8 million, non-cash expense upon milestone achievement of $2.9 million, amortization of debt discounts associated with loan guarantees, delayed draws, growth capital, and other debt of $3.1 million, depreciation and amortization expense of $2.2 million, and share-based compensation, including warrant remeasurements, of $0.9 million. The changes in operating assets and liabilities are primarily driven by a decrease in inventory of $20.7 million.     

 

Investing Activities

 

For the nine months ended September 30, 2020, net cash used in investing activities of $3.3 million was primarily driven by the capitalization of website and internal-use software costs.

 

For the nine months ended September 30, 2019, net cash used in investing activities of $4.8 million was primarily driven by the capitalization of website and internal-use software costs.

 

Financing Activities

 

For the nine months ended September 30, 2020, net cash provided by financing activities was $24.6 million, primarily due to proceeds from the Delayed Draw Term Loan of $12.5 million, the SBA PPP loans of $6.1 million and net borrowings on the flooring line of credit of $4.3 million.

 

For the nine months ended September 30, 2019, net cash used in financing activities was $1.4 million, primarily due to net repayment on the flooring line of credit of $7.2 million, partially offset by proceeds from the issuance of convertible stock of $5.8 million.

 

Contractual Obligations

 

The following table includes aggregated information about contractual obligations that affect our liquidity and capital needs. At December 31, 2019, our contractual obligations were as follows:

 

   Payments Due by Period 
   Total   Less than
1 Year
   1-3 Years   3-5 Years   More than
5 years
 
   ($ in thousands) 
Operating lease obligations  $13,948   $5,370   $5,753   $2,825   $ 
Debt, principal and interest   24,750    16,245    8,505         
Total  $38,698   $21,615   $14,258   $2,825   $ 

 

On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The CARES Act includes a provision for the Paycheck Protection Program, or PPP, loans administered by the U.S. Small Business Administration. In April 2020, we entered into promissory notes as part of PPP, the currently total outstanding amount of which is approximately $6.1 million, the future principal and interest payments of which are not included in the above table. The loans bear interest at a 1.0% annual rate. The loans were repaid in full in connection with the closing of the Merger.

 

  21 
 

 

As of September 30, 2020, the Company reported a liability for vehicles acquired under OEM program of $5.3 million. The Company records inventory received under the arrangement with the OEM equal to the amount of the liability due to the OEM to acquire such vehicles. The liability due to the OEM provider for such acquired vehicles is equal to the OEM’s original acquisition price plus 50% of excess estimated sales price over this original acquisition price.

 

Off-Balance Sheet Arrangements

 

We are not a party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interests, certain derivative instruments and variable interest entities that either have, or are reasonably likely to have, a current or future material effect on our Condensed Consolidated Financial Statements.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect amounts reported in our condensed consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.

 

Critical accounting policies are those policies that management believes are very important to the portrayal of our financial position and results of operations, and that require management to make estimates that are difficult, subjective or otherwise complex. Based on these criteria, management has identified the following critical accounting policies:

 

Revenue

 

We recognize revenue upon transfer of control of goods or services to customers, in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Control passes to the customer at the time of delivery or pick-up. We may collect sales taxes and other taxes from customers on behalf of governmental authorities at the time of sale as required. These taxes are accounted for on a net basis and are not included in revenues or cost of sales.

 

We have determined that a portion of the value associated with warrant consideration paid to Lithia, as a customer of Shift, should be treated as contra-revenue by Shift following ASC topic 606.

 

We recognize revenue at a point in time as described below.

 

Ecommerce Vehicle Revenue

 

We sell used vehicles to retail customers through the platform. The transaction price for used vehicles is a fixed amount as set forth in the customer contract. Customers frequently trade-in their existing vehicle to apply toward the transaction price of a used vehicle. Trade-in vehicles represent non-cash consideration which we measure at stated contract price for each specific vehicle. We satisfy our performance obligation and recognize revenue for ecommerce vehicle revenue at a point in time when the vehicles are delivered to or picked up by the customer. The revenue recognized by Shift includes the transaction price, including any service fees. Revenue excludes any sales taxes, title and registration fees, and other government fees that are collected from customers.

 

We receive payment for vehicle sales directly from the customer at the time of sale or, if the customer uses financing, from third-party financial institutions within a short period of time following the sale if the customer obtains financing. For any payments received prior to the delivery or pick-up of used vehicles, these transactions are recorded within the condensed consolidated balance sheets until delivery or pick-up.

 

Our return policy allows customers to initiate a return during the first seven days or 200 miles after delivery. Ecommerce vehicle revenue is recognized net of a reserve for returns, which is estimated using historical experience and trends. The returns reserve was immaterial at September 30, 2020, and December 31, 2019.

 

  22 
 

 

Other Revenue

 

We provide buyers on our platform with options for financing and vehicle protection products. All such services are provided by unrelated third-party vendors and we have agreements with each of these vendors giving us the right to offer such services on its platform. When a buyer selects a service from these providers, we earn a commission based on the actual price paid/financed. We concluded that we are an agent for these transactions because we do not control the products before they are transferred to the customer. Accordingly, we recognize commission revenue at the time of sale.

 

Wholesale Vehicle Revenue

 

We sell vehicles through wholesale auctions. These vehicles sold to wholesalers are primarily acquired from customers who trade-in their existing vehicles and such vehicles do not meet our quality standards to list and sell through our website. We satisfy our performance obligation and recognize revenue for wholesale vehicle revenue at a point in time when the vehicle is sold at auction or directly to a wholesaler. The transaction price is typically due and collected within one week of the date of the sale.

 

In December 2018, we agreed to sell cars to Lithia Motors, Inc., under an OSM program whereby we acquire cars primarily from consumers in the Oxnard, Salem and Fresno markets and re-sell them to Lithia. In July 2019, the Salem OSM was discontinued due to coverage overlap with the Shift Portland Hub. We recognize revenue at the agreed upon purchase price stated in the contract, plus charges such as repairs. Payment is normally made within two weeks of delivery.

 

Revenue Recognition Prior to the Adoption of ASC 606

 

Prior to the adoption of ASC 606, the Company recognized revenue when all of the following criteria were met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectability is probable.

 

Revenue from used vehicle sales is recognized upon delivery, when the sales contract is signed and the purchase price had been received or financing had been arranged. Used vehicle revenue is recognized net of a reserve for returns, which is estimated using historical experience and trends. Revenue from wholesale vehicle sales is recognized when the vehicle is sold at auction or directly to a wholesaler. For other revenue, the Company evaluates whether it is appropriate to record the gross amount of sales and related costs or the net amount earned as commissions. The Company generally records the net amounts as commissions earned if we are not primarily obligated and do not have latitude in establishing prices. Such amounts are determined using a fixed percentage, a fixed-payment schedule, or a combination or the two.

 

Contract Costs

 

We elected, as a practical expedient, to expense sales commissions when incurred because the amortization period would have been less than one year. These costs are recorded within selling general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss.

 

Valuation of Inventory

 

Inventory consists of used vehicles, primarily acquired through auction and individual sellers, as well as some vehicles sourced locally through the trade-in program of an OEM. Inventory is stated at the lower of cost or net realizable value. Acquisition costs, vehicle reconditioning costs include parts, applied labor, unapplied labor, inbound transportation costs and other incremental costs, which are allocated to inventory via specific identification and standard costing. Inventory cost is determined by specific identification. Net realizable value is based on the estimated selling price derived from historical data and trends, such as sales price and average days to sale of similar vehicles, as well as independent, market resources less costs to complete, dispose and transport the vehicles. To the extent that there are significant changes to estimated vehicle selling prices or decreases in demand for used vehicles, there could be significant adjustments to reflect our inventory at net realizable value.

 

  23 
 

 

Determination of the Fair Value of Common Stock

 

As there has been no public market for our common stock to date, the estimated fair value of our common stock has been determined by our board of directors as of the date of each option grant with input from management, considering our most recently available third-party valuations of common stock, and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

 

The assumptions underlying these valuations were highly complex and subjective and represented management’s best estimates, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could be materially different.

 

Once a public trading market for our common stock has been established in connection with the completion of this offering, it will no longer be necessary for our board of directors to estimate the fair value of our common stock in connection with our accounting for granted stock options and other such awards we may grant, as the fair value of our common stock will be determined based on the quoted market price of our common stock.

 

Income Taxes

 

We account for income taxes using the asset and liability method. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

 

In evaluating the ability to recover our deferred income tax assets, we consider all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. In the event we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance that would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period when such determination is made. As of September 30, 2020, and December 31, 2019, respectively, we recorded a full valuation allowance on our deferred tax assets.

 

Tax benefits related to uncertain tax positions are recognized when it is more likely than not that a tax position will be sustained during an audit. Interest and penalties related to unrecognized tax benefits are included within the provision for income tax.

 

Stock-Based Compensation Expense

 

We classify stock-based awards granted in exchange for services as either equity awards or as liability awards. Stock-based compensation expense related to awards to employees and non-employees are measured at the grant date based on the fair value of the award. The calculation of the stock-based compensation is based on the Black-Scholes valuation model, which requires significant estimates including the expected volatility of our common stock, expected dividend yield, option term and risk-free rate. The fair value of the award that is ultimately expected to vest is expensed on a straight-line basis over the requisite service period, which is generally the vesting period. We elect to account for forfeitures as they occur by reversing compensation cost if the award is forfeited.

 

Recently Issued Accounting Standards

 

See the sections titled “Summary of Significant Accounting Policies — Recently Issued Accounting Standards” in Note 1 in the “Notes to Consolidated Financial Statements” for additional information.

 

 

24

 

Exhibit 99.3

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

The unaudited pro forma combined balance sheet as of September 30, 2020 gives pro forma effect to the Merger as if it had been consummated as of that date. The unaudited pro forma combined statements of operations for the nine months ended September 30, 2020 and for the year ended December 31, 2019 give pro forma effect to the Merger as if it had occurred as of January 1, 2019. This information should be read together with Shift’s and IAC’s audited financial statements and related notes that are included in the proxy statement/prospectus on Form 424B3, filed with the Securities and Exchange Commission on September 24, 2020, Shift’s unaudited financial statements and related notes filed as Exhibit 99.1 to the Current Report on Form 8-K to which this Exhibit is filed, IAC’s unaudited financial statements and related notes that are included in the Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 16, 2020, and the Management’s Discussion and Analysis of Financial Condition and Results of Operations filed as Exhibit 99.2 to the Current Report on Form 8-K to which this Exhibit is filed.

 

The unaudited pro forma combined balance sheet as of September 30, 2020 has been prepared using the following:

 

Shift’s unaudited historical condensed consolidated balance sheet as of September 30, 2020, as included elsewhere in this prospectus; and

 

IAC’s unaudited historical condensed balance sheet as of September 30, 2020, as included elsewhere in this prospectus.

 

The unaudited pro forma combined statement of operations for the nine months ended September 30, 2020 has been prepared using the following:

 

Shift’s unaudited historical condensed consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2020, as included elsewhere in this prospectus; and

 

IAC’s unaudited historical statement of operations for the nine months ended September 30, 2020, as included elsewhere in this prospectus.

 

The unaudited pro forma combined statement of operations for the year ended December 31, 2019 has been prepared using the following:

 

Shift’s audited historical consolidated statement of operations and comprehensive loss for the year ended December 31, 2019, as included elsewhere in this prospectus; and

 

IAC’s audited historical statement of operations for the year ended December 31, 2019, as included elsewhere in this prospectus.

 

 

 

 

Accounting for the Merger

 

The Merger is accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, IAC, who was the legal acquirer in the Merger, is treated as the “acquired” company for financial reporting purposes and Shift is treated as the accounting acquirer. This determination was primarily based on Shift having a majority of the voting power of the Company, Shift’s senior management comprising substantially all of the senior management of the Company, the relative size of Shift compared to IAC, and Shift’s operations comprising the ongoing operations of the Company. Accordingly, for accounting purposes, the Merger is treated as the equivalent of a capital transaction in which Shift is issuing stock for the net assets of IAC. The net assets of IAC are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Merger are those of Shift.

 

Basis of Pro Forma Presentation

 

The historical financial information has been adjusted to give pro forma effect to events that are related and/or directly attributable to the Merger, are factually supportable, and as it relates to the unaudited pro forma combined statement of operations, are expected to have a continuing impact on the results of the Company. The adjustments presented on the unaudited pro forma combined financial statements have been identified and presented to provide relevant information necessary for an accurate understanding of the Company.

 

The unaudited pro forma combined financial information is for illustrative purposes only. The financial results may have been different had the companies always been combined. You should not rely on the unaudited pro forma combined financial information as being indicative of the historical financial position and results that would have been achieved had the companies always been combined or the future financial position and results that the Company will experience. Shift and IAC did not have any historical relationship prior to the Merger. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.

 

As a result of the Merger and immediately following the closing of the Merger, the former stockholders of Shift owned approximately 51.2% of the Company’s outstanding common stock and the former stockholders of IAC owned approximately 25.8% of the Company’s outstanding common stock (6.9% held by IAC’s initial stockholders), with the remaining shares of the Company’s outstanding common stock owned by the PIPE Investors.

 

As the release from escrow of the additional 6,000,218 shares of Company common stock is contingent on the future performance of the trading price of the common stock, they have been classified as an equity arrangement and therefore have not been recorded in the unaudited pro forma combined financial statements.

 

2

 

 

PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2020
(UNAUDITED)
(in thousands)

 

   (A)
Shift
   (B)
IAC
   Pro Forma
Adjustments
      Pro Forma
Balance Sheet
 
Assets                   
Current assets:                   
Cash and cash equivalents  $18,366   $129   $152,966   (1)     
              189,000   (2)     
              (34,533)  (3)     
              (650)  (7)     
              (6,085)  (9)  $319,193 
Accounts receivable, net   7,924               7,924 
Inventory   33,485               33,485 
Prepaid expenses and other current assets   2,161    110    (292)   (3)   1,979 
Total Current Assets   61,936    239    300,406       362,581 
Cash and marketable securities       152,966    (152,966)  (1)    
Property and equipment, net   1,802               1,802 
Capitalized website and internal use software, net   6,376               6,376 
Restricted cash   1,605               1,605 
Deferred borrowing costs   2,908    250    (250)  (3)   2,908 
Other noncurrent assets   2,850               2,850 
Total Assets  $77,477   $153,455   $147,190      $378,122 
                        
Liabilities and Stockholders’ (Deficit) Equity                       
Current liabilities:                       
Accounts payable and accrued expenses  $23,895   $2,624   $(2,624)  (3)  $23,895 
Convertible promissory note – related party       650    (650)  (7)    
Flooring line of credit   20,556               20,556 
Total Current Liabilities   44,451    3,274    (3,274)      44,451 
Related party long term note   22,004                22,004 
Warrant liability   11,021        (11,021)  (8)    
Other noncurrent liabilities   8,284        (6,085)  (9)   2,199 
Deferred underwriting fees       6,419    (6,419)  (3)    
Total Liabilities   85,760    9,693    (26,799)      68,654 
                        
Commitments and Contingencies                       
                        
Convertible preferred stock   223,631        (223,631)  (5)    
Common stock subject to redemption       138,762    (138,762)  (4)    
    223,631    138,762    (362,393)       
Stockholders’ (Deficit) Equity                       
Common stock   4        (4)  (5)    
Class A common stock           2   (2)     
              1   (4)     
              4   (5)     
              1   (6)   8 
Class B common stock       1    (1)  (6)    
Additional paid-in capital   38,023    6,501    188,998   (2)     
              (26,032)  (3)     
              138,761   (4)     
              222,129   (5)     
              11,021   (8)   579,401 
Accumulated deficit   (269,941)   (1,502)   1,502   (5)   (269,941)
Total Stockholders’ (Deficit) Equity   (231,914)   5,000    536,382       309,468 
Total Liabilities, Convertible Preferred Stock, Common Stock subject to redemption and Stockholders’ (Deficit) Equity  $77,477   $153,455   $147,190      $378,122 

 

3

 

 

Pro Forma Adjustments to the Unaudited Combined Balance Sheet

 

(A)Derived from the unaudited condensed consolidated balance sheet of Shift as of September 30, 2020. See Shift’s unaudited condensed consolidated statements for the nine months ended September 30, 2020 and the related notes appearing elsewhere in this prospectus.

 

(B)Derived from the unaudited balance sheet of IAC as of September 30, 2020. See IAC’s unaudited condensed consolidated statements for the nine months ended September 30, 2020 and the related notes appearing elsewhere in this prospectus.

 

(1)Reflects the release of cash currently invested in marketable securities held in the trust account.

 

(2)Reflects the proceeds received from the PIPE investment with the corresponding issuance of 18,900,000 shares of common stock of the post-combination company at $10.00 per share.

 

(3)Reflects the payment of fees and expenses related to the Merger of $35,075, including $6,850 attributable to the PIPE investment, $6,419 of underwriting fees payable to the placement agent in connection with the PIPE investment, and $21,806 of legal, financial advisory, accounting and other professional fees. These expenses are direct, incremental costs of the Merger and are reflected as an adjustment to additional paid in capital. Transaction related expenses of $2,526 are currently classified in accounts payable and $250 are classified as accounts payable for IAC. Transaction related expenses of $292 are currently classified in prepaid expenses for Shift. These payments were made with the cash released to or received by the Company at closing, as set forth in footnotes (1) and (2)

 

(4)The common stock subject to redemption for cash amounting to $138,762 would be transferred to permanent equity.

 

(5)Reflects the recapitalization of Shift through (a) the contribution of all the share capital in Shift to IAC in the amount of $260,152, (b) the issuance of 42,053,631 shares of common stock and (c) the elimination of the historical retained earnings of IAC, the legal acquirer, in the amount of $(1,502).

 

(6)Reflects the conversion of 6,088,338 shares of Class B common stock into 6,088,338 shares of Class A common stock, on a 1.09 to 1 basis, at the consummation of the Business Combination.

 

(7)Reflects the cash repayment of convertible promissory notes to a related party.

 

(8)Reflects the net settlement of the outstanding warrants for shares of Class A common stock.

 

(9)Reflects the repayment of the promissory notes related to Paycheck Protection Program, which was a condition of the merger agreement.

 

4

 

 

PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2020
(UNADUITED)
(in thousands, except share and per-share data)

 

   (A)
Shift
   (B)
IAC
   Pro Forma
Adjustments
      Pro Forma
Statement of
Operations
 
Total revenue  $122,307   $   $      $122,307 
Cost of revenue   111,666               111,666 
Gross profit   10,641               10,641 
                        
Selling, general and administrative expenses   52,109    3,415    (3,242)  (1)   52,282 
Depreciation and amortization   3,258               3,258 
Loss from operations   (44,726)   (3,415)   3,242       (44,899)
                        
Other income (expense):                       
Interest expense   (3,901)         (2)   (3,901)
Interest and other income (expense)   (6,017)   709    (709)      (6,017)
Loss before income taxes   (54,644)   (2,706)   2,533       (54,817)
Provision for income taxes       120    (120)  (3)    
Net loss  $(54,644)  $(2,826)  $2,653      $(54,817)
Weighted average shares outstanding of common stock, basic and diluted        15,065,000    67,041,969   (4)   82,106,969 
Basic and diluted net income (loss) per share       $(0.03)          $(0.67)

 

  5 
 

 

PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2019
(UNAUDITED)

(in thousands, except share and per-share data)

 

   (C)
Shift
   (D)
IAC
   Pro Forma
Adjustments
      Pro Forma
Statement of
Operations
 
Total revenue  $166,235   $   $      $166,235 
Cost of revenue   167,997               167,997 
Gross loss   (1,762)              (1,762)
                        
Selling, general and administrative expenses   71,860    765           72,625 
Depreciation and amortization   3,221               3,221 
Loss from operations   (76,843)   (765)          (77,608)
                        
Other income (expense):                       
Interest income   1,821    2,593    (2,593)  (2)   1,821 
Interest and other income (expense)   (5,461)              (5,461)
(Loss) income before income taxes   (80,483)   1,828    (2,593)      (81,248)
Provision for income taxes       502    (502)  (3)    
Net (loss) income  $(80,483)  $1,326   $(2,091)     $(81,248)
Weighted average shares outstanding of common stock, basic and diluted        15,065,000    67,041,969   (4)   82,106,969 
Basic and diluted net income (loss) per share       $0.13           $(0.99)

 

6

 

 

Pro Forma Adjustments to the Unaudited Combined Statements of Operations

 

(A)Derived from the unaudited condensed consolidated statement of operations and comprehensive loss of Shift for the nine months ended September 30, 2020. See Shift’s unaudited condensed consolidated statements for the nine months ended September 30, 2020 and the related notes appearing elsewhere in this prospectus.

 

(B)Derived from the unaudited statement of operations of IAC for the nine months ended September 30, 2020. See IAC’s unaudited condensed consolidated statements for the nine months ended September 30, 2020 and the related notes appearing elsewhere in this prospectus.

 

(C)Derived from the audited consolidated statement of operations and comprehensive loss of Shift for the year ended December 31, 2019. See Shift’s audited consolidated statement financial statements and the related notes appearing elsewhere in this prospectus.

 

(D)Derived from the audited statement of operations of IAC for the year ended December 31, 2019. See IAC’s audited consolidated statement financial statements and the related notes appearing elsewhere in this prospectus.

 

(1)Represents an adjustment to eliminate direct, incremental costs of the Business Combination which are reflected in the historical financial statements of Shift and IAC in the amount of $0 and $3,242, respectively, for the nine months ended September 30, 2020. There were no such amounts for the year ended December 31, 2019.

 

(2)Represents an adjustment to eliminate interest income on marketable securities held in the trust account as of the beginning of the period.

 

(3)Represents an adjustment to record a normalized blended statutory income tax benefit rate of 21% for pro forma financial presentation purposes resulting in the recognition of an income tax benefit, which however, has been offset by a full valuation allowance as the post-combination company expects to incur continuing losses.

 

(4)The calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that IAC’s IPO occurred as of January 1, 2019. In addition, as the Business Combination is being reflected as if it had occurred on this date, the calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that the shares have been outstanding for the entire period presented. This calculation is retroactively adjusted to eliminate the number of shares redeemed in the Merger for the entire period.

 

The following presents the calculation of basic and diluted weighted average common shares outstanding. The computation of diluted loss per share excludes the effect of 7,745,000 warrants to purchase 7,745,000 shares of common stock because the inclusion of these securities would be anti-dilutive.

 

   Combined 
Weighted average shares calculation, basic and diluted     
IAC public shares   15,065,000 
IAC Sponsor shares   6,088,338 
IAC shares issued to PIPE Investors   18,900,000 
IAC shares issued in the Merger   42,053,631 
Weighted average shares outstanding   82,106,969 
Percent of shares owned by Shift   51.2%
Percent of shares owned by PIPE Investors   23.0%
Percent of shares owned by IAC   25.8%

 

 

7